Obsessing about data
And building an Investment portfolio
Ever since from our initial days of running a fund to blogging from Somapah.com to Substack, we have been an obsession in keeping and tabulating every single data point.
Data include date and time of each and every meetings, the time spend on each devices and on which program and of course all the possible financial data we had accumulated.
Other than data include the usual like financial reports, there are data on all trades and the reason/rationale for the purchase. The data are organised to see and correlate causation. The data had been collected since 2002 and finally we had taken time to break it all down.
From 2002 to 15th July 2020, 378 listed companies been purchased and 222 been sold with positive returns. Our batting average is 58%. This is nothing to scream about.
Out of this 18+ years, there is 4 years in which my yearly positive pick had dropped below 50% (2008, 2011, 2017, 2019). On an overall basis, we have only 2 down years in 2015 and 2018.
Learning: Even if you had invested at the wrong time and have a lousy batting average, it is still possible to to have a positive return on your portfolio if you had held on to the investment.
Number of Trades:
The most profitable years had been in the earlier years when the portfolio is small and concentrated.
From 2002 - 2006, the average number of companies invested per year is around 7. From 2007 onwards, the numbers skyrocketed to an average of 25 companies invested per year.
Our batting average (number of years of positive return) from 2002 - 2006 is a high of 77% versus 2007 - 2020 of 56%.
Learning: Batting average decreases as more investment decisions are made. Do more in-depth analysis and invest in less companies per year.
If we are to go into the detail on what is skill and luck, we need to delve in further into the investing journal.
We will have a 72% batting average if we have a
thesis on the industry - Sector Gap Arbitrage (SGA)
and a thesis on why there is a valuation gap - Valuation Gap Arbitrage (VGA)
If we have only SGA, the percentage drop to 37.5% (pure underperformance).
If we have the only VGA, the percentage is 47% (almost a flip of the coin).
If we have neither, the chance of getting it right still stands at 47%.
This indicate to us that, if we are to have an investment working for us, we must have a SGA and VGA thesis.
Our data is telling us is what legendary investor Michael Steinhardt said 20 years ago, you need Variant Perception for an investment to work.
“That’s not enough you have to be right. A contrarian is a plus, but it’s not enough. To be a contrarian is easy, but to be contrarian and to be right in your judgment when the consensus is wrong is where you get the golden ring and it doesn’t happen that much, but when it does happen you make extraordinary amounts of money. And in order to do that, you have to be intellectually advantaged. You have to go through that same routine in terms of intensity, focus and commitment and the sorts of things that makes anybody in any area I think superior”
– Michael Steinhardt
Learning: Variant Perception still works. The investment should have a thesis that is not of consensus view.
Type of Investment:
We organised our investments into 8 basket
Cyclical Growth (12.5%)
Moderate Growth (69.7%)
Unrecognised Growth (53.33%)
Efficient Growth (72.73%)
Special Situation (70.97%)
Industry Leaders (85.7%)
The percentage beside the category represent our batting average.
The easiest game is to buy the Industry Leaders (85.7%) and the companies with Efficient Growth (72.73%) - ROE > 15%, when the market sells them down for whatever reasons. These are easy for novice investors to do.
Special Situation (70.97%) which include spinoffs, M&A and change in management, etc, has a high batting average but this type of situation takes a lot of work.
Moderate Growth (69.7%) are companies whose ROE is between (10% - 15%). The work level is similar to Special Situation. Most of the time, we are hoping to spot an Unrecognised Growth (53.33%) but instead spotted a Moderate Growth instead.
Graham (60.94%) is easy to spot and work on as we usually just buy the company that is selling below cash or networking capital level. Graham position takes the least amount of work but the volume of companies to build up a decent position is huge as we only take a small sizing on each position.
It is tough to successfully spot Unrecognised Growth (53.33%) whose growth had yet to materialised or is not well recognised by the market. It is just tough to spot an Amazon and Google well before they become one.
We have to just avoid or limit our sizing in Cyclical Growth (12.5%) and Turnaround (42.86%). We are so poor at them that we might as well be throwing darts.
Learning: Different investment require different time and effort. The novice investor will be best advised to just choose the best companies while the enterprising investor may want to go for more special situation. But the BEST returns should come from the Better companies which are engaged in Special Situation.
We hope that we had given you a flavour on how we invest and our thought process. We aim to still diversify our investment through the 8 baskets. For you, do choose the ideas you are comfortable in and maybe join us for the ride.