Learning to trust yourself. A story about one portfolio outperformed all others.
Professional athletes put in hundreds of hours of practice to hone their skills. Sure there are some who are just born with so much talent that they can get away without practicing, but the truly great ones...from Michael Jordan to LeBron James achieved their greatness through putting in hours and hours of hard work.
This can be said for lots of things in life, including investing. I have been reading about investing for several hours per day (with the exception of a short break in 2013) for a number of years now. I can honestly say that all of that work, it's tough to call it work when you enjoy it, has made me a better investor. The key is to believe it.
Without belief in yourself, you won't generate the sort of returns that you would have otherwise. Why? Well, you won't take trust yourself enough to buy into the good investment ideas that you've found OR you won't trust yourself to allocate enough resources to these great ideas. This is a problem that I've run into over the years. Well, habits are made to be broken and I am breaking this one. I have slowly been buying more and more of my good ideas and increasing the position sizes of the ones that I believe have near-term catalysts that present the best upside.
Portfolio allocation like this might seem logical and some might say "No duh" but I've found that trusting one's self is easier said than done. My revelation on this subject came to me not long ago when I was looking at my broker's performance reports of my various accounts. Yes I actually have eight active and one inactive investment accounts. Don't get me started on that, I would like to consolidate some of them but haven't looked into it yet. Let's see, there's my IRA, a roll-over IRA, a regular account, my children's college funds, a self-employment IRA aka SEP IRA, an international trading account... you get the idea.
Of those accounts, one stood head and shoulders above the rest in terms of the returns that it has provided...my personal IRA. When seeing the outperformance, I wondered to myself, what caused it? The answer is actually quite simple. That account is around 90% equities and 10% cash. Most of my other accounts have either a larger percentage of cash or some preferred stock / bonds mixed in. Those preferred stocks and bonds have huge yields for what they are, many of them 8%+, but they can't hold a candle to the equities that I hold in my good old IRA.
Another potential reason for the outperformance is that account appears first on the list of accounts after I log in. Perhaps I just automatically gravitate to throwing my best ideas into the first account that pops up on the list.
If you've gotten this far, you might ask what have your returns been like on this account and what stocks do you have in it? Even if you didn't ask that, I'm going to tell you :)
Account, Annualized returns for 3 mo., YTD, 1 yr., 3 yr., 5 yr.
Jason's IRA: 5.21%, 10.21%, 29.85%, 30.35%, 22.46%
S&P 500: 3.60%, 4.3%, 18.36%, 15.29%, 18.92%
My current holdings in this account are:
AerCap Holdings (AER): 14.85%
Extendicare (EXETF): 18.49%
Investors Bancorp (ISBC): 6.85%
Northeast Community Bankcorp (NECB): 8.95%
Oil States International (OIS): 25.99%
SunEdison (SUNE): 15.59%
Cash (CASH) 9.27%
So what have my biggest winners been? (my account only lets me go back to 2012 without doing a ton of digging):
EnergySolutions (bought out) [Thanks Special Ops]: +124.59%
Crosstex Energy (bought out): +88.66%
Retail Opportunities Investment Corp. (ROIC) [Thanks Special Ops]: +63.5%
Williams Companies (WMB): +61.55%
Suncoke Energy LP (SXCP): +38.12%
AER +19.33% (in only a little over a month)
Harvard Bioscience (HBIO): +19.23%
OK, it's great to talk about the victories, but we aren't going to learn as much as we could have without talking about the losses. So what are the losers in this portfolio? I think that this again is a key takeaway...there really hasn't been any. Avoiding significant losses boosts overall portfolio performance significantly.
Ambassadors Group (EPAX): -11.93%
WPX Energy (WPX) -2.51%
My position in AER is a perfect example of how I have adjusted my investing style lately. The money that I used to purchase that position was freed up when I liquidated my position in another stock Air Lease (AL). My thesis for AL was a jockey play, following Steven Udvar-Hazy who had successfully built ILFC into an industry giant previously into what should be a great time for airlines and companies in the sector. I am normally somewhat hesitant to sell positions that haven't fully played out, but when I read about the great deal that AER got when it purchased the ILFC portfolio from AIG and the advantages that the future delivery spots that it affords them will provide I decided to pull the plug on AL and buy AER. Time will tell how that decision plays out, but AER has outperformed AL by double digit percentage points in the month since I made the switch. The idea to reallocate money from one decent investment to what is perceived to be a better one comes from the portfolio management skills that I have learned from watching hedge funds make moves and from the great team at The Motley Fool's Special Ops service.
I realize that any account that has been almost fully invested in equities in the midst of a massive bull market will outperform, but I truly believe that the strategy of buying more of my good ideas and allocating more resources to the great ones would outperform in any sort of market. We'll see.
My purpose in writing this post was not to toot my own horn about the performance of this particular account, I wish that they were all rocking like this. Rather I think that an introspective look at one's performance can help them improve themselves both as a person and an investor. I just need to learn to have confidence and to trust myself more.