My Personal Investing in 2020
The year 2020 has been one of the most bizarre years in my investing career, and I believe that is the case even for the most experienced investors. If on January 1, 2020 a God-sent messenger was to tell us that during the year, we are going to have a global pandemic with 80 million cases (led by the U.S.) and 1.75 million deaths, and governments will force shutdown large parts of the global economy to control the virus, I doubt anyone would have guessed that S&P500 would be higher by 13.7% as of December 24, 2020. However, the following result was made possible by:
- Incredible speed with which multiple vaccines were brought to market
- Unprecedented scale and speed of the monetary stimulus by the Federal Reserve (and other central banks), including signaling intent to buy corporate bonds for the first time ever
- Unprecedented scale and speed of the fiscal stimulus by the government, including ‘helicopter money’ in the U.S.
- Aggregate market values increasingly being dominated by large technology companies that benefited from the shelter-in-place rules
While the S&P500 is higher than where it began the year 2020, the ride was not without high volatility. S&P500 had a maximum drawdown of over 30% with the bottom being reached on 23 March 2020. The volatility resulted in an excellent opportunity for finding bargains in the public markets. I used the opportunity to add exposure to stocks in my personal portfolio. In this essay, I will be describing in more detail my observations of the markets in 2020, my personal investment portfolio performance, my best and worst performing investments, and finally, the key lessons that I learnt or those that were reinforced in the process.
Given personal investing is a hobby to which I can only dedicate a very limited amount of time to, I generally impose strict rules to manage risk. #1 rule is exposure limits — no single investment can be greater than 5% of my portfolio at cost. #2 rule is having at least 90% portfolio in large cap stocks. # 3 rule is not to invest in companies with significant financial leverage. #4 rule is to only invest in companies within my circle of competence — financials, internet, software, media, consumer and industrials.
I ended the year 2020 (December 24, 2020) with a total return of 43% compared to 14% for S&P500 and 12% for Vanguard Total World Stock Index (chart below). On average, I had 70% of my portfolio invested in U.S. stocks, 10% each in China and Europe, and 10% in cash (USD).
One of the key reasons for this outperformance was that I began the year with c. 50% of my portfolio in cash. While I strongly disagree with sitting on cash in the current interest rate environment, at the end of 2019, I did not have great ideas to deploy my excess liquidity. While buying S&P500 ETF was certainly an option, the elevated index valuations at the time (c. 23x forward P/E) gave me a pause. However, once S&P 500 had fallen over 20% by mid March, investing in certain pockets of the markets felt like a no-brainer. I recall some well-intentioned Bloomberg TV hosts asking their guests at that time on how could one invest when there is no visibility on earnings next year. All asset classes except USD money market funds saw outflows. However, that general lack of visibility was what made the opportunity to invest in great businesses so compelling. For one, based on DCF math, a current year’s cash flow only account for c. 4–5% of the markets’ total value. At >20% fall in the markets, too much pessimism was being baked into prices. There is an interesting article on this subject by Oakmark Funds, which I highly recommend reading. Similarly, I recall certain investors trying to estimate the market bottom by looking at historical peak-to-bottom % in past crises and waiting for a bottom before deploying capital. However, from past experience and listening to prominent fundamental investors, I knew that timing the market is a fool’s errand and one is better off starting to deploy as soon as the valuations becomes reasonably cheap and add on the way down. The chart below given more details on my capital deployment over the course of 2020.
The second reason for the outperformance was the stock picking. The charts below gives my top performers (contribution to return > 1%) and bottom performers (contribution to return <-0.5%). Most of these companies are well known businesses, yet their stocks were trading at very cheap levels in mid-to-late March and some of them have doubled from their bottoms. While I would love to discuss my thesis for each of these names in detail, that is not the purpose of this essay. Nonetheless, feel free to reach out to me in case you would like to discuss a specific name.
Finally, I would like to discuss the key lessons that I learnt or were reinforced from my experience in the markets in 2020:
- Do not try to time the market: Discussed above and can’t emphasize this more. While I broadly adhered to this philosophy and benefitted, I did bite the dust with my relatively small short on the Russell 2000 index when I felt the market was getting ‘frothy’. It turned out to be my second worst performer (IWM put options, see above chart)
- Track insider activity: Several of my best performing ideas above originated because I saw management aggressively buying their own stock in the open market during the crisis. Such names include PLNT, EPD, TDG, CLR, MGM, MS, etc. It made the investment decision a lot easier
- When facts of the underlying business change, sell. Don’t wait to get lucky: This comes from observing Warren Buffett selling airlines stock right after the meltdown started. While airlines were relatively small part of his portfolio, he did not wait to get lucky and exit at cost or above. I believe that one should sell as soon as the fact of the underlying business change instead of waiting for luck (or the Fed / government) to bail one out!
- Be wary of excessively levered companies: One of the leading causes of poor investments is excess leverage. Many businesses are levered for the good times ie. when liquidity is cheap and abundant, and show good ROEs. However, when liquidity evaporates, the business is often left scrambling for rescue financing. We saw that with the financials stock in 2008 and mortgage REITs in 2020
- Patience is key: One of my heroes, Charlie Munger once said: “The big money is not in the buying and selling, but in the waiting”. Having liquidity and the guts to deploy it at times of panic requires an investor to be patient for the right opportunity to show up. While it is not easy in the context of professional investing, its perhaps one of the key determinants of long-term success in the investing business
2020 was certainly a year of tremendous personal growth for me as an investor. I believe that successful investing requires an unusual mix of intellectual horsepower, self-confidence, humility and level-headedness. While investing is incredibly difficult to master, it is certainly an exciting journey. 2020 has ended on a good note for many investors, myself included, but it may have some unintended long-term negative outcomes, a topic of discussion that I will leave for a future post.
