Hi!
My first year of investing is over. On this occasion, I would like to share with you my experiences from this period, but also from the period before I started investing, because it is also very important, maybe even more. I tried to include a lot of thoughts from this period, I hope it did not turn out too chaotic.
It has been divided into the following sections. Feel free to jump whichever interests you. If you are interested only in my portfolio summary, jump into F part.
A) My academic background
B) Digging into stocks
C) Going into the market
D) Going into Tech
E) My risk management approach
F) Portfolio 1-year results
Summary
Enjoy :)
A) My academic background
My investment journey started in October 2018. But with no money at all. I was just starting my third year of bachelor's degree (Finance and Accounting) and decided that university was not enough - I started thinking about joining a science club. Only two were active enough to consider - one related to accounting and one to capital investments. I rejected the accounting right away, because after two years of studying it seemed terribly boring (still seems to be). My friend was in the second one, so I decided to give it a try, even though my investment knowledge was limited only to the class.
The very first meeting made a huge impression on me. The difference in the level of knowledge provided to me compared to ordinary classes was enormous. I think the PE and VC characteristics were at the workshop. I didn't know anything about them, but the most active members were like walking encyclopedias which impressed me a lot. I eagerly waited for the next weekly meetings to further expand my investment knowledge. Weeks passed and I was hooked for good.
However, the thematic scope was still very wide. I parted ways with the science club at the end of my bachelor's degree and moved to a master's degree in a different, bigger city. Immediately started working full-time (although unfortunately not in investments yet), and in combination with full-time studies, there was less time to explore investment knowledge after work.
And then the pandemic crash came.
B) Digging into stocks
I immediately thought "it's finally getting cheap, I have to do something about it". There were quite a few theoretical aspects to this field in the science club, and I still didn't feel competent enough to start investing in stocks. I figured that the best way to change it would be reading some smart books on the subject. Graham, Fisher, Marks, Damodaran - I took them all to the workshop in about 2 months. My knowledge was sufficient to understand almost everything from them, but I took all the lessons very literally: "Since the March crash, the actions started to return very quickly, and all the previous crashes lasted much longer. No, I don't believe it, it must be a dead cat bounce, I won’t fall for it" (pls admit how many of you said the same). So I was saving money and waiting.
And I started to create my first watchlist (which I still rely on, albeit in a changed form). How was it looking? Like that:
They are all so cheap, isn’t that wonderful? God, I am so happy that I didn’t buy anything that time.
However, I am glad that from the beginning I attached great importance to financial fortitude.
But it wasn’t enough. I just felt it’s too simple. In the following months, I tried to distinguish the most important indicators and organize them in a hierarchy. And I was looking for more companies. Finally, there is an excel file called PORTF2 that replaces the previous watchlist.
It looks much better, right? Eventually, VEEV and ADBE landed in my portfolio and are still there today. As you can see, the most important matter that time was Sharpe Ratio, so relation between return and standard deviation. Many backtests have been made there. Still no buy.
It was somehow in the summer, the markets continued to grow like crazy. And it wasn’t feel right at all. It has never happened before after such a crash! There was so much talk that Trump would not allow another crash until the end of his term in November. It makes sense, doesn't it? How is it possible other way? It has to be the case, so I will wait for declines in November and finally enter the market. Yea…
Fortunately, I was still diligently looking for other companies, so in the end I didn't have to insist on one choice or another (All in all, this is an idea that guides me to this day - if business can't handle it, I am replacing it with the next one).
To be clear, all these ideas did not come out of nowhere, but were the result of various information, people, blogs that I discovered in turn. It was the same with the investment journal which I decided to start on September 6 in my notebook. I noted that from the beginning of the pandemic, there were almost a hundred companies on my watchlist (which means that I have at least briefly familiarized myself with the company's business model, and above all with its finances). I also noted that I initially focused on undervalued stocks, then focused especially on dividends, and finally turned my attention to healthy growth businesses with low debt and low volatility.
And so it started.
C) Going into the market
The long-awaited elections came and the markets did not budge. It was too much, I must finally begin. Finally, on November 11, I bought my first company - Vertex Pharmaceuticals (VRTX). PORTF3 has been born. I don't want to dwell on every purchase now, but I will try to briefly explain the evolution of my picks.
As I said, at the beginning I was focused on combination of growth, low debt and low volatility. However right after my first purchases I decided to give up low volatility. By acquiring knowledge from other sources, I understood that innovation usually comes with high volatility, so I have to embrace it, if I want to invest successfully in innovation.
However, I was still afraid to enter the technology sector as the valuations were astronomical for me at the time.
At that time, I was applying for a position in an equity research company. I was asked if Tesla was a bubble. I replied that they had already played a role in bringing electric cars to the market, and I believe that their valuation is too high. Oh, how uneducated I was about this...
Shortly after that, I spoke to a friend who had recently started working as an equity analyst and came down about my approach to investing. A name was given on his part - ARK Invest. I said this is the first time I have heard of them. "Lol, I thought you took that emphasis on innovation from Cathie Wood." "Well, I just figured it out myself." And I immediately educated myself on the topic of Tesla. Such a pity that the timing was so poor, but better late than never, right?
D) Going into Tech
ARK changed a lot. Most of their positions I still find dubious, which makes them in my head the most popular venture capital fund on the planet (where many of them have grown like crazy in the last year).
But their philosophy of thematic investing, identifying megatrends - that was it.
Cathie's style was still too aggressive, so I tried to strike a balance between what I have represented so far and what I want to take from her. I picked growth giants - Adobe, ASML, NVIDIA - all acquired within a month. In this way, the core of my portfolio has been created - quality growth.
And finally, this summer I’ve discovered Fintwit, where I realized that management is way more important than I thought. I am really grateful to all of these fantastic people there. I can feel a real community.
Only in recent months have I started betting on slightly more risky projects as well - Redwire, BICO Group, IONQ, Ginkgo Bioworks. Why? Because the risk-reward asymmetry is too high to pass by indifferently. So now a few words about my risk management.
E) My risk management approach
The conviction list. The most reliable picks have the highest share in the portfolio (cost basis), the riskier ones are at the bottom of the table. Creating such a list is really a lot to think about, and it often makes you realize that you don't really need the least convinced picks.
Cut losers quickly. Don't convince yourself that your loser will quickly come back break even if the declines were indeed justified by a change in the company's story (luckily, I just wrote my master's thesis on behavioral economics and so far I've managed to avoid at least some biases).
Let your winners grow. Don’t trim your winners only because they stock went too high and you think it’s too overvalued. What will you do with these funds released? Allocate to the next loser? Your winner deserves to be a bigger part of your portfolio. Just worry about your cost basis and let your winners win more. Feed winners, not losers.
In my opinion, this is the key point why so many individual investors are losing out to the market. All you have to do is find one true multi-year winner who will more than make up for all the other miserable choices.
So you ask: when to sell? When the company's business image changes so that you no longer believe it will be able to make sufficient returns. Or when you think you will use that capital better. But with the latter, I would advise you to think twice, if you are just not getting rid of the winner for a new idea.
Understand the main risk with opening this position. It may sound a bit strange, but in my opinion, you don't need to know the business inside out to be a successful investor. The only key is to understand the risks. Of course, you cannot be Mark Minervini and not know what the company does. You still need to spend at least a few hours to understand the potential and key risks of a given investment. However, I don't feel that you have to bend over every little detail. Understand whether your choice may expose you to 30% drops in times of crisis, or maybe 70%. And weigh the risk properly. Eventually, another hedge against such risks is enough diversification. In my case 20 picks should be max.
Don’t fight the trend. Statistically, the longer the trend continues, the more likely it is to continue. Betting on its reversal, predicting a crash, is playing roulette. People cannot predict the future. Everything is just a matter of probability.
F) Portfolio 1-year results
Finally, the first year of my portfolio is over. I am very pleased, not only with the return (22%), but especially with the lessons that I learned during this period. Without further ado, I am going to present you some stuff with the short description.
1) Performance chart vs S&P 500 vs MSCI World (S&P returns are so high there, because I my portfolio is in PLN, not USD)
2) Monthly returns and monthly returns vs S&P 500
3) Open positions returns
4) Closed positions returns (short comment there: clearly, I didn’t do enough DD with most of those picks and invested in present, not the future)
5) Current holdings
6) Current holdings P/L, sorted by current allocation (green = profit, red = loss)
7) Current holdings by Market Cap (divided into: big cap, medium cap and small cap) - Days in my portfolio, Market Cap in USD and Return with graphics in the end
8) Holdings Market Cap divisions
9) Portfolio by Theme, Country and Currency
Summary
I never know how to write endings. I don't want to sound like some smeghead who has been investing for a year and spewing great wisdom. Let me just say that I am very pleased with the course of this year. For such a short period of time, I really learned a lot. I am optimistic about entering year two, ready for the next lessons :)
I have included many different thoughts there, but I am aware that still not everything may be clear. Feel free to reach me on Twitter on Commonstock.