May 12, 2017

Portfolio Update May 2017

It’s already time for a brand new update of our DIY Portfolio. Please note that our next update can be expected in about 12 weeks, in August 2017.

Meanwhile, you can have a look at previous portfolio updates here:

Despite an uncanny style in the first 100-days to his presidency, Trump’s Rally still carries on and for now, investors are piling up nice profits. Our DIY Portfolio is no exception and has continued on its merry way.

The last days of April even gave us more good news courtesy of the French election that we will similarly call the «Macron Effect». Let’s just say that markets were very reassured by the possibility of an ex-banker becoming the next French president.

But as usual, some degree of uncertainty prevails and nobody knows what will happen next. Will Trump or Macron make crucial mistakes? Le Pen could have surprised and snagged the presidency under Macron’s nose? Many possibilities could lead to these overly inflated markets bursting...

Regardless of these fears, as many of you know by now, it will remain business as usual for us and our investment style won’t budge or change.

So today, we will talk about one of our latest investing mistakes; reaffirm our long term resolve and tell you about interesting opportunities to take time for some maintenance on our DIY Portfolio.

Once more, I’ll remind you that I am not an investment or tax professional of any kind. The intent of this blog is not to give specific investing advice. Before investing yourself, we suggest you to do all necessary research and consult a licensed financial professional if need be. 

Lessons Learned from a Loser

About 2 years ago, we bought some shares of Home Capital Group (HCG). Lured by possible juicy profits from that riskier play, at that occasion, we got away from our usual rather conservative investing nature.

Now that some shady practices from HCG have been exposed and that serious governance problems have emerged, we know it was a mistake! Luckily for us, our exposure was still somewhat limited.

We had our doubts about HCG from time to time and for once, our legendary patience worked against us.

Looking back, we didn’t truly understand HCG’s business model at the time (and still don’t). We only knew they were very gifted at lending money but most of it remained unclear to us. It should have stopped us from investing money in them. HCG was simply too risky, especially for our style of investing. We didn’t have a clue how they were generating those profits and this was a big red flag that we unfortunately elected to ignore.

We often get burned when we try to tackle on riskier stocks. We don’t even have good reasons to try it in the first place because most of our steady unexciting picks are already generating very nice returns.

With more volatile stocks, we sure hit exciting home runs a couple times like when we quickly transformed 1K$ into 6700$ with Teck Resources (TECK.B) but most of our riskier plays have resulted in foul balls, strikeouts and shutouts. Our style (still very efficient in fact) is more about maintaining a good batting average, producing a lot of singles and only occasional extra-base hits. A little boring but much more effective in the long run!

For us, making money with very risky stocks is more a question of luck than anything. If we mingle too much with risky stocks, we fear to transform ourselves into speculators instead of investors. That’s why we rather rely on proven companies to provide us solid results over time.

You have to realize that as DIY investors, we are far from perfect and still make our fair share of mistakes. In fact, learning from our mistakes thru real experience has made us better DIY Investors over the years and still does, every day.

Our HCG venture cost us about 600$, which is relatively not that much in comparison with our overall portfolio value. It represents less than 0.3% of our portfolio. We like to view it as a very low one-time management fee.

Focusing on Long Term using 20-Year Trend

Despite its somewhat contained impact, the HCG mistake still got our attention. So, we will continue to restrain as much as possible riskier picks, still controlling both the amounts we invest in these stocks and their number.

In fact, the whole situation enticed us to revert back even more to our true investing nature: to some extent quite conservative. We have to rely on safer reliable but sometimes boring picks because they have given us proven results over time. In that sense, our long term resolve also has been reaffirmed.

In our mind, long term means adopting at least a 10 year perspective but the lengthier the better. Available data using a broad number of stocks is kind of limited over time so we decided to adopt a 20 year span, the longest technically possible range to have a closer (yet long term) look at our stocks.

One quick glance at a long term stock chart can tell you a lot.

You can easily identify and evaluate potential candidates that way, as, even though it cannot really exist, the «perfect stock» would continually and constantly go up. You can still compare and identify the ones that are the closest to the «perfect thing».

You will look for steady constant reliable predictable solid up trends and probably be a little permissive for declines that coincide with markets corrections like the 2008-2009 crisis. At the same time, you will despise big fluctuations, cyclical gyrations, unpredictable volatile movements, erratic trends and down trends. Waves and roller coaster rides may be very appealing during your summer vacation but not so much for the health of your portfolio. 

Just remember that short term variations can be considered only as noise that you can ignore. In fact, they can be somewhat desirable as they can provide interesting buying opportunities.

To help consider long term implications, we’ve added three 20-Year Trend columns to our Portfolio, Watch List and Monitor List reports. The first one estimates average annual capital appreciation during that span for each stock. The second column grade additionally incorporates the general trend of the stock over those 20 years and is linked the actual StockChart. The last column presents a brief general comment on each stock.

You can expect a longer more explicit article on the matter to appear on this blog probably in July.

Portfolio Spring Cleanout

One of our investing principles is to keep a low turnaround in our DIY Portfolio, avoiding unnecessary fees and emotional mistakes. Despite that fundamental approach, we will still question our perspective or do some maintenance from time to time. Nonetheless, making important changes is always kind of unusual for us.

That being said, two major factors support the possibility of a spring cleanout. First, markets are quite high so this may be an optimal occasion to sell less productive positions. Second, we are at the doorstep of my second 6-month leave of absence from work so I will soon have more time on my hands to do additional research and analysis.

So, in the next couple weeks, using our fresh 20-Year Trend perspective, we will take time to revise our existing positions, especially the weaker ones. We will probably sell our less effective stocks as we also look for potential long-term replacement candidates. We will try to pull the trigger quickly as far as the selling part is concerned but in all probability will stay patient for the subsequent buying round or rounds.

Note that we won’t sell because we fear a general market decline but rather because we want, as much as possible, to ensure our money is invested in solid reliable long-term positions. The objective is always getting as much return as possible while tackling as little risk as possible. In appearance, that principle looks quite simple but in practice, keeping balance between risk and reward can be fairly challenging.

As usual, we will keep you informed but don’t be surprised if a few faces have changed in our DIY Portfolio when our next update comes by in August.

Photo Credit

No comments:

Post a Comment