Reflections on investing
A year ago this month, I was not satisfied at all with my recent results from 2016, so I decided to do some reflection and reevaluation. It seemed to have worked. Here’s what I wrote then, slightly edited, with some current reflections on those reflections:
I’m not content with my recent results (2016, and 2014, for example), and I am trying to reflect, reevaluate, and better understand what went on, with an eye especially towards what can I 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
First reflection:
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.
Second reflection:
At the end of the first week of August, 2015, I was up over 51% for the year, well on the way to a year similar to my best historical years. However, I finished the year only up 16%. That was still a lot better than the indexes, but it represented a drop of over 23% 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 the stocks crashed, not because they had been too high in price (their PE’s had been reasonable to low), but because business results tumbled suddenly and unexpectedly.
What did I learn from this? First of all, to avoid companies that sell bits of hardware to a limited number of large customers! Even though Skyworks said it could see years into the future, obviously it couldn’t. Even though Infinera said 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 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.
[Writing now in 2018, I’d say that what I had learned worked. Most of my current stocks have significant “guaranteed” recurring income, and you won’t see any brick and mortar retail stocks in my portfolio.]
Third Reflection:
Was there a problem, as some people have suggested, due to my having to post what I am doing, and having to give a rationale for it, that I didn’t have to do before I started the board? In other words, did having the board affect my judgment in a negative way?
I don’t think so. If there was, I doubt that I could have been up that 51% 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. [Writing now: and I couldn’t have had the results I had in 2017 if my decisions were hampered.]
Fourth reflection:
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 then. 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 1000 shares of a $10 dollar stock. Now you’ll pay perhaps $4 to $7 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.
Fifth reflection:
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 money to invest.
Sixth reflection:
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 over 115% in 1999, and then, in 2000, when everyone who held their internet stocks, or added to them on the decline, had huge losses, I was up 19%. 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 cornerstones 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. [Writing now in 2018, I have to say that being willing to sell positions where the story has changed is crucial to my success. In the bubble I sold stocks that went up irrationally, but the other kind of selling is even more important. I still see people who’ve held on, and held on, for years, while the stock stagnates or keeps dropping, tying up their money while it shrinks, because they don’t want to admit a change or a mistake, and take a loss.]
This was the Bubble when supposedly “great analysts” said things like “This stock is at 200 times revenue, but comparables are at 400 times, so it’s a bargain”.
Seventh reflection:
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. [Writing now, in 2018, I think that reducing the number of stocks in my portfolio to closer to what it was in the past, was a crucial change, and that it was reflected in my 2017 results, concentrating my portfolio to my best picks, and making it much easier to follow them].
Eighth reflection:
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. [Writing now: Maybe a little less now.] That also makes undervalued stocks harder to find in our markets.
And:
In conclusion, I’d say that reducing the number of my positions was the most important change. Buying companies with recurring revenue was also important, as was avoiding retail companies, and trying to avoid any with a few customers who were responsible for the majority of their revenue.
I’d be glad to hear other ideas from others on the board. And best to you all, and may we all do well.
Saul
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