Our 2022 Annual Performance

The investor’s chief problem – and even his worst enemy – is likely to be himself.

– Benjamin Graham

It is that time of the year that we publicly regret on our mistakes and shamefully flex our muscles on our lucks!

Last year, there aren’t very many thinks we can proud ourselves, but there are plenty of “cry foul” and “I knew it” moments.

Our portfolio shrunk 36.9%, while the S&P500 shrunk just 18.1%. A clear 18.8% victory for the broad market.

Our (AOP – Arrow of Performance) Performance vs S&P500 by year.

See our performance charts below.

Starting August of 2010, $100 invested in AOP and S&P500 will be $313, and $439 respectively. We surely would be better-off buying the index and doing nothing, but our willingness to play this loosing game has never gotten stronger.

If we sound like most of the retail investors, it is because we are. Although, occasionally, we cover ourselves with Warren Buffett’s investing quotations, and assume we are rational value investors. Deep down, our genetic mappings are carved with fear & greed, and our veins proudly carry envy throughout our body. Those are our only weapons to fight the investing war.

Every year, our own performance (see chart below) is clearly barking us some message that we are so indifference about. It wants us to stop! Unfortunately, our body will never run out of these weapons, and we will most likely be fighting this war till the end of our life or till the end of our portfolio, whichever comes first.

Year 2022 wiped out our Full 2021 and Half of 2020 gains. See below.

From the above figures, one can clearly conclude that our portfolio is not protected for the down market, and is outwardly tilted towards growth investing; Therefore, our portfolio is more likely to outperform in the Bull market and suffer badly in Bear market.

I forgot the exact words by Warren Buffett, but in one of his interviews he said, Berkshire Hathaway is successful because they go two steps forward and quarter step back. And others go two steps forward and one step back. Warren was kind enough to not mention our name, but that was meant for us!

Here is what he meant in figures (see below). We need 58.5% gain just to reach our original balance, whereas the index just needs 22.1% gain to get to the same level.

As they say, number one job of a portfolio manager is to protect from the downward risk, and the upward will take care of itself. Since we are not professional portfolio managers, that is not our job!

I keep saying “we” to share and minimize my regrets. Having no interest on it, my poor wife has no idea that she was 50% responsible for all the financial upheavals created by her husband alone. Thankfully, my wife does not read these articles and thus far I am able to get away with all these blaming injuries free.

The very stocks that helped us beat the market in the previous years, took us down. Perhaps we deserved it for our lack of planning.

Here is the sunny side of the financial bloodbath of 2022- We were net stock buyer, therefore, in the long run, that should help us; But in the short term, we only feel terrible.

We started our investing journey in August 2010 by buying 5 (no zeros omitted) shares of Bank of America. Since then, every year, we are net stock buyer. Loosing almost 50% in 2011 wasn’t a big kick as it was last year because our wallet has gotten fatter.

How did our individual stocks do in year 2022?

We are highly concentrated on our ideas. 90% of our portfolio is vested in just 5 stocks, which we feel comfortable about their long-term perspective. 10% of our portfolio is parked in cold cash and 4 other stocks.

Here are our 5 top holdings.

Our smaller position fared better than the heavy position. See below.

You may wonder, why are we so bluntly transparent about our financial position – One reason for that is – no one reads this article!

Lucky Bets and Mistakes

Our 2022 goal was to “Do Nothing”, and I terribly failed on that promise. As you may have guessed, I did something, and obviously, it sure turned out to be a terrible idea for our wallet. Although, it added some excitement to my boring life.

We existed from Meta Platform (META) in January of 2021, the beginning of the great slide (see below). META was our second biggest holding at that time. We dumped the stocks at 207 per share, and it trades at 121 per share currently. By now, all my friends know my expertise in forecasting the stock chart!

Mr. Zuckerberg at Meta Platform (Facebook) have dreamed of the Andrew Grove’s Strategic inflection point. Now, the whole company is behind that to lead the imaginary race. I believe that was a waste of time and money, and I should let my money fight the hunger war in China instead. I decided to more our alliance from one person system to one party system.

We initiated our position in Alibaba at the same time. Unfortunately, a little too early! By the end of the year, Alibaba fared slightly better than Meta Platform. But, in the midway, we realized some of the loss from Alibaba for tax loss harvesting and allocated some amount to other holdings like Alphabet, Microsoft and Berkshire Hathaway. We thought those businesses were more attractive at the giver price in the long run than Alibaba.

That was our excuse for trying to time the market. In another word – My stomach couldn’t handle the flux of acidity and gave up.

I will never learn! I repeated the same mistake of speculating. I wanted to make a quick buck by buying fallen stocks, you guessed it – in margin. The margin rate went up so quickly, and I calculated it is not worth the risk. I came to sense and quickly got rid of it, fortunately in some gains.

Portfolio Allocation

Our biggest holding is Berkshire Hathaway. We may not know how to read financial jargon, but we can confidently trust its management team.

To hold-back our excitement, we track our stock holding period. The longer it is, the better! Assuming it is a wonderful company. Currently, it averages at 4.3 years. Our longest holding stock is Amazon, which we are holding for 7 years now.

We trimmed Amazon, Google, Costco in early 2022 and added some at later point. But our core holding hasn’t change. If it has, our position is increasing.

I am deeply influenced by a line in an article written by Jason Zweig in Wall Street Journal. i.e. “Mr. Kidd makes those folks look like day traders.” Here is the full paragraph.

Portfolio managers brag about being “long term” if they hold stocks for a year or so. Mr. Kidd makes those folks look like day traders. He has often held stocks for longer than many other portfolio managers have been alive. Central has owned Analog Devices Inc., its second-largest position, for 34 years. Mr. Kidd held Murphy Oil Corp. for more than four decades, from 1974 to 2018.

That is my goal.

How bad is Business?

Take a moment to review these key stats from our holdings (see below). Berkshire Hathaway numbers are distorted because of the accounting change that requires them to book unrealized equity loss/gain in the income statement on the quarterly basis. It would be disrespect to Warren Buffett and Charlie Munger to scrutinize their number, also we are not in a position to do that.

As advised by Benjamin Graham in the book Intelligent Investors, one should not give too much attention for a single year Earnings. Earnings at one point in time portrays a completely different story than at another point in time. For an example, Alibaba’s Q3 2022 TTM Net Income Margin is 1.62%, but its 5Y Avg Net Income Margin is around 21.5%. Current margin is an outlier. This is exactly why Investing is called Art than Science. One cannot make decision just looking at the numbers or ratios. You must articulate the number in your mental model.

Amazon’s Earnings got stripped in 2022. Amazon was in the mist of over-expansion because of the Pandemic. Their Capital Expenditures shot up and Income went negative so did it’s stock.

Alibaba was forced in the Bull fight with its Government, Competitors and Lock-down. Unfortunately, none of them are winning. Slowly, the Government is coming in sense and is likely to act as a referee instead of a contender. Their top line is impacted by the Lock-down. They are investing heavily in promotions and discounts, which impacted the bottom line. Year 2023 should be a sunny year for them.

Nike’s Inventories shot up quite a bit by the supply chain crisis and its stocks took a dip. Perhaps it was a better opportunity for a prepared mind, but we were not prepared. We thought the stock was still slightly expensive after all that discount.

Google, Microsoft, Apple, Costco and Chipotle’s top and bottom line expanded. Although, their stock suffered badly by the general fear of Inflation, Interest rate increase and recession.

We are familiar with the products and services of all the above business. They aren’t going nowhere anytime soon. All of them are bloated with Cash with very little Debts. They are all wonderful companies run my wonderful managers. At least we assume they are.

Happy New Year 2023

Whether 2023 will be happy or not that is yet to be seen.

Mathematically speaking, even substantial change in Nike, Costco, Chipotle and Apple stock price will not materially impact my overall performance because their allocation is quite low.

I am counting on my darlings: Berkshire Hathaway, Amazon, Alibaba, Alphabet and Microsoft to positively impact my return in 2023.

I have granted them the power to rock my financial dream. That was my choice, now it is up to them to scare me or deepen my sleep.

I am starting to realize that keeping track of 9 different companies is a daunting task for a full-time employee, and a dad, and a husband. I am planning to allocate my capital even heavily into few companies that I can trust. For now, diversification is my shelter before I build an umbrella that is threaded with right temperament and competence.

Diversification gives me the comfortableness for not knowing the company in detail and the sub-optimal performance that comes with it.

Key Takeaway of 2022

There are mostly three things that profoundly impacted me in 2022. I am not sure which discipline these two concepts fall under, but they seem more of a psychological concept than financial concept.

  1. Keeping Cash-cushion helped me enormously in the falling market. I coped so well while my portfolio was down around 40%, just because in my mind I was thinking – the more it falls, the better for me. I was prepared to buy stocks at discount because I had buying power. This simple trick helped me ignore the market fluctuation and sleep well. I just kept 1% of my portfolio in cash which was enough to trick my mind to ignore the sliding market at the same time does not fear the opposite i.e., the fear of missing out.
  2. Seeing my gains at 50% less is way better than seeing my purchase at 50% loss. Like most of the investors, red scares me be it blood or down market. I wasn’t much bothered by seeing my Amazon holding at 50% below the Jan-2021 mark, because it was all gains. However, the newly added Alibaba sliding just 40% scared the hell out of me. I need to find a way to see light green rather than red in my portfolio. It is good for my stomach.
  3. Once I understood the true bearing on my holdings and understood the nature of stock market, my excitement is numbed for any daily fluctuations. Unlike AMC, none of my holdings are going to change 50% in a day, so I see no need to constantly check my portfolio. Month-to-month there is barely a few percentages change in my overall portfolio. I start realizing that investing is a slow process. Better late than never!

I am constantly working to find a method for my madness.

My goal of all this is to learn and let learn. Reflecting on my activities have greatly helped me improve my process. I want to be a better thinker and a better investor. I hope my mistakes can be of your help as well!

Currently, I do not have the discipline, courage and patience to deserve an outstanding result in stock market. However, one day, I hope I will find a big fish that will make all my mistakes of the past go away; And it will be worth it to lose all these little battles but win the war.

Happy new year and happy Investing!

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