2013 was a great year for the Integrator 50k portfolio in terms of dividend growth and stock returns. However there were a few things that didn’t go as I’d like. 2014 is the year to fix some of these problems
It’s hard to complain too much about a year where portfolio returns closed in on 30%. But those kinds of years can be the ones where complacency sets in. You develop bad habits, but because everything in the market goes up, you don’t get punished for being sloppy.
It’s only when things are tough that these bad habits can have a knack of punishing your mistakes. I observed a few problems in 2013 that I want to try and rectify going forward.
I bought and sold way too much in 2013. I started a number of positions in early 2013, which was fine given I saw a lot of value in Q1 2013. But then I also bought and exited a number of positions in companies like Quality Systems, Flowers Foods, Apple, Lockheed (partial disposal) which I believe were still good positions, but may not have been the highest quality ideas that were going around at the time.
Taking the time to do the necessary diligence of new holdings and not chasing everything that comes up is something that I want to be more disciplined about this year. Low cost trading is both a blessing and a curse. It makes it very easy to enter a position in a quality company with relatively low transaction cost. That same easy access can mean that the necessary diligence that should go into assessing the purchase in a business just doesn’t get done.
That easy access to buying and selling stocks meant that I made partial disposals in companies like Colgate, Mastercard and Visa which are some of my top performing businesses. While they had all achieved substantial gains, the folly of making such short term decisions occassionally hits home.
I had an opportunity to chat with a friend of mine recently who invested roughly the same amount into Mastercard as me shortly after the IPO. While I have made partial disposals of Mastercard along the way, my friend has faithfully held onto the Mastercard shares since shortly after the IPO. His modest 6k stake is now valued at over $70k. I distinctly remember talking to him a number of years ago when he was planning to sell and I advised him to keep holding. Pity I couldn’t follow that same advice!
This is definitely something I want to keep a closer eye on going forward.
Buying too large a holding in a single go
I entered a number of stocks too quickly and in too short a period of time last year. This was particularly so with some of the small cap dividend gems and even mid cap dividend players like Female Health Company and Resmed.
While I believe they are solid long term players, I need to be more patient at staging my entry points given the volatility of these players. Instead of positions of $2k or $3k, I need to start these off in lots of $1k or even $500. The runway for these companies is long. I need to remind myself not to be in a rush to build a position!.
I’m trying hard to put that into practise in constructing my growth portfolio. This is partially forced on me because we are conserving capital for our house purchase, but it’s paid some dividends given the volatility of the markets and these growth stocks in particular. It’s meant that I’ve been able to pull down some fairly good entry prices on these companies.
Not enough conviction in best ideas
Forcing a discipline on high quality is also an aim for 2014. All stocks are not creating equally. All earnings aren’t created equally. There are very few businesses that can match the earnings quality and longevity of businesses like Coca Cola and McDonalds. That’s just a fact. Adding an ever increasing list of positions is just going to bring about a dilution in the long term. It’s a statistical fact. Taking the time to do the diligence on the best positions that can deliver long term sustained returns will deliver outperformance with reduced volatility.
Rather than looking to make bets in 20 new companies, each with different sets of risks and different drivers, finding those companies that are best poised for long term success and doubling down on those bets is more of the focus that I’d like to maintain. That may mean not jumping on every moderately valued company, irrespective of it’s underlying economics and strength of moat.
I diversified out from being a purely dividend investor last year. I established a venture fund, and I also established a growth fund. This was more a recognition that there are solid companies that can offer strong long term returns that don’t necessarily pay dividends.
Having said, dividend investing has worked well for me over the years. It’s the main arrow in my bow that I’m using to achieve financial independence. I don’t want to lose sight of the fact as I pursue some of these other pathways, that may carry with them the prospects for huge returns, but also bring with them more risk, and more volatility.
At the moment, I’m fairly happy with the modest allocations that I’ve made to both the venture portfolio and growth portfolio, but I found myself tempted at various points in the last few months to more aggressively chase down opportunities in both the growth fund and venture fund.
That’s something I’m going to have to more consciously control as my capital is fixed and needs to be more carefully rationed. I don’t want to turn my back on the method that’s served me so well over many years.
Dividend investing has offered me the opportunity to have a shot at an accelerated financial independence and I don’t want to change my stripes so close to the goal line.
Periods of strong capital growth can cause some bad habits to creep in. I was surprised given all the years of my investing that I ignored a few of my basics, such as having patience and only looking to sell if there is a change in the underlying business .
The end of the year can be a good time to see what went well and what needs to be tweaked. I know there are a few things on my list to work on for 2014.