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Learning to trust yourself. A story about one portfolio outperformed all others.

Recs

23

May 28, 2014 – Comments (12) | RELATED TICKERS: OIS , SUNE , EXETF

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.

Jason

12 Comments – Post Your Own

#1) On May 28, 2014 at 5:07 PM, Mega (99.96) wrote:

Nice job Deej.

Here is some commentary on Extendicare. Looks like a good idea. http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/exetf-extendicare/

I think that most people might have the opposite problem though. They are overconfident about their investment ability, without having put in the hard work that needs to come first.

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#2) On May 28, 2014 at 6:47 PM, TMFDeej (99.25) wrote:

Thanks Mega. I'll definitely check out the link. 

Jason 

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#3) On May 28, 2014 at 11:06 PM, portefeuille (99.61) wrote:

Those were the days, when I recommended AER at $3.30 in early 2009 in comment #15 here -> http://caps.fool.com/Blogs/ellipsis/121799 :)

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#4) On May 29, 2014 at 10:39 AM, ikkyu2 (99.22) wrote:

I am a huge fan of regular retrospective investment journaling.  I think it helps you understand what your strengths are, what you do well, what you need to stay away from.

Over the years I've discovered that when I buy before I look at the balance sheet I generally don't do well.  Simple enough; obvious enough; I had to tell myself to quit doing it, though.  That was a long time ago :)  But that's the kind of thing one learns if one is honest and takes the time to look back and analyze what has gone before.

 I have also learned I often sell too soon; that's how I missed your 20% move in HBIO, which I owned for only a couple months.  

In terms of 'outperform', I don't know that you can attribute that to being in equities.  When I think about outperform, I think about the S+P 500 and how much better than that index my portfolio did.  The S+P 500 is all equities, so asset allocation isn't really part of the picture when making that comparison. 

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#5) On May 29, 2014 at 12:18 PM, Mega (99.96) wrote:

Hey Deej, you might like Blucora (BCOR). It's a sum of the parts play that is generating a lot of cash flow. Because of their disparate businesses, the market isn't giving them any respect for growth. 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bcor-blucora/

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#6) On May 29, 2014 at 2:38 PM, MKArch (99.70) wrote:

I'm a self taught (with a lot of help from my days as a H.G. sub) investor with zero formal accounting background so I'm always tempering my confidence in myself with my worry that maybe I just got lucky or; "what is it that I don't know, that I don't know". That said I have one account with no new money added from the pre-great recession days where I recently checked to see what it's high value was pre-recession vs. current value. Right now it's about 36% higher than it's pre-recession high it was ~43% higher a few months ago. I think the S&P 500 is up ~25% from pre-recession highs. Like just about everyone else I got killed during the great recession but my best moves came at the height of the panic looking at it as an opportunity to redeploy instead of following the herd out.

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#7) On May 29, 2014 at 4:14 PM, TMFDeej (99.25) wrote:

Thanks for the heads up on Blucora, Mega.  I always have an issue trying to figure out exactly what value to assign to parts like these, websites and web businesses.  I came across another really interesting one, Hollywood Media (HOLL).  It seems like a slam dunk to be worth more in liquidation than what the stock is currently trading for.  I just haven't pulled the trigger on it because I really don't know how much movietickets.com would be worth in a sale.  It seems like it should be worth enough to justify a purchase at this level, but it's tough to say for certain.  I'd love to hear your thoughts.

Hollywood Media: Liquidation with Significant Upside Potential

http://seekingalpha.com/article/2225673-hollywood-media-liquidation-with-significant-upside-potential

Jason

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#8) On May 29, 2014 at 4:17 PM, TMFDeej (99.25) wrote:

Kudos on having the peace of mind and intelligence to buy stocks at the height of the financial meltdown, MKArch.  I ended up buying a ton of stuff then...alas it was bonds instead of stocks.  I opted to go the safer route.  Most of them are up 30% to 50% since then, but that's nothing compared to the returns of many stocks.  I'll be ready for the next financial armageddon though :).

Jason

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#9) On May 29, 2014 at 5:13 PM, Mega (99.96) wrote:

I've looked at HOLL before. Cash burn at the corporate level looks pretty high, something like $5M a year.

They might be right about the hidden value of movietickets.com but it's not really my kind of investment.

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#10) On May 29, 2014 at 9:48 PM, MKArch (99.70) wrote:

Thanks Deej, I'm guessing you didn't take the beating I took in the great recesion either. If I counted my gains from the height of the recession my returns would be astounding but I think it's more realistic to look out over the course of at least a cycle.

I was rushing to get my first post out and skipped the actual point. While it's hard to be confident in yourself in the midst of having your teeth kicked in I tried to keep a level head and think through my options at that point. I grew up the son of a union carpenter, so recessions were always painful events in my family. They all seemed like they would never end but they always did. With the firm belief at the time, that while this was a particulary nasty recession it too would pass I decided the best course of action would be to redeploy to the most promising bets available and hope that when the economy finally recovered, I'd get back in the black again.

In late summer 08 it looked for a time like we might be in for another drive by recession and I decided in CAPS it would be a good time to go all in on stocks that would do well if the recession was shallow. That backfired big time and I went from top 1% to bottom 10 players at one point. So I did something similar to my real life portfolio jettisoning the gonners, loading up on the plethora of fire sales, and I remember specifically thinking these moves will get me back to the top 1% again when the economy recovers.

I think the lesson is that having the confidence to control my emotions is what got me where I am more than confidence in my analytical skills. I don't obsess about it but I do remind myself these days that recent performance is no guarantee of future peformance, particularly when riding the rising tide is a good part of my recent performance. One of my vices is hanging out on stock message boards where just about everyone is "confident". IMO the most important confidence is not that you are right but that you know how to handle yourself if and when you are wrong.

 

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#11) On June 02, 2014 at 12:53 PM, Mega (99.96) wrote:

Hey Deej,

I noticed the OIS spinoff went through today. I assume you like CVEO a lot at this price? It's only 7x CFO, could be over 70% upside if they become a REIT.

Do you also still like the OIS stub?

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#12) On June 02, 2014 at 9:26 PM, TMFDeej (99.25) wrote:

Good eye Mega. I own both and am considering adding to CVEO at this level. I think that its nearly a slam dunk to trade higher if its conversion to a REIT is approved and the operations at least tread water.  It definitely looks cheaper than it should be.  I requested that it be added to CAPS today too :). 

I am keeping my OIS shares as well, though I live CVEO better.  

Its spinoff city this week. I also own DNOW, the NOV spin.  The ENSG spinoff is supposed to happen soon as well. Lots of fun stuff happening and its not even earnings season.

Jason 

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