CA - The Journey To Investment Success: Embracing Failure And Evolving Your Strategy

2023-04-24 10:00:00 ET

Summary

• In this article, I'll talk about the three stages I went through since finding the stock market in early 2020.
• The first two stages were filled with mistakes and ruined my performance, but after finding my strategy I started to outperform.
• I believe it's important to reflect on mistakes and that it's best to do them early and often.

I firmly believe in continuous improvement and that mistakes are better made early. With that in mind, I want to talk about my portfolio strategy and how it changed and adapted over the three years I've invested in the stock market. To get it out of the way first: My performance so far has not been great or even good. I have lagged behind the market by around 45% due to the mistakes I made early. In the following article, I'll talk about the three stages I went through and why these couple of thousands of losses could save me millions along the way.

1st Stage: Headless Chicken

A few things about myself: I started investing in 2020 at 21 without much knowledge. I studied (or rather was studying then) business informatics and thought I'd know something about finance at that point. It turned out I was wrong. Back then, I mainly chose investments by consuming media without thinking about it myself. I ended up with a mixed portfolio without much structure within many industries I didn't understand, like Banking via Sberbank of Russia ( OTC:AKSJF ) or Rare Metals via Umicore ( OTCPK:UMICF ). I also convinced myself that China is a great opportunity and invested heavily in the market via Xiaomi ( OTCPK:XIACF ), Alibaba ( BABA ) and Tencent ( OTCPK:TCEHY ). Over this time, the market saw a speedy recovery from the Covid crash, but I was mainly invested in turnaround plays I didn't understand during the bulk of the recovery. A mistake I hope not to repeat. Turnarounds seldom turn . In hindsight, this portfolio wasn't too bad, but we'll see what made it a lot worse in the second stage. At this point, I had limited money invested, roughly equal to 10% of my current portfolio.

2nd Stage: Blind Fear of missing out

The second stage is where I have primarily ruined my performance so far. Throughout the end of 2020 and 2021, I became increasingly frustrated that my small portfolio was trailing the market. As many young investors do, I started to look at what has done well lately. This led me to look at unprofitable high-growth stocks with tailwinds from Covid. Around the same time, we also saw a massive crash in the Chinese Tech market after waves of regulation hit tech giants like Tencent, Alibaba and JD.com ( JD ). My portfolio was roughly 25% China at that point and I decided to keep doubling down until the positions reached over 30% after they drew down significantly. I sold out of most of my solid companies like Apple ( AAPL ) or Visa ( V ) to pursue buying the dip in these Chinese stocks and high-growth stocks like Teladoc ( TDOC ). The latter caused the most pain because, as you can see below, I excessively bought the dip and overweighted the position significantly. Teladoc has been my biggest loser; you can read my post-mortem article here . In hindsight, this phase was fueled by Fear of missing out and chasing stocks that already ran up well. At this point, my valuation framework mainly looked at the valuation multiples until the Covid crash, and I didn't pay too much attention to it. After all, over the long run, stocks always outperform, right? I added some money to my position during this phase but mainly funded the restructuring by selling other positions. The portfolio was around 20% of the size it is currently.

3rd Stage: Finding quality

Two events led me down this road near the end of 2021. The first was reading Chris Mayers book "100 Baggers": I went into it thinking that great stocks have to be exciting, fast-growing technology businesses and was shocked to see that it's really about companies with continued growth and high returns on capital, ideally led by an owner-operator. Afterward, I read Will Thorndike's "Outsider CEOs" and all of Mark Leonards's Shareholder letters. I learned I should own compounding machines with large moats and great capital allocators. The event that I use as a cutoff point for this phase is early January, when I sold out of most of my China exposure and added Constellation Software (CSU:CA) as my second largest position. This was when I started to focus more on the quality of my businesses, especially on the valuation. I blew up over 10% of my account with my Teladoc position; using a simple inverse DCF model, I probably could have seen that it was a lot riskier than I thought and wouldn't have overexposed myself as I did. Check out my portfolio introduction post if you want to read more about my current strategy. Below you can see my portfolio from when I started this transition. Since then, I have further improved the quality of my portfolio, selling out of most speculative positions or sizing them appropriately and focusing on steady compounders. You can find my latest portfolio here .

Starting to outperform the market

Let's look back at my significant underperformance since the start of the portfolio. We can also see that I started to generate considerable outperformance since implementing the focus on quality. The chart below shows my performance since January 2022 and only includes transactions since then. This was when I deployed the majority of my cash (80% of the total size now) and a point from where I found a strategy that works for me. Of course, this is a very short time horizon, but it is encouraging that I managed to outperform the market over this time frame while also reducing the stress my portfolio produced. I remember the constant stress and worrying about my positions in Stages 1 and 2. This has largely gone away after focusing on high-quality businesses with owner-operators. I started writing on Seeking Alpha in February 2022, with the quality mindset already taking shape. I hope to continue improving over the following years and decades and continuing this path of outperformance combined with lower stress. I hope you took something away from this article and I'd love to hear if you had a similar experience early on in your investment journey. It's important to make mistakes early and often, but even more important to learn from them.

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