Happy New Year to anyone reading the blog. Like many, I'm happy to see the end of 2020. It was a challenging year, but it also provided some opportunities. For one, I was able to move away from Melbourne thanks to changed policies in my workplace for working from home. I am grateful to be healthy, to have kept my job and to no longer be confined to my home.
From an investing point of view, 2020 was full of surprises and opportunities. Despite lockdown orders, restrictions on movement and all the other challenges presented by COVID the Australian sharemarket finished the year close to where it started. The S&P 500 meanwhile finished up 16.26% for the year, while the Nasdaq rose 43.6%.
2020 was fruitful for me, both in terms of returns and my learning. In March, we saw mass psychology in action with the toilet paper panic buying. Unfortunately, I must admit I joined in after seeing a cashier hoarding toilet paper behind the counter. It was a real-life example of how easily we can be influenced by social proof and scarcity. I'd read about these biases, and understood them, yet it wasn't until I got home that I realised what had happened.
I mention this because there has been a lot of mass psychology-induced craziness in the markets this year. What has really been hammered into me is that people do really dumb things under uncertainty and stress. And there are huge opportunities for investors in these moments. In March, I missed out on opportunities to buy better quality businesses at big discounts. One lesson, as I wrote in my update in March, is that it helps to have done the work beforehand. Another is just how difficult it is to time the market. I saw lots of smart people who went substantially to cash, only to miss out on the subsequent market rally. Good luck to anyone who thinks they can make moves like that reliably.
On the positive side, I didn't do anything too stupid in my portfolio. I did some selling around the edges, and added to some existing holdings, but that was about it. It helped that nearly all of my stocks had fortress-like balance sheets, with substantial net cash and no debt. It also helped that the companies I held managed to navigate COVID relatively well. For some, like Naked Wines, COVID was a huge boost. It must be said that I did not design the portfolio to be pandemic-proof. It was mostly luck.
Overall, my portfolio gained 33.22% in 2020. It was a great result, especially considering currency movements were a headwind. My annual performance since inception is shown in the table below.
My biggest winners were Naked Wines and a stock I bought late in December, Haier Smart Home D. Haier is the world's number one appliance brand. The company has an A share listing in China, and recently listed a H share in Hong Kong. The D share, meanwhile, trades in Frankfurt, where it has not attracted much interest (until recently) from investors. In its prospectus for the H share listing, Haier outlined a process for the potential conversion of D shares to H shares. The D share closed the year at 1.60 Euro, while the H share finished the year at $HKD28.10, which is equivalent to 2.99 Euro. This represents a discount of 46.43%, or potential upside of 86.66% should conversion prove to be possible.
At the time of my purchase the D shares were priced very attractively regardless of the conversion. The spread seems too large, even if conversion isn't possible. And there is a chance that Haier itself may do something about the D share listing, which does not appear to serve the company any real purpose. My sense was this situation offered potential for outsized returns with low-risk, as I would be happy to hold the stock even if conversion was not possible. I bought a large position in the D shares at around 1.10-1.14 Euro, which has since appreciated significantly after a blog post by an investor on Twitter. Haier is now my largest position. Thanks to Asian Century Stocks for sharing the idea, and my friend Chris for helping me with my research.
My biggest losers were Million Hope Holdings, which I still hold, and Donaco International. I was a bagholder in Donaco, and really should have sold it early in the year as soon as my thesis broke. I ended up selling in early December at 4.0 cents to fund better ideas. Since then, the stock has appreciated 70%. My biggest error really was not buying more Naked Wines. I understood the business model well enough, and it was clear the company would benefit from COVID, and there were plenty of opportunities to buy the stock while it was trading at around 2 GBP. It now trades at 6.90GBP. Naked Wines has a unique business model, and a huge opportunity to expand its DTC wine business in the US where it is already the number one player.
Over the year, my investing process has changed somewhat. At the start of 2020, the bulk of my portfolio was in statistically cheap net-nets and a basket of unlisted stocks that pay substantial dividends and trade at low multiples of their earnings and assets. Lately, I have shifted away from net-nets. There are two main reasons for this: the first is that there aren't many high quality net-nets around at the moment. The second is that I have been focusing my portfolio on my best ideas, and the better ideas have both a qualitative and quantitative aspect. This progression is a natural one. It is how Buffett approached ideas in his partnership, and is also the approach taken by Li Lu, Joel Greenblatt, Norbert Lou and other investors I look up to.
My net-nets were mainly microcaps found in Japan and Singapore. The problem, particularly in Japan, is that many of these companies aren't really run for the shareholders. The priority for management is often business survival, not shareholder returns. I was interested to read recently about a mochi shop that has been operated by the same family in Japan for 1,000 years. It's just a one of the many peculiarities of investing in Japan. While I have done pretty well in Japan, it feels a bit like a crapshoot. And even if you do buy something really cheap, there's no guarantee you'll ever get to see any of the benefits. As a result of this change in thinking, I've sold all of my Japanese holdings except for Shinoken (8909.T), which is unusually shareholder friendly for a Japanese company. That is not to say that I won't buy net-nets or cheap things in Japan in future. I just won't be buying things simply because they sell below cash, etc. I still think buying diversified portfolios of net-nets would work in Japan, but I think there are better opportunities available. Also, I just don't find buying a bunch of low multiple stocks very interesting.
Going into 2021, I have 16 positions, which is a bit more concentrated than I have been for most of 2020. I don't see this as a bad thing. In fact, I am trying to focus even further on my higher conviction positions. There might be a bit more volatility in the portfolio, but that is not something I really worry about. Finally, the unlisted stocks I own have now diminished to about 25% of the portfolio. As the portfolio grows, these stocks become less viable, simply because it is so difficult to buy them in a reasonable size. Occasionally there might be opportunities that come up, but I expect they will continue to become a smaller portion of the portfolio over time. Despite the issues with liquidity, I have no intention of selling most of these stocks at current prices.
In December, my portfolio rose 7.7%, while my benchmark rose 1.21%, My results since inception are summarised in the table below.
Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance.
August 3, 2017 | December 31, 2020 | Since July 1, 2020 | Since Inception | Annualised | |
G&W Portfolio | 1.0000 | 1.9008 | 23.35% | 90.08% | 20.70% |
Benchmark (SPAX2F0) | 61,250.80 | 83,917.9 | 14.65% | 37.01% | 9.66% |
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