Fin-Ed: Shareholders’ Letter 2017
Before starting: a few words of caution
What will follow is an old fashion style letter which will take more than 5 minutes to be read.
It is a shareholders’ letter related to Fin-Ed, a Facebook group with the purpose of improving your investing skills, even if you have zero experience in this world.
No funny cats videos, no images to make your brain rest.
Read at your own peril.
Some of the best companies in the world have a tradition in common: a shareholders’ letter.
In this type of letter, a company explained what it got right, what mistakes it made, and what’s in for the future.
Buffett’s letters to shareholders are legendary, ditto for Munger’s ones.
And this tradition is not limited to public companies only.
Farnam Street, one of the most interesting website to improve your investing (and analytical) skills, is doing a wonderful job as well.
These giants inspired me, so I decided to write a shareholders’ letter for Fin-Ed, even if the project is still at its beginning and it generates almost no money.
Why?
The reason is simple: I consider anybody reading a Fin-Ed article (like this one) a shareholder.
You decided to spend some time reading my posts and giving me your attention, one of the most precious resources you have.
For me, that’s more than enough to qualify you as shareholders, and to be accountable for the results of the advice I provide.
I believe that this process is important for two reasons: the first one is to let you be the final judge of the method I used, being as transparent as possible in the process.
If one day you will want to take my financial advice, you will know what I think and that I do what I preach.
The second one is a more egoistic note.
Writing helps me out to define better my ideas and to be ruthless with the mistakes I made in the past.
Writing this letter will make me a better investor in 2018, and you will be able to make a profit out of it as well, the moment you will decide to take my advice.
This reading will be long, so I decided to divide it into three parts.
They are independent, so you can read them in any order you like, or even skipping some of them, but I do recommend to read the second one: “Fin-Ed 2018: what next?”
You will see what Fin-Ed will be offering you and if your interests will still be aligned with this project.
The first part will be about (almost) one year of Fin-Ed. A short story on how Fin-Ed was born and what was done this year.
Finally, the third part will be “Stock Picking (for investment nerds): my 2017”, where you will find the results I achieved investing in stocks in 2017, matched against a defined benchmark and some self-criticism about the mistakes I made during this year.
I strongly recommend reading this part if you are investing in single stocks and you want to be wiser than I was, learning from my mistakes instead of making them on your own.
It is also interesting in the spirit of transparency.
To put it simply, how can you follow the financial advice of somebody who is continuously losing money or not having skin in the game?
Being honest and publish my results is the best way to show my competency and to give you sound advice on how to allocate your money.
Honest mistakes will always be possible here and there, but with a ruthless examination, I want to build an investment process (for me and for you) which will minimize the chances of making them, and lose a lot of money in the process.
Enough with the introduction, let’s start.
One year of Fin-Ed
Fin-Ed is my second trial to make money out of a side project. The first one was an Italian website, called “Pensa Fuori dalla Scatola” (literally: Thinking out of the Box, a name too long to be a good brand, but I didn’t know it by then).
I was talking about personal growth and giving actionable advice to improve happiness and productivity.
Because my lack of commitment and few other factors (among which shines the sharp decline of the blogs’ popularity in the last 5 years), it failed.
After that I spent a lot of time thinking hard about how I could deliver value to people, doing something I enjoyed.
Fin-Ed is the answer to this question.
In the last 4 years I started studying investing, out of frustration for the ridiculous low returns the safe financial products were offering, and seeing that I was having good results, I decided to study more about this world.
I talked about this idea with Dustin Goldade, a former US investing consultant who is now working in an international bank in Poland and we decided to work on this project together.
Our vision was to give solid (and understandable) advice to people not familiar with investing.
After a couple of months together (during which I learnt a ton from him), we decided to split up, mostly because of lack of time on Dustin’s side and I continued to work on Fin-Ed on my own.
On a happy note, now Dustin is pursuing a more creative endeavor and, if you live in Cracow, you can have a chance to go and listen to him performing.
My first decision as the only founder left Fin-Ed was to focus on one medium only: more specifically the Facebook Group.
At the time of writing, Fin-Ed counts 185 members.
I have been posting regularly once a day (weekends excluded) from the 13th of July to the 12 of December, covering basic concepts such as investing, the psychology of investing, stock picking, cryptocurrencies and useful online resources to improve your investing skills.
It has been chaotic (Facebook groups don’t allow a better structure at the moment), but I personally had fun, and I hope you found useful information about it.
What the group lacked, and I am taking full responsibility for it, is interaction.
Apart from some remarkable exceptions (the Fin-Ed portfolio game), the group members felt too shy to ask questions and rarely commented posts.
After some careful analysis, I realized that I shifted too much toward stock picking, forgetting that most of my audience is not familiar with the stock market, or they have strong reasons not to be interested in it.
I also started publishing some more in depth-articles on Linkedin and Medium (expect more on these in the next future).
This structure proved to be not the best to deliver knowledge and to create an audience, so I decided to implement some changes in Fin-Ed for 2018.
Fin-Ed 2018: What next?
2018 will be a “back to basics” year for Fin-Ed.
The main reason because this project exists is to transform people who don’t know much about investing in wise investors.
Last year I forgot this mission, and I shifted towards more technical posts about how to choose great companies, stocks and so on.
I still think that the content I provided was valuable, but it was completely off the mark.
So, in 2018 Fin-Ed will change its structure to respond better to the people it’s created for.
There will still be 5 posts/week on my side on the Facebook group, but the topics will be different.
More specifically:
- Saving tips: Some of the people who are reading Fin-Ed are not able to invest because they are living from paycheck to paycheck, they think they can’t save more money each month, or they think investing is too expensive. The saving tips will be actionable strategies tailored to make an impact straight away, keeping in your pockets something around 5% to 40% of your current salary, and creating the money you will need to invest.
- Investing Basics: Fin-Ed covered in random order some topics (what is a stock, a bond, an ETF, etc.) but there is much more to say. I will cover practical questions, such as: how can you buy specifics financial products, how you can choose your goals, what do you need to know to build your financial plan, and so on. This section will cover these topics.
- Investing Intermediate: Once you have clear your financial targets, how can you choose the best products to meet? Everybody has his own answer, but I will be giving a specific framework for different financial products.
- Investing Advanced: If you want to learn more about the art of stock picking, or doing more “speculative” activities, you will find advice, related to my own experience and the books I read (and will be reading) on the topic.
- Community Time: As I mentioned, interaction last year was lacking and this year I want to change it. Every Friday there will be a post where you will have a chance to ask questions or to post a valuable resource you found, or to just share your mind. Any other day will be fine, but I don’t want to “forget” about it like I did last year.
Moreover, I want to take Fin-Ed offline, starting a meetup in Cracow where I currently live. I am finishing working out the details, it should be up and running between the end of January and the beginning of February.
I will also create a “Useful resources” section, where you can find the best online resources to help you become a great investor, and will spend some money creating a home for Fin-Ed here on Medium.
Stock Picking (for Investing Nerds): my 2017
2017 represented a special year for me when it comes to stocks. So far I have been operating mostly with my parents’ money, but this year I decided to put my (few) money on the line and start investing in 2 markets I had no previous knowledge: US and Poland.
The main reason because I chose this platform is because Degiro, the platform I decided to use, was charging extremely low commissions on these 2 markets, so it made possible for me start investing using small amounts of money without having them eaten alive from commission costs.
I decided to approach these markets with a long term perspective, looking for undervalued companies or great businesses at a reasonable price.
In this perspective, I am investing inspired by Buffett and Munger’s principles, and I would not mind to hold great business for a long period of time (more than 10 years).
At the same time, I think it’s important to have an annual check-up, to know how am I doing against a correct benchmark. It can give some valuable feedback that can lead in changes in how I will execute my investment strategy, while the principles behind it will probably stay the same.
This year I managed to buy some businesses that I like very much, and for which I see a good outlook in the short-mid term. I am still not completely sure if they will do well in the next 10–15 years, but I am confident that I will improve in this respect studying as hard as I can.
I started investing 2000 PLN in February, and gradually adding more (and earning from the market) until I was able to reach almost 10 000 PLN at the end of the year.
These numbers don’t tell much if put here alone, so let’s give a bit more context:
At the moment of writing, my portfolio consists of 9845.64 PLN, almost all invested. Since I started investing I have earned 814,39PLN, which means around 8.26% net in 11 months.
So far, 2 good news: I haven’t lost money (yay!) and investing was a better decision than leaving my money on a saving account, where I would have earned an incredible 196 zl, (9845,64*2%) supposing that I put all of my money in January (not the case here).
Now, there is only one more question to answer: was it a good or bad performance, considering what the markets did?
Here the answer is more complicated, for few reasons.
The first one is that 8.26% net doesn’t look great compared to the meteoric rise of cryptocurrencies, which were earning (or losing) this amount of money within hours and which brought home crazily high returns.
I am personally very interested in the cryptocurrencies and the blockchain technology (I started to research them when bitcoin was around 1000$), but I refrain to invest in them, mostly because I found them too difficult to price and I didn’t like to put my money in a non-regulated market with extremely high volatility.
Moreover, there is an unspoken rule in investing (and in life): everything that went up, eventually will go down.
Very few financial products defy this rule, and I do believe that most of the cryptocurrencies around at the moment will face in the next years this harsh reality.
My first rule of investing is to invest only in what I understand, and cryptocurrencies still don’t fit in there, so I will never put a consistent chunk of my money until this situation change.
Now that we addressed cryptocurrencies, an anomaly not sustainable in the next years at this rhythm, let’s have a look at index stock returns.
If we compare 8.26%/11months as a return for investing in stock only, it’s not so bad: usually stocks have delivered around 7% return/annual basis, and I would sign any day to have the same performance over the next two/three years (especially considering that the most markets are at an all-time-high and a correction is expected).
Now though, the final test.
Was this number good or bad compared to the indexes where I was invested?
Instead of looking at indexes by themselves (a good choice, but not reasonable, because I need to buy a financial product), I chose 2 ETFs: the first one is the Lyxor WIG 20 UCITS ETF which represents my benchmark for the Polish Stock Market, while the second is the Lyxor S&P 500 UCITS ETF, my benchmark for the US Stock Market.
For the second case, I decided to choose an ETF expressed in Euro (I am an European investor living in Poland) and not to hedge it against the exchange rate fluctuations (more on that later).
Here are some numbers of how they did:
ETF WSE: 14.25% (from March, when I started buying Polish stocks)
ETF S&P 500: 3.77% (from February, when I started buying US stocks)
To weight these numbers, I decided to use my current stock allocation: 5520,85PLN for US stocks (56%) and 4324,79PLN for Polish stocks (44%).
That means that if I put the same amount of money in the 2 ETFs I considered here, the final result would have been:
0,44*14.25+0.56*3.77= 6.27+2.1= 8.37% gross/yearly basis (without considering transactions fees)
Considering that January was a good month that I missed, I consider this a good (but not great) result.
I want to underline that to make easier coming up with a number, I assumed here that I invested all the money in Feb and March, which is not the case.
What I did was gradually added 500zl/1000 zl on a monthly basis, so my money was not as exposed to the markets for 11 full months as in the 8.37% case shown above.
The 8.37% is an indicative benchmark: if I had done significantly worse than that for no good reasons, changing my approach and investing only in ETFs would have probably been the best way to go for me; if I had done significantly better, it would have meant that my luck is off the chart or I am a stock market genius (both outcomes are not so bad). The only way to find out what is what is to remember the ending of all the academic papers I read: “additional research is required.”
I am probably somewhere in the middle, striving to get into the second case (even if out of sheer luck, would not complain about that).
And that’s it for the celebration part.
Now let’s go to the most difficult, yet formative part of investing (for me and hopefully for you): my mistakes in 2017
This year I started investing for the first time in two different markets, US and Poland, and this didn’t help to come up with good investment strategies.
Let me share with you the biggest ones:
- I didn’t consider at all the exchange rate risk. If you are wondering how comes that the S&P closed with a whopping +20% this year, and the ETF I chose as a benchmark went up only 3.77% since February, the reason is the exchange rate.
When I started buying American stocks, the USD/PLN rate was 4.05, while now is 3.49.
That means a loss of value of 14%. I did some additional research later and it turned out that it is possible to hedge your investment in dollars using some specific financial products, but if you invest in the long run (such as my case) it is better not to pay these costs and to take the risk of letting the exchange fluctuate, even if that means being hurt in the short run.
This year it was a hard loss, but considering the small amount of money I invested, it doesn’t make sense for me to hedge it. The mistake I made in this case was not losing money (although that was extremely unpleasant), but not considering something so simple and plan accordingly.
Now I know it is definitely a strategy worth considering if investing a bigger amount of money, but for the time being I will refrain from using an hedge of my capital invested (less than 30% of my current assets).
- I bought a lot of cheap stocks just because. I started 2017 as a pure value investor. As Ben Graham said, I was looking at stocks with low valuation (P/E, P/B, P/S and so on), ending up buying a lot of them without a serious analysis of the business model, the revenues trend, the sector, the management, nothing. They are cheap, so they must be good (especially in the Polish market). Almost all of them turn out to be completely bad or doing nothing at best, so I closed all of the positions but one (ROPCZYCE SA) which is earning. I still have no idea what they are exactly doing, but they are up 13% and running with a stop loss. Not the best way to go on the path to be a great investor, but one of the sweetest mistake I made so far.
- I heavily underestimated the importance of communicative management: one of the cheap stocks I bought, AMIRA NATURE FOODS LTD didn’t deliver good results in the last 6 months, and the stock crashed, losing 30% in a single day. A big chunk of this crush is due to the management which did not care to communicate in a better way the situation to the shareholders. Since then I am valuing a lot more when management is taking prompt action during a crisis.
- I didn’t want to invest in big companies, or buying stocks with a higher value: I can’t believe I never realized this bias before. When I started investing in the Polish and US market, I gave myself some max value the single stock should have had, and I was determined not to go up with it. The instinct was telling me that it’s easier for a stock to pass from 1$ to 2$ than to go from 100$ to 200$. That’s bullshit. In both cases, you still need to double the value, and the value of the stock is not indicative of the dimension of the company. To put it bluntly, it costs more to buy 1 stock of LPP (a clothing chain store very popular in Poland) than to buy a Facebook stock, but guess which is the bigger?
After I realized it, I snapped out of this weird bias and now I don’t care to buy stocks that are valued as much as 100+ $ (as long as I have enough money to buy at least one) if I think that the company is good and it can grow.
- I gave too much weight to external suggestions: in some cases, my research was done too fast, just because I read few articles on SeekingAlpha and they all made sense to me. Now I limit myself to one purchase/month (it may change in case of a correction) and I established a research process to follow before “pulling the trigger”. More specifically:
- I do a “numbers’ check” to see if the company is doing fine (at least) and how expensive is the stock compared to revenues growth or dividend growth.
- If I like the numbers I start looking at the company: is the product good? Is the market good? Is the management good?
- I look around for extra information, and I try to build a bear case, asking myself: why should I not buy this stock?
- If after all of this, I still like the company, the market, the numbers, and the expectations for the future I buy the stock.
- I bought stocks too fast because I wanted to “put my money at work”: especially at the beginning, every time I was transferring money on Degiro, I wanted to buy stocks straight away, and that led me to some sub-optimal purchases that I had to get rid of later. The process I explained above keeps my impatience in check and help me avoiding purchases I will regret later.
And that was for the past.
What’s for the future, more specifically 2018? I have no crystal ball, and the reports I read from different investment houses are not helping a lot: they mostly say that 2018 will be just like 2017, just a little bit better.
I have no idea if they are right or wrong, but I noticed a dangerous tendency to extrapolate the future from the past, and that doesn’t work 100%.
I personally want to adopt a cautious approach to the stock market this year, adding a bit of money each month but less than what I can afford (will be adding only 500PLN/month, for the time being).
I have some hard cash to put to work in case of a correction, and a shopping list of companies I will be happy to buy at a lower evaluation.
For the time being, I will keep on working hard on Fin-Ed and on my investing game, improving my analytical skills and always looking out for some great companies selling at a reasonable price.
Thank you for the brave souls who managed to finish the first Fin-Ed shareholders’ letters.
I wish you a rich 2018, full of happiness and growth.
Lorenzo
