Investment Reflections 2020

JC Project Freedom Investment Reflections 2020
Image by Hans Braxmeier from Pixabay

2020

The only true wisdom is in knowing you know nothing – by Socrates

As this blog is a journey of us working towards financial freedom, we are trying to improve our investment returns. I am working on refining the investment framework by reviewing the mental model, reflecting on what works and what has not.

Cut Down on Turnaround Investment

I have spent around 3 years trying out turnaround investments but the results do not speak for themselves. One of the turnaround investment I remember wasting too much time on was Campbell Soup. I started buying in 2018 and sold them around 2019 at USD 49/share. The gain was minimum and the money was stuck there, while I missed out on other opportunities.

Recently, with BABA taking a hit, I am tempted again to put money in it. The various businesses are still in operation, people are still using T Mall, Aliexpress (I just bought Christmas toys from there but recently my wife is shopping a lot on Shopee), cloud services (growing), Alibaba Health and many other services. The regulatory risk for BABA is very high. I do not think the government will dismantle this company as it creates job for the country but will tame it. All I can say the risk-reward ratio must be right before I will enter. Resources are scarce.

In short, I need to cut down on turnaround investment as the risk reward ratio is not that good in my own context.

Stop buying low PE stocks

It is not a good comparison using PE ratio as a gauge. I used to think low PE means cheap, but cheap can just become cheaper in terms of price. While the valuation becomes more expensive when your share price drops. Why? The company’s earnings deteriorate.

Let’s say there are 2 companies, first company is called uSlow and second company is called uFast.

uSlow has a $10 share price and its earning is $1 per share, the P/E ratio is 10x.

uFast has a $2 share price and its earning per share is $0.1, the P/E ratio is 20x.

At the first look, you may think that uSlow is cheaper than uFast. That’s what I believe in previously as well. Imagine if uSlow earnings per share drops to $0.5 per share, the P/E ratio will be $10/0.5 = 20x. If I buy uSlow at $10/share, this will be my entry price. Naturally, the market will react to price this accordingly with a drop in share price but this does not mean the business becomes more valuable. In fact, it is more expensive to own this business now.

Now, look at it the other way, if uFast earnings per share increases to $0.2 in the 2021, the P/E ratio becomes 10x. Remember that your entry price remains at $2/share. Naturally, the share price will be reflected accordingly to this growth in earnings. If the share price does not move due to market mispricing, you should load more.

Stop Chasing Dividend for Now

I do not think our capital size is at the level to live off dividend income for now. Investing for dividend slows down the growth of my portfolio. Most of the dividend-paying companies are in mature stage or worse still declining stage in business cycle. The earnings are stagnant or declining. The company depends on its free cash flow to provide dividend, when company is not growing or no better projects to invest, it is better for management to pay out in terms of dividend. With lesser free cash flow, the company cannot reinvest to grow the company. It means your business will hardly grow. Unless, you are buying a company with increasing free cash flow.

In the next 5 – 10 years, I aim to grow the portfolio to a certain size before I convert the money to a pure ETF using VT.

Face Reality

I was watching the losses widening from S$50,000 to S$350,000 over the last 3 years. I was paralyzed. WTF I was thinking about?!

My greatest regret in 2018/2019 is probably not joining GIM then. I went to review, you can read this here. If I have signed up then, I won’t have wasted the last 2 years.

I start to impose a very strict criteria to only buy into exceptional growth companies. I have cut a few businesses from my portfolio and I will continue to streamline other businesses over the upcoming months. I had studied some companies for few hours and some up to 2 days, then I found that some of the numbers do not make sense, I threw them out of the window. I start to think what type of companies I want to analyze so that my time is well spent.

Conclusion

This is the journey towards financial freedom. There are heartaches, joys, mistakes, excitement, and fun. It is the journey that matters. The outcome does not matter. I aim to become an infinite learner, reading, and learning, trying out and work on improving myself.

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