In this series, I (Jin Choi) talk about my journey of investing in my TFSA account. If you want to know what a TFSA is, I recommend you read my free book. In this update, I’ll explain why I’m discontinuing this series, and how the content of this website will change in the future.
May Results: Down 13.8%
At the end of May, I had $40,416 in my TFSA account, which is down by 13.8% since the end of last month. By comparison, the Canadian stock market went down by 3.3% while the U.S. stock market went down by 5.4% in Canadian dollar terms. Therefore, my portfolio underperformed.
The majority of my portfolio consists of Canadian oil and gas stocks. Oil prices crashed in May, going from $63.83/bbl to $53.49/bbl (in US dollars). There is just one big reason for this crash. As I explained in my previous article, global economic growth has slowed dramatically, to the point that we’re now teetering on the brink of a recession. Global oil demand has fallen as a result, bringing prices down with it.
This latest stumble of my portfolio has forced me to think long and hard about my own investing acumen, and by extension the value I’m providing through this site in general.
For a long time, I considered myself a good value investor. I’d always excelled in academics, particularly on subjects involving numbers. I also believed I had good business instincts, a belief which I’d say is supported by the fact that I’m currently running a growing business. However, as I read through Michael Lewis’ excellent book called ‘The Big Short’, I’ve been convinced of the fact that in addition to intelligence, you need a specific temperament to succeed as a value investor, a temperament that I don’t possess.
The Big Short tells the story of several money managers who foresaw the collapse of the subprime bubble and profited from it. Although these managers had very different backgrounds, they all had one thing in common: they dug deeper into research than any of their peers. Michael Burry read legal documents that nobody else bothered to read. The principals at Cornwall Capital didn’t make huge bets until they spoke to everyone who could possibly tell them they were wrong.
If I’m honest with myself, I simply don’t have the patience or the interest to conduct such deep dive research. Rather, I’m motivated by ideas, and predisposed to building stuff. I think up new ideas for a web tool or a research project, and start coding before the ideas are fully formed.
Now, this doesn’t mean I’m doomed to fail at investing. Rather, it means that I need to concentrate on a style that works for me.
The investing style exhibited by the heroes in the The Big Short is called fundamental analysis. This style of investing requires an investor to focus on only a few ideas at a time, and since such investors don’t have the capacity to analyze every idea deeply, they generally end up with concentrated portfolios.
A good analogy would be that of picking apples in an orchard. A fundamental analyst would inspect each apple carefully before putting it into his basket. While there’s a higher chance that the apples in his or her basket are good, the basket would generally contain only a few apples.
On the other hand, there is an equally effective style of investing called quantitative analysis. This style of investing makes heavy use of statistics to analyze all companies at once, assigning ratings to each company. Investors who employ this style would then take some number of highly rated stocks and put them in portfolios. While investors wouldn’t place great conviction in any one company, they’d be confident that the companies they’ve chosen would be good overall.
In the orchard analogy, quantitative analysts would be like those who pick apples based on a set of well defined criteria, such as size and colour. Because the apple picker only cares about such limited set of criteria, he’d fill the basket a lot quicker, but he risks having some bad apples thrown in the basket. Both fundamental and quantitative styles have merit - you generally get better quality with the former, and more quantity with the latter.
Given my skill set and temperament, it’s clear to me that I’m more suited toward the quantitative style of investing rather than the fundamental. It’s a shame because I still hold some romance towards the fundamental style, which is probably why it’s taken me so long to come to this realization. But now that I’ve come to the realization, I’ve decided to change not just my investing style with my own money, but the orientation of this site as well.
Starting next month, I will discontinue ‘My TFSA’ series. Instead, I will start writing about the machine learning model that my company has been hard at work on. I will begin by giving a high level overview of the machine learning paradigm, and go on to discuss specific features and techniques we employ in our models.
I’m excited about this new direction, because I feel that we’ll be offering something truly unique. There are a good number of quantitative investing blogs out there, but none that I know of that focus purely on machine learning. Most quantitative analysts still rely on more basic statistical tools such as linear regression. But having worked on machine learning models, I know that machine learning can add a lot of value that these basic statistical tools can’t.
If you’re wondering about MoneyGeek’s portfolios, I don’t anticipate any major changes for now. I will continue to write about them, but I will perhaps put more emphasis on including ETFs with quantitative strategies in the portfolios.
Writing about my failures managing my TFSA account has not been fun. I’m also not convinced that it was the best material to write about from the reader’s perspective. I therefore look forward to putting this behind me, and start providing better value for your time.