Current Market Conditions And What Stocks I Hold In My Portfolio

Hey, The Investor’s Podcast Network Community!

I try to read — especially reread — as much as I can throughout the week. This week, I’m rereading Influence by Robert Cialdini. I believe that reading is vital for us as stock investors; if not to study the financial markets, then to combat our biases.

Prominent value investors including Guy Spier and Mohnish Pabrai have repeatedly talked about the “consistency bias” described in Influence and why that is one of the reasons they don’t want to talk about current positions in their portfolio. So what is “consistency bias?” When we have committed to something, we have a really hard time backing out, because we don’t want to be perceived as inconsistent.

There is a good reason for that. Consistency is a good trait to have. You want to keep your promises, and your word should be your bond. However, here is the problem: what helps us in our daily lives is one of our worst enemies in the financial market.

When our family and friends hear that we’ve invested in a specific stock, very often they would like to hear why we made that investment. This can be very costly. For example: back in 2013, I bought stocks in National Oilwell Varco and I wasn’t shy to outline my thesis to everyone who asked. I even posted my thesis online for everyone to see. As I slowly realized that my investment thesis was wrong, I found it surprisingly difficult to sell my position. After all, what would I tell all my friends who believed my thesis? That I was just wrong? So what I did was… even though I felt I could be wrong, I stuck with my “consistent” bull thesis and tried finding information that proved I was right. (You can usually find information that backs up any claim if you look long enough.) Years later, when I came to my senses and understood the fundamental shift in the oil and gas industry in detail, I finally sold the position at a significant loss.

So why am I on this long rant about consistency bias before I talk about the current market conditions? Well, consider this: back in March 2009 when the S&P500 bottomed out at 666 — it’s currently trading at 3,200 — it was easy to see that the stock market was cheap. However, it was hard to distinguish a handful of super cheap stocks. Even a fantastic investor like Mohnish Pabrai, who is known to take concentrated 10% bets in his portfolio, bought a basket of stocks at the time.

Fast forward to 2019 and an already expensive stock market went up 27% Year to Date. At these price levels, the tables have turned compared to 2009. And if you’re considering buying the market index with the bulk of your portfolio, you will likely cripple your returns in the foreseeable future. On the other hand, if you want to outperform the market, you will by definition have to consider individual stocks. But with that strategy comes the danger of “consistency bias.”

So please learn from my mistakes when I say: Don’t fall in love with any stocks, and be careful who you’re speaking to and what you’re telling them. Take me as an example. I run a concentrated stock portfolio with only 7 stocks currently: BABA, GOOG, BRK.B, MKL, LUV, EAF, and MU. We’ve discussed all 7 stocks at some point throughout the mastermind discussions. The exception is MKL and BRK.B, but we’ve talked about both companies multiple times on other episodes. You might ask, “When did they talk about EAF?” We do this during the next mastermind discussion, which is coming out on the 28th of December.

Anyways, I don’t recommend this concentrated approach to anyone. (I also hold an ETF and two other types of assets away from the stock market.) And I recommend it even less for you to go on record and outline your investment thesis in public. Personally, I’m struggling with my responsibility as a podcast host to talk about stock picking and then open myself up to consistency bias about my portfolio. However, it’s very simple because integrity always prevails. This is also why you always hear my disclaimers if I were to ever hold a position in any stock we discuss on The Investor‘s Podcast Network.

So to combat your consistency bias, this is what I recommend: Don’t talk to anyone about your positions unless they truly understand that you can change your mind on all of them tomorrow (without needing to give them a call first). And make sure they understand the difference between price and value.

All stocks are attractive to either buy or sell dependent on the price. For instance, several of the stocks that I have in my portfolio are not attractive to enter at the current price point. And to exemplify even more, please consider this: even if all of my stock holdings were undervalued, even more undervalued stocks would force me to move around in my portfolio again.

I’ve attached to this newsletter our latest intrinsic value assessment for Big 5 Sporting Good. You can find an overview of all the intrinsic value assessment Preston and I created with our team here. As with most good things in life, they are all free!

Happy Holidays!

Warmly,

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