What I’ve Learned (Or Relearned) About Investing Over The Past 3 Years!

Deanco Investment “Group” Update – October 2020 (Month 36)

There is no investment group, it is just me and my money.  I’m just a normal guy who has a full-time job that is not in the field of investing (right now).  However, I do have a finance degree and co-founded a fintech investment performance reporting company out of college (in the late 90s).  I’ve always been interested in investing and doing it well.  I’ve read many of the great investing books and built all kinds of tools/models (and fang-dangled spreadsheets).  I’ve been super focused on my investing for the past three years. 

A little over three years ago I started picking individual stocks and tracking my performance.  I began working hard to get my investments into assets that I believe will perform well in this crazy world we find ourselves in these days.  It helps me to perform regular reviews on my investments.  Since I’m doing them anyway, I figured I’d share.  I share my investment portfolio, individual investments, and performance (good or bad).  This is my October 2020 update (36 months of tracking it).

I’ve been investing for several decades.  Most of the time in index funds/ETFs but I’ve also bought individual stocks at times as well.  When my son got interested in investing and wanted to start picking stocks a little over 3 years ago the first words out of my mouth were ’too much work’ and ‘you can’t beat the market’.  He, like many, disagreed and wanted to give it a shot.  I was not particularly happy with how my investments were allocated at that time and wanted to make some changes as well.  Over the past three years, I have, at times, taken a pretty aggressive all-in approach to my investing.  There have been times where I’ve invested pretty much my entire portfolio in individual stocks.  It has been fun and I have learned a great deal on many fronts.

Somewhere along the way, I discovered #fintwit (people on Twitter who regularly talk investing related topics).  I also discovered investing related podcasts.  This has been a real game-changer as I’ve learned a great deal from both.  I wrote about my favorite podcasts here: https://deanorolls.com/podcasts/

Somewhere else along the way I decided to start writing everything I was doing down and publishing it to my website.  I’ve learned a ton along the way (about myself, my methodologies, and investing in general).  Writing things down has also been a game-changer.  No one particularly gives a hoot about me or my money but the discipline of noodling on things and then writing down the thoughts regularly has been extremely helpful.  It has also been excellent to be able to come back later and easily remember why I did a particular thing I did.  I do this solely for myself but if you are interested you can read more here: https://deanorolls.com/investing/

Strategy Shift But Still An Enterprising Investor

I would describe myself as an Enterprising Investor.  This is a term originated by Ben Graham to describe someone willing to put forth an “intelligent effort” to actively manages their investments intending to outperform the overall market.  There are plenty of people out there who believe they can do this.  Few succeed.  Mr. Market has a way of making sure this is the case. 

I’m shifting strategies but I’m still an Enterprising Investor.  Over the past year, I’ve been shifting strategies back towards where I started a bit…but not totally.  There are several reasons for this change.  The main reason is the “intelligent effort” piece.  Time and energy is something I only have so much of (as we all do).  In the first two years of doing all this I ‘invested’ a tremendous amount of time and energy into increasing my knowledge.  It worked too.  I could probably go work in the investment industry as an equity analyst these days.  I’ve also learned a tremendous amount of new knowledge about asset classes and macroeconomics that I didn’t know 3 years ago.  All this has helped me navigate the investing landscape and has also helped me feel good about my recent strategy shift.   

Three years ago, I owned index funds across a variety of asset classes (67% stock / 14% real estate (REITS) / 4% commodities / 15% bonds).  I had a set it and forget it mentality (and had for many years).  I spent almost zero time on my investments.  I focused on limiting my fees and taxes (I still do this). 

At that time, I was frustrated with what I perceived as an ‘overvalued’ stock market.  I worried about my investments.  Hence the reason I owned 15% bonds (which I had no desire to own otherwise).  I was positive the world would come crashing down any day and I’d back the truck up to buy stocks.  My investments were causing me to lose sleep at night (not really, but you know what I mean).  My son, Preston, was getting interested in investing so I dusted off some old stock-picking research/tools and finished it up.  Thirty-six months ago, I set out to buy individual stocks to try to beat the stock market.  I thought that if I bought individual stocks it would help me in a few of ways.  First, I’d own stocks with cheaper valuations that would not be as beat up in a downturn.  Second, I’d know the stocks I owned well and it would help me hold them if things got rocky (versus just owning an index).  Third, if I bought cheaper stocks in companies that were poised to do well, I should outperform the market.  The day we decided to start picking stocks I told him it was a ‘waste of time and energy’ and that ‘no one can beat the market consistently’.  I believed this completely.  After doing it for two years I believe this more.  Now after doing this for three years I believe it more than I did when I started. 

Over the past few years, I had some wins and I had some losses. I think they were all pretty much luck (both good and bad).  I was just along for the ride.  Plenty of things happened that I (and no one else) could have predicted that drove my results.  After spending two years of doing this (and learning veraciously) I started to adjust my investment strategy away from individual stock picking a bit.  I wrote about this change in strategy here: https://deanorolls.com/2019/12/08/the-top-things-i-learned-or-relearned-about-investing-over-the-past-2-years/

In September of this year (2020), I wrapped up the final steps to completely shift strategies by selling the remaining individual stocks that I owned.  I had been selling down these positions for over a year already so this was not a drastic change in my portfolio.  Alas, it did feel a bit more drastic than it was as there was a certain level of finality to it when it happened.

All in all, I feel like I performed pretty well given the circumstances.  I could have done a lot worse than I did.  I think the shift in strategy last year helped with that.  I didn’t suffer any permanent impairments on my capital which is a good thing.  Could have been better, could have been worse.  If I had just stuck with the strategy I had in place prior to starting this I’d have about the same amount of money as I have now.  I’d have also had a lot less work.  So, much ado about nothing!  But, I’d also have a lot less knowledge.  I always call this getting my tuition from the University Of Hard Knocks!  I definitely have more knowledge now than when I started (which could be considered more valuable than the monetary gains).

Why The Shift?

Time and energy a big piece of the equation.  As I’ve said, I do this in my spare time.  I have a day job (and a fairly demanding one).  I am the COO (and part-owner) of a homecare company that operates in 6 (soon to be 7 cities).  I have plenty of work to do keeping up with several hundred clients and employees (especially with COVID-19 gumming up the works).  Having extra time to keep up with individual stocks and research new ones doesn’t happen.  I do think it is possible to pick individual stocks and to beat the market.  I am fairly positive it is not possible to do this on a part-time basis.  The greatest investors of all time all dedicated all of their time to it (and still only a few of those were successful at beating the market consistently).  Doing it in my spare time when I’m fairly spent is not going to yield market-beating results (and allow for a balanced life).  A balanced life is also important (so they say).  In short, I determined that my best energy should be dedicated to my company because I have a better chance of increasing my net worth through those efforts than through trying to become an investor who beats the stock market (which is highly unlikely).

I think in general; I’m moving back to the mindset that individual stock picking is a waste of time and energy.  Sure, you might pick a stock that outperforms and beats the market.  You might also get side-swiped by something completely unexpected.  No one knows which companies are going to prevail and which ones are going to hit hard times.  The CEOs of these companies get paid a lot to think about that and take those risks.  I’m not the CEO of those companies.  I have my own company to run so I’ll focus most of my extra energy there (as I have for years).  Investing is a side gig that I do with extra time.  Individual stock picking takes far too much time and energy at this point in my life (and potentially ever again in my life).

Losing sleep was another big reason.  I also decided to shift strategies because my investment portfolio was keeping me up at night.  That was the whole reason I started doing this 3 years ago.  Three years ago, I was worried that the market was overvalued and that we might experience bad economic times.  I didn’t like what would happen to my portfolio if overvalued stocks met up with a nasty economy.  I decided that buying value stocks would ensure I would have a stock portfolio that was not overvalued and would fare better in a downturn. I didn’t want to own high flyers.  Over the years I determined that I was probably wrong about that.  I learned that buying individual stocks will not protect you from overall market drawdowns.  I also learned that I was honestly probably more worried about my asset class allocation than I was with my stock selection.  When my individual stock selection had me checking the price quotes often and reading news about specific companies I owned and wondering if I should still own them that was a bit too much for me.  This was especially true when I don’t perceive all that effort to matter in the grand scheme of things.  So, I sold those individual positions and reinvested the funds into the appropriate Fidelity sector ETF.

My Current Portfolio

Somewhere along the way, I learned that the great allocator investors all wind up pretty much performing the same over many years.  All the asset classes mean-revert over time and few can time the shifts between them perfectly (at least consistently).  This makes total sense to me.  Anecdotally we read about great investors but when you think about them in the context of luck and energy their results often look different. Many of the great ones either are 1) literal geniuses or 2) got very lucky with some market calls/timing along the way.

Today I sleep like a baby with my current investment portfolio allocation. My asset class allocations look much different than they did when I started this.  This is how I’m currently allocated and the ‘enterprising’ reason why I’m allocated that way.

• Stocks (59%) – My desire is to be heavily allocated to equities at all times.  I am a stock guy.  I believe stock ownership is the best way to stay ahead of the inflation monster over long periods.  The only reason I would allocate money away from equities is if I held an alternative investment/asset class due to my current thinking on a subject (overvalued equities, recession risks, better value, etc.).  Truth be told I would be fine owning 100% stocks.  Over time they are the best performing asset class.  And since growing my net worth is what I’m all about I ‘should’ have 100% of my net worth allocated to stocks.  The stated goal of Deanco Investment Group is to beat the stock market over time.  This has been incredibly hard over the past 3 years but it is still the goal.  I won’t know if I did it until I’m nearly dead.  We’ll see! 
  • US Stocks (55%) – I generally invest in US Stocks (especially when I’m buying individual equities).  I limit my individual positions to only US Stocks to eliminate the currency risks that I am not trying to manage (but that could have a huge impact on my USD returns).  If I am unable to find individual US Stocks to purchase, I will generally invest in Fidelity sector ETF funds to maintain the appropriate sector allocations (https://deanorolls.com/2019/11/01/fidelity-sector-etfs/).  At this point, however, I’ve made the decision not to own any individual US stocks.  Within my stock asset class, I’ve moved to a methodology where I try to keep my portfolio sector allocations matching the 25-year average of the S&P 500 index. I do this to level out when certain sectors get a bit frothy (and start taking a larger weighting) and vice versa.  This is effectively market cap-weighted indexing with a twist.  I think market-cap-weighted indexes are unwise in general but they are extremely: 1) tax-efficient and 2) low costs.  I think those two things matter more than most other characteristics.  I tweak this part of my portfolio in a few minutes each month. It takes SUBSTANTIALLY less time to administer each month than individual stock picking takes.  I suspect it will perform fine (and maybe better).  I wrote about this change in strategy here: https://deanorolls.com/2019/12/08/the-top-things-i-learned-or-relearned-about-investing-over-the-past-2-years/
  • International Stocks (4%) – There is one investment account that I have (a tax-efficient account) where my investment options are not all that great.  Two good ETF options in these accounts allow me to allocate to international equities and emerging markets equities.  I’m not too sure that ‘home country bias’ matters to me.  I understand the concept but believe that sector allocation and currency exposure matter more than anything related to home country bias.  In case I am wrong, I’ll use this account’s two good options to allocate to these.  I’ll just keep maxing out my contribution to this account over time (into these two investments).
• Commodities (35%) – Commodities are ‘real assets’ and are different than ‘financial assets’ in some ways.  I think they are both fine.  These days, however, with fiat money ballooning and interest rates seemingly artificially suppressed I think owning something more ‘real’ isn’t necessarily a bad thing.  I’d rather not own commodities (versus stocks) for a variety of reasons.  I will own them, however, if I believe stocks are expensive and commodities are cheap (or maybe simply unloved).  I also keep an allocation to physical precious metals.  I will likely always keep that as a ‘financial system/financial asset risk mitigation’ instrument (it is an insurance policy against financial assets).  If financial assets get ‘cheap’ relative to commodities I might make the allocation smaller (or non-existent) and allocate it all to stocks.  I’ve spent the last few years moving money out of the system (financial assets).  The actions of the Fed and/or the passive bubble have valuations pegged.  There are games being played with the global monetary system that no one on earth understands.  I don’t like it at all and I’ve tilted my portfolio as far towards an ‘antifragile’ portfolio as I know how to implement.  I’ve cranked down my exposure to equities/stocks and cranked up allocations to commodities, physical gold, physical silver, short-duration bonds, and Bitcoin.  I made these shifts to hedge against the unknowns of all the risk with seemingly unlimited printing of fiat currencies.  The system isn’t collapsing but it certainly feels broken.  Even if it isn’t broken or going to collapse, I sleep better shifting my allocation the way I have.
  • Broad Basket Commodity ETF (5%) – I own commodities begrudgingly.  This is the most expensive investment in my entire investment portfolio (.30% expense ratio).  It also is very expensive due to the ‘roll’ where commodity contracts have to be rolled from one month to the next.  Regardless, for the exposure I’m trying to manage it is very cost-effective.  For why I own commodities at all (even though I’d rather not) and why $BCI is the investment of choice read here: https://deanorolls.com/2018/02/18/aberdeen-bloomberg-commodity-index-etf-bci/
  • Physical Silver & Gold (18%) – I’d never owned precious metals at any point in my life until a few years ago.  I’ve read enough and learned enough that I believe they have a place in the portfolio.  I own physical silver and physical gold (in a vault), and some physical silver and junk silver coins (in a safe place closer to home).  I use the silver-to-gold ratio if I’m reallocating and/or making new purchases.  To read more about why I bought physical precious metals for the first time in my entire life (in my mid-40s) read here: https://deanorolls.com/2018/06/08/physical-gold-and-silver/
  • Bitcoin (13%) – Few topics today are as polarizing as cryptocurrencies (and specifically Bitcoin $BTC).  People either believe they are the greatest thing to ever hit the universe or think they are complete and utter garbage.  I’ve invested enough time to understand they are important and will remain important.  I own Bitcoin because I believe it has the characteristics it needs to have to deliver its mission.  Will it?  Remains to be seen.  The one asset I own that seems like it might benefit most from a collapsing fiat monetary system is Bitcoin.  The biggest move I have made in my investment portfolio during recent months was to up my allocation into Bitcoin.  In 2020, I’ve sold down some bonds, gold, and silver exposure and added to Bitcoin.  The selling down of my gold and silver positions is no indication that I’m not bullish on these positions.  To the contrary, I’m very bullish on these positions but they had grown a good bit and I wanted to shift some money around a bit.  My Bitcoin allocation went from around 2% of my portfolio up to around 10%.  I consider this move a move that moves money out of the current fiat monetary system.  I doubt this money will ever reenter it (along with my physical gold and silver).  GONE!  To read about why I’ve put a chunk of my portfolio into a bunch of computerized 0s and 1s read here: https://deanorolls.com/2019/12/27/bitcoin-btc/
• Bonds (5%) – I generally don’t want an allocation to bonds/fixed income at all.  I consider social security income to be ‘bond-like’ and this income (whatever it might be) is my bond position.  I am investing for the long-term and bonds have not and will not outpace inflation over the long term.  Therefore, I have no use for them.  At the moment, I have a larger allocation to short duration bonds because I have 2-3 kids in college at the same time for the past few years (and the next few).  I also have a decent amount of risk in my earnings related to my work/business (as it is still a closely held, startup).  I don’t intend to use any funds from my investment portfolio to fund either of these (college or business) but I don’t want to be in the position of having to use my portfolio and having to sell depressed assets if I need the money quickly.  So, I currently have a larger bond/fixed income allocation than I might normally have.  This will change if things play out as I hope they will in the coming years (and I move some little humans off my payroll).  At that point, my bond allocation will go to my ideal allocation…ZERO!
• Cash & Equivalents (0%) – I have a waterfall where I keep enough cash to pay my living expenses liquid.  That money is not tracked as a part of my portfolio holdings.  Once the waterfall is ‘full’ the money rolls (DeanoRolls?!?) into my portfolio for investment.  If I hold cash at all it is because I am in-between positions (and holding time will be measured in days).  I am investing for the long-term and Cash and Equivalents have not and will not outpace inflation over the long term.  Therefore, I have no use for it.
• Asset Classes I Don’t Use (And Likely Won’t Ever) – I’ve researched all of these over the years (many quite considerably).  I’ve determined they have no places for an allocation inside my portfolio.
  • Real Estate (0%) – I generally don’t allocate/track my portfolio holdings to this.  I can/will hold real estate as an asset (for example equity in a personal residence).  I view this as more an expense than a portfolio holding (they don’t generate income and they take income to ‘feed’ them).  Personal residence real estate is not an investment at all in my opinion.  The equity can be an important component of one’s net worth, however.  Ultimately, I don’t like that real estate is hard to diversify, too illiquid, not tax-efficient (except for the personal residence exemption which is incredible), and very expensive to transact.  Ultimately the way local governments tax real estate every single year for as long as you own it make it a NO GO for me.  This tax treatment for me, makes it a horrible investment.  That said, they aren’t making any more of it either.  Real estate is a piece of my portfolio allocation, for sure, as it is part of my net worth but not tracked here.  I can/will own REITs or REIT stocks in my stock portfolio.  If I ever decide to buy real estate for investment reasons, I will include it in my tracking but I do not see this happening at any point soon (but always researching).  I am learning more and more about the tax advantages of owning various forms of real estate.  At some point I will likely expand this portion of my portfolio.  But for now, pass, but interested.
  • Options/Futures/Derivatives (0%) – I have no desire to participate in the derivatives market.  I think this market is responsible for driving some portion of the unreasonable prices in traditional markets (like the stock market and precious metals markets).  With options and futures, you have to get too much right in order to win.  You have to get the direction correct AND the timing correct.  That is too much and I say near impossible to do.  I have exposure to this in my $BCI ETF for commodity exposure but I understand the strategy and the methodology (and it is what is necessary in order to gain long exposure to a broad-based commodity basket in a cost-effective manner).  I’ve research putting a tail hedge strategy on my portfolio but found it is fairly expensive ‘insurance’.  I’ve researched ways to implement a ‘long vol’ strategy in my portfolio but it is nothing that I am equipped to implement.  I’m not going to pay the necessary fees to have this strategy implemented by a manager/hedge fund.  So, I’ll just go along for the ride.  Pass, but still interested.
  • FOREX (0%) – Currency hedging (or directional plays) is nothing I want any part of.  I’ve researched the impacts currency moves can be on a portfolio and they can be considerable.  Regardless, this is not anything I believe is important enough for me to allocate to within my portfolio.  All the people on Instagram and Twitter showing how they make a few trades each day and drive a Lamborghini do not change my mind on this.  My ultimate currency hedges are in my physical gold, silver and Bitcoin positions.  These are all currency neutral.  This asset class is not needed by me.  Pass.
  • Absolute Return (0%) – These are relatively expensive strategies (from both a fee and tax efficiency perspective) that are designed to provide absolute returns regardless of what happens in various markets.  I don’t have a need to reduce my portfolio’s return volatility.  I only have a need to maximize my portfolio’s size over time.  I have no need for these types of products.  If I think I’m going to need money short-term I’ll be sure to have it available (like I’m currently doing with my children’s college money in short duration bonds).  If the market gets crushed, and I experience a drawdown, I’ll just learn to live on less (I won’t be the only one doing that by the way). Pass.
  • Annuities – An asset where you invest a lump sum of money in exchange for steady stream of income over the course of your lifetime.  These carry financial institution risk and are usually very (very!) expensive.  I’ll manage my lifetime income needs myself.  Pass.
  • Venture Capital / Private Equity (0%) – Most (not all…but most) of the people who run these investment products are some of the worst people I have ever met on the planet.  Literally…the worst.  I’ve never met more people I dislike more than in the halls of these institutions.  Not to mention that the structure of these investments are some of the most convoluted on the planet.  The reason despicable people make things unnecessarily complicated is to screw you over!  I promise!  The returns on most VC investments require losing a lot of money funding a lot of dogs in order to (hopefully) get a few winners.  I don’t like that model at all.  The returns on most private equity investments require excessive leverage and probably the ability to unload your investment on some other person later for higher price.  I don’t like either of those models at all either.  I’ll gladly let other people deal with this herd of jerks.  Deano out!  Hard!  Pass!
  • Limited Partnerships (0%) – The structure of a limited partnership would have to be very appealing for me to ever enter into one of these types of investments.  The main issue is with liquidity (or lack thereof) and with how capital is added to (or removed) from these entities.  Way too complicated!  Besides, I already have a partnership that works just fine for me with my wife of 25 years.  Pass.
  • Hedge Funds (0%) – A hedge fund might include any/all of the above in them.  Everybody and their mother have a hedge fund these days.  No way I’d ever invest in most of the strategies and definitely not via a hedge fund.  If there was a particular hedge fund that allowed me to implement a particular strategy that I deemed very important to implement I probably still wouldn’t invest in it.  I believe there is no way to overcome the fee structure.  The ONLY person getting rich in a hedge fund is the hedge fund.  Pass.

The asset class allocation I have today is designed to take whatever the markets throw my way while giving me zero heartburn.  I go this route because I know that I’m just along for the ride (like we all are).  Whatever comes I am allocated in a way that I believe allows me to weather it.  I am diversified for whatever comes but with a tilt for growing my net worth over time (and outpacing inflation).  Investing is laying out money now to get more money back in the future–more money in real terms, after taking inflation into account.  That is the entire goal of my enterprising investing activities.

I also think I may potentially prosper from the way I’m doing things.  I am doing things that I believe will serve me better than the average person.  My portfolio is not the portfolio that the typical American owns. I think this will serve me well. 

I learned I was an enterprising investor but I also still invest with a bit of contrarian mixed in.  I still make active decisions with my allocations.  If I believe a particular asset class is over/undervalued I will allocate to it more (or less).  I don’t mind wild price swings, however.  These decisions are also made on a longer-term basis (annually-ish) so things are not moving quickly at all.  I expect that if I’m doing it the way I intend that most people will look at my portfolio and wonder why I’m doing certain things.  “Why in the heck do you own that?!?”  If someone is saying that to me, then that is exactly why I own it…because it is unloved.  If it is unloved then, I believe, it is cheap and has more value to me as an investment.

Regardless, I don’t care too much about how all this plays out because I’m just along for the ride.  Anyone who tells you they are not is 1) lying (and knows it), 2) doesn’t know they are (ignorant), or 3) an investment person who makes their living from it (likely fees from your account).  That accounts for just about everyone in one way or the other.  So, take what I say with a grain of salt.  Hell, take what anyone says with a grain of salt.  Do your research and implement a plan that works for yourself.  For me, this portfolio will do fine over time (no matter what).  I suspect it will do better than my blended benchmark (so better than fine).

I recently read a great article from Warren Buffett that was written during the 2000 internet stock bubble (https://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm).  He talks about 1) interest rates and macro (and how no one can know the direction of all this), 2) investment fees (and those who earn them which he calls ‘helpers’), 3) how hard it is to pick winners (alpha), and 4) the importance of tax efficiency. 

I believe all these things fully and this only further solidified my new direction.  We are all along for the ride in some areas but have total control over certain other areas.  I’ve always been hyper-focused on fees. I’ve also always been hyper-focused on tax efficiency.  I’m going to maintain a thoughtfully allocated portfolio, and remain hyper-focused on managing taxes/fees.  I’ll try to get a little bit of alpha in the process (but I’m worried much less about this). 

Other than that, I’ll spend my time running my company and more time hiking in the woods with my beautiful wife of 25 years!  I like the returns on that investment!  All that is subject to change next month, however!  HA!  That is the beauty of investing and what I like most about it.  It is something I will always be able to do and learn about.  I enjoy it very much.  I’m sure at different times in my life my attitudes and strategy on how I invest will change.  Each time they will build on the knowledge I’ve gained throughout my lifelong quest as an Enterprising Investor.  I’ll likely keep writing about it as time goes on.  I hope you find it somewhat helpful in some way (if you made it this far).

I wish you good luck in your investment journey!

For a full update download this ^^^ PDF.

My individual positions (and all kind of additional information about each of them) can be found here:

Investing

I’d love to talk about investing with you.  Link up with me on Twitter https://twitter.com/deanoroll5