Welcome to our monthly passive-income portfolio (PIP) update—#19 in the series! Before we get to our January update, I wanted to take a moment to focus on the critical role that a proper long-term mindset and investing process play in embracing and effectively capitalizing on short-run market volatility—a role that represents a fundamental requirement for ultimate success!
There’s a reason why we chose to have a public portfolio on Wicked Capital—it serves as a tremendous learning tool for others.
It provides you with an opportunity to sit in the right seat and experience the journey of passive-income investing from a real-world frame of reference. That adds a very important component to your learning process—one you simply can’t replicate from merely reading investing articles.
Stated differently, it provides a real-world laboratory to share insights and lessons with you—providing you with a glimpse into both (1) our investing mindset and process and (2) the real-world of the market. It is our hope that you can take some of those nuggets of experiential wisdom and apply them to your own investing journey.
January provided us with a perfect opportunity to do just that—to highlight the dynamic nature of short-run market volatility and how we are embracing it in terms of our portfolio management.
So, before we dive into the performance details, let’s take a moment to explore how we can embrace and harness the power of short-run volatility through employing a proper mindset and solid process—thereby capitalizing on long-run opportunity!
(As always, feel free to skip down to the portfolio update and then come back and read this month’s message!)
In January, we saw some significant volatility introduced into our public portfolio—producing a 10% drop in value.
I have no doubt that the ever present and always boisterous trolls will be quick to hammer us on that performance. However, I must confess that I’m actually tremendously excited about it—even thankful for it!
To explain why, you need to step into our investing minds and consider four critical things that are required to achieve long-term, passive-income success:
The first takeaway from January is that long-term success with passive-income investing—whether you prefer dividend-growth, dividend-value, or a mix—requires maintaining a proper perspective.
You have to keep your eye on the proverbial ball—the right one!
What really matters? In other words, what is the underlying and overarching driver of your ultimate success?
Your answer should be: (1) passive-income and (2) long-term focus.
As such, that should be the ball we are focused on—not short-run capital appreciation.
If we try to measure our progress against the wrong ruler (i.e., our portfolio value over the short run), we are engaging in the fool’s errand of comparing apples to oranges… and we will likely become frustrated at points along our journey!
One of the pivotal keys to long-run investing success is staying in the game.
However, it’s hard to stay in a game when you are unfairly measuring yourself against bad benchmarks or unrealistic expectations.
Understand your game—it’s about building passive-income with a long-term focus—and keep your eye firmly on that ball!
Always keep your focus on what truly matters—the strongest drivers of your ultimate success.
The second lesson from our January update is that long-term success with passive-income investing requires embracing volatility.
As opposed to appreciation-driven strategies (e.g., growth investing), market volatility is our friend—not our enemy to be feared.
As Warren Buffett is found of reminding us, if you’re not prepared to watch your investment drop 50%, then you shouldn’t be in the markets!
I would add that if you don’t welcome short-run volatility, then you shouldn’t be a long-term passive-income investor! After all, it is that volatility that acts as a catalyst (the proverbial oxygen to our fire) to accelerates our passive-income growth when properly captured.
A perfect example of this is our positions in GasLog Ltd. (GLOG) and Hoegh LNG Partners (HMLP). We saw these positions drop 37% and 17% respectively in January due to a perfect storm of short-run volatility.
Both were hit by two negative short-run catalysts: (1) a record warm winter and (2) the Coronavirus outbreak in China (China being a major importer of LNG).
GLOG was impacted by additional developments related to its stake in GLOP—of which it is the parent company. Unlike parent company GLOG (with a growing fleet of new, state-of-the-art ships), GLOP has a small fleet of aging hand-me-downs from the parent company. This has led to difficulties in acquiring long-term contracts… resulting in the inevitable (though surprising drastic) 78% distribution cut announcement for 2020 based on degraded forward EBITDA guidance. The market’s reaction was as swift as it was severe, with shares plunging from around $20 to a low of $4.91.
To be clear, we are not—nor have we ever been—high on GLOP (and that’s putting it mildly) and would never have invested in it. However, its market volatility did result in a bleed-over impact on parent GLOG (to be expected).
So, what do we do???
We keep our eye on the ball (see lesson #1) and embrace the volatility. Neither our passive-income nor our long-run investing thesis has changed. We are still bullish on the long-run outlook for LNG (based on long-run supply and demand) and the fundamental positions of both GLOG and HMLP.
Thus, we embrace the volatility—predicated on short-run catalysts—and view it as a beneficial opportunity to lower our cost basis in the long game. In other words, we can now put our capital to work more efficiently—driving more passive-income with less money.
Now, you may completely disagree with our outlook for LNG and our investing theses for GLOG and HMLP. That’s 100% fine… and 100% irrelevant.
Our purpose behind Wicked Capital is not to influence what you invest in. Rather, our goal is to positively influence how you invest—meaning your mindset and process.
We strive to provide you with the tools and fundamental building blocks to develop your own successful investing plan and approach—one that fits your unique personality, situation, and needs.
The lesson here is not that GLOG or HMLP are good or bad… rather, it is that we must keep our focus on the things that actually matter and embrace volatility.
The beauty of passive-income investing is that market volatility has zero impact on our cash flow. Rather, it provides opportunities to increase that flow more efficiently. As such, volatility is our friend—not our enemy.
As long as our passive-income is not negatively impacted (e.g., a dividend cut) and our underlying long-run investing thesis remains intact, we stay the course.
Remember, just because we may be right in the long run does NOT mean we can’t be wrong in the short run. The market may ultimately agree with us… but it can sometimes take a long time for that to occur—further delayed by unexpected and unpredictable short-run catalysts.
When that occurs, we capitalize on the market’s emotionally driven propensity to overreact to those near-term catalysts. That’s our value edge—known as time arbitrage.
However, this is precisely why long-term, passive-income investing is so difficult and so few are ultimately successful with it! It requires a unique mindset and solid, consistent process.
To learn more about the challenge and required mindset, I highly encourage you to checkout our other great articles on this crucial subject:
The third takeaway from our January update is that long-term success with passive-income investing requires filtering out the noise.
It is critical that you don’t allow the noise coming from those around us to distract you!
We are surrounded by a plethora of noise sources: the media, social media, coworkers, friends, and family.
Their aggregate noise bombards us 24/7 and can both overwhelm us and redirect us from our investing course—whether through a gentle Siren’s call or harsh criticism and judgment.
Regardless of the source or intention, we can’t allow outside noise to influence us. We must stick to our mindset and process.
Investing is an individual sport. We can’t fall into the trap of comparing our performance to that of others—especially those competing in other disciplines!
That’s akin to being a marathon runner and comparing your 40-meter dash time to that of a sprinter—again, it’s apples to oranges!
Instead, put your nose to the grindstone and focus on the task before you—staying true to your investing plan and strategy. We can only measure our performance over longer periods of time and against similar investing approaches and strategies.
Unfortunately, failure to do so can lead to frustration, disillusionment, and—ultimately—abandonment. You’ll never win a marathon if you quit after the first mile. Stay the course and trust your process.
Our public portfolio is in its infancy. In terms of the lifecycle of a long-term investment portfolio, it was practically born yesterday. As such, noise (and trolls) be damned, we are thrilled to have a great opportunity early on to significantly reduce our cost bases in the short run, with our favorable long-term theses remaining intact!
Filter the noise—ignoring that which adds no value!
The final lesson from our January update is that long-term success with passive-income investing requires graciously taking what the market gives us.
When it comes to investing, never look a gift horse in the mouth!
If the market is giving you an opportunity—seize it!
Don’t question the value of it based on some misplaced desire for something else (see lesson #1)—simply accept it for what it is!
Furthermore, accept it with a smile of gratitude and appreciation—understanding that, like time, power, and fortune, the market can be a fickle mistress indeed.
Would you rather have some short-run unrealized capital appreciation or increased cash flow (aka real passive-income) over the long-term?
If the market gives you volatility… grab those lemons with both hands and squeeze them for all they are worth! You’ll enjoy that beautiful passive-income lemonade for years to come!
Focus on the right ball and seize opportunities whenever the market is serving them up to you on a silver platter.
January provided us with an opportunity to unleash some of our dry powder—and we welcomed it! We still have a sizeable cash (or cash equivalent) reserve left to be tapped and a lengthy list of potential new additions that are getting close to our targets!
With 2020 now well underway, let’s take a look under the hood of our passive-income portfolio and recap our performance over the month of January!
As we close out the month of January and our 46nd week, we currently have a portfolio value of $5,209—up from our starting value of $500 on March 13th.
In terms of market performance, we are down -10.4% since inception, down +7.5% over the past quarter, and down -10.2% over the past month.
As we noted in our discussion, we encountered some significant short-run volatility during January—reflected in the numbers above.
This was a welcomed development and we deployed around $600 in capital to the portfolio. While that is not reflected in the current portfolio value (due to the volatility), it is reflected in the growth of our passive-income stream—the name of the game.
There’s nothing worse than being a passive-income investor with capital to deploy… but nowhere to deploy it!
As we were noting in late 2019, the pace of our portfolio capitalization growth had slowed significantly due to two related factors: (1) great opportunities had become more challenging to find given current valuations and the market’s PE expansion and (2) we were increasing our cash position on the sideline—waiting for the right opportunities to materialize in 2020.
We are absolute investors. If great value opportunities are not available, we patiently wait (while slowing building existing positions). We don’t settle for relative opportunities based on the potential for continued multiple expansion—possibilities that can quickly evaporate in a game of musical chairs. We have a system and a process—and we stick to it long-term just as we encourage you to do on our website!
January finally welcomed-in some great value opportunities—opportunities that enabled us to start putting our war chest to work.
As we always emphasize, this is both (1) an income-investing portfolio and (2) a long-term investing portfolio. As such, capital gains/losses are only a secondary performance metric. Your focus should always be placed primarily on income metrics!
With a DGI (passive-income) portfolio, our primary goal is to build passive income. Market volatility should simply be viewed as potential opportunities to deploy your capital more efficiently and generate more income over the long run.
Here’s where we are at in terms of income metrics…
We have earned $249.96 in dividends since inception, $117.26 over the past quarter, and $68.12 during the past month.
Dividends continue to trend in the right direction with basically 47% of our earned dividends coming in the last quarter (representing 25% of the portfolio’s lifespan).
Our portfolio currently generates $527 in annual passive-income. Moving forward, we’ll track this trend in our updates—as it provides the best and most fundamental measure of our true performance based on our strategic investing approach.
In terms of dollars, here’s a look at our paid-dividends trend:
We are excited to announce that we hit our year-one goal of $100 per quarter in passive dividend income at the end of 2019. As we mentioned then, our 2020 goal for the Wicked Capital public portfolio is to achieve an average of $100 per month in dividends by the end of the year!
That will be a challenge—but one that we are excited about and feel is completely achievable.
Our yield-on-cost (YOC) has increased to 8.9%, while our current yield is at 10.1%.
Below is a graph of our YOC and current yield since inception. From a portfolio-level perspective, anytime YOC is below the current yield, it’s a targeted buy zone—there is opportunity to increase our capital efficiency (i.e., raise our YOC).
We’ve maintained a narrow yield variance, which indicates that we are deploying our available capital about as efficiently as possible with this portfolio.
Obviously, the recent volatility spike produced a jump in current yield. We will continue to tap into that value opportunity—seeking to close the gap.
As we always note, ceteris paribus (e.g., underlying fundamentals), we utilize an opportunity-focused portfolio allocation approach—one that seeks to deploy capital (both new and reinvested) with the greatest efficiency possible.
To wrap up, here are our current allocations by holdings, capitalization, asset type, position size, and sector:
Additionally, here are our allocations for our industrial sector that includes two subsets: (1) broad and (2) freight and logistics…
We hope you’ve enjoyed this month’s update on our public-view dividend growth portfolio and my always-opinionated (but usually valid and hopefully beneficial) discussion!
You can always view our Wicked Capital dividend growth portfolio at https://m1.finance/1zUclN2JL
If you’re interested in starting an M1 Finance portfolio, please consider using our referral link https://mbsy.co/sZVS3 and we’ll both get some free cash!
That’s just one more reason to start your dividend growth investing today! It’s never too soon to start working towards your financial freedom!
If you’re interested in dividend growth investing—you’re in the right place! We focus exclusively on helping others be as successful as possible with this approach and we hope you’ll continue to return to our site to learn, grow, sharpen your skills, and find effective and positive ideas and motivation!
Soak it all in, take and use what you want, modify it to fit your unique situation, and keep building that portfolio with a solid process and winning mindset!
Always remember, investing involves substantial risk of loss and is not suitable for everyone. The valuation of investments may fluctuate, and, as a result, you may lose substantial amounts of money. No one should make any investment decision without first consulting his or her own financial adviser and conducting his or her own research and due diligence.
You should not treat any opinion expressed on the Wicked Capital website as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion for entertainment purposes.
The opinions are based upon information we consider reliable, but neither Wicked Capital nor its affiliates, partners and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such.
Past performance is not indicative of future results. Wicked Capital does not guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this website.
As noted above, strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested.
Investments or strategies mentioned on this website may not be suitable for you. The material presented does not take into account your particular investment objectives, risk tolerance, financial situation, or needs and is not intended as recommendations appropriate for you. You must always make an independent decision regarding investments or strategies mentioned on this website. Before acting on information provided on this website, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own licensed financial or investment adviser.