I’m Down >30% This Year And I’m Doing One Thing Right Now

Time flies.

The last update for our Hedgehog Portfolio was in July 2021. It was almost 6 months ago. Back then, Hedgehog Portfolio was doing remarkably well.

It was up 133% YTD.

Since then, my performance went downhill. The stocks I held gave way and corrected heavily in the past few months. My gains disappeared overnight. I lost a Tesla and many things along the way. I am not sharing this to brag about my net worth but to highlight the pain of seeing money disappearing from my brokerage account. But I’m not fazed. I will explain why later.

On 18 January 2021, I reopened my brokerage account and checked out my performance since inception. From a high of >800% returns, it fell to 283% returns. From January 2019, the compounded annual growth rate works out to be around 56.46% returns.

The main detractor for my portfolio is a distillery company.

I have never shied away from admitting my mistakes, demonstrating the power of compounding through the Hedgehog Portfolio and communicating to all of you in a transparent manner.

Before we move on to my actions, let’s address one thing first.

Why Did Stocks Drop So Badly?

Inflation is very persistent and it hit a high of 7% in December which is a lot higher than the usual 2-3% inflation we had seen in the past few years. This situation is unique because demand for consumer goods/services recovered to pre-covid19 while the supply chains remain affected.

Having high inflation is bad for the economy.

This affects consumers’ demand and creates uncertainty for many businesses. To tame inflation, Federal Reserve is forced to raise interest rates causing a spike in risk-free rates which is represented by the 10-year treasury bond.

This creates downward pressure on the valuations of many companies.

While it may sound simple, some investors do not believe interest rates would solve inflation because it is a supply-chain issue that may linger longer than expected. If that’s the case, Federal Reserve might raise interest rates faster than we expect. To complicate the issue, when interest rates are raised too quickly, it may cause a recession.

As such, investors may think stocks are vulnerable to another sell-off.

I have no crystal ball to predict the future and this is an uncontrollable factor. I rather focus on my businesses and whether they would continue to grow rapidly despite our current economic environment.

This points me to one thing I’m doing.

I’m Not Waiting for the Bottom

This is the iShares Russel 2000 ETF with a ticker code of IWM.

An index composed of 2,000 small-capitalisation US equities.  

From 2008 until 2022, IWM experienced multiple drawdowns.

2009.

2011.

2015.

2020.

For investors, these drawdowns were either fantastic opportunities or nightmares. For sellers, if they sold during the dips out of fear, they would have missed on the recovery. For buyers who saw drawdowns as opportunities because they based their decisions on facts, they benefited big time.

I have been an investor for almost 10 years.

I used to think having a superior mind to dissect business models and perform valuation was the secret to achieving great results. I used to think it is easy to take advantage of stocks especially if they drop by 30%.

My time in the stock market has proven me very wrong.

When the drop really happened in your portfolio, the feeling is entirely difficult. It’s easy to become paralyzed. In reality, it is the courage to act during tough times that generates great results.

I believe great investors are made during tough periods, not easy periods. Therefore, I am not waiting for the bottom. I am going to nibble my way down as I see value in the stock market. Currently, there are many stocks that are trading 30-40% off from my valuations.

Some of you may ask, “why not wait longer, Kelvin?”

While it sounds nice to wait longer, catching the bottom is like trying to win the lottery on your first try. My experience taught me it is far more important to buy more shares without waiting for the bottom.

I see investors trying to time for the elusive bottom in March 2020 and they missed both the bottom and the bounce.

This caused them to report lower portfolio returns. I prefer to buy 5 – 10% higher than the bottom instead of not buying any shares at all. In the long term, our returns come from the fundamental performance of companies – not market timing. When we zoom out and look at the history of compounding, catching the bottom would lose its significance.

So, why am I not fazed by such a big drawdown in my performance this year?

Think in Years – Not Quarters, Weeks or Days

When it comes to seeing returns, we want this: 4 + 4 + 4 + 4 + 4 = 20

Most often, we get this: 4 + 0 + -4 + 8 + 4 + 8 = 20

That’s the data and that’s the stock market. If we cannot accept it, then the stock market is not for us.

I acknowledged my returns will NEVER be in a linear fashion. Some years, I look bad as if I lost my marbles. Some years, I look so good that I can walk in public, just wearing my underwear and feeling like Superman. At the end of the day, I’m going to look okay.  

Most of the content below is a paraphrase from Morgan Housel of Collaborative Fund. No new original content from me, but please still enjoy it nonetheless.

Let’s just use an example of Monster Beverage.

The stock grew 662x from 1985 to 2022. Life-changing returns.

Did many shareholders enjoy such a stellar return? The answer is no.

Most of us must earn our rights and deserve such returns. We need to give up steady returns and we need to pay up in terms of patience and endurance.

Looking at this chart above, I cannot count the times when Monster Beverage fell more than 30% between 1995 to 2016. We must be comfortable with periods of unknown and periods of no returns. We must pay the price of volatility. We must be comfortable with periods of unknown and periods of no returns.

We must pay the price of volatility.

Investing in the stock market is so different from our daily activities.

For example, if you go to the gym and do a heavy workout, you will be sore tomorrow. Or if you finished an examination, you would know your score pretty soon. There is a quick feedback loop.

But the stock market does not work in this manner. You could be making the best investing decisions, but the feedback will not be reflected until many quarters later. What happens in the interim? If the stock prices of your companies fell, you took that as immediate feedback instead.

You give up so quickly even before the real feedback is being reflected.

Those who deserve great returns tend to put up with looking stupid.

Having said all this, it does not mean we do not bother about the fundamentals and moat trajectory of the companies. We have to be watchful but detached about short-term price action.

So, think in years – not quarters, weeks or days.

Closing

As long as I am an investor, my investing skillsets are being tested by the stock market every single day. Since we’re publishing on the internet, I am vulnerable to many pundits providing their expert opinions on my performance. I don’t see that as a negative thing because it keeps me on my toes.

Furthermore, as a coach, it’s even more important for me to be transparent with my thoughts and directions. There is a chance that I am stupid for investing in ED. If that day comes, I will acknowledge my mistake.

Till then, I will work hard to maintain or surpass my long-term portfolio returns of >30% per year.