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2014: The Year In Review

January 09, 2015 | About: MANH +0.14% CPSS -1.92%

2014: The Year In Review

Earlier this week, a friend of mine in the investment world and I were
discussing one of our passions outside of finance home brewing.
After our conversation I went back to working on my annual report and
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realized there was some remarkable similarities between the two.

These include:
1. One can never learn everything about home brewing. To be a successful
and happy brewer, you never stop learning. There is always a new
development just around the corner. Whether it comes from reading an
article about new hops being developed to trying new yeast in one of your

recipes, the challenge is to keep up with a remarkable amount of change in the technology,
ingredients, and business of brewing. And thats a great thing for those who brew and even
better for those who drink beer.
2. It doesn't seem possible that something made with four ingredients water, malt, hops, and
yeast can provide so much variability. Try as you might, its likely you will never get a
chance to experience more than 10% of what the beer world has to offer.
3. Really good home brew comes from two main things. First is a superior process of
cleaning, sanitizing, and the mechanics of brewing. Second is really superior ingredients
high quality malt, clean water, carefully packaged hops free of oxidation (usually), and fresh,
healthy yeast. Ask a brewer about why their beer turned out badly and nearly all accept there
was a flaw in their process.
4. Finally, the whole brewing experience Ive found is made up of really honest, fun-loving, and
relaxed individuals. People share ideas and recipes expecting nothing in return except to try
some new and interesting beer in the future. You cant underestimate the need to find a
hobby filled with great people you genuinely enjoy working and drinking with day in and day
out.

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As my friend and I ended our call and I went back to preparing my Annual Report, it
occurred to me that investment management and home brewing are actually pretty similar.
At Nintai, we spend an inordinate amount of time acquiring knowledge by researching
companies, trends, and relationships that are evolving and dynamic. Second, the act of
investing both buying and selling a stock is actually far more complex than it seems. Its
extraordinary how much diversity can be found in the market. Third, successful investments
cannot be made by cutting corners, sloppy research, and terrible companies (at least not
the way we approach investing). Last, we work with people we genuinely admire and
respect. These are people who constantly acquire new knowledge and freely share it to
become a better team member.
So as the New Year starts and perhaps you kick back with a beverage to celebrate, take
pride in the fact that we are involved in a remarkable business. We can make of it what we
want, but how far you succeed is entirely and ultimately up to you.
The Year in Review: Why Do We Do This?
At the beginning of each year, we take a look back and see how the portfolio performed
over the past 12 months and also see how we are doing over the long term. Because we
trade so rarely, many people ask us why we even bother to send out an annual report. We
believe there are three major compelling reasons:
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1. Does Our Philosophy and Process Work?

There really isn't any better way for analyze whether our investment process works than
measuring our returns against our proxies. It's our goal to significantly outperform the
markets in the long term. To prove that we need to demonstrate an ability to beat our
benchmark and explain why we have or haven't done so.
2. Is It Worth It for Our Investors to Remain Invested With Us?
Everyday we go to work knowing it is extraordinarily difficult to beat a low cost index fund
over time. To make it worthwhile for our investors, we need to both outperform the indices
and do it in a way that our investors are comfortable supporting and can sleep well at night.
If we meet these conditions we are confident our investors will remain long-term partners on
our journey.
3. How Do We Improve Our Process and Returns?
No investment process we've designed - or seen - has been perfect for its entire lifetime.
We like to use our annual reports to discuss what we've learned and what steps we are
taking to improve our professional knowledge as well as investment process. We believe
we owe it to our investors to acknowledge our mistakes. It's even more important to
discuss what we learned and what we've done to avoid making such mistakes in the future.
So without further ado, lets take a look at our results and see how we did.
2014 Review
2014 was a year very similar to 2013 in that the Nintai Holdings portfolio underperformed
both the S&P 500 and the Morningstar Total Stock Market Index. The portfolio handily beat
what we consider a more appropriate comparison - a blend of the Vanguard Total US
Stock Market Index, Vanguard Foreign Stock Market Index, and cash returns. For 2014, the
Nintai Portfolio returned 7.9% versus a 10.7% return for the Morningstar US Market Index
and a 13.7% return for the S&P 500 TR Index. The Nintai Portfolio outperformed its
recommended bogey's (82% Vanguard Total Market Index, 16% Vanguard International
Stock Market Index and 2% cash) return of 1.9%.
Historical Returns
Since inception in 2004, the Nintai Holdings portfolio has generated a 15.0% annual return
(net fees of 0.75% annually) versus a 6.3% return for the Morningstar Total Stock Market
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Index and a 7.7% return for the S&P 500 TR. An investment of $100,000 in the Nintai
portfolio in 2004 is currently worth (net fees) $465,200 versus $195,800 for the Morningstar
Total Stock Index and $226,100 for the S&P 500 TR. A blend of Vanguard Total Market
Index and Vanguard International Stock Index (rebalanced each year to reflect Nintais
percentages) produced an annual return of 4.8% leaving an investor with $167,500 after
the same period.
The following are comparative historic returns:
Investment

3 YR

5 YR

10 YR

Return Return Return

Nintai Portfolio (Net Fees 0.75%)

15.7% 14.4% 14.5%

Morningstar Total Stock Index

17.5% 12.8% 6.3%

S&P 500 TR

19.1% 14.5% 7.7%

Vanguard Total Market Index + Vanguard International

11.7% 9.4%

4.7%

Stock Index (83% /17% )

A couple of things to keep in mind. Weve actually been outperformed by the Morningstar
Total Stock Index over the past three years. The S&P 500 TR has outperformed the Nintai
Portfolio over both the past three and five-year periods. While disappointing, we believe
our long term performance demonstrates the value of our investment philosophy.
Finally, Nintai really earned its management fee when in 2008 the portfolio lost less that
17% versus losses of well over 35% for most of the markets. As weve mentioned
previously, sometimes the best value we can add is by not losing rather than trying to shoot
the lights out.
Conclusions
Even though the Nintai portfolio has underperformed both the S&P 500 and Morningstar
Stock Market Index, we are quite comfortable with our holdings and positions. The current
PE of our portfolio is 15.5 or roughly 15% less than the S&P 500. In addition, the portfolio
has an average ROA of 22.4% and an ROE of 33.2%. Respectively, these are roughly
double and 50% higher than the S&P 500. Finally, projected earnings growth over the next
5 years is projected at 13.3%, or roughly 40% greater than the S&P 500. In essence, the
Nintai Portfolio is cheaper and far more profitable than the broader markets and expected
to grow considerably faster. This is a situation we are very comfortable to remain fully
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invested and quite patient.

Going forward only one stock in the portfolio is being seriously considered as a potential
source for funds - Manhattan Associates (MANH). During the next few weeks, we will
review many of the companies in the portfolio and discuss their investment case and
current valuations. Manhattan will certainly be one of these we take a long look at from a
price/valuation standpoint.
Over the past 10 years, we have a turnover ratio of roughly 5-7% annually. We expect this to
continue into the foreseeable future. Each of the companies in the portfolio shares common
characteristics - excellent profitability signified by high ROA, ROE, and ROIC, little to no
debt, management who are great allocators of capital, and they were purchased at a
significant discount to fair value. Our turnover is low because there are simply not that many
companies that meet such criteria.
We made one change in the portfolio that came too late to be included in the annual report.
This was the purchase of a small position (1.5% of total assets) in Computer Programs and
Systems (CPSI). Additional thoughts and reasoning for our investment in the company can
be found in our article entitled "The Search for Compounding Machines" published on
Nov. 21, 2014.
Over the course of the year, we will notify members of the GuruFocus community of any
additional changes to the portfolio. With a cash balance of roughly 2%, it's not likely there
will be any significant purchases without the sale of a current holding.
We appreciate everyone's thoughts and comments over the past year here on GuruFocus.
We don't believe there is a better website to meet fellow value investors, learn from a
fantastic group of writers, and conduct research from data that really is unique to the
Internet. We wish everyone a very prosperous, happy, and healthy New Year.
- Nintai Partners
Nintai Portfolio Holdings
December 31st, 2014
Investment

Coach (COH)
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Portfolio

Buy

Total

Date

Return

1.4%

Oct 2014

8.9%
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Baxter International (BAX)

3.4%

Apr 2005

90.2%

Blackrock (BLK)

3.6%

Dec 2008

130.3%

Expeditors International (EXPD)

4.3%

Oct 2004

163.1%

Qualcomm (QCOM)

2.7%

Apr 2006

73.6%

T Rowe Price (TROW)

8.0%

Apr 2005

227.1%

Novo Nordisk (NVO)

9.3%

Jan 2006

428.6%

Cognizant Technology (CTSH)

7.3%

Nov 2007

491.4%

Fastenal (FAST)

4.5%

Jan 2004

153.7%

Mastercard (MA)

6.0%

Dec 2008

355.2%

Waters (WAT)

3.5%

May 2006

182.0%

Ansys (ANSS)

3.5%

Dec 2008

190.2%

FactSet Research (FDS)

5.5%

Jun 2006

255.5%

Dolby Labs (DLB)

4.2%

Dec 2004

162.2%

New Oriental Education (EDU)

2.1%

May 2009

41.6%

Herms International (HESAY)

2.1%

Nov 2010

58.3%

Manhattan Associates (MANH)

12.2%

Feb 2006

887.7%

Morningstar (MORN)

2.3%

Feb 2006

71.9%

Synaptics (SYNA)

7.9%

Apr 2005

541.3%

Terra Nitrogen (TNH)

6.4%

Jan 2007

20.4%

About the author:

tmacpherson1966
We manage private accounts based on finding companies with high ROIC, significant free
cash flow, no debt, and trading at a deep discount to fair value.

Visit tmacpherson1966's Website

Voters:
Rating: 5.0/5 (1 vote)
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Comments
Snowballbuilder - 1 day ago
Thanks for sharing your portfolio.
"...based on find ing company with high Roic, significant free cash flow, no debt,
and trading a deep discount to fair value"
I m looking for the same and i think your portfolio well fit your statement.
I also apprecciate your "let your profit run" philosophy so that compound work at
best.
Finally i think your absolute performance is good and consistent.
Congrats and keep investing and sharing

Thomas Macpherson

- 1 day ago

Thanks Snow. Appreciate your feedback. The problem with a document showing
portfolio positions at year end is much like a balance sheet. It's an interesting
snapshot but fails to show all the failures/successes along the way, the struggles
to decide when to buy/sell, and all the other transactions which can make a huge
impact on total return. We thought the most important piece of information to show
was the length of holding and total return. This demonstrates our commitment to a
long term, compounding investment philosophy. Thanks again for your comments.
Best. - Tom

Snowballbuilder - 1 day ago

We thought the most important piece of information to show was the length of
holding and total return
Fully agree and i specifically share this accountability.
I will check , with interest, any of your reported holding

Dr. Paul Price

- 1 day ago

CPSS seems to be making money only on sub-prime auto loans. Those have
been looking extremely dicey based on recent data showing large increases in
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early defaults (within 9 months of loan origination).

These guys got killed during the last recession and will probaly find the going very
tough again soon.
While the P/E is low now, it wouldn't be surprising to see CPSS start losing money
again quickly on any economic slowdown. Is CPSS, shown above, really the
correct symbol?
[I think you need to fix the symbol in the article to CPSI].

Thomas Macpherson

- 1 day ago

Thanks Paul. Edit made. What a difference a letter makes. Appreciate the catch. Tom

Brian_flores

- 1 day ago

Hi Tom,
Congratulations on your investment results, that speaks louder than any
statement. I wanted to ask you, how do you go about finding them? Is there a
specific service or provider that you personally recommend? I generally construct
my own screeners and read ideas from value investing communities, but I would
also like to hear from successful investors such as yourself.
Thanks in advance and congratulations again,

Thomas Macpherson

- 23 hours ago

Hi Brian. Thank you very much for your comments. We generally use Morningstar
and Gurufocus for our research needs. One of our techniques on GuruFocus is
explained in greater detail in our article dated November 21, 2014 "The Search For
Compounding Machines". On Morningstar a tool we use is creating a portfolio with
multiple mutual funds we admire and respect for their investment acumen. We
then run the "X-Ray" tool and select the "Stock Intersection" tab. This shows us
companies which have been purchased by multiple funds. We find that companies
with investment by 3 or more fund management we admire is a great place to
start. I hope you find these tips helpful. Thanks again for your comments. Best
wishes - Tom
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Quixote1

- 17 hours ago

Tom: Your portfolio makes a credible track record as posible.

Im suspicious of high turnover models generated by computer.
With holdings that you dont touch in years you defer taxes and keep cost at
minimun,
Almost doubling the CAGR of a beast (like the S&P TR).....is not easy over the last
10 years....doing it with minimun tax impact is almost a miracle.
Thank you very much for sharing.

Thomas Macpherson

- 15 hours ago

Thanks Quixote. Appreciate your comments. What's interesting - and we discuss

in our Annual Report in much greater detail - is the fact that we trail both indices for
a considerable amount of short term cycles. Much of our long term
outperformance was generated by outperforming in down markets such as 2008
and 2011. We believe a focus on companies with little/no debt and generous free
cash flow really protects our investors well. In the next market downturn (no idea
when but it will happen with some certainty) we believe we are well positioned
once again. Thanks again for your comments. It is much appreciated. Best. - Tom

Snowballbuilder - 14 hours ago

We believe a focus on companies with little/no debt and generous free cash flow
really protects our investors well. In the next market downturn (no idea when but it
will happen with some certainty) we believe we are well positioned once again.
Agree. Wise word .
How much you have in cash & cash equivalent?
Can you share with US your complete annual report?
Thanks again snowballbuilder

Thomas Macpherson

- 13 hours ago

Hi Snowball: we currently have less than 2% of our portfolio in cash. That might
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change after our year end review of each portfolio holding. After we review
valuations it is possible we might reduce some portfolio positions though unlikely
we will completely close them out. Unfortunately we share the Annual Report with
our investors only. We do that for several reasons - first we believe their financial
relationship with us should give them access to some research and analysis
which is proprietary to them alone. Second, each report is individualized to put our
research in context. Accordingly we don't share that with anyone other than their
designated recipient. That said it us likely we will post some of the more generic
sections of the report sometime in the near future. My best wishes. - Tom

Snowballbuilder - 8 hours ago

Hi tom i understand your policy on annual report, i think is fair .
I m not a fan of full investing but if is working well for you (and by the number IT is)
is ok and good for you and your client.
Tom russo is probably the only great investor i track that is always full invested.
Again thank for sharing and best regards . Snow..

Thomas Macpherson

- 5 hours ago

Thanks Snow. We are generally fully invested less from a policy standpoint (we
don't really have a policy or preference like some do for being 100% engaged at all
times) and more related to the fact we are long term investors. For instance, right
now we have roughly 20 companies in the portfolio which we are entirely satisfied
will produce outstanding long term returns. Why would we sell one of these simply
to have cash on hand in case another comes along? The only time we've ever had
considerable cash not invested was when we were getting the fund up and
running. I will let you know when we release any section of the Annual Report.
Best. - Tom

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