Fun Fund: Q2 2023

In this post, I will discuss how and what I am doing in one of my actively managed investment accounts (“the Fund Fund”).

As a reminder, most of the prior posts about this account (which is really just a small Roth IRA that I am tracking more closely than my other investments) are located on this page.

The Fun Fund was up 5.01% in the second quarter of 2023. This compares to 8.27% for SPY, 2.79% for RPV, .83% for QVAL, and 10.23% for BRKA. I will classify that as a decent quarter given the market environment last quarter (favoring growth or glamour stocks).

Making Moves

During this quarter, we welcomed a new baby to the family. As a result, I’ve been looking at my stocks more than usual while I’m feeding and burping the baby, etc. This could be resulting in more trading activity in my portfolios. I will need to be mindful of this.

Whether as result of this or some rational insights, I made several changes to the portfolio during Q2 2023. I will go through those and document my reasoning.

Right before the end of the quarter, I sold about half of my $WFC, taking it down to about a ~7% position. I sold at a little over 1.2x trailing tangible book value per share. I figured this was a fair price since management aspires to achieve mid teens returns on tangible common equity. This is perhaps especially so given the stated intention of regulators to make the big banks hold more capital and apparent additional regulation coming down the pike. Also, I’ve been looking to reduce the holding for a while as the position was purchased back before I started using this account as my “Fun Fund” and I bought a larger position than I now would.

I rationalized this decision as being consistent with my stated selling rules. 1) I decided that I want to sell because of bidness reasons (i.e., not purely valuation); 2) the price was not experiencing positive time-series momentum (i.e., was below ~ 200 day moving average). The goal of self-imposing some constraints on selling is to move sort of closer to a “coffee can” or buy and hold forever approach. This will hopefully allow me to experience some “right tails” and avoid some of the normal behavioral errors, which lead humans to sell winners, which can result in a sort of self-imposed negative skew to the range of possible outcomes of equity investing (i.e., you rule out the possibility of large unexpected gains).

My second move was to purchase some shares in a small title insurer. I picked them up near book value. It seems likely that the market is discounting some pretty strong headwinds for title insurance and real estate transaction volumes. That makes sense but I just like this business and the history of management’s capital allocation. I would hope to be rewarded over the long term. I haven’t got a full position yet, so I’ll hold off on discussing the name for now.

Finally, I also added a bit more to my position in Kellogg’s ($K). I started this position in the first quarter and added a bit more to make it about a 5% position. My high level analysis was: 1) good company (branded CPG with nice snacking exposure); and 2) a good price (I think it’s probably worth around $80 based on some simple comps…you can find several sell-side research reports spelling this out). I bought my shares in the mid $60s.

Third, $K presents potential alignment/lower agency costs. Normally, I would have been concerned about this with $K. It is controlled by a charitable foundation established by the founder of the company, W.K. Kellogg. However, the company is currently in the process of spinning off its snacking business.

This creates a potential catalyst to move closer to the $80 fair value. Equally important to me, it shows that management and the controlling shareholders/trustees may be more interested in returns and operating performance than in maintaining status quo and/or enlarging the domain of management. Maybe it works, maybe not, but at least we have some tangible evidence that management and/or large shareholders may care about the business and stock performance. That alone probably sets $K apart from most public companies.

That plus the decent price and the good business made $K a buy for me.