matt croce

alive since 1981

2016 Annual Letter

We all love to read annual reports, right? Before making an investment, I always like to read a few annual reports in order to get a sense of the business. Warren Buffet is famous for, among many other things, writing some brilliantly entertaining and enlightening letters at the beginning of the Berkshire Hathaway annual report. In fact, his letters over the years have been combined into a book. They are well worth reading.

Most asset management firms also produce an annual letter to their clients/shareholders. This is a useful tool for communicating about the year’s performance, but also a way to crystallize thought and explain certain moves that the firm made during the year.

Have you considered writing an annual letter for your own investment performance? I thought I would give it a try. Here’s my first attempt:

Dear Investment Partner,

For the full year 2016, the Croce Capital Management portfolio returned 15.82% net of commissions and fees, including dividends. The S&P 500 returned approximately 12.25% including dividends in 2016.

Regarding performance for the past year, I find it’s always helpful to remember that, while it is nice to beat the market, no single year’s performance should be taken as a proxy for a manager’s intelligence or skill — or lack thereof. I would anticipate having years where we are able to handily outpace the general market, and I also anticipate other years of getting beat by the market. It’s the repeated work of reading, listening, analyzing, and intelligently allocating capital that leads to outsized returns over time. We are happy to have had a good year, but also recognize that a longer time horizon presents a more accurate view of performance.

Our investment approach is to minimize risk while also maximizing our opportunities to capture reasonably aggressive growth where it can be accretive to our long-term results without unnecessarily exposing us to risk. If you re-read that sentence, you’ll notice that there’s really nothing special about this approach — everyone wants to minimize loss and maximize gains. Our method of implementing this approach is to maintain our largest positions in companies that we feel minimize downside risk. This means that we have the majority of our capital invested in solid, dividend-paying, blue chip companies that have proven track records of consistent, if unspectacular, growth in both earnings and dividend payouts. These companies also tend to have rock-solid balance sheets and reassuring cash flows. Some companies may try, but it’s really quite difficult to fake cash flows and it’s impossible to fake the dividends that end up in our coffers each quarter.

So if our investment approach is not particularly unique, what is our particular advantage? From where we sit, there are two main advantages that we hold:

  1. We have a long-term time horizon.
  2. We have the luxury of being to act on only our best ideas.

What do these mean? Since we are not beholden to quarterly reports or other silly metrics, we have the ability to make investments that we think might not pay off for a few years. Additionally, we have the ability to hold investments for years — decades, even — and sit back and watch the capital gains pile up. In that same vein, we are encouraged to take action only when we feel like we are acting on our very best ideas. There are no outside shareholders to please, no activists to ward off. We act only on ideas that we believe will add to the long term wealth of our primary constituents — you.

It might be a good time now to remind you that not only are we acting with your best interests in mind, but we have aligned our interests with yours. Every time we make an investment on your behalf, we put our own money into the same investment. If an idea is not good enough for our money, it’s not good enough for yours.

As a quick recap on the 2016 portfolio performance, here are two items we would like to highlight:

  • Johnson & Johnson (JNJ – 28.81%), The Hershey Company (HSY – 24.42%), Unilever PLC (UL – 11.92%), and Nike Inc. (NKE – 11.65%), together make up 76.8% of our current holdings. This portfolio composition is a little more conservative than we would like — look for this to change over the coming years. Even though it’s conservative, we have no complaints about the performance of these companies that we own. Nike did have a negative annualized return for 2016, but we believe this company represents a real value at the moment – we may increase this position over time. See the below chart for 2016 returns of these rock-solid, foundational holdings:
Company 2016 Return
JNJ 12.75%
HSY 19.82%
UL 19.37%
NKE -5.45%


  • We sold out of our position in Piedmont Natural Gas (PNY). We first opened a position in this company in March 2014, and over time added to that position at an average cost basis of $35.28/share. When we sold in January 2016, the price had appreciated to $57.00/share, representing an increase of 61.56% over our cost basis. Beyond that, we were able to recover 5.63% of our invested capital via dividends paid out by the corporation. At the time of our sale, Duke Energy had announced intentions to purchase PNY. When we exited, we were able to record annualized gains of 42.08%.

Certainly not all of our investment in 2016 were winners (see Nike), but the ones above are mentioned to reinforce the advantage that we have. PNY would have been a nice little company to hold; we would have been more than happy to keep it and collect dividends over the next several years. We thought it was slightly undervalued, but the share price wasn’t really going anywhere during our holding period. When you identify a value, though, you’re not usually the only one. In this case, Duke Energy thought PNY looked good and bought the company. That was a real boon to use as shareholders. We certainly don’t count on these types of corporate events to boost our results, but we’ll take them when they happen.

As we move into 2017, we are looking to expand our portfolio of deep value investments. This will likely introduce a little more volatility to the overall portfolio, but this is the price we pay for excess returns. We will do our level best to ensure that the investments we make align with our values and beliefs and we believe that in the long run these investments will add to our collective wealth. Always keep in mind that our top goal is this: do not lose money. In fact, we follow Warrent Buffet’s two investing rules pretty stringently:

  • Rule No. 1: Never lose money.
  • Rule No. 2: Never forget rule No. 1.

With that in mind, we will always maintain (and likely grow) our fortress investments. These are companies such as JNJ, UL, HSY, NKE, etc. Look for this list of foundational companies to grow, even as we expand our portfolio and act on our very best ideas.

Thanks for your trust and your partnership.
Many happy returns.

Matthieu Croce.

2016 McCormick Annual Report

Did anyone else get the 2016 McCormick annual report?

I love that they scent the report. It smells like nutmeg and cloves. 

Investment Account Activity

Just a quick update today on some activity in my investment account:

I’ve been watching Target (TGT) recently and yesterday decided to take advantage of a recent large drop in price to open up a position. I didn’t really add much new capital to my account so this was accomplished in conjunction with a few other moves. In my regular taxable account, I sold out of my small position of Royal Dutch Shell (RDS.A) and used the capital to open the TGT position.

I still wanted to maintain exposure to RDS.A so in my IRA, I took some profit from my positions in General Electric (GE) and AT&T (T) and put the proceeds into 117 shares of RDS.A. This will be nice because RDS.A pays a healthy dividend and I’m pretty happy to defer taxes and let the dividend reinvestment work for me for a couple of decades.

So, at the end of the day I put 31 shares of TGT into my regular investment account, reduced my positions in GE and T to 100 shares each in my IRA, and put 117 shares of RDS.A into my IRA.

Personal Finance Report – January 2017

Well now that we are pretty much at the end of February, it seems like a great time to take a look at my personal finances for the month of January.

Income for the month was 21.5% over budget. This is because I don’t include my wife’s income in our budget. Her income is somewhat irregular, so I don’t bother to include it.

Expenses for the month were 38.1% over budget. This is partially due to the way certain expenses are timed – I paid two gas bills in January, for example. But mostly this number is high because there were several expenses that were planned, but not included in the budget number. These mostly fell into the “Household” spending category, which covers everything from clothing to shoes to other general stuff like items bought at Target or from Amazon. Anyway, these were pretty much planned for, just not included in the budgeted spending number. Our checking account carries a bit of cushion in it for things like this so there wasn’t really an impact.

Savings rate for the month was 43.68%. That’s a terrific number, but slightly inflated. Like I said earlier, we carry some cushion in the checking account. That means that sometimes, when I’m feeling froggy, I’ll move some money from checking into a savings or investment account. So the 43.68% isn’t purely coming from monthly income, but the total amount saved/invested is compared to monthly income. Make sense? Ok.
A quick note on savings rates: There are many ways to calculate this number. I use a fairly simple method. How much did I transfer into a savings or investment accounts that month compared to my monthly income. This is all net of taxes, so I’m not including my 401(k) contributions, which are currently something like 12% of my gross pay. This also isn’t including my buying into the Employee Stock Participation Plan, which allows me to buy shares of company stock at a discount each month. I only contribute something like 2% or so of my net pay to this.

I started tracking spending and net worth differently in January of this year, so I’ll use January 2017 as a baseline for net worth reporting. I’m not yet sure if I’ll be sharing actual numbers, so for now we can say that my net wort at the end of January 2017 is 1. I’ll report each month relative to that number. So next month might be 1.1 or .96 or whatever.

January 2017 Family Update

Here’s what happened in January 2017:

We went to the Children’s Museum and Margot sat behind the wheel of a car:

We built towers:

We went for walks in the snow:

We built a seat for Elmo:

Our bathroom remodel was completed. Here are a couple before/after pictures. Sorry for the (lack of) quality:

I went to a Steelers playoff game. It was very cold:

All in all, it was a pretty good month. It was great to get the bathroom project finished and be able to use the main bathroom. We’ve been using the bathroom on the third floor for showers and baths and that got old pretty fast. Tune in next month for a recap of February – hopefully I’ll have another finished home renovation project to share.

Thanks @watsunatkinsun for the beautiful Mandelbrot interpretation and thanks @white_willow_collective for hosting!

from Instagram:

Investment Portfolio Cleanup

Here’s something I wrote about in January of 2016, regarding cleaning up my investment portfolio:

I’ve been sitting on a large-ish position of DHY and a slightly-more-moderate position of PHK for several years now. I had the misfortune of buying into these high-yield funds at what was basically their peak price. Over time, I’ve seen their value erode by anywhere from 25%-50%. Given the high yield/high income nature of these funds, I was able to cover approximately 33% of my initial investment just from the dividends I received, but I really had no business being in these positions. These stocks are not at all aligned with my investment philosophy and I was really just hanging on to them in hopes that the price might recover a bit and I could sell at less of a loss.

This week I finally decided to pull the trigger on Operation Portfolio Cleanup. I sold out of these positions and will be redeploying the capital into companies that are more closely aligned with my investment thesis. What am I going to buy? I initiated buy orders for AWR, CL, MKC, and TIF. I’ll be increasing my positions in AWR and CL, and initiating new positions in MKC and TIF.

I thought I’d post a little update on this process and where my portfolio stands today.

I did go through my portfolio and weed out stocks that did not belong or weren’t quite right for my philosophy. As a result, here is what I’m currently holding:

  • ABT
  • BRK-B
  • DEO
  • GE
  • HSY
  • JNJ
  • MKC
  • NKE
  • RDS-A
  • T
  • TIF
  • UL

I’ve been working toward owning at least 100 shares of each of these companies. So far I’ve got at least 100 of the following:

  • ABT
  • GE
  • HSY
  • JNJ
  • NKE
  • T
  • UL

By the end of 2017, I should be over 100 shares of RDS-A and I’m sure something else.

These positions are broken up between an after-tax investment account, a Roth IRA, and a traditional IRA.
I also have investments in my company’s 401(k) plan but I’m not a huge fan of the options in the plan. I’m mostly invested in some stock funds, a real estate fund, an international fund, and some company stock. Additionally, I participate in my company’s Employee Stock Purchase Plan.

So there you go. I cleaned up my portfolio a good bit and I’m fairly happy with the approach I have right now. My plan is to keep plowing money into this portfolio and watch the share counts grow, along with the cash I’m receiving in the form of dividends.

New Run activity on Strava

Just finished a Run on Strava for 42 minutes, 48 seconds going 7645.6m.

Vendor with Walkman. FLL.

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