Important lessons on investing that I learned

Over the weekend, I reviewed my portfolio and by extension, my performance as the CIO of my personal hedge fund (lol). I want to see how I have fared so far and importantly, if there is a lesson or two to take away going into the remaining four months of the year and 2022, what would that or they be?

In the first half of 2021, ending 30th June 2021, my portfolio’s return is 8.5%, compared to the return of 15.3% of the S&P 500, including dividends. Last year, Minh Duong Capital’s 2020 return was 21.3%, compared to S&P 500’s return of 18.4%. What does it mean? Obviously, I underperformed the market in the first 6 months this year, a fact that is particularly disappointing given that I outperformed the index last year. In other words, I overestimated my stock-picking power this year. Frankly, I didn’t do a good enough job. Instead of spending a lot of time looking at new ideas, I should have just bought the S&P 500.

That’s actually one of the big two lessons I learned: buy more ETF stocks. Take S&P 500 ETF ($SPY) and Vanguard Total Stock Market ETF ($VTI) as examples. In the last 10 years, they have an annualized return of 13.9% and 15.2% respectively. The beauty here is that investors don’t need to spend any time researching and regularly checking their portfolio. The ETFs just routinely deliver two-digit returns every year with minimal efforts or financial understanding of the companies.

At the moment, ETFs make up only 2% of my portfolio. I do plan to increase the ratio significantly in the next few months and next year. Don’t get me wrong. I still enjoy researching companies and finding winners which I believe will bring higher returns than that of the ETFs. But at the same time, I want to make sure that I at least have the same return as the market. You know, being realistic and all that. Does buying ETFs sound simple and easy? Yes, but it’s not in reality. Nowadays, it only takes a few phone taps to trade for a stock. When the barriers are that low and when you are tempted to prove that you are a better investor than just somebody buying an ETF, the illusion kicks in and the temptation is highly irresistible. Nonetheless, that’s what I plan to do in the near future. Buy more index and wait for only great opportunities.

That’s one lesson. What’s the other one that I learned?

In addition to stock picking and investing in ETFs, one can leverage the expertise of hedge funds. These guys get paid in the form of 2/20 (2% management fees and 20% of your profit) with an implicit promise to outperform the market. In other words, they are EXPECTED to deliver higher returns than what investors would get from the likes of S&P 500 or VTI. Here are the returns of a few funds in the first half of 2021:

• Giverny Capital: 16.3%
• Argosy Investors: 16.5%
• Saga Partners: 7.5%
• Headwaters Capital: 9%
• Palm Valley Capital Management: 4.8%
• Worm Capital: -15.2%

Among this small sample, my personal return this year is higher than some funds’ and lower than others’. Of course, there are more funds spread out across the spectrum. The question, though, is how should I think about my performance in comparison with these funds? Well, not so much. Such a comparison is a slippery slope. If I want to make myself feel better, I only need to identify a few underperforming firms. On the other hand, it’s just unrealistic to think that I can beat the professionals whose full-time job is to find investing ideas and whose experience & resources far outweigh mine. The goalposts should stay constant, not move based on how I want to feel. In fact, Morgan Housel said: one of the most difficult skills in investing is to not constantly move the goalposts.

Hence, I decided to judge myself based on two things: did I avoid making the same mistakes twice? Am I delivering a higher return than ETFs? If the answer to both questions is yes, every time I conduct a review, then I will be a happy person. Otherwise, there is work to do.