1-10-2024 Humans have an emotional basis for thought, including their portfolio investment decisions. Therefore, practically speaking, a successful investment strategy must be able to operate while being associated with these emotions, functioning both in spite of, as well as because of them.

The market correction of 2022 was related to the Federal Reserve’s increase of interest rates, with consequent fears of prospective slowing of economy, and associated adjustments in analysts’ models and earnings estimates.  Market downturns cause fear among holders of stocks. This is not totally avoidable, and it happened to me.

Why was I afraid?  Unfortunately, I had committed a major error in my role as investor, an error which had become a pattern over several preceding years.  New time constraints occurred, related to devotion family demands,  passionate commitments to fulfilling personal pursuits, and duty to professional demands. Therefore, over a few years I had much reduced my formerly practically constant reading about my companies and investing in general.

Bearing in mind the nature of my investments, “eternal companies” with a durable competitive advantage that have the “culture” and capital, human and financial, to adapt to continue dominating their market.  These companies can weather an economic downturn and rise with the recovery and continue on their march to growth.  We know this because they have done so repeatedly over their history, and they continue to develop the qualities which drive this durability. And so these companies do not require constant monitoring to see if their earnings are finally coming into existence, or if paying customers are appearing, as is the case with some novel hot companies.  Indeed, this is one specific advantage of the “eternal company” concept for the individual investor who has done the work to select investments, but does not want to spend an inordinate amount of time on an ongoing basis, worrying about his portfolio.

However, because I was no longer keeping close track of my investments, having reduced my immediate awareness of my portfolio companies’ current achievements and strengths, I was vulnerable to the fear which affects the ignorant in a market downturn.  In the anxious and volatile market of Summer 2022, recession was widely predicted by economists for early 2023. I began to read again. I did not in panic sell my holdings at the low points.  This was because I know they are sound investments and this attachment has an emotional tone.  However, while I refreshed and reestablished my current knowledge of the repertoire of business strengths of my companies, I felt the need to do something to protect my portfolio from a time period of losses of unpredictable duration. I searched for a suitable candidate investment to which I might allocate part of my capital. One which did not correlate with my current holdings and might therefore better withstand a possible upcoming recession.

Thus, at approximately the end of January 2023 I shifted some funds from my current holdings, to a novel portfolio component: United Healthcare Group (UNH).  I reallocated approximately 1/3 of funds from ADBE, 1/4  from MSFT, and less than 1/4 from V. I made these moved because of anxiety regarding recession, rising interest rates and the effects on tech and digital finance stocks. But I made only a partial reallocation, because I trusted my current companies would certainly eventually recover and in fact likely take market share during any recession.

As the broad market recovered in the second half of 2022, it became clear that I had traded a portion of funds out of my current holdings, just in time to miss the major recovery run ups of 12.3% for V, 49.3% for MSFT and 60.6% for ADBE.  In contrast, UNH only appreciated approximately 8% between January30 and the end of 2023. My return on investment for 2002 would have been better had I remained fully invested in my original portfolio of eternal companies.

This episode yielded a couple of investor lessons. By regularly reading, keeping informed about your own investments, you are continually aware of the reason that they are sound investments.  Had I done this, I might have held onto my ADBE, MSFT and V with more confidence, knowing that the companies would certainly survive and thrive.  Even should a recession have occurred, as companies riding a wave of secular market expansion, they would play an early part in the rebound of market sentiment as the prospect of tangible economic growth reappeared ahead.

Second, equally important: regularly search for novel portfolio candidate companies which are in a different business and sector than current holdings.  Do this research in anticipation of a change in economic conditions which makes the novel companies a relatively better value.  In this way, you can be ready to shift allocation into them at this relatively lower valuation compared to your current holdings. Moreover, preferential selection of companies in different sectors promotes construction of a portfolio whose future performance is less vulnerable  to economic changes which harm a specific sector. Finally, keep informed of valuation conditions in the various market sectors so as to know when they are likely to present relatively better values and opportunities for purchase.

Because I did not maintain this regular, anticipatory research, I had yet to identify new portfolio candidates with relatively more attractive valuations, by the time MSFT, ADBE and V hit new highs in the second half of 2021.  Instead, I delayed until they had already reached subsequent 52 week lows in Spring of 2022.  I therefore lost  the initial period of advantaged returns which could have resulted from diversification into non-correlating holdings.

Notwithstanding my apparently poorly timed UNH purchase, portfolio performance (IRR) for calendar year 2023 was quite good at 43.2%  This was a product of both the durability of my long term holdings, and that of the new investment. I continued to trust in my long term holdings and therefore resisted selling them completely even in the face of significant price declines.  This was balanced by anxiety regarding further losses related to a recession, prompting my search for a company meeting my investment criteria, with returns not likely to correlate with my current holdings.

I admit these emotionally related errors not just because I value transparency and truthfulness.  It is important to know that an investing strategy can be reasonably successful in spite of your fears. A strategy which depends on perfect logic is pure fantasy. 

Interestingly, the selection of UNH actually represents an evolution of my eternal company criteria. This innovation was stimulated by necessity, the mother of invention.  I will describe my process for selecting UNH in a separate article.