2023 Review: A lesson in risk management.

Should have went long only

Hello everyone!

Hope you all had a great new years eve celebration and great returns in 2023. While the former was true for me, the latter wasn't.

Looking at the long only portion of the portfolio, I had excellent returns at 61.87% and yet despite that my overall portfolio performance clocks in at -74.84%. So what went wrong?

What went wrong

I came into the year widely bearish tech and more fraudulent companies. But the worst companies went up. Despite technicals screaming against me, I refused to close my short positions. While Nvidia is overvalued (and I got the thesis wrong), the fundamentals increased by much more than I anticipated - but my refusal to quit the shorts was more on companies that showed the opposite.  Tesla, Affirm, Upstart and Coinbase all showed fundamentals and added risks (like the Well's notice for Coinbase) that were even worse than I anticipated. Yet the stocks doubled or even quadrupled.

While I reduced some exposure throughout the year, I began revenge trading hoping for a quick stock reversals and a topping of the equity market that never came.  If there was a book on what not to do when trading and investing, I would have checked every single item this year.  The disconnect for me, was the refusal to let price guide my investment decisions on the short side. 

If you go long a stock, price matters only in the sense that it should be cheap enough.  Business fundamentals and the valuation you bought at decide your future returns. That isn't true for the short side.

Irrational companies can trade at even crazier prices, and you have to let the price decide on when to close out your positions and not the business fundamentals. That turned out to be incredibly difficult for me.

So do I stop shorting? I tend to evaluate methods in investing over a three year period.  The first year of shorting was excellent, the second disastrous.  I have implemented a few things, such as that no single short position induce more than a 3% drawdown on my portfolio and that I diversify the factor exposure of my shorts more heavily. 

While the performance and mistakes were terrible this year, I think it is important I made them so early. Everyone should push their circle of competence as hard as possible at the start of the investing journey to find out where their limitations lie.  The push from my side was a bit too hard and more like a push off a cliff, but I now know where my potential pitfalls are. 

What went right

While my performance on the short side was abysmal, on the long side it was exceptional. I have a few small positions that are down, but except Glencore nearly all of my bigger positions did well.  Even more so, it wasn't just a single position or sector but multiple. 

Throughout the year Petrobras had an exceptional return. I started to trim in November and am now out of the position. Given the valuation it still has room to run, but sentiment isn't as bad anymore. I indirectly own Petrobras through a Brazil ETF.  For Zigexn, the Japanese roll-up company, I sold very close to the top and re-bought the stocks when it went below 500. My Argentinian land corporation Cresud had an exceptional year even before the election when i closed out most of my position. Stellantis also did very well.

I also managed to buy the bottom for Global Atomic. The first time I ever managed to buy at the lows of a stock. The stock then nearly doubled and I have just recently sold.  In October I re-entered the coal space with a purchase of Sumiseki Holdings doubled and in early December bought two Mongolian coal companies: Mongolian Mining and South Gobi Resources. 

In contrast to last year, I managed the scaling in and out of positions much better -  leaving less performance on the table than before. I doubt that I will get that result on the long side next year, as the rising market lifts all stocks, but I hope that I can generate a good return nonetheless. 

What I own now

So at the short side, I currently have no positions. I still think that companies like Upstart, Coinbase, Affirm and another host of unprofitable tech companies are good fundamental shorts - but I will wait for the technicals to confirm that view. 

I am very bullish Chinese and Hong Kong stocks now.  Sentiment and valuations are both extremely low, with many companies trading as low US stocks did in 2009.  Furthermore economic numbers and even earnings have started to recover in the last two quarters and will probably continue to do so in 2024. I recently went through all 2700 stocks in Hong Kong to find a few gems. After the first pass and reading dozens of annual reports, I have around 40 companies left. I will post an update as soon as I combed through them a second time. With the exception of Alibaba, Postal Savings Banks of China and the already mentioned Mongolian Coal companies - I don't own any other companies listed in Hong Kong.I do have additional exposure to China with Lufax and Huya. 

Zigexn is another core position of my portfolio and while I think most of the run is done now, I still hold Sumiseki Holdings.  In terms of mining companies, Glencore is still exceptionally cheap and I also bought Sibanye Stillwater after the big earnings drop. Regarding Brazil, I still own a small position in a diversified ETF. 

Due to the recent conflict in the middle east, I cut most of my oil exposure. The thesis for Petrobras was that oil would not crash horribly and that the valuation and sentiment was too low given the history of Lula and the company. Now the picture is a lot different. Political risks that involve several countries are impossible for me to asses, so with the exception of Rubis SA I have no exposure to oil companies.

I have made many mistakes, but I think learning from them will increase my returns in the coming years. 

I hope you had a great 2023 and an even better 2024.