Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

Portfolio management

Apple position up 15.82% in four months

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Apple is up 15.82% since it was added to the Wealth Accumulated portfolio at the beginning of February.

It is the largest position in the portfolio by a country mile.

24% according to my broker both through holding shares of Apple and through a large position in Vanguard’s US Equity Index, of which Apple is a sizeable chunk.

There’s more than one way to pony up for Apple, and why not?

Apple is the best business in the world and so it makes sense to me to disregard textbook portfolio management theory that usually trumpets spreading positions equally among 15-20 stocks.

Why Apple is such a large position in the portfolio

It begins and ends with research.

As fun as it is to distill investment reasoning and share it on social media platforms, there’s a grain of truth to me piling into Apple based on Warren Buffet’s love of the company.

The Oracle recently opined at the annual Berkshire Hathaway shareholders meeting:

It happens to be a better business than any we own

Warren Buffett

I also often take a leaf out of Peter Lynch’s book which encourages retail investors to pay attention to their daily experiences of using products and services, ‘stumbling onto the big winners in extracurricular situations’ as Lynch eloquently puts it.

I’ve been an Apple user for over two decades, seen the ups and downs, followed their story, and even stretched to a documentary here and there.

Apple, especially the iPhone, has been central to the daily operation of my life and the lives of millions of people across the globe.

I’m writing this blog post on the WordPress app.

Booking flights, banking, relationships, buying a house – the utility of a modern cell phone is unmistakable, and Apple simply makes the best cell phones in the world.

Their laptops, tablets, and watches aren’t too shabby either.

Why Apple is such a good business

Let’s take a look at a selection of Apple’s numbers from the last three years:

The explosive growth in earnings and ROCE is incredible and unlike other tech firms, Apple is not seeing a collapse in earnings since the reopening that other notable firms have been experiencing.

Sometimes a business makes things so good that everybody has to have the things they sell. That ability (or inability) to sell ends up in the numbers.

Apple is NOT 35% of Berkshire’s portfolio

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Apple is not 35% of a Berkshire portfolio… Berkshire’s portfolio includes the railroad and the energy business Garanimals, you name it, See’s Candies — they’re all businesses

Warren Buffett

The mistake I sometimes make is not that I rely on sources like dataroma’s breakdown of Warren Buffett’s portfolio; the mistake is not placing that data into context.

Buffett owns a lot of Apple stock compared to the rest of his portfolio, but compared to the portfolio of the entire business of Berkshire, not so much.

To place the data into context, at the end of the last quarter, Berkshire had $997 billion in assets, $328 billion of which were in equities.

Even so, there’s no doubt, Buffett loves Apple.

But as with Greeks bearing gifts, beware of sources bearing data.

Q3 2022 performance report

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The Q3 2022 performance report for the Wealth Accumulated Portfolio is compiled from broker quarterly statements and publicly available information of the quarterly performance of the S&P 500.

Results for the Wealth Accumulated portfolio for the third quarter of 2022 are as follows:

  • The Wealth Accumulated Portfolio: -1.04%
  • S&P 500 -5.28%

The Wealth Accumulated performance is net of expenses.

Towards the end of 2021, just after Christmas, all portfolio positions were liquidated.

Throughout most of 2022, the portfolio has held cash which has been an unfortunate but necessary position to be in.

News flows became increasingly negative throughout this year and journalists have not stopped sharing their gloomy outlook for global financial markets.

Having dry powder in the form of cash is one thing, actually holding on for so long with it is extremely trying, especially as bargains are more prevalent each week.

Clearly, stocks have had a very poor year which has led to the Wealth Accumulated portfolio doing better than the stock market averages due its large cash position.

When the time comes, the Wealth Accumulated portfolio will be purchasing a combination of index funds and carefully selected undervalued large caps.

Outlook

My general view of global large-cap stocks – the type in which I invest – is that they are at fair value.

The PE ratio of the S&P 500, my preferred approximation of market value, is 19.07 as of the date of this post.

Before the massive liquidity events, that started in the 1980s and were exacerbated in 2008 and 2020, a PE ratio of 20 for the S&P 500 would have signaled the top of the market.

The current economic environment means we factor in central bank and government interventions.

Policymakers have artificially inflated the prices of assets leading to inflation and crises in the global economy.

Their extremely small set of tools means that it is almost certain they will be forced to use inflation-causing tools again, most likely when a financial crash is imminent, or is already underway.

Right now I believe stock prices will be heading lower until well into 2023.

This belief is not a prediction or some type of forecast.

The Federal Reserve’s commitment to fighting inflation has been more robust than in recent years and interest rates are its only current weapon of choice.

Historically, investors despise interest rates and dump assets as a show of force against the rising cost of credit.

But it does mean the market is getting cheaper every day.

So far in 2022 stock prices have declined by -22.83% as measured by the S&P 500.

The US is already in a recession despite policymakers trying to redefine what a recession is and at the same time, the Fed is tightening the money supply.

Inflation has plateaued at historical highs and we are yet to see any sign that the war in Ukraine will end any time soon.

My policy of stock purchases is firmly rooted in the value investing school, with an emphasis on buying them at a discount to their intrinsic value.

Under these conditions, I do not see any advantage in deploying capital into stocks at this time and possibly into 2023.

Q3 2022 performance report: what happened in the third quarter?

The portfolio added one FTSE 100 position in the third quarter of 2022 after a disastrous news report citing a potential lawsuit that could result in a hefty fine for the business.

It is a well-established stalwart of the FTSE 100 and remains in the top 10 largest companies by market cap on the London Stock Exchange.

At the time of purchase in mid-August, the dividend yield stood at 6.54% and price to earnings 11.09.

They have since paid a dividend and the share price has declined slightly since the initial purchase.

The price decline is the reason for the portfolio’s negative returns of -1.04% this quarter.

I’m not overly concerned about short-term price fluctuations, especially from such a large well-established company that pays a handsome dividend.

The purchase represents 10% of the portfolio whilst cash is at a staggering 90%.

My main concern is the continuing fall in general prices which has forced me to maintain a large cash position.

The staying invested v inflation eating away at the value of cash debate is of no concern when losses from declining stock prices also devalue portfolios.

A double-whammy if you will. I’d rather a single-whammy.

In the current environment, the only sensible course of action is to hold cash whilst policymakers work to bring down inflation an unintended consequence of which is to wash up bargains stocks.

Conclusion

Hopefully, I’ve been able to communicate more about the Wealth Accumulated investment approach in this inaugural quarterly report without reference to specific stocks.

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