In November 2015 I decided to take a more serious look at investing with a goal of getting to a point as soon as possible where I can live off of my investments. To further this goal, I am evaluating my portfolio and looking at what I can learn from my experience so far this year. While I normally am not one to post this to a public forum such as this, I am doing my best to give myself a brutally honest review to find out what I can learn from my mistakes. It is sometimes difficult to get perspective on one self so I offer my past six months for your commentary.
I began the year invested in index funds, stock in BLL (a company I used to work for) and a handful of small positions in stock which were generally badly thought out. I was intent on taking more direct control as per Saul’s statement that beating a mutual fund should not be very difficult. I consider it a stroke of unbelievable luck that I made the decision to take control of my investments during the market at the beginning of the year where everyone terrified of disaster. I know many people didn’t see the beginnign of this year as lucky for investment, but I am apparently more of Buffett’s mindset and found it an amazing time for investing.
My investment philosophy is remarkably similar to Saul’s (I will forever be grateful for his wisdom posted in this forum), with a few notable exceptions: I will remain partially invested in index funds, I intensely dislike banks as investments, and I keep a few stocks with higher stability / lower return than Saul looks for (but that may change in the future).
With that introduction, here is my own self evaluation. Please comment and feel free to be brutal with me, I am looking to learn!
Overall Performance
As of Tuesday (21 June 2016), YTD Performance:
S&P 500 : + 1.24%
Russell 2000: + 0.37%
My Portfolio: + 4.17%
6-Month Low : -16.69% (11 February)
6-Month High: + 7.36% (22 April)
While I don’t really care how any individual stock performs against any market index, if my overall return is lower than the return provided by an index fund I have to question why I would go through the trouble of choosing individual stocks. Thus the above comparison.
Investment Breakdown
Mutual Funds
22% of my portfolio is currently held in vanguard index funds VFIAX, VSMAX and VB. These provide my portfolio a bit of stability as a hedge against my investment ignorance and as a vehicle for storing money not currently invested in individual stocks. I expect the percentage of my portfolio invested in index funds to decrease as my expertise in stock investing increases.
High Confidence Stocks
43% of my portfolio consists of 4 stocks: LGIH, SKX, INFN and SWKS. I have a very high level of conviction in these stocks because of a combination of my understanding of their finances, confidence in management, an understanding of the industry, and big-picture views of current trends in the nation and/or the world. These stocks individually make up 8.0% - 16.0% of my portfolio.
Medium Confidene Stocks
30% of my portfolio is consists of 7 stocks which I either have a lower level of conviction for reasonable future performance (PN, BLL, MIDD, AMBA) or simply don’t view the potential return as worthy of a really large position (CASY, AMZN, BRK.B). These stocks individually make up 3.3% - 6.5% of my portfolio. Of these, I am considering selling or decreasing my position in AMBA and CASY.
Low Confidence Stocks
9% of my portfolio consists of 6 stocks which I view as either having extremely high risks (CTRP, SEDG), am uncertain if I want to be invested in at all (INBK, BWLD), or simply haven’t found an attractive entry point for adding more money when compared to other stocks (SNCR, UFCS). Of these, I am considering selling my entire position in SEDG and INBK.
Use of Margin
The astute reader will note the above adds up to 104%. This represents 4% margin. I have very strict rules on when I will trade on margin:
(1) There must be low risk of the stock falling below the purchase price except for temporary fluctuations (personal judgement call).
(2) There must be a large potential return.
(3) I must have cash on-hand for the borrowed amount, but not invested for some important reason.
(4) I must re-examine each stock traded on margin every week.
I have so far been satisfied with this policy. Moving forward I will make one significant change to this policy: I will remain extra vigilant of stocks in my margin account for situations where the stock price has risen unusually high at a fast rate. Selling a portion of my position at these times will decrease the margin risk and permit new purchases in the margin account if I see unusually good buying opportunities.
Big Mistakes
I made 5 mistakes in the past six months which may have cost me money. It is difficult to say if I truly would have done better with a different decision, however looking back I can see moments where I definitely had the opportunity.
Ambarela (AMBA): Didn’t sell in early March.
I looked at AMBA in early March and decided there was no justification for the recent rise in price. Too much competition with insufficient indication of unique technologies or exceptional management. However, I didn’t trust my judgement and so held on as the price plunged. I stubbornly held on to the stock for no good reason. Today that looks justified as I now have a 30% return, however I still have no conviction that this company will provide decent returns. I would rather invest my money in companies where I can see a more clear potential return. If I find a better looking investment in the near future I will likely sell AMBA to fund that purchase.
Patriot National (PN): Could have bought additional shares.
At the exact same time as I was concerned AMBA was overpriced, I looked at PN and saw no possible justification for the falling price. I bought a decent sized position at an average price of 4.35, but got nervous as the price continued to plunge down to 3.65. I knew there was no justification for this. I knew there had to be a rebound. Yet I fell prey to fear and didn’t buy more stock at that incredible price. Not a big difference, however I should have listened to my logical conviction and not my emotional fear.
Solar Edge (SEDG): Failed to look at the big picture.
This was a complete failure in looking at the big picture of a stock. I took a close look at SEDG just before earnings in February and bought a position. This was justified by an immediate large gain after earnings, however that was also the high price for the past six months. I correctly determined that earnings were very likely to outperform expectations for that earnings report. However, I do not see that the overall market is going to lead to large gains for SEDG any time in the near future compared to my other investments. I have stubbornly held on to the stock hoping I was wrong in that look at the possibilities for SEDG, however at the moment it seems I was correct.
First Internet Bancorp (INBK): Failed to evaluate the company objectively.
I dislike bank investments as a personal choice because I disagree with how debt is used in our society and see banks as supporting bad debt practices (NOTE: I’m not saying this is true, I have strong personal prejudices which keep me from impartially considering the other side of this issue). However, I also try to evaluate investments based on their own merits, not necessarily my personal prejudices. Unfortunately, my personal prejudice against banks has blinded me multiple times this year to obvious good and bad stocks. I have not done proper research, I have picked bad entry points and I have ignored alternatives (SBNY). I plan to sell INBK and avoid bank investments until such a time as my prejudice against banks no longer exists. I realize banks may at times be great investments, however my own prejudice introduces too big a risk of blinding myself when evaluating these companies.
Infinera (INFN): Bought too large a position at too high a price.
I like INFN and see a lot of potential for this company as an investment, however I knowingly picked too high a price for too large a position. In February and April I made a few purchases seeing a lot of potential for this company, however I was concerned that the current price at a P/E near 20 was not a good entry point. Whatever the prospects for INFN as a company, the stock is up against some major challenges. At the top of that list is that this is a company hard to analyze quantitatively as there is little to no product pipeline and no clear way to evaluate future product demand. With this in mind I worried the stock price would drop significantly. I also suspected the overall economic fear would effect INFN negatively for a minimum of two quarters. With all this in mind, the price drop in late April looks obvious. I have remained invested because I believe the market is improperly evaluating the prospects for this company. I may purchase additional shares if the stock price drops even further.
Good Decisions (that could have been improved)
I have made a number of decisions in vesting these past six months which I consder good and worthy of particular note. Yet they could have been improved upon. Of particular note:
Skyworks (SWKS)
I have held on to SWKS throughout the recent price drop because I was expecting this to happen. I did not know it would be this bad, however I was waiting for the guaranteed opportunity of a price drop near earnings. My reasoning was that this company shows promising progress but was negatively effected by the general economic fears through February. This meant that the most recent earnings reports (covering the beginning of the year) would miss expectations leading to price drops and thus good entry points. I have made small additional purchases at good prices to take advantage of this, however I looking back I should have made larger purchases during recent price drops.
Ball Corporation (BLL)
This has been a very good investment for me over the years, however it goes through some unpredictable slow cycles. I am very confident that BLL will continue to provide excellent long-term returns, however both divisions (containers and aerospace) are in down cycles leading to poor performance this year. However, while BLL frequently outperforms the market it tends to drop very slowly because revenue streams are setup years in advance. As a result, the BLL stock price had lost very little value early this year and provided an excellent source of funds for purchasing other stocks which will perform far better in the near future. Looking back, I should have sold more BLL stock than I did.
Amazon (AMZN) and Berkshire Hathaway (BRK.B):
I bought both of these at excellent prices in February as a hedge against future bad markets. I expect both of these stocks to drop in price relatively slowly yet still provide acceptable returns. Thus, if another bad market occurs I can sell shares of these stocks (hopefully having fallen only a small amount) to take advantage of great opportunities. Looking back I should perhaps have bought larger quantities of both.
Lesson Learned: Entry Point
One of my biggest lessons learned these past six months is the importance of a good entry point for my investments.
I believe SWKS is an excellent company which will likely provide me with a good return. However, I chose my first entry point badly (in January) and as a result this is not nearly as good an investment as it should be.
SEDG, as mentioned above, is one of my biggest mistakes. However, if I had just been patient and made my initial purchase at 17 (instead of 26) I might consider this merely a highly questionable high-risk investment instead of a big mistake.
PN is a stock that has potential, but also faces enormous risk because it is a micro-cap stock. I consider today’s price a moderately high risk entry point and have decided not to buy more unless I see something improve significantly about this stock. However, my original purchase price (4.35) makes this a good and reasonably safe investment. (as safe as a micro-cap can ever be).
Overall, I have done a good job of picking my entry points. I have not been paranoid about finding the lowest possible price for purchase, however I have nonetheless averaged out to some very good values. As a result I not only have good long-term investment potential but also immediate short-term (unrealized) gains which protect my overall portfolio against bad news, market panics, and my own bad decisions.
Lesson Learned: High Conviction vs Low Conviction
Another important lesson I learned is the meaning of: “Invest in what you know”. I am very familiar with technology because of hobbies, career and natural interest I am familiar with real estate because I have considered that as an investment and have done lots of research. I am familiar with the aerospace industry as I worked for those companies for more than a decade. These experiences have naturally led me to invest the majority of my money in these sectors. However, that would be too little diversification for my taste so I have added additional stocks from other sectors. Unfortunately, my lack of knowledge hinders me significantly.
A good example of this is United Fire Group, inc. (UFCS), a stock I have owned for several years. This is a small insurance company which is very well run and almost meets criteria that Saul would look for in a stock. However, my severe lack of knowledge of the insurance industry means that I simply don’t have a good way to evaluate this company. As a result, I feel I need to keep my position small to account for the risk in my own ignorance. This has led me to miss multiple investment opportunities over the years.
Lesson Learned: China
I have been invested in CTRP for a number of years and have received a very nice return from this stock. However, the more I learn of China the more I understand Saul’s position of not investing in China stocks. As a result, I have avoided adding to my position even though I have seen what appear to be very good entry points, even though I see a lot of good prospects. I have not sold yet, but I do understand a bit better and am not currently considering adding new stocks from China.
Lesson Learned: Resist the urge to trade too often
I noted I consider AMBA one of my bigger mistakes, however at the same time it has also risen 30% since my original purchase. Hard to argue with that return in less than half a year. I need to keep in mind that I am investing long-term and not trying to time short-term fluctuations.
Lesson Learned: Resist the urge to trade too little
The flip side to the above lesson: While I am investing long-term, sometimes it appears a stock may have risen to high too fast, or dropped too low too fast. I need to remain more vigilant for that happening and take action accordingly, especially if a stock is growing to an unacceptably large percentage of my portfolio.
Lesson Learned: Don’t get emotionally attached
For the most part I have prevented fear from controlling my investing, using it instead as a motivation to improve my investing strategy. However, I do still have a tendency to get emotionally attached to my investments which has definitely not served me well. My failure to sell INBK and SEDG before now comes from an emotional attachment to those bad decisions. I have also at times failed to buy additional shares at good prices in one of my investments because of an emotional attachment to my previous purchase price.