Photo by Hendrik Morkel on Unsplash

Published on January 27, 2022

It’s that exciting time of year after taking stock of 2021 and planning for 2022. Hopefully, we’re all a little wiser and still motivated to improve and set up new investing goals. Markets-wise, 2021 was probably a better year than 2020 for most. There was no massive drawdown at the beginning of the year, and fiscal and monetary policies were accommodative and in sync through most of the year.

Still, there is room for improvement. I have spent the past couple of weeks reviewing my performance, trades, and journal entries from last year to better understand what went right, where I messed up, and how I can do it better in 2022. Hopefully, sharing this exercise can inspire and motivate you to consider similar practices.

Today, I’ll cover:

  • 2021 priorities from last year’s post and whether I achieved them
  • Investing goals for 2022
  • My useful statistics from 2021

Before moving on, I want to highlight the five tips I gave in last year’s post. They’re still very relevant today and worth a refresher!

The Achievement of 2021 Priorities

Setting goals only matters if you hold yourself accountable. So, this is my attempt to do that publicly for my investing goals in 2021. They were as follows:

  • Create a Framework for Investment Diversification
  • Learn to Trade Around Core Positions
  • Eliminate Outsized Losses Through Trading Small and Scaling

Create a Framework for Investment Diversification

Status:  Failure (but improving)

Honestly, I feel like I have improved here without deliberate practice. I still do not have a formal system for allocating between ideas and strategies, but my portfolio is more broadly diversified than it has been in some time.

Regarding investment diversification, I have been allocating more to non-long equity exposure via futures, fixed income, and options than I have in the past. In addition, with more tools in my kit, I have adapted and taken advantage of specific viewpoints that would have been difficult to express with equities.  

On the framework side, I have taken to heart the quadrant investing map approach taken by many research providers. Like what we talked about in the earlier posts on cycles (here and here), the idea maps out changes in inflation and economic growth and recommends a series of sector and asset class exposures based on what quad an economy is. If you’re looking for more on this, check out Hedgeye listed in the resources section of this website.

This has become my informal framework for allocations. Still, I have more work to do in creating more rules around shifting allocations, particularly as it relates to single stock selection and the weightings of positions within a particular quad/regime/part of the cycle.

One point to add here is that it’s difficult to test any change in the process when the investing backdrop doesn’t change. Because 2021 was the same regime throughout the year, it’s been difficult to verify if my adjustments have made an impact.

Learn to Trade Around Core Positions

Status:  Failure (but with a solution to fix!)

Wow, this has been hard to achieve, even if it is more of a journey than a destination. As we’ll see in my goals for 2022, I have made the most challenging aspect of this an investing goal for 2022 after understanding where I was having problems.

In hindsight, it should be evident that a value investor should have no difficulty adding to positions, even if they’re going against them. It’s the selling into the strength that’s the problem.  

It’s an asymmetry of urgency. I always feel like I can take my time selling because things are moving in my favor. On the other hand, the pain of a loss forces action. Now, if I want to put on my excuse hat, I often delayed trimming winners with my travel this year because I was not in a “convenient” spot to place an order. It was a lack of urgency with a seemingly bulletproof excuse.

Eliminate Outsized Losses through Trading Small and Scaling

Status:  Qualified Success

The most significant evidence to show the achievement of this goal is that no realized loss on the year amounted to more than 50bps of NAV. This 50bps loss was a trading position where I got offsides and bent my risk limits. Other than that one trade, everything was relatively controlled. I increased my risk limits per position by 20% across the board in the third quarter after things continued to perform well.  

I qualify this success for the same reason mentioned in the first goal. Generally, this was a good year, so we’ll need a change in the backdrop to see if what I have done can handle a drawdown.  Ironically, we’re sort of in the middle of one now!

Overall Assessment

I had mixed success (at best) in achieving my goals last year, but I also realized that my goals did not have clear metrics to establish how and if I’d completed them. That said, I think I’ve improved my process, but we’ll have to see how these improvements hold up in more challenging markets.  

Investing Goals for 2022

Now that we’ve reviewed 2021, what am I focusing on this year?  Here are my three priorities:

  • Learn to Trim Winners, Especially Shorts and Commodities
  • Not Switch Why I Own a Position
  • Branch into Different Futures Trading

Learn to Trim Winners, Especially Shorts and Commodities

In reviewing shorts and commodities trades, I discovered I rode a bunch to a profit only to watch them give back a lot and then get stopped out.  There were no significant losses, but I gave away most of my earnings.  

In the case of commodity names, I gave myself a wide berth given the volatility. Unfortunately, this meant that, rather than getting chopped out quickly, I got stopped out, typically after the reversal of a significant gain (typically 20-30bps of NAV). That sucks.

My risk management is working, but I need to develop the discipline to trim on big up-move days to make positions more profitable.

There were plenty of days in uranium this past year where this would have been helpful, and to be fair, I did try. However, more times than I would care to admit, I tried to squeeze a few extra cents out of each share and did not get filled. Paladin Energy (ASX: PDN, OTC: PALAF), I am looking at you!

I don’t have a complete process for systematizing such sales, but I plan to experiment with it this year.  

Not Switch Why I Own a Position

This error is as old as time. Trades often become investments when they do not work; we hold them longer than initially planned. Then, they become marginal trades.

I had no outsized losers from doing this, but one of my most significant realized losses was from converting a trade in Sberbank [MOEX: SBER, LSE: SBER, OTC: SBRCY) into an investment.  I stuck to my risk budgets, BUT I could have reduced the losses by keeping the position in the trade bucket.

I added a minor position in SBER based on a pullback in share price. I denoted this a trade simply because the multiples no longer indicated a value investment. Technically, it was worth a punt as the chart had suggested a breakout. 

More importantly, there were precise technical levels that, if broken, would have suggested a broader breakdown and not a dip as I had thought. I foolishly did not set my stops at this level or size my position so that my risk budget aligned with that level. The position cleared that level, and I did nothing. Fortunately, I realized the error and got out before hitting the max risk budget. Still, it was an unforced error.

I will fix this by forcing myself to label a position as an investment or trade and making sure my risk management is adjusted accordingly.

Trade at Least Two New Types of Futures Contracts

So far, I have kept my futures trading to interest rate contracts like Eurodollars. This year, an investing goal is to trade two new types, forex and commodities.

I am seeing the case for forex futures as a way to bridge my current inability to trade fixed-income securities in specific emerging markets. Futures permit one to play these markets differently without opening an account in that country.

Like the roll in interest rate products, the roll in FX futures produces a form of income. If a country has favorable interest rates, it should have a backwardated curve (remembering that the quotes are dollars per unit of foreign currency and not the standard convention). Thus, assuming spot rates do not change, you get paid to own the contract—the greater the local interest rates, the greater the carry. I have covered several currencies on this blog where this might be a good idea.

For commodities, it’s as simple as trying not to overcomplicate things. As someone who grew up in the fixed income and equity markets, additional risk was taken to find groups or individual stocks to play a particular commodity theme.  

If the group of names was diverse enough, you could eliminate the idiosyncratic risk, but that is not always easy. Why not just buy the underlying commodity? While futures carry a different set of risks (timing and shape of the curve being the most obvious), that trade can make sense.

In the end, these are all just more tools in the tool belt.

Castaway’s 2021 Log

To close out, here are some general stats for year-end 2021. As I mentioned, they’re not terrible, but there’s room for improvement. Therefore, I am stripping down the statistics this year to focus more on process items.

  • Win% Current Portfolio:  70%
  • Win% All-Time Exited:  54%
  • Win% 2021 Exited: 73%
  • All-time Gain to Pain Ratio:  1.37
  • 2021 Gain to Pain Ratio: 9.43
  • # Exited Trades in 2021:  56
  • Average Time Held Portfolio:   0.87 years
  • Average Time Held Exited:  0.38 years
  • Median/Average Position Size:  3% / 5%
  • Positive Unrealized Performance from Uranium, Russia
  • Negative Unrealized Performance from Interest Rate Volatility, Turkey
  • Best Closed Trades of 2021:  CTA, Mytilineos (partial), Paladin (investment)
  • Worst Closed Trades of 2021:  Eurodollars, Sberbank, Paladin (trade)

I am struggling with how to right-size positions. My average holding period has gone down with the trimming of Mytilineos and my exit from my CTA position. Last year was a positive environment, and I feel a down year is a necessary crucible to test whether the process-oriented work I’ve focused on has made any real difference!

Conclusion

Hopefully, my review has helped you identify your weaknesses and set your own investing goals for 2022.

Best of luck in the new year!


The Castaway Capitalist

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