Bear's Portfolio at the end of 2016

PaulWBryant · January 2, 2017, 1:09am

I will get to the details very shortly, but the TLDR version is I lost 15% this year.

That’s bad. No reason to sugar coat it. But the amount I lost is truly nothing compared to the knowledge and experience I’ve gained in 2016. Could I have learned the lessons less expensively if I’d had half or 3/4 of my money in index funds? Maybe. But maybe sometimes you have to jump in with both feet when you’re really passionate about something. I’m 36. I’ll be ok. I also helped my Dad (who’s 67) invest, and we took a conservative approach and he handily beat the S&P. So there really is a risk / reward component to this art.

I like my style, which is very similar to Saul’s…and hopefully has become more so in large part thanks to this board and his tutelage herein. Someone pointed out today that “modified buy and hold” might not be the best description. I don’t really care what you call it, but as I pointed out here (http://discussion.fool.com/modified-buy-and-hold-32203068.aspx), I see it as a balance between the short term and long term. Why tie one hand behind your back? Consider both.

I feel good about the companies I own. I understand them infinitely better than I understood the companies I owned at the end of 2015. I’m excited. I’m resolved. I’m enjoying the journey. And I’m not fooling myself. If I can’t get the hang of this in the next year or two, I will go back to being a passive index investor. I’ve got plenty of time to let compounding work for me.

But here’s to 2017! Looking forward with anticipation! But first, let’s talk about the year we’ve just completed.

Previous Month Summaries

Portfolio Performance


This Month
My Portfolio            1.20%
S&P                       1.82%
Nasdaq                   1.12%
Russell 2000            2.46%

YTD
My Portfolio          -15.10%
S&P                       9.54%
Nasdaq                   7.50%
Russell 2000          19.74%

Well, the last few days have been an inauspicious end to an inauspicious year. But it’s nice to finish December in the black, even if the only index I beat was the Nasdaq.

Changes this month, and why I made them

Sales:

SKX - After SKX jumped to $26, it no longer looked like a bargain to me, and I sold a good bit. When it was over $27, roughly 20% higher than the week before and more than 40% up from the recent low, I sold the rest. I didn’t really sell out because of any problems or risks, but simply because growth has slowed and the stock is not screaming buy right now. It’s not super expensive at a PE of 15, but until margins start growing again, I’ll let others worry about it.

AMN - Here’s another that was up almost 20% this month, so I sold. It tends to move to factors not related to the company’s performance. Also, the growth has not seemed super inspiring.

Buys:

BOFI - Took a small position around 28. Interested, but need to study more.

SPLK - After the close to 20% drop, seemed worth getting back in. I still don’t completely understand this business, but as with BOFI, I’m eager to learn more.

Trims, Adds, and Holds:

I’ve been adding to my top 7 positions, which now make up 78.6% of my portfolio. That’s a lot, but concentrating on what I know best seems a better strategy than spreading myself too thin. I’m doing a better job of realizing what I actually know instead of just what looks “cheap.”

I’ve added to:

SHOP
LGIH
HUBS
YELP
SQ

I’ve mostly added on dips, so even though some (LGIH and HUBS especially) are down substantially in December, I still had a net positive month.

The only trims were XPO and AMZN. I took a little of my gains off the table.

PAYC, FB, SSW, TWTR, and PERI remain unchanged. Would have added to PAYC, but it is already so big from my adds last month.

About SHOP… Yes I realize it’s basically irresponsibly huge. But it’s my highest confidence company, by far. I continue to buy each time it dips to 40 or so. I just don’t think we’ll see that opportunity too many more times.

Watchlist

HDP - still just watching. Really glad to see Saul took a position…and especially enjoyed the conversation that ensued here: http://discussion.fool.com/hortonworks-32537042.aspx?sort=whole#…

VEEV - still too crazy expensive…kinda feel like it will get acquired and I will miss out, but I’m still waiting at these levels.

STMP - maybe I was wrong to sell this. It’s volatile, but they just keep killing it. But like UBNT, their incredible margins actually scare me. How is it sustainable??

My Current Allocations


SHOP	25.7%
PAYC	10.9%
LGIH	9.5%
HUBS	9.3%
YELP	8.8%
XPO	7.1%
SQ	7.2%
AMZN	4.9%
FB	3.8%
SPLK	3.4%
SSW	3.0%
TWTR	2.4%
BOFI	2.8%
PERI	0.9%

Random Thoughts and Conclusions

New Years Resolutions:

Since I’ve started investing in individual stocks (end of 2014), I’ve had 2 meager years. In addition to under-performing the market, I’ve lost a lot of money. In 2015 I didn’t keep good records, but I estimate I lost about 11%. In 2016, I lost 15.1%. However, since I started keeping these monthly journals in February, I am basically flat. That’s even with INFN, SEDG, and others taking huge bites out of my portfolio.

Here are some things I learned in 2016:

“It’s so cheap” is not an investing thesis http://discussion.fool.com/quotit39s-so-cheapquot-is-not-an-inve…
Just because a company is growing like crazy, that doesn’t mean it will continue to do so. See INFN, SEDG, SKX, RUBI, FIT. Networks are huge…businesses where there are real switching costs are much more steady that those that sell products that customers can buy once and never again.
Services and software mean more differentiation, network effect, and margins possible than products, most of which are in danger of becoming commodities sooner or later (and whether sooner or later can be hard to predict).
I’m still working on this, but there are many reasons to sell (or not buy) a company. Most center around inability to predict their future, aka being “too difficult,” as I said in the post above (see #1). I discussed a few of these reasons here: http://discussion.fool.com/reasons-not-to-own-a-stock-32519619.a…
I’ve learned to stop gambling and invest in companies with long term advantages and short term catalysts. I’ve learned to stay away from things I can’t understand or am just hoping will work out, and stick with proven winners that are winning for understandable reasons.

Here are my goals for 2017:

Beat the S&P, Nasdaq, IWM, and IJS.
Have less volatility than the IWM and IJS. This means being down less in down months…obviously I’m ok with being up more in up months. I’m basing this goal on the fact that Saul has been able to achieve gains even in years where the market is down (even though small caps were down in 2015, he gained 16% or something).
No matter what the market does, achieve a positive return for the year.

I think these goals are reasonable and achievable. I think I’m getting the hang of this investing thing, but if it still proves to be too difficult, by all means I will go back to passive investing.

My best to all,
Bear

YouAreNumberSix · January 2, 2017, 12:13pm

… nothing compared to the knowledge and experience I’ve gained in 2016.

There is a basic assumption around here that knowledge, research and analysis will lead to superior investing results. There is no evidence to support that claim. I have observed many investors over the years, friends, family, co-workers… I have not noticed any correlation between intellect and effort to actual results.

Making money in the stock market is not that complicated. Don’t over-think it.

That said, I salute your honesty and intellectual integrity. This group is promoting an idea that is very seductive. That you too can average a 25% gain annually. You went for it and documented the journey. This is very valuable as it may serve as a warning to others, as well as help you self-correct quickly limiting further damage.

#6

SaulR80683 · January 2, 2017, 1:39pm

I have not noticed any correlation between intellect and effort to actual results. … This group is promoting an idea that is very seductive. That you too can average a 25% gain annually.

But 6, you CAN average a 25% gain annually. I know, because I did it for 18 years or so. Now I’m perfectly willing to accept that there must have been some factor of luck in that, just hitting the right stocks at the right time, hitting the 1999 internet boom, and being scared enough to get out of internet stocks early in 2000, etc, etc.

Look, I’m perfectly aware that if someone pulls marbles out of a sack with 50% white and 50% black marbles, he has one chance in a thousand of picking 10 black balls in a row. No skill involved. Maybe I was the one guy in a thousand who made the lucky picks and picked the unlikely 10 black balls in a row. I don’t actually think it was ALL luck though (probably because it was me that did it).

With the stock market, I think putting in effort, and trying to understand the companies I’m investing in helps, because it apparently worked for me. You don’t seem to think it helps. You see no correlation between effort and results (possibly because it hasn’t worked for you).

That’s what makes horse racing, as the expression goes.

Best,

Saul

dumaflotchie · January 2, 2017, 1:58pm

Have less volatility than the IWM and IJS. This means being down less in down months…obviously I’m ok with being up more in up months. I’m basing this goal on the fact that Saul has been able to achieve gains even in years where the market is down (even though small caps were down in 2015, he gained 16% or something).

Bear:

Looking over your portfolio, you are anything but “less volatile”. Don’t get me wrong, I do like and own 3 of the stocks you have listed but you have some serious gonads in the percentages IMO.

I am glad to see that you and others are embracing the bench marking concept because it it crucial to understanding if your approach is accomplishing your goals from a “risk reward” and “effort reward” perspective.

You are also quite young and you do NOT need to hit this out of the ballpark every year.

As regards comparing yourself to Saul…forget about it…he is an outlier by far…his prior results are way out there from what probably 99% of investors do or have done…in fact, on a “what have you done for me lately” basis, the market is crushing his returns since this board was established.

Just a word of caution as you go into the new year and wishing you a much more prosperous outcome in 2017!

darrellquock · January 2, 2017, 8:56pm

25.7% in one position. are you sure you learned your lesson about not gambling?

PaulWBryant · January 2, 2017, 11:24pm

25.7% in one position. are you sure you learned your lesson about not gambling?

I have come to believe it is more of a gamble to put my money in more companies that I’m less sure about instead of fewer companies that I’m more sure about. I’ve owned over 25 companies in some months of 2016. Being down to 7 really substantial positions now, obviously each is going to be a higher percentage.

Bear

StelWestrunX · January 3, 2017, 6:48am

Here are my goals for 2017:

1) Beat the S&P, Nasdaq, IWM, and IJS.

2) Have less volatility than the IWM and IJS. This means being down less in down months…obviously I’m ok with being up more in up months. I’m basing this goal on the fact that Saul has been able to achieve gains even in years where the market is down (even though small caps were down in 2015, he gained 16% or something).

3) No matter what the market does, achieve a positive return for the year.

I think these goals are reasonable and achievable. I think I’m getting the hang of this investing thing, but if it still proves to be too difficult, by all means I will go back to passive investing.

here’s an alternative view to consider

Ignore the indexes. Your portfolio doesn’t look like them, so unless you want to adapt the core sector allocations for the respective indexes and stay 100% invested all the time, comparing yourself to various indexes can really hurt you, esp over short-term periods.
Targeting ‘volatility’ is a virtually impossible goal. A stock ought to move in tandem with earnings progress but that progress is hardly linear, and there ought to be no correlation on an individual basis on up and down months. If anything, those things are utterly irrelevant. The only thing to care about it how your company is doing and how the market is pricing it - to achieve your goal, you have to assume the market is rational. Often it ain’t.
The only way to do this is stay 99% in cash and 1% invested and make sure that 1% goes up. Otherwise, if you are invested in stocks at all, there’s an implied axiom that sometimes you are going to loose money.

Course, I understand 100% where you are coming from, and beating the indexes while achieving a non-volatile return while always making money is EVERYBODY’S goal. But taken to extremes, it is impossible - unless you are specifically designing a portfolio to match those goals, but none of these are close correlated or ultimately make sense. Conceptually at least.

The goal - be the best Bear you can be. End of story

There is a line in the 2nd Lynch book relevant here:

This is a useful year-end review for any stockpicker: go over your portfolio company by company and try to find a reason that the next year will be better than the last. If you can’t find such a reason, the next question is: why do I own the stock?

just 2c

PaulWBryant · January 3, 2017, 10:01am

The goal - be the best Bear you can be. End of story

I’m trying to be a little more specific than that. Not necessarily because it will help me achieve my goals, but just for the sake of having them spelled out.

Looking back on the last two years, it’s easy to say I haven’t been the best Bear I could be. But I’m starting to identify specific reasons why (I invested in tiny companies without steady growth…I invested in companies I did not have a good grasp of…etc, etc). In the same way, I’d like to be able to look back at the end of 2017 and evaluate not just whether or not I made money, but how the ride aligned with my goals.

I’m not trying to be Saul. As someone pointed out, he’s a huge outlier. But if I can’t beat the indexes in at least SOME ways (return, volatility, real gains) is it even worth trying? I’m truly considering going back to being a more passive investor after 2017, so I need to judge this year as clearly as I can.

Thanks,
Bear

StelWestrunX · January 3, 2017, 10:28am

Hi Bear,

If it matters, I do this full time (professionally). It took me 10 years to finally switch from funds to stocks, and it took at least 4 years of getting my rear end kicked (in a bull market) before I had anything to show for the effort.

But if I can’t beat the indexes in at least SOME ways (return, volatility, real gains) is it even worth trying?

if it matters, an alternative approach is to do both - you index and then you pick in spots, and you wait until your picking in spots begins to evidence real skill; that usually involves being able to be predictive in your selections, in knowing what you expect to happen, what does happen, all leading to a successful investment, done consistently. One approach is to become an expert in an industry or category.

Just my opinion, but you are setting a very high bar right off the bat. Again, tracking volatility is absolutely irrelevant - completely irrelevant (unless you are picking mo-mo stocks of course in which case mo-mo is the only thing you’ve got). Just friendly advice - be careful with that goal.

last bit from me on this…

Smorgasbord1 · January 3, 2017, 1:44pm

This is a useful year-end review for any stockpicker: go over your portfolio company by company and try to find a reason that the next year will be better than the last. If you can’t find such a reason, the next question is: why do I own the stock?

While it’s useful to review your holdings, doing better than last year isn’t a valid criteria.

Look at NVDA, for instance. It had a great year, more than tripling. The question isn’t whether it’ll have a better year than that, the question is whether it’ll have a good year in 2017. If NVDA only doubles, that isn’t as good as last year, but it’s still damn good.

StelWestrunX · January 3, 2017, 3:06pm

While it’s useful to review your holdings, doing better than last year isn’t a valid criteria.

It is all in the context, and I didn’t reference the context well. Lynch is talking about what the actual company path is to a better year (or higher earnings) in terms of what they themselves are doing, not what the stock will do. So, getting specific, what is NVDA going to do in 2017 to make 2017 even better than 2016. It is a straight-forward question to ask.

foodles · January 3, 2017, 8:59pm

As others have commented, over 25% allocation in one company is potentially dangerous as any thing can happen to any company at any time. That said, if it does well, it’s also a (risky) way to make some above average returns!

What I would be careful of is this comment regarding SHOP, “I continue to buy each time it dips to 40 or so. I just don’t think we’ll see that opportunity too many more times.”

Don’t fool yourself, it can always go significantly lower. I’m not saying I think it will, but that thinking is what had me buying more INFN as it dropped under $20 after I had bought it between $5-$10 and rode it up to $25, then added as it dropped below $20, thinking, I’m not going to get this opportunity many more times, boy was I wrong!

I’m not trying to compare the companies, just to not put much money behind that phrase for the sake of the phrase itself.

CMFDoubtingThom · January 4, 2017, 12:03pm

Hi Bear,

Interesting summary. This statement stood out to me:

I also helped my Dad (who’s 67) invest, and we took a conservative approach and he handily beat the S&P

I know I’m late to this thread and you have probably moved on, but I have a couple questions:

Can you share your “conservative” approach?
If you could handily beat the S&P500 with this conservative approach, why not consider it for your own investments?

Any conservative strategy that handily beats the S&P is nothing to scoff at, me thinks?

DT

PaulWBryant · January 4, 2017, 12:23pm

1. Can you share your “conservative” approach?
2. If you could handily beat the S&P500 with this conservative approach, why not consider it for your own investments?

Just dividend stocks, really. We just took some money that was languishing in bond funds in his 401k and strategically bought stalwart companies (XOM, JNJ, CVX, GE) when they were down. We also targeted dividend companies – the reason for that is I felt the market might go sideways for a while, and he would be happy with a 3 or 4 percent return.
One reason we handily beat is because he got CVX and XOM at crazy bargains…just good timing. I think over time, his approach mirrors or even slightly trails the S&P, but with much less volatility. With a MUCH longer timeline before retirement, I would rather accept more volatility and shoot for higher returns. My current approach is most volatile, but with the highest potential reward. If I deem it to be “too difficult,” I will go to passive investing in small cap ETFs like IJS, IJT, IWN, IWM, as well as maybe some tech ETFs like XSD.

Good questions.

Bear

CMFDoubtingThom · January 4, 2017, 2:08pm

Thanks for the reply, Bear.

Sounds like a value based approach to large dividend stocks, which can be very effective. Reminds me of “Beating the Dow”, “Dogs of the Dow”, Foolish Four (a popular TMF method 20 years ago or so), etc.

DT

YouAreNumberSix · January 4, 2017, 3:21pm

Sounds like a value based approach to large dividend stocks, which can be very effective. Reminds me of “Beating the Dow”, “Dogs of the Dow”, Foolish Four (a popular TMF method 20 years ago or so), etc.

“Dogs of the Dow” is an interesting strategy. It was published and became famous in the early 1990’s. Then everybody started doing it and it stopped working.

Now I hear that in the last 5-10 years, “Dogs of the Dow” had great results again, precisely because people abandoned it…

#6

xenotedvr1 · January 4, 2017, 5:40pm

Bear,

What I am doing is kind of a mix of the three. I have mostly individual stocks. Early on I went mostly with dividend payers, other companies I knew. I held on to most of them, but now have more growth/volatility/call it what you will. Recently I started small regular contributions into a couple funds too, as well as building a small cash cushion. (somewhere between 5-10% is where I want to be).

As the ETFs and some of the dividend payers grow, I will probably keep less cash and just use the $ in those as a “cash position” that pays a dividend for any opportunities that come up. Seems good in theory to me, way too early to know how it will work out.

Just my thoughts on active vs passive - it doesn’t have to be all or nothing.

Kevin

earslookin · November 30, 2017, 5:57pm

Bear,

My brother died of lung cancer at the age of forty-five. He smoked a pack a day since he was
a teenager. The year after he died I would tell people who smoked that their chances of getting
lung cancer from smoking was very high. Later on I found out that the actual risk is somewhere
in the neighborhood of 10-25%, depending on the study. I overestimated the risk based on one
sample, a sample that was very immediate to me.

This type of bias has a name: the law of small numbers. It’s not an actual law – its just a name
for the type of mistake people make by using sample sizes that are too small when they make
decisions.

I think you would enjoy the work of Daniel Kahneman and others that explore this subject.
An easy way to get started is with these videos and book:

https://www.youtube.com/watch?v=HoMb4nKTZwg

https://www.youtube.com/watch?v=CjVQJdIrDJ0

https://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp…

Apologies if you are already familiar with these.

Bear, the above is NOT a knock against you. It is a good faith attempt to help you avoid the
mistakes I made. I hope you take it that way.

Ears

foodles · November 30, 2017, 6:39pm

Bear, the above is NOT a knock against you. It is a good faith attempt to help you avoid the
mistakes I made.

Sorry, Ears, I’m a little slow sometimes…or maybe I just don’t know your history, but was your post to say that only a few people are able to consistently make money with this type of stock picking method and sooner or later most on this board are going to get burned being invested in the stocks that Bear (or others) have listed?

earslookin · November 30, 2017, 7:13pm

but was your post to say that only a few people are able to consistently make money with this type
of stock picking method and sooner or later most on this board are going to get burned being invested
in the stocks that Bear (or others) have listed?

foodles,

No. And I want to emphasize again, that was NOT what I was saying.

If Bear was down 80% this year my post would have read exactly the same.

Thanks,
Ears