Happy 2022! I finally got around to calculating my 2021 performance.
I ended 2021 with a 9% gain. Not bad, but far from the 26.9% return I would have achieved by indexing the S&P 500, incurring a lot less stress.
Every January, after finalising my portfolio numbers, I internally debate whether I should be managing my own money or indexing.
On the 1st of January, the dreaded second line appeared on my lateral flow test. Covid was not as bad as 2 years of fear and lockdowns would have me believe. Being drained of energy allowed me time to pause, read and reflect. My down time helped me consider my investing strategy. After some deliberation I assembled some personal tenets to guide my decision making, which I wanted to share.
Personal Tenets for Investing
Personal engagement with the business
“Risk comes from not knowing what you're doing.”
One key change to my investment approach since the March 20 drawdown has been to focus in my circle of competence. This limits risk but also my opportunity.
If I need to undertake a deep dive on a company to understand it, it’s outside of my circle of competence. I want to invest in businesses which I have been product testing for several years.
Find great companies with solid moats
This is easier said than done and is open to interpretation. Speaking from experience, this includes companies with recognisable brands and proprietary architecture that will create recurring ROIC. I draw on Hamilton Helmer’s 7 Powers, Pat Dorsey’s Little Book that Builds Wealth and David Gardner’s Snap Test to support my decision making.
Low risk downside with high potential upside
According to Saber Capital, Buffet quickly eliminates investment ideas that could lead to what he describes as “catastrophe risk”, or complete capital wipe out. As Huber highlights, the best stocks come from companies that can last a long time, not necessarily from the fastest growth rate.
Permission to hold cash or index
FinTwit is rife with growth investors buying every dip but never losing any money. Our brains naturally release dopamine when we buy something new. It’s easy to get addicted or turn investing into gambling.
Fidelity demonstrated that $10,000 invested in the S&P 500 between 1980 and 2020, which missed the best 5 days, could lag that which was fully invested by $265,010. There’s real FOMO attached!
For that reason, I have had to overcome that FOMO, giving myself permission to hold cash or index, even if it means missing out on gains… it helps me sleep at night.
Be patient and pick my spot -
Margin Of Safety is perhaps the most important term in investing. The reason I am willing to hold out for my entry price is that it prevents me from changing my decision on a daily basis. My entry prices are pre-set and not influenced by Mr Market.
Can I Beat the Index?
For those that have been keeping track, here’s my third Buffet quote of the post, and one of my favourites. "I am a better investor because I am a businessman, and a better businessman because I am an investor"
For several years I ran my own business. When the time is right, I intend to start a new one.
Investing, for me, is an education of all things business. We invest in living, breathing businesses after all, not tickers on a screen.
In Ride of a Lifetime Bob Iger, discusses the Japanese art of Kaizen, "continuous improvement." Part of my reasoning for actively investing is that it motivates me to read, write and share, making me a little more knowledgeable each day.
Despite all of this, I haven’t answered my earlier question “can I beat the index.” Results are unlikely to be clear immediately, but I go into 2021 at least 17% behind the S&P.
By the end of 2022, if I find myself lagging the index by a considerable margin, I have to hold myself accountable. No matter how much enjoyment or education I get, the act of missing out on those gains is just too costly for my future self.
Word of warning - this post may have been affected by Covid brain fog and contains a considerable amount of sentiment. As always DYOR.
Reflecting on 2021 and Personal Tenets for Investing
Good stuff man, I'm hopeful for you for a quick recovery! and as Simon said I would say you gotta go for at least five years before making any decisions on keep going or indexing.
good for you for holding yourself accountable for your performance. i would suggest 2 years of underperforming is perhaps not quite enough time to really judge if you should go to indexing. But to each their own. Look forward to hearing about your ideas in 2022!