I am no writer. Here are some of my most important lessons from 2020.
Short summary:
I made two big mistakes: Rolls-Royce (bad-luck+overthinking afterwards) and Wirecard (gambling)
Don’t try market-timing
Stick to your strategy: GARP, no more difficult stuff.
Be more open-minded. Broaden your horizon, learn
In a sentence: Thank you for making me learn the hard way, Mr Market.
Single mistakes and their lessons:
Rolls-Royce was weighted at a double position when covid hit. I really liked the story: seemingly boring name, going nowhere for years, misunderstood, cheap valuation, but with bright future ahead: market leader in long-distance engines, rising market share, huge upcoming cashflow because of high installed base, a flawless new engine and recurring service fees. Could go into more detail here, but the important point is:
I held the stock through the pandemic, realized the loss way to late. Too many statistics, news articles, opinions, experts, while trying to weigh the pros and cons in my head and what to do and not to do.
Lessons learned: don’t overthink, protect your money, expect the unexpected, strong balance sheets and most important: don’t force “black/white” scenarios.
Black/white was the same mistake with Wirecard. I really wanted to diversify into tech/payments sector and its growth prospects. Adyen was too expensive, Wirecard very tempting. I researched one of the earlier short thesis on Wirecard, where the conclusion was, that half of the profits come from dubious sources or are not there at all. The reassuring statements from management may have had an impact on me, the competition had strong numbers as well, I was blinded by greed.
My scenario was that there was a chance of fraud and that it might be a backlash from earlier days, when they did business with gambling and porn sites. Growing too fast, too quickly in the earlier days sounded reasonable, the Wirecard today promised full transparency.
Well, I was wrong. I was happy to read the news intraday of “no annual report, no money” and be able to sell quickly, big position with 50% loss. Still, that was more luck than skill.
Lessons learned: Don’t ignore short sellers, “when in doubt, get out”, it might be too good to be true, and again, this time in capital letters: DON’T FORCE “BLACK/WHITE” SCENARIOS.
Market timing does not work, proven the gazillions time. If you are honest to yourself, we all fall back into the thinking that we can. Selling and buying back cheaper later, tweaking some money here and there.
Well, nobody saw the rapid turnaround coming and who knows how many people stood there looking stupid on the sidelines with their trousers down at their ankles.
Cheap money seems to be here forever and politics play firefighters and rescue everyone. As Warren Buffett loosely said, “my telephone remained silent during covid”.
Another thing that you should keep in you head is, that a huge chunk of the performance is made on a few very strong up-days a year. Missing those while you tried to market-time can be very hurtful for your total performance. So stay invested in your good names, focus on the big picture.
But of course, don’t ride weak stocks down the drain, reassess and act if needed.
With that being said, of course I tried to “rebalance” my portfolio in March. Some covid losers or non-conviction names were sold successfully, some strong names in the process who held up well, too (hello Naked Wines).
After the dust settled, I tried to evaluate everything, which ultimately lead to rethinking my strategy. I am going to post another article on that later.
In short: no more deep-value, hard turnarounds, very difficult cases.
More growth at reasonable price, cash on hand, free cashflow. Looking back at my previous years, I landed my biggest gains doing just that, with much higher precision.
Cigar butts, terminal decline, sum-of-the-parts, commodities, too complicated pile, however you want to call them: I am no longer a fan.
It has definitely worked better in the past, when there was an information advantage for example. It does work today, but it requires work, time and dedication. And not only one time but permanently.
I just noticed I could go on and on here. One point I’d like to make:
Don’t become a grumpy old man, persisting on your (old) views and ignoring advice.
Instead, stay flexible, open-minded, learn every day and be positive. What has worked decades ago, might not work today anymore.
All the best everyone for 2021!
Ray