1. Covestor Manager Spotlight Article 2011.
2. Year End Letter 2008.
3. Sunday Express Article 2008
4. The Aveo Articles 2013


Covestor Manager Spotlight Article:

In September 2011 Covestor published a Manager Spotlight article featuring Chris Rees of Tenstocks.com. Here's the text:

“What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”

It’s extremely difficult and probably unwise to narrow the process of investing down to a single best rule or element. I personally use a blended and balanced application of many different elements. But if I try hard I can perhaps chop these down to three main rules:

1. Maintain an investment portfolio that is not priced at more than one times net tangible assets.
2. Limit portfolio holdings to your ten highest conviction investments.
3. Invest at times of market or company stress.

Careful and disciplined application of #1 can go a long way to looking after #2 and #3.

I try to keep my investment portfolio priced at around one times net tangible assets. In an overvalued market, new investment candidates become harder to find and already owned investments tend to reach sell targets and get sold. I aim to pile up cash in overvalued markets, then re-invest in undervalued markets.

Many investors invest based solely on assumptions and forecasts about future earnings. If someone pays a price to earnings ratio of 20 for a stock, they need to be a very good fortune teller to get it right with any degree of consistency. My approach is different – I only pay for current tangible assets and thereby aim to get future earnings for free.  As Warren Buffett has said, “a girl in a convertible is worth five in the phone book.” (Berkshire Hathaway 2010 annual letter – http://www.berkshirehathaway.com/letters/2010ltr.pdf)

So where did this focus on tangible assets come from? Imagine the market as an elevator in a skyscraper. Tangible book value is the ground floor. Each floor you go up, the more risk you take and the lower your survivability becomes in the event of an accident. If the cable snaps and you’re on the ground floor, you open the door and go get a coffee. If you’re on a higher floor, they are scraping you off the walls.

Investing with a focus on tangible assets is all about managing risk. An investment portfolio can go up, down or sideways. If you concentrate on not going down, the alternatives take care of themselves.

"How do you apply that lesson in your current investing? What do you find are the challenges to applying it?"

I know there are many different approaches to investing and many of them will be outlined in this series. I can’t say I have the best strategy. But for me, when I started investing, I had nothing. I couldn’t afford to lose. So my priority and focus from day one was not on making money, but rather on not losing it. And this is one of the most important lessons I’ve learned about intelligent investing. The way to make money is first and foremost to strive to not lose it.

Psychology and emotion are probably the biggest challenges to sticking to an investment and portfolio discipline. You need to be mentally and financially prepared to invest when others are afraid to, and to have the discipline to leave the market’s wild parties early and sober. This is not easy to do, but I believe it’s the first law of investment survivability.

Also, I believe a portfolio needs to be put together like a jigsaw puzzle. Too many people think of an investment portfolio as merely a bunch of stocks thrown into a basket. A strong portfolio doesn’t work like that. In a strong portfolio, investments work and fit together. Entry points, allocation, sector, country and currency considerations all play a part. The concept of stock picking, in my opinion, is overstated. The importance of portfolio management and strategic planning  is understated.

A global perspective is also important in building a strong portfolio. It makes no sense to limit potential investments to one country, or one currency, or one sector. Instead, I seek the most compelling investment prospects I can, wherever I can find them, and then blend, diversify, fit and balance them together into a concentrated global portfolio that meets my overall strategic goals.




Year End 2008 Letter:

In 'The Warren Buffetts Next Door' by Matthew Schifrin, the author excerpted parts of a letter we wrote in January 2009 about how we did in 2008, the worst stock market year of our lifetime. We publish it here uncut (a slightly different version of this letter was published at Marketocracy to address their audience).


January 3, 2009

We have just finished the worst year in our history.

The Tenstocks.com portfolio ended the year down 44%. It is remarkable that we were still positive (up 5%) coming into October. To lose half a portfolio in three months really takes some doing but we managed it.

Volatility in Q4 was jaw dropping. Portfolio positions plunged and lurched 10-20% in a day- sometimes in minutes. In Q4 the S&P 500 moved more than 5% up or down (mostly down) on 18 trading days. There has been less than 20 such days in the last 50 years.

As markets plunged, some 30 trillion dollars of wealth were wiped from global markets. The US alone has given up some 7 trillion dollars of wealth since the 2007 highs. Some of this wealth was ours.

The S&P 500 closed the year down 38%. It was the worst down year since 1931. The MSCI World Index finished down 42%. Brazil, Russia, India and China all fell over 50%.

In 2007, we did not add meaningful value to the market despite a good first half. This year, despite a good first half, we have also failed to add value. If we do not add a significant amount of value (alpha) over the market in 2009, we should be fired. Managed accounts would be better served in an index fund. Some of you may not be inclined to wait for a third year.

While getting our head handed to us in 2008, we were not alone. We had some very good company. Mr. Warren Buffett’s Berkshire Hathaway (a holding) fell around 45% from its 2007 high. Mr. Martin Whitman’s Third Avenue Value Fund was down 45% for the year. Mr. Bill Miller, of Legg Mason Value Trust, and famous for outperforming the S&P 500 for 15 years straight, finished the year down 55%. There were so many violent twists and turns in 2008 that very few people got it right and of those who did a lot of them STILL lost a lot of money.

Mr. Buffett has said “predicting rain doesn’t count; building arks does.” We clearly didn’t build an ark and we can be faulted for that. But we did have anchors to windward (including a large Berkshire Hathaway position). But when the Cat 7 hurricane of October/November came, nothing held.

Mr. Ken Heebner, who manages CGM Focus Fund, was one of those who saw the gathering storm coming in real estate and mortgage related financing. He built an ark and made good money for his clients in 2007 with big, brave and fearless short positions (a bet they will go down) in homebuilders and mortgage companies. As the storm raged in 2008, he moved into energy and finance and got his head handed to him. CGMFX finished the year down 48%.

One of the most stunning revelations in 2008 concerned Mr. Nouriel Roubini, Professor of Economics at the Stern School of Business at New York University. He has been dubbed Dr. Doom by the media and is widely credited for seeing the entire storm coming in all its ravaging glory. Surely, Dr. Doom, seeing it all coming and getting it all right built an ark? Well no. A recent article in Newsweek states “despite his prescience, he's suffered just like the rest of us: he's remained fully invested in stock index funds through the market downturn, causing his portfolio to plummet.” If he’s in index funds he took a 40% haircut as well. And he got it right.

We’ve looked carefully at what we did wrong in 2008. Closely matching the market in the worst year of our lifetimes is no comfort. We are supposed to be better. We are supposed to keep the portfolio safe. We are supposed to produce alpha. We didn’t do it.

We have posted to the Tenstocks.com website updated annual average returns as of 12/31/08. They are:

  5 years   17%
10 years   25%
17 years   21%

This long term track record was built using strict value investing disciplines. While not perfect on a year to year basis, they have served us well over time. These valuation metrics center on liquidation values, net tangible assets, low price to earnings, and low debt among others. Long term safety is supposed to come from a careful and balanced blend of these metrics (as well as sector and currency diversification) across the portfolio.

One of the things we noted while looking at our updated 17 year performance of 21% per year was that over the same timeframe, the S&P 500 returned 7% per year and MSCI World returned 2% a year. The numbers are quite remarkable. Over a 17 year stretch, we produced 14 points over the US market, and 19 points over the global market. Apart from that, two other things are worth mentioning. First, competition for stocks (meaning downward price pressure) can be expected to come into the market anytime something else, with an equal or lower risk profile, offers more than 7%. Second, that a diversified investment on the global economy, bought and held for 17 years would have produced less than a money market fund?

There is something else here too.

S&P 500 (500 stocks) = 7%
MSCI World (1600 stocks) = 2%
Tenstocks.com (10 stocks) = 21%

Over a 17 year time span (which includes 2008- the worst market year in 77 years) the market is saying you pay dearly for the perceived comfort of diversification. Careful disciplined portfolio concentration outperforms. The price for concentration is extreme price volatility over the shorter terms.

When we look at what we did wrong in 2008, we conclude the answer is ‘not much’. Some may not be happy to hear this. We did produce value coming into October. We were up 5% versus S&P down 19% and MSCI World down 25%. By any reasonable standard, we had done our job coming into Q4.

One of the things we got right in the first half was exiting all our energy positions in early summer. In June we wrote “oil is around $140 a barrel. The energy market is starting to feel like a very crowded trade. For us, it evokes the image of an overloaded Filipino ferry. It might get where it wants to go but we don’t want to be on it if it doesn’t. As a result, we have sold our energy investments.”

Over the next months, oil fell from $140 to around $35 a barrel- a drop of 75%. As smart (or lucky) as we were to get out at the top in energy, we were quickly stupid (or unlucky) enough to start buying the positions back way too early and still took a pasting.

Another thing we did right in the first half was not to buy back into Elan when its share price collapsed from $37 to $10. We reviewed Elan (an old friend) and came up with a valuation in the $14-16 range. We were very tempted to take a first bite at $10 but didn’t. It recently traded as low as $5. At sub $7 it’s a reasonable buy here but we will probably pass.

So, if we did all right coming into Q4, what the hell happened to blow us away so badly in October/November? Simply put, we believe all fundamental valuation metrics were ignored and abandoned by the market in a panicked rush for the exits. In desperate sudden need for liquidity as the credit markets froze up and redemption demand soared, hedge funds, banks, mutual funds and insurance companies, etc, sold off what they could as fast as they could. In many cases, firms, unable to sell the paper garbage they wanted to get rid of, were forced to sell what they didn’t want to get rid of. If there was a market for it out the door it went. Panic feeds on itself. In many cases, selling prices simply uncoupled from any standard measure of true value. When nobody is interested in what something is worth, investing based on value is not going to work and it didn’t in Q4 in spectacular fashion.

However, if disciplined concentrated value investing has worked (on average) over the last 17 years, do we stop doing it because it failed to work for two months? We don’t think so.

There is a huge amount of cash piled up on the sidelines. It amounts to about 75% of the total value of the US market. This cash is making less than 2%. Right now we are experiencing deflation. The next concerns will likely be inflation and dollar devaluation. Staying in cash will not protect you from either. The incoming Obama administration is readying a stimulus package that could well reach one trillion dollars.

Combine the money already on the sidelines with the new money rolling off the printing presses and you have a powerful force to re-inflate the economy and push stock prices higher.

At year end 2008, the Tenstocks.com portfolio was selling at a P/E of 4, at a 60% discount to tangible assets, at an 80% discount to estimated fair value, and pays a current dividend of 15%.

Quite simply, nobody can get where they want to go in this world making 2% on cash.

There is a new bubble forming in treasuries and another forming in gold (we prefer oil and gas which is taken out of the ground and burned). The cash will have to move somewhere. We believe, given the relative valuation spreads, it will move back into stocks.

So what’s the timeline?
We don’t know. But we think it will be about a year for the Obama recovery package to filter through to the economy. The market often moves about six months ahead of economic data so we may see some stability/improvement by mid year 2009. Meanwhile, some of that sidelined cash should start finding its way back to the market as fear and forced selling subsides.

But there are some negatives. Bad news will continue to roil the market at least through mid year. 2009 S&P 500 earnings could come in as low as $50. If we assign a bad recession bottom P/E of 10 to those earnings we could see the S&P 500 sell down to 500 although we think it unlikely. More possible as a worst case scenario is a brief retest of the recent 740-840 range. Another question mark on the market is there continues to be good value available on corporate debt. It is reasonably easy to find decent paper paying better than 7% which, as noted above, gives some competition to common equities.

Reaching for our crystal ball, we think several themes are likely to be prominent over the next year or two. Hard assets and commodities will likely do well from current depressed levels as inflation and currency devaluation hedges. They will also benefit from increased demand as the global economy begins to recover. We have started nibbling at some discounted real estate that offers hard asset protection and produces good current income.

When we seek shelter from global political risk, inflation, and possible continued dollar depreciation, as well as seeking hard asset investments with good future supply/demand characteristics, we like Penn West Energy (PWE). It closed 2008 at $11. Annual oil demand has fallen only once in the last fifty years (1983). The International Energy Agency forecast global production will drop roughly 7% a year going forward while demand will increase. It is noted that Mr. Bill Gates and Mr. Warren Buffett flew to Alberta recently to take a first hand look at the oil sands. While there may be short term weakness in the price of oil due to slower demand, we think 2009 and beyond will see higher oil prices.

[PWE was sold in October 2010 for $22.20. The average sale price of the entire PWE position was $20.30]

Now a few closing notes.

We have had a jarring and painful 2008. I have received many emails, especially in Q4, expressing understandable concern. Overall you have been truly wonderful. I thank you for your support and continued trust.

Also, I am a strong believer in keeping my mouth shut and letting the results do the talking. Over the long term, the results have generally spoken favorably. I spend a lot of time reading opinions, articles and reports. I listen to talking heads on Bloomberg. 90% of everything I read, see and hear is total garbage and an utter waste of time. Not too long ago I told someone that “increasingly investors will need to produce more return on their capital and with conventional mutual funds wallowing in mediocrity it becomes a smart proposition to at least consider alternative methods and vehicles where the emphasis is less on the talk and more on the walk.” In 2007 and now in 2008, there hasn’t been much ‘walk’. But I still don’t like talking. When we have a reasonable year, I don’t usually do a year end letter. For 2008, it’s all I’ve got.

I wish you all a happy, healthy, peaceful and more prosperous 2009.


Chris Rees
Tenstocks.com

[The Tenstocks.com portfolio was up 134% in 2009. The S&P 500 gained 26%]



Sunday Express Article:

A shorter version of this Danny Buckland article featuring Chris Rees of Tenstocks.com was published in Britain’s Sunday Express newspaper on January 6, 2008.


They used to smirk at the kitchen porter who arrived at work with a Wall Street Journal tucked under his arm and colleagues could scarcely believe that he spent his free-time hunched over a computer screen and leafing through financial publications in a local library. As they spent nights off drinking, hard-up Chris Rees continued his monastic lifestyle, spurred on by a tortured childhood and being branded a failure at school. Now the former porter, waiter and odd-job man has an enviable lifestyle with an ocean view apartment on a Caribbean island and the wealth to keep him and his family in a luxury that seemed remote after he trudged out of his secondary school gates as a 16-year-old.

Rees is now a top performing player on the stockmarket whose skills regularly out-strip investment companies crammed with high-flying graduates and business specialists. His investment portfolio has reaped incredible dividends posting an average annual return over five years of 58 per cent which has helped lift him from poverty to paradise.

“I was working with ten other staff at the restaurant and when it came to wages and tips most would go out drinking and be skint the next morning. I’d go home and study and sleep and then go to the library when I could,” says Rees, who now lives on the Dominican Republic, where he owns several properties. “They would make the decision to spend and pee and I’d make the decision to save and invest. Multiply that out by 365 days, throw in a little investment success, and at the end of the year one guy’s got £20,000 in cash and everyone else is still penniless. Multiply and compound that out for ten years, and one guy is home and dry and all the others are going to be waiting tables for the rest of their lives.”

The rhythm of the world markets is now the soundtrack of his life and he rides the corporate convulsions with the skill of a surfer gliding just ahead of booms and crashes.
For once, rags to riches is an understatement.

Written off at school, Rees suffered from debilitating eczema and asthma attacks as a child. Confined to hospital for long periods, he had to be tied down at night to stop himself scratching as the infection cursed his youth. Missing vast chunks of schoolwork gave him no chance and few were surprised when he walked out the gates of his Buckinghamshire school the moment he could…and he just kept walking.

The adventurous teenager left his family in Stony Stratford with a rucksack and some savings with his parents Eric and Irene expecting him to make around six miles before heading home for his supper. But it was the start of a remarkable and heroic journey that has seen him take odd jobs in exotic locations around the world on a meandering road to redemption.

“I was born with asthma in my lungs and eczema all over my body. Between the ages of five and ten, I was tied down spread-eagled to a bed night and day to stop myself scratching at my skin. It was torture for a small boy,” says Rees, the son of a bookmaker.
“My only good memory from the hospital was that there was a thickly treed wood out back. One day a maintenance worker loaded a bunch of us kids into an open roofed Land Rover and took us on a fast ride through the wood. I can remember the rush of crisp air, the speed, the sense of freedom and escape. The memory of that ride has never left me. About a month ago, I got to take a bunch of poor Dominican kids for a ride in the countryside in a borrowed open Jeep. They didn’t want to go back either.
“Not long after I got out of the hospital, I took the 11+ exam. I could barely read or write. I couldn’t answer the questions because I didn’t know what the questions were. I watched the other kids scribbling away while I sat and looked at the clock wondering when I could go home. I failed.”

Few teachers took the trouble to help and despite catching up his peers swiftly and developing a keen interest in geography
“I’d often finish first in Geography tests but the teacher was convinced I was cheating by copying from the other kids even when I got the most answers right,” he adds. “I would get sent to the headmaster Jack Reid but he was a wonderful man and one of the few who believed in me. He told my mum that her son ‘was going to be famous one day and will do something with his life’. He died recently and I never got a chance to thank him. I wish I had.”

Rees travelled the world with a fierce independent spirit. He worked as a tailor in Afghanistan, a cook in India, a builder in Switzerland, an eco-tourist guide, a sailing instructor and a charter boat captain in Belize and Guatemala.
“I travelled to more than 30 countries and washed my fair share of dishes along the way,” he says. “I worked as a tailor in Kandahar for about a year. I wore full Afghani clothes and made my own turban every day. There were seven tailors in the town and each night a different tailor would host the other tailors for dinner. Each night we’d get together in a different house. We’d sit on the floor and eat with our fingers.
“The funniest thing about this time was that we all made 100% polyester three piece suits for export to Iran but the law changed so that no imports were allowed but you could cross the border with the clothes you were wearing. Overnight a market developed for really thin guys. We would dress them up with suits of different sizes. Ten pants, ten waistcoats, ten jackets. It was a sight.”

Settling down was never on the agenda and the money he made simply funded the next leg of a never-ending travelling experience that eventually took him to California where, penniless, he got the chance to play in a poker game and swiftly picked up the subtle nuances of human behaviour that make or break a card player.
“I played for about six months getting better all the time until I got involved in a high-pressure game. I was with guys who wore Stetson hats and chomped on cigars and the stakes kept rising,” he adds. “I stayed with them and then it was just two of us and he threw in the keys to a 1965 Cadillac Coupe de Ville. I won without realising it was a classic car worth a lot more than the $700 he used to stake it. What a game.
“I had a car, cash and the next day I was gone on a six month trip to Florida. I was independent and the idea of staying in one place just didn’t really occur to me.”

His next saga was sailing a 33 foot yacht around the Caribbean, cruising past whales, dodging storms and keeping afloat with charters and odd job work
“It was magical. Sailing and being ‘out there’ can be very spiritual. Sometimes you feel very close to God. Other times it’s awful. One time I got caught in a bad storm off the Florida Keys. The boat was taking an awful beating. I was strapped to the wheel and the cockpit with a safety harness. Sometimes a whole breaking wave would come over the stern, flood the cockpit, and roar over the boat. There were moments when I couldn’t even see the boat. It was all under the water. You didn’t have time to be scared though. In bad situations, you’d always work through the problem first. When you got the boat somewhere safe and sound, or when the storm passed, then you could start shaking,” says Rees.
“I loved sailing. It was a wonderful life. But it’s hard work. If you put all the bad things and all the good things that can happen together, it’s probably a lifestyle best suited to those with deep psychological problems. I did it for fourteen years. I can’t swim, so I guess I qualify.”

The Eureka moment came about 15 years ago when his dentist was too busy to deal with his toothache because he was glued to a computer checking his stock dealings. The fuse was lit and Rees headed to the local library to plunge into the first academic phase of his life for almost 30 years.
“I realised immediately it was something I was fascinated by. The dentist got me started on the learning curve,” adds Rees.
He then started a marathon quest to save money and learn the nature of fluctuating stocks and the subtle financial climate changes that drove profit and loss. He crammed during the day and worked at night in restaurants where he would arrive with a copy of the Wall Street Journal under his arm.

He got his confidence by trialling his new found skills on the Marketocracy system which offers investors the chance to play the stock markets on a hypothetical exchange. It gives newcomers the chance to make mistakes without losing fortunes. The company has helped hundreds of people gain the skills to ditch their day jobs and make life-changing money.
“Chris’s story is inspirational and a great example of how learning to invest is available to anyone and can transform their lives. When you are learning it is best not to risk your life savings,” said Mark Taguchi, President of Marketocracy Research.
“Given his beginnings and what the world told Chris as a young man, it is remarkable that he has achieved so much and now performs on the real market with confidence, conviction and a belief that is the envy of professionals. His transformation has been phenomenal.”

Rees has seen 84 per cent of all his investments return a profit – a rate that would have City bosses purring with delight.
“My first recorded investment success was the purchase of two gold mutual funds. I bought U.S. Gold Shares and Invesco Gold. I made 93% on the first one and 42% on the second,” he says.
“Investment success comes with hard work, discipline, patience and study. You also need to be very careful. But you don’t need to go to university. Everything you need is at the local library or online.
“The biggest investment winner was Irish company Elan when its Multiple Sclerosis drug Tysabri got pulled from the market when a few cases of a brain infection were reported and the share price plunged from $30 to $3. But, if you calmly and logically went through the medical reports and histories of the patient cases, you could see that the problem was with the drug being used in combination with others. Shares were trading on emotion, misinformation, poor journalism and faulty Wall Street analysis as well as just plain rumour and scaremongering.”

Rees is currently outperforming the giants of the British markets who have the benefit of working for massive City corporations.
He has gone way beyond the imagination of his former teachers and schoolfriends but a life on the road means he is far from showy and lives a simple existence in the Caribbean trading in his best investment – happiness
“About six months ago, I bought a small apartment overlooking the Atlantic Ocean. My daughter will be four in February. I absolutely love being a dad. I’m content. I’m successful, I have a beautiful wife Isabel and daughter Tina, the sun shines every day, there’s money in the bank, and I can see the ocean from here. What more could I want?
“I don’t have a car or a boat. I don’t have a suit and tie. What I do have is a beaten up, tatty old dirt bike. I bought it second hand for $500 about seven years ago. It’s a great vehicle to have around here. Nobody wants to steal it.”

Rees monitors the markets from an office in his home and his portfolio has outperformed every mutual fund in the US. He could probably have been one of the wealthiest men in the world if his talent had been noticed earlier. He now believes that real world financial dealing should be taught in schools.
“It’s important. It is a major key to getting out of poverty and living a better life so it should be on the curriculum,” he adds. “But everything you need to learn to be a successful investor is available at the library and online. I’ve proved that. You don’t need a university. You don’t even need a teacher.
“I came to this late in life but the lessons are there for everyone. Determination, discipline and hard work are essential ingredients for success. Luck will not work.
“For me, it was the simple expedient ‘I absolutely point blank refuse to not be successful’. In my case, I can’t fail. I won’t allow myself to. I am not going back.
“There is no way in hell I’m going back to washing dishes for a living.”

End

The Aveo Articles

In early 2013, we made the fateful decision to invest a large percentage of the Tenstocks.com portfolio in a small-cap biotech company with a promising cancer drug. We wrote three articles about this investment and published them on Covestor’s Smarter Investing and Seeking Alpha. The investment failed and handed us our biggest ever dollar loss. We think the three articles are a good example of how we work despite the fact we were wrong.

Here's the links:

Aveo Article One: Why we expect FDA approval

Aveo Article Two: FDA versus Aveo's Tivozanib

Aveo Article Three: FDA's rejection defies logic












"His portfolio has outperformed every mutual fund in the US."
- Sunday Express