In 2013, we returned 19.46%. This is much less than what S&P500 returned, 31.90%. I’m definitely not happy with the large underperformance. Albeit, it is the long term track record that matters.
What is the lesson learned from 2013? A quote from Allan Mecham, “I think if investors adopted an ethos of not fooling themselves, and focused on reducing unforced errors as opposed to hitting the next home run, returns would improve dramatically.”
In an environment where the market is up 25%, making money is easy. For me to under perform in this market, the reason was our unforced errors. It was the positions where we tried to have huge hits in a short term but ended up realizing a loss. These positions added up to substantially weigh down on the good performance from our best picks. For example, we took a trading position in a company. The rationale was that a specific event was likely to happen and the my take was the market would react pleasantly with the event. The event came and went but the market didn’t budge. I closed this position two months later, taking a big hit. This one position had a negative 1% impact on our 2013 performance. These are unforced errors where I could have avoided them by not trading based on what the market would do.
Lesson learned: In each case I was enamored by the potential gain that I didn’t even focus on what would occur if the market didn’t act as I expected. In most of these cases, greed tends to make the mind act fast. As Richard Thaler would say, the Automatic System becomes too strong that the Reflective System doesn’t get a chance to think. Interestingly, it is in these special situations where I expected huge returns in a short period that I tend to make these mistakes. When looking at investments that you expect to pan out over years, the Reflective System has the ability to think through the decision.
The other thing that I had a negative impact on our performance was poor picks from 1-2 years ago that we closed in 2013. Dolan Media was a stupid mistake that we should have closed long time ago. Instead we waiting until Q1 ’13 to close the position. The stock was down almost 50% in the first quarter. Similarly, Yukon-Nevada was another mistake that we finally closed in 2013.
As I look at my current holdings, I’m very happy with what we own. I can see myself owning these shares for multiple years, as there is huge upside for these positions. I expect the portfolio to out perform the market.