Saturday, 12 November 2016

The Minions (Millions) Mentality

Last week, I blogged about the minions in my portfolio, i.e. small, speculative positions in loss-making companies with reasonable chance of turning around. Although small, they have the potential to become multi-baggers. I also mentioned the advantages of minions, which are: (1) they serve as incubators for further investment should further evidence of the company turning around emerges and (2) "risk-free" positions to counter the high risks involved in investing in some companies and industries, such as the Oil & Gas industry. You can refer to Meet The Minions for more info.

However, the minion strategy goes beyond these 2 advantages. I discovered the mentality of investing like the rich. Because the amount invested in minions are relatively small, typically 1/3 the size of a typical investment in a profitable company, any price changes are fairly insignificant. In fact, as mentioned in my last post, the investment is mentally written off the moment they are purchased. Because of the relatively small size and also because they are mentally written off, there is no emotional attachment to the share price. Whether the price is down 10% or 100%, I could not care less. Contrast this with the largest holding in my portfolio which takes up 15% to 20% of my capital. When I first held such a large position, every 3-cent movement (equivalent to 1.5% price change) was enough to make me feel jittery. There is only 1 word to describe the lack of emotional attachment to share price: liberating.

Because I could not care whether the stock is down 100%, I also could not care whether the stock is up 100%, 200% or 400%! That was the case with MIT, which I originally bought at $0.066 and it went up to $0.285 for a 332% return on the purchase price. I decided that a 332% return was inadequate and held on for a 1000% return. Unfortunately, the price came back down to $0.165, with further drops likely after a series of disappointing results recently. Nevertheless, I had no regrets not cashing in on that multi-bagger and locking in a gain of 332% plus bragging rights for a 4-bagger.

One of my problems in investing is the inability to hold on to winners. This problem becomes more obvious as the stock approaches a 100% gain, which is the threshold for a multi-bagger and comes with bragging rights. Watching the stock price fluctuating just above and below the line is nerve-wrenching. On one occasion, I decided that I had enough of the jittery and sold for a 163% gain, only to watch the stock climb another 118%! In other words, I sold for double my purchase price, and the price doubled again after I sold! It was not a minion position and the amount of "lost profits" was staggering. The stock was Riverstone.

This is why I said that when there is no emotional attachment to the share price, the feeling is truly liberating. When there is nothing to anchor the share price, such as the 2-bagger threshold, the sky is the limit. The minions mindset also gives me a peek into how the rich treat their investments. Whenever there is a stock market crash, newspapers would tabulate how much money the billionaires in the world have lost. Yet, they never seem to want to sell their massive shareholdings in the companies they founded or owned. When the stock market recovers, these billionaires made much more money that they had lost in the crash. They are in the top 10/100 billionaire list for a reason: they never sell. Had they sold at the top of the stock market, they probably would not be in the list for much longer. The dividends from the stocks they own are way more than sufficient to fund their lifestyles. There is no need to sell the stocks to protect the value from dropping in a stock market crash. In constrast, retail investors like myself are always looking to protect the value of our investments. If someone were to tell me with 100% accuracy that tomorrow's stock market would crash, I would sell a majority of my stocks. (Actually, if you read my blog, I do think that a crash is coming, and I'm 50% in cash. Thus, you can see that I am still a very long way from adopting the mentality of the rich).

The minions might be small and insignificant. But they have important lessons on how to make millions. I have certainly learnt a lot from them.

P.S. As I'll be overseas next week, I would not be able to respond to your comments until I return. Appreciate your understanding.

No comments:

Post a comment