A value investor's reflections on 2017 | dhandho.dk
A look back at 2017

Reflection

A look back at 2017

December 31, 2017

This post is also available in: Dansk

Abstract

  • 2017 marks yet another year in what is now history’s longest bull market. Any metric cements that the stock markets are expensive (objectively speaking), e.g. S&P500’s Shiller P/E is approaching 33.
  • The seven stock analyses I’ve published here on the blog have average returns of 61% on an annualized basis. It’s more by good luck than good management though. I betted heavily on the retail sector, which made a turn around exactly within the six months I began my shopping frenzy. Double-digit actual returns and short holding periods produce high annualized returns.
  • Below I’ll present my ‘Books Top 5’ as well as an ocean of other learning ressourcers I found useful on my journey into the value investing universe.

2017 is drawing to a close. The next trading day is in 2018, so it’s time to settle the score. How did the financial markets perform? How did my portfolio’s returns compare to those of Mr. Market? What is Book of the Year? What other learning ressources did I find valuable? What have I learned? If the answers to such questions could interest you, you’re welcome to take a sneak peak in my public diary below.

2017: The never-ending bullmarket continues – now with a crypto sidekick
In the post Why I’m hoarding cash and praying for the crash I presented an array of metrics that objectively cement just how ‘expensive’ the markets seem to be. Stocks have continued their upswing since aforementioned post, and rather than a S&P500 Shiller P/E of 31, we’re now approaching 33. P/BV and P/S are following suit. 

Despite Janet Yellen’s ‘soothing’ (and laughable) comment, “we will not see another financial crisis in our lifetime”, I’m still treading carefully. History tells us that there will be another correction. It’s a matter of time, but when is the time? It’s close to impossible to predict. If, for instance, you had refused to invest whenever the Shiller P/E exceeded 25 (and thus ‘overvalued territory’), you would have been out of the market since 2015 and thus missed 3 years of a roaring bullmarket! Since deposit accounts and bonds (‘traditional’ ones, at least) do not yield anything worth mentioning, stocks seem to be the only viable alternativ – at least for me, since precious metals, commodities, real estate and crypto currencies aren’t within my circle of competence.

Speaking of crypto, this asset class has the ability to make even a three-digit return look pale. Will this epic rise of thousands of percent continue moving into 2018? No clue. I’m completely ignorant when crypto currencies are the topic of discussion. I have a hard time figuring out wherein e.g. Bitcoin’s intrinsic value rests. And since I can’t estimate crypto currencies’ intrinsic value, I stay on the sidelines. Is it a bubble? The course of its rise fit perfectly within the ‘bubble templates’ that are presented in i.e. Manias, Panics, and Crashes and Irrational ExuberanceIf it is a bubble, and it pops, will it be the catalyst that (finally) ignites the long anticipated correction? It’s a silly idea, I know, since there doesn’t seem to be a correlation between crypto currencies and other asset classes. However, the dot-com bubble pulled every other stock south even though General Motors or Coca-Cola shouldn’t be affected by some utopian companies’ downfall, right? So, can crypto currencies be the spark that sends us into the next recession due to plain panic? Or will the next downswing be caused by whatever madness the ruler-trio – Trump, Putin and Jong Un – could do? And how about Southern Europe’s instability – I suppose that’s still a mess?

As you can probably deduce from above, my speculations are nothing but guesswork. I don’t have the faintest idea in regards to how long this bullmarket will continue. And because of that, I continue to invest whenever I spot an apparently good investment opportunities.

Mr. Market vs. Mr. Dhandho
Such (in my view!) ‘good opportunities’ have shown their faces a few times during 2017. I’ve made 12 trades this year (7 buys, 5 sales), which is quite a lot more than I usually make. The reason hereto is twofold: 1) I’ve spent a lot more time researched ideas in 2017 than previous years, and 2) I screwed up in 2016. When I dived into the value investing universe, I was in a hurry to exchange cash for stocks. I bought a bunch of different stocks merely because of low P/E and/or P/BV multiples. In some instances, I didn’t even know what the core business was or who the competitors were. I won’t abuse the word analysis to characterize these decisions – it was very superficial. I have ditched these during the year (hence the sale trades), and bought stocks/businesses I have a comfortable level of insights in (thus the buy trades). Yes, I did a total reset.

I’ve sold waddell & Reed Financials, Deutsche Bank, Volkswagen and Buckle. Loss/gains vary from -7% to +8%, so it wasn’t these investments that put rib-eyes on the table. Despite the fact that all (yes, all!) have appreciated in price after I sold, I’m contend with having trimmed my portfolio. I feel more comfortable with a focused portfolio of businesses I’ve studied and feel I understand. The only sale that had some rip-eye potential, was my decision to sell A.P. Møller Mærsk. I held it for 814 days for a total return of 41%. That corresponds to a 18.45% annualized return (without regard to compounding).

The current portfolio is a more enjoyable tale. The seven stock buys I mentioned earlier have wrenched of a 61% annualized return on average, cf. the table below. Despite the fact that this number beats the market’s 6.7%*, it’s difficult t assess whether I truly did beat the market. This doubt comes from several factors. The primary cause, however, is that I haven’t properly tracked the inflow of savings dollars vs. investment return dollars. I can’t thus say that my net worth has gone from to y, ergo is my return z. I have a hunch that 2017 has been a decent year, but not how decent – which is amateurish. Better tracking of my portfolio is a new year’s resolution of mine, so I can confidently settle the score in 2018.

Before the reader gets the idea that a 61% annualized return is the ‘new norm’ for your’s truly, I’ll have to immediately shoot down those expectations. The returns in below table is a result of having placed a few contrarian bets in the long-struggling retail sector, which everyone regarded as dead based on the Amazon effect. I began looking for values in this pool of stocks nobody else wanted to touch. That these stocks turned exactly during the 6 months I went stock shopping is plain luck. For instance, Sports Direct rose 15% in two days, Domino’s Pizza rose 11% during a day, and Footlocker shot-up 30% during an afternoon. These days and results were fun and profitable, but not to be expected going forward. My bets were simply placed in the right spot at the right time. Double-digit returns and short holding periods are the causes of the high annualized returns – the actual returns, as you’ll see below, are more modest.

Portfolio per 31-12-2017. The results are including currency losses (both the pound sterling and the dollar have caused lower returns). If you compare the stock prices from the posts with the current prices, you can calculate the stocks’ ‘isolated’ returns.

* I’ve used  Vanguard Global Stock Index Fund as a benchmark, since it appears to be one of the cheapest solutions for the passive investor who – like your’s truly – is invested in stocks from around the globe.

Learning ressources
I’ve always been interested in investing, but it wasn’t until the last quarter of 2016 that I became captivated by the value investing philosophy. After my eureka-experience reading The Intelligent Investor, I was possessed by learning the secret behind Warren Buffett and his disciples’ phenomenal results. I’ve been spellbound by the literature, most importantly books. But the media universe is floating with fantastic content within this sphere: podcasts, blogs, videos, newsletters – you name it.

I have read 46 books in 2017, primarily investing books and biographies. Of these nearly four dozens of books, I would like to highlight the following five. I found this handful to be phenomenal books that aided me in my journey into the world of value investing, i.e. by outlining the philosophy’s core concepts as well as the value investor’s mindset and approach.

#1 – The Dhandho Investor
#2 – The Education of a Value Investor
#3 – The Most Important Thing
#4 – Deep Value
#5 – Buffettology

Books have undoubtedly been my primary learning ressource, but certainly not the only one. I love to watch Talks at Google. Google invites a bunch of interesting people within a wide array of fields to give lectures, which are then recorded and published – brilliant! They have an Investors at Google playlist that contains lectures by some of my favorite writers and investors, e.g. Mohnish Pabrai, Tobias Carlisle, Aswath Damodaran, Jim O’Shaughnessy, Joel Greenblatt, Guy Spier and Howard Marks.

Another ressource I’ve benefitted tremendously from is podcasts. My absolute favorite is The Investors Podcast where the hosts, Preston and Stig, reviews books and investing ideas as well as interview investors, authors and business men. I too enjoy the Mihaljevic brothers’ Value Investing PodcastThis series centers on 1-on-1 interviews with a value investor who outlines his or her approach and philosophy. Finally, I would like to highlight The Meb Faber Showwhich is quite entertaining.

Bring it on, 2018
In short, 2017 has been yet another interesting year in the history’s now longest bullmarket. I’ve been lucky to hit a few stocks that have enjoyed the tailwind of the retail sector’s turn-around. My greatest returns, however, have been in the realm of learning. Creating this blog has been the best of all, as it has occasioned me to put my thoughts into words, which is how I learn best. I’ve voiced some of the lessons I have packed this year in the post series Lessons from 20 value investing books, part I, II and III.

I’ll continue to read, listen and learn – and hopefully earn some decent returns in 2018, also on the financial front. Speaking of, I’ll continue to sit on 40-50% cash, but I won’t make the high market valuations discourage me from striking on the truly fat pitches. In other words: I’ll continue my 2017-strategy into 2018. Namely, with a focused and cash-heavy portfolio and my fingers crossed that we’ll soon experience the long-awaited correction.

This post is also available in: Dansk

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