I've been investing since 1990 but 18 months ago I got back to actively investing after a few years hiatus.
I've enjoyed reading this board daily, now for 1 year.
I was reviewing my holdings over the last 18 months, asking myself what is my strategy, and what lessons have I (re)learned.
So, I figured I would share it.
These are the stocks I've held in the last 18 months.
SYMBOL G/L IN OUT
AAPL 53.1% 93.39
AMZN 28.7% 665.76
ARNC 34.3% 10.95
BLUE 54.2% 49.00
BRK.B 19.9% 165.00
CMG 1.2% 421.00
GBX 46.1% 42.30
HUN 20.8% 10.33
KMI 7.9% 22.09
LGI 24.2% 26.70
ORCL 1.7% 40.50
SBNY 18.8% 139.13
SPG 8.0% (short) 193.00
FRT 15.1% (short) 157.00
SKY 13.0% 73.79
XOM 29.4% 79.44
XYL 23.5% 39.28
SCTY -43.3%
-> TSLA 418.00
FSLR -40.6% 47.50
INFN -40.4% 15.10
HNNMY -9.8% 5.83
----
G/L: represents my overall realized, or unrealized, gain or loss.
IN: represents average cost basis of stocks I currently hold.
OUT: represents average selling price of stocks I do not currently hold.
I intentionally ommitted the relative size of each position in my portfolio. The point being that this could be a portfolio that
made 40% or a portfolio that lost 40%, depending on the allocations. The net gain happens to be in the neighborhood of 11%.
If I had asked most people on this board to choose an allocation for the above stocks, I bet most people would have beaten my 11% handily.
I'm pretty sure it would be hard to do worse than I did !
The major lesson which I cannot overstate is the art of AVOIDING big LOSERS. I believe this has to be one of Saul's greatest strengths.
I've learned this lesson over and over and yet I am still far from mastering it. If I remove the 2 worst stocks from the list above,
my net gain nearly doubles.
There are 3 ways I think of, to avoid big losers, both requiring great attention and discipline to avoid lapses in judgement.
I'm sure I'm not saying anything novel, but just reiterating, hoping to drill it into my own thick skull.
1. Size of position. For risky bets, choose an appropriate size such that a big loss is only a small loss on the portfolio.
I think Saul was just illustrating this in a recent post I saw.
2. Cutting losses. Get out and avoid the temptation of thinking you can win your money back.
3. Paring down. Simply order your stocks in order of descending conviction, and throw away the botton few. This is especially
applicable if you have a large number of positions. Which, on this board could mean anything over 10 or 20, depending on your level
of time commitment. The flip side of 'diversification' is that the greater the # of stocks you pick, the greater your odds of picking
a loser. If it's hard to pick 5 winners, how can you pick 20 winners. This is probably consistent with the Dhando investor in terms
of less bets, bigger bets, if you know the reference.
My biggest mistakes of the last 18 months:
I failed number #1 big time with SCTY. My position was 4x larger than it should have been, and as a result wiped out alot of my nice gains.
In hindsight, it was just a lack of mindfulness, and acting on an impulse, that I bought too much. It actually converted to TSLA and then I
sold it right away. Disaster all the way around. I practically wrote a masters thesis, replete with Monte Carlo simulations to model this company.
The market is simply too myopic to support a company like this. But, no amount of my wishing otherwise is relevant.
I failed #2 with INFN when I didn't exit. Of note, Saul exited INFN at a point when I would have been down around only -15%
I failed both with FSLR.
The lesson I relearned (again) this year is to be more careful with the relative sizes of my allocations. Many numerous great gains were wiped
out by 1 or 2 losers, made worse by bad allocations and/or stubbornly holding.
The converse argument can be made for winners. There are 2 or 3 positions above which, by any logical measure, should have been much larger.
And I don't mean this after-the-fact, based on the performance.
The next lesson is price anchoring. I failed this lesson notably with 2 stocks:
HUN and ARNC. I made money but there was no reason to sell either, other than they went up alot.
Incidentally, both have more than doubled after I sold them. I exited GBX and SBNY for basically the same reason but I'm more at peace with
those 2 because I had no real story left for GBX, and with SBNY I was skeptical about commercial real estate ( as evidenced by being short SPG
at one point ). Interestingly, more recently Saul exited SBNY and relayed his story about empty store fronts in NYC.
On strategy. I apprently have 5 strategies, not by design, but empirically noted, which are applied in roughly the proportions below.
I mention these in order to explain to myself some of my holdings above which may not fit the Saul criteria.
I. 50% Roughly Saul-like. Since I only discovered this board 1 year ago I am saying in hind-sight that 50% of my trades could probably be
described this way, historically. That is, modified buy-and-hold growth stocks. My growth criteria is not strictly as agressive as Saul's probably,
on average. Since reading this board I've been trending more in his direction.
II. 35% Saul-like but with more overt price anchoring. Even though the story may still be intact, I sell for a gain under the assumption that the
upside is no longer as attractive and I'm likely to buy it back at a lower price or safeguard against a falling market. I'm not defending this strategy.
But, empirically, this is what I have tended to do 1/3 of the time. Some of this is due to my paranoia that I'm playing a suckers game against machines.
For example, I will repurchase GBX below 35, and BRK-B below 150. If they don't get there, I'll buy something else.
III. 5% Shorts. Once in a while I spot a short that is so glaring I can't look away. I identified SHAK in May 2015 with an implied valuation of
50 million dollars per store, and this was an absurdity. I calculated that it was overvalued by at least 4x, even with the reported growth story.
This minor shorting habit is as much for a psychological boost as it is for making money. When the market tanks and I see I am making money on at
least one stock, I feel a little better. I will reread why Saul does not short stocks ever. One would think he would be just as good at identifying
overvalued stocks as undervalued stocks.
IV. 5% Betting on volatile stocks. Notably, BLUE. My bet is that the company will ultimately produce profits but it will take much longer than
people think. There is no concrete basis on which to value it. Others are psychologically anchoring, and I'm taking advantage of that. When
it's down in price, people will keep dumping money into it because of the huge potential, which is real. In the meantime I may trade it many times
simply taking advantage of the statistical ups and downs. I do this for fun. The goal being to multiply by 100 in 6 years, or 100% per year.
I've yet to succeed in this game.
V. 5% Options. Notably, when XOM gets to 70 I automatically buy it and/or sell 70 PUTS, as I did last Fall. I've done this probably 6 or so times
in 10 years. Small hedges on the indices. A few covered call sells. I used to bet options 25% of the time but when I started waking up at 5 AM in
a panic to check the world markets, I decided for my sanity to stop it. That was in 2011.
33 Likes
Fascinating Joegurguis, thanks for sharing - not just the portfolio data but even more so the psychology behind your approach and lessons learned. It’s interesting as I’m learning or coming to very similar conclusions in reviewing my own investing habits, thinking and record which I am posting about in my monthly reviews.
Cheers
Ant
(Plug alert - my March review is going to be a very extensive kiss and tell all)!
2 Likes
hi JOE:
. Size of position. For risky bets, choose an appropriate size such that a big loss is only a small loss on the portfolio.
If you think about it–Every security is a risky bet. some maybe more risky than other-but they are all risky. I never decide ahead of time that this is safe so I should buy a lot. Because the timing might not be right at the time of buying I run a concentrated portfolio because I find it hard to keep me to keep finding winners because it is hard for me. I hate trading. I am better at adding to stocks I already own that are doing well and eliminating what isn’t. Being vigilant can help control your losses and add profits to the portfolio by adding to winners. There is no way IMHO to know ahead of time what the big winners are going to be if your portfolio is clogged with losers. The stocks themselves you own will tell you if they are good for you or not. Watch them go up and buy more. Another factor that isn’t discussed here much is dividend paying securities. 40% of all stock market profits came from dividends/distributions and 60% from capital appreciation.
good luck
b&w
4 Likes
Thanks Joe, What a great post. Great analysis. I wish I had written it. I especially liked:
There are 3 ways I think of, to avoid big losers, both requiring great attention and discipline to avoid lapses in judgement. I’m sure I’m not saying anything novel, but just reiterating, hoping to drill it into my own thick skull.
1. Size of position. For risky bets, choose an appropriate size such that a big loss is only a small loss on the portfolio. I think Saul was just illustrating this in a recent post I saw.
2. Cutting losses. Get out and avoid the temptation of thinking you can win your money back.
3. Paring down. Simply order your stocks in order of descending conviction, and throw away the botton few. This is especially applicable if you have a large number of positions. Which, on this board could mean anything over 10 or 20, depending on your level of time commitment. The flip side of ‘diversification’ is that the greater the # of stocks you pick, the greater your odds of picking a loser. If it’s hard to pick 5 winners, how can you pick 20 winners. This is probably consistent with the Dhando investor in terms of less bets, bigger bets, if you know the reference.
By the way, I see you’ve only made nine posts so far so you may not be aware of how you can set up a table in the middle of your text without having to put all your text into that difficult to read monospace text. Then it can read like this:
I’ve been investing since 1990 but 18 months ago I got back to actively investing after a few years hiatus.
I’ve enjoyed reading this board daily, now for 1 year.
I was reviewing my holdings over the last 18 months, asking myself what is my strategy, and what lessons have I (re)learned.
So, I figured I would share it.
These are the stocks I’ve held in the last 18 months.
SYMBOL G/L IN OUT
AAPL 53.1% 93.39
AMZN 28.7% 665.76
ARNC 34.3% 10.95
BLUE 54.2% 49.00
BRK.B 19.9% 165.00
CMG 1.2% 421.00
GBX 46.1% 42.30
HUN 20.8% 10.33
KMI 7.9% 22.09
LGI 24.2% 26.70
ORCL 1.7% 40.50
SBNY 18.8% 139.13
SPG 8.0% (short) 193.00
FRT 15.1% (short) 157.00
SKY 13.0% 73.79
XOM 29.4% 79.44
XYL 23.5% 39.28
SCTY -43.3%
-> TSLA 418.00
FSLR -40.6% 47.50
INFN -40.4% 15.10
HNNMY -9.8% 5.83
G/L: represents my overall realized, or unrealized, gain or loss.
IN: represents average cost basis of stocks I currently hold.
OUT: represents average selling price of stocks I do not currently hold.
I intentionally ommitted the relative size of each position in my portfolio. The point being that this could be a portfolio that
made 40% or a portfolio that lost 40%, depending on the allocations. The net gain happens to be in the neighborhood of 11%.
If I had asked most people on this board to choose an allocation for the above stocks, I bet most people would have beaten my 11% handily.
I’m pretty sure it would be hard to do worse than I did !..
At the end of the Knowledgebase Part 3, there’s a section on ## How To Post in Italics, Bold, and make Tables and it will show you how to do that.
Best
Saul
10 Likes
The major lesson which I cannot overstate is the art of AVOIDING big LOSERS.
If I had to pick the top lesson from your post, this might well be it. In reviewing my performance (elsewhere) my conclusion is that my performance is being seriously handicapped by unnecessary losers. In a previous post I mentioned that I search the company data not for reasons to invest but for reasons to avoid a stock. I need to improve on it.
Denny Schlesinger
6 Likes
In a previous post I mentioned that I search the company data not for reasons to invest but for reasons to avoid a stock. I need to improve on it.
Denny:
IMO, this is less important than developing the discipline to cut losses and move on…emotionless investing…Saul has mastered that and doesn’t often look back…until this past year that is, when he re-entered a couple positions.
I theorize that this tendency to hang on to losers is related to an innate human instinct to not want to “waste” all that time it took to research a stock (similar to art of negotiation and getting one’s opponent to invest time), not wanting to miss out on a recovery that might justify one’s original investment thesis and not wanting to be wrong.
Three “nots” do not make a right…and IMO, this is perhaps the single most important investor trait that correlates with returns…willingness to move on…Saul clearly had/has mastered that with a few recent exceptions.
5 Likes
40% of all stock market profits came from dividends/distributions and 60% from capital appreciation.
I’m not sure from where you’re pulling that statistic (is it really all stock markets or just the S&P 500?), but dividends can matter, and matter a lot.
Here’s one paper on why they matter: https://www.gafunds.com/wp-content/uploads/2012/11/imdf_WhyD…
Note that typically, these analyses are done in relation to the S&P 500. Also, they assume that you’re doing a DRIP (Dividend ReInvestment Plan), which is fair, but then the value becomes more about the value of compounding and periodic purchasing than about dividends themselves. If you take out the dividends to live on, you end up with a lot less money than if you reinvested them over the years.
If you want to try some what-ifs, this S&P 500 Return Calculator: https://dqydj.com/sp-500-return-calculator/ shows you results with and without DRIP. With over 80% of the stocks in the S&P paying dividends, what you do with them matters.
Here’s some history of dividends in the S&P 500: http://www.investopedia.com/articles/markets/071616/history-…
2 Likes
Thanks for the encouragement Saul. Next time I’ll remember to use the formatting markup.
I remember reading the rules of the board, twice actually, both times skimming over that section thinking “I’ll never need that”!
- Cutting losses. Get out and avoid the temptation of thinking you can win your money back
Thanks for posting your thoughts. I am not sure if I agree with this … maybe a different angle would be to reassess your losses and determine if there has been a fundamental shift in the business, economy, competitive landscape, etc. and then make the decision. Examples from some stocks I have owned for a number of years and have down the up down and up trend.
Select Comfort - owned before the 09 and most of my purchases were in the 20’s (not a large position), this crashed and burned down to under $1. Street didn’t think it would make it. Didn’t have a lot of debt and was a matter of time for economy to rebound - patience - bought more at $1 and sold out about six months ago for $30.
Exelixis - had great portfolio of lead drugs, one of their first that they thought would get approval, didn’t, stock got hammered, kept holding, looked at rest of pipeline (which was very deep for biotech) and decided to purchase more and kept adding in the $3 dollar range. Still in it, around $21 bucks depending upon the day.
EMC - bought sometime around 1981, went up fivefold, then bought Wang Computers, then street killed it for the purchase and that it was not a smart acquisition. Sold out. Turned out street was very, very wrong and was one of my worst “sold it but still made money at the time” quotes. And yes, I do know what those shares would be worth today.
Netflix - we all know this story. Got clobbered multiple times, people said to sell, MF was one of few companies that supported the new “streaming” model. Can you actually think of sending in an envelope and get a movie today? But at the time, people thought it was crazy b/c it was a new business model, content wasn’t deep, etc.
Now, I certainly have had some investments where the company was doing things well and things changed and the stock price declined immensely, as well as a couple that went bankrupt over the years, but I would of lost out on more if I had sold all that had substantial losses at one point in time.
I forget the exact stat but it’s something like 80% of stocks, at some point in time, will lose 50% or more of their value. So if you sell at that point, you will certainly have large losses. but if you can analyze the situation and make a solid assessment, you sure can find some diamonds.
Just another humble opinion to consider.
Sox nation
11 Likes