I had a good month of performance in January despite all the calamities going around in the world. My portfolio returned 6.92% for the month, while the benchmark gained 4.98%.
*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance.
In my post last month, I discussed selling Nzuri Copper, a merger arbitrage play. I bought a small position because I was attracted to the large spread on offer. I decided to sell my NZC position in December when it became clear that I had not properly appraised the situation. Unsurprisingly, the regulatory approvals that were holding up the merger were quickly approved shortly after I sold my position.
The situation is interesting to me because it highlights one of the strange things about investing performance. Had I held on to the stock, I would have profited, even though my purchasing decision was a mistake. Of course, the flip side can also be true: sometimes prudent decisions to purchase stocks can result in losses because of low-probability events, etc. In these situations, the feedback we get by way of profits or losses can be harmful to our long-term financial wellbeing. It's what Annie Duke — a former pro poker play — calls "resulting". As investors, we should be constantly trying to improve, and the best way to do that in my view is to focus on whether we made the right decisions rather than outcomes.
In Nzuri, it is clear that my initial purchasing decision was a mistake. I didn't properly research the situation for starters. On top of that, Chinese merger arbs are not in my circle of competence. I have no edge in terms of handicapping potential outcomes and have no specialist knowledge about Chinese regulatory or legal issues pertinent to mergers.
But was I right to sell it when I did? This part is less clear to me. My inclinciation in these situations has been to sell as soon as possible. For me, it's psychologically difficult to hold on to a stock purchased for the wrong reasons. But what's the rational thing to do? For starters, the decision making process should ignore prior decisions. As Buffett says, the stock never knows that you own it. It's something I should have done, but I didn't. (To be clear, I'm not sure I would have held on to NZC even if I did look at it in this way.)
So what's the takeaway? I personally have found it helpful to write down my thinking when making buy decisions to refer back to later. From now on, particularly in tricky situations, I'm going to write out my reasons for selling, too. Additionally, I think the right way to invest in stocks like Nzuri is by using a basket approach, which is not something I had done. People like Alpha Vulture — who first wrote about the idea — get paid because they can stomach risk and volatility that others can't handle. It's a good strategy in my view. Nevertheless, it is interesting to read Alpha Vulture's post-mortem on Nzuri:
Even though we're only a month into the year, I've already made some more mistakes. Thankfully, they have been relatively small. Elsewhere in the portfolio, I have a stock that has been affected by an unforeseen, low-probability event. It is likely I will take a loss on this position, even though I believe my purchasing decision was correct. On the plus side, I received a good price when selling Open Orphan (formerly Venn Life Sciences), a net-net that ballooned 300+% since my purchase last year. It rose significantly between the start of the year and when I sold it, which accounted for some of this month's gain. In February, I'll be looking to put some of the proceeds to work.
Finally, if you got this far, you might be interested to check out this excellent blog post from Lyall Taylor, which touches on issues related to my discussion of Nzuri and "resulting".
August 3, 2017
|
January 31, 2020
|
Since July 1, 2019
|
Since Inception
|
Annualised
| |
G&W Portfolio*
|
1.0000
|
1.5251
|
7.16%
|
52.51%
|
18.42%
|
Benchmark (SPAX2F0)
|
61,250.80
|
85,785.44
|
9.87%
|
40.06%
|
14.45%
|
*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance.
In my post last month, I discussed selling Nzuri Copper, a merger arbitrage play. I bought a small position because I was attracted to the large spread on offer. I decided to sell my NZC position in December when it became clear that I had not properly appraised the situation. Unsurprisingly, the regulatory approvals that were holding up the merger were quickly approved shortly after I sold my position.
The situation is interesting to me because it highlights one of the strange things about investing performance. Had I held on to the stock, I would have profited, even though my purchasing decision was a mistake. Of course, the flip side can also be true: sometimes prudent decisions to purchase stocks can result in losses because of low-probability events, etc. In these situations, the feedback we get by way of profits or losses can be harmful to our long-term financial wellbeing. It's what Annie Duke — a former pro poker play — calls "resulting". As investors, we should be constantly trying to improve, and the best way to do that in my view is to focus on whether we made the right decisions rather than outcomes.
In Nzuri, it is clear that my initial purchasing decision was a mistake. I didn't properly research the situation for starters. On top of that, Chinese merger arbs are not in my circle of competence. I have no edge in terms of handicapping potential outcomes and have no specialist knowledge about Chinese regulatory or legal issues pertinent to mergers.
But was I right to sell it when I did? This part is less clear to me. My inclinciation in these situations has been to sell as soon as possible. For me, it's psychologically difficult to hold on to a stock purchased for the wrong reasons. But what's the rational thing to do? For starters, the decision making process should ignore prior decisions. As Buffett says, the stock never knows that you own it. It's something I should have done, but I didn't. (To be clear, I'm not sure I would have held on to NZC even if I did look at it in this way.)
So what's the takeaway? I personally have found it helpful to write down my thinking when making buy decisions to refer back to later. From now on, particularly in tricky situations, I'm going to write out my reasons for selling, too. Additionally, I think the right way to invest in stocks like Nzuri is by using a basket approach, which is not something I had done. People like Alpha Vulture — who first wrote about the idea — get paid because they can stomach risk and volatility that others can't handle. It's a good strategy in my view. Nevertheless, it is interesting to read Alpha Vulture's post-mortem on Nzuri:
While in the end I got the result I was betting on, it’s tough to say in hindsight if my thesis was correct or not. It’s quite possible that those delays were indicative of a real problem that could have blown up the merger. Or perhaps it was just some administrative issue. Who knows?
Even though we're only a month into the year, I've already made some more mistakes. Thankfully, they have been relatively small. Elsewhere in the portfolio, I have a stock that has been affected by an unforeseen, low-probability event. It is likely I will take a loss on this position, even though I believe my purchasing decision was correct. On the plus side, I received a good price when selling Open Orphan (formerly Venn Life Sciences), a net-net that ballooned 300+% since my purchase last year. It rose significantly between the start of the year and when I sold it, which accounted for some of this month's gain. In February, I'll be looking to put some of the proceeds to work.
Finally, if you got this far, you might be interested to check out this excellent blog post from Lyall Taylor, which touches on issues related to my discussion of Nzuri and "resulting".
