I remember the moment like it was yesterday.
The date was April 2008.
As an investor with less than three years of experience back then, my stock portfolio had been beaten down and was in shambles.
Of course, what I didn’t know was that a massive market crash, soon to be known as the Great Financial Crisis (GFC), was already happening.
Even then, my mind was elsewhere.
Because what I read would change the way I invest forever.
A message from January 2008
On a fateful day, I came across a letter from Bill Nygren, a manager for the Oakmark Select Fund.
More importantly, it was what Nygren described — a tactic by former hedge fund manager, Micheal Steinhardt — that caught my eye.
In Nygren’s own words:
“Perhaps Steinhardt’s most interesting tactic was selling his entire portfolio when he was frustrated with his performance.
As he explained: “I did not think we were in sync with the market, and while there were various degrees of conviction on individual securities, I concluded we would be better off with a clean slate … In an instant, I would have a clean position sheet.
Sometimes it felt refreshing to start over, all in cash, and build a portfolio of names that represented our strongest convictions and cut us free from wishy-washy holdings.”
Intrigued, I decided to do a mental experiment.
What if someone sold ALL my stocks while I slept and I woke up in the morning with a portfolio full of cash?
The process was eye-opening, to say the least.
Soon, a simple fact dawned on me: I had bought stocks when their prices were falling, not because I wanted to own more of the shares.
Buy to own, not because the price is falling
When the market is down, the typical reaction would be to plough more cash into beaten-down stocks.
The downside to that move is you could be putting more cash into stocks with low conviction, and less cash into stocks with high conviction.
In short, to use Peter Lynch’s analogy …
… instead of watering the flowers and cutting the weeds, I watered the weeds, and left the flowers unattended.
Armed with this important discovery, I started asking some key questions.
Imagine if you were starting with only cash today:
- Will you buy the same stocks, in the same amounts, as you had before? If not, why?
- What are your highest-conviction stocks and have you previously invested appropriately to match your conviction?
- If you find your portfolio overweight on low-conviction stocks, ask yourself what led to this situation. Once you have identified the error, what guardrails should you put in place to prevent it from happening again?
- Should you keep some cash on the sidelines for future opportunities? If so, how much?
Here’s the thing: I strongly believe that this process is the best thing you can do today.
There is no shame in admitting to mistakes made, especially when the last three years involved a pandemic that few, if any, have ever experienced.
More importantly, you can move on with a clearer idea of what to do next.
With fresh eyes, we view the stock market as if we are looking at it for the first time.
Investing with a renewed purpose
As you rebuild your portfolio from the ground up, ask yourself:
- What are your highest-conviction stocks today?
- How would you allocate your cash, if you started again, to match your convictions?
- Should you keep some cash on the sidelines for future opportunities? If so, how much?
With a clear game plan, I targeted only the best business that I could find and shielded myself from other stock market distractions.
In April 2009, I bought shares of ParkwayLife REIT (SGX: C2PU) at S$0.73.
Today, those units, which I still own, trade at S$4.12 per share.
That’s not all, between 2009 and 2022, the healthcare REIT declared and paid out almost S$1.73 in distribution per unit (DPU), a value equivalent to more than 2.3 times my original buy price.
Between May 2010 and June 2010, I went on a shopping spree and picked up shares of Bookings Holdings (NASDAQ: BKNG), Apple (NASDAQ: AAPL) and Amazon.com (NASDAQ: AMZN).
Unlike in 2008, this time I knew exactly which stocks I wanted to buy.
Here’s the kicker …
… even after the huge US market decline in 2022, the average return (excluding dividends) for the trio is 1,368%.
That’s what a clear mind and game plan can deliver — if you are patient enough.
Get Smart: The gift that keeps giving
The best part of Michael Steinhardt’s approach is — it is within anyone’s reach.
What this thought process delivers are useful insights on past errors in judgement; in the process, helping you focus and clarify what you need to do next.
That’s especially critical in today’s stock market environment.
A slower economy can be unpleasant, but it also helps weed out the weaker businesses within your portfolio.
Disclosure: Chin Hui Leong owns all the shares mentioned.
