Unlike everyone, I really don’t like my current portfolio.

You might ask then “Then Ritzty, why are you still holding what you are holding?”

Well, I can think of multiple reasons:

• Laziness
• Indecisiveness
• Loss averse tendency
• Psychological Rigidity

And part of the reason why I’m writing this article is to objectively look at my undisciplined portfolio and admit that my younger self was wrong.

What I’m holding right now really does not make any sense, and my reasoning for why I own the companies are immensely inadequate.

Here’s what I own right now in my little brokerage account:

My Current Portfolio

You will be surprised by how much cash I hold in the portfolio. This is the result of my procrastinating in doing DD on potential investments that will generate more value than my current investments. I have been doing some monthly deposits into my brokerage account and never really bought anything for 6 months.

Half of the portfolio comprises 10 stocks and 8 of them were bought with inadequate research which was executed by me 2-3 years ago.

If you cannot see the graph properly, this Excel sheet will detail the exact stocks and percentage of the holding.

Let’s see why I don’t like my portfolio by looking at the numbers.

FCF Yield

Firstly, let’s focus on the FCFE that my portfolio generates. Free cash flow to equity stakeholders is basically the amount of cash that is left for me (equity stakeholders) when my companies pay off all contractual obligations and reinvest in the business.

The weighted average FCF yield for my entire portfolio is 1.12%….

If I adjust for cash, the FCF yield becomes 2.30%. This is extremely low. In fact, it is lower than the current 10-year T-bill rate which is 3.53%. If my portfolio was selling as ETF, I rather buy the T-bill rate or just close all of my position to put it into Apple’s new saving account which offers 4.15% APY!

Who wants to have a low expected return from having a high risk of losing their money? The FCF yield is lower than the risk-free rate really makes me just sad.

ROCE

But maybe a low FCF yield means that I’m investing in high-quality companies that are trading at a premium. To check this, let’s look at the return on capital employed, a trusted indicator of how efficiently the company is using its capital to generate profits. The average ROCE of the S&P 500 companies.

My weighted average ROCE is 5.01% including the cash balance and 10.30% if we exclude the cash balance. If we compare this to the average ROCE of the S&P 500 (18%), my holdings have a significantly lower rate of return on each capital they employ.

Growth

Alright, but if my companies are able to grow and deploy more capital in the future, this may outweigh the lower rate of return! Maybe I’m investing in the massive future growth potential?

Wrong.

Almost all of my companies experienced a topline revenue decline this year.

Ok, my portfolio is shit.

But why did we get here in the first place? Why did I end up owning all these expensive, low-growth, and inefficient companies?

Well, we will need to go all the way back to the time when I first started my investing journey as a little kid.

 

Japanese Dividend Magazine

 

Background

I grew up on the largest island in East Asia called Japan. Japanese culture values long-term stability and security and the conservative attitude towards investing has been one of the key detractors that led to Japan’s “Lost Decade” of the 1990s.

According to the 2022 financial literacy survey that was conducted by the Bank of Japan, only about 66.2% answered that they have never purchased stock in their entire lifetime. In contrast, US has only 41% of the population say that they have no money invested in the stock market (link to the article)

(Link to this survey)

Meeting Mr. Market

My parents were no different from the general public. They have rarely talked about investing and my mum especially was all about education. She told me in my late teens that she would invest to the last penny if the kids could have better education.

However, when I was 10 years old I stumbled into a stock market magazine that my dad brought back home from his client at work. The client was Matsui Shoken (the 9th largest brokerage company in Japan) and the magazine was about the best Japanese Dividend Company to invest in.

This immediately caught my attention and it was also the first time that I’ve ever recognized the world of investing.

The Japanese companies also have a concept of “Kabunushi Yutai” which emerged in the 1950s in Japan as a way for companies to show gratitude to their shareholders. In addition to dividends, some companies also offer other forms of appreciation to their shareholders, such as discounted products or services, or invitations to exclusive events.

For example, if you hold over 100 shares of IKK Holdings (2198), you will be rewarded 2000 yen (about $15-$16 USD) worth of Japanese pastries & cakes that the company produces.

While there is debate about the effectiveness of these programs in terms of improving shareholder value, everyone appreciates the recognition and gratitude shown by a company that you take ownership of right??

As a small kid, I dreamt to have gifts and vouchers given to me by owning what people call “Kabu” (stocks translated in Japanese).

I am also very interested to see how the concept of Kabunushi Yutai continues to evolve and spread in the coming years.

 

Start of My Investing Journey

 

As I began to work part-time and earn a modest income, I found myself contemplating potential investment opportunities.

However, as a novice in the realm of finance, my initial thoughts invariably turned to the alluring prospect of securing an unimaginable return on my investment. Our human psyche has evolved to prioritize short-term concerns, as we are biologically predisposed to respond to immediate threats.

The art of investing, unfortunately, is no exception. Moreover, as a young adult, my prefrontal cortex has yet to fully mature, leaving me vulnerable to making impulsive decisions based on incomplete information.

Finfluencers

When I was searching for the best investment strategy with my uneducated & undeveloped brain, I came across all the day traders online.

These days it seems like more people are entering the stock market and opening a brokerage account after being influenced by so-called Finfluencers. At one point, the videos that these traders posted were all my entertainment & content consumption in my life.

The idea that was plausible and resonated with me the most was the notion that “small short-term gains will compound into sizable returns.”

Ironically, I first learned the basic concept of compounding from extremely short-term-minded people. However, this idea was very plausible to me at the time. I also liked the frugality of making small consistent gains over time.

So I opened a brokerage account with my hard earnt $10,000 USD in the midst of COVID and started shorting penny stocks which gaped up in the morning regardless of their repugnant fundamentals.

How did I go? I lost almost all my money when I shorted this stock.

Shorting a Biotech

 

Putting 20% of my capital into this stock has quickly turned into a nightmare as the stock gapped up for 3 consecutive days. As Buffett said before “Leverage is the only way a smart person can go broke”, instead I was not very smart but rather dumb.

The feeling of all your hard-earned money going away with a single event is unfathomable. I remember actually kneeing on the grand when I closed the trade.

The only bright side during this period was that I also learned that just focusing on short-term trade was not a great idea. I understood that diversification of strategy is important. So while I was focusing very much on day trading, I also bought some risky assets to hold for the longer term. But without doing any research. My strategy was the following:

if the YouTube guy explains it well and it also is plausible with me, I bought the stock.

This is very much foolish but it lost a lot less money than my short-term trading. And those stocks that I bought 2 years ago are my current portfolio.

 

The Learning Curve

 

Reading

When I lost the majority of my trading money, I took a break from all my gambling tendency and started reading some books to forget about everything. This defense mechanism of mine worked quite well. Following are the books that I read during that period that had a prominent impact on me:

• Invest for Growth – Terry Smith
• Margin of Safety – Seth Klarman
• Warren Buffett and the Interpretation of Financial Statements – Mary Buffett & David Clark
• Common Stocks and Uncommon Profits – Philip A. Fisher
• Poor Charlie’s Almanack – Edited by Peter D. Kaufman

Reading the writing of these greats has really helped me accept the ludicrousness of the actions that I have made in the past.

Other Resources

A person that was in jail also helped me fast-tracked this process.

 

That was Martin Shkreli. He was sentenced to 7 years in prison after being found guilty of two security frauds (he is out now and streaming), but the works he published online were one of the best introductory lessons to learn.

Especially the series of his long-form investing and finance lesson (link) really breaks down the cause-and-effect relationship in the finance world so a beginner understands. Also, the interaction between him and the strangers is also highly entertaining if you are into those.

One of the recurring themes in Shkreli’s teachings is his emphasis on honing skills that are in demand but not commonly possessed. He argues that inefficiencies in demand represent opportunities for profit and that developing marketable skills provides a more stable foundation for long-term success.

Skepticism

His insights on the industry of investment lend a level of skepticism and realistic expectation, which is particularly valuable in a social media-driven culture that often promotes investment as an effortless way to a quick gain.

Shkreli’s teachings serve as a reminder to aspiring investors that following others blindly and relying on their insights can lead to missteps and losses. Instead, he encourages individuals to focus on building their own expertise and proficiencies in a particular area of the market, which can be leveraged for personal and financial gain. In sum, Shkreli’s perspective is a valuable one for those seeking a well-informed and prudent approach to investing and finance.

Forming a conviction based on an idea that you have cultivated from the beginning results in a conviction that you will reliably hold, despite external forces that may try to repel it.

And this is what I’m going to do now.

 

What I Know, What I Don’t

 

 

Peter Lynch once said, “Know what you own”.

So I’ve decided to sell all my holdings that I don’t know. But what does it mean to not know the holding? The checklist below is what I made to decide this.

Know What You Own Checklist

 

• Am I able to reason the investment to a person who has no idea about the stock market?

When an investment thesis is overly complex or difficult to explain, it may be a sign that the investor does not fully understand the underlying investment or the risks involved. This can lead to poor investment decisions based on incomplete or inaccurate information.

In addition, a simple investment thesis can also help to prevent overcomplicating the investment process and getting bogged down in unnecessary details. By keeping the thesis simple and straightforward, we will be able to focus on things that only matter.

• Do I know the cause of price inefficiencies?

Everything often occurs within reason. The stock will not just lose half of its value for no reason. By understanding the reason for price inefficiencies, we can assess the true value of an asset and make informed decisions about whether to buy or sell. If I come across a stock with a P/E ratio of 1, it’s likely that there is a valid reason why the stock is trading at an abnormally cheap valuation. Our job is to determine whether the reasons behind the price inefficiency are accurate reflections of the underlying reality.

• Can I estimate the margin of safety?

The German mathematical Carl Gustav Jacobi solved difficult problems using the power of inverting. Rather than thinking about how the company can grow, go and ask yourself how this company can be hurt. Inversion will not always solve the problem but it’s a trustworthy way to be prudent.

If we conservatively assess the intrinsic value of the company and it’s significantly under the current market price. There is a strong case for margin of safety.

However, if I don’t have the ability to assess the intrinsic value of the company, it would be like gambling without knowing the odds of the bet.

After my portfolio holdings are been through my simple three-mental model approach, I only have 2 stocks that I’ve decided to keep out of the 10 stocks that I hold.

 

BABA

What is the simple reason for the investment?

• Despite nearly 16x more revenue and 3.6x more operating income since 2014, the stock is trading at the same level in 2014. The core business still remains strong and the uncertainty is overthrowing the stock price.

What is the cause of price inefficiencies?

• Geopolitical risks such as Chinese government interference and military conflict with Taiwan. Also, the capital outflow from the delisting risk is priced in as well.

What is the margin of safety?

• With a free cash flow yield of 7-8% and a 14-15x EBIT multiple, coupled with being the largest retailer in China where Amazon is barred from entry, it is safe to say that this business enjoys a significant margin of safety. There are no plausible reasons why the government would interfere and cause structural damage to a business that contributes significantly to the annual consumption of the economy. Although it may not be the best valuation, I am comfortable with the risk-and-reward situation.

META

 

 

What is the simple reason for the investment?

• I purchased Meta when the stock was tanking toward the $100 mark. The reason for the investment was that I thought Facebook will not go anywhere. The majority of functioning adults (even kids) have their social connections stored in an app and I think people will not just delete and move on to another app to build their connections again. The core advertising business was strong and had no structural damage.

What is the cause of price inefficiencies?

• There was uncertainty around the massive CapEx spending towards the Metaverse. They did not articulate the materialistic value that the Metaverse would bring to the company. Investors are priced in that the CapEx spending will continue at the same rate without any return on investment.

What is the margin of safety?

• Meta currently has a trailing twelve months (TTM) free cash flow yield of 2.8%, which is relatively expensive compared to its historical yield of +10% at the time of purchase. However, as mentioned earlier, Meta’s ownership of the social connections of 2.93 billion people globally is an invaluable asset, and even in the event that the Metaverse fails to take off, the company’s strong balance sheet and cash flow stream can help mitigate the risk of failure. However, since the valuation is around the norm now, I may sell some in the near future.

Other 8 stocks

 

As I mentioned earlier, I held these stocks not based on my own reasoning but following what other people were saying. Valid propositions and critical reasoning were out of the window.

But let’s just pass my worst investment ever through the “know what you own” sieve.

That is this sucker.

 

TTCF

I’ve lost -92.80% of my cost basis on this stock.

This is a value-destructive plant-based food company that religiously burns as much cash as it can every year. I invested a small amount on 30 June 2021 and since then the stock is down -92.8%. Let’s see the fundamentals of when I bought into it.

• They have burnt nearly 44M of cash in the trailing 12 months period
• Short-term debt increased from $0.8M to 6.62M
• Never been free cash flow positive in the past
• The operating income of the last two quarters was negative
• In 2021 Q1, the enterprise value was 1.39B, this was a P/E of 166!

Ok, why did I buy into this disaster? Let’s pull out the sieve.

What is the simple reason for the investment?

• I saw several Youtubers talking about the stock and how it had a massive growth potential.

What is the cause of price inefficiencies?

• People are underestimating the potential growth of the company (it was trading at 166 P/E).

What is the margin of safety?

• The margin of safety is supported by the 40% y/y top-line growth in 2020.

You don’t even need to pull out the 10K for this quality of answer, but I cannot change the fact that I bought into this.

No One Is Crazy

In the book “Psychology of Money”, Morgan Housel talks about the concept of “No one is crazy”.

This essentially talks about how everyone looks at money through the lens of their past experiences. In 2020, all the stocks were skyrocketing and I just wanted to chip into the race.

In retrospect, I was participating in the greater fool theory but I was still trying to make the most informed decision with my limited knowledge (still working on it) at the time by combining available information with my own metal model. I made sure to check all the boxes that mattered at the same time.

And still, to this day, I’m trying to make sure to check all the boxes that matter to me based on my experience and knowledge that I have gained in the past.

And with that in my mind, I’m selling all eight holdings.

Conclusion

 

 

I prefer to view myself as a discerning general manager of a basketball team, carefully selecting my roster for the next decade. As a GM searching for promising prospects, they meticulously evaluate them based on the quality of their current lineup.

Their decision to part ways with an existing player is not necessarily because of poor performance, but rather a result of their unwavering pursuit of optimal talent acquisition.

Translating this mindset to portfolio management requires a similar discerning approach. Just as I carefully scrutinize basketball prospects, I would like to seek to cultivate a sense of confidence and security as I observe my roster, which requires thorough research and the formation of my own convictions.

Taking the loss and admitting your past wrongdoing is always a hard pill to swallow.

But at this time, it really does make sense to move the capital from a stagnant declining business to growing durable businesses that could also potentially expand their multiples.

Thanks for your time and I will keep you updated with my roster.

Ritzty