My first six months at Morningstar have involved a lot of self-reflection.
I have written about how I have traded far too often. About how I initially struggled to stay invested for the long-term because I didn’t have a cash savings buffer. About my oversight of a key criteria put in place by Warren Buffett. All of those articles pale in comparison to this one.
I say that because researching this one physically pained me. Those sitting close enough to my desk in our Sydney office would have heard a small groan as every fresh data point revealed itself. I never thought that looking back at 2021 would be so hard.
Digging up the past
I thought it might be interesting to look at a full calendar year of activity in my brokerage account and see what I was up to back then. What I was buying, what I was selling, what approach I seemed to be following and what I’d change now.
I chose 2021 because it was my first full year investing with cash dedicated solely to the task. I was living in the UK at the time and had opened a retirement investing account where the money is locked up until I retire and the government would add 20% tax relief to any contributions.
It’s also a year in which I thought I had behaved fairly well. I didn’t get involved with NFTs, SPACs and day-trading Gamestop. In fact, I was the one in groupchats and at (socially distanced) gatherings telling my friends not to do that stuff.
Unfortunately, the record shows I was doing things in the stock market that were just as bad. All in all, I saw five main sins that I hope never to commit again. Here is my attempt to turn those mistakes into a lesson for your benefit and mine.
Sin #1: Overtrading (and then some)
Between the dates of January 1st and December 31st 2021, I made 62 different buy or sell trades in my retirement account. 62! Every one of those trades commanded a commission.
How much, you ask? I ran those numbers too and the results shocked me.
I paid £923.33 in brokerage and FX charges during the year – a number that embodies financial insanity as I only contributed £3753 in fresh cash (including tax relief) to my portfolio over that period.
This means that almost a quarter of the amount I contributed in 2021 went to my broker with no hope of it coming back. A 25% handicap on my returns before my investments had even moved up or down a single percent. What on earth was I doing?
Sin #2: Chasing hot stock tips
My frenetic trading can be explained in several ways. One of them, without doubt, was that I was consuming a lot of hot investment tips at the time. Twitter, Substack, podcasts, you name it. If somebody sounded smart and was talking about a stock they thought could go up, I wanted to hear it.
Seeing as I didn’t have a huge amount of cash going into my portfolio, this meant that the latest big idea I wanted to “jump in on” needed to replace something else. One goes out, one comes in and the trade count goes up by two. Rinse and repeat until you get to over sixty trades in a year.
We’ll talk a bit more about having a clear goal and investing criteria later. But investing without these things – and relying purely on hot stock tips for investment decisions – poisons your investing with borrowed conviction and a complete lack of context.
How much of the portfolio does the investor you are following have in the stock? What role does it play in their portfolio? When would they sell? How will they keep track of whether things are moving in the right direction?
If I didn’t take much time to understand the company, investment proposition and – most importantly – whether it fits my strategy and goal, what keeps me invested when the next idea comes along? Not a lot. There were low barriers to entry and exit in my portfolio. Hence the huge number of trades.
Sin #3: Not keeping the goal in mind
In the past I’ve talked about how failing to look a few steps ahead can leave you with a portfolio unfit for purpose.
This is a lesson I have learned from my own portfolio. It stems from the basic reality that what might sound like the world’s greatest investment idea one day will probably seem completely random a few years later.
So it was for some of the securities I bought during 2021.The bulk of my purchases in dollar terms centered around what I would call high quality companies such as the Wide Moat trio Berkshire Hathaway (the mainstay of my portfolio at the time), Philip Morris and British American Tobacco. I made several purchases of all three companies during the year.
But there is also a lot of trading in securities that I would have nowhere near my retirement portfolio these days.
An unproven medical technology micro-cap, a highly leveraged company in a challenged industry and long-dated crude oil options (seriously?!) to name just three. Do those investments in the second group sound suited to the goal of funding my retirement 30 years hence?
I would say that they absolutely do not. They were lottery tickets. And in many ways, they were a sign of the times.
Sin #4: Crumbling at the market top
Among other things, 2021 is known for being the heyday of the great Covid rally. Things got increasingly frothy. Growth stocks and Cathie Wood’s portfolio went to the moon. So-called value investors got left in the dust.
As I hinted at earlier, I was laughing at a lot of the weird behaviour going on. And for much of the year, my investing activity reflected my investing world view that cheap and safe is better.
Apart from the odd weird purchase, my buying was dominated by Berkshire Hathaway, cigarette companies, gold related assets, oil and Japan. They fit the “value investing” persona I wanted to live up to and the kind of company I was comfortable owning.
What the hell happened in December, then? Here are the stocks I bought that month:
- Twilio
- Crowdstrike
- Apyx Medical
- Vimeo
- Doximity
- Upwork
Buying those stocks for my portfolio is the investing equivalent of a personality disorder. I honestly don’t even remember owning them and don’t know why I did.
Did the gains I was seeing in SPACs and hypergrowth stocks go to my head? Did the screenshots of ever higher crypto account balances from my friends push me over the edge?Maybe. But I don’t like either explanation because they shift the blame.
Instead, I think it partly came down to me having an idea of how I wanted to invest – but not setting my strategy in stone or establishing firm guardrails to keep me on course. For help with this, you can see my colleague Mark LaMonica’s four-step guide to defining an investing strategy.
Sin #5: Playing mind tricks on myself
Given all of the above, the thing that surprised me most about my review of 2021 is that I still eked out a small gain during the year.
The data I have on this is not perfect (Sharesight wasn’t in my life then!). However, my broker does provide me with an annual report in mid-December. Here are the numbers from mid-December 2020 to mid-December 2021 as a rough guide:
- At the beginning of the period I had a balance of £2,323
- My total cash contributions (including tax relief) were £3,753
- I also transferred in another retirement account worth £1,079
- At the end of the period my balance was £7,541.11
So my starting balance plus new funds totals £7155 and I ended up with £7541. Even after the ridiculous trading commission fees, that suggests an overall capital gain of £386 or 5%. Given that I spent 12% of my total year-end balance on fees during the year, how is that possible?
I would say it was the combination of a raging bull market and sheer luck.
- 2021 was a very strong year for global equity markets. For example, the iShares MSCI World ETF returned 23.5% in sterling amid the vaccine rollout, “V-shaped” economic recoveries and low interest rates. Few of the “hot stocks” fell before I inevitably sold them quickly after.
- I consistently had around half of my total assets during the year in one stock, Berkshire Hathaway (BRK:B). It rose by around 30% during the year.
- I also had a fairly big position in an oil and gas royalty company that I had bought in 2020. It doubled again in the first three months of 2021 before I got scared about its portfolio weight and sold (probably to buy something of far lower quality).
As I said at the start of this article, the extent of my bad behaviour in 2021 shocked me while I was doing my research here in 2024. It is almost as if my brain pushed reality to one side in order to puff up my ego, only hanging onto evidence that supported my desired conclusion: that I was a man in control.
Things like my account balance at the end of 2021 being triple what it was a year earlier. Or the fact that I had a couple of big winners along the way. In reality, though, my 5% gain during 2021 was nothing to be happy about for two main reasons.
Reason #1: Much bigger returns and lower risk from index
As I said earlier, the iShares MSCI World ETF returned 23.5% over 2021.
That wouldn’t be the return I received because I would have been buying at several different points throughout the year. But still – that’s a huge difference. And I achieved my far lower returns while taking far higher levels of risk.
Say what you want about the risks of global index concentration. Trust me, I probably said a lot about it at the time too. But global indexes and ETFs doesn’t generally have 50% in one stock. And they are usually dominated by companies that are a) highly established and b) less likely to plummet in value than a lot of the garbage I invested in.
Reason #2: Long-term process is more important than yearly outcomes
What matters in the long-term for investors is discipline and sticking to a plan that makes sense for the goal you are trying to achieve.
So if you – as I hope you do – emulate my exercise and look back at your own investing track record, please focus more on the process than the dollar return. A poor process can be accompanied by a good return in any given year. But it will eventually catch up on you.
For a non-investing example, I could play golf tomorrow and hit the worst tee shot of my life with a dreadful technique, only for the ball to hit a root or something and end up in the hole.
It would look good on the scorecard, but would it make me a good golfer or be a valid leading indicator of scores to come? No. My poor technique would eventually express itself in a lot of poor scores in the future.
Even if I had recorded a 100% gain on my investments in 2021 with the actions I outlined above, an honest review of my year should still have been scathing. Why? Because if I behave like I did in 2021 every year, I am virtually guaranteed to end up with a dreadful result for my retirement portfolio.
How I have tried to improve since
The point of conducting a review like this isn’t just to roast yourself. It is to find ways that you can do better in the future.
Among other things, my review of 2021 showed me that I was:
- Trading far too much
- Had no strict criteria for purchases and would buy anything
- Had no overarching strategy
- Held investments that were completely unsuited to my goal
- Completely mindless in many investment decisions
Here is how I have approached improving this.
1. Adding more structure
It is clear from my actions in 2021 that I was not acting with a clear mind at all times. There are stocks in my statements that I don’t even remember owning! The best way to become more deliberate in your actions is to define a strategy. Following the four-step approach laid out in this article by Mark LaMonica really helped me here.
2. Focusing first on suitability, not stock prices
My portfolio of individual stocks now only contains companies that I would, as things stand, be happy holding forever. My criteria for this include a favourable industry outlook, a strong competitive position or high-quality assets, and a business model that I understand.
When I am weighing up a company these days, I am far more focused on the qualities listed above than whether I think the stock is going to go up. And when I say weighing up, I am more focused on finding companies I’d like to own one day rather than right now. I think this is a big step forward.
3. Trying to eliminate over-trading
I also set a rule that any new holding cannot be sold for a minimum of three years. This also puts up a higher barrier against stocks being purchased in the first place. The only holding I have sold since April was a company that accepted a takeover bid. Funnily enough, it was the very same brokerage and pensions firm that I sent all of those fees to in 2021.
4. Recognising my ability to do harm
As people with an interest in stock markets and investing, we like to see ourselves as good guardians of our own finances. Having an honest look at your track record (not just in terms of returns, but in terms of actions) can show you otherwise.
I would be horrified if somebody I love’s money was managed in the way that I invested my own retirement savings in 2021. As a result, I do not think I can seriously say I am the best person to do this going forward. Unless I show a real change in behaviour over several years.
For that reason, all of my fresh retirement savings are going into a lifecycle super product that invests my money in index-tracking ETFs, using an asset allocation that is based on my age. In other words, it is a completely hands-off approach. And about time, too.
Want to review your own investing record?
This was a painful but valuable experience and one that I hope you will take the time to replicate. My biggest piece of advice would be to pick a year that is far enough in the past for you to have forgotten the rationale for each and every move you made.
It was more valuable for me to look at some of the purchases I made and simply ask “what the hell was I doing?!” rather than remember “oh that was cheap for reasons X, Y and Z at the time”. All that does is make myself feel better about it.
I would also recommend going through the data a couple of times to make sure that you are actually calculating the correct contributions and returns.
I was lucky in that all of my trades and contributions were with the same broker. But I almost tricked myself into thinking I had secured a huge return for the year because the method I first used to calculate my contributions didn’t account for the 20% tax-relief that was added to each one.
The exercise also made me grateful for the Sharesight portfolio tracking tools I now have in place through my Morningstar Investor account. This will make future reviews a whole lot easier because every trade and all of my returns are now tracked. Let’s hope that’s not the only way my next review is more pleasant.
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Questions? Thoughts? Something else you’d like me to write about? Send me an email at joseph.taylor@morningstar.com.
