My portfolio ended 2022 down 15.5%. It's the first year I've lost money — and it's been painful. I made a number of mistakes and it's important to reflect on what went wrong.
Mistake #1: Naked Wines
Naked was one of my largest positions heading into 2022. The key mistake I made was misunderstanding Naked's success during the pandemic. As Naked is a subscription-based business, my thinking was that Naked would be better at retaining customers than typical pandemic beneficiaries. In 2022, Naked's economics declined rapidly and auditors called into question Naked's ability to continue to operate as a going concern. While the situation has since improved, I had a number of opportunities to update my priors and avoid a huge loss. To make things worse, I significantly added to my Naked position on the way down which compounded the mistake.
So what happened? I think there were a number of factors at play. For starters, Naked was a different type of stock than I usually invest in. I was attracted by the presence on the register of Norbert Lou, a famous investor. And, while the markets were running hot, Naked was a huge winner for me. (I initially bought Naked at around 200 pence, it rose over 800 pence in 2021, and now trades at 126 pence.) I was affected by endowment and confirmation bias. In fact, at one point, another smart investor told me he was shorting Naked — but I waved away his concerns.
As my thesis fell apart, I realised I knew a lot less about the business model than I thought. On top of that, there was a failure in risk management. If I simply held my original position in Naked, which was bought prior to the pandemic, the loss would have been much less impactful. I had other good investment candidates available at the time, which I could have added to rather than Naked. Finally, my position in Naked was far too large. I didn't trim it, despite huge share price appreciation in 2021. Considering the riskier nature of Naked's business, the position was far too large. I still hold Naked shares, however they now only account for only a very small part of the portfolio.
To avoid a similar mistake in future, I will be more cautious of extrapolating windfall gains into the future. I will be more cautious in position sizing, especially for riskier business models. I will be less swayed by actions of other investors, regardless of how successful they have been in the past. I will be more sceptical of non-GAAP measures, such as Naked's standstill EBIT calculation. I will be more cautious in doubling down on a stock. I will be more disciplined around identifying businesses truly in my circle of competence.
Mistake #2: Destination XL
Destination XL was a much smaller position for me. The big mistake, as I see it, is that I shouldn't have invested in Destination XL in the first place. US fashion retailers are not in my circle of competence and my initial research on Destination XL was poor. As a result, I traded Destination XL terribly. DXLG started the year at 5.68 and then fell precipitously amid fears of recession and rising inflation in the US. While DXLG appeared optically cheap, I became sceptical of the business and I ended up selling my position at 3.59. DXLG has since rallied and finished the year at 6.75. When currency changes are included, the stock trades 87% above where I sold it. Ouch.
Mistake #3: Imara Inc
Imara was a busted biotech trading below cash value. I bought shares after reading a good writeup on Clark Street Value. It became quite clear that IMRA was pursuing a reverse merger transaction. I felt that IMRA had a decent margin of safety thanks to a hefty discount to cash, but I was worried about the potential for value destruction from a poor reverse merger. I purchased my shares in September when IMRA was trading around $2.05. In October, IMRA announced a reverse merger. I woke up in the morning and saw IMRA was up close to 40%. I skimmed the announcement and quickly put in a sell order in the after market trading. I sold my shares for $2.80, a gain of around 40% including currency translation, in 17 days. This works out to an IRR of 845%. You might be wondering at this point why I've included this in the mistakes. Well, if I actually read the proxy properly, I would have seen the stock purchase agreement, which showed that the transaction was being co-financed by share purchases at $3.84 per share. IMRA last traded at 4.09. If I held my shares today, they would be worth roughly 60% more than the price I sold them. This is an embarrassing and easily avoidable mistake. If I printed out the proxy and read it properly, as I should have, IMRA would have been a much bigger winner.
Missed opportunity: Evergreen Gaming
It was not the only time I sold early. I also held some shares in Evergreen Gaming Corp, which trades on the Toronto Venture Exchange. Evergreen had a very solid merger agreement with a strategic buyer, Maverick. The agreement was not subject to financing and the shareholder approval seemed almost certain. On top that, it seemed Maverick was getting a good price. I purchased some shares and made about 3.6% from the spread in about two months, which worked out to an IRR of 23.8%. Shortly after I sold my shares, Evergreen received a second bid valuing the company at $0.605 USD, which was above Maverick's offer of $0.55 USD. In the end, Maverick ended up buying the company for $0.65 USD, equivalent to roughly 88 cents Canadian. I sold my shares at 71 cents, missing out on the 24% bump. I don't classify this as a straightforward mistake. There was a chance the deal could fall apart, for example, and there were no indications that a bump was coming. That said, I'm still kicking myself for missing out on the real money in this situation.
What went well
Thankfully, I had some wins in 2022 as well. My best position was CEL Corp, which is now my largest position by far. I have written about CEL on Substack. I began purchasing CEL in July and most recently purchased shares in November. My position is up roughly 30% including the benefit of the decline of the yen in recent months. I'm slightly uncomfortable about the size of the position, but I'm reluctant to sell at current prices. Even using extremely pessimistic assumptions, it's hard to come up with a value for CEL that's not above today's prices.
TTJ Holdings was a strong contributor to returns earlier in the year, however I'm not celebrating. Shareholders received a terrible price in the management buyout, and while I made money, it's made me far more cautious about investing in Singapore.
My Hong Kong stocks performed poorly, as did Haier's D share. I said last year I thought Hong Kong's market was cheap. Well, it has become even cheaper. There are of course risks related to the geopolitics and the mainland, which I did not properly recognise earlier on. I am comfortable with my positions for the time being, but I may change my mind in future.
In general, I'm looking to have more special situations and event-driven ideas in the portfolio. I have made money from these sorts of ideas over time, and it's nice to have capital coming back to recycle into new ideas. These ideas also are generally uncorrelated with the market, which is helpful at the portfolio level. Also, I find these ideas quite fun and it keeps me busy. I find I only have a few really good general long ideas each year, and that's if I'm lucky, so it's good to have shorter-term ideas to work on in the meantime.
My friend has introduced me to a useful exercise which is to look at the portfolio at the start of the year and see how it would have performed if you didn't trade at all. Last year, the results were confronting: I realised I would have been far better off doing nothing at all. Thankfully, this year, despite my numerous blunders, I did add some value. My portfolio would have been down 21.5%, so I am about six percentage points better off for the activity. It doesn't quite make up for last year's deficit, but it's an improvement. In a difficult year, I'll chalk that up as a win.
A quick update on the blog
While 2022 hasn't been the best year for my investing, it has been good to me in other ways. I've become a dad, which is wonderful, but it also means I have less time on my hands. As a result, I may not be as quick to update the blog as usual, however I do plan to keep writing quarterly reflections, as it's helpful for my investing process. Going forward, I will use my Substack for investment write-ups. I plan to only write-up good ideas, so I imagine posts will be very infrequent.
I am also currently looking for an investing job in Australia. If you are looking for an analyst, or if you know someone who is, I'd love to hear about it. You can reach my via the email form on the blog.
Now for the numbers. My PA has compounded at 11.32% since inception compared to 9.44% for the benchmark.
My SMSF has returned 1.64% annually since inception on August 4, 2021. The benchmark has returned 1.21% over that period.
Here's to hoping 2023 will be better than 2022. Good luck and happy new year!
Impressed by the work put in on CEL Corp. It takes a lot of guts to be honest on the Imara trade. Kudos.
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