2022 – Year End and way forward

Another year went by…

2022 is history now, it surely was an eventful year, especially for the world. A war in Europe, or let’s say “almost Europe”, was something that I never thought possible in my lifetime, but as a matter of fact I was sadly mistaken.

That has to be the the headline, in Stalflare’s household this was and still is the major topic of discussion as my better half is Belorussian, and of course the was is impacting her directly.

Italy saw right wing parties winning the elections, we had the first World Cup in the middle east, COVID was archived for most of the world, at least in terms of headlines. It is still an issue in China, and I wonder if it will come back to bite us in the future.

After 2 years of pandemic the world changed quite a bit. One of the major changes that see, and I am quite worried about it, is that people are not afraid to take risks anymore. Not like before at least. I guess that since governments covered up for any bad occurrence during the pandemic, we are getting a sense of “we’ll never lose anyway”.

Companies that had to bankrupt were saved, new investors that are investing covid relief money are entering the stock market, “buy the dip” “the market always rise” concepts are now very common, and by common I mean they pass the “taxi driver test” (which is when the taxi driver talks about it during a ride).

It’s all very “nice”, central banks are now getting the world to avoid a major crisis, but in doing so nobody seems to be really missing out, apart from a bit of inflation that in “temporary” anyhow.

Not sure what is to come, I see massive debt issues on the horizon, but maybe it’s my fault, maybe I am too negative?

Anyhow, let’s see what 2023 brings, there are some positive things that we can take from 2022. The first one is that fearing an energy crisis people started consuming more responsibly, and we are all still alive but with an energy consumption that is MUCH lower than the previous year. For someone that teaches sustainability like me, it’s a great result.

The war is bad, but it brought Europe together like I would have never expected, this is a good thing of course. We are still VERY FAR from the United States of Europe, but it’s a step in that direction. As I do not trust local politicians, especially Italian ones, to make structural changes, so if Europe gains more traction I would be very happy. I see this as the only possibility to get countries “back on track”, of course I am talking about the countries that need that, some have been more virtuous and need less work to be done.

By back on track I mean tackling public debt, and maybe starting a cultural change that takes time.

As I am writing this I feel that I am just venting some wishful thinking, my commons sens says that the only way is a major crisis, heavy, nasty and quick. Because change is a great concept and we all love it, until we need to actually do it…

Las bit of the intro goes to this blog. I have been updating results and so on for years now, and I was to keep doing it, but I see that I am struggling with time. Two kids are a full time job on top of the standard job, and I hate to update the side always late.

So I am switching to a Quarterly Report system, I have a few ideas, so no spoilers, but it makes more sense to do it that way, also because from a month to another there are little changes.

So if you don’t see much action, do not worry, every three months you’ll get the updates (the graphs and portfolio automagically update every day, so technically that part will always be fresh).

2022 and the LH FUND

2022 saw markets tumble, in the end it was not as bad as it started but we’ve had a “bad year” with a 20% decrease from 2021 (in US on some indexes, on others the fall wasn’t so bad).

We have had the most discussed non-recession of history (and we are still waiting for it), central banks dropping guidance, public debts soaring, inflation rising BUT still only 20% loss.

Now this is where I turn bear. 20% off a market what was in a major bubble is nothing. It could be argued that some markets dropped much further (tech stock for example), and that it’s ok, it’s “healthy”. But in general I do not think that the financial environment dropped all that much. I was expecting a lot more.

First and main reason is the fact that with higher interest rates, “economically sound people” should switch from high risk assets like stock to bonds, as they can get a better return for less risk.

Second reason is the fact that all the money that was thrown around ended up in the stock market, retail side. In the past retail was not so important, but I challenge that view now, there’s a LOT MORE people investing now, it’s easy, it’s quick, internet helps a lot there. Unfortunately this means a MASS of financially uneducated people effectively betting at the casino. (but they watch youtube gurus and think they know it all). I was expecting more volatility on this side, that would have fueled the downside.

Third reason, is debt. Needs to be paid. I was expecting highly indebted companies to suffer much more from this interest rate environment, as a matter of cat it seems that debt is not even considered anymore by anailists!

I could continue but I’ll stop here, in the end the bear market arrived, but I still consider it to have been a “teddy bear market”.

How did the portfolio perform under these conditions? Well I cannot complain at all, the first test, under this teddy bear market showed a marvelous resilience of the LH Portfolio, exactly as it was planned to behave.

Here the Year End stats:

Share YoYCNAGR (y)NYoC

Scrolling down to the bottom we can see that the performance of the LHPF stock was 0.84% lower than 2021. Please consider that in this price you have ALL dividends, options, interests but also commissions, costs and income taxes paid.

Compound Net Annual Growth Rate (CNAGR) 4.12%, confirming the trend that I’ve had in the last 4 years (COVID year excluded), which is great. It’s a NET result again, so I am pretty happy about it. If you gave me 10000 Euro in 2015, today you would have 13265 Euro, net. Yes of course if you put the money in bitcoins you would have much more, but as I always say, there is little gain in comparing pears with apples. This portfolio is designed to pay an yearly yield, protecting capital as much as possible.

The shares produced a 5.41% Net Yield on Cost, which was reinvested or kept as cash, and of course is featured in the stock price of the fund. If I were to “pay” myself these dividends (the last figure), they would be taken away from the stock price of course. But right now we are not at that point yet.

In terms of targets, I still hold my 3% net yield target up high. You could say that with that 5.41% I’ve already made it, but it’s not like that. The Portfolio has to yield 3% from inception. During the first 3 years, when cash was not fully deployed (and cash is part of NAV!), the yield has been terrible, and yet in 2022 the score has been of around 2.8%.

Surely keep getting results like this year I’ll get there eventually. Patience is the game here.

When I see other people reporting their results, they usually omit cash. As if that wasn’t an asset. In my opinion it’s wrong, everything is part of the investment. Even the parts that don’t produce income.

Going back to target talks, I was asked what would be a potential “FIRE INCOME” for me. Given my present situation, I would need at least 2000 euro per month, to “retire”. Right now we are around 1400 euro, though 600 euro might not seem big, please consider that these types of investment suffer from the law of diminishing returns, meaning that the first years, as you are deploying cash and getting “fist income” the rate of growth is stellar, later on when the portfolio is all deployed you grow but at a much lower pace.

This year dividends grew by 12.70% vs. 2021, which is a great result. But in 2017 this figure was 30%. Generally speaking keeping above 10% growth of dividends (options excluded) at this stage of life of the portfolio is a great result. Anything below 3% I would consider disappointing.

On the fiscal point of view, I managed to “wash away” (compensate) profits selling positions in loss, so no real income taxes are due (although there are other taxes that I can’t avoid, dividends it’s the first).

Investment Strategy

An addition to the standard DGI/Option strategy has been the slow acquisitions of Preferred shares of companies that I like that floated them recently. As they feel interest rate hikes muck more than older prefs, I was able to accumulate a relatively low prices. In terms of strategy this is a little change for the portfolio because I am adding a “fixed income” element to the mix, not inform of bonds of course, but close to it.

I still want to reduce the number of holdings, I managed to cut down by 1 or 2 names, but that’s not remotely enough…

2023 Prospective and targets

I am not going to guess how 2023 will be. If I look at fundamentals, it should be another pretty bad year. But the reality is that the stock market is ruled by a bunch of things that have nothing to do with logic, so there is no point in guessing.

My stance is still bearish, I think that a further drop of the markets would be healthy, but after (if it ever happens), the tables are going to be set for a more bullish stage, that might coincide with the rebuilding of Ukraine (if they stop fighting), and the resume of clean energy investments (pretty much all over the world).

My target is to increase the dividend income of course, it would be nice to pass 20K gross dividends in 2023 (almost made it in 2022), and have another positive year with the options.


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