2020: Year End Review

Performance

The performance of the active account that I track on this blog was poor. This was mainly due to my mistakes.

It has been four years since I began this experiment: move money to a fresh investment account and track the trades in real time on a blog.

The great thing about this exercise is that it has forced me to rub my nose in my errors. This is a live trading journal. Putting my thoughts down here makes it impossible to delude myself.

This is now year #4 of poor performance. I’ve had three years of underperforming the market and 1 in which I basically matched the performance of the market. I’ve outperformed the deep value universe, but that is little consolation.

In 2020, I lost 2.98% compared to the S&P 500’s gain of 18.37%.

With that said, it could have been even worse.

My max drawdown this year was only about 20% compared to the 50% drawdown that occurred for the EV/EBIT < 5 universe that I track. That universe is down 7% for the year. It’s also pretty good performance considering I managed to recover from a 20% drawdown when I was 80% cash and also owned a short ETF.

The March drawdown was contained because I went into that crash nearly 50% cash.

I also sold aggressively as the crash went on, eventually building my cash balance up to 80%. I should have pounced on the value that was available at that time, but didn’t because I assumed this was another 1973-74 and 2007-09.

I even bought a short ETF. Fortunately, I had enough sense to get out of that position when the S&P 500 went above the 200-day moving average.

Mistakes

I made a number of mistakes including:

  1. Timing the market.
  2. Attempting to predict the macro-economy.
  3. Trading too much.
  4. Purchasing bad businesses in the hopes of flipping them for some multiple appreciation.

I previously thought that an astute investor could predict the macroeconomy using things like the yield curve, valuation metrics, and statistics on debt.

This year finally rid me of that belief. I don’t think anyone could have predicted that a pandemic would decimate the market in March. I also don’t think anyone could have predicted that the market would bounce off the lows in March. Those that bought in March got lucky it didn’t turn into a 2008 debacle. It could have easily turned into that.

The last time we saw action in the market like this (when the market collapsed and then bounced back into bull territory) was in 1987. I thought this one was going to unfold more like 1973-74 or 2007-09, considering that the impact of lockdowns was reflective in the real economy. The 1987 crash was a purely market event. Nothing was wrong in the real world.

Lessons

My errors this year caused me to revisit the entire approach that I had to investing.

I’ve had four years of getting my butt kicked by the S&P 500, and then I failed to accurately call the macroeconomy this year.

This summer it started to become apparent to me that I made an error as I watched the unemployment rate collapse as the lockdowns ended and stimulus kicked in.

I considered moving this account to my passive strategy, the Weird Portfolio. That’s how I am investing most of my money and the strategy has been working for me. I thought about giving up on this pursuit of trying to pick stocks.

This account was money that I specifically set aside to apply Ben Graham’s “Simple Way” strategy. Put another way, this account on the blog is a variable portfolio: an account where I can pick stocks and try to actively beat the market.

My frustrations over this account made me reconsider whether it was worth all of the aggravation of analyzing stocks and actively trading. For four years, I have been pounding my head against a wall with nothing to show for it. The amount of effort I’ve put into this has basically been a part time job. It’s really frustrating when you put all of that effort into something and have nothing to show for it after four years of trying. I probably would have been better off with an actual part time job. Effort spent delivering pizza would have been a more productive use of my time.

Ultimately, I decided to continue. Rather than give up, I decided to learn from my failures and try something new. Instead of trying to flip bad businesses and time the economic cycle, I decided that I would try a longer-term approach. I would buy businesses worth owning for the long haul and purchase them at attractive prices.

The positions that I purchased in the last four months reflect this philosophy:

General Dynamics

Charles Schwab

Enterprise Product Partners

Biogen

These are all businesses that I am confident will grow over time and I purchased them at attractive prices. These aren’t the kind of stocks that I need to immediately sell as soon as there is an operational hiccup or if they hit a reasonable valuation. I used to own things like Gamestop and the Gap, which needed to be sold as soon as they rose in price or if the operations fell apart.

For a company like General Dynamics, if the economy rolls over tomorrow, I don’t have to worry about the business collapsing. I don’t have to frantically get the sell order in as soon as it hits my target price.

I am saying “no” to a lot of stocks that I would have purchased aggressively a few years ago. If it’s not at a compelling price, it’s a no from me. If I would be terrified to be stuck in the position for 10 years without selling, then I’m saying no.

No more compromises.

I am trying to look at the market less as a trader and more as the owner of businesses. I want to rely less on multiple appreciation as a source of returns and buy the sort of businesses worth holding.

I used to check my portfolio multiple times a day. I deleted the app on my phone. I have been checking it less and less. I still probably look at it too much, but at least I’m making progress. I would like to get to a state where I only look at it once a quarter.

Cash Drag

My pursuit of wonderful businesses at wonderful prices comes with a problem: there aren’t a lot of them. This means I wind up holding a lot of cash, which is a drag on returns.

I decided to put the cash into my asset allocation strategy, the weird portfolio.

Currently, 53% of this account is invested in my weird portfolio strategy.

Eventually, my hope is to be fully invested in 12-15 wonderful businesses purchased at wonderful prices.

As I hunt for these rare opportunities, the remaining balance of this brokerage account is in my asset allocation strategy to prevent cash drag.

To put it another way, I hope to never have another year where my frantic trading activity looks like this. This was a ridiculous waste of time and activity.

The Weird Portfolio

Speaking of my asset allocation strategy (which is how I invest most of my money), I have been pleased with the reception to it. I wrote a long-form Medium post about it and I’ve enjoyed discussing it.

I spent two years researching and refining it. Writing it all down was helpful for me.

The portfolio served me well this year.

When I was idiotically bailing in March with this account, I stuck to the weird portfolio.

I knew the treasuries and gold would restraint the drawdown. I knew that if the Fed’s money creation spurred inflation, I had gold and real estate. I knew that if we had a double dip recession, I had long term treasuries that would go up if the Fed eased more. I knew that if prosperity resumed, small value would rip.

This year (which felt like four years of market history), the portfolio did what it was supposed to.

In Q1, gold and treasuries restrained the drawdown. As the economy recovered, the “offense” pieces of the portfolio kicked into high gear. As people worried about inflation from the Fed’s actions, gold did well.

When the vaccine news came out in Q4, small value went nuts while LT treasuries went down.

The portfolio did what it was supposed to do. While I was trading like a maniac in this account, I let the rest of my money sit in my asset allocation and do what it was designed to do.

When all was said and done, the weird portfolio returned 10.87% and I had a max drawdown of 13.66% this year. I think that Ben Graham would refer to this performance as satisfactory.

Most importantly, it was a stress free return. I knew that no matter what happened to the economy, I had something in the portfolio that would benefit. No crystal balls or newsletter subscriptions required.

Macro

In past year-end posts, I included a big section with my predictions about the macro-economy. I’d talk about the yield curve, valuations, inflation expectations, the value-growth divide, etc.

I’m done with that. I have no idea what’s going to happen next. Maybe more lockdowns will cause economic turmoil. Maybe the vaccine makes the economy roar back to life. Maybe the Fed’s actions cause USD to decline and inflation to ramp up.

Markets looks frothy. We’re clearly in a “risk on” environment. There are stocks that are expensive. Of course, I don’t own those stocks. I don’t own market cap weighted indexes. So, what’s the point of worrying about it?

I have no idea what will happen next and I’m tired of thinking about it. I know nothing.

I have been following the market and investing for over 20 years. I started this bad habit in high school.

The entire time I thought that I could predict the macroeconomy if I thought hard enough and analyzed things. After 20 years of trying, I now concede that it’s impossible.

I’ve also finally realized is that no one else knows what is going to happen, either. I’ve wasted a lot of time and mental energy worrying about forecasts and predictions from “experts.” They don’t know what is going to happen, but that won’t stop them from plugging their predictions on Twitter, on podcasts, in book form, etc.

I stopped following these people on Twitter. I’ve muted their accounts. I stopped listening to their podcasts.

The reality is that no one knows wtf will happen with the dollar, inflation, or interest rates. Anyone who claims that they can do this is either a fool or a charlatan.

The finance industry is wretched hive of fools and charlatans.

What I do know is that I have an asset allocation that ought to protect my money no matter what happens and should deliver a decent return over the long haul.

In this account, I own some really great businesses that I bought at attractive prices. I think that strategy is evergreen.

Hopefully, this strategy will deliver satisfactory returns. While that’s not a guarantee, I can say with certainty that this approach will reduce my self-imposed stress.

Random

I re-watched Deep Space Nine this year. I watched it in high school and never revisited it. I’m glad I did. Through adult eyes, the show had relevance I never picked up on when I was younger. I recommend watching it. This is a great guide to watching it.

Three episodes stood out to me as the absolute best. They all had pretty heavy themes:

  1. Duet. An examination of war crimes.
  2. The Visitor. An episode about how obsession can impact your life. Also a good analysis of the relationship between father and son.
  3. In the Pale Moonlight. This one is all about moral compromise in war.

Also, CBS should remaster it in 4k. This is a good example of what that would look like.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

5 thoughts on “2020: Year End Review”

  1. The market makes fools of us all. Well done on your honesty: we all tend to delude ourselves into carrying on with approaches that don’t work. To change your ways, especially when you’ve been doing them for a long time, takes a lot of self-reflection, determination and strength of will. Good luck with your knew strategy for a new year.

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    1. Ever considered writing puts on stocks you like but see as too expensive currently for income and to lower cost basis?

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  2. I enjoy reading your newsletters and appreciate the honesty the performance of your active stock picking. I am also a fan of your weird portfolio to which I have allocated a portion of my portfolio. Thank you again for your insights.

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