Longer-time followers know that I’m investing 10% of my portfolio in value-related opportunities. Those are stocks that don’t need to pay a dividend and they are mainly there to satisfy my inner value-investing urge. Hence, the main goal of that part of the portfolio is pure capital appreciation.
To be honest, knowing yourself is probably one of the most valuable lessons you can learn in the stock market. Hence, this section is mostly here to stimulate the risk-taker in me although you could argue that I’m still on the conservative side compared to pure growth investors.
In a nutshell, the strategy I take is classic value investing. It probably needs no explanation, but the below picture speaks more than a thousand words:
I have been doing this for several years now and the stocks currently part of this section in my portfolio are:
- Meta Platforms ($META)
- Alphabet ($GOOGL)
- Alibaba ($BABA)
As you can observe, they all have one thing in common: Big Tech stocks. It doesn’t come as a surprise to me, because I work in the Information Technology industry so these are stocks that I relatively well understand.
But to be honest, I haven’t given this strategy the time it deserves over the years. Because allocating 10% to such stocks has so far been the most underwhelming.
As an example, typical issues I struggle with are:
- Forgetting about this section in my portfolio
- Not being clear about when to sell
- Not sticking to my thesis and fair value estimates
Actually, this is quite ironic, because generally speaking I have the intent to first double my money and then sell my initial investment to play with the house’s money.
Hence, it shouldn’t be too difficult, right? Why don’t I just place my sell order and wait? If it was only that easy!
So yeah, let’s have a look at my returns so far and if this strategy is really something I should continue doing.
Let’s start with the good news!
I bought a single share in Google for $936 back in June 2017. Since then it has split its shares 1:20 and nowadays it trades at $126 ($2520 before the stock split).
This means it has more than doubled and therefore it’s time to take my initial money out again (I sold 8 shares on 5 June). It’s currently trading at a 23 P/E forward earnings so it’s not too richly valued, but at the same time, it isn’t cheap either.
Going forward, I have also taken the opportunity to set my buy order at $167 to sell the entire set of remaining shares. It would then trade at a 30 P/E and that’s what I would call a clear indication of overvaluation.
Then the bad news, because this one is giving me a headache!
I have been dollar-cost averaging all the way down from an initial small purchase of $230 to $137 in my last tranche. This all happened in the time span of 12 months during 2021.
After that, I also exchanged my US-listed $BABA shares for the Hong Kong listed shares ($HKG:998) to mitigate potential delisting risk. This was also part of a tax-harvesting exercise to mitigate a potential tax bill on some profits I had from options trading.
It’s June 2023 now and the $BABA shares are trading at $84 for a forward P/E of 9. In my opinion, these shares are still heavily undervalued, but the market has clearly got a different opinion about them.
Nevertheless, the hard fact is that I lost a lot of paper value in these shares and it’s still far away from my initial thesis of reaching $300 by 2024.
Going forwards, I’ll stick to my plan and let it play out until the summer of 2024. However, I might sell half of it again as part of tax-loss-harvesting in December if there are no signs of recovery in the shares.
Luckily though, my paper profits in Google cover most of my paper loss in Alibaba. But oh boy, what have I been wrong so far about $BABA.
This is my holding that the title of this blog post refers to, because it looks like I’m getting a second chance on this one.
I bought the first set of shares at ~$175 during the spring of 2018. It first dipped, but after that, it reached a peak of $376 during the height of the tech-craze in November 2021.
Needless to say, I can’t time the market, but at least I could’ve stuck to my rules. I had more than enough opportunity to configure a sell order at $350 to sell half of my position. But I didn’t.
Since then, it mostly went spiraling downwards all the way to $90 in November last year. At that time, I could only wish for it to recover to where it is now.
But honestly, in the stock market, you can really feel like a loser and a winner in a very short amount of time. It’s quite humbling when you think about it.
Having said that, $META currently trades at a forward P/E of 21 which seems to be fairly valued. I have therefore configured my buy order at $350. To me, this feels within reach if the market becomes a bit ahead of itself.
And let’s assume that this happens by December. By that time I would’ve had my shares for 5.5 years and that would mean a 13% compounded annual growth rate when applying the rule of 72.
This is not the kind of performance I signed up for by using this section of my portfolio. Maybe it’s unrealistic, but I was aiming to get at least a 16% CAGR out of this type of investing.
In any case, let’s just cross our fingers that it gives me a second chance and that it reaches the $350 mark this year.
I’ve written this post because this 10% of my portfolio is also part of my journey. Clearly, I have a lot to improve here and I can hear you saying already: “stick to dividends boys and girls“.
I know, I know.
In the end, this is to some extent the price I pay to satisfy my urge to invest in undervalued (tech) stocks. Some go to the casino, I throw it into $GOOGL, $BABA, and $META. I believe there are worst choices to make 😉
Going forward though, I will drop my 10% target as my overall portfolio continues to grow in size. 10% 5 years ago is not the same amount of money as 10% right now.
Therefore I have decided to cap my value investing section to 5.000 Euro and let it grow from there. Let’s see how it performs, but I really want to limit my exposure and risk to something I’m clearly not good enough at yet.
But don’t be mistaken, valuing companies using a discounted cash flow methodology is something that I will continue to do. It helps me in establishing the right buying zone and I don’t have the issue of when to sell. As you know, I simply aim to never sell (unless in case of dividend cuts, fraud, and dividend safety risks)
Last but not least, we are also talking about opportunity costs of buying non-dividend-paying stocks. In the meantime, I could’ve probably earned a 3.5% average dividend yield on this money.
That’s it from my side. It was a bit of a different post this time, but I hope to have inspired you by sharing my learnings.
Now tell me, are you doing something similar to what I do? If so, how has that been working out for you so far?
European Dividend Growth Investor