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May 21, 2013 – Comments (8)

I like to do a little investment review from time to time.  This takes the form of a few folders in my computer, filled with little text file scribbles - one of my file names is 'investment scribble' - and maybe a few Excel files, often .csv files exported from Fidelity, where I maintain my investment accounts.

I try to put a date on these documents, and enter in my thoughts at the time - pretty much anything I am thinking about my investments are fair game.  

I do this because my thoughts and attitudes regarding investments change over time, and I find that process to be gradual and unnoticeable; it is good to be able to go back and watch the evolution of my ideas over time.

Around April 2010 I was 65% in cash, so I figured that was a good time to do some review.  In the interim 3 years I achieved a 77% return; root three, this is about  21% yield to basis per annum.  S+P 500 dividends reinvested over the same time period achieved 14.3% per annum, so, roughly 7.7% annual outperformance.  I have averaged a 20-25% annual return (absolute) over the 10 years that I've been managing my investments, and I think that's pretty decent.

I have achieved this with a variety of strategies.  Asset allocation is something I've spent a lot of time thinking about and managing.  Over the last 10 years, the US stock part of my portfolio has consistently outperformed, and the other things I'm allocated to - foreign stocks, a tiny bit of gold, and high yield bonds (convertibles, corporate junk and high-yield emerging markets sovereign debt) have proven to be in general poor hedges; correlation has increased every year.  I am less excited about diversification and asset allocation than I was 10 years ago, although I do strive to have sector diversification in my US stock portfolio.

Stock picking has been the major area of outperformance, and most of this is attributable to my AAPL investments.  I have been overweight AAPL since I started picking stocks and it has juiced my returns considerably, although that era may well be coming to an end.  

I distinguish stock picking from betting on more or less sure things.  MO and PM have been my next best investments and I recently reviewed a few years of 10-Qs and transcripts.  I found no reason to change my thesis on these companies, which are basically efficient manufacturers, advertisers and distributors of addictive widgets.  The decline in the US cigarette market is offset by MO's management: by share repurchases, dividends which I reinvest, and diversification including a great minority stake in SABMiller, smokeless products, and wine and other non-cigarette products.  PM is still a growth stock and its international diversification buffers it against legislative/regulatory risks.

I have done well in investments that are organic growth investments.  BWLD and CMG have made good on their promise to keep opening stores; everyone cares about comps and margins but I don't because I know that new locations are the drivers of revenues and earnings over the long haul.  This thesis has panned out and made me lots of money.  WAG was the same thesis but they failed to gain traction in opening stores and the mail-order pharmacy revolution kneecapped them and I lost a lot of money there.  I also did not expect GM to restructure away my equity investment and I would probably have had an additional 5% of alpha had my outsize investment in them not gone to zero.  That was a lesson about position size and I have tried to heed it.

As a stock picker I have found entry and exit points critical and I have been in and out of BWLD and CMG to get my basis optimized.  Other stock picks I fared worse; I lost a great deal of money on JMBA and SIRI, which if I had held to date would each have been three-baggers.  But I gave up on them.  PTN was an invest-in-what-you-know strategy, but I knew less than I thought; the stock is worthless, so do not think I am a great stock picker.

I have taken other investments with a macro view: EEM and ITB are two investments which have returned decently over the time period, the latter being my most profitable single investment.  A certain Fool user clued me in to the right time to buy ITB and I owe him a beer or two.

And, contrary to accepted wisdom, a lot of my outsize gains are due to market timing.  It is not hard these days to get a read on sentiment; after a few years you begin to catch on to how the market behaves during times of strong sentiment.

I have tried value investing a number of times: INTC, MMM, GLW, and a few other names whose prospects were good and whose valuations were historically low.  I have learned that I am poor at making money off this kind of investing.

How about it, Fools™?  Do you do this kind of review?  Do you find that your gains come from practicing what you preach? 

8 Comments – Post Your Own

#1) On May 22, 2013 at 11:19 AM, Mega (99.97) wrote:

"I have averaged a 20-25% annual return (absolute) over the 10 years that I've been managing my investments, and I think that's pretty decent."

That's awesome, nice work.

What percent cash are you now, and what percent Apple?

Regarding value stocks and value traps, some investments end up requiring a lot more patience than others. If the business value is increasing, the stock price will eventually follow.

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#2) On May 22, 2013 at 9:38 PM, jiltin (27.88) wrote:

For many years,almost 15 years, I was out of stocks. I played with it little bit with less than $5000. Mostly made minor loss.

Hence, believed gold and real estate. Both returned 12.5% yearly basis. This year, I came to stocks and got appx 20% to 25%. For me, 25% return is enough overall. I can not say that I did really invest, but kind of day traded as my experience is less than 3 months. I really felt bad missing the 2008-2012 bull run. 

The mistake was lack of systematic approach and insufficient funds to play stocks to take the risk. For newbie fools purpose, we should have invested minimum 50k (best is 100k) to leverage the ups and down. 5k or 10k is not enough. Fool.com is great source for my learning curve.

 

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#3) On May 23, 2013 at 3:55 AM, MrNonsensical (79.80) wrote:

Congratulations on your decade of success. I'd imagine your next ten years will thump your already impressive 20-25%, given the rigorous reflection that you put yourself through ("rubbing your nose in your mistakes" a la Charlie Munger).

After six years of investing exclusively on instinct -- and making the same mistakes over, and over, and over, and over -- I started keeping an "Investment Journal" with predictions looking forward and observations looking backward... and I'm up 65% in the six months since I started reflecting between actions (having decided to never again diversify or invest in businesses I don't have firsthand experience with).

 So I think we're on to something. 

Could you do me the favor of a lifetime and elaborate on this?

 "It is not hard these days to get a read on sentiment; after a few years you begin to catch on to how the market behaves during times of strong sentiment."

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#4) On May 23, 2013 at 3:22 PM, ikkyu2 (99.27) wrote:

Megashort, at this time I am 12% cash, and 8.7% AAPL.  I am looking to increase the cash position somewhat over the summer, unless the economy seriously strengthens; and decrease the AAPL stake, unless by Sept-Oct the company introduces something new, something that has the potential to be a serious revenue stream.  I have many friends who work at AAPL and the company is still undergoing a serious restructuring, almost like a turnaround, which began after Steve's death; I am not sure that the company's stellar outperformance will survive this.

DRNM, I am not sure exactly how to phrase my understanding of sentiment reads.  I read a lot of online business news; I read a lot of CEO transcripts; I watch Cramer and pay special attention to his opening monologue and his CEO interviews (especially the transport companies, those CEOs ALWAYS know where the economy is headed in the next year).  I pay attention to new coats of paint in the downtown business district, number and bet size of people gambling when I visit Vegas, the shoes kids are trying on in the local Foot Locker.  I talk to cab drivers everywhere I go; those guys ALWAYS know where the economy has been in the past year, and what the trendline is saying.

I've read all Cramer's and Peter Lynch's books, and Reminscences of a Stock Operator, and those books informed the principles that I use to catch a sentiment read.  Like Cramer says, when the guy shining your shoes wants a stock tip, the market is 'toppy'; when the secretary you're talking to at a South Manhattan cocktail party turns her back and walks away when you mention Dow 5000 and she clarifies that you didn't mean S+P 500 at 5000, the market is toppy (happened to me, 2000, best sentiment read I've ever had.)

And of course I watch what the market actually does.  Wish I could be clearer about it.  Right now I feel like we're about 75% of the way through a bull market and we are about to break through fairly valued and start frothing, although I don't have a good feel on how frothy it's going to get before it corrects.

 

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#5) On May 23, 2013 at 3:24 PM, ikkyu2 (99.27) wrote:

jiltin, most of my net worth is in coastal Calif. real estate.  That is unlikely to change in the future.

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#6) On May 29, 2013 at 5:22 AM, MrNonsensical (79.80) wrote:

ikkyu2, I appreciate the concrete explanation of a nebulous issue (your in-person "sentiment reads" could not be more compelling), and completely concur with your reflections looking backward and your predictions looking forward.

Do you have an opinion about trailing stops?

Given my agreement that we are probably "about 75% of the way through a bull market and about to break through fairly valued and start frothing," trailing stops seem like a viable strategy to remain disciplined emotionally and protected financially in case a stock-crushing correction is, in fact, around the corner.

I am highly ambivalent (and less experienced than you are), but couldn't help but notice that after I bought AAPL at the end of 2008, I could have simply set a 15% trailing stop and ridden AAPL from $85 (December 2008) to $538 (May 2012) without another second of thought or stress... and with the trailing stop to do my thinking and trading for me, so I'd never have the chance to overthink and sell, prematurely and reflexively, based on price and noise.

This little case study seems like a potential microcosm of the market -- and also seems to apply to all the other stocks I've bought (except for Netflix, which would have needed a 20% stop to cruise from $63 to $236).

But, given your successful decade-long exploits, I find it best to query your opinion before I take the tact too seriously.

This is the fattest unresolved issue in my aforementioned "Investment Journal" so I would certainly appreciate your guidance.

Either way, thank you for this thread. It's given me a lot to chew on. 

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#7) On May 29, 2013 at 12:42 PM, ikkyu2 (99.27) wrote:

I have a pretty strong opinion about trailing stops, which is that in a perfect world, composed of well-informed investors trading on the fundamentals, they'd be awesome and I would use them.  However, that's not the world we live in.  High frequency automated trades, short sellers, and computer "glitches" (or so they say) cause intraday price swings that are designed to shake folks out of their stops and so I don't use them.  Stop-limit orders are even worse; they don't execute when you really need them to.  Corrections always happen really, really fast and usually they plunge right through the limit you set.  In other words, if you are relying on a computer to make decisions for you, bear in mind the other fellow, in the investments division of a megabank, has better computers.

The bottom line is either you do what Buffett suggests - buy a company that you are certain you would be happy to own 10 years from now, even if shares didn't trade in the meantime; or else, if you're in these high-beta stocks like AAPL and NFLX, you have to pay pretty close attention, monitor your position size, take profits incrementally, don't worry about selling too soon, and not walk away from the "trading desk."  (My own strategy is closer to Buffett's than the traders!)

I like to remember a quote from, I believe, a billionaire named Bernard Baruch, who claimed "I made all my money by selling too early."  Good enough for him; good enough for me!

 

 

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#8) On May 30, 2013 at 2:29 PM, MrNonsensical (79.80) wrote:

Great answer. I appreciate the wisdom (and also love the quote).

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