AOF’s Q3 2020 Letter to Shareholders

Dear Partners,

The fund finished 8.4% up in Q3, with the portfolio up 3% YTD, net of all fees. This is despite the historic pandemic and allocating on average 30% of the portfolio in cash and 20% in investment grade bonds. The cash stack will hopefully start being used over the coming months, but as I’ve said before, I’m doing something by doing nothing. I’m not going to buy a stock just to be fully invested — I’m waiting for the right price, as any good value investor should do. The economic backdrop is still completely disconnected from the markets, making the task of finding strong value companies that much harder and time consuming.

Review

I continue to reshuffle my portfolio, and as I’m doing so, I’m learning about the potential capital consequences. I’m starting to understand just how fast trading fees can add up and eat into one’s profit. What’s worse, the potential tax consequences can be significant (capital gains). In order to combat this potentially significant erosion of capital, I have hired a legal tax expert/financial advisor to educate and give advice that I know will last me a lifetime. As I’ll mention later, learning these things at an early age gives me a huge advantage heading into my later years, where I expect to earn more money and manage a larger amount of capital.

Biggest learning experience

Speaking of learning experiences, over the past 18 months I have been taught so much — and I’m thankful to have been taught it at the age I’m at. Whether these lessons have come through learning on the job, from direct insight from my colleagues, financial qualification exams (CAIA, IMC), etc., I’ve done my best to act like a sponge and soak it all in. The biggest lesson I’ve learned, however, was through a hugely missed opportunity.

The great investing minds of the 20th century, such as Benjamin Graham, Warren Buffet, Philip Fisher, etc. all stressed the importance of long-term investing. I admit that I never fully realized just how right they are until I harshly learned my lesson during this pandemic. For example, I thought this one company was undervalued at $4 before the pandemic, but never pulled the trigger. It then fell to below $2 during mid-March, and I bought a 5% position in it at $1.80, thinking it was worth more at least $10. After three weeks, I sold it (at a 35% profit), thinking that the market would drop again because the virus restrictions and economic impact were becoming more and more pronounced. Instead, the stock raced to $11.50 by the end of August. I lost out on 539% profit, a great jump in any 10-year period, much less 5 months!

Saying that, however, I don’t want anyone to think I’m dwelling on this much — no, I’m extrapolating the important lesson from it and moving on, not allowing this to blind me from other opportunities. I imagine that in 20–30 years from now, I will look back on this mistake and thank the Lord so much that he taught it to me at 24, rather than when I was older. Incorporating what I learned from this error, I am looking for opportunities that are more long-term oriented, while training myself to not be influenced by short-term outlooks. The three companies I’ve purchased since then are proof that I am learning and applying, keen to not make the same mistake twice.

Prospective buys

Over the past year and a half, I’ve gotten to witness first-hand a major shift in investor sentiment. As I’ve mentioned in my previous letter, never has government, big money, or society ever been in such agreement on environmental issues and their role in making our world a clean and safe place to live in. Investors in particular are taking up that role as leaders in this change. For better or worse, money is often what makes the world move, and these family offices, fund of funds, banks, etc are in charge of most of it, giving them a large say in the future.

The investment in clean, renewable energy companies by those with billions (or trillions, see USA[1] and China[2]) is not the only reason why I would invest in this industry. These companies still have to fit my other criteria, namely strong balance sheets (I don’t want bad companies to implode when a bubble eventually forms), strong growth prospects, management with their own capital in the company, buying at a margin of safety, etc. I will continue monitoring my watchlist, adding to it as I research more clean stocks, narrowing down my top picks, and then waiting for the right time to buy them.

As I gush about renewable energy stocks, I’m not turning a blind eye to other industries. It’s important to have a well-diversified portfolio, not just at the single stock level, but also at an industry level. How is a portfolio with three solar energy stocks more diversified than one with 40? Yes, I am quite obviously bullish on renewable energy, but that industry probably won’t take up more than 40% of my portfolio, and that in of itself will be diversified through wind, solar, and other sources. In addition, the same criteria for what I look for holds true across the market, no matter what industry/stock I’m looking into.

Conclusion

This has been another massively informative quarter. I am absolutely sure I will look back on 2020 as a banner year for my investment career. The lessons I’ve learned, as I’ve openly written about, are continuously shaping my investment philosophy and strategy. I plan on writing a full list of all these lessons in my year end letter, and how it will serve me well in the future. In the meantime, if you have any questions, please don’t hesitate to reach out to me.

Regards,

Matthew

[1] 9 Key Elements of Joe Biden’s Plan for a Clean Energy Revolution | Joe Biden for President: Official Campaign Website

[2] https://www.nytimes.com/2020/09/23/world/asia/china-climate-change.html