As this year is coming to an end, roughly 1 month and a few days to Christmas, few days to thanksgiving, some ups and downs, I thought it is good to write down how I feel today for future references.
As an optimist, I do not doubt my ability to find investment opportunities that will perform reasonably well over time. I do not have a track record except sporadic wins here and there.
This year had been the most emotionally excruciating year I have ever been through in my rather short investing journey, and one I do not want to forget
The early win
A $150million market cap company doing resale e-commerce. I got the idea from a famous investor 13F and immediately looked into why it is a compelling investment opportunity. Lo and behold it doesn’t take much reading to figure out that it is within my comfortable area of investing. They recently replaced the CEO, who focuses on EBITDA and cash flow and EBITDA projection has been trending in the right direction. The stock is battered too much that it became an interesting opportunity. I took a 2% of NAV bet in the company, which later I doubled down few months later leading up to an earning report that shows positive EBITDA.
Stock doubled and I sold out of the position, realizing almost 4-5%.
What a great start I thought. I even started to think about how to save on tax, more on this later.
In the run up, I kept thinking about how the stock would triple, quadruple, those were days of heavy trading volume, and as soon as the trading volume starts subsiding, I started selling out of the position. I rate my execution 7/10, that I didn’t sell too early, or too late, the stock later normalized but still elevated compared to my average buying price. The stock was meant to be at double the price I bought it at, if the condition stays the same.
The treasury
If there’s one thing that defines 2024, it is the treasury yield. What starts out as a very optimistic start of the year, everyone thought that the Fed will cut so many times and inflation will go to target 2% immediately, proven to be a VERY bumpy ride. Inflation stays persistent longer than usual and the market swung to the other end of the spectrum, estimating no cut.
It only took a few very weak reading to swing the market all the way to other end, from flying high to soft landing, hard landing, no landing, etc. It took Warren Buffett getting out of 25% of his holding of Apple, a Fed that didn’t cut rate followed by a weak economy reading. Everyone immediately thought the Fed was wrong, equity plunged 10%, and now we’d have recession.
There were a few weak reading after that, and in the next chance, Fed cut 50 bps. The market swung from no cut, to now expecting few 50 bps cut in the remainder of the year, and this was September, almost 3/4 of the year has passed.
Lo and behold, economy stayed strong, few more readings after showed inflation is going lower but not as fast, Trump won the presidency and treasury yield which was about 3.5% in September, is now at 4.5%.
I signed up for a roller coaster ride.
I am a believer in de-worsification. I run very concentrated and leveraged portfolio, which amplifies the gain and the losses. Howard Marks had a very good article mid this year, that says that how good you are as a manager doesn’t depend on your return solely but your risk. If you make a very good return in the up year, but also very bad return in a down year, you are just taking more risk. I belong in this camp.
A HUGE bet that I am making is on the treasury yield, in particular through a very defensive, high quality REIT of a beaten down, almost hated by now, vibrant city in Asia. The REIT has been a big part of my holding and has gotten bigger this year due to my risk-reward calculation. The REIT has managed to increase its revenue, income, despite all the gloom and doom about the city, it has low leverage of about 20%, safe amount of the loan are fixed rate, yet punished by the swings in treasury yield.
I can find no safer bet than this one, which I am willing to put a significant chunk of my capital, and with leverage with it.
The result, is the roller coaster ride I am on right now. My portfolio was up almost 60% only to see ALL of that gain disappear today, 1 month to Christmas.
Not that Christmas or yearly result matters to me, but I had imagined sipping my glogg and enjoying the Christmas market knowing I’m up 60-70% for the year. While we still have one month to that target, I don’t have much hope.
On China
A staple of self-proclaimed value investors in the world today is China. Great companies are trading for bargain, and have been for the past 3 years. This year, and part of the reason for the September euphoria in my portfolio is that the Chinese Government stepping up support for financial market. David Tepper came out on TV and said he was buying “EVERYTHING”. That is a huge confidence, especially if you are on record, on national television making such statement.
Only 1 months after the euphoria, you can get the same shares for 25-50% off!
It is also odd I feel, that somehow the treasury yield also have correlation with China stock prices, therefore I now believe that my portfolio is basically a bet against the treasury yield.
My first merger arbitrage bet
This year, I read a book about Warren Buffett’s early investment partnership. I discovered that on top of the regular buy-and-hold investing, the oracle also did merger arbitrage opportunities.
The idea is to find companies that are engaged in an M&A deal, that for whatever reason the market is pricing incorrectly
I found my first deal as such in Capri Holdings. I was flipping over my ValueLine where I found about this company which was to merge with Tapestry for $57/shares and was trading at $30 because FTC sue for preliminary injunction on the deal. It proves to be a very expensive lesson.
The story is about two holdings company that holds handbag and accessories brands in “affordable luxury” market. I didn’t even know that such market exists and whether it makes sense to have such market segmentation. That raised an eye brow. Michael Kors/Versace/Jimmy Choo was going to merge with Coach/Kate Spade/Stuart Weizmann. I started my reading on the subject and an initial position of about 3% of my portfolio, I thought that the current price represent the price if the deal didn’t go through – so heads I win, tail I don’t lose much.
Time slows down when you are waiting, indeed this is the case with this story, starting from subpoenas, findings, trials, FTC’s inhouse experts miscalculation, I thought the odd of the deal going through is very high and that this case is just politicized and has no merit. The market seem to have thought that way when the trial was over and the hearing was pending. I was up 20% on the position which I had tripled from the initial sizing and now was considering if I should play it safe.
My average price was $34 and stock was trading at $42, those who read the court filings, hearings, etc will find that the FTC basis was a bit off and that the merger was going to happen. I was going to have my ideal christmas, sipping glogg while watching at how well my portfolio was doing this year. Few days before the election, result was out – the judge granted the FTC the preliminary injunction, stock was down 50%.
There was a lot to learn from this experience:
- The FTC was suing for preliminary injunction, was the bar lower?
- Should I have taken the profit, switch it into a call option on the agreement termination date?
- Should I have taken the profit and buy some put option against the position to protect the downside at the cost of a portion of the profit?
- Should I have just taken the profit and go away, I was 1/3 of the way in terms of the potential profit
Regardless, I was lucky that I didn’t make my living based on this because some portfolio managers got fired because of this.
The world is unfair
I think value investing is investing, there’s no other type of investing. You invest based on fundamentals of the company. As an aspiring good investor, I try to learn from the world’s best and that means reading newspapers, trade periodicals, annual reports, earning transcript, quarterly report.
Yet, folks who are up bigly this year are those who bet on Trump winning the election, bitcoin ruling the world, and TSLA call options.
The path I follow gives a ground to any decision I am making, the hope is I don’t lose much, but it is still hard if the world keeps on giving you lemonade. There’s only so much sourness you can accept.
Hope
I think what keeps me going, is hope. I might not be a smart investor or a great investor, but I have hope. I try to get better everyday, even though sometimes it means taking few steps back. I have taken a lot of steps back in the past and will do so in the future, but I have hope, and that is what is keeping me going, with the hope that I will thrive eventually, and proven right.