by elmads

Introduction

“When defeat comes, accept it as a signal that your plans are not sound, rebuild those plans, and set sail once more toward your coveted goal.”

– Napoleon Hill

From the start of the year until June 1, 2023, the S&P 500 had an approximately 10% return. This year has been one of the best half-year performances of the said index in its lifetime. While the broader market has been doing well, mine has been decimated not just for this half-year performance but for the past couple of years.

I call this underperformance a complete investment defeat on my part, which made me realise the further apparent wrong choices I’ve made, particularly in fiscal year 2021.

For the past couple of days, I just thought of stopping this useless endeavour; I might as well just go 100% on passive investing rather than doing active investing.

The defeat is not the problem; it is being demoralised by the defeat that destroys most people.

Demoralised at my core, I just stopped doing my usual investment routine for a couple of days. Luckily, I had my Half Marathon race recently, which substantially helped me to alleviate my thoughts on my investment portfolio.

After the half-marathon race hype and adrenaline subsided within me, my mind started again to slowly think of my investment portfolio. The doubts and the self-sabotaging thoughts started to creep in. I tried not to think of it, but it weighted down on me.

I know I won’t be able to get away from this. The only way out is to face the problem head-on, hence the overall changes I’ve made to my investment portfolio.

I’ve realised my investment losses and reallocated my capital. It was hard, but it was the only way.

The Investment Failures

Since I started investing in 2013, I’ve roughly lost approximately 9% of my 2023 half-year total investment portfolio value.

Around 90% of the total 9% realised losses happened both this year (2023) and the year before (2022).

Below are my top 3 investment failures to date.

Megaworld Corporation (PSE: MEG)

I’ve invested a large amount of my investment capital in this company. It was roughly 7% of my total portfolio a few years ago. This company is one of the big four real estate developers in the Philippines. Though MEG has been undervalued for a long time, it has continued to go down and be undervalued these past few years. The decline happened when the company had a larger percentage of POGO renters in its property portfolio compared to its property developer peers.

Then the pandemic came, which further depressed its stock price. Though the price rebounded a year later, it went down again in 2023, nearly touching its 2020 pandemic lows. Property equity industry stock prices have been moving in the same direction for quite some time. I was willing to plan to purchase more shares of this company before because its balance sheet was strong and its income generation wasn’t too bad.

But then, I found a red flag in the company’s performance. Their efficiency in generating capital relative to their invested capital is substantially low. It has been around 5–7 percent. That’s a poor ROIC, while their Weighted Average Cost of Capital (WACC) has been more than 8% post pandemic.

A company that has a higher ROIC than its WACC generally indicates that it is generating more returns from its invested capital than the cost of that capital.

NOTE: Weighted Average Cost of Capital (WACC) represents the average cost of financing a company’s operations. It considers the cost of both equity and debt financing. It is used as a discount rate to assess the feasibility of investment projects.

In MEG’s case, its WACC has been higher than its ROIC, indicating a more likely destruction of its business value, hence its low price-to-earnings ratio for the past years.

What I’ve Learned: Return on Invested Capital > Weighted Average Cost of Capital

Before I bought MEG, I hadn’t focused yet on ROIC, and I didn’t know how to do WACC. When I found this out, counterintuitively, I didn’t immediately sell my MEG position, as I was hoping that the management would be able to generate a better ROIC. Eventually I realised one thing: I was just hesitant to realise my losses; I had a loss aversion bias. By recognising my mistakes and bias, I sold my MEG holdings at a 48.68% loss. 🥲

For example, if I invested 200,000 PHP, I would take home only 102,640 PHP and lose 97,360 PHP (a 48.68 percent loss).

Alibaba Group Holding Ltd – ADR (NYSE: BABA)

This company had been my largest holding in my 2022 portfolio, reaching 25%. It is a China-based company that is the largest e-commerce business in China and operates worldwide.

I started buying this company in 2021, during a time when the CCP took measures to tighten control and regulation over the country’s largest technology companies.

In recent years, the Chinese government has implemented various measures aimed at increasing oversight and regulation of the technology sector. The stock price was in freefall because of this.

I kept on buying shares of Alibaba until they had already reached 25% of my total investment portfolio. As it reached that mark, I stopped acquiring its shares, which was unfortunate for me because the stock price continued to fall off the cliff and the strong clampdown of the CCP also ensued up until 2022.

To add on top of that, the geopolitical tension kept on rising between China and the US regarding Taiwan, then there is also the Russia-Ukraine war and the trade problems worldwide. It was a tumultuous time to be invested in Chinese equities.

Global investors pulled large sums of capital away from China because of this, and the local retail investors who held on to the shares of Chinese equities were left with negative returns, me included. Gone were the times when the Chinese equities market was one of the most popular markets worldwide.

The company’s financial performance deteriorated since fiscal year 2022 due to the CCP clampdown. Also, the profitability margins (gross, operating, and net income margins) of Alibaba have been declining over time as they continued to tap into other markets such as brick-and-mortar grocery stores (margins will usually be lower in this industry). Currently their margins are nearly at the levels of a global large capitalized retailer such as Walmart and Amazon. See Alibaba’s historical net income margins below, relative to Amazon and Walmart, from 2012 to 2023.

Despite this, its financial fundamentals are still intact and profitable but growth has definitely shrank, it might be at its tail end of growth phase or already at its mature phase of its business life cycle. Other public Chinese companies also have sound business and financial performance, but there is no light in sight yet if the geopolitical tension has been losing steam. As of this writing, the Chinese equities market is depressed to the extent that it is very attractive in terms of valuation, but we don’t know for how long things will stay like this. Undervalued stocks can stay undervalued for a very long time.

Personally, I would still want to enter the Chinese Equities market, as there are a lot of fundamentally sound companies trading at a cheap valuation, but only once the geopolitical tensions subside. I’ve pulled out all my individual investments as it is too much of a drag on my portfolio, plus I’ve accepted that Alibaba is not in a good position as of this moment. I’m willing to look at it again after things stabilizes in the geopolitical front.

What I’ve Learned: Be mindful of Political Risks!!!

Currently there are plans to split the Alibaba holdings group into six units.

As reported by CNN: Alibaba on Tuesday said it plans to split its business into six separate units, in a move that promises to radically reshape the sprawling Chinese e-commerce firm that Jack Ma founded nearly 25 years ago.

Each new business unit will be overseen by its own chief executive and board of directors, the company said. Five of the new business groups “will also have the flexibility to raise outside capital and potentially to seek its own IPO,” according to a company statement on Tuesday.

The major restructuring at one of China’s most iconic companies comes one day after Ma made a rare public appearance in the country and as Beijing has signaled that its regulatory pressure on the internet industry may be coming to an end.

The 6 units are its current revenue streams which are:

1. TAOBAO TMALL COMMERCE GROUP – The Taobao Tmall Commerce Group covers Alibaba’s domestic-facing e-commerce marketplaces, which make up over two-thirds of Alibaba’s total revenue. Taobao and Tmall are China’s dominant e-commerce marketplaces in China.
2. GLOBAL DIGITAL COMMERCE GROUP – Alibaba’s Global Digital Commerce Group includes its overseas e-commerce marketplaces such as Lazada, which serves Southeast Asia, and AliExpress, which has become popular in Russia, Latin America, and parts of Europe.
3. CLOUD INTELLIGENCE GROUP – Alibaba’s Cloud Intelligence Group includes Aliyun, the company’s cloud computing unit. The company is the dominant player in China’s domestic cloud computing sector, with a 36% market share, according to research firm Canalys.
4. LOCAL SERVICES GROUP – This division includes food and grocery delivery services such as Alibaba’s Ele.me app as well as Amap, its mapping app.
5. CAINIAO SMART LOGISTICS – Alibaba formed Cainiao in 2013 by making investments in a number of Chinese logistics companies.
6. DIGITAL MEDIA AND ENTERTAINMENT GROUP – Alibaba’s Digital Media and Entertainment Group will house Youku, the company’s YouTube-esque streaming video site, as well as Alibaba Pictures, its film production unit.

This is also one of the reasons that I personally feel that I need to sell all of the shares of Alibaba, as I don’t know how things will move forward after the split. As I’ve sold my holdings, I’ve lost 47.30% of my initial capital invested in the said company.

For example, if I’d invested £10,000 on Alibaba, I would have taken back £5,270. That means I lost £4,730 (a 47.30 percent loss).

Alphabet Inc Class A (NASDAQ: GOOGL) & Focusrite PLC (AIM: TUNE)

Google is “THE” search engine and one of the big US tech companies. I bought Google at a decent price when its stock price fell below $105 per share early this year (2023). I was planning to hold this company for a long time, but since A.I. came into the picture, I wasn’t so sure anymore if Google would be able to hold the search engine dominance in the future as Microsoft entered its monopolised business.

It was unclear to me what would happen; I don’t even have any basic knowledge about AI or coding to understand the possibilities, threats, and opportunities that Google and its competitors will have in the future. Thus, I sold all my Google shares.

Selling it is not my perceived failure; it is what I bought after. I bought Focusrite PLC, a global music and audio products group that develops and markets proprietary hardware and software products. Used by audio professionals and amateur musicians alike, its solutions facilitate the high-quality production of recorded and live sound.

I bought it too early, and then the half-year results came out, which showed a decline in its operating income due to a decrease in the demand for their product. Perfect timing indeed. It’s just like the meme image below, where the stock you sold immediately goes up and the stock you bought immediately crashes. Hahaha!

I’ll still continue to hold this; all of my investment parameters were ticked already before I bought the said shares of Focusrite, so I’ll continue holding it or adding to it until the stock price isn’t at my purchase level anymore. The business runway is long for Focusrite as it is a small-capitalised stock worth less than £500 million.

What I’ve Learned: Margin of Safety!! You know this already but you’re usually too excited in purchasing shares to early!!😅😔

I just really hate it when its stock price keeps on falling, and then you’ll see after a few weeks that it’s already down by 25%. On top of that, you don’t have any capital to add to it. 😆😅😔

Capital Reallocation

“Sometimes, a disappointment can be a divine appointment.”

It’s certainly hard to admit mistakes and accept that you’ve messed up. The feeling of stupidity is overwhelming; add the thoughts of incompetence and that I’m never going to be good enough to achieve my financial goals. All of it just swells up within.

I am constantly reminded of this line in the “A Knight’s Tale” movie.

“You have been weighed, you have been measured, and you have been found wanting.”

—Adhemar

That said, it is exactly at this moment in time that we must realise that this is meant to happen. That in feeling defeated and of failure, we can emerge better than our previous feeble selves.

We must face hardship and pain with enthusiasm and vigour to see ourselves evolve, despite the difficulty of doing so.

Stop, breathe, take a rest, and then resume.

I have been defeated and found myself wanting, but it won’t stop me from achieving what I set my eyes on, for no one will save me but myself.

And don’t ever forget about faith. “Through Him, with Him, and in Him”.

I’ve recently started an investment portfolio overhaul.

I’ll now be allocating more than 50% of my portfolio to passive index funds (previously it was roughly 40%), while around 35–45% will be for individual equity investments (it was 50% or more before) and 5% of Bitcoin (it was 6-7% in 2022).

This portfolio allocation of mine relays one thing. I am not a good value investor, and I may even be at the below average percentile within the value investing world. Despite this, I still love the process of value investing. Looking for wonderful companies, with great management and purchasing its shares at reasonable prices.

I may or may not be able to reach a level of an above average value investing stock picker, what I do know is that I will forever be grateful in finding what I like to do despite being a mediocre person in this area. It is the process of discovering, learning, and applying all of it that makes this worthwhile.

My passive index fund portfolio will protect my overall investment returns in the long run, while my active value investing portfolio will serve as my enjoyment and learning capital allocation.

Before I made this decision, I first considered doing the barbell method investment portfolio allocation of Nassim Taleb, 90% on low-risk investments, while 10% on very high risks investments, but in my case, I’ll tweak it to 90% index funds and 10% stocks. In the end I chose 40/60, more weighted on index funds so that I can have more room for my value investments.

I shared my previous portfolio allocations in my blogs down below.

• 2022 Year End Portfolio
• My 2022 Overall Investment Portfolio Performance

To Sum It Up

Every loss is a lesson. Every win is a warning. Stay humble, stay hungry and remember that the market owes you nothing.

-Steve Burns

As I reached the halfway mark of the year 2023, it’s important to reflect on my progress and acknowledge the areas where I may have faced setbacks or fallen short of my initial goals.

“Admit Defeat” is a phrase that encourages me to accept and acknowledge my shortcomings or failures without dwelling on them negatively.

It’s an opportunity to learn from our mistakes, reassess our strategies, and make the necessary adjustments to move forward. Admitting defeat doesn’t mean giving up or losing hope. Instead, it’s a chance to gain valuable insights and experiences that can guide us towards future success.

It’s a reminder that setbacks are a natural part of the journey towards achieving not just our financial goals but other life goals as well, and it’s how we respond to them that truly matters.

So, as we enter the second half of 2023, let’s embrace the lessons learned, let go of any self-doubts or disappointments, and approach the remainder of the year with renewed determination and resilience.

As much as we want to say that we have a winning strategy, the truth is, a true winning strategy will always have failures included in it.

Admitting defeat today sets the stage for a stronger comeback tomorrow.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.