1st Half 2015 Fund Performance Update Letter to Investors

 Dear Partner,

During the 1-st half of 2015 (Jan 2 – June 30^th), the Green Valley Fund (“GVF” or “Fund”) appreciated by +26.1% on a gross return basis. Since the inception of the “GVF” on March 1, 2014, the Fund has appreciated by +73.8% before LP related allocations.

	2014 (from 03.01.14)	2015	Since Inception (03.01.14)
GVF Gross Return	+38.3%	+26.1% (YTD)	+73.8%
S&P 500	+13.6% (full year)	-0.14% (YTD)

Fund Performance

During the first half of 2015 (close of June 30th, 2015), our fund has appreciated by + 26%, while the YTD S&P 500 (ETF SPY) Index has returned – 0.14% and Dow Jones Industrial Average (ETF DIA) has returned – 1.34%. This result should not make our partners to assume that future will be like the past. I would strongly advise not to project our future profitability on the back of 1H 2015 results. In essence, our primary goal is to have a rate of return no less than 35% and preferably higher on an annual basis. In addition to that, we are full aware that there will be a time when our judgment will be wrong or the general market conditions might affect our performance. Despite the fact that our major goal is to have absolute returns, S&P and DJIA are two benchmarks that we use to measure our performance against.

Portfolio Related Events

In the early part of the year, we had established positions in a number of industries, such as healthcare, energy, telecoms, technology and financials. The portfolio has been well diversified, across the number of companies that we believed would drive our performance. However, beginning from the early part of May, we had a number of positions in a financial sector that dragged our overall performance lower. We have a view that in a near future (3-6 months period), the markets might see a major correction in the range of 10% or more. Therefore, starting from June 15th, we have either completely sold off or reduced our positions in a number of companies. By the end of the 2^nd quarter, we had nearly half of our capital sitting in cash or short term safe investments. However, the members of our core portfolio is still intact.

Investing Tenets

In general there are several tenets that we follow in building a portfolio of companies.

1.       First, we have to make a little confession though. Macroeconomic events, that are taking place in the world, though do affect the way many businesses make decisions, invest and grow. However, it does have no effect on the processes of business analysis that we undertake with each and every company. In our mind, there is absolutely no bearing of economic events to how companies should be evaluated. Case in point is the latest developments in Greece with its creditors. We actually used the opportunity in drop of prices in a number of companies due to the fear from Grexit.

In general, it has never been a good policy to base investing decisions on macro events, such as political intricacies, interest rate predictions or fiscal/monetary policies of certain countries. The reason for that is very simple; we believe that nobody has any predictive power to know in advance what will be the outcomes of macro events. Therefore, our motto is to “concentrate on things that are knowable and important, than waste time and energy on things that are not knowable and unimportant”.

2.       In our mind, a balanced portfolio has to have both elements of growth and value. Which entails being long on the names that has a sizeable upside potential and the names that have recently been lost out of favor due to various factors. The first ones (growth) are generally volatile in their price movements, while the latter ones (value) are not. However, as we don’t try to predict the short term price gyrations of companies, it has almost no relevance to our investing philosophy. Because, once we purchase shares, we become a long term holders of equities, alternatively up until the point where company has changed its business model, become seriously overvalued or had made irreversible mistakes. In addition to that, sometimes we find better opportunities in terms of capital appreciation, which makes us sell our current holdings to use on other more profitable ideas. Given the fact our fund has a tiny amount of capital in comparison to major hedge funds, it is to our advantage to be nimble in our approach to buying and selling stock more actively taken into account the risk/reward calculations.

3.       In terms of value plays, the appraisal of the business’s intrinsic value is very important, as well as having a margin of safety in place. While we might make mistakes in our calculations, the margin of safety should serve us a safety mechanism in the case of downside. Even the best businesses of the world, can’t be considered as the best investment vehicles, unless they have attractive valuation. In the short term prices might gyrate, and it might keep us from utilizing capital more effectively.

4.       In any business endeavor, the quality of management should be a cornerstone of any investment thesis. We study the records of management very intensely. Great managers make investing decisions easier to take.

Final Remarks

We define investing as “acquiring and holding quality securities at suitable prices”. We are not trying to predict the short term movements but consider ourselves to be partners in companies that we are in, which basically means that we stay through thick and thin with the companies that we have selected to be a part owner of. These companies might have lagged in performance, but it has no bearing on their attractiveness in our eyes. The collection of companies that we own, are fine businesses that has yet to show its true value. As the Benjamin Graham once said, “The market can stay irrational longer than you can stay solvent”, we take our tasks seriously and do not have any margin at all. In addition to that, we keep certain amount of our capital in cash, to seize opportunities when they arise. Probably, you have already guessed that our collective view for the markets and many securities, at a current time is that they are being very overvalued and frothy. We believe that some sort of market correction seems imminent, though we are agnostic as per the date for that event. We have time, and we are waiting. Just be sure, that when the time comes, we will be ready to load our vaults.

On a personal note, you can find the most favorite ideas published on seekingalpha.com, where I am a regular contributor. The link is here: http://seekingalpha.com/author/talgat-akhmetov. From here you can go to my articles tab, which is located on the left side of the page.

Also, please check my blog where, I publish articles on general topics of personal finance, investing, investing philosophy and other interesting topics. The link is here: http://greenvalleyinvesting.blogspot.com/

You should also understand that, we will be providing updates at quarter ends only, so that we all have certain yardsticks to measure performance. And, you should also understand that I can’t guarantee that results will always be positive, as I don’t know what prices of stock will do the next day, next week or even year.

But, what I do know is that businesses we have taken positions in and will take in the future, will become substantially more valuable in the next 2-3 years of our involvement. Please don’t hesitate to get in touch with me if you have further questions.

Cordially,

Talgat Akhmetov

Importance of Risk Management in Trading or Dumb Mistakes that I Did Recently

Well, the time has arrived for me to come clean with my latest mistakes. I plan to write a post at the end of every month, where I would share with my major mistakes and what I have learnt from them. 

There are several reasons why this might be a good idea. In the below paragraphs, I list some of the reasons and give short description for each one of them.

1) Being able to measure results, is one of the elements of SMART way of doing things. In the business of trading/investing, this comes through analyzing past trades and establishing major mistakes to learn from them to decrease the probability of repeating them in the future. I say decreasing, but not eliminating, because, we are all human beings and we will make mistakes in the future, as we have emotions that will constantly interfere with our common sense judgement.

2) Writing about my mistakes, will help me crystallize the actual reasons that lie behind the mistakes I did during the month. Thet should ideally help me become less prone to repeating the same mistakes.

3) Paying attention to mistakes, is in my view is more important than paying attention to successfull trades. The reason for that, is the belief that by minimizing the mistakes that incur will eventually help the ultimate goal of growing capital.

So, let's dive in and see what mistakes helped me stay poorer in the month of June 2015,

Mistake #1: Not cutting losses as soon as possible. Or in other words not having a disciplined approach to exiting the trade.

This mistake undoubtedly is a deadly one. If there is one deadly disease that can kill a small time retail investor, with limited resource base, this is it! This is a mother of all diseases, that MUST be avoided at all costs. Ok, it might sound melodramatic, but truth is that cutting losses is the tool that any investor has to utilize, especially retail investors such as me. We are trying to make a living from markets, that's why it is essential we have a dry powder at the beginning of a new day to fight for the income. As the famous saying goes, one has to stay in the game to stand to fight another day. There is always a new day, with new opportunities, that will give to a patient investor plenty of opportunities to profit. 

Example: I have bought AAPL Jan 16 LEAPS, but overstayed the decline in the price of opton calls. I should have exited the trade the minute it had reached no more loss territory! But...I didn't, and as you have guessed, it made me suffer a lot.

Mistake #2: Being not patient with trades. That is right. This is in the class of major mistakes that should also be avoided at all costs. The next mistake below explains in detail the algorithm of the correct trade, and shows the ways the successful trades has to be executed. And to do that successfully, I have to learn to be patient with my ideas and not rush for the first idea that came to my mind. I have to search for ideas that are around their major support and resistance levels, where I can place my NMLPs and define the risk level.

Mistake #3: Not having an exit strategy. Before entering the trade, I have to have two numbers written and prepared. First is the entry price, that has to be based on the price of my risk level. The risk level is the price that I call “ No More Loss Price” or “NMLP”. So, before entering the trade, I have to define the amount of capital that I can stand to risk (for instance in the case of options - $200) then determine the position size (number of shares of contracts), then only search for a suitable entry price. The entry price has to be around major support levels, that theoretically might give me an upside with a determined risk level. After having established the NMLP, the amount of capital to risk, and entry price, I can start the trade. Then I should hope for a move in the direction of my bet. It does, then I should aim for 5-1 reward to risk payout, and at least 3-1. However, it all depends on the situation, and if I suspect the price might move in the opposite direction, I should close the position in the green. The same thing goes for the moves at the loss level. In case, I am convinced that the stock might move lower than my loss level, I should close it before it hits the NMLP.

Example: Let’s say that WMT is trading at $72, with a major resistance level at $70.50. So, at $72 the most it has to move $1.5 to hit a resistance. My NMLP has to be placed at around $70.50 level. And considering the fact that my risk for capital is $200, my position can’t be more than $200/$1.50 = 133 shares! (or 133*$72 = $9576) According to my risk to reward ratio of 1-5, I should expect a gain of $200*5 = $1000. For this scenario to come to life, the stock price has to move more than $1000/133 = $7.51 and reach $7.51+72 = $79.51

In this example, I am using a common sense way of first identifying the resistance level that the stock might fall to, and then I calculate the most amount of capital that I can risk for this trade. However, in the daily trading, I tend to cling to favorite stocks, rather than search for companies that have moved closer to major resistance and support levels. This is what I should focus on.

Well these are some the mistakes from the month of June 2015. Please share your mistakes from the month of June, that you incurred in your trading/investing processes.