This post is about my “Fun Fund.” I am going to discuss the performance of this actively managed investment account in the recently ended second quarter of 2021 and share some thoughts on a few positions.
As a reminder, most of the prior posts about this account (which is really just a small Roth IRA that I am messing around with) are located on this page.
Q2 2021
The second quarter of 2021 wrapped up a couple of weeks ago. This account was up 4.35%. I am still suffering from carrying about 25% of the account in cash. I had some buy orders this past week that didn’t quite get filled but I don’t think I will have this much cash at the end of the second quarter. One stock I am actively trying to buy is a home builder.
This performance was worse than the SPY, and QVAL, which were up 7.20% and 4.98%, respectively. I did beat RPV, which was up 3.81%. Like RPV, I have a lot of financials. I’m running at about 30%.
I think I’m going to go ahead and prohibit buying anymore banks in this account. This may help me limit the risk of cognitive errors due to some psychological biases that could come into play here. For example, a consistency, commitment, overconfidence, or endowment bias could cause me to overweight stocks that I already have in my portfolio and my general decision to buy big banks.
Consistency Bias, Overconfidence, the Risk of Ruin and potential mitigation via “Never sell”
I just finished rereading Cialdini’s Influence ($), so this risk is fresh in my mind. I have also noticed that Warren Buffett and Charlie Munger usually don’t trade around positions. Rather, they seem to pounce on a new stock, take it up to a full position relatively quickly, and then “sit on their ass” (they do not usually trade round or continue to scale-in).
Buffett usually also takes dividends and redeploys them elsewhere. There are obviously exceptions to this over their long careers, but this pattern sticks out to me among famed investors. They usually just buy a ton and then “move along.”
While reading the sections about some of the biases discussed in Influence (for example, our tendency to want to be correct and become entrenched/overconfident in our decisions), I wondered if Buffett perhaps decided to use this method to control this risk. You makes a decision, buy a full position (maybe with some time to limit market impact) and then move on to the next decision. I was probably also inspired to noodle this over by recently reading an article discussing how Munger sent Cialdini a Berkshire A share with a note saying that Cialdini had helped the two make billions.
Of course, the fame that Buffett and Munger have to deal with could also explain this pattern. Once their purchase or sale becomes public, it is probably very hard for them to continue to transact, so they could be forced by the market impact to move decisively and then move along to the next decision.
Another factor that could influence this behavior is an acute awareness of the earnings retained by businesses. Throughout his career, Buffett has repeatedly highlighted this aspect of investing/business (in various contexts). It is easy to forget, but even without investing another dime in a business, if they are retaining a portion of the earnings that you own as an equity holder, your investment in the company is increasing over time.
So even if Buffett took the dividends paid by $AAPL and invested them in the utility business, Berkshire’s investment in $AAPL would be increasing if they retained earnings and reinvested in the business. The relative proportion of ownership in $AAPL might be increasing even faster if $AAPL retained earnings and also bought back stock on behalf of continuing shareholders (from selling shareholders). Buffett talked about this in the last annual letter, indirectly explaining his decision to sell some $AAPL (an exception to the usual course of action I am writing about here…resulting in his detailed explanation of the thinking. He is usually “either in or out.”). He basically sold $AAPL into the buyback to maintain Berkshire’s relative ownership position.
It seems like the strategy of putting on the position and then moving on would reduce the “risk of ruin” that could result from becoming overly reliant on one decision, such as arguably happened to Eddie Lampert ($SHLD) and Bruce Berkowitz ($SHLD and $JOE) (and a lot of investors with financials just before 2007, or Valeant, or GE). One huge decision that is held with perhaps too much conviction (and the need to be proven right) can really ruin decades of a great track record. The longer an investor’s track record the more confident they usually become and the more capital they have under their control. One wonders if this may be one reason why there are so few exceptional long track records.
The sort of strategy seems very similar to a “coffee can” approach, wherein you make a security selection and then simply place the stock in a metaphorical coffee can (like a time capsule) to let the decision age to its conclusion.
Imposing a rule whereby you make the purchase of a particular business or decision and then move on to the next one (as opposed to trading around a position and/or scaling up with conviction) seems to also result in getting a bigger “sample size” of decisions. For example, instead of letting my portfolio grow to 60% big banks, with each position basically expressing the same view, the outcome of which will probably result from similar factors, if I impose a sort of coffee can rule, it might force me to “move along” and get some other ideas/decisions in the portfolio.
So anyway, I’ve been thinking about this a fair amount and have decided that I’m all full up on banks in the account. I am still reinvesting via retained earnings. I will also allow myself to fiddle around with dividend reinvestment to satisfy the need to “do something” (one of the many behavioral benefits of dividends).
Legacy MEdia. I like Brian Roberts?
I didn’t buy any stocks or anything during the quarter. I am watching this whole $T and $DISCA thing. It looks like $T is going to spin the new HBO/Discovery to its shareholders. Maybe they will dump the spin, because it won’t be a dividend paying stock and it will be too small relative to their mandates/position sizes.
I also am watching $CMCSA. I like “legacy” media. Maybe I will get into it sometime in the future. I have been reading about Brian Roberts and the deals he has done over the last year or so and I am kind of a fan.
I really haven’t found anything that I thought was a mistake. He definitely seems to exhibit price discipline and is very strategic about working things into a position where the incentives for the buyer/seller are in his favor.
For example, Disney had some board strife back when Michael Eisner was the CEO, so Comcast lobs over a cheap offer (very cheap, in hindsight). The Disney family members/anti-Eisner folks on the board don’t reciprocate, so he walks (smart enough to make the offer to see if he can be the “white knight” but also smart enough not to go hostile on Disney).
He got blocked on the Time Warner Cable purchase but he ended up getting the systems that made the most sense for the Comcast footprint from Charter anyway. By the way, I am under the impression that he has actually been able to maintain a good relationship with John Malone (maybe that’s fake, IDK). If so, that probably shows real rationality on the part of both men. The relationship could have easily spiraled into a contest of egos (even if the businesses were naturally aligned on many things…I mean there’s only been one “Cable Cowboy” book).
$CMCSA picked up NBC Universal from a VERY motivated (financially distressed) GE which is basically a weaker Disney clone (parks, etc). He structured the deal with some face-saving two steps to allow GE to hang on to the equity for a bit and defuse some of the media coverage/Immelt and Welch embarrassment. He has since assembled Dreamworks and illumination, etc around that engine and they can monetize that content through parks etc (like Disney).
He hung onto his Hulu stake and it’s getting more valuable every day and/or has hamstrung Disney’s international streaming expansion. He bid up the Fox assets up to push Disney and created a forced/motivated seller of the Sky assets on the back end (TBD how that plays out but he moved the game in his favor as much as possible in my opinion). Anyway, I think he might be underrated, bigly.
FIN
In conclusion, I got smoked by the SPY last quarter, but I hung in there with value funds. I have “cut myself off” on big banks in order to limit the risk of consistency/commitment bias and overconfidence to my fun fund. I am considering a general rule that I can either buy on a 5% or 10% position when I make a decision and then I have to move on. The cash in the portfolio continues to be an anchor. Swing you bum (but not at that)!