In one of the very first articles for the year, I did a pre-mortem analysis on my investment portfolio. The very first question I tackled was,

What will I do and how will I feel if stocks reverse from these levels and fall 10%, 20% or 30%?

I presented data supporting the evidence that >30 % drawdown event was very unlikely. I had no premonition of the impending pandemic and the ensuing market collapse resulting in the fastest market decline >20 % ever. We hit rock bottom for the year on S&P 500 (I call the market), on Mar 23rd, when the index closed at 2237.4, a decline of ~33 % from the peak reached on Feb 19th.

My pre-mortem analysis based response for the above question was, look to gobble up stocks of stable growing companies that are currently trading at a premium.

As markets cratered and crossed the 10 % drawdown threshold, I began purchasing/adding to my stock portfolio. The first bucket of stocks I purchased were reported in my blog entry dated Mar 2nd. In the hindsight, the purchases that I made in the very early phase of the market draw down were all mistakes. As of this writing, I am still in the red on these early purchases, even though the markets have pretty much rebounded to pre-pandemic levels.

What led me to act so early on in the market drawdown phase? and why did I pick the stocks that I picked? Pre-mortem analysis is my answer to the first question. I relied on the historical odds that a drawdown of >30 % is very unlikely. Furthermore the speed of the drawdown was uncharted territory. Result, my timing was quite a bit off! The answer to the later question, my style of investing, contrarian value. I knew airlines will get hit and so would any firm that makes planes! My rationale, this is an obvious first level thinking!

In the depth of the crisis, I penned another blog entry, titled What to do!. That entry was in part my response to figuring out how to react to the low odds, tail event we had witnessed! The key insight for me was be accepting of the sunk cost and under no circumstance sell my equity assets at wrong time. 

Boy, did these insights help! I did not panic, and persisted through my portfolio holdings. Not only did I not sell down stocks with massive losses, as the markets started to bounce back, I found my self again hunting for value bargains, some of them have already paid off quite handsomely, and some have dampened the mistakes of the untimely purchase I made earlier on in the market downturn!

Below is the summary of my investment activity since March 2nd.

Synposis

• While there was a lot of trading activity, most of it was in stocks I already own. I initiated only two new positions in the intervening period, INTC and JPM (more details below) and completely closed out of two positions, BGS and BAM.
• Some of purchases were made by selling assets that were my long term hold and were trading at a valuation above my confort level.
• Except for the sale of BAM, it seems, I may have bailed out much too soon on other stocks that I sold. This action is reminiscent of troubles I seem to have with holding winners for long, especially holding onto growth stocks in a momemtum driven bull market! Bill Miller’s Q2 Market Commentary is worth a read here!
• I seemed to have done dollar cost averaging in reverse, case in point my purchase of BRK.B stocks. As markets continued to tank following Mar 2nd, I kept on adding to my BRK.B holdings, in quite significant chunks. But as markets kept falling, I found myself short of dry powder, resulting in a smaller and smaller stake in high conviction holdings. Lesson learned, momentum is a real thing, in a falling/bear market, it may be prudent to initiate small positions first and mindful that momemtum will offer more opportunities for future bargains to be had.
• Given my style of investing, I tend to invest in out-of-favor sector/stocks. As such, my purchases reflect my style. I piled onto financials, airlines, utility and conglomerate. I divested out of in favor sectors, such as tech and completely missed the massive rally up in this sector!
• My holding period for investments is at minimum one year, and I am hopeful that these out of favor sectors will have their day in the sun not much into the distant future!

All the while, I have been aggressively contribution to my 401K account and as noted in my recent networth update post, I have already reached my contribution limits for the year.

Thesis for Two New Positions

JPM: JP Morgan and Chase is one of the top 4 largest US banks, led by the charismatic chairman and CEO, Jamie Dimon. Unlike WFC, which is primarily a commerical bank, JPM is a dominant player in several banking sectors including, commercial, Investment, Retail as well as asset and wealth management. The sheer scale of banking operations gives JPM an edge over the competitors. It is now the biggest American bank by market cap, $299.5 B generating the highest ttm revenue of $138.5 B and ttm ROE of 10.05 %.  The firm has produced a cash flow growth of >14 % over the trailing 3 year time period. The only other big bank with double digit cash flow growth in the last 3 years has been BAC at 13.12 %. The bank success has not gone unnoticed and relative to the other three big banks, BAC, WFC and Citi, JPM has been trading at premium valuation. JPM P/(TTM E) is 13.2, only WFC, due to its mandated constraint on growth and earning (P/(TTM E) of 30.2 is higher. The stock looks expensive relative to the traditional value metric of P/B, currently trading at 1.28 where as the other 3 banks are trading at sub 1 multiples.  I already own WFC, and given the impact COVID-19, and the interest-rate cuts and the uncertainty in the economy, bank stocks have suffered massively and so did JPM. I was looking for an investment opportunity in this sector and given the choices, I felt JPM offered the best trade-off between value and growth, not to mention, JPM has the advantage of a stellar leader in Jamie Dimon at the helm.

INTC: I added INTC to my portfolio yesterday after the stock tanked upwards of 15 % on the news that it is contemplating outsourcing chip manufacturing. The drop represents the biggest drawn down for INTC in the last 20 years. Articles with title such as Intel ‘Stunning Failure’ Heralds End of ERA for U.S. Chip Sector, is indicative to me of how bad the media and the markets consider Intel’s decision to outsource chip manufacturing. On the news AMD rode >16 %. Is Intel staring into the abyss of doom and gloom? I sure do not think so. Intel is pivoting itself towards a datacentric world and away from a PC centric world and as with any pivot story it takes time. With markets punishing the stock as badly as it has, and as the numbers bare out, INTC has become a classic contrarian value bet and I am willing to take a punt! Here are the numbers on INTC, market cap $215.2 B with a TTM revenue of $79 B (compare that to AMD with market cap of $81 B with TTM revenue of $7.2B). INTC is now trading at a P/(TTM E) multiple of 9.3 relative to a multiple of 161.4 for AMD. Returns on equity for INTC stand at 30.52 % relative to 19.6 % for AMD and the profit margin for INTC is 25.88 % relative to 9.07% for AMD. What gives? Growth! INTC renevue growth has been 12.17 % relative to 18.77 % (last quarter vs. same quarter last yr) and given the pivot, its earning growth has tanked, -19.44 % relative to 105 % for AMD (last quarter vs. same quarter last yr).  Momentum is clearly in favor of AMD and markets are willing to pay a frothy premium, for INTC not so much, hmmm!

Musing

I came across an interesting article on the performance of stock market gurus on the zeninvestor.org website. The article talks about the 6 month results for Barron’s Guru roundtable of highly skilled stock-pickers and presents detailed report of their stock picks on Jan 3rd and the subsequent performance of their portfolio’s through June 29th. I have summarized these in the chart below and have added the performance of AVI family total investment-portfolio (in red).

AVI total investment portfolio is smack in the middle of the spectrum of performance. Equity portfolio is in the lower 50 % quartile of the performance distribution. This peformance reflects my investment style/bias coupled with the fact that the market rally has pretty much been a tech driven, growth/momentum story.

For example, Mario Gabelli is a well known value investor and his portfolio produced -15.27 % return for the year too date. The best guru performer by far is James Anderson of Baillie Gifford. How did he do it? On the backs of a rally in TSLA, that have flumuxed pretty much every investor in the business. The other two big winners were Spotify and a relatively obscure Hong Kong listed stock Meituan Dianping, a name that I had come across through Mohnish Pabrai.

I am happy to be in the middle of the pack and plan to stay the course for a foreseable future.

Video/Book/Article/Audio for the Week

• Book: I have been reading quite a lot these days and lucky for me I never cease to find amazing books. Last week I started with Freedom at Midnight and this week found myself reading much different book, on motivation and success, titled Barking up the wrong tree, by Eric Barker, a fascinating read indeed!
• Podcast: Discovered a new podcast, The creative nonfiction podcast, through the example of Matthew Polly, the author of American Shaolin that Eric Barker talks about in his book.
• Blog:  Found a fascinating FI blog, modernFImily.com. Its been fun reading net worth updates, FI number and other personal finance related articles on the blog. The author has done a marvelous job at meticulously detailing their thought process and approach behind these topics. They also have an interesting running series on FIRE community guest interviews, its been fun to read about the FI journey of real-world ordinary folks!