Its time for net worth update. Starting from Oct. 2019, in addition to tracking net worth as a percentage of our FI number, I started tracking two additional metrics: (a) Liquid Net Worth/ Debt Ratio (LND) and (b) Cash Balance/ Two years living expense (CBT).

These two metrics are designed for me to know when would AVI family be in a position to pay of mortgage in its entirety without encumbering any changes to AVI family life-style or feeling house rich and cash poor. As stated in my blog post titled, Pay Off Mortgage Early?, once we satisfy the conditions: LND > 2.0 and CBT>1.0; we would consider paying-off mortgage in its entirety to be a matter of choice.

That said, the numbers as of this writing are:

• Net worth as percentage of our FI number: 60.59 %
• Liquid Net worth/ Debt Ratio: 1.41
• Cash balance/Two years living expense: 1.05

Liquid Net worth = Cash + Equity portfolio in taxable brokerage account.

Musing

The big news from the world of retail brokerage world in the last week was, potential merger between TD-Ameritrade (ticker: AMTD) and Charles-Schwab (ticker: SCHW). On this news Schwab soared 7 % and TD soared a whopping 18 %.  I could not have been more precinct predicting such an event, when I noted a potential downside of zero commission trading, for retail investors.

Unfortunately, I could not invoke level-2 thinking to act on this call and purchase stocks of either TD- or Schwab. This news may also mean that the future of small players such as Robinhood have become that much uncertain. As such,  I will be looking to moving funds from Robinhood to Schwab soon.

As the year and the decade comes to pass, it will soon be time to start thinking of whats in store for us in the coming year and the new decade. From investments perspective, its been a great run. Fortune magazine recently put out an article trying to explain, what powered such a great decade for stocks? The article explains a simple formula, put forth by the late Jack Bogle, founder and CEO of Vanguard Group, that allows us to check on the historical fundamentals driving the returns in the US stocks. The formula says:

Market Returns = Dividend Yield + Earning Growth + Changes in PE Ratio.

The following chart shows these sources of returns for US markets dating back to 1900s

As Ben Carlson notes, majority of gains in market returns for the decade that will soon be history has been through earnings growth and dividend returns. Price increases have pretty much been in line with the earnings growth, producing a insignificant change in PE. Now, this is quite interesting. There has been no dearth of bearish articles predicting the impending recession, given the relentless bull run of this decade. But, if above analysis is any indication, markets are trading at fair value.

The data also shows that earnings pretty much revert to the mean following a decade of strong growth. surprisingly though, the market returns remain relatively inflated, primarily driven by increase in the PE multiples. If the trend continues, we should expect, if anything, the overall market returns in the coming decade to continue to grow into double digits, this time round, driven not by fundamentals, rather euphoria.

 Net Worth

Below is the table summarizing the distribution of AVI family net worth as of Nov 23rd 2019.

• We made a big purchase in the past month, see here, which is reflected in the significant decrease in our cash holdings and a rise in our credit card liability.
• Savvy folks probably noticed no new addition to the liability column for the month. This is because we have managed to pay off the vehicle loan in full thereby truly leveraging the loan arbitrage I talked about in my final post on new vehicle purchase.
• We continue to see significant improvements in market returns as reflected in our non-retirement brokerage portfolio, in a portion of which I follow the contrarian value investing strategy.
• We are making steady progress towards paying off our home mortgage, which now stands at about 23.11 % of our FI number.
• Home prices have inched upwards ever so slightly in the past month. This, I assume, is in part driven by the prevailing historic low mortgage rates. Our Primary residence is slightly over 30 % of our FI number. Ideally we would have liked this number to be in single digits (a way to accomplish this would be to increase FI number by 3X or downsize). Opinions differ on this subject though. For example, Mr RB40, would feel comfortable putting 20 to 25 % of net worth into primary residence and according to the website budgeting.thenest.com, this number should be between 20 and 30 %. Going by these recommendations, we remain some slightly over subscribed into our residence.

Investment Activities

This past month was busier than usual for me. For sake of brevity, I will keep the discussion on my stock purchase (and sale) to a few words. Assuming no action for the remainder of the week (being a thanksgiving week), I plan to elaborate on my investment thesis for each of these stocks in a follow up article.

Following the big news of Fitbit (ticker: FIT) to be acquired by Google, I was finally able to offload my position in FIT for an overall gain of 22 % (annualized return of 8 %).  Google plans to acquire FIT for $7.35 a share.

I further added to my position in Criteo (ticker: CRTO). CRTO is yet another deep-value stock for me, now at about 5 % of my actively managed portfolio. CRTO being a technology stock operating in a highly lucrative ad-tech space is currently trading at EV to EBIT multiple of around 7 and EV to Revenue multiple of below 0.5. It has a healthy balance sheet with about $7 in cash per share. Google ad-blocking software and Apple’s implementation of Intelligent Tracking Prevention (ITP) system has hampered growth in the last year or so and the markets have certainly punished the stock. The stock is currently trading at $17.29.

My PG&E trade was purely speculative, feeding on the overtly negative sentiment (caused by California fires) on-top of what is a seriously grave situation for the company. I got in at a dirt cheap price of $3.46. However, the uncertainty surrounding PG&E is too much for me to stomach and I decided to get out at $7.09, for a healthy gain of over 100 %. The stock is currently trading at $7.31.

I made two additional purchases in the past week or so. The first being Macy’s (ticker: M). It should not come as any surprise for folks to  know that this icon of a brand has been struggling for quite some time now, ala. Amazon effect. The earnings numbers this quarter were no different. To top it off, Macys’s announced a massive data breach and the stock sold off. The sentiment around Macy’s is so negative now that I sense an opportunity. I therefore added a small stake in M at $14.97. The stock is currently trading at $15.43.

The final purchase that I made was in Penn Virgin Corp (ticker: PVAC). PVAC is a small player in the exploration, development and production of oil, natural gas liquids and natural gas primarily focusing on the Eagle Ford shale project in S. Texas. The company has a very long history of exploration in this space, being founded in 1882. PVAC is yet another deep-value stock currently trading at EV to EBIT ratio of 3.05. PVAC has a healthy ROE of 44 % and ROIC of 15.3 %.  With a growing focus on the Eagle Ford producers, this may be an opportune moment to get in at a relatively cheap valuation.

Video/Book/Article/Audio for the Week

• CNBC full interview with Liberty Media Chairman John Malone. I first read about the brilliance of John Malone in the now famous book, The Outsiders. For anyone interested in the media sector its worthwhile to hear what John Malone has to say.
• Jim Chanos sets record straingt on Tesla.  Short interview with the famous short-investor, Jim Chanos, on why he remains bearish on Tesla.