May 2022 Portfolio Update: FLY VIP
Let’s start off with this update: our portfolio is technically outperforming the US index. Our portfolio is, as of the 16th of May, down 11%, and the US market in the same period, has fallen 11.18%. Some of our picks are up by a decent amount- AxReit (up 1.60%) and Maybank (up 4.55%). Our other 5 picks aren’t doing too great, with Twillo and Revenue down almost 40%.
On the bright side, while we can’t call ourselves stock picking geniuses, we have not lost any money because this is a virtual portfolio. To reiterate, the point of this exercise was purely for educational purposes. As we stated in our introductory post, investment theses, FLY VIP was set up to demystify investing and illustrate how investing can be as easy given a strong thesis.
However, upon reflecting on this three month experiment, I would like to amend that statement to: investing can be as easy as having a strong underlying idea behind the investment, but it’s important to mitigate risks by having clear plans on when to (a) stop-loss and (b) take-profit.
This reflective post will discuss two things, (1) The Importance of Parameters and Planning and (2) The benefits of “stock picking”
Lesson #1 : The Importance of Parameters
Setting parameters or alerts allows investors to take profits and manage downside risks. At one point, our Berkshire investment was up 10%, but now it’s down 2%. We probably should’ve sold our Revenue holdings when rumours that their digital licence bid failed surfaced (given that part of our investment was in the hopes of it winning said bid).
It’s only when you’ve lost potential profits do you realise that you don’t realise any gains unless you sell.
Setting parameters is largely arbitrary (in theory, you could set a take profit level when it’s up 100%, and only ‘cut loss’ when the asset is down 98%), but the general train of thought is to follow a 2:1, or 3:1 ratio. To contextualise a 2:1 ratio, it would mean if I invest RM1000, I’m willing to lose RM100 for a potential gain of RM200. This strategy I believe is applicable not only to FIFO trades (or Fast in and Fast Out), but also to long term picks. Given market turmoil, if a long term stock pick were to fall by 30%, you could make more money by selling said stock at the stop loss, and purchasing it again when it “bottoms out”.
Say, you’re an Apple Bull (meaning you truly believe that Apple is the greatest company in the world, and the Apple Car is going to revolutionise the way we think about cars, like the iPhone did. Consider this scenario;
- I invested RM1000 in Apple, at $150 dollars. I’ve set my parameters to be; stop loss at $135 (when Apple is 10% down).
- Market turmoil ensues, and it hits the $135 level and I’ve sold the stock. Apple shares go as low as $120, and I’ve decided to re-enter with my remaining capital of RM900.
- In a few years, Apple has reached $200, and my RM900 investment is now RM1500. If I had not stopped losses, my investment would still be up, but only by 33%, netting me a cool RM1333.
It’s worth noting that timing markets is extremely difficult and one shouldn’t be swayed by short term movements. In the event where some stocks don’t bottom out, you run the risk of losing all your capital.
The problem of letting losses run is not only the fact that you’ve lost out on other potential investments that could have made up for the losses, but “hope-analysis” is simply not a viable strategy. Having parameters and plans in place takes emotions out and helps you remain clear headed in the face of market turmoil
Lesson #2 : Arguments for Stock Picking, and maxing out safer avenues
Passive investment strategies, which for Malaysians would mean maxing out their ASNB/ASM, is probably better for the young purely because it removes the need to pay attention to market movements and for those who don’t have one, building a savings fortress is the more financially wise thing to do. Feel free to read more about saving here, in this article.
For students and those immersed in day jobs who have less “hands on time”, investing in more volatile assets like Cryptocurrencies or Technology stocks will likely have to endure huge drops that may be higher than 10% on a daily basis. Again, it’s completely up to how much risk you can stomach, but I can say on a personal note, that when I suddenly refresh my crypto account and see big losses, it does dampen my mood.
However, this doesn’t mean that investing in equities and “stock picking” is a completely useless endeavour. While 5/7 of our stocks are in the red, 2 of our stocks have outperformed the broad market.
Here I think lies the benefits of stock picking: I believe fortunes are made by owning stock in a good company and holding for the long term until it becomes a “multi-bagger” (stocks that give a return of more than 100%). Examples of recent multibaggers include Lululemon, an athletic manufacturer that managed to capture the premium yoga market and have a fascinating direct to consumer model. If you were an early adopter of this business (and a believer!), a share would cost you about $50 in 2017, and if you held on to that stock it would net you a cool 518% gain (it’s now worth about $309 a share).
Multibaggers can also be found in Malaysia. Take Inari-Amertron, a Malaysian based company that supplies key iPhone components. In 2013, it was worth about 10 cents and now, it is about RM2.56 a share (which is about a 3000% return).
I hope the conclusion from this is not that you should aggressively invest in all companies and hope one yields an exceptional return, but a carefully calculated stock picking in businesses that you perhaps believe in, could net you some exceptional gains. I agree to some extent with a recent tweet by Elon Musk, but I’d probably amend it to say always invest with a plan and clear parameters in mind.
(Source : Twitter)
In my mind, investing is like planting. Some seeds will probably go bad, but some seeds could potentially grow into a giant tree that yields many tasty fruits (dividends!). One thing is certain though, not planting anything means nothing will ever grow.
With that in mind, I have decided as de facto fund manager, to end this iteration of FLY VIP, and work on starting our fund anew with the lessons of setting parameters in mind. In that spirit, if you haven’t begun investing and are worried – why not do what we did? Begin a virtual portfolio of stocks that interest you and see how it goes.
For our US portfolio we used Yahoo Finance.
For our Malaysian portfolio we used KLSE journal to track our trades.
See you next month!
FLY VIP Manager
Editor : Emelia Anne