This morning ValueStockGeek released his 2020 Year End Review piece and a comment stood out: “Those that bought in March got lucky it didn’t turn into a 2008 debacle. It could have easily turned into that.”
Before I go on I want to make perfectly clear I am not disparaging him/her (I assume ValueStockGeek is a male). It’s a comment that got my intellectual curiosity about my process in investing and what I did in March.
Brief Background About Me
2020 was first year being fully invested. I began my journey as an investor 3-4 years ago. (I honestly don’t think I’ve even come close to the knowledge level of actual investors yet. When I read/listen to people like Tobias Carlisle and Jim OShaughnessy I know I’m still playing on the middle school basketball team.)
For the first 3 years I read mostly books/articles/hedge fund letters on investing, psychology, behavioral economics, financial history and valuation. My plan was to understand base rates, prepare myself psychologically and understand human behavior. Only in the last 12 months did I spend more time with 10ks, proxy statements and etc.
March 2020
I didn’t know what was going to happen. On March 14-15 I wrote my investing thesis. It included my thoughts about the macro environment and more importantly, I created a plan on how I would deploy my money.
I created a rudimentary quantitative system. My idea was to deploy money at certain levels at the SP 500. If it 2,500 I would deploy X% of my money.
I thought the worst case scenario was 1,950 for the SP 500. I was very aware of what happened to the Market in The Great Crash of 1929 and how there was a 90% drawdown.
My goal was to not buy at or find the bottom; instead I wanted to be fully invested at a SP 500 level where I would be psychologically okay with not missing out on greater deals. If you don’t deploy cash you have to be okay with being wrong; you have to be okay you missed out. In other words, I focused a lot on my potential future regret. How would I feel if the SP 500 got to 1,700. Would I be okay without any cash?
ValueStockGeek is 100% correct. People who bought in March were lucky the Market snapped back to all-time highs several months later.
However, when I was making my initial purchases I was buying Berkshire Hathaway and Markel. Both of which were selling below book value. The SP 500 was still pretty expensive (2,500) but I didn’t care. These businesses were selling at extremely cheap levels. I think they were that cheap only handful of times previously in the past 15-20 years.
Was I lucky that I bought Berkshire and Markel in March? Yes. In my opinion if you buy a great business at cheap prices the odds are overwhelmingly in your favor you’ll make money. (In all fairness I think ValueStockGeek is mostly talking about the very frothy stocks like Tesla, Zoom, Peloton and etc.)
When I was buying in March I was never scared. I was buying companies that were cheap and were operated by people with integrity. I invested in companies I thought would have a much higher probability than me to profit from the situation. As prices got lower I deviated from my aforementioned strategy and buy really cheap, good businesses like Micron, Heico, Bank of America, Carriage Services and Spirit Aerosystems.
My system didn’t fully work because I didn’t deploy all my cash at low prices. However, I spent a lot of it and I have no regrets.
My favorite investing book is The Most Important Thing by Howard Marks. The biggest lesson I learned is risk is a double edged sword. On one end you lose money BUT on the other end you miss out on gains. Investors are on seesaw and they must constantly balance between both sides of risk.
That’s why the first thing an investor has to learn is before he/she invests they must realize who they truly are; he/she must know how much future regret can they live with. This lesson wasn’t really learned until December 2018. I didn’t buy anything that month and I deeply regretted it. When I got my opportunity in March I didn’t make that mistake again.
