I'm a much better investor than when I started, but I still make a lot of stupid mistakes. There's plenty of room for improvement, which is encouraging, and I'm confident I'll continue to do well by sticking to my process and staying in my circle of competence (which is small, but growing ever so slightly over time).
For the year to December 31, 2021, my PA gained 11.28%, while my benchmark, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt), rose 18.33%.
Results since inception (PA)
Overall, I'm very satisfied with my 2021. While I underperformed my benchmark, I've had a remarkable run since 2017 and an 11% year is nothing to complain about.
What went wrong in 2021
I lost some money getting out of a position in Techno Quartz (TSE:5217), a company that sells quartz glass products for use in the semiconductor industry. While the company looks cheap, I realised some problems with my thesis and exited the position at a small loss. I consider Techno Quartz my biggest mistake of 2021. It was a mistake of my process, and it could have cost me a huge amount of money due to the size of the position. Thankfully, this lesson wasn't too expensive. However, Techno Quartz has continued to do well, and it ended the year well above my exit price.
My other big losers were Chen Hsong (average purchase price of ~2.68) which shot up from 2.30 to ~3.50 in November but ended the year at 2.40, and Destination XL. Both companies seem very cheap to me, and both remain in the portfolio.
Another costly mistake was selling my position in Guillemot in early January. At the time, the shares were still cheap, but I thought Haier offered a better opportunity. Over the short term, Haier did better, but Guillemot ended the year ~70% above my exit price. You can't get them all right, but Guillemot was a good, cheap business and I should have been more reluctant to let it go. Let's hope Haier makes up the deficit in future.
What went right in 2021
Most of my winners were cheap industrial stocks in Asia. Boustead Projects started the year at 0.81 and I was able to sell most of my holding at 1.30 in early August, prior to the company paying a special dividend. The gain including dividends was around 66% and Boustead has tracked lower over the year.
I had decent positions in TTJ Holdings and Analogue Holdings, which gained 29% and 58% respectively including dividends. Pleasingly, these gains came without much risk, and both companies remain cheap today. Million Hope Holdings, a smaller position, gained 41%.
Looking ahead to 2022
It's been useful to spend some time reading and thinking over the summer, and I've had a lot to reflect on. In 2022, I have a few areas I'd like to improve on when it comes to investing. For starters, I'd like to be more patient. I tend to get a bit trigger happy when I have cash on hand and make rushed decisions or mistakes. The bar for new investments should be high and I need to be more comfortable holding cash when I don't have good alternatives. I want to trade less, and make fewer decisions overall. Interestingly, if I took my portfolio at the start of the year and simply held it, I would have earned 19.05%. While this doesn't account for additions over the course of 2021, it demonstrates that trading in and out of positions likely destroyed value over the year.
In terms of research, I'd like to place more emphasis on capital management. Historically, I have tended to own stocks with a lot of cash or assets on the balance sheet. While there are benefits to conservative balance sheets, there are also at least two key problems to these situations. The first is that stocks that look optically cheap on an EV basis can lead to poor returns. This is a lesson I've learned through experience but it's also something that Joel Greenblatt has discussed.
The stock is at $6 with $5 in cash and the stock is going to $7 in two years. But you are laying out $6 and it is only going to $7. The EV doubles (100%) but your return is 8% annually compounded over two years.
Another issue can arise when you attribute value to cash on the balance sheet, only to see that value destroyed by poor capital allocation. For example, TTJ Holdings has destroyed value with M&A historically. While I continue to hold TTJ at current prices, I would likely sell my position immediately should management embark on new M&A that's not aligned with its core steel business. In short, finding a company trading at a low value in relation to its cash or investments is not enough: you also need a clear thesis around how that capital will be used or distributed.
Fishing where the fish are
At the Daily Journal annual meeting in 2020, Charlie Munger had some timeless advice for investors.
I have a friend who’s a fisherman he says, “I have a simple rule for success in fishing. Fish where the fish are.” You want to fish where the bargains are. That simple. If the fishing is really lousy where you are you should probably look for another place to fish.
Lately, I have been finding a lot of "fish" in Hong Kong. Consider for a moment that the S&P 500 gained ~27% in 2021 while the Hang Seng fell ~15%. Besides the political situation in Hong Kong, there has been the fallout from China's crackdown on tech companies and the Evergrande crisis. For many fund managers, Hong Kong and China seems to be a no-go at the moment. Just look at what's happened to Hamish Douglass and Magellan. The result is an incredibly cheap HK stock market.
Hong Kong’s main stock benchmark is trading below book value. Yup, the entire index. pic.twitter.com/O4eKl5se1D
— David Ingles (@DavidInglesTV) December 14, 2021
For those unfamiliar with investing in small companies in HK (or Asia generally), a word of warning: you will encounter dodgy controlling shareholders, poor corporate governance and value traps. However, for those willing to do a bit of digging, there are bargains to be found. David Webb — a famous HK small cap investor with an astonishing track record — wrote in June 2020 that "many of these stocks are cheaper on fundamentals than they have been in a decade". For those interested in looking at interesting HK situations, I would suggest taking a look at Webb's holdings.
The results of my private investment account and SMSF are summarised in the table below. The portfolios are constructed differently and performance will vary. I don't account for cash balances in my PA but I do in my SMSF.
My PA was up 3.23% in October, up 0.64% in November and down 1.79% in December. The cumulative return for the period was 2.03%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) gained 2.09% over the same period.
August 3, 2017 | December 31, 2021 | Since July 1, 2021 | Since Inception | Annualised | |
G&W Portfolio | 1.0000 | 2.1152 | -5.56% | 111.52% | 18.50% |
Benchmark (SPAX2F0) | 61,250.80 | 99,298.21 | 4.81% | 62.12% | 11.57% |
My SMSF gained 6.66% in October, gained 3.08% in November and fell 4.16% in December. The cumulative return for the period was 5.37%.
August 4, 2021 | December 31, 2021 | Since August 4, 2021 | Since Inception | Annualised | |
G&W SMSF | 1.0000 | 1.0166 | 1.66% | 1.66% | 4.12% |
Benchmark (SPAX2F0) | 98,123.18 | 99,298.21 | 1.20% | 1.20% | 2.96% |
