These are my year end results. I don’t go into detail about all the companies we own. There are other posters here who do a much better job of that than I could. Rather I have just three thoughts on managing a growth portfolio with a brief conclusion including my results. Those thoughts are:
Don’t use nicknames for your companies.
We’ve all heard descriptions like “The Amazon of Latin America” or “The Chinese Google.” This is convenient short hand to let an investor know what sector a company operates in, but other than that it can be misleading. All companies are different. Using nicknames will likely make us think that two companies are more similar than they actually are.
Markel is a specialty insurance company. They are share holder friendly and long term thinkers. I bought shares in 2009 and again in 2010. Initial price appreciation was strong - by the end of 2017 I was up over 200% - but growth had slowed. Should I sell? Of course not! This company wasn’t known a The Mini-Berkshire for nuttin’! So I held.
In late 2018 as I was re-balancing our portfolio I reassessed. The main reason for the price appreciation was because of when I bought shares…in the depths of the great recession. There were many other companies I could have bought which would have had similar appreciation resulting from the luck of timing.
Many of Markel’s investments are in industrial companies….bakeries, furniture, dredges. These are solid companies, but making hotdog buns is hardly a growth industry.
The company has experienced amazing growth over the course of its history, but in the last two years it was a total of just 13%. As always, Warren Buffett says it best: “The investor of today does not profit from yesterday’s growth.” In January of this year I sold all of our shares.
Company nicknames are great to get you to click on the article that uses them, but that’s about it. Don’t let those nicknames subliminally affect your decision making.
(This year the appreciation is under 9%.)
Don’t buy a bunch of tiny amounts of starter stocks.
There is a theory that an investor should buy a bunch of tiny amounts of various companies so they have “skin in the game.” This will force him follow the results of the company. Plus, if the shares decline in value, it’s not a big deal because the very small size of that starter position will make the losses minimal. I have two problems with this logic.
To say that you have to actually own shares of a company to follow it would be like saying you have to have own part of a NFL team if you want to play fantasy football. That’s crazy.
Second, by owning a huge number of small positions it quickly becomes too difficult to follow those companies with any degree of thoroughness. I used to own shares about 60 companies. I couldn’t follow all of them. As a result, I didn’t follow any of them. Since the amounts were so small it felt like nothing mattered. If something dropped by 20% I’d see the dollar amount…say 20% of .3%……and think “meh.” By the same token, a .1% position that goes up by 1,000% is still just 1%. Again, meh. Taken in aggregate, these tiny, inconsequential shares could have been 5% each of three good and meaningful companies. Instead it was basically idle money.
I found owning a bunch of tiny positions diluted our performance. We now own 17 companies. For the other companies I’m interested in, I enter a dummy purchase of .01 of share into my online spreadsheet. This lets me follow the company without diluting the returns of my highest conviction companies.
Don’t make portfolio rules based on the performance of outliers.
This is sort of like the first rule about nicknames. Most companies are so different from one another that it is intellectual laziness to say “This is what company A did, so I assume that is what Company B will do as well.” Every company should be evaluated on its own merit (or demerit) before deciding whether to buy, hold, or sell. You may very well take the same action with Company B as with Company A, but never take that action just because of Company A. Right?
The poster child for performance outliers has got be Amazon.com. For 25 years Amazon has had amazing growth, entered new markets, consistently defied expectations and instilled fear wherever their name was mentioned. The problem is that Amazon is a once-in-a-lifetime investment opportunity. If you make portfolio rules based on what Amazon has done you will likely be disappointed far more often than you are pleased. Expecting outlier performance is like betting you’ll hit a hole-in-one. Every time someone says to me “Well Amazon……” I reply “YEAH? What about GoPro? Or The Container Store? Or Atwood Oceanic? Or any of the thousand other companies whose tickers should be lettered RIP?”
So how am we doing?
Our portfolio now holds 70% fewer companies than it did a few years ago. Around 70% of our holdings are “SaaS” companies that are closely followed on this board. Now I don’t hesitate buying an initial position if it is 2% of our holdings. That may not sound like much, but it is 10X the amount that I would have bought just eighteen months ago.
We are up 44.5% for the year.
- This is more than the last three years combined.
- It is over double of our previous best year.
- But one of the things that is most gratifying is that ALL of our net worth is tied up in our portfolio since we own now real estate or have any other equity.
Goals for 2020.
The only thing I have going for me as investor is process. I want to always be aware of what I am doing and why I am doing it. If I can just make sure that I don’t have flaws in my process I should be fine. Other than that, I want to listen to more conference calls and get a better handle on the numbers. Just putting this in writing on the board should help me in that regard.
Bottom line: I’ll take another year like 2019 any day.
I really want to thank everyone that participates on this board for all of your contributions. They are very meaningful to me and many others who don’t post. I hope all of you also had a good year and an even better 2020!
Happy New Year.
Jeb
