A Financial Year in Review
With my 3rd financial year investing coming to an end I wanted to take a look back and review my year, my performance and more importantly my strengths and weaknesses. Due to having multiple portfolios and constant irregular inflows and outflows of capital I don’t track my specific performance so this will be a more general look. The first half of the year up until December I had my best period of performance in my history. This was due to a combination of favourable financial conditions (long illiquid small cap value with a large short portfolio as stocks collapsed) combined with leveraged, poor risk management that naturally lead to outperformance on the upside (while it was working). I basically gave these entire returns (and a bit more) back in January as we had a short squeeze the magnitude of which has not been seen since Feb 2021. While I was always going to underperform during this period, poor risk management combined with lack of awareness (I was on holidays at the time) led to a big underperformance and I reviewed my strategy and adjusted. I have made it back in the following months and ended the year strong with high concentration in Match.com and Ossia International which have both performed very well recently. I’m proud of my performance this year and while I still have lots to work on I feel as if I’m starting to see the fruits of my labour. My performance in the last 3 months has been especially solid considering many long/short portfolios significantly underperformed during this period.
Making and Breaking Rules
I came into the year with a fairly strict set of risk management rules that I have steadily expanded upon throughout the year. These rules were around areas such as position sizing, leverage, circle of competence, geography and trading. This was especially important on the short side and contributed significantly to the solid performance of my short book post January (including holding up well during the recent May market rally). Frequent readers of mine will know that a core rule is around concentration, refusing to take bets larger than 15% of my capital while newer followers will be confused as I recently made Ossia International into a >50% position. There are a few reasons for this: My current capital base is pretty much equal to my current annual disposable income, so I can afford to take significantly outsized risks while my capital base is low. The rules I’ve set are for running my portfolio with an optimum level of risk management, which is something I don’t feel the need to worry about at the moment. This is essentially a “free hit” for me that could significantly benefit me if it works out while not impacting my quality of life if it doesn’t. Furthermore, Ossia presents a unique opportunity that I believe is worth breaking the rules for with both significantly higher upside and lower downside than any ideas I’ve seen in my entire time investing so far. As my capital scales up and the value in this idea is realised (hopefully) I will diversify and go back to following my rules.
One feature of this year has been writing about my ideas and investing thoughts. I’ve greatly enjoyed this as it’s allowed me to focus my thoughts and work on improving my stock picking and general thinking around investing. I’m proud of the articles I’ve written and hope I’ve brought some sort of value to you readers. As far as tangible value, I looked at the returns following my various writeups and put them in a table below. While it’s still very short term and mostly noise I think the performance has been solid. The only major mistake was the initial Hasbro buy call, which I realised my mistake with and reversed 4 months later. I’ve also had a few notable wins with Ossia International and Nuvve both being high conviction picks that have performed very well. I’m excited to continue sharing ideas and to see how these age over the longer term.
Strengths and Weaknesses
My first strength is just turning over rocks. I really enjoy researching new companies and have a lot of fun spending large amounts of time going through screeners of obscure companies. It is this searching that has led me to companies like Nuvve, Hello Group and Ossia which have performed very well for me.
Another strength is knowing what I know and sticking to a circle of competence. I’ve done a good job this year at not trying to chase ideas in areas I lack understanding in (such as commodities). Furthermore, many of my better ideas have been from within areas I understand well such as hospitality, social media and technology.
I also think I’m good at understanding my portfolio, especially from a risk management perspective. Due to the nature of the last few years I’ve become hyper aware of the downside and am generally more conservative regarding outlook and margin of safety.
Finally, I think I’m very good at taking criticism and am very self reflective, which has helped me stay mentally flexible. I’m always quite actively looking to improve and willing to change my mind with new information or perspectives (such as Vmoto, Nvidia Short and Ibex). I believe that this mindset will only help my investing in the long run and potentially even gives me an edge in a market full of people with strongly held beliefs.
On the flipside of one of my strengths, I worry that my general cynicism and bearishness will punish me long term in a market that rewards optimism. I still don’t really have a framework for investing in quality compounders or growth companies and I think a lot of that is just lack of experience along with ptsd from investing through 2020-2022.
Furthermore, a key blind spot I continue to have is around management. I definitely feel like I lack a framework to understand and assess management teams. I suspect that much of that will improve over time as I watch various theses play out however currently I mostly ignore analysing management teams when making a stock pick other than at the extremes.
Finally, I already feel like my analysis is often a bit surface level, however this is only going to get worse going forward as I transition to full time work. I’m lucky that my largest two positions are companies that I feel like I have a legitimate informational edge, and companies that I intend to hold long term. Other than them I have very little conviction, and really struggle to research companies and industries to an extent that will give me that conviction. This will only get worse as I reduce the amount of time I spend turning over rocks in the future.
Despite investing 2020, 2021 and 2022, the current macro outlook is the least certain I’ve ever been. My portfolio is positioned as such with a lot of exposure to fairly uncorrelated ideas plus mostly beta-neutral long short. The main area of concentration is around emerging markets value which is quantitatively very cheap. At the time of writing I have around 60% of my portfolio in Ossia International, which essentially makes me uncorrelated to the market. My second largest position is MTCH which makes up around a 10% position. The high beta of Match is offset by my long short portfolio which contains a broad variety of quant short positions with a few reasonably priced, growth longs such as INMD, MELI and MITK along with some broad market exposure through etfs. Finally, at the time of writing I’m in the process of building out a few Japanese positions that I hope to take to around 10-20% of my portfolio as well as I believe the Japanese thesis is very solid. Overall I don’t think there’s many easy longs out there currently, however I also don’t believe the market to be egregiously overvalued like 2020-21 (with the exception of a few outliers like Nvidia and Apple). We’re kind of in Schrodinger's recession at the moment, with many valid arguments and evidence for both the bull and bear cases in my opinion. I think anyone with high conviction opinions on what will happen going forward must be either the smartest person in the market or a fool.