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Do you remember what your portfolio was like back in 2017?
I can remember mine when I looked at my portfolio just a year ago. Most of the stocks I owned had positive gains. The stock market had performed well with most market indices achieving double-digit annual growth:
|Index||31 Dec 2016||31 Dec 2017||Return|
|Straits Times Index (Singapore) 🇸🇬||2,880.76||3,402.92||18.1%|
|Bursa Malaysia KLCI (Malaysia) 🇲🇾||1,641.73||1,796.81||9.5%|
|Jakarta Composite Index (Indonesia) 🇮🇩||5,296.71||6,355.65||20.0%|
|SET Index (Thailand) 🇹🇭||1,542.94||1,753.71||13.7%|
|CSI 300 (China) 🇨🇳||3,310.08||4,030.86||21.8%|
|Hang Seng (Hong Kong) 🇭🇰||22,000.56||29,919.15||36.0%|
|Nikkei 225 (Japan) 🇯🇵||19,114.37||22,764.94||19.1%|
|KOSPI (South Korea) 🇰🇷||2,026.46||2,467.49||21.8%|
|Nifty 50 (India) 🇮🇳||8,185.80||10,530.70||28.7%|
|ASX 200 (Australia) 🇦🇺||5,665.80||6,065.13||7.1%|
|Dow Jones (U.S.) 🇺🇸||19,762.60||24,719.22||25.1%|
|S&P 500 (U.S.) 🇺🇸||2,238.83||2,673.61||19.4%|
Fast forward to today and this is how the indices have performed in 2018 — almost of them have fallen into the red due to US-China trade war tensions and an uncertain economic outlook:
|Index||31 Dec 2017||24 Dec 2018||Return|
|Straits Times Index (Singapore) 🇸🇬||3,402.92||3,051.06||-10.3%|
|Bursa Malaysia KLCI (Malaysia) 🇲🇾||1,796.81||1,683.82||-6.3%|
|Jakarta Composite Index (Indonesia) 🇮🇩||6,355.65||6,163.60||-3.0%|
|SET Index (Thailand) 🇹🇭||1,753.71||1,591.29||-9.3%|
|CSI 300 (China) 🇨🇳||4,030.86||3,038.20||-24.6%|
|Hang Seng (Hong Kong) 🇭🇰||29,919.15||25,651.38||-14.3%|
|Nikkei 225 (Japan) 🇯🇵||22,764.94||20,166.19||-11.4%|
|KOSPI (South Korea) 🇰🇷||2,467.49||2,055.01||-16.7%|
|Nifty 50 (India) 🇮🇳||10,530.70||10,663.50||1.3%|
|ASX 200 (Australia) 🇦🇺||6,065.13||5,493.80||-9.4%|
|Dow Jones (U.S.) 🇺🇸||24,719.22||22,445.37||-9.2%|
|S&P 500 (U.S.) 🇺🇸||2,673.61||2,416.62||-9.6%|
Likewise, looking at my portfolio now would show many of my stocks in the red. To be honest, it triggers a bit of emotion when I look at my positions. Then again, this is not the first time I’ve experienced this — the same thing happened during the euro debt crisis, the oil price crisis, and the China stock market crash.
Like the saying goes: ‘Tough times don’t last, tough people do.’ Eventually the stock market will recover but no one knows when. So instead of trying to predict when the stock market will turn around, I’d rather reflect about my investing for the year and learn from my mistakes to become a better investor.
So here are four personal lessons I learned from investing in 2018 — which I hope will serve as new insights or as important reminders for the year to come:
As an investor, finding a new investible stock is like striking the lottery which, for me, comes with an addictive feeling of euphoria. Sometimes, this ‘addiction’ will cloak my judgement and I end up buying every new investible stock I find before realising that I’ve over-invested. When I realise that I have too many stocks, I start trimming my portfolio down to the number of stocks I initially planned to own.
While having too many great stocks to own can be a ‘good problem’ to have, I prefer to focus on the 15 best stocks for my portfolio. So in order not to get carried away, I now ask myself this question whenever I find a new idea: ‘Is this new stock a better investment than one I already have in my portfolio?’
The question may be simple, but it forces me to think deeply about the stocks I own and the ones I could potentially own. To maintain the number of stocks I wish to focus on in my portfolio, I have to make sure that a new stock is better than an existing one.
I often notice that companies that earn non-recurring revenue or are cyclical in nature tend to trigger my doubts during times of crisis. On the other hand, companies with stable, recurring revenues are the ones I feel safe holding onto even during the worst recessions because I’m confident that the probability for their recovery is high.
My business partner Kenji recently pointed out an interesting insight about Berkshire Hathaway’s investment portfolio which I decided to look into — I realised that 80.7% of Berkshire’s portfolio is concentrated in four sectors: banking, technology, food, and payment processing. Companies in these four sectors generally provide products and services that consumers have to use on a daily basis — which provides recurring income. Only 7.9% of the portfolio is invested in companies with non-recurring revenue. So if the Oracle of Omaha likes investing in recurring businesses, I don’t see why I should argue with him!
Before I explain this point, I have to admit that I am guilty of this mistake at times. As much as I know we should ‘sell your losers and keep your winners’, I do have my moments of weakness when I hesitate to click the sell button.
For instance, my investment in the bulk shipping industry has not only cost me money, but also a huge amount of time I spent doing research on understanding the industry. The bulk shipping industry suffers from an oversupply of ships which I thought would subside as the scrap rate for old ships increased. But I learned the hard way that supply can be pumped into the industry anytime with private equity players investing in new ships which dragged out any potential turnaround. Unlike the property industry in Singapore where the government can intervene and reduce supply, no one has such control in the global bulk shipping industry.
To be honest, I was slow in waking up to the fact but it’s a mistake I won’t forget anytime soon. As the markets started to fall at the end of the year, value for several high-quality stocks started to emerge. I had to remind myself that instead of staying on a sinking ship (pun intended), I needed to cut my losses and redeploy my capital in places where it could earn a higher return. In the end, I sold my losers and I’m glad I did.
I particularly like the story of Noah’s Ark where Noah spends years building an ark preparing for the biblical flood to come. With that story in mind, my team and I have spent the past few years building our watchlist (ark) in preparation for a crisis (flood). As the markets came down this year-end, we jumped onto our watchlist and started deploying our capital in stocks that had become significantly undervalued.
There’s a quote that says: ‘Investing is nine years of hard work and one year of action.’ What this means is that you should always be busy doing your research to build a watchlist of potential investment ideas, so when the flood hits you are ready to take advantage of any opportunities that arise. If you’re only building your ark while ankle deep in water, you may miss out on a great investment because the window of opportunity may be small and fleeting.
All the best for your investing in 2019!