Personal Total Portfolio Breakdown

This is my personal household total portfolio breakdown as of February 26, 2018.

 Yield   Adj. ROE   P/B   Adj. P/E  Company Earnings From Most Recent Generic Rating (Not a Recommendation) Price at this update Portfolio Percent
3.5% 4.8%  0.50       10.5  Melcor  Dec ’16 Y.E. +Q3 ’17  Strong Buy rated at $15.05           14.75 17.1%
2.5% 10.7%    1.6       15.1  Canadian Western Bank  Oct. ’17 Y.E.  Buy at $40.55           39.00 11.8%
0.7% 11.3%    1.8       16.5  Toll Brothers  Oct ’16 Y.E. +Q3 ’17  (higher) Buy rated at $42.81           47.53 9.8%
6.8% 10.6%    1.5       14.7  Boston Pizza Royalties Income Fund  Dec ’16 Y.E. +Q2 ’17  Buy rated at $21.12           20.26 5.8%
1.9% 9.1%    1.2       14.0  AutoCanada  Dec ’16 Y.E. +Q3 ’17  (higher) Buy rated at $22.86           21.09 5.6%
1.5% 10.9%    1.9       18.0  Stantec  Dec ’16 Y.E. +Q2 ’17  Buy rated at CAN $34.28           32.27 6.4%
0.7% 19.3%    1.6         8.8  Linamar  Dec ’16 Y.E. + Q3 ’17  Strong Buy rated at $68.50           71.12 4.9%
0.6% 22.3%    4.3       21.3  Alimentation Couche Tard  Apr ’17 Y.E. +Q1 ’18  Buy rated at $60.25           62.09 2.9%
2.5% 14.3%    2.3       15.3  TFI International  Dec ’16 Y.E. + Q1 ’17  (lower) Buy at $32.86           33.14 2.6%
0.0% 38.1%    3.4         9.5  CRH Medical  Dec ’16 Y.E. +Q3  Speculative (lower) Strong Buy at U.S. $1.85 and Canadian $2.37             2.95 2.9%
0.6% 101.3%  27.1       31.0  Constellation Software Inc. (CSU, Toronto)  Dec ’16 Y.E. + Q2 ’17  (lower) Buy rated at CAN $704, U.S. $559         834.00 1.6%
5.2% 4.4%    0.9       19.4  Enbridge Pref Shares                                –   Buy rated at $21.16           21.29 1.2%
0.0% 5.4%    1.7       33.5  Berkshire  Dec ’16 Y.E.+ Q3 ’17   (lower) Buy rated at  $186         210.62 1.2%
4.7% 4.5%    1.0       21.1  Brookfield Office A Pref Shares                                –  not rated           23.77 1.0%
4.9% 4.9%    1.0       20.3  Brookfield Office G Pref Shares                                –  not rated           24.64 0.8%
3.6% 16.6%    2.2       13.8  Royal Bank of Canada (RY, Toronto and U.S.)  Oct. ’17 Y.E.  (higher) Buy rated at $101.92         102.39 0.9%
4.0% 9.6%    1.3       15.9  Fortis Inc.  Dec ’16 Y.E. + Q3 ’17  (higher) Buy at $46.18           42.17 1.5%
4.5% 12.1%    2.0       17.2  BHP Billiton plc ADR  June 30, 2017 Y.E.  Speculative Buy at $U.S. 25.00 22.39 BBL           21.68 1.7%
8.3% 7.0%    0.7       10.0  Melcor REIT  Dec ’16 Y.E. + Q3 ’17  Buy at $8.63             8.09 1.0%
0.6% 25.4%    9.0       35.8  Visa Inc.  Sep 30, ’17 Y.E.  Weak Buy / Hold at $111.25         124.59 1.0%
1.5% 16.2%    3.9       23.3  Heineken ADR  Dec ’15 Y.E.  + Half 1 ’16  not rated         106.26 0.9%
4.5% 12.9%    2.0       15.5  iShares Australia                                –                                not rated           23.47 1.1%
0.9% 6.2%    1.5       24.2  Bank of America  Dec ’15 Y.E. +Q3 ’16  not rated           32.42 0.8%
6.0% 6.8%    0.8       16.6  Kinder Morgan                                –  not rated           19.29 0.7%
0.0% 8.0%    1.7       27.9  Ceapro  Dec ’16 Y.E. +Q2 ’17  Speculative Weak Buy / Hold at   $0.65             0.52 0.1%
 Other Small Positions                                – 0.5%
2.57% 13.0%  2.12       14.0  Total Equities         
 U.S. Cash in $CAN 8.0%
 Canadian Cash 6.2%
2.2%          16.35 Total        100.0%

Comments on My Asset Allocation and Diversification

Overall, I currently have a 77% exposure to common equity shares, 3% to preferred equity, 6% to Restaurant Royalty and 14% to cash.

I have an extremely (most would say dangerously or ridiculously) concentrated portfolio. The largest four stock positions are each very important to my portfolio and together constitute 44% of my portfolio and 52% of the non-cash portion of my portfolio.

Overall, my investments, including cash, are 24% in the U.S. (of which one third is cash) and 74% in Canada and 2% other. (But some of the Canadian stocks such as Stantec and Couche-Tard earn most of their money in U.S. dollars which adds to my effective U.S. exposure.)

I don’t claim that there is any deep rationale to the mix of stocks here. I buy stocks, from among those rated on the Site, (and a few that are not rated including preferred shares) that I like (or want) most and I tend to concentrate my holdings. The percentages held in each stock is built up from (in most cases) years of historic individual trades and decisions. I don’t target any particular allocation by sector.

Although I am comfortable with it, my portfolio would be considered by most experts to be dangerously concentrated in too few stocks and too few sectors and also would be considered by most experts to be over concentrated in equities. A portfolio concentrated in just a few stocks requires unusual confidence in the companies selected, and the financial capacity and stomach to endure volatility.

Here is a break-down of my portfolio by sector:

Auto Parts Restaurant Royalty Preferred Financial Real Estate Retail Auto Dealers Engineering Other Cash Total
4.9% 5.8% 3.1% 15.6% 27.9% 2.9% 5.6% 6.4% 13.5% 14.3% 100.0%

I have very large allocations to Real Estate and Financials at this time.

These allocations are the result of individual stock choices, rather than portfolio planning. Warren Buffett teaches that we should not be overly concerned about high allocations to a given sector as long as we are confident of the investments we have made. Still, I want to at least be aware of what my allocation is.

I am not suggesting that any other investor copy my portfolio. These are the stocks I hold and this portfolio and its weightings are the result of a host of factors including my current views of these stocks and industry segments, my history with certain stocks, my knowledge of these stocks, my lack of detailed knowledge of many other stocks, my particular (high) risk tolerance and (high) risk capacity based on my age, portfolio size, non-investment assets, (zero) debt level, other income, pension plan, other factors, and even my inevitable (if illogical) emotional attachment to certain stocks.

Analysis of the Valuation of My Portfolio and My Potential Future Returns

I track the overall value ratios of my portfolio partly due to some advice I read from Warren Buffett.

Buffett then provided the following advice for individuals:

We also believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a “company”) that will deliver him or her the highest possible look-through earnings a decade or so from now.

For many years I have tracked the overall yield, P/B, ROE and P/E ratio of my own portfolio. I also use those figures to track my total annual dividends and “my share” of the earnings of the companies I own. I don’t know of any investment service that provides that information to its clients. My ratios are reasonably up to date but can often be a couple of quarters behind for some of the companies.

I note that the adjusted P/E on the equity portion of my equity portfolio (including the preferred and the restaurant royalty and treating their dividends as earnings) averages 14.0. The reciprocal of this 14.0 is 7.1%. So the companies I own have earned in total, in the past year (based on the date each company was updated), 7.1% of the current market value of my equity investments. If this were to continue I can expect to earn somewhat more than the 7.1% earnings level (in the longer term) because some of the earnings are retained and reinvested at a relatively high ROE. The average dividend yield on my investments (excluding cash) is 2.57%. And, these companies are averaging a trailing return of 13.0% on book value (ROE). On average they retain 64.0% of their earnings and IF they can continue to earn 13.0% on those incremental retained earnings, as well as on their existing equity, then overall I can calculate an expected long-term return of 10.9% (13.0% ROE times 64.0% retained plus 2.57% yield) on this equity portfolio assuming also that the 14.0 P/E ratio is maintained in the long term. (The P/E will definitely NOT remain constant in the short-term but it may not tend to move much in the long term) The 14.0 average P/E assumption is conservatively low given that it is lower than the long term market average for U.S. stock market P/E ratios, which is about 15.1.

If I were to earn 10.9 on the equity portion of my portfolio and 1% on the 14% that is in cash the overall return would be 9.5%. On this basis, it would appear that my historic average return of 13.5% (my compounded annual average return since the end of 1999) is going to be very difficult to maintain.

END

Shawn Allen
President
InvestorsFriend Inc.