Quiet Contrarian. Ep 6: FY20 Reflection

FOMO, Fear and Feline Fatalities…

Well. That was an interesting year. The first half was an incredible rally, I took a lot of profit on the way up, and was happy with myself and my choices. Then… it shifted… somewhere around November. I was sitting on 40% cash, I didn’t want to get out anymore… But the market kept rising! I started to regret my choices. Share prices kept going up and up and I had to battle hard with my FOMO to not get back in. 4 long months of watching things continue to rise, cost me a lot of discipline and self control. 

Then at the end of February the Corona-crash hit. I had all my pent up FOMO and a pile of cash sitting there. I was also scared of missing out on the correction, like I did while on holiday at the end of 2018. All these things coalesced together and I jumped straight back in and bought heavily at the end of Feb, and early March. Weeks before the bottom hit. 

Eventually I started realising this was a bigger deal than the 2018 correction, but I had pretty much blown my wad, and my FOMO shifted to FOFU as I watched all my “cheap” buys get cheaper and cheaper… Fear and Loss aversion kicked in and I stopped buying, remaining on about 15% cash. I totally missed out on the bottom, despondency and fear had won out. 

Then towards the very end of March, things started to bounce back into positive territory for the US stocks, so I started drawing down on those, as coronavirus uncertainty lessened, and the latest stock market rally continued, all the heavy emotions have faded away.

In my head, things feel more level now, my purchases and sales have been made in a more reasonable headspace. It was a rollercoaster of a year. The following diagram summarises this quite nicely in the stocks I bought and sold through the year. You can clearly see the Frenzy of activity in Feb/Mar. Bring on FY21! Feel like it could be another interesting one…

Portfolio Performance

In terms of performance, my portfolios did extremely well this year. Outperforming both US and Australian benchmarks, in total and individually. All things considered, the crash improved my position. Widening the gap between myself and my ASX benchmark quite effectively.

Best and worst performers

The highest profits this year have been from my best Aussie players. There is a lot of overlap between the best performers by percentage gain (e.g. share price change) and profit (e.g. share price change x amount held). Which is a good sign that I have confidence in my best picks. All of the stocks in the top 3 would qualify as “High Quality”, though Appen could be argued is making a bit of a transition away from that towards “Pure Growth”. 

• The top 3 profitable holdings this year have been: Data#3, Appen, Northern Star. 
• The best performers in % terms were: Appen, Data#3, and Skyworks Solutions.

The worst performers, I would largely put under “Value”, though there is a chaser of “High Quality Dividend” in Flight Centre, but their business model will be under fire while we sort out what travel looks like in the Post-Corona world. Two of them were bought at below book value (GAP and VUK), which is a reminder of the risk being taken on when looking for a good turnaround story.

• The worst 3 loss making holdings have been: Gale Pacific Ltd, Australia and New Zealand Bank, and Flight Centre Travel. 
• The worst performers in % terms were: Virgin Money UK Plc, Gale Pacific, Limited, Flight Centre Ltd. 

Good choices

• Took profit on the way up – As much as I could have made more profit if I’d held for a few months longer, I don’t regret taking profit. 
• Self discipline and FOMO management – Was patient and sitting on a good amount of cash when the crash hit. 
• Focusing on “Quality at a reasonable price” and allowing some of these to pivot to growth, has been my most successful long term strategy. To me this is probably the best “value” strategy out there at the moment. 

Bad choices

• Allowed the pent up FOMO and fear to get the better of me during the market correction. Bought in on the way down, but too early, and froze with fear before it hit bottom. 
• Bought too many “turnarounds”. Some of my worst performers have been “cigar butt” style stocks (GAP, VUK), where purchases were made at below Book Value. 

Goals and positioning for FY21

As of this writing the US market has gone back to near all time highs, using the TMC/GDP indicator, it hasn’t hit levels like this since the Dotcom bubble of the early 2000s. The Australian market, whilst having recovered significantly, is still below it’s long term averages. Though the valuation will rise when the drop in GDP is realised.

The general consensus is that this doesn’t reflect what is actually happening to the economy. The markets are getting ahead of themselves, and are being supported by worldwide governments. The big question is how long can the “Dead Cat Bounce” last and how high will it go?

• Reduce my US holdings – In line with Long Term Debt Cycle, and the coronavirus economy hit, plus the all time TMC/GDP highs, I feel like the next few months will be a good time to reduce US holdings.
• Monitor the Australian market, and some of my holdings, look for opportunities to take profits if things continue to go well. 
• Gold and “defensives”? – If the economy is going to go through a period of underperformance it may be good to look at stocks that will do ok through that period. Is it acceptable to accept lower quality for less loss? Is sitting on commodities/cash a good idea?
• Re-developing my valuation and allocation method to determine how much of a stock’s returns come from dividends vs how much comes from Capital Growth. These two factors will result in different buying and selling thresholds. 

Next time on the QC: …