This week I have struggled to find anything inspiring to write about. I do not want to write another post about how to deal with draw-downs or volatility. I have written posts about that already. As long as we are under the marginal cost producer, I still think we have a long way ahead of us. This is just one of many corrections to come.
Instead I will write a short write up about my first 10 years of investing my own funds and some anecdotes I have found and learned from on the way.
My investment story so far
In the beginning of my investment career I was a third year student at business school without a lot of money. I wanted to learn about investing and found the best thing was to experience it for myself. I therefore created an account for myself and started trading. The first thing I learned was there was a big difference from theory to practice. The rush of endorphins if I saw my stocks go up 5% in a day at the beginning can only be compared to winning at a slot machine. The clinical descriptions in the textbooks were not good at describing how investing felt.
I learned about diversification, the efficient market hypothesis, how it is practically impossible to beat the index at school. At the same time I read a lot of books on investment strategies, the stock market, and economic history on my own time. In the beginning I just about followed every strategy I read about at once. This led to results that can only be explained like the decisions were made by a headless chicken. Long story short, I lost money. In retrospect I will choose to call it my school money. Luckily the amounts were 0.1% of what I have invested today.
In the following years I tested out a lot of different strategies, I just made sure it was one at a time. In 2012 I was very enamoured with dividend stocks and wanted to receive as high cash flow as possible from my investments. I was not alone in this sentiment. Many people have felt the allure of cash flow from investments. Andrew Carnegie, one of the more famous tycoons, being one of them:
Like every other investor I also had a stop by Warren Buffet and value stocks, but I did not have the experience at the time to stick to that plan. In the end I found the best thing for me, as an impatient investor, was investing in quality stocks that had steady revenue growth. The FAANG stocks, and other tech giants, became the staple of my portfolio for years. Something that was very profitable for me. Instead of the index beating me all the time, I started to outperform it. I also had to pay a lot less attention to the markets. The companies just continued to go up.
This could very easily have been the end of my investment journey, but I was always looking for new inputs. I was looking into angel investing and the “Unicorns”. A lot of what I saw there did not make any sense to me. You had competing ride-share companies Uber and Lyft, who were both valued in the billions. Both of them did not have any plans to be profitable for years. (I think the low interest environment has been a big factor in these valuations. Very low discount rates for future cash flows, increase the value of the company today).
What put me over the edge here was WeWork and their failed IPO in 2019. Angel investors had just inflated the valuation of the company on the way up to $47 billion. When the company was ready for the “dumb” institutional and retail investors, interest just evaporated when they scrutinized the numbers. Afterwards we saw SoftBank come out with this graph saying “some time into the future we will be profitable”. It did not specify the amounts, or the years it would take. I would rather choose to invest with 50 Cent and “Get Rich or Die Tryin’” as my only strategy over this.
At the same time I learned about Howard Marks and his view of the general markets. He talked about a group of companies in the late sixties that were called the “Nifty Fifty”. These were quality companies that were great investments no matter what price. They were improving profitability, had moats against competitors, and would be around for decades to come. Still, these companies in the end became overvalued. Before the bubble burst in 1973-74 they had a P/E of around 100. After the market turned, these companies fell much more than the market in general. The reason was simply that these companies were overvalued. They were not outcompeted by others in the market. You can find most of these companies today, and they are still market leaders. (Pfizer, Coca-Cola Company, General Electric, Procter & Gamble, McDonald’s, The Walt Disney Company, American Express, Xerox og Black & Decker). In the end valuations matter. At work I was hearing the same thing being said about a lot of the companies I was investing in.
That is why I decided to look for new sectors in 2019, and what made me look to the uranium and commodity markets. The change from growth stocks to deep value in commodities was not without its challenges. From the beginning I had trailed the Norwegian Benchmark Index (OSEBX). This was a natural result of my horrible beginning. After I went over to the growth stocks I started to outperform the markets some of the years. I even started to catch up to the head start I had given the index. When I switched my portfolio over to uranium I had a big test of conviction in my portfolio from July 2019 until March 2020. My investments in uranium were performing horribly, and I just lost more and more ground to the index. After 8 years investing I was having my worst year. It seemed like I just had invested in hopes and dreams. (The investments I had exited were still performing very well during this time). If I was at one point doubting my thesis, this was the most important time for me. Without faith in the investment thesis I would have exited my positions during this time. Instead I went over it again and invested more. From March 2020 the different commodity markets started their run and I started to outperformance the index. (The OSEBX index is heavily weighted to energy).
I am here showing my first investment account that I still have today. (I have started other accounts that have beaten the index for longer, but I show the first one to make a point). You do not need many great ideas in your career to outperform. You just have to survive long enough to catch the big wave when it comes along.
I do not plan to marry my investments. I am constantly looking for new places to put my money, but I will not scale out of my current positions before I see better opportunities elsewhere. I talk a lot about investment strategy, but not so much about change of strategy. I am not saying change strategy every year, but as the conditions change, I am always willing to scrutinize and change it. So should you.