I ran a few ‘experiments’ during the year, some of which I wrote about on the blog. As the year draws to a close, I am preparing the report card and as always it’s a mixed one – Lots of D and F and not a single A J
Let’s look at some of these experiments, learnings and plans for next year.
Buying dirt cheap stocks
The main ‘idea’ behind these positions was that the stock was dirt cheap and hence once the pessimism cleared, the price would bounce back
Business cycle related
The capital goods sector has been hit very hard in the last few years and the news worsened during the year. As I wrote in this post – ‘How I think about macro’, I personally thought the pessimism around this sector was overdone and one could look for some quality firms in the industry to take a position at rock bottom valuations.
You can see the price action below
So what’s the grade ? It’s a B at best for the following reasons
Learnings
– I don’t have timing skills and this episode proved it again. I care about buying at the right price rather than at the right time. However in the above example, it is important to get the timing right too, otherwise one will have to wait for a long time. A number of fellow investors I know are experts at this – but I am not. As a result, this type of investing has rarely worked for me.
– Due to the lack of timing skills (and being aware of it), I have been hesitant to create a large position in such opportunities. The result of a small position is that a 33% return, does not move the needle on the portfolio. As a result, buying such kind of stocks, which I do not plan to hold for the long term are just a waste of time (for me)
– These kinds of timing opportunities in the end may just be good to keep me entertained, but will not add to my returns in the long run.
I wrote about zylog here. I laid out the argument for this position in the post and the reason for the eventual exit.
It is easy to look at this episode with hindsight bias (management was suspect and hence one should not touch the stock). Around the same time last year, I was looking at some high profile cases of failure (read here) and wanted to test the following hypothesis – is it possible to figure out management fraud from publicly available documents such as annual reports (market grapevine does not count).
The above trade turned out to be a disaster as it soon became known that the management was indulging in insider trading.
Value trade
I wrote about this short term opportunity here. As I noted in the post, this is a stock which had become cheap for short term reasons (quarterly earnings miss), though there was no long term issue or any management concerns.
This type of investing is more suited to my personal temperament. I am able to analyze that the market is being too pessimistic due to short term factors. If the business is doing fine and there are no management issues, I am able to take a mid size position and make reasonable returns over a one year time frame.
Not all trading
If you have started reading my blog recently, you may feel that I am into short term trading. That is miles from the actual reality. The above cases, are just experiments on the side, representing not more than 1% of my personal portfolio.
The long term changes
The key change I have been focusing on my core portfolio, is moving towards higher focus or concentration. I have kept a fairly diversified portfolio in the past with majority of positions under 10% of the total portfolio. I have now started increasing the size of some positions where I have a higher level of confidence in them.
Chicken that I am, the move is likely to be very slow and measured.
—————-
Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.
Thanks Rohit for the post. Even my learning is that these small trading positions are not worth the effort unless the risk reward is heavily skewed or it is an arbitrage/special situation play.
Rohit,Great summary of your experiment with results. There is something in us that make us learn better only when we make the mistake instead of learning from others mistake (proverbial peeing on the electric pole by munger). Hope we all learn something that adds to our investing knowledge base. Wish you a Happy, prosperous and joyous New Year.RegardsRavi
Hi Rohit,Thanks for your inspirational blog. what was the rational behind selling bhel at 160? I am interested to know your thought process on selling decisions.I entered bhel at an even more absurd timing – at 162 :). I am happy to hold it though till it comes near the intrinsic value. BTW i got the intrinsic value of above 600.RegardsGinto