STEP stands for (S)imple, (T)olerable, (E)nduring and (P)assive.

Before I dig deep into my revised investment philosophy and the changes in AVI portfolio that it has entailed, lets take a look back into the 3-years of investing life that was guided by my prior investment philosophy, which I put to pen in late 2017.

For folks who have been following my investment journey and this blog, you may be aware that I described myself as a contrarian value investor and I put to pen my investment philosophy in a blog article circa ~2017.  Being a contrarian investor, I looked for investment in businesses with strong financial history coupled with some form of near-term bad news, which usually leads to near term stock price distortion relative to the underlying intrinsic value of the stock.

Some examples of my successful trades  following this strategy in the pre-pandemic era were, Chipotle (ticker: CMG)– purchased after the e-coli scare, Discovery (ticker: DISCA)– purchased after the perceived scare of cord cutting; Disney (ticker: DIS)–purchased after the ESPN subscription drop,  Apple (ticker: APPL)–purchased after perceived saturation of the market for smart phones, Stamps.com (ticker: STMP) — purchased after the scare of contract cancellation with USPS, its biggest customer, in lieu of increase in the pool of diverse customers to serve and finally, Pacific Gas and Utility (PG&E)– after it came out of bankruptcy and then suffered another scare with fires in California.

Following the same strategy, some of my dud investments were: Criteo (ticker: CRTO)– purchased after the google policy on cookie integration produced a perceived threat to the business model; CVS (ticker CVS)– after the perceived threat to its business model after Amazon decided to enter the prescription drug market; National Oil Varco (ticker: NOV)– oil glut resulting from the fracking boom in the US in 2014 and OPEC decision to not restraint oil supply; Boeing (ticker: BA)– 737 max grounding resulting from 346 deaths from two crashes, Lion Air Flight 610 and Ethiopian Airlines Flight and Graftech (ticker: EAF)– producer of graphite electrodes used in steel production tanking as a result of secondary block trade by its majority share holder.

A common theme running across these trades– in general stocks with growth prospects recovered from their near term woes, where as stocks with stable business but fairly unclear growth prospects veered into the value trap territory. 

Yet another consequence of my style of investing, especially painful since 2015 was the error of omission! I missed out on the big revolution happening in the technology sector that took stocks such as NVIDIA (ticker: NVDA) and AMD to stratosphere, not to mention the relentless growth in the valuation for the so-called FANG stocks (Facebook, Amazon, Netflix and Google). My focus on contrarian value also produced a blind-spot towards the crpyto assets such as Bitcoin and Ethereum, that just passed me by!

The COVID-19 pandemic of 2020 offered a once-in-generation opportunity to go big on my style of investing! As the world ground to halt, stocks in oil, retail, banking and travel sector collapsed. Even firms such as Berkshire-Hathaway was on sale below Buffet-put trade of 1.2 times book. I doubled down on a subset of distress sector assets, in particular, banks, with investment in Goldman Sachs (ticker: GS); Bank of America (ticker: BAC); JP Morgan (ticker: JPM) and Wells Fargo (ticker: WFC). I also bought a boat-load of Berkshire-Hathaway stocks (ticker: BRK-B). The result, in the past-one year, my active portfolio in non-retirement account produced an annualized return of 81.4 % as opposed to 64.63 % return for the S&P 500 index, and the active portfolio in retirement account also trounced S&P500 for the year!

Interestingly, over the first 3-year period that I am actively managing AVI portfolio, my active portfolio has handily beat S&P 500 index!

While these returns look good, could I have done better?

A few more errors of omission that I can cite during the pandemic era, I had a blind-spot to the so-called in-home stocks, such as Zoom (ticker: ZM) and growth-momentum stocks such as Tesla (ticker: TSLA).  On the other hand, some stocks that I did not have the courage to hold on during pandemic were, L-Brands (ticker: LB); Fiat-Chrysler (ticker: STLA); Newell Brand (ticker: NWL), BGS Foods (ticker: B&G), CVS (ticker: CVS) and Criteo (ticker: CTRO). All of these stocks have since surpassed my purchase price and then some!

Talking of passive portion of my investment portfolio, in the midst of pandemic, my passive investment strategy also evolved. Macro fears for inflation and the end of the bull-run for the bond market resulting from the generous fiscal and monetary policy caused me to revise my passive investment strategy. I went heavy on gold and reduced my exposure to long-term bond US treasury!

We stand in a market environment today where markets have completely recovered from COVID-19 bottom and then some. It seems the markets are hitting new highs every-day! FOMO is live and well (to name a few,  $100 Million Deli joint in New Jersey, Dogecoin, meme stock rally, and digital art selling for eye-popping numbers)  and I am finding it increasingly difficult to find investment opportunities to make money work! As such, I find myself sitting on some what uncomfortable levels of cash.

To summarize, a few observations of things that have been drag on my investment performance from my investing experience as described above, which for the most part all happened in the 3 year time period since I put to pen my investment style and philosophy:

1. Value trap is a biggest risk to my style of investing.
2. My style of investing is very much a timing based strategy.
3. I tend to sit on uncomfortable levels of cash for long-time periods.
4. I find it very difficult to hold onto my long-term hold strategy, especially when investing in stocks that meet my contrarian value style but otherwise suffer from weak to no growth prospects.
5. In the present macro environment, I find myself making active decisions on passive strategy as well.
6. I find it very difficult to buy into stocks with massive growth potential and trading at fair or some-what premium valuations.
7. My active investment portfolio is not generating enough of a passive income for AVI family to truly enjoy financial independence life-style

In search for a investment approach more suitable to my ultimate goal of financial independence and to avoid some of the pitfalls of of my style of investing,  I have landed on what I refer to as the STEP [(S)imple, (T)olerable, (E)nduring and (P)assive] investment philosophy.

Lets look into what STEP entails and how it is leading to an evolution in the type of assets I want to accumulate

1. Simple:

Charlie Munger has said “Take a simple idea and take it seriously”. Mohnish Pabrai draws inspiration from this quote and he has said, “…. usually the fanaticism and intensity around a simple idea that gets you to the promised land”. Some other quotes from famous investors around the idea of simplicity in investing are: Seth Klarman– “If you don’t quickly comprehend what a company is doing, then management probably doesn’t either”; Peter Lynch — “I want a company that’s simple. They don’t have to make seven brilliant decisions every six months to keep going”; Charlie Munger– “You don’t have to hire out your thinking if you keep it simple.”

The essence of simplicity that I want to pursue in my investments is best put forth by Bruce Berkowitz — “Your thesis should be on the back of a postcard if it’s right”. I only want to focus my energy and time into studying businesses that are simple to understand and those that I can explain to my 10-year old son. Looking back into my past investments, CRTO would never have been a investment for me when viewed through the lens of simplicity!

2. Tolerable:

I want to focus on investing in assets that are durable! In other words I want to own assets that I will have no desire to panic sell when markets turn sour and negative tide pulls down asset prices for my investments significantly. The assets I would want to invest in may not turn heads in a cocktail party and neither would they impress any of my friends or show my investing acumen! However, I want to be rest assured that investments that I make are investments that with high odds will have the ability to produce consistent, stable and hopefully positive returns in all market environments. Case in point, looking back into my past investments, what above means, I would never invest in firms such as Newell brands or Macy’s.

3. Enduring (or Long-Term):

I came across a very nice concept from project management literature, “you can have it good, cheap or fast. Pick any two”. What this means; good and cheap wont be fast; good and fast wont be cheap and fast and cheap wont be good. My old style of investing followed the mantra of good and cheap at the expense of fast! I was never willing to pay up for solid businesses such as Amazon or Shopify, although their business moat and growth potential was obvious to me all along. 

I want to pursue an enduring investment strategy that encompasses “Good” as the core tenet! That means, I should be willing to pay up (up to a reasonable valuation multiple) for assets that are “good and fast”, with huge growth trajectory for a foreseable future as well as bargain hunt for firms that are “good and cheap”, and are offered from time-to-time at a discount by the market. I want to at all cost avoid “fast and cheap” investments.  I want to invest only in firms that I can foresee holding for the long-haul, ideally holding for ever and at minimum have a holding period of atleast three years!

4. Passive:

My pursuit of wealth is driven by the desire to own my own time! Financial independence is paramount to my well-being and I believe one way to achieve financial independence is to not have to work for money! One way to achieve this objective is through passive income! I want my investments to encompass a subset of income producing assets, which means, I want to own atleast a few stocks of dividend growth firms. Closed end funds (CEFs), Utility stocks and stocks in Master Limited Partnerships (MLPs) are but some examples of investment opportunities that I want to exposure to in my investment portfolio. I will continue investing in income producing assets until the income generated through dividends and re-investments can cover AVI family annual ex-mortgage living expense.

In one of the follow up posts I will go over changes that I have made in my investment portfolio to abide by the STEP investment philosophy that I have outlined above.

Video/Book/Article/Audios for this blog post

• Book: Incase you havent already heard, William Green is out with his most anticipated investment book, titled, Richer, Wiser, Happier, How the worlds greatest investors win in markets and life. A must read for all investing afficianados, you may just as well pick nuggets of life lessons worth cherishing for life
• Podcast: William Green has been on several of my popular podcasts. Its refreshing to hear him speak about his experience speaking with the worlds greatest investors, his approach to interviewing and how his view on life has evolved since. Have a look at: Acquirers Podcast, Cappuccino and Conversation with Guy Spier, the investor podcast