by elmads

Introduction

“The secret to global investing is gaining an insight into the hopes and desires of the people who live and work in the countries you invest in.”

– Mark Mobius

The world of equities is a system of owning a piece of a business run by individuals who provide goods and services to the public and, in turn, capitalise from what they offer.

In today’s global equity markets, we have 58,200 publicly listed companies that we can be part owners of. This data is taken from the World Federation of Exchanges (WFE) website: https://focus.world-exchanges.org/articles/number-listed-companies.

From these companies, a few will flourish, others will grow, and some will fail. This paves the way for us to become part owners of a company that not only adds value and growth to our money but also to people. Finding (Active Investing) and/or capturing (Low-Cost Index Fund Investing) those companies who will flourish and grow.

At first, my mind was only focused on my country of birth, the Philippines, but then I realised that the world is vast and I could learn a lot more outside the confines of my country’s geographical boundaries. Thus, the birth of my Freetrade and Vanguard portfolios.

Into the global investment world.

Freetrade Portfolio Breakdown

I’ve discussed what is this brokerage account in my 2021 Portfolio Performance blog. See the link I’ve provided down below

• 2021 Freetrade Portfolio Performance

Freetrade is my global stock portfolio investment account. It is a small brokerage firm that operates in the United Kingdom. I’ve been using their services since 2020. As of year-end 2022, I have FOUR company holdings in this account.

Consumer Discretionary (China) – This is not just my largest holdings in this brokerage account, but also my largest individual position size on my total investment portfolio.

This company is a global E-Commerce behemoth whose headquarters is located in mainland China. Their revenue breakdown are as follows:

• 70% – China Commerce (Within China only)
• 8% – International Commerce (the top five countries in terms of total orders placed on this company’s international commerce, not in particular order, were the United States, Russia, Spain, France, and Italy. This was as ther 2020 annual report).
• 9% – Cloud Services
• 6% – Local Consumer Services
• 6% – Logistic Services
• 4% – Digital & Media Services
• 0% – Innovation Initiatives and others

Its advantage: I love a lot of things about this corporation, such as its competitive advantage through its high retention rate from loyal customers, their stake in a large private company payment system in China (this further cements their MOAT), their spawner DNA (expanding to other businesses outside their core e-commerce business, and also helps improve their core operations), and economies of scale that aids with their global expansion.

Unfortunately, this company, along with other technology-related Chinese companies, experienced a series of crackdowns from China’s own government. The multiple government interventions, which started in 2021, continued until 2022, and finally tapered off in 2023.

On top of that, the war in Ukraine happened, commodity prices—most especially oil—spiked, supply chain issues happened, increasing geopolitical tensions occurred, the property crisis in China took place and President Xi Jinping’s consolidation of power occurred.

Indeed, a lot of things have happened. These events significantly spurred a massive sell-off in Chinese equities for more than a year.

This company’s businesses, of which I am a shareholder, has also declined as their growth slowed and their margins declined. It faced both macroeconomic and business microeconomic headwinds.

This specific investment of mine is my “I caught a falling knife” moment, where instead of catching it by the handle, I instead caught it directly by its tip. To make things worse, the tip of the knife didn’t just cut into my hand; it also pierced through it.

If my Col-Financial account has my underperforming Property developer company investment. Then this specific China company investment of mine pulled down not just my Freetrade portfolio returns, but also my WHOLE investment portfolio returns.

See below my Freetrade account’s historical returns compared to the FTSE All World index, since 3^rd of March 2022.

My portfolio actually did well at the start of 2021. It superseded the returns of the FTSE All-World ETF (it tracks the FTSE All World Index) by more than 5% in the 1st of June 2021.

• What Is an Exchange Traded Fund (ETF)?

Sadly, things turned south so fast after I purchased the shares of this Large Chinese E-Commerce company, during its massive sell off (hence the term catching a falling knife).

As you can see in the 3rd image, my Freetrade time weighted return had gained +31.13% in June of 2021, then crashed to a low of -35.13% in October of 2022.

I’ll not be a hypocrite and say that I was not fearful during the decline. I actually felt mental and emotional pain, horror, and dread as I watched a significant portion of my hard-earned money deteriorate slowly over the course of a year in this one company! I will never forget this experience at all.

Why did I not sell my holdings? Firstly, based on my own analysis of the company’s data, the market was in a deep depressive state.

Here is what I mean, the stock price of the company was deeply disconnected from the fundamentals (financials) of the company. It is as if there was a vote of no confidence by global investors in the Chinese equity market. Essentially, the market is indicating that Chinese companies are on the verge of bankruptcy, if not from a significant drop in profit (mostly influenced and brought about by the negative opinions and views by global

Investors with China’s political system).

Secondly, though there are major changes in the company’s core e-commerce business—they are entering lower tiered cities to capture provincial areas of China, which is one of the causes of its declining margins—I still see it as one of their essential investments to further strengthen their reach in China.

Thirdly, this is also my bet on China’s economic growth. Sadly, I bought the shares of this company too early because I didn’t follow my margin of safety.

Why didn’t you add more money if you’re confident in this company? It’s because of my asset allocation. I already exceeded my own, personally chosen maximum percentage holdings in a company. This company already represents 21% of my overall investment portfolio. Personally, my high-conviction bets should only be at most 20% of my total investment portfolio.

Communication Services (US) – This is a global company whose main office is in the US. In fiscal year 2022, this is the only company share that I’ve newly acquired.

Advantage: It is a large player in the online advertising space. The main risk to its business is government intervention, as this company is said to be a monopoly in its industry.

Nonetheless, there’s a new threat to its monopolistic business, and that’s the A.I. chat box that was launched in November of 2022.

To be fair, the management team of this company is not complacent, they did not downplay the potential threat that this A.I. chat box possess and took this matter seriously. They immediately called a “code red” amid the rising popularity of this A.I. chat box.

Adding fuel to the fire, one of the top US technology companies has invested a monumental amount of money on the private company handling this A.I. chat box. It is indeed a red alert, hence the company’s management took it one step further by asking the founders of the business for help.

Due to the declining macroeconomic factors, this company’s stock market price substantially went down to the extent that it hit my own intrinsic value calculation with a margin of safety. This is the reason I’m continuously purchasing shares of this company while it’s still below my buy price.

Consumer Defensive (UK) – This company operates in the UK. It is a food-on-the-go retailer that sells products to franchisees and wholesale partners for sale in their own outlets. It is also involved in property holding, non-trading, and trustee businesses. The company operates approximately 2,200 shops and 375 franchise locations.

Advantage: Though the competition is tight in the food industry, this specific company has been able to hold onto market share from their competitors, such as McDonalds. The uniqueness of their food comes from their understanding of the food culture of the British people. a company that was born in the UK and has since then served food to its people for over 83 years.

The first time I bought shares of this company was in 2020. At the time, the funds I set aside for it represented a sizable portion of my overall Freetrade portfolio. Today, it comprises 3% of this portfolio. I am not able to purchase more shares of it as the stock price has not hit my buy price again.

Finance (US) – The company I own under this sector is one of the best-known banks in the US. I’ve owned its shares since 2020. I am looking forward to adding more, but sadly, its shares haven’t hit my entry price anymore to this day.

Cash

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”

-Warren Buffett

In exuberant market times, accumulating a substantial portion of our net worth in cash is important. It gives us the leverage to take on market downturn opportunities when one occurs. Then, by adding courage on top of it, we gain a rare lifetime opportunity in the equity market.

“Cash combined with courage in a time of crisis is priceless” – again, Warren Buffett

Freetrade Historical Performance

As shown from the data and line graph above, My Freetrade returns have performed abysmally, having a compounded annual growth rate of -11.18%.HAHAHA!😂

This is all thanks to my Chinese company holding.😅

If I am an actual money manager in an investment firm, my clients would have probably been mad at me for investing in China.

Since I purchased this consumer discretionary e-commerce Chinese company, this Freetrade portfolio of mine has yet to outperform the FTSE ALL World Index (a market-capitalization weighted index that represents the performance of large and mid-cap stocks from the FTSE Global Equity Index Series and covers 90-95% of the investable market capitalization).

• https://www.ftserussell.com/analytics/factsheets/home/search – Link to the FTSE ALL-World Index Factsheet returns.

Experiencing two consecutive years of negative performance is nerve-racking, and that’s an understatement. To be honest, seeing a slow decline in your portfolio value for weeks and months for more than a year is pure mental torture and agony.

You’ll be questioning your decision-making skills; you’ll feel stupid; you’ll have regretful feelings; and you’ll have an overwhelming flow of negative emotions.

“I’ve always said, the key organ here isn’t the brain, it’s the stomach. When things start to decline – there are bad headlines in the papers and on television – will you have the stomach for the market volatility and the broad-based pessimism that tends to come with it?”

–Peter Lynch

If my Freetrade portfolio returns have been negative for two years, then it is also expected that inflation will further aggravate my losses. haha! See the line graph below for my Freetrade portfolio’s inflation adjusted returns. (Inflation rate used is in GBP currency)

If I felt the pain of such unrealized losses, what more for the investors who only have Chinese companies in their portfolio. They are the ones who felt the pain the most; having returns way below six feet underground.

That being said, if their investment thesis turns out the way they have calculated and assumed for the business, then their returns moving forward would be stellar. It would most probably supersede the returns of the S&P 500 and NASDAQ indices in the future.

This is the wonder of investing, it is dynamic and personal. What appears to be a bad investment to some may be a golden opportunity to others. There is no completely right or completely wrong investment, there is only your conviction and accountability for your own investment decisions.

My Investment Goals Checklist (Freetrade Portfolio):

Fiscal Year 2022

1. Beat my chosen benchmark index (FTSE All-World) = My Portfolio -24.65%; FTSE ALL-World -17.70% 👎
2. Minimum 10% Annual Return = -24.65% 👎
3. Beat inflation = My Portfolio -24.65%, UK inflation 9.07%. 👎

Goal not met.

Vanguard Portfolio Breakdown

Index investing is a passive approach, which removes the risk of active decision-making and offers broader exposure to the entire market. A person doesn’t need to study companies or do their own research. The index fund investing approach rides the growth of a specific industry or sector, a country’s economy, a region, or the whole world.

to know more about mutual funds, active and passive funds, and Vanguard funds. See the following links below:

• 2021 Vanguard Portfolio Performance
• Mutual Funds
• Passive and Active Funds
• The Power of Cost Averaging Investment Strategy
• How to open an Index Fund Investment Account – Vanguard
• Vanguard UK – The FTSE Global All Cap Index Fund
• Vanguard UK’s Ready-Made-Portfolios

I am invested in three different Vanguard funds in this portfolio.

1.) Vanguard US Equity Index Fund “Accumulation” – This fund mirrors the company holdings of the S&P 500 Index.

The United States has the world’s largest economy and a significant influence in global finance and trade.When investing in a low-cost index fund, it is a no-brainer decision to have an allocation in the largest economy in the world.

• https://www.vanguardinvestor.co.uk/investments/vanguard-us-equity-index-fund-gbp-acc/overview – link to the said fund

2.) Vanguard FTSE U.K. All Share Index Unit Trust “A” GBP Accumulation Units – The UK is a service oriented economy. They’ve been at the pinnacle of global power for centuries, and though they’ve declined, they are still a global power, a “soft power” country to be exact.

Their technology industry is still lagging behind that of the USA and China. Don’t get me wrong, they certainly have technological companies, but when compared to the USA’s and China’s tech giants, the UK’s tech businesses don’t have the same scale as the two countries have.

• https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-uk-all-share-index-unit-trust-gbp-acc/overview – link to the said fund.

3.) Emerging Markets Stock Index Fund “Accumulation” – This is a bet on the strong economic growth of emerging countries. Currently, this fund’s top 10 countries where they allocate the fund’s money are the following: China accounted for 30.4%, India 14.8%, Taiwan 14.4%, South Korea 11.9%, Brazil 5.4%, Saudi Arabia 4.1%, South Africa 3.8%, Mexico 2.4%, Thailand 2.1%, and Indonesia 2.0%. 

https://www.vanguardinvestor.co.uk/investments/vanguard-emerging-markets-stock-index-fund-gbp-acc/overview – link to the said fund.

Vanguard Historical Performance

This is the only brokerage account of mine that ended fiscal year 2022 in the green and has outperformed both the FTSE All-World and S&P 500 indices.

It is also the only account where I use the cost-averaging method, as my Col Financial and Freetrade investment accounts are for my value investing approach.

Maybe you’re wondering; “How come my Vanguard portfolio is not down as much as the major market indices? Considering that I invest in vanguard funds that track the S&P 500, Emerging Markets, and FTSE All-Share Indices, which are all in red at the end of 2022?”

It’s because I started this portfolio in 2019, and I’ve been investing a portion of my salary in my three Vanguard index funds ever since.

Let me explain this by showing you an image below.

As depicted above, if you invest regularly in a specific fund or stock, you’ll eventually average out the performance of the fund or stock in which you are invested.

Recall that this is a fund under Vanguard where it invests the accumulated money of the fund in companies that constitute the S&P 500 index.

From Mid year of 2019 to today, the S&P 500 index rose a couple of percentage points. During that time, I invested consistently in this Vanguard US Equity Index Fund, thereby capturing both the crash in 2020, the increase in market price from 2020 to 2021, and the slow decline in its market price in 2022. Therefore, my accumulated investments in my chosen Vanguard fund are the average of the S&P 500 stock price since 2019.

The main reason why my Vanguard US equity fund investment was able to supersede the market index was because the market price of the index is well above the cost average of the fund.

But what if I’ve invested at the peak of the market, followed by its decline? This is exactly what happened with my Emerging Markets Index Fund – Accumulation investment. I started investing a portion of my salary in this fund in August of 2021. It has steadily declined since then. See the image below. 

As the image above shows, the net asset value (it is similar to a stock price of a company, but when you invest in mutual funds, it’s called the net asset value instead of the stock price) declined from 2021 to today. By buying consistently over time, I’ve also averaged out the net asset value of the fund. Once it goes up, then the unrealized losses on this investment will quickly turn into unrealized gains.

By the way, 30% of this Vanguard UK Emerging Markets Stock Index fund is allocated to Chinese equities. This is the reason why the emerging market index has been declining since 2021. Remember that my Freetrade portfolio also includes a specific Chinese company holding.

Emerging markets, most specifically Chinese equities, have substantially underperformed the other major indices worldwide since 2021. Will this underperformance continue? No one knows, but usually, a good time to invest is when there is blood on the streets. A long-term thinker and an optimistic contrarian point of view

For every investment, there is a corresponding real return. Enter the adjusted for inflation Vanguard Portfolio Return

My Investment Goals Checklist (Vanguard Portfolio):

Fiscal Year 2022

1. Beat my chosen benchmark index (FTSE All-World) = My Portfolio: 10.39%, FTSE ALL-World: -17.70% 👍
2. Minimum 10% Annual Return = 10.39% 👍
3. Beat inflation = My Port. 10.39% UK inflation 9.07%. 👍

🎊🎉Goal met!!! 🎉🎊

Let’s Sum It Up

A person who wants to invest a portion of their salary and will not need it for more than ten years will not make a mistake by using low-cost index funds. It is a no-brainer, simple investment process for everyone.

Even the world’s most successful investors encourage most individuals to take this route. Namely, Warren Buffett, Jack Bogle and Peter Lynch.

It takes away the hassle of doing your own research, the diversification process, the capital allocation decision, and what and where to invest, to name a few.

Index fund investing enables individuals to make their own hard-earned money work for them without the aforementioned complications.

As I’ve shown you in this blog, the performance of my Vanguard and Freetrade brokerage investment accounts implies that, for most of the time, it is better to take the easier path of investing in a low-cost fund that tracks a major index, especially if you don’t have the interest in exerting your time and effort to learn more about investing.

Even if you have an interest in investing and are willing to do what is needed to have good returns well above the market, it still doesn’t mean that you’ll automatically achieve great returns. It’s not as easy as it seems. This is what I’ve learned, and my Freetrade account performance is a clear example of this: a complete underperformance and negative compounded annual growth rate since 2019.

Most investors would have said that I’m just wasting my time doing my own research because I’ve performed abysmally with my returns since I’ve been exposed to Chinese equities, which is absolutely true. And, I would have done better if I just allocate 100% of my hard-earned money to an index fund, which is probably true.

That being said, I enjoy what I’m doing. I may not be a stellar stock/business picker, but as long as I feel that what I’m doing is right and fulfilling, an approach that will help me achieve my future investment goals, then I’ll always devote a substantial portion of my net worth to my value investing endeavour.

What matters is that we enjoy the process, the journey to the mountain top, and that we achieve our own set goals. 

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Knowledge is my Sword and Patience is my Shield,

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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.