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TMFPostOfTheDay (< 20)

Something Had to Change

Recs

10

June 18, 2013 – Comments (0)

Board: iPIG Portfolio

Author: jackcrow

Gene,

I just have to ask: Is this based on "What I know now" or "What I knew when I began?"

Basically both. One of the many mistakes I made when I began was not following my own well reasoned thinking. I let too many "experts" and professionals convince me to follow conventional thinking. Not that anything I wanted to do was radical. From the very beginning I didn't see tremendous value in diversification. I saw value there but not "lets start building a portfolio with diversification as the first premiss" value but that was the conventional wisdom; diversification = safety and it improves returns. So like most beginners I followed that advice and immediately created an average portfolio if you excluded commissions and fees.

I also followed the crowd into tech, well, followed them into places in tech that I shouldn't have. In my college days most of my buddies were Star Wars, D&D and computer game geeks. We were playing D&D on the internet with students from Germany and Sweden using the universities back bone and occasionally the main frame way back in the day. We were hosting dial up bulletin boards and cursing AOL(pronounced A hole #ell). I never understood the commercial value of portal/search sites; I understood the utility but couldn't figure out the commercial value. In fact I'm not sure anyone really did until Google figured out the value is in the anonymous data trends of certain demographic groups. But I chased Yahoo!. I had friends building computers in their basements and at work and knew that they were fast becoming a commodity and bought Gateway anyway.

As the 90's progressed all the pros were preaching about the new economy and that old valuation methods didn't apply. This didn't make sense but what do I know these guys and gals are the pros, they do this stuff for a living. (most actually don't). I bought Oracle too high, I bought Amazon too high, I bought Cisco too high but didn't get hurt on that one mostly by accident. And there is a 3x5 box full of cards of trades full of accidental winners and losers.

All of this led to average returns if one excluded fees and commissions which really means I was under performing the market.

Somewhere around 97, give or take 6months, I did the math and realized I wasn't getting average returns and something had to change. What I was doing wasn't in my control, I didn't fully understand it, something had to change. I cleaned out the port, winners and loser only keeping those very few that I had a good thesis for keeping and a reason for selling when the conditions were struck. I went and looked for investments that made sense to me and found financial value in bonds and intellectual and practical value in learning how to read financial statements. For years I thought I was doing this "Valuation" stuff wrong because I couldn't find any companies at value prices. About the time I thought value couldn't work or I couldn't work it right and maybe the "pros" were right the dot.bomb blew up.

I learned a great deal going through those many mistakes but the one I regret I have is that I didn't follow my own well reasoned thinking. I jumped into to tech but I had to have a diverse tech portfolio, so I needed 5-10 of those. Because I was now over weight tech I needed to add more diversity, that was somewhere between 15 - 20 stocks spread across many non-tech industries. Frankly, then and now that was nuts because the logic is: in order to protect any outsized gains in tech I had to have a bunch of average or below average stocks, this severely ate into the returns of the tech winners. I could see this was odd logic as plain as the nose on my face.

The best downside protection I have found is three fold, buy at a value price and when you do make sure you are buying a sound balance sheet and a company/C-staff with a good forward plan. Again, this was the basic investing thesis I had when I first opened an account with the guy in town that sold funds, stocks and bonds. It is simple, buy good companies at good prices. What I lacked back then was the skills I have now at identifying the good companies from the sparkly companies from the bad companies and I didn't know how to derive a good price. It always bugged me that I wasn't doing this. I might have been buying good companies with a good plan but I rarely bought at good prices and I bought a bunch of meh companies with meh plans for stupid prices.

The hardest thing in investing is sticking to your guns. It is a balancing act we have to be open minded enough to hear someone's critique of what we are doing as a check against our conviction that we are smarter than the average bear and knowing what you can make work even if it doesn't make sense to someone else who's opinion you value.

Luckily I didn't take a sever beating learning that I was smart enough and right enough to kinda do my own thing. It was also gut wrenching to invest in a way that the majority thought was poor methodology. The primary reason I went to online accounts was so I didn't have to justify what I was doing to "My Guy" downtown who always treated me fairly. I didn't want to have that argument or worse let him convince me into letting him help me diversify. Some of my biggest losses were the funds I bought through him that I let ride because DCAing is a safe and sane way of investing.

If you managed to make it this far, this is what I have learned that I didn't know then:
*Diversification is useful but way overrated
*DCAing is overrated
*Value prices trump diversification
*Solid balance sheets trump diversification
*Solid management and business plan/goals beat diversification
*beta is stupid
*Modern Portfolio Theory fails when its most needed
*CAPM isn't horrible if you toss out beta
*bonds and bond funds are not the same thing
*dividends are good
*Being fully invested is overrated
**having dry powder when something drops in your lap is a good thing
*diversification will happen on its own

The underlying thesis is the same "Buy good companies at good prices"

jack 

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