Date: 2023-01-08
A progress report on investment
A new year, another progress report.
Investment wise, there has been substantial developments/improvements. Over 2021 and 2022, as far as personal investment is concerned, I finally confirmed which investment style to pursue for the remaining life. Turnover in the past two years has been NIL, too - this is a good sign. I feel little silly that I haven’t done this much earlier mostly due to some permanently lost capital which would have stayed otherwise. However, the confirmation process was enriching in terms of experience (always) and monetary returns (most of the time), and the time taken to come to such a conclusion was probably well spent. As much delay there was, as strong conviction there is. This is because, such a long observation/consideration period allowed me to understand my forte and weakness better than otherwise, and I got to explore/test out other styles quite extensively.
While (1) non-levered (2) long only (3) quality focused (4) bottom-up value has some limits (=prolonged periods of poor performance at times and no eye-popping returns at the portfolio level in short period of time even when high conviction investment ideas actually play out), it seems to suit me best. I go over it, piece by piece.
(1) In 2018, 2019, and 2020, I had an opportunity to use leverage quite extensively. Everything was good until things went wrong just once due to a silly mistake, and I was burnt very badly. Emotional roller coaster with leverage was incomparably dramatic compare to that without leverage, mainly due to the fear that even if my investment thesis eventually plays out, I can still be wiped out in the process. All in all, had I not used any leverage, I would have enjoyed a far superior investment return with far less stress.
(2) I observe myself placing increasingly greater emphasis on the efficiency in investment research and execution. In that sense, I find long only more efficient than long-short or short-only, due to the nature of short positions. At one level, there is an innately unfavorable risk profile of naked shorts (exposure to possibility of infinite loss versus maximum 100% return), then there is another issue of having to keep the short positions tiny for the risk management’s sake, even for the successful shorts. On top of that, holding assets with fast eroding time values also go against the way I view the concept of permanence and preservation of capital, so this is a challenge when utilizing derivatives. Most of all, I found shorting highly inefficient, as I found myself draining way too much intellectual (due to research intensity) and emotional energy, even as actual position size could never be big so long as I am responsibly investing. Risk management wise, long (infinite upside and limited 100% downside) is arithmetically just far superior to short as well. I value this especially because I experienced meme stock squeeze during the Covid period, firsthand – thankfully my initial sizings were prudently made, so I was safe at the portfolio level, however looking at shorts blowing up over 100% a day still was extremely painful. Back in 2018 and 2019, there were times my short positions were definitely way too big, mainly due to my inexperienced-ness in shorting, and just the thought of squeeze still gives me chills. Back then I was unknowingly hubristic, and I survivsed purely thanks to good luck, in that sense. Hence no shorting.
(3) Again, when thinking of the efficiency in investment research and execution, quality focused approach is superior to the opposite approach (of having a much longer list of assets on the watchlist, essentially). I finally came to a realization that quality focused approach allows the researchers to revisit the same names over and over again, and the process of mastering those few names is highly constructive. One just needs to take caution against emotional attachments to these investments. I find that this is also quite conducive for focusing on values, because this revisitation approach seems to be effective in preventing any short term over-excitements. Such revisitation approach also allows the analysts to effortlessly feel the pulse of the industry/macro accurately, and this is a bonus.
(4) I recall reading somewhere that human brains are story telling/hearing machines. In that sense, both top-down and bottom-up stories are very fun to follow or write. So my long term shift in focus from top-down to bottom-up probably isn’t just because it is fun to follow micro stories. But it is very fun, so that certainly is a factor. Perhaps I was too disappointed at the outcome of my long term gold trade – this was the trade that took longest (in the period between 2011 and 2021), and whatever the reason was (most likely due to the distractions created by cryptos, I would argue), return fell far short of what I originally expected, even as the macro environment could not have been more favorable to gold. Per this topic, a prevailing theory among my closest friends' circle in investment (exclusive 3 men club because nobody else expressed interest to join) is: finally, it is time for gold to shine, because Minseok got out after being so deeply disappointed. And of course, gold has been performing fine, recently. Investment certainly makes me be humble. Bottom-up value suits me also because, after about 14 years of personal investments, I realized that some of my long term picks performed extraordinarily well and that I shall focus more on picking those and holding. I let most of these great picks run away from me, not due to lack of patience but due to lack of evidence based confidence with my stock picking ability. Now that I feel the need to give myself much more credit in terms of the picks, I am more likely to keep revisiting and holding. Of course, there were numerous terrible picks in the past as well, and avoiding those picks will remain as the biggest challenge going forward. Until I turn as confident, bold, and decisive as Munger is, I shall continue managing such wrong-pick-risk by diversifying sufficiently.
Result has so far been quite encouraging, and I am hopeful that I will be able to benefit from a decent and stable performance in coming decades. This excites me. Since 2021, my investments have been positioned in the way that would benefit most if there were improvements in corporate governance in major Korean corporate groups, and while the progress can’t be timed, the direction seems clear, and I belong to a more optimistic camp. Investors including myself just need to wait for some activists/public/politicians to make some noise. Then there are some yield focused Hong Kong picks (given the tax considerations) and Japan picks which are assuring-ly benefitting from secular tailwind yet reasonably valued. Fingers crossed.
In Q4 2022 and Q1 2023, I am slashing the public equity portion to reduce the mortgage loan principle, and this is probably similar for many people. This may turn out to be a prudent path to take, especially if the rate turns out not to have peaked yet – which is not a low probability scenario. I am not very hopeful on the prospect of any substantial surprise cuts anyway, given that Arthur Burns’ mistakes have been so well published and Jerome Powell understands this topic so well.
Alas, what am I talking about? What am I becoming, a reluctant macro trader?