2-Years Investing in Public: The Good, The Bad, The Ugly
A little over 2 years ago, I started publicly sharing investments on my Performance Scorecard. Specifically, I shared the baskets of stocks that I was buying. What I was building is a Coffee Can Portfolio. The idea of a Coffee Can is simple: Try to buy a basket of the best investments you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
At first, this was meant to be shared with friends and family. Over time, I decided to share it more broadly.
Well, it’s been a little over 2 years (~27 months) since the first publicly shared purchase. Here are the results so far.
Note: The above Coffee Cans have a minimum 3-5 year holding period.
Let’s review what’s happened and what we can learn from the experience.
But First, How It All Started
Why did I start sharing my investments publicly? 4 reasons:
To Document Things To Improve My Decision-making
To Better Codify my Investment Philosophy
To Experiment & Keep Score
And To Have a Little Fun Along The Way (i.e. Family Bragging Rights..see below)
1. Documenting Things To Improve Decision-making
Investing is a long term game. It requires one to make many decisions. Some of these will be good, and some bad. In aggregate, over time, they will have a lasting impact. As someone who’s made a lifetime commitment to investing, I want to ensure that I make better decisions everyday.
To do this, I must build the capacity to always challenge not only conventional views and beliefs, but also my own. This can be hard. Extremely hard.
“One reason why it's so hard is that our brain's have some funny kinks that exist to give us a "kinder and gentler" view of reality and ourselves than is warranted. One such kink is the foundation of hindsight bias, where our brain rewires our "memories" to make them consistent with current conditions. And the sneaky part is, we genuinely believe that our current "memory" of what we thought in the past is accurate.”
—Jim O’Shaughnessy
By sharing my investments on my Scorecard, and writing about them here on Playing For Doubles, I can “go back in time” and see what I had been thinking, and compare it to what actually happened. By reflecting on the events that took place in between, I believe I can improve my investment decision making process over time.
2. Codifying my Investment Philosophy
Although I have been investing for a while, I had never taken the time to really articulate my investment philosophy. Of course, this will always be a work in progress, but, I wanted to take some time to write it down for myself.
I have started to do that here:
3. Experimenting and Keeping Score
It’s amazing how little scoring is done when it comes to the world of investing.
Wall Street doesn’t keep score. We know very little about the investment track records of most investors. The media doesn’t keep score either. Several individuals make stock predictions on CNBC all the time. However, their predictions seem to be forgotten as soon as the show ends.
However, if you really want to get good at something, you need to be keeping score. This allows you to create a learning system where you can experiment and observe whether you did well. Then as a next step you can ask yourself, “what can I do to do better?”. Lastly, you can make changes, conduct new experiments, and re-evaluate your progress, and so on.
As a result, I wanted to better track my investing experiments. This has allowed me to see what I’m doing well, and where I can improve.
4. Family Bragging Rights
For years, I have been trying to convince my sister that she should invest in individual stocks. She prefers indexing instead.
So in early 2019, in an effort to encourage her to switch, I told her that I would invest in a portfolio of individual stocks and that we could compare the results against the market. To my surprise, she was actually interested to see what happens.
So We Made A Bet:
If I beat the market over the next three years (April 2019-2022), I win.
If I don’t, she wins.
Loser will be the winner's personal butler for a day!
And so it began, the quest for bragging rights.
Investment Strategy: Investing in Mavericks
I am convinced that most people don't beat the market. It is extremely hard, especially the longer the time frame. But most people also BELIEVE THEY CAN'T beat the market. So if you're looking for reassurance that it is possible, you are unlikely to find it.
As a result, most people don't try. I don't blame them. Long term market index returns (~7-8%) are adequate.
The good news therefore is... competition is low.
I certainly believe it is possible. In fact, after having worked in Tech and VC, I believe that approaching stocks like Venture Capital is one way we can all beat the market. And it is this belief that has most influenced my investment approach.
A brief outline of the approach, as shared on my Scorecard, is as follows:
Investing in Mavericks: Venture Capital in the Stock Market
This investing approach applies "Venture Capital Investing", but in the Public Markets.
In short: We are looking for small companies poised to become the best companies of our time. Think, Amazon or Netflix in the early 2000s. Companies that, if they succeed, have the potential to 10X in 10 years or less.
This approach really comes down to envisioning what the world MAY be like in the future, and investing in companies who can make that proposition a reality.
We want these companies to be run by visionary leaders, and we will aim to own these stocks for long periods of time.
I believe this approach will likely result in many failed individual investments (just like Venture Capitalists experience) but I also believe this investing approach can be quite lucrative, if executed well, and patiently.
The Magic of the Power Law
On December 4 2019, I wrote “Investing in Mavericks: What Returns Need To Be?”.
There, I suggested that if we are to be successful with this strategy, we need to construct a portfolio that will help us generate a venture capital-like return profile. That is, we need:
To take enough risk in our holdings and
To hold on to our investments long enough, such that we can get outsized returns from a handful of them.
I wrote:
“If we are successful, winners (which should return multiples of their original investment) should cover the losses from all the Distractions, and then some...”
And that, if the investments demonstrate Power Law dynamics,
“The best investments ends up being worth about as much as all the rest of the investments combined.“
We are starting to see exactly these characteristics emerge.
Below is a distribution of the investment returns over the past 2 years.
Notice, unlike a normal distribution, our return distribution is heavily skewed to the right. We’ve captured a large number of winners. Of course, it has only been 2 years, and we have been in an incredible bull market post covid, so I do expect this distribution to shift left over time. This has already been happening.
More importantly however, notice how our winners are significantly outstripping our losers. The worst 27 investments are cumulatively breakeven (+2%), while Five Below (FIVE), the 28th worst performing investment, has returned 64%. That is, FIVE is worth more than all of the 27 lower performing investments combined!
The remaining 30 investments have performed even better.
This is exactly the power law at work.
Performance Metrics:
Number of Investments: 58 equal sized purchases
Win Rate: 76%
Loss Rate: 24%
Average Gain: 144.33%
Average Loss: 15.7%
Win to Loss Ratio: 9:1
A 9:1 win to loss ratio and a 76% win-rate are clearly unsustainable.
I think a 45-55% win rate, and a 2:1 Win to Loss Ratio may be a good long term target to strive for (see purple region below).
Lets zoom out and look at the performance of the Coffee Cans, because that’s what ultimately matters.
We’ve been in an incredible bull market. As a result, all the Coffee Cans have done well. But I’m most proud of Coffee Cans 1 and 2 since they were purchased before the Covid crash.
What I expected to see? In general, if I invest well, I would expect the longest held coffee cans to perform the best, unless we experience a severe market crash in between. In that scenario, the coffee can(s) purchased during the downturns should perform the best over time.
Is that happening? That’s largely been the case. The lowest performing coffee cans are the newest ones. “Coffee Can 3: Flywheels”, which was purchased during the Covid lows is leading the pack so far. We will see whether this continues.
Revisiting The Covid Lows
On August 15, 2019, I wrote that in order to Win at Investing, we must be prepared to embrace volatility.
We saw first hand what volatility looks and feels like. Many of the investments took massive haircuts during the past two years, primarily due to the Covid Crash.
This scatter plot helps us visualize the volatility we experienced, as a function of time.
The Average Max Drawdown was 18%
The Average Time to Max Drawdown was 48 Days
The Median Max Drawdown was 10.5%
The Median Time to Max Drawdown was 20 Days
I expect all of the above metrics to increase (i.e get worse), since we have benefited from a bull market.
Four investments saw declines of more than 50% from purchase:
Eventbrite, bought on 4/4/2019 (max drawdown was 72% after 366 days)
Eventbrite, bought on 5/2/2019 (max drawdown was 65% after 338 days)
Bitcoin, bought on 2/11/2020 (max drawdown was 61% after just 27 - talk about bad timing!)
Baozun bought on 8/21/2019 (max drawdown was 51% after 210 days)
Three of these were from Coffee Can 1. That’s quite a ride.
A quick look back to the Covid lows shows us that the market bottomed on March 20, 2020. At that time, the only investment in our portfolio that was positive was Teladoc (TDOC). Every other investment was down…significantly down.
It was not easy to experience this. We had to sit still, and trust that the businesses we own will adapt to the changing market landscape.
By embracing volatility, this is exactly what I mean.
The Dreaded Drawdown...Or Is It?
Investing in Mavericks is what I call an “Active Passive” investment approach. The active part is choosing our individual investments. The passive part is sitting tight and letting our theses play out over long periods of time.
It's hard to avoid volatility with a relatively passive investment approach like this.
However, there are a few ways we can dampen volatility:
One is with Diversification.
Ideally, the stocks we buy aren’t correlated. Unfortunately, practically speaking, this is rarely the case, particularly during downturns.
Even so, stock prices generally don’t always move in the same direction and to the same extent. As a result, even if a portion of our portfolio is declining, the rest of our portfolio may still be growing, or at least not declining as much.
We try and achieve diversification by investing in baskets of stocks.
A second is with Time Diversification.
I believe time diversification is one of the greatest sources of edge for individual investors. This is one of the reasons Index Investing works so well. Time diversification is the idea that we invest our money on a periodic basis, say a certain amount every year. This ensures that we are investing in the best opportunities we can find every year. Some years, we may be forced to pay high prices. In other years, we will pay a lot less.
To be clear, just because the market (i.e. S&P500) is up doesn’t mean, the prices we are paying for individual stocks is automatically high. Remember, it is not the stock market that we invest in, but rather, a market of stocks.
We can achieve time diversification by investing in multiple Coffee Cans per year, every year.
A third is with Hedging.
Hedging is the cost of insurance against a potential stock market drop. By definition, hedging is a waste of money... most of the time. Just think about how many months of car insurance premiums you’ve paid vs used. Sometimes however, insurance comes in handy.
Hedging is something I ought to look into more deeply.
All that said, the good news is volatility is not risk. Unlike a private market transaction, since the stock market is auction driven, prices tend to undershoot and overshoot fair values. Volatility therefore is a feature of the stock market, one that we can try and exploit.
As individual investors, we have the luxury not to be forced to sell our investments at in-opportune times, just because they are temporarily down, or due to other external pressures. In fact, we have the power to deploy more cash during such downturns.
Therefore, although drawdowns may be dreaded (no one likes watching their net-worth fall drastically), drawdowns can also be a gift, especially if one is a net buyer of securities.
A Few Parting Thoughts
Good Investments Need Not Be Obscure
Can you imagine how off-putting the stock market would be if the best performing stocks were all the ones you’d never heard of? Or the ones selling obscure products you’d never tried?
The beauty is...that’s not the case.
It’s Important To Trust Your Judgement
Nothing screws over the average investor more than self doubt.
When it comes to the stock market, I believe that imposter feelings, the idea that one has only succeeded due to luck, arise because of a lack of confidence. It is easy to fall into a trap of thinking “there are so many institutions investing in the stock market today, so how can I possibly compete?”
This inferiority complex causes investors to do several self-destructive things, like discounting their own convictions, taking excessive risks, or imitating “so called professionals”.
I suspect that most investors would have a much higher opinion of their investing abilities if they simply favored their own research.
Fearful Times Are The Best Times To Invest
Our best performing Coffee Can was purchased during the depths of the Covid Crash.
Why did this turn out to be the case? Because there was significant fear and uncertainty around, which meant prices were low.
During such times, every fiber of your being will tell you to run for the hills. However, reaffirming your investment strategy by adding money to your portfolio, is usually a great decision when markets are in a selling frenzy.
“Be Greedy When Others Are Fearful!”
-- Warren Buffet
Easier said than done, but that’s the goal.
There Will Always Be Missed Opportunities
Like everyone else, I also missed out some great stocks. Some I never bought. Some I didn’t buy as much as I would have liked. Here are a few :(
The Joint Corp (JYNT): JYNT is a franchisor and operator of chiropractic clinics in the US. It seems like every new strip mall I drive by has a JYNT in it. This was trading around $15/share in July/August. It’s currently in the 80s. Sigh…
Twilio (TWLO): In early May 2020, this stock skyrocketed from about $120/share to almost $180/share in one day. Unfortunately I missed it. I was hoping for a pull back, which never came. Today the stock is just shy of $400. I finally came around to buying it recently. Hopefully, I’m not too late to the party.
Shopify (SHOP): I wish I had bought more Shopify.
Zoom (ZM): Another one, I didn’t buy early enough.
There Are Always Ways To Improve
Like any worthwhile endeavor, it isn’t easy. There are always opportunities for improvement. Here are a few things I hope to work on:
A More Structured Investment Process: The demands of an intense full-time job can make regular stock picking difficult at times. As a result, I hope to continue to create more structure around my stock picking process. This newsletter has certainly created accountability and is a step in the right direction. A full-time investment operation or job might be ideal?
Watch Stock Prices Less: In the short run, stock price movements can be unpredictable. In the long run, stock returns are driven by business fundamentals, things like revenue and growth and profits. It can be easy to fall into the trap of focusing too much on what the stock is doing as opposed to what the underlying business is. Paying less attention to day-to-day stock prices is one antidote. I hope to do more of this.
Connecting with Other Fellow Investors: There are many great investors out there. If you share the same passion for investing as I do, I’d love to meet, connect, and collaborate. Do reach out.
Smarter Coffee Can Design: How can I design better coffee cans? For example: What can be done to reduce correlation among the investments in any particular coffee can? Or how many stocks should make up a Coffee Can? I will continue to think about how to design better Coffee Cans.
What’s Next?
Some things I’m considering writing about in the future:
How to build your first coffee can?
How to build a portfolio of Mavericks?
Is Public Venture Capital (i.e. approaching stocks like venture capital) better than the real thing?
If these topics interest you, let me know.
If you’d like me to write about something specific, also let me know.
In Conclusion…Coming Full Circle
I wrote above that my sister preferred indexing. Have I succeeded in encouraging her to invest in her own Coffee Cans?
In her defense, she has certainly become much more interested in investing. So I’ll take that as a win.
Thank you for reading.
Now, let’s see what surprises the next year brings.
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Happy Investing!
I doubt selling so many stocks allegedly at the highs , fits your description of "coffee can investing-holding for 3-5 yrs" r.i.p.