5-Year Review

“I find value investing to be a stimulating, intellectually challenging, ever changing, and financially rewarding discipline.”

– Seth Klarman

I made my first investment on March 19, 2009 – 200 WFC common shares @$16.73.

Having read the Intelligent Investor and Security Analysis, I was 100% sold on the value investing idea.  Moreover, I was mesmerized by Warren Buffett’s story as told in Buffett: The Making of an American Capitalist and The Snowball: Warren Buffett and the Business of Life.

Earlier, in mid-2007, I joined the CFA Program as a way to further my education in finance and investing, and gain a recognizable credential.  At the time of my first investment, I was well under way with my preparation for the Level II CFA exam, but I had zero market experience.

What better time to get some experience?  And what better stocks that bank stocks?

Value investors are contrarian by nature and what could be more contrarian in 2009 than financials.  I had been looking into banks since the start of the financial crisis, trying to make head or tails of their annual reports.  A pretty futile effort.  After the Lehman implosion I redoubled my efforts, but focused on telling the companies that were going to live from the rest.  It was a sufficient condition for a good investment at the time.

Despite my infatuation with Buffett and my knowledge of his positions in WFC, BAC, and USB, it took me about a year of research and pondering to muster the confidence to actually put money on the table.  Now that hindsight is 20/20, it seems like a no-brainer, but I will never forget how nervous I was to hit the send button on that first order.  Looking back, those were very uncertain times.  My analysis lacked depth.  Overall, I was ill prepared to jump into the markets.

Be that as it may, I was lucky that I wasn’t too cautious, or as Howard Marks put it in his appearance on Barclays Global Financial Services in September 2013 (transcript thanks to @ValueWalk):

What didn’t you need [in 2008q4 and 2009q1]? Caution, conservatism, risk control, selectivity, discipline, patience that kind of attribute. If you have those attributes they held you back. The people who had those things made less money over the last five years than the people who only had money and nerve, and that’s what you needed then.

Sometimes it pays better to have just money and nerve.

Last year, nerve won once again.  Those with tons of caution and conservatism, who maintained huge cash piles, apprehensive of the heady markets and shaky economies, lost (or didn’t gain as much).  This time, however, the situation was very different.  Valuations, instead of at multi-year lows, were near pre-crisis highs.

Therein lies the big difference between 2009 and 2013.  At 2009 levels, it was OK to be greedy.  No.  It was highly desirable to be greedy.  In 2013, one had to be cautious and conservative.  While you almost couldn’t go wrong in early 2009 because of the huge margin of safety embedded in stock prices at the time, you had to make very careful choices in 2013.  It was a market of stocks, not a stock market.

Going back to my beginner days in 2009, I didn’t fully appreciate how hard it is going to be.  In theory, value investing is pretty simple.  But simple is not the same as easy, as I have come to learn.  The principles are very logical and I like to think that I possess the requisite temperament of a value investor.  Yet, doing the work day in, day out, knowing where I stand in the shifty macro environment, executing decisions amid fear and greed, and dealing with other emotions and biases is very, very hard indeed.

For those who expected to see the mandatory for such reviews performance graph, sorry, it will remain private for now, although I take comfort in having done better than the S&P 500 total return index over the same period.  Besides, there is no way to separate luck from skill in those early days of my value investing journey.  After 5 years, I am glad to have followed the value investor’s way.  As the quote on top states, it has been challenging, engaging, and financially rewarding.  What more is there to ask for?

Not that I am asking for it, but I still have to experience a serious market crash since that first purchase.  Only then, once the market has come full circle, will I have a better idea of my performance against the averages.

Until then, and hopefully after – happy hunting.


P.S. My posts here have become rather infrequent.  The culprits are lack of ideas and time.  I’ve made made it a New Year’s resolution to get back on track.  Meanwhile, you can follow me on twitter (@DGenchev) where I am much more persistent – 1,000+ tweets in a little over 2 years.  You can also grab the RSS feed of the blog.