At the end of 2017, I put to pencil my investment philosophy.

Essentially, I consider myself a contrarian value investor, who seeks to find investment opportunities in firms with strong fundamentals (strong gross margins, net positive returns on invested capital above cost of capital) that are shareholder friendly and have excellent operational efficiency, which for whatever reasons, either macro or micro, land into  trouble, producing a negative ongoing sentiment, and a down trending price movement.

My intention is to buy these firms, selling at a cheap price relative to their intrinsic value and hold for a duration of atleast one year post purchase. Depending on how strongly I am convinced on a possible turn around, I continue to dollar cost average down, until reaching my max per stock exposure of 15 % of net-portfolio.

Given that its been about 5 years since I started following the above strategy (I started investing using these principles about 2 years prior to me putting them down in writing), I feel its good time to review my performance on per stock basis so as to figure out what has worked and what has not.

The table below summarizes the stocks that I purchased and sold over the last 5 years. The table lists, average cost of purchase, the sale price, current market price and the 5yr compounded average revenue growth rate for each of these firms.

For simplicity of present analysis, I do not list the stocks that I am still actively holding in my portfolio, except for the stocks that I held in the past and liquidated completely before initiating a fresh new position.

I have divided the stocks in 3 buckets– Multi-baggers, Winners, and Lossers– based on foregone gains (losses).

Some observations to be drawn from the table

• The distribution of multi-baggers (had I held onto the stocks), winners and the lossers is surprisingly quite even, 5 multi-baggers, 5 winners and 6 losers.
• Of the 5  multi-baggers, I managed to pull through (barely) with realized gains of >100 % only for one of the stocks.  As I noted in my post from couple of weeks back, I struggle with letting winners run and it has cost me dearly
• All of my multi-bagger positions were a classic contrarian play, buying into stocks when the stock was struggling and the narrative around the stock was quite bearish… ecoli with CMG, loss of USPS contract with STMP, single product wonder AAPL, and stagnant software services business with MSFT.
• The 5Y- EBIT compound average growth rate for all multi-baggers, except for CMG has been strongly positive. CMG saw a massive draw down in earnings for several quarters after the ecoli crisis, pulling the CAGR into the negative region. However, with Bill Ackman’s activist position and the changes in the C-suite, has produced a massive turnaround story for CMG in the last year or so.
• My winners have been a mixed bag! I have no idea why I sold out of BRK-B when I did.. BRK-B for me has always been an index-play, a bet on the US of A. There never was a contrarian story for me with BRK-B, and I never saw it producing outsized gains.. Yet, as can be seen from above, it has almost become a multi-bagger from the time I first purchased BRK-B.
• CVS and FIT turned out to be massive duds.. value traps! I seriously started accumulating CVS after the news broke out that AMZN is entering pharmacy business. I knew breaking into a regulated industry such as pharmacy and health-insurance was never going to be easy! Furthermore, I thought the purchase of Atena would have produced  vertically integrated synergy resulting in a healthcare behemoth that buys pharmaceuticals through its Pharmacy Benefit Management business, insures patients through Aetna, and dispenses drugs and provides treatment at its drugstores and MinuteClinics. It was a no brainer.. Unfortunately for me, I bought into CVS too early and as a result, suffered through a long wait for the stock to break even! I eventually got out of CVS locking in about 9 % gains.. Thus far it seems to have been a wise move.
• I was one of the first buyers of the Pebble smart watch and I simply loved the watch. So, when I learned of the news that Fitbit was buying Pebble in a bid to enter the smart watch business I was intrigued. By the time my interest was piqued, the stock had suffered a massive draw down. For me the thinking went, if only Fitbit could integrate Pebble into their eco-systems, they would produce a killer product and it was only a matter of time when they would come to dominate the wearables sector!!! Alas I was completely wrong.. AAPL came from behind and to Fitbits chagrin, just conqured the wearable segment. Fitbit stock struggled to gain grounds.. and I was stuck with a bag holder for a very long time. Finally when the news broke that Google was going to purchase Fitbit, I saw an exit. Holding Fitbit for an upwards of 3 years, I had 10% returns for a annualized gains of mere 3 %
• DISCA was an interesting purchase for me. I first read about the legendary John Malone in the Outsiders and then heard him give an interview on CNBC and learned of his Liberty media holdings and Discovery stake. The timing was fortuitous in that Discovery was struggling due to the concerns that millenials will unbundle cable in droves, droping traditional cable subscription, the bread and butter of Discovery properties such as the HGTV, Discovery channel and Animal Planets. The stock was trading at value-multiples and I loaded it up. As I am writing this, I realize that my sale of BRK-B was to fund the purchase of Discovery stocks. As the stock reached $30, I sold my stake locking in gains of 63 % over a period of 3 years.
• Finally the losers bucket, which also was plentiful, comprised of stocks in struggling sectors– oil and retail! The exception being CRTO, which was the only tech small cap stock that I found selling at value-multiples..and I loaded up. The fundamentals for CRTO from all perspectives still look amazing. The stock had suffered a massive drawdown from the intelligence tracking prevention (ITP) systems put in place by APPL on its Safari browser. I loaded the stock up, after learning that the impact of the ITP blocking would not be that significant and that CRTO had over 99 % customer retention rate. I was so wrong. The headwinds from big American firms have been relentless and the stock has taken massive beatings! I simply could hold it no longer and exited out of my position was a significant realized loss.
• The story is pretty much the same for all my losers. NOV being the biggest of all, with me loosing >45 % of my investments in the span of 2 years. My purchase of NOV was based on oil sector recovery, which unfortunately never materialized.
• A common theme with most of my losers is the decline in their EBIT growth rate, with firms in a sector with secular headwinds

Below are some conclusions that I want to draw from these observations: Contrarian value seems to be a viable strategy for me and it could work wonders if only I can

• Be vary of value traps especially when it comes to investing in sectors that are suffering from secular headwinds.
• Be patient and when it comes to investing in struggling sectors, ask for a massive margin-of-safety buffer.
• Let the winners run, especially if the company exhibits EBIT growth, net positive cash flow and strong gross margins
• Be willing to double down on companies with strong cash flow and earnings growth if and when they meet my contrarian value investment criterion

Video/Book/Article/Audio for the Week

• Book: I finished reading the book, The Best Investors and their worst investments, by Michael Batnick. It was a fascinating reading the failings of some of the big wicks of yester years, from Mark Twain to John Maynard Keynes to the legendary Benjamin Graham and even Warren Buffett. Highly recommended
• Blog: Bill Miller, Lessons from the legendary value investor, fascinating read and a motivation for my blog post today. As the author Brandon Beylo notes, the 3 key things that distinguishes Bill Miller from the herd are (a) Focus on cash flow (b) disregard for investing labels and (c) buying at low inflection points. The later has always been my philosophy, the key missing ingredient for me was focus on cash flow.
• Video: Retirement Doom and Gloom, Monologue by one of my favourite macro gurus, Raul Pal. Hearing him speak, one wonders whether investing in equities at todays valuations makes any sense at all!