|Price Performance on Stock Buys from January - June 2017 (click image to zoom)|
You can use short-term back-testing to fine-tune your stock picking ability to maximize long-term profits and margin of safety.
I keep a detailed spreadsheet to record all my investment decisions as well as writing down by hand in a notebook. There is something special about writing by hand as it slows me down and makes me think about my decisions at a deeper level than if I were to just use spreadsheet.
The short-term back-testing process helps me determine whether I bought the stocks at the right price or not. Did I buy it too soon or too late? Was my investment thesis correct or at least on track? Did I let emotions take over sound judgement, or did I buy in a hurry or got lazy and skipped my usual analysis?
I use the results of back-testing to tighten up any lose ends in my decision making process while patting myself on the back for making good decisions. This type of exercise prevents me from becoming complacent or lazy with my investment decisions while helping me become an Intelligent Investor. I also find it to be very rewarding and motivating when I see positive results of my effort.
Out of these 48 buy transactions, 35 are currently profitable, these are shown as positive bars in the above chart. While 13 buy transactions are currently showing a price loss.
Overall, that's a 73% positive buy rate with many of them showing double digit percentage growth in stock price. For a short-term performance, this is looking pretty good so far.
On the good side, the most prominent or profitable of my buy decisions were the stock of VF. Corporation (ticker: VFC) which I eased into nicely as the stock was getting hammered due to Amazon affect on the retail sector.
I started buying VFC in January, right after I wrote about my VFC analysis: I am adding V.F. Corporation to my Dividend Portfolio
Since then, the VFC position has gone up by 23% while earning me a respectable dividend (yield-on-cost) of 3.26%. It's not that often one gets to buy a dividend aristocrat this cheap.
My other big winners are Abbvie (ticker ABBV), Nordstorm (ticker: JWN), Kohl (ticker: KSS), and W.P. Carey (WPC) among several others.
I picked up JWN and KSS during the retail sector's Armageddon when most investors were dumping these stocks left and right. Both JWN and KSS positions are up double digits while earning generous dividends. You can read about my retail sector analysis here: Which department store stock should I buy?
My other big winner is Abbvie, a biotech/pharma company. My thesis for buying Abbive was high earnings and sales growth biotech company with fast growing dividend, at an excellent yield of 4%. Among all the other biotech companies, I found Abbvie to be the most mature and least risky. I wrote in detail about Abbvie here: Bought More Abbvie (ABBV) On A Dip Today
Less than quarter of my buy decisions are currently at loss with majority of the losses under 5%. That's not too bad and even if I didn't get the price at the bottom, at least I got pretty close to buying these stocks at the bottom or at fair price. Some of these were also more recent buys, so hopefully in time they will move up as there is nothing fundamentally wrong with any of these stocks.
However, I do have one buy transaction that is currently at a loss of 18% and I will talk about it in some detail as I have a good reason for why it happened and why I didn't see the looming price decline.
Qualcomm (ticker QCOM) was one of the first stocks I bought this year in mid January. As usual, I did my buy analysis before buying the stock, and everything looked good. It's a high flyer technology company which is dominant in mobile space while having great growth prospects in emerging areas such as IOT and 5G. It was also just after QCOM announced acquisition of NXP which would have given QCOM a leading position in autonomous vehicle and IOT areas.
Also fundamentals checked out well with huge pile of cash on the books and ever growing licensing business. So overall fundamentals looked great and therefore, I started a position.
However, just a few weeks after I started my position, the FTC filed its anti-trust case against QCOM and then came the Apple litigation.
I couldn't have seen the FTC and Apple litigation issues that propped up just weeks and months after I started my initial position.
As the stock started its nose dive, I started to dollar-cost-average into lower cost basis.This also helped increase my yield-on-cost to around 4% while increasing margin on safety on my initial buy transaction. I'm currently at full position on QCOM and not buying any more shares.
I think long-term Qualcomm will do very well as they are well positioned in the future growth areas of 5G, IOT, and Autonomous vehicles. The litigation issues will resolve likely in some sort of settlements. Such litigation are nothing new in the high-tech licensing business and QCOM management knows how to deal with them. I seem these pains as only short-term and see a bright future for the company and my stock purchases.
- The buy process is mostly doing its job and seems to be working in determining good entry points based on fundamental analysis and my fair value calculations.
- Unforeseen issues or surprises such as QCOM's legal issues were hard to detect before hand. Therefore, when buying a company, especially a technology company with a licensing business, it may be prudent to have additional margin of safety built into the fair price calculation. Had I known that, I would have discounted the fair price by an additional 10-15%, if not more.
- 73% of my buy decisions have resulted in profitable positions with several double digit gains. That's pretty decent, though I can do better by further tightening the buy rules. I would like the positive buy rate to be over 80%.
As an investor it is important to track and back-test your buy and sell decisions. Back-testing of short-term decisions can help identify mistakes made in buying or selling a stock at the wrong price or wrong time or worse purely based on emotions or a knee jerk reaction.
More over, having a good record of all investment decisions can help you become a better investor as you learn both from your mistakes as well as success. Happy investing!
Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer