My Story of Too Much Concentration

Example 1285 of your author being an idiot

Recently, a Swedish pharmaceutical company (Moberg) that quite a few investors on Twitter concentrated heavily into reported poor results during a trial and dropped 61% on the day. One particular investor who took a lot of heat had 70% of their portfolio in this Swedish company, and another 10% in Cipher Pharmaceuticals, which holds the license to sell the Moberg’s drug in Canada.

I can’t be too judgemental about those that made Moberg or Cipher very large positions. That’s because I have also experienced a very large position going against me. And that same position remains very large. I tweeted about my experience with a large position underperforming badly, and while I didn’t think I had anything particularly insightful to say (if that’s not the purpose of Twitter I don’t know what is), it seemed to resonate with a few people. I left a few things unsaid in those tweets, and at least a few people thought I could elaborate a bit. This story is to help get my point across a bit better and expand on a tale I’d like to provide others.

Before I start, I’ll say that because I own stocks in a margin account, a TFSA, and three different RRSPs (a consequence of leaving employers, trying to transfer workplace defined contribution pension plans to TD and them, rightly or wrongly, telling me they needed to be a new account each time), calculating portfolio weights at various points in time is tedious. I have since been introduced to Portseido, a portfolio tracking tool that like a lot (you can try it for free here, and I believe if you end up subscribing through this link I make a few bucks). I would have loved to have checked my allocation to Dream over the whole time period, but I couldn’t be botherered. I ain’t doing all that work, because I don’t think the exact numbers are terribly important. I did check all my statements for a few noteworthy times, but how the weighting changed over the whole time period is too much work for little gain.

This is roughly the relevant time frame.

If we go back to 2018, your author had his own website. He wrote about some Canadian stocks, much like he does now, except much worse if you can believe it or not.

For some reason I had a few loyal readers, one of whom (Rod) told me several times about a company called Dream Unlimited . I looked at it but passed on it a couple times. Looking back at a few old statements from that time, it seems like I also bought it and sold it at least once before owning it for good.

I don’t know what was going through my mind at the time. I don’t know if something pushed me over the edge in January 2019, but best I can tell, this is the first time I bought Dream Unlimited shares that I still own today.

January 2019 statement. Reverse split adjusted this would be $14.36.

Knowing me back then there is a good chance that this is just when I had some money. When I was thinking back on this for my thread on Twitter, I thought I made this a very large position. It seems that wasn’t true. In March 2020, I had a pretty diversified portfolio, but my largest position, by far, was in the Brookfield entities.

As COVID played out in the summer of 2020, I sold some of my lower conviction stocks. The big declines served as a great opportunity to look inward and determine what I was comfortable holding and what I wasn’t. I used a lot of those proceeds to buy more Dream, but I was buying other things. I took on leverage, as I didn’t have enough cash to buy as much as I wanted. Dream spent most of 2020 within spitting distance of my first purchase price, which I was probably at least somewhat anchored to. I don’t have an aversion to averaging up, but it’s definitely easier to buy more if you’ve already decided you’re comfortable buying at that price.

While all this buying may or may not have been a bad decision, I can say that I did my homework on the company. I know the company about as well as anyone can know a public company. Intuitively I knew that if a company was going to comprise this much of my net worth, I needed to know that company.

Over the course of 2020, as I was buying more, Dream Unlimited reinforced my belief in it. It started its hugely valuable Alpine Park development. It bought back shares well below intrinsic value. It increased its dividend. It had ended 2019 by selling Dream Global REIT, cashing in on its asset management agreement, then completing a substantial issuer bid with the proceeds. Dream Office obviously fell on hard times, but Dream Industrial became more valuable, and Dream Industrial is the one that is important to the undervalued asset management business. The asset management business and the land being undervalued is more or less the crux of my thesis with Dream Unlimited - and remains so - so those positive developments with Alpine Park and the asset management business made me more confident.

It looks like this buying grew Dream to somewhere around a 30% weight.

I’ll interject now with a few things running through my head that led me to being comfortable having such a large position. For most, 30% is a much larger position than they would consider, and I continued buying more even after that.

First of all, I’ll say that this was a pretty small amount of money all things considered. The fortunate position I was and am in isn’t lost on me, but by any measure - years of income or savings, multiple of annual expenses, absolute dollars, the size compared to now - my portfolio wasn’t a huge amount. A position being 30% at that point in my “savings career” probably would have grown much smaller over time if I had put new savings into new positions.

Second, I already had a large position. One of the first investments I ever devoted a lot of savings to was Brookfield Asset Management, or what would become Brookfield Corporation. I didn’t devote time to looking at what the weighting was, but it was huge percentage of my (very small) portfolio at the time I began buying Dream in 2019.

This large Brookfield position has obviously worked out well, but it was a much more reckless bet. I did not look nearly as closely at Brookfield as I eventually did Dream. Every once in a while someone comes out accusing Brookfield of fraud, or at least aggressive accounting, and each time it spooks me a little in a way you can’t spook me about Dream, because I know I don’t know everything going on inside Brookfield.

If I can hand wave away my Dream position as being acceptably large because the dollar amounts were small, that holds even more true regarding the Brookfield position. It was practically peanuts.

Charlie Munger has famously said Rick Guerin “was just as smart as Warren and I but he was in a hurry”. I believe this could also have been said about me, minus the smart part of course.

I have been motivated by a desire for independence long before anyone had heard of the idea of “FIRE”. I don’t know if I was 8 or 10 or whatever but I was very young when I first read The Wealthy Barber. I didn’t understand half of it but the underlying principles of:

• save 10% of your income

• start young

• pay yourself first

• invest those savings

I got immediately. I got my first job when I was 14. I didn’t keep it long, but I distinctly remember that the first thing I did with any of my earnings was buy a Canada Savings Bond. I thought if starting at 25 or 30 and saving 10% of your income can result in a comfortable retirement at 60 or 65, saving more of your income and starting even earlier can only result in good things.

In one world, I have these thoughts and invest in index funds and become fabulously wealthy and have a tonne of free time that I currently spend investing (and now writing). I didn’t follow this path though. Somewhere along the line I read about Warren Buffett and decided, not that I would emulate Buffett or could be him, but that I found studying businesses fascinating. I thought it was great that you could possibly earn better returns than the market and the way to do it was to do something I found interesting anyway.

But the consequence of this was me getting in a hurry. I took the formula of

years of savings x savings rate x investment return = wealth

and decided to see if I could max out each of the variables. I began investing as soon as I could. I am naturally frugal so I was able to save a lot of my income without feeling deprived. And I decided to reach for high returns. One of the methods I chose to do this was taking large positions when I thought a company warranted it.

As I had these positions, I remember at least occasionally thinking that these positions would decrease in size as I continued saving. That plan fell apart because Dream stayed at prices at which I wanted to buy it much longer than I expected, and returned to those prices after briefly going above this “buying range”.

Some time early in my investing life, I also became aware of “lifecycle investing” - the concept that investing with leverage when you are younger allows you to diversify more across time. As your savings grow with time, you become over exposed to the returns you get later in life. By investing more dollars earlier, which requires borrowing to invest, you have more money exposed to returns earlier in your investing life, and decreasing the leverage with time smooths out your exposure to returns over time.

I still find the concept solid and believe in it. Unfortunately, I combined this idea with being in a hurry, so I took on leverage to buy even larger positions than I should have been able to. I did it in a pretty controlled way, but still… this would come to hurt.

Realistically, I never thought “I want Dream Unlimited to be a XX% position”. The whole time I thought “I know this company inside and out. I am confident that the company is worth a multiple of what I can buy part of the company for today. Why wouldn’t I buy more?”. I may not have had a particularly close estimate of what I thought Dream was worth, but if you go back and read my “meandering post” about Dream Unlimited, written in August of 2020, you can get a good idea of my thinking at the time.

I ended that post with this:

After all this blabbering, what is Dream worth? I really can’t say. It could be $28 (standalone book value), it could be $30 (20x normalized EPS), it could be $34 (analysts’ median NAV estimate), it could be a lot higher. If we work under the assumption Dream can earn double digit ROEs in the future and grow book value in the high teens, you can justify even higher prices. I am specifically not making those assumptions nor do I want to convince you of them. More to the point, I think you have to make wilder assumptions to justify $17 than you do to justify $30.

Dream Unlimited is a fat, fat man. I don’t know if he weighs 300 lbs or 350 lbs or 400 lbs. I know he’s not 175 lbs though. And I know he’s going to keep overeating.

To be clear, at the end there when I was talking pounds, the poundages were meant to be stock prices multiplied by 10. The stock was around $17.50 at the time, and I thought it could be worth $30 or $35 or $40 or more. I wasn’t sure. I was just sure the stock was worth much more than $17.

Quite frankly, I didn’t think I would have to narrow my estimate of the intrinsic value much. I didn’t think it was likely for Dream to hit $30 anytime soon.

But not long after I posted that, the stock started a relentless march up. I remember there being long periods of time where the stock was green every day. Like weeks at a time - it was a pretty great time for a guy writing on the internet that the stock was worth more.

We know now that a lot of this run was fuelled by interest rates and Dream’s buybacks. I saw that a bit at the time. But also Dream was doing what you’d want it to do. The company was buying back lots of undervalued stock. It was growing its asset management business quickly. It was creating private funds to manage. Dream Impact Trust and Dream Industrial were acquiring assets - fueling more asset management fees. At the same time, Western Canadian land was once again becoming in demand.

As the stock rose, I felt the value of the company was increasing as well. Clearly some others did as well, as not all of the stock’s rise was rates and buybacks and momentum buying.

In early 2021, I went on the Value Hive podcast and extolled the virtues of Dream. In it, I described my position as “irresponsibly large”. That was mostly in jest, as I was comfortable with its size, but part of me must have acknowledged the risk I was taking.

I bought more stock in 2021. All through the year, I had the same thought: “I know this company well and I know it’s worth more”. Never did I consider that perhaps Dream Unlimited at $20 was a good bet to be X% of a portfolio, but Dream Unlimited at $30 or $40 should not be sized at twice X%.

The peak for Dream came in March 2022, briefly trading over $50. At the end of that month, Dream Unlimited made up 57% of my portfolio.

Despite how large of a position this was, it turns out I wasn’t done buying. At the end of March 2022 I only owned 63% of the shares that I own today.

The Bank of Canada began raising rates in March 2022, going from 0.25% to 0.5%. In April it raised rates another 0.5%. In June it raised rates another 0.5%. In July it raised rates 1%. That hike happened on July 13th, and Dream ended that week around $30, a 40% drop from its high. It kept dropping after that.

Throughout this decline, the leverage I had taken on crept up as a natural consequence of my portfolio becoming smaller. I ended up selling some holdings that had held up better than Dream in order to reduce my leverage. Many could see this as throwing good money after bad, but I was once again selling holdings in which I had less conviction. I may have been better off with those in my portfolio than more Dream - that’s easy to say in hindsight - but I was happier with my money in a company I knew very well than in more companies that I didn’t understand as well. I don’t know at what percentage of leverage I stopped, but I remember there was some amount I was comfortable keeping based on my age and income level.

In the fall, I began buying more Dream with new savings. I balanced the purchases with a bit of debt paydown, but with Dream back in the mid to low $20 range, I was once again happy to own more. Most of my buying was done in late 2022, and while I did buy a few more shares in 2023, it was a pittance compared to the position’s size at the time.

The huge drop in 2022 was tough to swallow, but I had the “excuse” to fall back on that it was mostly interest rates causing the large drop.

Don’t get me wrong, I wasn’t cursing central banks. I wasn’t blindly blaming interest rates for my stock dropping, but I knew it was a big factor in Dream’s fall. This also meant I had to acknowledge that much of Dream’s previous rise was not because I was a great investor, but because of rates (something I’m remembering now as the stock once again has gone up).

2023 was much harder than 2022; as rates had more or less stopped increasing, I didn’t have that excuse to fall back on. It was during 2023, when the stock continued dropping from the mid-20’s to the mid teens by late 2023, that I began to have some doubts.

I didn’t have many doubts about my analysis. I was very confident that I knew the value of Dream’s assets; the value was obvious. I did start to have some doubts about the value of Dream Office and Dream Impact Trust, both of which affect Dream Unlimited’s value. But Dream Unlimited itself had relatively low leverage and had an objectively low valuation, so I could not see much risk of financial ruin (ie. the stock being considerably lower five years hence) investing in it, and I still saw upside.

I underwrote the position several times throughout 2023, but even taking into account the lower value of Dream Office and Dream Impact Trust and higher cap rates on its income producing properties, I just couldn’t get down to a number near where the share price was. I was confident that my analysis was correct, and even with the doubts I has about a few assets, and lower values than when I had previously valued it in 2019-2022, I was sure the stock was worth much more. Less than before - at one time I had a blue sky number in my head that Dream could be worth $100 or more - but still…

I wrote a second Meandering Post about Dream in March 2023:

In it, you can read my thoughts at the time. The stock would go lower after March, but my thoughts wouldn’t change much from that post. I still saw the lowest plausible values as being $30-$35, but a conservative value I felt more confident about was ~$40. That represented upside of over 50% at the time, and at various points in 2023 would be over 100% higher than the stock price.

When I say I had doubts, I mean that I had doubts whether Dream Unlimited would allow me to accomplish my goals. I had/have financial goals, which rightly or wrongly do have a time sensitivity. Dream could be worth $40 or $50 or $60 or more, that is fine and dandy, but unless it could offer me the X% return I needed by Y date, it didn’t particularly matter. I saw a chance of Dream languishing at low prices while the market goes up enough that that I could have accomplished my goals with simple index funds. That said, I did have the luxury of moving my goalposts. Nobody was forcing me to return X% a year. Nothing stipulated that I needed to have a certain amount of money by a certain time. As an individual, with nothing but my wellbeing dependent on my returns, there was no real consequence to not meeting the ambitious goals I had set.

Despite my doubts, I could not justify selling a position that:

• was quite profitable even in a poor environment

• had low risk of financial ruin (however you want to define it)

• paid a pretty good dividend that represented a very low amount of its cash flow

• owned a lot of assets I liked owning (particularly at the price implied by the share price)

• would probably grow its cash flow per share

• was run by an owner-operator that I trusted

• had shown it would buy back shares if they were cheap

I had come to terms with owning Dream, but I still had intrusive thoughts. My adjusted cost base in my margin account is ~$22.00, and for most of 2023 the stock traded below that price. Every day I had to fight off the urge to sell for the tax loss, hoping to rebuy it lower after 30 days. The tax benefits of this would have been substantial, and even without the benefit of hindsight I probably should have done this just for the tax loss. I did manage to take advantage of the situation somewhat, contributing shares in kind to my TFSA and RRSP in 2023 and 2024, so I have that going for me, which is nice.

At some point in 2023, I decided that while I wouldn’t sell Dream for a price I saw as well below fair value, I couldn’t in good conscience buy more. Going back to those financial goals, I could accomplish them, albeit on a longer timescale, with Dream being uncooperative as long as I had enough other savings. If Dream turned out to be a money pit, I just couldn’t keep throwing money in it. So new savings and dividends all went to other holdings, but it would have been a long time before I got to a reasonably diversified portfolio this way.

Then in April of this year, I sold my condo (happy life circumstances made it necessary), and had a windfall with which to diversify. I also used it to finally bring leverage down to zero. This was significant to me, but even putting almost all of it in my portfolio only brought Dream from 58% to 44%.

Dream was around $18 at that time, whereas now it is ~$32. A few months of dividends and new savings can’t keep up with that kind of increase, and Dream is once again over 50% of my portfolio.

Allocation screenshot courtesy of Portseido

I hope that Dream keeps rising, and if it does it’s going to keep increasing as a percentage of my portfolio. Unfortunately (fortunately?) the amount of money I can save each month is a drop in the bucket compared to my portfolio, and the yield of my portfolio is pretty low, so my new savings and dividends have no chance at increasing diversification if Dream is on a tear.

Lessons/Observations

That probably wasn’t the most interesting story, I realize that (it was also painfully long I see as I sit here editing it). But I do think there are some things to take away from this.

I really take the heart the whole “imagine you are buying a piece of a private business, ignore the stock market, hold good businesses for long times,…”, and I have heeded quite a few quotes of the investing greats along those lines.

“Investment is most intelligent when it is most businesslike.”

• Ben Graham

I have thought about this quote a lot, in particular in regards to my Dream investment. When I was buying Dream, I truly didn’t think about it as owning a stock. I thought of it as buying into the partnership that owns the Zibi development. I thought of it as buying part of Arapahoe Basin. I thought of it as becoming the asset manager for Dream Industrial REIT. I thought about how each share I bought was entitled to $6 of the accrued incentive fee from Dream Industrial.

Warren Buffett has many quotes along these lines that I could have chosen to highlight, and between March 2022 and now I have definitely mulled over all of them, but it’s the Graham quote that truly guided me. It guided me through my buying. It guided me in my not selling or even lightening up the position, and it stuck with me as I held the shares on their way down.

I had made the joke plenty of times about if Dream kept doing buybacks the owners of the company would just be me and Michael Cooper. But I honestly thought that way.

I would say that most of my holdings I have a similar thought process, but because I understood Dream’s assets so thoroughly it was much easier to think this way.

To this day, I look at my Dream position as me being a minority investor in a private business with a large owner managing the company for me. This has a great benefit to me because I know that I react less emotionally to volatility than most investors. But it also meant that somewhere in my mind I rationalized my large Dream position with thoughts along the lines of “many people have XX% of their wealth tied up in private companies/real estate, and as long as it is a solid asset/company nobody questions it because there isn’t a price quoted every minute”. I think of myself as having 52% of my portfolio invested in the projects and buildings that Dream owned, in Arapahoe Basin, in the asset management business which was producing lots of cash flow, etc. That’s easier to stomach, for better or worse, than thinking about it like a stock.

If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.

• Charlie Munger

https://x.com/cdnvaluestocks/status/1569771406023397377

I was able to poke a bit of fun at myself, but I did hold Dream through a 50% drawdown and reacted with equanimity.

Maybe ironically, a big part of why I was able to react with equanimity, why I was able to look at Dream like a privately owned company I held a piece of, was focusing on its dividends.

When I bought Dream, it didn’t pay a dividend, though it declared one very shortly afterwards. I was a bit disappointed. I would have preferred the money, if it could not be reinvested, go to share buybacks. Dream was trading well below book value at the time, and I wanted to own more Dream without paying taxes. No matter my thoughts though, Michael Cooper started paying a dividend. He has increased it each year since then, and I believe in March when it raises the dividend again, Dream Unlimited will be a dividend aristocrat.

I am the furthest thing from a dividend guy. My second largest investment, Cymbria Corp, has made it clear its preference is to not pay a dividend, and it may never do so. That’s fine by me, and it’s at least a part of why I invested in it (deferring taxes). Strathcona Resources didn’t pay a dividend when I bought it, though it was easy to see it would pay one in the future. Partners Value Investments doesn’t pay one. Brookfield Corp pays a nominal one, as does Fairfax, TFI International, and Constellation Software.

During 2023, while the share price of Dream may have caused me pain, I could look at the dividend I was receiving/was likely to receive in the future, and feel comforted. It was paying a $0.50 annual dividend in 2023, up $0.10 from the year before. In 2024 it raised it to $0.60. And these dividends were not a millstone around Dream’s neck by any means; the payout ratio was quite low and there was plenty of cash flow left over to grow the business and grow the dividend.

With the growth in earnings that I saw coming, dividend growth being a more or less explicit goal of Cooper’s, and the history of $0.10 raises each year, I had visions of Dream paying me $1.00 per share by 2030 easily. That represented a significant amount of income (to me anyway). I came to peace with holding on to Dream almost regardless of the stock price, as long as the company was executing, because the dividends would in a round about way contribute to my aforementioned financial goals. If Dream was trading at a 5% yield in 2030, so be it. Not that it should trade on yield, but I knew if the dividend was $1, earnings would be considerably more, and I would almost certainly be happy holding Dream at that valuation.

I’m not becoming a dividend investor, but I get the appeal, and I have seen firsthand how a focus on dividends can encourage a strong investing stomach.

The final thing I want to note a friend actually brought up to me.

From 2019 through 2023, I was Dream’s most vocal adocate. There were the three posts on my blog/Substack and probably over a hundred tweets. I was the one tweeting press releases and spreading news. I was getting asked a bunch what I thought of news, or what I thought Dream was worth, or whatever. I was the Dream “guy”.

It is impossible to tell how that affected my behaviour, but I suspect that on the way up, it made me less likely to lighten up on Dream. How could I tweet out news about Dream winning an exciting new project while selling shares? What kind of jerk would I be if I told people I thought Dream was worth a premium to NAV while selling at 80% of NAV? Logically, I know that taking some profits on a 50+% position is not imprudent. Such portfolio management could easily be explained, and I’m sure people would understand. But I think I would have felt sleazy doing so.

On the way down, there was a surprising lack of people coming to me asking what was going on, am I holding, etc. I believe I was lucky in this regard. It has played out differently for other vocal stock supporters I’m sure. The Moberg guys probably dealt with it.

I have been much less active discussing Dream on Twitter. Part of it is the news is coming in much slower over the last year or so. There is simply less to talk about now. Part of it is I have said a lot what I have to say. Part of it is I have been less active generally as I have been doing other things. Part of it is that others have picked up the mantle and I don’t have to lead the charge. Finally, I want to avoid any internal feelings of conflict I may have felt before. Without living through that time, I can’t say definitively that my advocacy of Dream altered my behaviour in any way, but I think it could have. Nobody made me feel accountable to them, but I still don’t want to feel disingenuous.

If Dream has a large run up again in the future, I think I may to sell at least some shares. I might choose round numbers at which to do so ($40 sell X amount of shares, $50 sell another X, etc). I might set an upper limit size I allow Dream to grow into. There might be a dollar amount I draw the limit at. There might be a dollar amount my portfolio hits at which point I decide “I’ve made it, why risk what I have and need for what I don’t have and don’t need”. I may choose to reduce to a nice round number of shares and leave it at that (I own an annoyingly odd number right now). Or I may not sell any. Who knows? But if I do, I want to do so with a clear conscience and not feel like I’ve misled anyone.

Conclusion

I doubt that there is an opportunity where I like and understand a company (along with its valuation) as much as I liked and understood Dream in 2019-2023. I doubt that I would ever concentrate like this again now that I’m older and my portfolio is so much larger than my annual contributions to it now. So in that sense, I think I learned the lesson. But as you can see, Dream is still a huge position, still “irresponsibly large”, so maybe I haven’t. This post was mostly me journaling to myself. If you made it through the whole thing I appreciate your time reading this and hope you got something out of it (some entertainment at the least).