Quiet Contrarian. Ep 3: How have I done? Part 2: The USA.

Firstly, in the interests of full disclosure. This is my second attempt at making a US portfolio. My initial attempt was horrendous. I won’t go into detail, but it was a travesty. In the end I lost a big chunk of money, and totally shut down my US account. It was between Jan 2014 to Feb 2017. In the end I got out relatively unscathed, only losing ~10% of my portfolio. I took a year off, evaluated my failings, and went back in with a new strategy. Here are some of my key losses, and the lessons I learned from them:

• BBBY – You get knowledge of companies by being in the country and involved with them, in a way you don’t if you’re overseas. Stay in your circle of competence. 
• TROW, WDR – Understand the business, and industry conditions – On paper fantastic. Numbers etc all looked amazing, they were fund managers, but lost out as part of America’s transition to ETFs. 
• FOSL – Past performance ≠ future performance. The market was moving away from traditional watches, and I had no idea how much this could affect the business. 

In all honesty, any of the lessons could have applied to all of the stocks. They all looked good on paper. All of them had major headwinds to go against them/changing business models, that some more understanding would have helped me to get ahead of. All of them had just gone through inflection points, a great run that was coming to an end. 

I restarted my portfolio again almost exactly a year later. This time I focussed on the businesses I understood better. This meant they had to have global reach (so I could keep up on their products), in sectors I liked so I would naturally keep better tabs on them (my circle of competence). 

My American portfolio is much more streamlined than my Aus portfolio, and it’s outperformed just about everything: The ASX, my ASX portfolio, the US Market, etc etc. Not all of this is due to just stock picks though, I’m just going to note a few of the tailwinds the US portfolio has going for it:

• FX tailwinds – I measure performance in Australian Dollars (AUD) as I’m based here and pay taxes here. Over the last few years the AUD has gotten weaker while the USD has gotten stronger, this has equated to a pretty significant profit in my portfolio. 
• The US market strength – the US market has been doing amazingly for the last number of years. Lots of money has gone into it, and driven prices up. The Total Market Cap to GDP Ratio has it up at near all time highs (see also Buffett Indicator: Where are we with market valuations? (gurufocus.com) (Foreshadowing: I will probably rant about the TMC:GDP in the future))

Here is the contribution report from each of my holdings, all are positive, but once again, only the gains of AAPL have really driven the outperformance of the market. You can probably easily see that the businesses are much more of a “who’s who” of international players, with only one that I think the average person wouldn’t have heard of. A few notes about this portfolio:

• Firstly it’s very concentrated, because there are fewer holdings, the stocks are concentrated in “the best investment ideas”. This is a risky strategy as diversification is low, but the potential benefits are high if you pick winners. 
• For the most part I stayed a bit further away from this one, emotionally speaking. I don’t track the US markets as tightly as I do the Australian ones. This worked in my favour, as I was less impacted by the FOMO and fear that accompanies market up and downswings, and consequently made more disciplined decisions. 
• The performance of the US markets have been stellar over the last few years. The TMC/GDP indicator was at all time highs before the virus hit, and has almost rebounded back to its peak. This was a lovely tailwind that drove all the prices up significantly. In the long term, I personally feel like this isn’t a bad place to get out and wait for reinvestment opportunities (I am currently shifting a bunch of this portfolio to cash). 
• Finally, the Facebook purchase. This was a failure of all my investment skills, I bought in about a week before the Cambridge analytica scandal hit. I decided within a day or two that the risk was too high after they made the announcement, and got out. In hindsight I would have done better to be more patient. I was reacting to uncertainty, not the actual pertinent information. If I’d stayed in I could have added another outperformer to the portfolio. 

The holdings in the US portfolio are much closer to how I would prefer to run my main portfolio, with 10 or so of my best bets, the proportions here are much higher, as the holding amounts are lower. I am currently drawing down and taking profit, hoping to get to about 50% cash, that I will either bring home for redeployment in Australia, or wait for a market crash in the States and hopefully take advantage of cheap prices in some other global companies (AMZN, MSFT, BABA are all on my list). I need to examine this in more detail, 

In summary, my US portfolio has outperformed my Australian one. There have been alot of factors in this: ok picks, more streamlined portfolio, better discipline, FX tailwinds, better overall market performance. I’m not convinced I could recreate all these factors in a way that would lead to continued outperformance, and the market is at all time highs, so I’m largely taking profit, and will either move money home, or reinvest depending on future opportunities. 

Next time on the QC: Lessons from Losses