Reflecting on volatile times

Disclaimer: The information provided in this post is not to be considered as any form of investment advice. I might buy or sell shares in any companies discussed in the post without notifying readers of the blog. I currently do not own shares in Points International.

It´s been quite some time since I last wrote something on this blog, about two and a half months in seems like. A lot has happened since, to say the least, and it actually feels like it´s been a lot longer.

First of all, I should probably mention that I have sold all my shares in Points International. It is hard to imagine a worse scenario playing out than what is happening right now for a company with massive exposure to the travel and hospitality sectors. When the company released it´s Q4 Earnings Report on March 4th, they reported that they had not yet seen a material impact from the COVID-19 virus outbreak, and that airlines historically in times of low passenger traffic had used other sources of revenue such as their loyalty programs to a larger extent to compensate for lost revenue. However, people just aren´t flying or even travelling right now unless it is absolutely necessary, and might not do so for quite some time, and over time I imagine that this has to hurt the business. This is obviously a temporary thing and not detrimental to the business long-term as they carry no debt, but I do fear that revenue will plunge to such an extent that they might end up having to buy loyalty points from their partners due to not reaching the annual guaranteed revenues that they give to their customers, which could change their balance sheet drastically if they were to assume debt and carry loyalty points on the balance sheet. Also, there is a real chance that airlines could go bankrupt and that Points lose business that way. I could very well be proven wrong, in which case I will tip my hat in respect to the company. If they actually manage to get through this without a severe drop in revenues, the company is way more resilient than I thought and I would be more interested than ever in owning the company. I do continue to the follow Points with great interest, and might certainly own it again the future, depending on the outcome of this crazy situation.

I don´t regret buying Points, and I do not regret selling it either. Sometimes, a low probability event that smash your thesis to bits occurs, in which case you just have to accept it and move on. That does not have to mean that your initial analysis was wrong or that you made a bet with a negative expected value. I could have probably been a little bit quicker in reacting, but overall I don´t have any major problems with how I handled the situation with Points.

I try to reflect on how I´ve handled this very tumultuous time in the market overall, and learn from it. Given that I´ve played poker for a living for many years, I´m probably more used to daily swings and losing money than most people, but I have to admit that it still hurts to see you portfolio drop 30+% in a very short period of time, even though I am well aware that in a lifetime of investing, this is likely to happen many times, and that we might still be far from reaching a bottom. It is very easy to let your emotions get the best of you and make irrational decisions, that are likely to mimic the emotional behaviour of the rest of the market, i.e. selling what everyone else is selling at the same time, and buying what everyone else is buying at the same time, or not buying at all. I don´t think that I have panicked during this crisis, but I might have made a decision or two that was a bit rushed, buying into something where I wasn´t really done analysing it because the price dropped by a lot in a short period of time, without really knowing what I estimated it´s intrinsic value to be. Hopefully I will learn from this and not repeat that same mistake in the future. Having patience and the ability to keep calm and rational is incredibly important, and something else I have learned about myself during this very volatile period in the market is that conviction in your holdings is crucial. If I feel confident that the value of the company is greater than the current price and that the business will be fine long-term, it just makes it so much easier to ignore the current share price as well as other random noise, and focus on what is important.

My overall strategy remains the same. I do not believe in timing the market, as there is ample empirical evidence that shows that this is a fools errand. Since I don´t plan to use the money that I have invested in the stock market for a long time, and I feel very good about the chances of all my holdings compounding at a rate of well above 10% for the years to come, I remain more or less fully invested. As I write this I happen to have some cash lying around from selling Points, but it will put to use as soon as I find a case that I feel confident about. But learning from previous mistakes made, I try not to rush it. I´m sure there will be many great opportunities going forward and as I mentioned above, I really want real conviction when buying into a new business.

I see a lot of people discussing macro stuff and selling of or hedging in my social media feeds. Some of it probably has to do with people using very different strategies from mine, but as far as I can tell, a lot of it is also driven by fear and the notion that one can know perfectly well when to enter or exit the market. The number of tweets I have read with people saying that they are ”waiting until things have settled down to get back in” are probably in the hundreds. The problem is that we will never know when things have settled down, or when the market has bottomed. If nothing else, the volatility from the last month goes to show how incredibly fast markets moves these days, and once things start to look better across the world, the market might be very quick to react. Or they might not. Thats the point. We just dont know. And honestly, who really knows the implications this whole thing will have on the economies across the globe? I sure don´t. I have no opinion as to whether we´ve bottomed out now, or whether it will take five years to do so. What I do feel confident about, is that if I left my portfolio untouched for ten years, it will be worth a lot more by that time, or at least some time during this 10-year period. With my time horizon, I would also guess that now is likely a better time to buy stocks than six months ago, as (some) valuations have come down quite a bit. Since I try to stay fully invested at all times (provided I have enough ideas) that part isn´t as important to me, but it is something to keep in mind if owning stocks right now feels awkward. Even with a 3-7 year holding period, the price you pay affects your return quite a bit, and even if future prospects have become significantly worse (and hard to perfectly determine) for some companies, there are also companies out there that have become a lot cheaper without this whole episde changing their outlook much, or in some cases not at all.

Investing in volatile times is emotionally hard, but I honestly feel that it is in times like these that you can actually add a lot of value by not being caught up in the market panic, and to instead stay calm and rational. I also think that since these instances are (thankfully) rare, you have to take the opportunity to really try and learn from them, and this is the key, without being short-sighted or results oriented. I have certainly learned a ton about how markets function in times of crisis, and maybe even more so, how I function in times of crisis. I hope that will pay off for many years to come.

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