Random Thoughts and the Personal Portfolio

Hedging against our own biases, SPACs, and buy and sell decisions.

Allegory of Fortune, Frans Francken the Younger, 1615-1620, oil on canvas (Louvre)

I’ve had a few thoughts and ideas that didn’t have enough meat on the bone to merit a standalone post.

A good idea doesn’t always remain a good idea

A common refrain among financial circles is that “the best new idea may already be in your portfolio”. There is quite a bit to unwrap in this phrase, really. The logic behind the statement is that you have spent time researching the companies in your portfolio. You have a more intimate knowledge of the business and are more likely to have a feel if its stock is over or undervalued.

I largely agree with the concept and frequently buy more of the companies I own (as you’ll see in a bit). However, there are a few drawbacks to this thinking that investors should be aware of before jumping back into the same pool.

1. Are you anchoring to previous decisions? I’m not entirely sure of the correct term here. However, the concept is a combination of the sunk cost fallacy and our tendency to view positions in our portfolio favorably. The effort we put into due diligence can sometimes skew our view of the company. We might not think the same way if that same company were not in our portfolio.
   A recent example that comes to mind is Crowdstrike (NASDAQ: CRWD). In conversations with people who own the stock, they largely view the recent technical glitch as a minor blip in the road for what they believe will be a successful business for decades. Some even saw the share price drop post-glitch as a buying opportunity.
   I don’t have a strong opinion either way about the company or whether they are right or wrong in their assessment. In such situations, though, I often wonder if they would have the same view if they didn’t already own the stock. I know I have viewed current positions with a higher degree of favorability because they were in my portfolio. It hasn’t always been the best course of action.
   It’s challenging to scrutinize existing positions with the same rigor as we did before they became part of our portfolio. It is a rare trait among investors that we should all aspire to develop over time.

2. Have you turned over enough stones elsewhere to determine if your position is still the best idea? One lesson I have taken from the research to do this newsletter is that even though the number of companies outperforming the market is small relative to the total market, there are way more out there than we think.
   This idea contradicts the “buy what you know” mantra, which I have often resorted to when buying stocks. You want to leverage your learnings and expertise to make sound judgments versus going on a limb for a less familiar company or sector.
   The only way for us to truly know if what we already own is the best investment to make is to venture elsewhere to try and disprove it. At a minimum, exploring other sectors or less familiar companies will sharpen your skills and expand your knowledge base. At best, you may find several ideas much better than those you had previously stuck to.
   Investing in individual stocks means you are willing to put in the extra work to generate better results. This effort shouldn’t stop once a position has made it into your portfolio. Not putting in the work to explore other ideas before hitting the “buy more” button abandons the very principles that make individual stock investing so lucrative.

On a completely unrelated topic…

Who’s buying all these blank check IPOs?

This is really short, but I want to get it off my chest. I think we can all agree that the SPAC phenomenon in 2021 was ill-conceived. It was a combination of 1) some potentially good companies that were in no way ready to go public and would likely suffer because of it, or 2) poor-quality businesses that were likely not going to make it and were making a cash grab.

This isn’t unique to SPACs. Numerous companies go public each week vai traditional IPOs that probably have no place doing so. However, unworthy SPAC companies going public was certainly amplified for that short window.

What I find surprising is how many black-check companies are still going public. For these acquisition vehicles to go public, someone has to buy the stock. After watching so many SPAC businesses crash and burn in recent years, who is still willing to buy shares in blank check acquisition vehicles before a target is even announced?

On to the portfolio.

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