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Luck, Skill and the Human Condition

It’s funny how those who are successful most often attribute their success to their own skill and those who are less so attribute their misfortunes to bad luck. The truth is it’s very hard to determine what is luck and what is skill. Especially a posteriori. This is particularly so in the investment world. Let’s say you decide to purchase a stock and it immediately goes up. You pat yourself on the back and say “Good job! You were really smart to purchase stock in XYZ company when you did.” Of course that’s absurd! First of all you probably didn’t purchase the stock thinking that it would go up right away (otherwise you’re not an investor but a speculator!). So why are you patting yourself on the back? I think the answer is, being right makes us feel good. And making money while being right even more so. So we really like to ‘be right’ about an investment. It’s fulfilling. We convince ourselves that ‘we were right to pick that stock’, rather than ‘Oh how lucky that the stock went up after I bought it’. Being lucky doesn’t exactly produce the same high.

The truth is, one can almost never be sure whether skill is involved in picking a certain stock. Yes, we can be more certain that skill is involved as the sample size gets larger, i.e. more picks. But still, we know that you can be right calling a coin flip 10 times in a row and you’re still just lucky. 100 times in a row and you’re just luckier. (That is, I think so, as no one has yet been able to call a coin flip a million times in a row. But is it ever really knowable?) The same can be said of picking stocks. Picking 10 winners over a year might easily be just luck. 100 winners over 10 years begins to look less like luck, but in fact it could be just luckier. After all, if you have enough stock pickers, one is bound to get it right! Its just math (or probability, in this case). But experience tells us that in most instances its true what they print on mutual fund prospectuses; ‘Past performance is no indication of future returns’ or some such. So how can we be sure that we are adding value, ‘skill’, in our investment practice? If we can’t be sure about adding value, and thus skill,  shouldn’t we just resign ourselves to investing in low-cost index funds?

I’m not sure I can provide an unbiased answer to that question. Perhaps its illogical but there’s something in me that says there must be a way to produce superior returns. So when I see studies showing that value investing produces market-beating returns I feel immediately relieved. I like that answer to the active vs. passive investing conundrum. So am I being biased in accepting those studies as proof? I’m not sure. The indexers have a point. You just put your money in an index fund and let it sit there. It produces good returns over the long-term. Most of the time better than the active managers collectively. But then there’s this little voice inside my head saying it’s not all about cut and dry returns; you have to consider human emotions (especially your own). Why is it that the average investor’s return in a mutual fund is far inferior to the mutual fund’s long-term performance? The answer is simple; most investors pull money out at the bottom of the market and put money in at the top. I want to avoid that at all costs; that’s the kiss of death for investment returns. So I’ve tried to adopt a strategy that embraces value investing but addresses the emotional aspect of investing. My strategy is a kind of value approach where I only invest when I’m confident that I’m buying a dollar’s worth of a company for less than  dollar and leaving whatever’s left of my investment funds in cash, as a kind of countermeasure to the emotional side of investing. Take this moment in the market for example. I’m less than 50% invested in equities. I just can’t find the kind of value I want for the prices being offered at the current ‘risk’ level. It’s been that way for over a year, so I’ve missed much of the market appreciation over that time. But I sleep well at night. I know that if the market falls 50% I’ll have cash to load up on shares; I have my wish list ready. I’m not really worried about not catching that 10% upside. I want to be emotionally ready when the market drops 50% to put my money at risk. Just ask yourself, if you have 95% of your savings invested in equities and the value of your portfolio dropped 50% would you be in the appropriate emotional state to invest the remaining 5%? or even to leverage up on margin? knowing that you have a mortgage to pay, a family to feed, health bills to pay… and your job security is becoming more and more tenuous as the overall business outlook dims? I know I wouldn’t! So I’d rather forsake the certainty of index investing for the relative emotional calm of my value investing strategy. It’s funny, the secret of success with both strategies is the same, patience, but one requires more emotional resilience, a resilience I’m not sure I have.

The Big Picture

OK, so the end of 2016 has rolled around, and its time to reflect on ‘The Big Picture’. Where are we? Where are we going? Broad questions but let’s restrict the subject to the equity markets, in particular the US market; What’s really been happening in the US stock market and where is it going in 2017? Even more important (for me that is), what have I been doing with my investments and what am I going to do in the new year?

First of all, let me say I have absolutely no idea where the markets will go in 2017, just as I had no idea where they were going in 2016 at the end of 2015, and so on and so forth. The only thing that I COULD have correctly predicted at the beginning of last year was that I WOULDN’T be able to predict what was going to happen. And that’s exactly what came to pass! We had the energy-induced market swoon at the end of 2015/beginning of 2016, then the Brexit swoon in June then the Trump post-election rally. Who wudda thunk?? The only thing I can say for sure is that market valuations are at the high-end of historical averages… they were last year at this time and they are, even more so, this year. So I can unequivocally state that the market will go down at some future point in time and, most likely, regress to the mean. In my lifetime?? who knows. Lets just say that I think forecasting the next move in the market is a waste of time.

So if forecasting the direction of the markets in 2017 is out, I can at least try to understand what happened to the markets in 2016. My observation on this is simply that ‘the market is a fickle creature’; it goes down when it should go up and up when it should go down, or so at least it seems so to me. With oil prices going down, the equity markets should have gone up; lower energy costs should mean lower industrial production and transportation costs and thus higher corporate profit margins, lower heating and transportation costs for consumers and thus more disposable income to be spent. But no, that’s not how it went. Lower oil prices dragged DOWN the US equity markets! (well, we can’t really be sure that’s what dragged down the markets, but the markets did go down around that time, so it’s not unreasonable to assume….). Then we had the Brexit vote that nobody anticipated and the ensuing downdraft in markets across the pond had a dampening effect on US markets. Totally unexpected! And now we’ve had this wild post-election Trump rally! Before the election pundits were saying the market would fall off a cliff if Trump was elected.. but on the day after the election a strange thing happened; the market went up. So the market forecasters changed their tune and affirmed that the Trump election was GOOD for the economy and thus the market because he is a businessman and will reduce regulation, increase military spending, increase infrastructure spending, reduce taxes, etc. I’m not so sure they were right before, or are right now for that matter. I don’t see how a heavily indebted nation is going to both cut taxes and increase military and infrastructure spending; even deep cuts in entitlement programs (social security? Medicare? welfare?) could hardly be large enough to counterbalance that increased spending. Then there is the issue of the impending impact of increasing interest rates on our national debt… But who am I to judge forecast?

With the market passing favorable judgement on the yet-to-be-installed new administration and the first rate hike in years, bank stock prices have climbed precipitously. A bit too fast in my opinion so I have finally sold my Bank of America warrants as they have tripled in price since last summer. After this sale my overall exposure to the market is less than 50%, i.e. cash is greater than 50%, even with the several small additions to my portfolio this Fall. This is not so say that I am taking a macro view and structuring my portfolio accordingly. No, it’s just that I haven’t spent much time trying to uncover undervalued shares, and what time I have spent has been anything but successful. Sometimes the best thing to do is just sit on your thumbs if you aren’t quite sure… But, if I could find some interesting net-nets or even low P/E and P/B opportunities I wouldn’t really care about overall market valuations. The point is, I just can’t find much of interest to purchase. In September/October I did add a small position in New York REIT (NYRT) when the shares were trading toward the bottom of their annual range. This is a liquidation situation where both the upside and downside are limited; it is more of a parking place for funds for which I can find no better opportunity. More recently I picked up a small starter position in Support.com (SPRT) as a special ‘turnaround’ situation (thank you, Shadow Stocks!). No slam dunk, mind you. but enough overall positive characteristics to make it a small position in a diversified portfolio (which mine is not at the moment).

So the first part of my New Year’s resolution is to spend more time focused on stock analysis, and, given the overvaluations in the market, focus on small cap special situations. Perhaps I can uncover some gems for the portfolio despite whatever gyrations the market may take. The second part is to get more invested because market timing just doesn’t work; YOU JUST DON’T KNOW WHAT CRAZY MR. MARKET WILL DO.

In addition to the relatively high valuations in the market I do have another concern; the growth of index funds and their impact on the overall market. The fellows of Horizon Kinetics have written about this more at length and with greater insight than I ever could.  I just wonder if this won’t be the catalyst to nudge the market into regressing back to the mean. Taking the current index fund growth trend to its (il)logical extreme, if 95%, 97% or even 99% of US equities were held through index funds, who would be determining the value of individual stocks and thus the composition and level of the indexes? that 5% or 3% or 1% that actually owned the individual company shares? So isn’t the real US equity market getting smaller and smaller, rather than larger and larger? And isn’t market size the single most important factor in making pricing efficient? Index funds re-weight in response to changes in market capitalization of the components of the index they mimic. Thus if shares of GM go down more than the overall market, index funds have to sell some portion of their GM holdings. So all it takes is one guy deciding he needs money for a new truck and selling a million GM shares in a low market-volume context to send the GM share price down. Well, of course, its more likely that some rogue trading system sells 100 million shares, but that’s just an extension of this argument. Furthermore, index funds that use heuristics (using a subset of stocks to mimic an index) create more imbalance as share price movements are magnified or demagnified based on the relationship between the subset and the true index.

Could it be like the proverbial butterfly flapping its wings off the coast of Africa and starting a hurricane in the Caribbean? Prices changes magnified because so much of trading will be program trading? It’s not just black-box program trading that destabilizes the equity markets, as we have seen, but perhaps even more, index fund ‘program trading’ as retail investors move more and more into index funds.

Is there any kind of investment opportunity created by this? I don’t really know. The only thing I can think of is focusing on stocks not in the indexes (micro and small caps), focusing on situations indexers don’t participate in (spinoffs, exchange offers, etc), and simply not being afraid to hold cash. Perhaps we’ll see if this is even a factor when the next big selloff finally comes.

note: edited 1/2/17

Portfolio changes

Just a quick update to note several portfolio changes in December. I have sold my Bank of America A warrants (BAC.WS.A) and added a small position in Support.com (SPRT).

Bank of America A warrants have tripled since this summer. With the prospect of rising interest rates and the generally accepted perception that the new administration will reduce regulations investors have bid up bank stocks to levels we haven’t seen since before the 2008 financial crash. I think this has happened too quickly and now bank stocks are a bit overvalued in my opinion. I don’t know what the new administration will do but I do know that banks, left to their own devices, i.e. with less regulation, have a tendency to overreach for profits and get themselves into sticky situations. And, no, I don’t think the future will be any different from the past.

I took a small position in Support.com after reading the writeup in Shadow Stocks and reading the latest 10Qs; I’m always on the prowl for small cap net-nets with some sort of catalyst (in this case an activist investor and new management). Unfortunately since I began accumulating the shares have gone up 10%. If the shares dip down below $.70 I’ll be filling out my position.

Winthrop Realty Trust (FUR) Liquidation

When does a public company liquidate? The answer is …. not very often!  Management has a vested interest in keeping a business alive at all costs, since in a liquidation they lose their job. In fact, more often than not management continues to drain the coffers of ‘their’ company over many years rather than make the shareholder-friendly decision to liquidate, drawing a salary while the owners are gradually swindled of their equity. Even when equity and cash have been completely depleted, management can still make out like bandits; in a chapter 11 filing management most often oversees the liquidation, keep their jobs even after the company emerges from bankruptcy, and sometimes even get to reset all their non-salary remuneration thresholds (options, grants, bonuses, etc.) giving them greater upside. I find this a rather strange phenomenon since bankruptcy is more often than not the fault of very management that benefits.

So when do liquidations happen? Mostly they take place when either management is itself a significant shareholder, and the benefits of liquidation for management are greater than the continuing stream of cash from remuneration, or when there are significant non-management shareholders who force management to put the company into liquidation. Note that I haven’t cited the Board of Directors as a catalyst for liquidation. That’s because most Boards’ first allegiance is to management. After all, they generally owe their jobs to management and they too have a vested interest in keeping the company alive so they can remain Board members. It’s only when Board members have significant ownership in the company (and this is VERY unusual) that they actually look out for the shareholders (themselves, obviously). Otherwise it takes an activist investor to ‘shame’ the Board into providing the shareholder guarantees that they are legally bound to provide. And I really mean ‘shame’ since Board members are protected against monetary claims from shareholder legal action by mandatory insurance policies. It is thus only the potential damage to a Board member’s reputation that is at stake. This can, however, be a decisive factor, depending on who the Board members are. In the case of Winthrop Realty Trust (FUR), fortunately for shareholders, management was/is a major shareholder.

The issue I want to address here is what happened to the FUR stock price AFTER the announcement of a liquidation, with the goal of identifying in hindsight when the best time to invest might have been. Clearly this is a specific instance of liquidation, and the results cannot be used as guidelines for what to do in other situations. Nevertheless, I think there may be some lessons we can draw from this situation that we might apply to another potential liquidation I am following, the proposed liquidation of New York Realty Trust (which I will address in the next post).

Back to the liquidation of Winthrop Realty Trust. In November 2013, approx. 6 months before the liquidation announcement, FUR management provided, a NAV estimate of between $12.98 (low) and $15.01 (high). At the time, shares were trading at $11.15. On April 29, 2014 the company issued a press release stating that the Board had approved a plan of liquidation, but did not provide any estimate of liquidation proceeds. There was only a statement that the liquidation proceeds for common shareholders would not be less than the lower end of NAV estimated as of the end of the first quarter, $13.79 per share.  The share price traded up to the $14-$15 range. The Proxy statement requesting shareholder approval for the liquidation, first issued in mid-May, continued to use the first quarter NAV estimates of liquidation proceeds, $13.79 to $15.79 per share. Shareholder approval was given at the annual meeting on August 4. On November 6 a press release was issued announcing 3rd quarter results. These results used liquidation accounting for the first time and per-common-share liquidation proceeds were estimated at $18.16, subsequently increased to $18.35 later that month. On the announcement, the share price traded up to the $17-$18 range. Since then, estimates for liquidation proceeds have been included in each quarterly report but have not varied significantly. The latest estimate of liquidation distributions, made in late July 2016, was for $10.61 per share (which excluded $7.75 per share in previous distributions). In 2015 three liquidating distributions were made, $2.25, $1.25 and $1.00 per share, respectively on 1/15, 6/16 and 12/3.  A $2.00 per share liquidation distribution was made in May 2016 after which shares traded down from $12.50 to the $10.50 – $9.62 range. At $9.62 on June 17, shares were trading at a significant discount to estimated future distributions of $11.85, about $19%. A further $1.25 distribution was made at the end of June. Reflecting this distribution, shares traded down to $8.62 in late June after the ex distribution date (though note that they never traded down the entire amount of the distribution) and there was another opportunity to purchase at about an 18% discount to estimated future distributions. After this distribution, shares traded around $8.70, gradually increasing to $9.14 over the month of July, still a significant discount to estimated liquidation proceeds, up to 18% early in the month. On August 5 the shares were delisted (2 years after the approval of the liquidation) and the assets transferred into a liquidating trust with the result that the shareholders became participants in this trust with non-transferable shares.

So, when was the best time to purchase shares in FUR subsequent to the liquidation announcement? The best time, in retrospect, was just after the announcement was made in May 2014 when the shares traded up from $11 to $14 per share. However, it must be remembered that no official estimate of liquidation proceeds had been made at that time. When the first management estimates of liquidation distributions were made in the Fall of 2014, the shares popped to between $17 and $18. In retrospect that was the WORST time to buy. Over the next 18 months the share price gradually receded, and if one waited until  30 to 75 days before the assets were put into the liquidating trust on Aug 5, 2016 this would have been the second best time to buy. The discount to management’s conservative estimate of liquidation proceeds was between 15% and 20% during that period.  I assume the discount widened to the 15-20% range when it became clear that liquidation was not going to be completed before the 2 year deadline, i.e. the remaining assets were going to be put in a liquidating trust. Certain holders would be forced to sell as institutional  mandates would preclude them from holding illiquid securities such as the participating interests in the FUR liquidating trust.

I had made a small initial investment in FUR at the end of 2014, adding to it at the end of 2015, with the idea that I would double or triple this amount opportunistically as the liquidation progressed. I viewed the August 5th trust conversion as such an opportunity, but, of course, I BLEW IT!  I purchased more shares in May (not a bad time) but then waited to double down until July when I thought institutional investors would all be running for the exit at once as they were forced to sell. This was my mistake; I was too greedy!! I was totally wrong on the timing! During July the share price gradually increased. I now have to concede that institutions were much more proactive than I anticipated, selling at least 2 to 3 months before the shares became illiquid. Needless to say I was sorely disappointed. In retrospect I can see that I invested too early, with single figure discounts to liquidation estimates, and then waited too long to make further purchases.

I console myself with the thought that the purpose of this investment was simply to park funds in a low risk situation that would provide liquidity in a couple of years when I hope the investment scenario will be more favorable. And, as always, better an error of omission than commission!

 

Update: A very uninteresting market

I’ve just logged in again after more than 12 months of silence. Why so long? The answer is simple: I haven’t been enthused about the US stock market for over 2 years. I just don’t see many ‘long term values’.  Instead I see a lot of potential downside.  When it looked like there was going to be a meaningful correction in US equities last January/February I began to perk up and take note. Unfortunately, the mini correction was over almost before it began, and now US markets are once again at or near their all time highs. I continue to believe that by all meaningful measures equity markets in North America are at historically high valuations, with price earnings ratios and operating margins at the high end of historical ranges. Many market observers justify these levels because of the continuing low interest rate environment. While I can see that using low interest rates in a cash flow valuation model leads to higher company valuations, the unanswered question remains how long interest rates will stay low. I have to admit, they have remained low for far longer than I (and most economists) expected, but, as they say, the past is no indication of the future. I think we are being lulled into a false sense of security; When we humans consider the future our brains are wired to give the recent past a heavier weighting that the distant past, and so we tend to project the recent past into the future. Valuations, in my humble opinion, are currently reflecting this bias. When interest rates do begin to march higher, I have a feeling the spell will be broken, and suddenly! Investors will be forced to face the fact that 0% interest rates are unusual, and that they will only go up. The market re-valuation will be swift and merciless.

The question remains, what to do until that day comes. And how to have enough patience to wait out the ‘general consensus’. Keep funds in cash? Possibly. But you can only hold so much cash. Cash sits in an account, earning no interest in todays environment, and makes an investor question whether indeed he/she IS an ‘investor’. No investor worth his/her salt wants to be un-invested for years. It’s kind of unnatural. The inclination to ‘put money to work’ is too strong.  Last year my solution was to park funds in several municipal bond funds under the theory that the low interest rate environment would last much longer than was, at the time, deemed possible. I sold these in January/February when the US equity market sold off with the thought of moving these funds into equities. That didn’t happen as valuations never met my thresholds.

So what have I been doing in the interim? I’ve sold off some of my smaller holdings that didn’t work out (CVEO, COV, RYAM) at a loss, pared back some other holdings, and sold out ZINC at a big loss (Shame on me for following the BIG BOYS). Most of these funds have remained in cash, but some have been put back into liquidations (Winthrop Realty Trust and NY Realty Trust) which should throw off cash once every once-in-a-while as the liquidations progress. I’m still well over 50% cash at this point and plan to continue holding more or less this level of cash until market valuations become more attractive.

My holdings in order of size now consist of:

Fortress Paper (FTPLF)
NovaGold (NG)
Resolute Forest Products (RFP)
Bank of America A Warrants (BAC.WS.A)
Winthrop Realty Trust (FUR)
Altius Minerals (ATUSF)
Gyrodyne Corp. of America (GYRO)
New York Realty Trust (NYRT)
Cherniere Energy (LNG)
BFC Financial (BFCF)
Aviat Network Systems (AVNS)

I think this is fairly defensive with two gold/commodity stocks (NG and ATUSF) and three liquidations (FUR, NYRT and GYRO). I have been looking for something in the out-of-favor oil patch for the last 6 months but have only come up with adding to my small position in LNG which I first purchased before the swoon in oil prices a year ago.

Opportunity Missed? (EPAX)

On July 13 Ambassador Group announced a plan to cease operations by year-end and liquidate the business, returning capital to shareholders. The day after the announcement the stock took a wild ride down to $1.50 a share from the previous day’s closing of $2.40, ending the day at $1.78. On the surface of things this kind of made sense since the book value as of the end of Q1 was $1.83 a share. But EPAX is (was?) in a very seasonal business where cash is received upfront as a deposit and recognized only when the trip takes place, so it behooved anyone interested in the underlying value of the liquidation to look a bit deeper. In fact, on July 16 the company issued another press release updating the amount of ‘cash available to shareholders’ at the end of 2Q; it had increased to $45.3 million from the $31.7 million on the balance sheet at the end of Q1. The stock rebounded the next day to the $2.20-2.40 per share level and has remained there since. What can I say? I was on ‘vacation’ at the seashore and missed the wild swing in the share price when the liquidation announcement was made. The lesson here is that you have to have done your analysis beforehand and be ready when Mr. Market acts so foolishly! Well, what now, you’re asking. Are shares still trading at a discount to liquidation value? For that, we needed some estimate of shutdown costs which the company has, as of today, kindly provided ($2.3 to $4.5 million). Still, the analysis is not straight forward; the company will be recognizing cash received as deposits over the balance of the year as well as prepaid and other expenses incurred or to be incurred. Assuming all sales & marketing efforts ceased as of the end of Q2, a quick and dirty liquidation analysis might look something like this:

Cash on balance sheet as of 6/30/15 (millions) $71.0
adjusted for:
  prepaid expenses $12.2
  payment of A/P ($4.4)
  deposits ($33.5)
Cash available for shareholders as of 6/30 $45.3
Balance of year cash expenses:
  Est. G&A expenses 3Q & 4Q ($4.6)
  Shutdown expense (avg of high and low) ($3.4)
Net cash available to shareholders after shutdown $37.3
shares outstanding 17.284 million
per share cash available for distribution $2.16

Now that’s not a very enticing proposition! You can pay $2.25 to buy a share today and get back $2.16 sometime over the next two years! But, as in any liquidation, there are some upsides to company projections. Do the PP&E assets have any value? Those assets are primarily depreciated computer equipment and software so I wouldn’t hold out much hope here; the company notes that this item will be written off entirely in the 2Q financials. (Remember the company has already sold its headquarters building last year). G&A expense for the balance of the year could be lower; I was using the 1Q run rate of $2.3 million but the company announced it will begin laying off staff in August. And of course, shutdown expenses could be lower. All in all, however, I don’t see that much upside. But maybe that’s just my shortsightedness. If you see the magic bunny that could be pulled out of the hat please let me know!

Edit: Sold my entire position at $2.40 today as I think there are situations with greater upside out there.

Parking Meter

Last August/September I had some extra cash just kicking around and decided to ‘park’ it somewhere that I expected would provide a small return but would be pretty safe for my principal. I posted two ‘parking’ ideas, Diversified Real Asset Income Fund (DRA) and Firsthand Technology Value Fund (SVVC). So how did the two ideas work out? The first, pretty much as expected, the other less well.

Diversified Real Asset Income Fund (DRA)
In a post last September I wrote about my rationale for ‘parking’ some funds in DRA. Part of my rationale was the prospect of participating in potentially 3 tender offers at or close to Net Asset Value each for 10% of outstanding shares. So how has the investment fared? After 9 months, 2 of the 3 tender offers have been completed, and despite a sell off in fixed income securities over the past 2-3 months, I have still come out ahead. Both the first and second tenders bought back about 15% of tendered shares as they were significantly oversubscribed. So, as you might imagine, with a significant investor like Bulldog trying to unload their position – but not being fully able to – the discount has not really narrowed significantly. It still stands at over 10%. I did purchase some additional fund shares in February, before the second tender offer, which turned out to be not a particularly propitious moment to increase my holdings, but overall, notwithstanding the negative developments in the bond market over the past couple of months, my IRR for this investment is just over 10%. Had I elected to sell just before the second tender offer my return would have been almost twice that. However, I still believe the fixed income market has over-reacted recently and that rates will once again subside when it become clear that the Fed will not be raising discount rates on the currently anticipated schedule. Clearly I am in the minority on this subject and, unlike most everyone else, remain in the deflationary camp. And therefore, yes, I’m holding my current position in DRA in the belief that the Greek problem (or perhaps the Italian, Spanish or Portuguese problem?) will eventually rattle the European financial infrastructure (and investors’ confidence), there will be a flight to the dollar and that will continue to put downward pressure on interest rates(perhaps even putting equity markets into a tailspin). But of course things will probably work out quite differently than I imagine, so I’m not beholden to my macro view. In the meantime, fund management has boosted the dividend, I believe mostly to reduce the discount (and thus make the 3rd tender unnecessary – its will only be done if the discount remains over 10%), which supports the price somewhat, and I’m getting a near 10% current yield on my investment.

Firsthand Technology Value Fund (SVVC)
Another Bulldog investment! Shares were selling at about a 20% discount to NAV when I bought last August (read about it here). My theory was that the agreement between management and Bulldog Investors would act as a catalyst to narrow the discount. The agreement was for SVVC management to sell their two largest positions, Facebook and Twitter, and distribute the profits to shareholders by a date certain, as well as repurchase up to 10% of shares outstanding. Well, the sales took place as agreed. The distributions to shareholders took place as agreed. The repurchase also took place as agreed. But guess what, the discount to NAV didn’t narrow, it WIDENED and significantly! Yep, that’s right, the 20% discount to NAV when I purchased has gotten BIGGER. At a recent price of $13.80 the shares are now trading at over a 45% discount! So much for my theory about the discount  Anyway let’s see where I stand. I purchased shares at $21.66/share and received 2 dividend payouts totaling $5.86/share in Nov./Dec. Then I was able to sell back 17% of the shares I held for 95% of NAV ($23.27/share) in January. With all of that, despite the widening discount, I’m still off only 6% on this investment, and as of now I plan to continue holding; a fund trading at 45% discount to NAV can only have good things happen (or can it?). With this kind of discount I believe the investment risks are overstated. If just one of the top fund holdings were to IPO I think the discount would narrow significantly. Also because Bulldog still holds a substantial investment in the fund, some 9.7%, I think there could be a repricing either when the Bulldog overhang is reduced (because they sell off their shares) or because there is another liquidity event.

Any thoughts from readers on these investments are welcome! As always, my meanderings are not meant to constitute investment advice; You should always do your own analysis before investing.