"Learning is the oldest excuse in the book for a failure of execution," wrote Eric Ries in The Lean Startup. "It's what managers fall back on when they fail to achieve the results promised...Entrepreneurs, under pressure to succeed, are wildly creative when it comes to demonstrating what they learned. They can tell a good story when the job, career, or reputation depends on it."
Yet as the stock market drops to its lowest level in 2018, what else are we to do as investors but reflect on what we learned this year? Since January 1 of this year, index fund investors witnessed a drop of 2% in value. And if you look back at the stocks I bought this year, you can now buy them at an average price that is 8% less than what I paid for them.
This meditation is about the things I learned this year.
Over the past 11 months I sifted through the financials of 170 publicly traded companies. I use the word "sifted" deliberately as I did not read 170 annual reports, but merely reviewed and compared the average 10-year earnings per share to the price of the stock. Only when the price to earnings ratio was low enough, I downloaded the 10-k report and began to read about the business.
This was a new process for me. In 2017 as a comparison, if I had seen a stock listed in the 52-week low list, I would have then carefully read about the company and determined whether it was an opportunity or not. This was a flawed and costly process because by the time I read about the company, I was compelled to invest in the company simply for the fact that I already spent hours of my time.
Learning the hard way, I finally understood this year how important it is to understand the right side of the balance sheet. Buying the stock of Orchid Paper Company, for example, was an unforced error on my part. It was not difficult to see that in a rising interest rate environment, Orchid's ability to cover its debt service would tarnish.
Another unfortunate example was forgetting to adjust for the market value of a preferred stock. The company was Rait Financial Trust, and in What Buying Rait Financial Trust Taught Me, I explained what eventually happened because of my omission of thought.
Even with a somewhat dormant stock market in 2018, I now understand how emotional stock investing is. When I saw the price of stocks climb in price, I immediately sensed a call to action. And because of this urge I overlooked important issues before purchasing stocks.
Reading for the second time Guy Spier's The Education of Value Investor reminded me that checklists are crucial. So, throughout 2018 I developed a checklist as part of my investment process. It has standards that I now must follow before buying, while holding and prior to selling a stock. For example, I now force myself to ask: “What is the value of the business if the publicly traded company was to become private?” Or “What would a liquidator pay for this company?”
It is easy to read what other great investors are buying. Websites such as WhaleWisdom.com allow us to see what is in the portfolio of some of the great investors of our time. For example, Mohnish Pabrai owns Fiat Chrysler (FCAU); Bruce Berkowitz owns Vista Outdoor Inc. and St. Joe Corporation. Guy Spier owns MasterCard (MA).
And even better, they often write and explain why they bought the position. This is how Berkowitz narrated his St. Joe purchase: "The St. Joe Company recently announced that it received final approval from state and local agencies for its 110,000-acre Bay-Walton Sector Plan, with 170,000 residential units and more than 22 million square feet of retail, commercial and industrial development."
There is a wealth of information out there and most asset managers are not shy to share it.
Building a list of companies that I would love to own, at the right price, is one of my main goals for 2019. During the past year, I came across wonderful businesses that generated plenty of cash flow while showing little to no debt. But the valuation of these businesses was too rich for me. With earnings multiples greater than 20 times the trailing earnings per share, I often felt that I was asked to pay a dollar and thirty cents for a business that is worth one dollar.
But market values change. And my mistake this year was that given the rich valuation, I dismissed and never wrote down the names of the businesses that, at the price, could be great bargains. In short, next year I plan to list all the companies that I would like to purchase.
Since I mentioned 2019 in the last paragraph, I intend to buy more stocks next year than I plan to sell. At the time of this writing, 60% of my investment portfolio is still in cash. Not because I am fearful of the stock market, but merely because I have not found any companies of interest.
Over the past 60 days, I added more capital to positions I took earlier this year. Mainly, I bought more shares in Leeway (LWAY) and in Frontier Communications (FTR). I wrote about my purchase of LWAY in Why I Am Long Probiotics. And I described my purchase of Frontier Communications in March of this year.
I continue to be passionate about sharing my journey with you. If you learned a thing or two about the stock market then my efforts, and the efforts of Lisa who edits these meditations, were not in vain.