Portfolio review 2018

Portfolio review 2018

Portfolio performance analysis 

 Overall shape of my portfolio performance chart mirrors the STI ETF. This is due to my incorporation of it into my portfolio via monthly Dollar cost averaging.  

*Amended *

Overall, my IRR curve is below the STI ETF. On an absolute return basis (Holding period Yield including dividends) , my returns are negative (-6.96%) this year . I under performed the STI ETF last year (18.1% at recovery stage ) and outperformed in this  bear market (-10.3% at recessionary stage ). 

Although a part of me is engaging in mental gymnastics to rationalize that the market have not  priced in my undervalued securities and I should have performed better, my other half is fearing that I am engaging in hubris and falling into choice supportive bias. 

From a quantitative standpoint, if I under-perform the market in the concurring years , I need to acknowledge that serious money can only be put into low cost index funds, and active investing can only be a pleasurable hobby. 

2) Dividends have dampened the blow in my unrealized investment losses. Although I did not intentionally pursue a dividend focused investment strategy, my preference for companies with strong cash flow has lead to significant dividend yield at 4.16%

Despite my preference for growth companies, it's unpredictable nature lead to choice of companies with good free cash flow and operating cash flow. This incidentally led to companies which have strong dividend strength 

3) Excluding my monthly DCA of STI ETF, when I analysed my transaction history, I have short bursts of rapid accumulation focusing on discrete counters, followed by 2-3 months of downtime. Also, I do not average up / down on the same counter until a few quarters have passed. This may be tied to my behavior of accumulating residual salary in my war chest and averaging up/down at the next dip. 

Although I am largely undecided on the time in the market VS buying at dips argument, my current investing behavior (lack of disciplined accumulation) will not allow me to accumulate a significant war chest in significant bear markets. Considering my limited income inflow through my meager salary, If I were to improve my investing performance, discipline is key.

 4) Another surprising point I discovered is my tendency to accumulate overseas "growth stocks" with historical superior growth rates, during the recent bear market. I did not deliberately make an active decision to do so. 

My search for undervalued opportunities intuitively led me to accumulate those companies, which heavy price corrections led to significant margin of safety, whereby the long term growth opportunities and fundamentals are not affected. My limited understanding of valuation (independent of market price) of technology companies may come back to haunt me eventually, and I can only cross my fingers and hope that everything ends up well.

5 things I learnt in 2018
1) The advantages of anonymity

Being ahead of others is indistinguishable from being wrong. In investing, having a long time horizon and being eventually right in 10 years time, is indistinguishable from being wrong for 9 years straight.

Everyone will lose money (unrealized) at some point. Looking foolish for a long and indefinite time is much easier when you are anonymous and starting up rather when you are a celebrated blogger / fund manager widely followed by the crowd. It is only when you are in the market, that you can only truly understand that value investing is simple to understand, but difficult to execute.

2) Picking credible sources of information
When I started my investment journey, I was well aware there is significant noise and fake news in the market. Considering the fact that an entire industry is monetary incentivized to generate excitement and churn for the retail brokerage industry, I was exceptionally wary of self proclaimed wall street experts and macro-economists. Considering the fact that Classical / Monetarist and Keynesian / Neo-keynesian economists had fought close to a hundred years and still frightfully wrong with their macro-economic predictions, I will trust the monetary-incentivized wall street experts less.

Even worse, there are plenty of self proclaimed investment experts in the BIGS / retail investor community, whom are using investment / personal finance articles as a tool to gain recognition / trigger view counts / eyeballs as an income stream, or up sell their investment courses. If every blog / social influencer is a market beating expert, there will be no poverty in this world. 

Although I greatly enjoy the articles like pretty much every other member of this community, what people like to talk about, and what people wish to hear, has no correlation and influence to the performance of the underlying asset. It took me significant time to accumulate a list of authentic and credible analysts and news sources, in the form of a blog list.

3) The importance of intellectual honesty

Similar to point 2, intellectual honesty is an inward examination of my personal investing behavior and behavioral bias. Value investing is inherently contrarian when you buy from pessimists and sell to optimists. Balancing arrogance and humility is easier said than done. To confidently call the market wrong and buy mis-priced securities, and acknowledging that your investment thesis is wrong requires a large dose of humility.

When executing a long term buy and hold strategy, the importance of the screening and selection process is of utmost importance. Valuations shift with the changing fundamentals of the company. It is important to seek credible analysts that is critical of your investment thesis such that you are forced to look into loopholes in your assumptions, to avoid Hubris and holding on the "undervalued security" forever. As with all great men and evangelists, the louder and more frequent you proclaim a line of thought, the harder you hammer in the idea within yourself.

4) Be aware of the limits of your circle of competence.

Market timing and human irrationality can make the best investments a poor performer.
Peter lynch can make 29%per annum. The average investor lost money from participating in his fund. 

Know how to recognize your limitations, and avoid industries and companies that are cyclical, in continual flux, or areas that you are not well versed with.  Nonetheless, dodging the too hard questions does not equate to ignoring discomforting fundamental news about your investments.  

There is a need to observe my investing performance and behavioral bias to confirm if I am temperamentally and intellectually suitable for this. The lack of mental fortitude and discipline to execute the investing strategy, or even worse, excessive arrogance and the existence of hubris, could lead to losses. Considering Investing is probabilistic rather than deterministic, I can jolly well be wrong for a long period of time.

There is only a thin line between scuttlebutt analysis from industry insiders and rumor mongers harping about a non-issue. Scuttlebutt acts as sampling sources of live company data, but only credible sources of information matter.

Building a knowledge pool in core competencies, especially on financial statement analysis and business analysis. Developing filters to weed out bulls hit. Never invest in a company unless you have reviewed the annual report at least once. Even that is not foolproof.

5) Importance of implementing controls and portfolio  management safeguards

Defining overall investment strategy and time horizon

Decision to ignore top down macro approach to portfolio allocation, but bottom up approach complemented with SWOT / PEST to conduct fundamental and macro analysis. 

Controlling overexposure of portfolio to any specific industry in particular. Diversify sufficiently but not excessively.

Creating a thesis of the company based on its category. Ensure that the narrative is supported by its numbers. 

Do a DCF / valuation ratio  / market sentiment analysis to determine if there are exploitable margin of safety. Recognize the fact that Margin of safety and intrinsic value is imprecise / fuzzy and what is cheap to one is expensive to another. Be prepared to average down based on fundamentals as what has gone cheap can always become cheaper. 

Check-list to minimize glossing over important details. 

Execution of the size of the Buy / Sell  position based in High / Medium /Low conviction thesis. Spread out the timing of your tranches to prevent buyer remorse / FOMO.  If the stock is that great, it will not matter if I bought at 2.50 or 2.75.

Periodic self assessment of behavioral shortcomings, and investment thesis through blog posts. Learn from others and with others in their respective investment journeys.