Stock Reset - Take Out the Trash
When something isn't working, especially something important, you gotta make some changes
Sometimes you need a stock reset - take out the trash in your portfolio.
Sometimes it's a relationship or a thankless J.O.B. that's threatening your future security and present happiness. In my case what wasn't working was my terrible investing strategy and 2016 was the year I started my journey from the outhouse to the penthouse. Got a substandard spouse or partner? How about a boss and company with a putrid soul? Move on and improve your lot in life. The same goes with your money decisions: if it's broken then tear it down and fix it! Or just flounder along... but I strongly recommend the repair option.
You need a reason to improve
I've been pretty fortunate to have linked up with a great spouse and a tolerable J.O.B. As I told you before though I Used to Be Terrible with Money. Then I Got Better With Money Once I Cared. Well, I started buying stocks with relatively small amounts around 2006 and made about every investment mistake in the book between then and around 2016. I was almost flying blind and picking stocks hardly anyone had ever heard of and thinking I was very clever. When I said you need a reason to improve my reason came in 2015 when Mrs. Smidlap's company shit-canned her 401k account at work and we had to roll it to an Individual Retirement Account (IRA). That transfer just about tripled the amount of money we I had to manage in the TD Ameritrade Brokerage accounts and it was time to get help. Even though we have mostly combined finances with our own checking accounts it felt different investing a large sum that someone else had earned. At first I put 90% of Mrs. Smidlap's roll-over funds into a preferred stock fund and some index funds. At the end of 2015/beginning of 2016 I had the following which is one of the ugliest and smelliest stock portfolios known to man. It might be a world record for awful; a potential Olympic medalist for bad investing.
Why we needed a stock reset to take out the trash
The weighting of the positions was a mess. It's really OK to pick a crappy stock from time to time. You have an investment thesis and it turns out wrong but 37% of this stock portfolio was wrapped up in two stocks that had gone down in value. Ideally for me, if one or two stock positions grows to a large percentage of a portfolio it would be due to massive gains after starting initially with a reasonable allocation. That's what eventually happened with most of our Shopify!! investment. I originally bought most of what we hold today for an average of $39.52/share in 2016. Even then I bought that in two chunks several months apart for $36 and $42/share and even then it only made up less than 4% of the stock portfolio at the end of 2016. By today those shares will cost you over $900/share so that's a good reason for a supersized proportion within a portfolio! Start small and wait. It was dumb to make those "all in" investments in a couple of businesses and to compound matters they weren't good investments.
Chasing dividend yield was a terrible idea. Our top holding was Calumet ($CLMT) who are oil refiners and makers of specialty chemicals. They had some massive yield around 10% but were riddled with debt and eventually that dividend went to zero and is still at zero today. Oops. It bears repeating that I would have been Ok just to be wrong with a 2-4% allocation and take some lumps and move on without too much damage. There were a couple of other dividend names like $UAN and $CHKR that turned out to be terrible stocks. If you're new at this and you see a giant yield that very well could be due to the stock price being depressed which is likely a function of the company not executing very well or maybe even just a whole industry in the dumper. "Use caution with these super high yield stocks" was my lesson learned and now I rarely play in that sandbox.
I owned shitty companies. Sure, there were a couple of winners in there. The stocks highlighted in yellow are still core holdings today like Fiserve ($FISV) and Alibaba ($BABA) but they only accounted for 16% of our individual stocks back then. I eventually dumped the ones highlighted in blue and orange. The two orange ones may have been worth holding onto as they just about doubled in price between 2016 and today but you can't cry about that. There is no crying in baseball or investing! The point of this whole review is not to look back and beat myself up over past mistakes. It is useful to review what you did right and wrong AND maybe somebody reading this can avoid some of the mistakes that I made. Believe me when I say there is a time and place to take the hard road but the easy road with investing is a better way to roll.
I was stubborn with those shitty companies. See all that red ink? Some of those crappy companies were down between 40 and 80%. These days I wouldn't tolerate that bullshit from myself. Buy and hold only works with winning companies. I don't have hard and fast "rules" but a person ought to know when something is not going to work out well. You know when you had that partner who lied to you or cheated on you or both? They're probably going to do it again and let's call it a trend. Winners tend to keep winning and losers.....you know. Occasionally you can see a turnaround story but not much of the trash I owned is worth much 4.5 years later. At least I didn't compound those bad purchases by buying more!
It wasn't all doom and gloom
Here is what went right
We owned more than half of our brokerage assets in the form of index funds. This is in addition to my own 401k account where the only available investments are basically index funds. We had about 1/3 of our money in fixed income with a bond ETF and a preferred stock ETF ($PFF). The one stock fund really worth owning was VGT which is a technology index fund whose returns track my favored QQQ very closely. I ended up getting rid of those index funds and buying stocks which has turned out to be the right move so far but that VGT was the one worth keeping. If I had it to do over I would not have bought so much preferred stock until we needed a more regular income. We still own preferred ETF's where most people would allocate bonds but now it's only 11% and not 35% like back then. We were too young for that weighting back then and we were also both still working full time in le Smidlap Chateau. The positive part of owning all these funds is they didn't lose money.
We took out the trash. It took me some time but in 2016 I got rid of a good percentage of those shitty companies and bought a bunch or good ones. I've mentioned regularly I bought a Motley Fool Stock Advisor membership early in the year to help sleuth out some better investments. I also learned a lot about how I wanted to allocate once I found some good businesses. I don't believe finding some winners is that hard but knowing how to buy positions and allocate capital are equally important. Things like adding to winning stocks or at least holding those winners for long periods are extremely valuable lessons. Have you ever made 20% and sold a position to "lock in the gains" or "take money off the table?" Holding those winners is often the better decision. We were even adding to them when we were making more regular contributions.
We bought better stocks. I'm fixin' to show you how our holdings changed over the course of 2016 as we ended up with much better future holdings than the previous year. Much of that has to do with selecting better companies with bright futures. The ones we still own in our core portfolio today are again highlighted in yellow. I was still a little stubborn with some of the trash and stupidly "hoping they would bounce back" but we did get rid of a lot of junk and bought higher quality holdings.
This is where we first bought the bulk of our current holdings like Match Group ($MTCH), Nvidia ($NVDA), Mastercard ($MA) and Shopify ($SHOP). I didn't know very well what I was doing so I purchased some help in my analyses and it sure started to pay off right away. Here's the rest of what we owned by the end of '16.
The only cruddy underperforming holding we bought that year and still own is Kinder-f'ing-Morgan ($KMI). We owned a few that I gave up on way too soon but you can't win 'em all. $RH went up about 10x its value since I owned it and $MED went more than 4x but you can't win 'em all. Most of the stuff I dumped turned out to be pretty good decisions based on the portfolio returns since 2017. In fact if you look at our June 2020 YTD Stock Scorecard: Smidlap +47.2%, QQQ +15.7%, VTSAX -4.8% our holding were worth 3.42 times what we paid for them. Most of those were purchased back in 2016 so I would say the turnaround was off to a pretty good start. Even with all those good new purchases we ended 2016 with a loss of around 10% compared to the S+P 500 at +19% and QQQ +18%.
So, we made some good moves to set us up for our future. It's been extremely useful to download every transaction and combine them into spreadsheets for each year. It took me a long time to sort out the stocks buys/sells from the fixed income transactions and the dividend reinvestments but I found it very much worth my time. For instance, remember when it used to cost $9.99 to buy or sell shares of stock and now we give 3 Cheers for Commission Free Trades? Well with all this information downloaded and sorted I was able to determine I made around 120 moves in 2016 alone that cost us $1200! Jesus H. tap-dancing Christ! That's a lot of money. I got better that year but apparently was still suffering some growing pains. A lot of that was due to some lingering indecision about "am I doing the right thing?" or impatience with a newer holding. Sometimes I bought a stock and sold it 3-4 months later. I say this just as an observation as I have learned, evolved, and moved on since then. In 2019 I made around 25 buy/sell transactions which is a much more reasonable level.
You know what else was beneficial? The investing pie was still relatively small when I was dickin' around from 2006 to 2016. Every year was not terrible but in 2014 the whole brokerage account portfolio was about 1/8 of what it is today. This deserves a whole post of its own but it's to your advantage to get your ass kicked when you are younger and dealing with less money. I consider that time to be the equivalent of investing school tuition. Hopefully if you need the lesson you learn it more quickly than I did. Of course we would have done much better if we hadn't taken those lumps but it built character and humility. After having done poorly and then done well at this the past 4-5 years I can surely tell you I like the success part better.
We'll be here in about a week for Smidlap-con. See you there?
If you keep score of your investments you are probably doing it wrong
Here is a return calculator and explanation from MoneyChimp. This method is approximate and doesn't take into account the exact date of contributions. I have always just subtracted the amount of contributions from the total gains but that doesn't account for the time those contributions were in the market. For instance, if you added $5000 to a $50,000 account in January it had a lot more time to work than if you added that same $5000 in December. I'll be using that Money Chimp one to report in the future.
This explanation from my favorite financial people at Motley Fool is very precise if you want to dig down to the real nitty gritty. Of course, you could just make a mythical buy of a couple of indices like QQQ and VTSAX along with contributions/buys like we do in For Beginners: The Malevolent Missy Investment Series. Anyhow, keeping score is more complicated than you might first think unless you track right from the start. Oh, and if you didn't it takes a lot of work to figure out what happened in the past like I just did for the past 4.5 years of contributing and buying and selling. Having stocks mixed with fixed income funds complicates things even more. For instance, did I reinvest all those fixed income monthly dividends of did I use the proceeds to add to stock buys? You're welcome.
What about you Smidlappers? Do you have investment records in the way back machine? Do you think these kinds of reviews are useful in any way? Do you like learning the hard way or the easy way from someone else's mistakes?