2018 Performance Review

In 2018, the S&P 500 index returned -4.38% while my portfolio[1] returned 30.36%. These types of gains are unsustainable long term and a lot of luck was involved, but I learned a lot about the investing process in a volatile market.

My holdings throughout the year included Advanced Micro Devices (AMD), Nvidia (NVDA), Amazon(AMZN), Facebook (FB), SINA (SINA), Tencent (TCEHY), Nokia (NOK), Marvell Technology Group (MRVL), Micron (MU), Google (GOOGL) and Berkshire Hathaway (BRK.B).

I will have more to say about each of these companies in future posts, but below is a quick summary.

The Good

NVDA and AMZN were legacy holdings that I had from a few years ago. The only credit I can claim on these two stocks is that I sold NVDA in the first half of the year, after I did a proper analysis and determined that it was grossly overvalued. I also sold AMZN around the same time when I realized that I didn't have the first idea on how to properly value the company. So although, for the most part, my entries into these two companies were due to mere luck, I did exercise some careful thought in selling, and thus avoided some precipitious declines in the second half of the year.

AMD was by far my largest holding and also the biggest winner in the portfolio. In fact, it was the best performing stock of the S&P 500 during 2018. Clearly there was some luck involved here, both in the magnitude and velocity of the rise. But the key takeaway for me is that the investments were made using a sustainable system based on fundamental valuation and margin of safety, even though AMD was a highly speculative and overvalued stock for most of the year.

Most of my purchases were made when the stock price was hovering around $10-$12 (which was 20-30% below what I thought was a conservative, fair value) and sold when the stock price reached $18 (which was, at the time, what I considered a rich valuation for even a few years out). The stock rapidly rose to $34 (before plummenting back down to $17), but I have no regrets on missing out on what I think was a highly speculative rise beyond fair value, because such a system of investment is unsustainable, and giving in to such psychological swings could cut both ways.

AMD in 2018 was a perfect example of Mr. Market in action, resulting in great opportunities for a patient investor - as long as you had an internal lodestar for intrinsic value. Clearly the value of the company did not fluctuate as dramatically as the price of the stock.

See AMD: Mr. Market's Irrational Ride for a more detailed retrospective.

The Bad

SINA is the holding company of Weibo (WB), a highly profitable twitter-like site in China. It traded for a considerable discount to net-asset value taking into account its cash and value of its stake in WB. I ultimately exited this holding after a considerable loss, not because of any trade war related tensions (which I was comfortable with), but because of further reflections on corporate governance. Ultimately, any narrowing of discount to NAV for a holding company will depend on the ability of management to respect shareholder interests, but SINA did the opposite by granting their CEO complete voting control of the company after nearly losing some board seats to an activist hedge fund. Numerous emails to their investor relations department also went unanswered. I never felt completely confident in mangement, and the simple lesson here is that no one is forcing me to invest in companies I am not 100% comfortable with.

MRVL, NOK, and GOOGL are actually some of my largest holdings now and I am very optimistic about their long term prospects, but the reason I put them in this category is that I didn't excerise as much discipline as I should have when I was building my initial positions. My initial purchases were around what I calculated to be fair value - but there wasn't a significant margin of safety. Fortunately, I was able to add to my position (at significant margins of safety) as these stocks declined inline with the broader market selloffs at the end of the year, but the lesson here is that I should have waited for those price points in the first place. Obviously, hindsight is 20/20, but this quote from Dr. Michael Burry seems apt: "Don't worry about missing a rally. Worry about losing your money."

The Undecided

FB and TCEHY were breakeven for me. Most of the shares were accumulated during the height of fear for each company (FB's privacy scandals, TCEHY's game approval issues), but were ultimately exited for a similar reason: I ultimately decided that the amount of sustainable, compound revenue growth I was estimating was far too optimistic for my comfort level, and these companies were only "deals", even after their respective "scandals", at these too optimistic outlooks.

Summarizing and simplifying greatly, FB's continued growth seems premised on Instagram, WhatsApp and Messenger. But it's unclear how much of Instagram's growth will be cannibalistic to the core FB user base, and it's also unclear how monetizable chat will ultimately be. Odd initiatives such as Portal and Watch also seem to indicate that they are grasping for meaningful opportunities.

TCHEY is a little tougher - in contrast to FB, they have a lot of strong, diversified business lines (Cloud, Payments, Gaming, etc). I always viewed the increased gaming regulatory scrutiny as a temporary hiccup, but at its current valuation upside seemed limited, even if every division executed perfectly for the next few years. Also, although its aggressive investment in unrelated companies could ultimately be a winning strategy, I don't know enough about the Chinese market to understand the potential rewards, and if history is any lesson unbridled diversification (or, as Peter Lynch says, "diworsification") usually leads to less favorable outcomes for shareholders.

MU seems undervalued by every conceivable measure. I'll keep it short and say that I don't think anybody reasonable is arguing that memory is not a cyclical industry and that "this time it's different", but people are losing sight of the fact that it is a long-term growing cyclical industry, controlled by a handful of firms, and that some of the more important long term threats have been considerably mitigated (or, at the very least, signficantly delayed). This appears to be a classic case of confusing uncertainty with risk.

See Micron: Cycles and Risk for more analysis.

BRK.B is my smallest and most foolish investment in the sense that I have done zero research or valuation. I'm merely trying to get an invite to their annual shareholder's meeting in 2019. Hopefully, Warren Buffett will forgive my investment indiscretion.

  1. For full disclosure, I am currently maintaining two portfolios: an active one where I hand-select each stock, and a passive one that is a standard mix of low cost index funds. Currently, the split in allocation between active / passive is 50 / 50. It did not feel prudent to go "all in" during the first year, but the idea is that the active proportion will increase as I continue to learn and (hopefully) demonstrate my ability to beat the market. All references in this post are to the active portfolio. ↩︎

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