Investing Resolutions for 2024
A Mean Reversal for Your Mindset
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” - Adam Smith
As this first trading day of 2024 has now closed on this How Tuesday, I find myself reflecting on the past like many others do at the start of a new year. More specifically, I want to share some of my mistakes from last year and resolutions for my portfolio going forward.
RESOLUTION #1:
What I Don't Know Take the Time to Learn and Never Pre-judge
In May of 2023, I was looking for some diversity in my holdings. I wanted a FinTech (financial technology) company to offset some traditional banks I held and came across Affirm Holdings, Inc. (AFRM). It wasn't a new company. Founded in 2012, AFRM started trading on the Nasdaq in 2021, but I didn't get it. How could a "buy now pay later" carve out a market share competing with the likes of Visa (V) and Mastercard (MA)? What happened when consumers started defaulting? Notice I said "when," not "if" because I was so sure of my take without doing any digging. It came out the gate hot as an IPO (initial public offering), then fell off partly due to COVID and free money in people's pockets. Not uncommon for an IPO, but coupled with my dismissive approach, I never gave it a second thought and never realized the two-sided approach (consumers and merchants) that has put AFRM among some of the top names in FinTech. Growing its consumer base by 3.28mm (Q3FY22-Q3FY23=16.01mm total) while at the same time building relationships with Google (GOOGL), Amazon (AMZN), Walmart (WMT), and others aided AFRM's position in holiday spending this year to increase by 29%. If I had done my research in May or at least tried to understand AFRM better, I could have been up nearly +388% today. It's easy to say what could have been after the fact, but the real lesson here isn't about the loss of potential gains (although it still stings). The lesson here is to make informed, not knee-jerk, decisions.
RESOLUTION #2:
Planning for Short Gains on Quarterly Earnings Calls Rarely Work Out
I had a plan for American Airlines (AAL). A good sign that everything that follows that statement is a tale of woe. They reported their Q2 earnings on July 20, 2023, and I was positive it would cause a price bump. In general, I'm not too fond of travel stocks. There are too many variables for me between consumer confidence, business vs. leisure travel, safety, and weather. But remember, I had a plan. I bought a small position on July 12 at around $18.57/share. The news for the airlines had been good going into the earning stretch. Good ratings from the banks. Conservative estimates most thought would be an easy beat. United Airlines (UAL) had gotten a boost from their report, so obviously, so will AAL. I was pleased with myself and my plan. The earnings come out. Record quarterly revenue of 14.1B. Credit rating up. Bookings looking forward up. Good cash flow. Positive future guidance. The stock price? Down and then WAY down. The talk, of course, was that the airlines were all priced too high. Then, as if Icarus himself was aboard an American Airlines flight, the stock tumbled through August, September, and October until hitting a new floor of $10.92/share. Fortunately, I had bailed out before August using some option chains to ease my loss, but that was a stressful couple of weeks to end up in the red. The point is that while earnings can cause turnarounds or boosts, they also open the company up to extreme scrutiny (operating costs, tapped out on value, etc.) even on positive numbers.
RESOLUTION #3:
Trap Prices Don't Chase Prices
Artificial Intelligence was all the craze in 2023, driving Tech higher and higher, and likely will this year as well. Microsoft (MSFT), Nvidia (NVDA), and CrowdStrike (CRWD) were among the big players, but in April of 2023, I was looking at generative enterprise company C3.ai, Inc. (AI). I still like C3.ai and plan on doing a Spotlight in the coming weeks, but this lesson learned isn't about the company but rather my poor execution. Anyway, I had done my research and thought the business model was strong. Still relatively small, I thought I could get in early on C3.ai with a more significant position than the big names. I had set my sights on a target price of $16.50/share. C3.ai had just had a pullback from $22 to $17.92, so I thought my target was solid and a reasonable ask. A week goes by, and it's down to $17.24. Not budging. Two weeks later, it started to climb, and I began to falter. New target: $17. Still climbing. Target $18.50. STILL climbing. A month passes, and I am trying to remain strong by increasing my target, which is just an exercise in futility because I am still severely underestimating its movement. Eventually, I caved and bought it at $19.23, which is far from where I started. A few months later, I closed the position and made a profit, but there is that convenient hindsight again. I could have just as easily been chasing the price off a cliff or made a larger profit if I hadn't been so short-sided and created a range for my target price early on.
And there for the world to see are my greatest hits of bonehead moves from 2023. Hopefully, my mistakes can remain mine alone and help at least one person from doing the same.
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