Please remember that this was posted at the beginning (Jan 2017) of the incredible run from 2017 to 2023 inclusive during which I compounded to 750% of what I started with in seven years, seven and a half times what I started with, even including the horrible 2022.
Reflections on investing
So far this month and this year, SURE, I am beating the market nicely. I’m currently up 9.1% for the year, while the S&P is up 2.65%, the Russell is up 1.9% and the IJS (the small cap value ETF) is up 0.7%. However, I’m not content with my recent results (2016, and 2014, for example), and am trying to reflect, reevaluate, and better understand what went on, with an eye especially towards what I can do to improve? The thoughts I will express below probably won’t all stick together, and some thoughts may conflict with, or contradict, others, but so be it. They come from different directions
What happened in 2016? The beaten down oil and commodity stocks made a comeback throughout the year, and especially as the incoming President promised infrastructure spending and support for fossil fuel industries. I don’t usually invest in oil or commodity stocks, and it wasn’t my kind of market. Growth stocks were not the number one priority of the market in 2016.
What can I do about it? Not much. There will be some years that value stocks and cyclicals do better than growth stocks, but it’s not in my nature to invest in value stocks, hoping for a turn-around, or to invest on the basis of trying to guess cyclical patterns.
At the end of the first week of August, 2015, I was up 51.6% for the year, well on the way to a year similar to my best historical years. However, I finished the year only up 16.0%. That was still a lot better than the indexes, but it represented a drop of 23.5% of my portfolio value from August to the end of December, nevertheless.
What happened? The S&P only dropped a few percent from that date to the end of the year, so it wasn’t due to a big market move. What happened was that a number of my stocks that I had major positions in crashed or semi-crashed. These included Infinera, Skyworks, and Skechers. One thing especially troubled me: These companies had been rapidly growing, and management had kept telling us that all was well and that they had plenty of visibility into the future and it looked bright, and then they crashed, not because they had been too high in price (their PE’s had been reasonable to low), but because results tumbled suddenly and unexpectedly.
What did I learn from this? First of all, to avoid companies that sell bits of hardware. Even though Skyworks said it could see years into the future, obviously it couldn’t. Even though Infinera sounded as if it had the world by the tail, it didn’t. Neither had any guaranteed recurring income. Even management couldn’t tell what was going to happen. I don’t think they were lying outright to us. I think they really probably believed what they were saying. Maybe it was partly wishful thinking, but they both believed what they were saying.
Second, I learned again to avoid clothing retail. Also to pay attention! When I bought a pair of shoes at a big Skechers store a year or so ago, and they gave me 40% off of all three if I would buy three pairs, I should have sold out of my position, or at least seriously worried, instead of thinking that they were just silly employees who were giving me a bargain.
Was there a problem, as some people have suggested, due to my having to post what I am doing and giving a rational for it?
I don’t think so. If there was, I doubt that I could have been up that 51.6% in 2015 in just seven months plus. Also, I don’t feel inhibited in my decisions. I do what I feel is correct, and if people disagree, I’m fine with that.
Is there anything to do about it? Nope. I like what I’m doing with this board.
Changes in the market: There are a lot fewer underfollowed and mispriced stocks than there were 20 years ago!
Why? Information wasn’t readily available. Twenty years ago if you wanted a stock quote, you looked in the physical NY Times newspaper in the morning and looked through all the stock quotes from the day before to see high, low, close, and volume on your stocks. Not much effective internet. If you wanted an intraday quote you called your broker. (Spreads were often a quarter or a half a point, by the way, and commissions were 1% or so. That means $100 commission on a single trade of 1000 shares of a $10 dollar stock (or $1000 commission if it was a $100 stock). Now you’ll pay perhaps $5 to $9 on the same trade). You weren’t invited to conference calls. There often weren’t even recordings, and never transcripts. You were entirely dependent on your full service broker – who got his information from his company’s analysts, who may or may not have listened to the conference call. I don’t even remember ever seeing earnings press releases like we have now. Where would you look for them with no internet? Now, information is everywhere, and it’s much, much harder to have an edge on a stock.
What to do about it? Nothing. It’s a lot better in general. A lot better! I’d rather be fully informed.
I can no longer invest in microcaps or illiquid stocks. Look, I’m investing many times, perhaps twenty times, what I was investing twenty years ago. I guess I could slowly work into a position in an illiquid stock, but the problem is how would I get out in a hurry if there was bad news? I’d be locked in. Not a good place to be.
What can I do about it? Live with it! I much prefer having the additional assets.
Listening to everyone talking about the Internet Bubble made me wonder how much of my success was due to my one extraordinary decision to sell out of my internet stocks at what turned out to be the top of the bubble, or close to it. This resulted in me making a gain of 115.5% in 1999, and then, in 2000, when everyone who held their internet stocks, or added to them on the deline, had huge losses, I was up 19.0%. The indexes were down, as well, of course.
This certainly helped my overall results. However, I did make that decision, and immediately acted on it. That’s one of the cornerstone of my investing style: to be willing to change my mind and sell. (Amazon, AOL, and Yahoo, which were the darlings of the Bubble, lost 90% to 95% of their value. Amazon came back, but it took ten years. It’s now way above where it had been. Yahoo and AOL never came back. This was the Bubble when “great” analysts said things like “This stock is at 200 times revenue, but comparables are at 400 times, so it’s a bargain”. [I kid you not, they did say things like that.]
Have I made incremental small changes in my investing style over the years that have changed my results? I don’t know. It’s hard to remember exactly what I was doing 10 or 15 years ago. I am trying to cut down the number of stocks in my portfolio though, to make it closer to the streamlined version it was then.
One more point. There are now people from all over the globe investing in the US markets. Everyone wants to invest in the strongest most stable economy and currency. That also makes undervalued stocks harder to find in our markets.
I’d be glad to hear other ideas from others on the board. And best to you all, and may we all do well.