Time for a Public Portfolio Update (Note: typed from an iPad)
The strategy is largely buy-and-hold, with some leverage applied on the merger arb. I occasionally use option writing.
The guiding principles behind this portfolio draw heavily from the value investing frameworks I learned at Ivey, alongside insights from reading annual reports, books, and other seasoned investors’ reflections.
In this update, I’ll reflect on two key areas: 1. Results, 2. Mistakes
1. Results:
The portfolio has less than 20 names (probably too many), it remains far more concentrated compared to typical retail funds: the top 5 positions comprise 72% of the portfolio. Coming from a private investing background, I’m more than comfortable running a concentrated portfolio like this.
Performance is measured against SPY (S&P 500 ETF), EFA (MSCI EAFE ETF), and VT (Vanguard Total World Stock ETF). As observed, I tend to underperform when general markets are surging and outperform during market sell-offs—an outcome reflective of the value investing philosophy. Value investing inherently assumes that markets often become overly optimistic at peaks and overly pessimistic during troughs.
2. Mistakes:
Overall, the portfolio has outperformed its benchmarks despite numerous errors along the way. Investing, after all, is a skill that requires constant learning and refinement. Thankfully, the value investing philosophy incorporates a margin of safety, which has helped cushion my mistakes. Below, I outline some key missteps, with the hope of minimizing their recurrence in future decision-making:
2.1 Overindulgence in the Casino-Like Nature of Derivatives
In 2021, and 2022, I dabbled in Eurodollar future & future options, they were indeed interesting instruments to manage one’s interest rate risk. I was carried away by the possibility of using it to express a view on interest rates. In hindsight, I was not investing when using them, but to buy time wagers to speculate.
2.2 Buying Good Businesses at the Peak of the Cycle
This is the exact flip side of what generates extraordinary returns. I fell into this trap with RGR in 2021, where I used recent earnings to assess valuation without considering the cyclicality of the business. If held indefinitely, the returns will naturally revert to the business’s fundamental performance. However, in the short-to-medium term, overpaying during a cyclical peak significantly hampers returns.
2.3 Selling / Trimming Positions Despite the Theses Remaining Intact
Yep, I bought several high-quality businesses that were sold off at the trough of the cycle aggressively (FFH, Tapestry, Photon control, Costco), the accumulated gains just kept nudging my “loss aversion” bias, luring me into trimming or exiting; I then sat still to suck thumbs for the whole time watching the theses continues to play out…..
It was challenging to identify these opportunities correctly AND build sizable positions; I got lucky on these names on both fronts but the human bias cut the winnings short.
2.4 Failing to Reassess Odds with New Information
In early 2024, I built a position in Capri as a merger arb. Back then, the payoff looks fair at $45 (downside $10 vs. Upside $12). I had a valuation model built on Capri in 2021 resulting similar intrinsic value level to Tapestry’s offering price. So I thought the worst case would be buying Capri at a ~20% discount to EPV without looking into the business again.
However, as events unfolded, two consecutive earnings reports in May and August 2024 revealed deteriorating fundamentals at Capri. I failed to update my valuation and credit analysis. These key warning signs should have prompted a reassessment of downside risks, which would have invalidated the original risk-reward odds and justified exiting the position earlier.
By November, it became clear that Capri faced potential credit downgrades, covenant breaches, and even shareholder dilution through capital raises or restructuring in a worst-case scenario. Time is no longer on my side to hold on to the position post the judge’s unfavorable ruling on the merger.
Final thoughts
Human biases, such as emotional bias, loss aversion, anchoring, the illusion of control, and the gambler’s fallacy, played a significant role in the missteps outlined above. By documenting these instances, I aim to turn these reflections into an opportunity to improve and refine my investment decision-making process moving forward.
