One unique part of my journey to FIRE is my investing style. Like many FIRE bloggers, I invest my money into the stock market but when given the option, I like to actively manage my investments versus passively investing in index funds which has resulted in a CAGR of 40%+ over the past 5 years vs. the S&P 500’s 9% or so.
Now don’t get me wrong, there’s nothing wrong with investing in index funds and anyone I meet seeking to get investment advice, I always suggest investing in index funds. It’s just that I personally find investing really interesting and rewarding and so I choose to invest my money in individual stocks in an effort to increase my returns (aka alpha) and accelerate my journey to FIRE.
Before I dive into some high-level notes on my investing strategies, I’ll share a little background about how my investing strategy has evolved over the years.
Crash & Burn
While I was growing up, I got a good rundown on budgeting and saving, but investing was another thing all together. Investing in my household was often seen as “trading” where you would make small little wins and then sell your wins to make a quick little profit. So this was my understanding of how the stock market worked and when I gave it a dabble with some of my own real hard-earned cash at the ripe age of 18, I crashed and burned hard. See, the immediate error I ran into when I started my investing journey was I didn’t diversify my investments. I opened a brokerage account with Scottrade and put in $2,000 and found a stock that I thought would be a good one and then put all $2,000 towards that individual stock. Unfortunately, that stock didn’t have a very good earnings report shortly after I invested my $2,000 and within a few days I lost over 25% of my initial investment. That was pretty upsetting and I decided to sell my position and take the loss without giving that stock another thought. Problem is, that stock then went back up and so I decided to buy back again at a higher cost basis than when I sold my position. Of course, the stock went up a little and I was really excited but then it crashed again for whatever reason that I don’t recall and then I sold that stock again. Talk about buying high and selling low. Needless to say, after a few runs with this stock and a few others, my investing journey was over before it really even got a chance to start.
Tech Stocks & Short-Term Holdings
While I was in graduate school in 2010, I started to dabble a little more with stocks since despite not having personal success in investing early on, I apparently was a very good stock picker if you looked back on some of the stocks I had suggested to friends (all tech stocks, since I only knew about tech stocks). Anyway, when I got back in, it was a pretty good year to do that apparently since in 2010 the S&P rose 15% for the year. So, when I got back in, I came around a little company by the name of Netflix and I decided to buy some Netflix shares. It was a really solid decision and within just a few months, my shares had appreciated 20%+. A friend of mine told me that it seems Netflix had a good run and advised me to sell. Since I didn’t know better and I had already made a nice tidy profit, I decided to do just that. I then found some other stocks to invest in and they all did really well too. After having made some decent profits over the next few months (around 10-20%), I decided to sell my holdings and get an early start on paying down my student debt. What a mistake since investing requires patience and something the Motley Fool advocates is holding onto your winners. My cost basis for Netflix, had I held onto the stock would have been $10 split-adjusted (it’s $418 as of June 13, 2020).
Getting Back into the Game
I paid off 6-figures worth of student loans in about 4 years and in that time, I did nothing but throw money at my loans since the majority of my loans had an interest rate of 8%. So I was out of the market for awhile. I didn’t really start investing again until late 2014 and a friend lovingly informed me that I had missed the biggest bull market of all time…
Anyway, we met with our financial advisor and he advised us to buy some mutual funds with him and a friend told us to start a brokerage account with Vanguard. My wife and I opened up a Vanguard account and threw $5,000 or so into some Vanguard mid-cap mutual fund and then we made it a habit to started contributing all of our non-emergency fund savings into this mid-cap mutual fund which later turned into a few more funds. I think we did pretty well with our few mutual funds and I was pretty happy and then I learned about the Motley Fool…
It’s now the summer of 2015 and my wife and I at this point had thrown a lot of money into the market. We had some pretty decent returns so far but after having binged all of Motley Fool’s podcasts and looking back at my track record of stock picks that I never did myself, I decided it was time to try my luck again with stocks. I sold about half of our Vanguard mutual funds and bought a basket of stocks that I had high conviction in: $NVDA, $INTC, $ATVI and $UA to name a few. Of course, I decided to get back into individual stocks at precisely the wrong time since in August 2015, the market undergoes a pretty big correction, rebounds slightly and then hits bear market territory in February 2016. Now August was my first dose of market volatility and I didn’t like it one bit and then came January/February 2016… LOL, what a ridiculous time to invest. First major bear market since 2011 and it really killed my confidence in investing. Thank goodness for Motley Fool that helped me keep my sanity, I decided to double down on $AAPL, $NFLX, $MSFT and $LUV to name a few the first week of February of 2016 and held onto the majority of my shares of those stocks through most of 2019.
10,000 Foot View of My Investing Strategy Today
A lot has happened since the bear market of 2016 but what I can say is that I learned a lot about investing and also learned to keep my emotions in check. It’s now 2020 and my portfolio has definitely evolved and me learning to become more comfortable with high conviction stocks and having those stocks become a bigger and bigger part of my portfolio. I’ve also learned a lot from my mistakes (which are many) but those lessons have really helped me become the investor I am today.
In today’s stock market, even with COVID-19 still very much impacting the US economy, I still stand by my number one investing strategy: Buy & Hold. I can’t say that I have always held 100% firm to that strategy, but for the most part, I have and it has truly paid dividends over the years. Every stock I buy, I buy with the intention of holding onto it for a number of years or until the investment thesis changes.
Another fundamental strategy that I stand by is: Buy The Dip. Every week/month that I add to my portfolio, I always try to find opportunities to buy periods of weakness in stocks. For example, this has enabled me to buy Shopify numerous times along its way up to becoming my first 10-bagger (a stock that goes up 10x from your initial investment). I recognize that buying the dip takes courage especially when your Seeking Alpha screen is blood red and down 10%+ but buying the dip has really accelerated my returns.
Now, this next one may raise a few eyebrows, but I believe it makes sense especially if you have decent savings every month. I believe that you should find opportunities to leverage margin. Now don’t get me wrong, margin is complicated and an incredibly risky strategy, but I believe if used in moderation, it can really elevate your market returns. I personally do not go into more than 5% margin debt at any given time and I make sure I am actively managing that balance to ensure that it doesn’t get worse but I’m willing to hold onto a margin debt balance for a few months especially if I’ve run out of cash to invest from my account.
When it comes to individual stocks, I predominately invest in tech and I invest in great companies that are growing rapidly. Every stock I own, I have a spreadsheet that tracks their earnings and the improvement/decline in their performance metrics. I invest in tech because I understand tech and I believe that tech is generally much more sticky and a faster-growing their other industries. It also scales well, especially SaaS-based business models (more on this in another blog post).
Finally, options are a big part of my investment strategy. I rarely use short-term options since I don’t do technical analysis and have little interest in it. I do invest a lot in LEAPs (long-dated options) since I figure a few years is generally enough time for an investment thesis to fully play out.
Honestly, my investing strategy is actually not very complicated. I invest aggressively and I invest in great companies and selectively utilize leverage/margin at opportune times. Over the past five years, as noted above this has resulted in a 40%+ CAGR which has accelerated my journey to FIRE. In a future post, I’ll spend a bit more time detailing out my investment strategy and will review my portfolio.