Lessons Learnt from a Recession. 1755% gain on Netflix.

2008 recession

 

Credit: This Post was originally written by H.L Chin, on a forum, on 5 Nov 2010. 

*Note:  I have decided to republish his post as I feel that many investors chase low prices first then, companies.  I agree with H.L Chin that it should be the other way round.  This gives you a psychological advantage and preps your thoughts and emotions from any shockers that you may face. 

 

I thought I would add my amateurish 2 cents.
But first some background:
In early 2007, I had mostly stayed out of the market as I felt that the market was over-valued. When cab drivers were selling their cabs in China to trade in the stock market, you just know that something’s ain’t right anymore. In any case, I like to think that I did well there, staying out. When the first wave of correction swept in around Aug/Sept 2007, I thought I was ready and picked up what I perceived to be bargains in VLCM, BWLD and FMD (tragically). Looking back, the mistake was that it was simply investing too much too fast – perhaps the long wait had made me too eager.

2008 recession 2

Enter April 2008, with the recession now in full swing and prices dropping much lower than what I had anticipated – my portfolio was in shambles and I was not quite sure what to do. My cash position was limited, therefore I was selective and could only afford to sit and watch.

I chanced upon an article about “wiping the slate clean” i.e. selling everything and starting over with a clean sheet of paper (portfolio). It was a breath of fresh air and also opened my eyes to the disproportionately high amounts of % I had allocated to companies which I did not have much (or less) confidence in (VLCM/SNHY/IIVI/FMD/BWLD) and in turn lower amounts in companies which had more control over it’s future (CMG/MIDD/NFLX/DLB).

In essence, what happened was that I had chased price, THEN the company, when it should have been the other way around. Allocation was an unintended result

My BIG take-away from this is that one should first decide what company which they have the most confidence in and THEN decide what price/allocation to purchase it. Not the other way around.

With that now clear, I re-allocated my portfolio (taking some losses also), concentrating my cash NFLX/CMG/MIDD/DLB. And it has been the most satisfying decision I have made.

The performance since then has been (as of today 5 Nov2010):
NFLX – up 630%
CMG – up 300%
DLB – up 106%
I sold MIDD for a profit of 21%

So, my lessons learned so far:
1) It’s ok to start small % allocation
– I have also opened a small position in ATVI in May 2009 and to date, the price basically has not changed. Lots of gashing of teeth in the boards right now but I find myself calm as I had not committed a high amount. Had I committed a higher amount, I reckon that I could be showing concern on the amount of cash tied up in this investment. But instead, the small amount did not bother me and I have spent more time reading about the performance of the company.
– I also had the unusual good fortune to open a position in PCLN on May 2010. The stock subsequently plunged 10% further down before going to gain 93% (as of today). Small allocation or not, a 93% return in a little less than 5 months has been incredibly satisfying. In the past, I think I would not had the guts to plunge in (with the volcano in Europe and Greek debt) as I would have had to commit sizable % of my cash position. My conservative nature would have caused me to miss out.
– Smaller positions also allowed me to diversify as I could not afford the amount of time which Peter Lynch or Philip Fisher spent in researching.

2) Spreading allocations over longer periods of time
– With the flashing prices every second, it’s easy for one to feel that a long period of time has passed when it has only been months.
– To that, I have added the date of purchase on my Morningstar portfolio tracker to remind me exactly how many months or weeks have passed. More than once, it probably had saved me from thinking nothing is happening and doing something rash.
– Investing action (buying or selling) should be kept as boring as possible.

3) Know thyself
– I find myself reliable enough to avoid over-optimistic stock prices (as early 2007 as shown) due to my conservative nature. I am comforted by the knowledge that Peter Lynch has missed out on many multi-baggers and still was able to produce 30% annualized performance.
– On the other side, I needed a more structured way to manage my buying especially during corrections and I found that small allocations is working for me to keep my logical side of my mind un-fluttered.

4) Timing may not matter in the end
– As I look at my best performers, it’s actually interesting that I had opened those positions in NFLX in Jan 2007, DLB in Sept 2007, CMG in Feb 2007. Yes, right before the Great Recession started.
This actually reinforces my thinking that it’s how much you allocate and the quality of the company that matters over the long term. And whether the company is “fortunate because it is able” (paraphrasing).

5) Concentrating more on portfolio strategy
– Smaller positions also released my logical side of mind to concentrate on portfolio strategy
– The revenue/profit data-points from 2009 has been valuable for me to seek companies which demonstrated growth even in the Great Recession. I have opened small positions in AAPL, AMZN, BRLI, ISRG and PCLN — so far, this has surprisingly quite positive in a short time.

Of course, this is not the only way to invest but I thought I would share find that this approach seems to works for me best. Still learning to find confidence to add on rising price (but better value points) and what to do with NFLX.

All the best and thanks for reading.

 

netflix

 

Additional Notes from The Bf Gf: 

From 2007 till date, here are the capital gains for:

Netflix (NFLX) ~ 1,755%

Chipotle Mexican Grill (CMG) ~ 985%

Dolby Laboratories ~ 13%

 

From 2010 till date, the capital gains for

Priceline (PCLN) ~ 500%

 

The author sold Middleby (MIDD) in 2010.  From 2011 till 2015, capital gains for

Middleby (MIDD) ~ 260%

 

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4 Comments

  1. B

    Hi BfGf

    Thanks for sharing your story here.

    Looks like the strategy pays out to allocate a good amount of money on great company that trade at a fair price than a fair company trading at a great price.

    When recession takes over, we need to ensure that the company is able to withstand the period and make it through and it is hard to do for company with weak balance sheet in general.

    Reply
    1. The Bf (Post author)

      Yes and also I want to point out the psychological advantage of buying a strong company vs one that may seem ‘cheap’ but business is mediocre.

      and point number 4 is rather comforting:” Timing may not matter in the end.”

      Reply
  2. anon AC

    thanks for a very timely reminder, especially as the next big crash appears to be just around the corner.

    Fundamentals first, pricing second.

    Reply
    1. The Bf (Post author)

      I don’t think there will be a big crash around the corner because everyone seems to be waiting for a crash since 2011!

      For a bubble to form there needs to be signs of irrational exuberance – really crazy like taxi-drivers selling their cabs to trade stocks.

      But anyways if a crash comes, you are right: Fundamentals first, pricing second.

      Don’t go to a shopping sale and buy things you have no use for just because they are cheap.

      Reply

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