The Small Experiment

 

I have always found stock market investing to be an interesting topic.  This is mainly because I am not very good at it.  My boss throws a lot of zingers at me.  One of my favorites is what he had to say about my abilities as a project manager - "you can become a mediocre project manager if you work really really hard at it".  Well, it did make me try really really hard.  It is the same with stocks.  Most of my life, I have been mostly an external observer of it, since I know myself and I know my limited stomach for risk.

A few things have changed in the last few years.  Financially, we are at a much better place and I realized that I can afford to risk a lot more without really denting the outlook of our financial future.  The second is the growing realization that you mostly learn about investing by doing, not by learning.  The reason being that your investment philosophy needs to be aligned with your own personality (in my case, the limited risk appetite and a constant search for bargains) in order for you to succeed.  If not alignment, you at least need awareness of self and a willingness to step out of those limitations.

In this series of posts, I intend to mostly present results of my experiments and leave it up to the readers to draw their own conclusions.  Until last year, I did not seriously consider holding anything except index funds.  I was happy to cost average and ride out rough markets.  However a couple of years of reading two blogs: Mr. Tako Escapes and Tawcan encouraged me to look at dividend investing.  The main reason why these appealed to me is because it is written by two everyday people much like me.  Most other blogs I read are written by highly competent investment professionals (like Aswath Damodharan).  I am not capable of replicating their investment choices.  Tako and Tawcan on the other hand are just everyday people who have managed moderate success mainly by patiently grinding it out.

I slowly formed my Investment Thesis#1:

Buy Dividend Stocks that are paying about 2-3% presently and are growing them by about 10% CAGR.  The yearly dividends will grow to more than 10% percent of the original invested capital in about 15 years.  We can likely get there in 10 years by reinvesting the dividends to grow capital.  A 100K dollars thus invested will give a 10K return every year after that - a meaningful component for your post retirement income stream!

The main problem with this thesis is my need for "bargain".  I felt good companies that offered dividends in this range were all overpriced.  The market pullback in March 2020 was a great opening for me.  Between April and September, I purchased a bunch of companies that I wanted to buy before the pandemic.  I did not know the market would bounce, but I felt these companies would get back to their pre-pandemic trajectory once the pandemic ended.  WHR, ALPIB, DIS, AFL are some stocks in this portfolio.

There was however, a problem with this thesis.  I was very fortuitous with my timing.  DIS was a stock I purchased the week the market bottomed out.  I could not have done better in terms of timing (it was sheer luck).  However, I could have purchased the stock way back in 2018 for a similar price, but I thought it was "too expensive" then.  It seemed to me that waiting for a bargain event to show up is the wrong way to invest.  You lose years of growth waiting for the right moment, and will most likely miss that moment when it does arrive.

I am also influenced by my experience with GOOG stock.  I thought it was expensive when it debuted at around $100.  My wife kept asking me to buy it, but I did not.  At every point during its rise from 100 to 1000, I thought it was too expensive.  To this day, I have never owned the stock.  From the hindsight of almost 20 years, I can now clearly say that this was a wrong decision.

A very similar dynamic started playing out when ABNB IPO was imminent.  I wanted to buy it.  Aswath thought the stock would be priced fairly at about 40 and 47 was the high end of what he would consider a sane valuation.  It was clear the stock was going to IPO well above that range - so what should I do?

I decided to do a natural experiment with Investment Thesis#2:

Here the idea is to suspend my own disbelief and trade in stocks that I believed had a good story, but whose valuations rebelled against my notions of a "bargain".  As I snidely put it to my cousin, I wanted to first decide which stocks I would never buy at their current price, and then go ahead and buy them.  The idea here is to forget dividends, and buy momentum stocks with plausible stories for long term growth and make money by capital appreciation.  Without actually risking these dollars myself, I did not feel any opinion or learning was worth a damn.

ABNB, PUBM, VWDRY and FUBO are representative of this set.  ABNB debuted at $150 (3 times the upper limit that Aswath suggested).  Against all my instincts, I bought this as the first add to the Speculative portfolio on the day it started trading.  Each add in this portfolio since has a growing business, but are speculative investments since they are not backed by free cash flow, or dividends, or even profits in most cases.  Their valuations are way above where most quantitative models say they should be at, given what we know about them at this time.  They all truly represent stocks I would never buy.  

One note on my speculative portfolio is in order.  The Speculative Portfolio still has stocks that I intend to buy and hold for a while.  They do not have things like GameStop which could be good trading plays, but are not really things that I can buy and hold for a long time (many months to many years).  I just don't have time to watch a stock during the day and am really not playing at taking advantage of sharp intra-day moves.  I want to check in on my stocks no more than once a week.

Now that I had these two ideas, I setup two separate accounts for them and started them off on Jan 1st with the same amount of funds in each.  They each represent about 10% of my liquid investments (most of which is in retirement accounts).

I will provide a monthly update on how they are doing.  I don't suppose we will know which one is better for 10 years.  But it should be fun and revealing to see how they operate in the many bull and bear markets we are likely to see in the mean time.  I am sure I will learn things I cannot even conceptualize right now.

January Update:

The Dividend Portfolio has grown 1.7% in a month.  It was actually up 8% last week, but pulled back significantly since.  About 0.3% of this was from dividends.  The rest from capital appreciation.

The Speculative Portfolio has grown an incredible 20%!  It was up 25% at the peak before pulling back in the last week of the month.  The funny thing is that this speculative portfolio pulled back less than the "safe" dividend portfolio.  Two stocks FUBO and PUBM actually rose strongly when the market corrected and counteracted sharp pullback in some of the other stocks in the Speculative Portfolio.  It could be because of GameStop style short squeeze in FUBO.  Time will tell.

Although the Speculative Portfolio seems to be off to the races, it is too early to draw any lessons.  This could be just the late stage tired bull going parabolic before a crash.  Or it could be setting the stage for a new leg.  Who knows!

Key Stats - Jan 2020:

S&P 500 Since Jan 1st 2020: -1.1%

Dividend Portfolio Since Jan 1st 2020: 1.7%

Speculative Portfolio Since Jan 1st 2020: 20.7%

See you all in Feb for the next update.