Things We've Learned

Jason’s Random Words

We've talked a lot more about banks this year than I ever expected we would on this podcast. At the same time, there's a very good chance we talk very little about banks for the rest of the year. That's typical. Banking is a boring business, right up until it's not. And then it gets exciting. Or, well, depending on where your money is, scary.

This week's episode got me thinking about banks again, and the importance of learning the right lessons. As you likely know, I made a terrible call this February, completely underestimating the risk of a run on Silicon Valley Bank and called it a great buy. Poor skill on my part to miss this risk.

But I got lucky: I never bought. I had planned to, but it fell off my radar, and I never did. It, along with Signature Bank and First Republic failed and were taken over by the FDIC and sold off. Shareholders got nothing.

But of course, I'm not one to let a bit of good luck stop me from making a dumb mistake. Before it failed, I pulled of a great trade of First Republic stock, before immediately getting in my own way and losing essentially my entire investment.

This wasn't bad luck. This was, plain and simple, a mistake on my part. I'm not a trader. I don't have the mindset or the skill. I messed up.

But - and this is the most important part – I am pretty sure I have learned the right, best lessons. Bank stocks are cyclical, and when we go through these crises, every bank stock gets hit hard because nobody knows who's the next one to fall. Well. That's not entirely true; there is a massive amount of public information freely available describing what is on bank balance sheets. But most people don't bother to check that. When someone says the theater is on fire, everyone runs for the exits. Nobody chooses that moment to be the skeptic.

And therein lies the opportunity. Bank stocks aren't burning theaters. And during a banking crisis, you should be a skeptic. Both looking for the weak or exposed ones best avoided, and to find the ones marked down to fire-sale prices but not, you know, actually burning down.

Like Jeff droning on about his portfolio, I'm sure you're tired of my – far more eloquent – words about banks. But the point is, taking the time to humble yourself and look for the lessons you can learn from your mistakes will pay off, whether it's keeping you from throwing the baby out with the bathwater in a moment of panic, or being able to act decisively and with conviction when the market does give you a rare opportunity (like a banking crisis).

Jason

Jeff’s Random Words

I’ve been thinking a lot lately about my personal portfolio, and have spoken about it on numerous occasions on the podcast. In fact, you may be tired of hearing me talk about it…but I have a newsletter, and you’ve already started reading, so…

For those who aren't tired of this yet, I’m on a quest to get down to some to-be-determined number of stocks where I will (magically?) feel better. I’m assuming I’ll see an angel and hear a choir or something once I get to the right number. This is something I think about a lot because:

• The sum total of my individual stocks accounts for around 10% of my overall investment portfolio. I own 58 stocks. Do the math and you see that it would take a substantially material upward movement of a stock to really “move the needle” in the grand scheme of things.

• I really like keeping track of the companies I own. I like reading their earnings call transcripts and 10-K/10-Q filings [insert meme about me being a nerd here], and doing that for 58 companies four times a year is…a lot.

• I still own several stocks of companies I don’t understand as much as I would like, and I haven’t invested the time to get up to speed on them. See last week’s newsletter to read my thoughts on “borrowed conviction”, which are more nuanced, smart, and insightful than Jason’s.

This week I was reading the Misfit Alpha Substack, which is penned by an anonymous author who writes very compelling posts about totally obscure and undercovered stocks. If getting stock tips is your thing, the research is well done and these companies are certainly not on many investors’ radars. Check it out! This particular post was about the author’s personal portfolio and this line about having too many positions in their portfolio really stuck out to me (emphasis mine):

“Many of them were set up to track the recommendations of other newsletters, but it was far too many for me to evaluate and follow. I have sold dozens of small positions and have focused on ones in which I have some form of conviction (or at least enough conviction not to sell).”

I really love the idea of “enough conviction not to sell”. Listen to other investors talk for long enough and you’ll hear a common thread when it comes to biggest mistakes…selling something too soon. I’m pretty conscious of this, and it’s probably what prevents me from hitting the “sell” button more often than not. But now I feel like I have a framework (and we love frameworks here at Smattering HQ) I can use to think about a position I am considering selling. Enough conviction not to sell could be what buys me another quarter or two to see if things turn around, or if my inclination to sell was correct.

We have a commenting feature on our newsletter, so I’d like to hear from our readers. What’s a stock you’ve considered selling but have “at least enough conviction not to sell”? If we get some responses, perhaps a future post can be about a few of mine that I would put into this category.

Jeff