It’s the first time in many years where I’m revealing my live money portfolio.
More importantly, this is my market beating 2017 Action Score portfolio.
But at the same time, I’m in the middle of liquidating a couple of accounts.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
No, it’s not because of I’m afraid of what the economy will do, and it’s not because the picks are doing so bad that I’m selling out. I do not plan to sulk in the corner.
First, if you’re new to Old School Value and my story, I came to the U.S. in 2006 on my own (technically 2005, but I consider 2006 to be the official start) with nothing. After 11 years of hard work, saving, investing and running a couple of businesses, my wife and I are thankful to have bought our first home. It was unexpected as the plan was to wait a couple more years. The proceeds from our investment account will help pay for the home.
Reminds me of the story when Susan Buffett bought the first home for the Buffett’s in 1958 for $31,500.
That was a big deal for Buffett. Buffett was mega cheap back in his early days. In sports you talk about the athlete’s prime. For Buffett, he was in his cheapness prime.
Buffett balked at the price of the home, but went along withe home purchase anyways. Good move.
I’m also value, and wanted something on the lower end, but that didn’t sit well with the missus.
At least with low 30 year rates, I’m confident that we’ll come out on top as the years roll by.
In any case, to pay the down deposit and all the costs that come with first home ownership, I’m liquidating our non-retirement accounts.
I have the same holdings across my retirement accounts, but in good spirit, here’s my Action Score portfolio I built over January and February. This way you’ll be able to see how I utilize the Action Scores to pick stocks and try it yourself.
First, an IMPORTANT Point
A very common question I receive is this:
- “What is the annual performance of Old School Value?” or
- “How much can I expect to make using Old School Value?”
Old School Value is NOT a stock picking newsletter or advisory service.
We do not not provide stock recommendations like a newsletter. The purpose of Old School Value is to empower you with the tools to pick the best value stocks on your own.
To put it into perspective, it would be like asking the Yahoo Finance department, what type of returns to expect using their site.
Some people have generated 20+% with OSV.
Some have made 10+% with OSV.
Heck, some people lost money after 2 weeks and canceled.
It comes down to how you use it. You are in the driver’s seat. What we provide are the tools and systems.
Having made that clear, let’s move on.
My 2017 Action Score Stock Picks
I own all these stocks across my retirement and non-retirement accounts.
There are a few I did not include, as they were not part of the Action Score picks.
The rule is to keep them all for one year for tax purposes. But transferring the investment money into the house is more important at this stage. I’ll have to bite the taxes.
For the data, I’ve included my average purchase prices as I either crept into some positions, or couldn’t buy the full position in one swoop due to reasons explained later on.
Some took a couple of weeks to buy, while others I ended very underweight.
You will see that I have a total of 26 stocks and the allocation is not equal as I just mentioned. I’ll discuss my reasoning in the following sections. Lots to go through.
I also doubt I’ll publicly reveal my entire Action Score portfolio like this again for simple reason.
- I won’t be liquidating my accounts like this again. Only able to show this as I am locking in the following gains and losses.
- I don’t want to defend any position to the general public
- I regularly test little things that don’t fall into any rules of thumb that could seem contradictory to the info I provide OSV Insiders
General Overview of How to Pick Action Score Stocks
The backtested performances of the Action Scores I’ve published are based on a simple strategy. Buy at the beginning of the year and sell after one year.
By the end of 2016, the backtest portfolio was looking like this.
No OTC, Financials, Miners, Utilities in Backtest
The strategy is to pick the top 20 and then hold for one year.
With my personal portfolio, I mixed it up a little.
One of the golden general rules with quant investing is to strictly follow the process. No human meddling.
For OSV Insiders, I send a tutorial of how to pick stocks based on your activity profile.
If you’re a passive investor, there’s a simple portfolio method for that, and for the investors who like to get their hands dirty, I show another method.
And because I’ve been self-picking stocks for so long, it’s excruciatingly hard to knowingly buy some of the retail stocks that showed up on the list this year.
Companies like ASNA, GPS and AEO.
These are the rules of thumb I share for passive investors:
- spread your bets with at least 20 stocks. Can be 25 or more.
- equal weighted positions
- don’t chase stocks
- 2 companies in the same industry max
- stay away from complicated sectors like financials, miners, resource, utilities (leave it to the active investors who can dig in)
How I Picked My Action Score Stocks
My stock picks and the ratings of each stock at the start of the year were not all A rated.
- 9 out of the 26 stocks are B rated Action stocks
- 1 is a C stock
- 16 are A stocks
In terms of performance and in the short 5 months, 6 stocks are negative, with 4 out of the 6 being B stocks to begin with.
Also important to note that the stock ratings change throughout the year. See the various paths of movement a stock can take.
Paths an Action Score can Flow – Click to Enlarge
I downloaded the Stock Database CSV, started with the A stocks and spent some time to filter it down further.
- Removed industries I didn’t like
- Deleted stocks with little history
- Limited the number of stocks from the same industry
Here’s what I ended up with.
However, this is a total of 16 companies.
I wanted a minimum of 20, but wanted to get to 25 holdings.
So I went fishing in the B rank pool.
The B ranked stocks are very good selections. Based on the data below, fishing for stocks in the A and B pools are profitable.
A and B rated stocks are highly profitable
A ranked stocks are easier because they get great scores for all three Quality, Value and Growth.
When you come to the B’s, you only get 2 out of the 3.
This is where I mixed it up for the next 10 stocks. Frankly, I let go when it came to valuation for which I know a certain group of people will say that this isn’t “value investing”.
Being hard coded with value in my blood makes it very difficult for me to buy stocks each year where it looks expensive.
I would never buy Red Hat (RHT) on my own. The Value Score was horrible, but I chose it for the Quality and Growth. Trusting the process has worked out so far, along with some luck.
With the B stocks, check out the different styles I went with.
How my B rated stocks line up
Again, I came up with this list after refining the B stocks just like I did with the A’s.
Buying the Action Stock Picks
This entire process of refining, choosing, refining, choosing etc, took me about 2 days. To get a better a idea of how I check each stock in more detail, check out this article on Wal-Mart.
If you go through the same process, add an extra day or two. Only because I know the OSV system so well and I’ve trained myself to interpret the numbers quickly.
Now, with my shopping list in hand, I entered the buy set limit orders at 50% of the max allocation. I didn’t want to buy everything in one go. I never use market orders.
The usual stock buying process occurred:
- Illiquid stocks obviously took a few days to a couple of weeks to fill.
- Some of the momentum stocks ran up.
- Some stocks dropped as soon as I got them.
I was fortunate that the illiquid stocks did not run up.
Some momentum stocks that went up past my buy price, didn’t come back down and I ended up with a much smaller position. I only managed to grab a 25% slice of Domino’s (DPZ) – very underweight.
Entercom Communications (ETM) is the worst performer so far and was able to initiate a full position fair quickly, but has gone down since. Looks like the person on the other side of this trade will win once the position is sold. I have a history with ETM too. Bought it during 2009 along with a basket of other radio stocks which became multi-baggers for me.
I can’t deny that I did reminisce the post recession “glory days” and expected it to play out again.
Picking the stocks is part of the process. Having the discipline to buy it all properly is also important. You could filter for high market cap and high volume stocks, but if you look at my results so far, a lot of the winners have come from smaller companies.
What to Do for Rebalancing or Adding New Picks?
There was only one stock I added to the portfolio after my first wave of buying – Wal-Mart (WMT).
With the backtests, I kept it super simple with no rebalancing until a full year later.
Even if a stock get bought out, the backtests kept it as cash.
If I had extra cash deposited into the account, the goal is to stick with choosing a good A or B ranked stock. My current holdings are now mostly B’s, but I wouldn’t add more blindly.
I would see if there was anything better, and if not, I would add to existing positions within the A/B range. Essentially, redo what I did at the beginning of the year and make a list based on how much extra cash I had.
It’s been a fun exercise, but I give more credit to luck.
A rising tide lifts all boats.
Had the market sunk 10%, this will be a different story.
What I didn’t go through is the day to day price movements of the portfolio. Another lucky part is the timing worked out perfectly. If I bought the home 1-2 months earlier, the returns would be much lower. The portfolio lagged the market the first quarter and it’s now gotten into full gear. It’s a reminder to not throw in the towel too quickly and to not check stock prices daily.
More luck than skill.
But hey, I’d rather be lucky than unlucky.
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Article by Jae Jun, Old School Value