One year of Exploiting Mister Market – Review

One year has passed since I started this project. So it is about time to take a step back and review what went well and what did not. 

Let’s start with the blog. The frequency and quality of posting was not great. I could come up with many excuses why that was the case but let’s look forward instead. I will try my best to publish more company analyses and investing related posts. The blog has brought me into contact with some very knowledgeable and smart individuals. This is a great motivation to post more, reach out to more people with my ideas and have them reviewed critically. 

Then the project itself. There is a clear distinction between the first half and the second half of the year. In the first half I did 23 trades, during the second half I did a whopping 200 trades. What changed is that I finally implemented my portfolio management framework. (https://exploitingmistermarket.com/2020/01/17/portfolio-management-framework/) This amount of trading sounds probably excessive but rest assured there is method to the madness. I follow very strict portfolio management rules, which leave no room for emotional decisions fraught with biases. I am very proud of the process driven and diligent implementation of portfolio management. Besides mitigating risk, I believe it is a source of significant edge. 

I will implement a few changes. I have been trading through multiple brokers, in an effort to try to minimize brokerage commissions. I have decided this will change. I will centralize all positions and trades in one account. This has some downsides (higher fees) but one big advantage is that I can start building a track record that is easily shareable and easier to audit. I will try to get everything sorted by the end of the year. At that point, I can really start running a proper track record. I will still share the performance up until then though. 

Let’s talk about performance now. The portfolio is up 3.3% in the first year. Excluding dividends, the S&P and the MSCI World are up 10.7% and 6.4%. The Hang Seng Index was down 8.5% during the same period. The average performance of all the stocks that are/were in the portfolio is around -25%. What can I conclude about the performance? I guess two things. 

• On average the stocks in my portfolio behaved poorly compared to all indices I cited before. However I have confidence in all the portfolio companies. There has been an impact on some of the businesses by the covid crisis but all have great financial strength and will see it through. What happened to the stock prices of these companies is mostly multiple compression. The entire portfolio is now cheaper than ever. Since I am always adding money, I am happy with this.
• The portfolio management framework brings a significant edge on top of the stock selection. (Portfolio performance is 3.3% vs -25% on average) Two things are responsible for the outperformance on the average of the stock selection. I was committing money faster when the stock prices were marked down. And I was profiting from the fact the stock prices were quite volatile and uncorrelated.

A few more general remarks then. I try to fish where the fish are. I have found the HK small cap market to be a very fertile fishing pond. That’s why my portfolio consists of 95% HK stocks. If this pond becomes overfished, I will move on to the next pond. But I still have a long watch list with potential inclusions, so I don’t see that happening soon. The companies that I own are overlooked, misunderstood (I hope) and very cheap. Most often the cheap valuation is the result of the combination of very low liquidity and a big holder that is trying to get out. I generally am on the other side of this seller. This also means that the price will generally not rerate quickly. This is a feature and not a bug. I can live with a very long undervaluation of the companies that I hold. As a matter of fact, I would actually prefer this, since it means I can slowly accumulate a bigger stake in the companies that I already hold. (Besides adding money regularly, my portfolio has a 9-10% dividend yield) With this in mind, it makes sense to evaluate performance over longer time periods rather than a one year interval. I expect to average a 15-20% compounded return over the long term. I’ll report the performance again in half a year or earlier if the portfolio has fully migrated to one account.