How to Fail at Most of Your Stock Selections and Still Win Big?

Envision Portfolio Review

Scott Adams, the author of How to Fail at Almost Everything and Still Win Big, underscores the value of systems over goals. He argues that while goals provide short-term direction, a well-crafted system ensures long-term success. The concept of 'Managing Your Odds for Success,' has profoundly influenced my approach to portfolio management. In the world of investing, where the average investor frequently faces losses due to poor stock selections, the real challenge lies in overcoming a high rate of errors to achieve substantial long-term success. In this discussion, I will detail adjustments to Envision portfolio and demonstrate how, despite making several stock selection errors, investor can still attain substantial long-term success. I'll start by outlining recent adjustment to my portfolio, which involved liquidating 'Tune Pro' and waiting for an opportune moment to invest in 'QES.' Meanwhile, allowing other stocks to remain and letting the winners run.

Why I decide to sell Tune pro? 

The latest quarter report, Tune pro General insurance revenue decreased by RM102.8 million in YTD 2023, primarily due to an adverse impact of RM43.6 million from non-redemption of PTV and a decrease of RM59.2 million in the Fire, Marine Hull, and Onshore and Offshore Oil-Related segments. The GWP mix for commercial shifted from 39% in FY20 to 8% in FY23. However, the decrease in commercial revenue was not compensated by the (1)lower growth rate in the overall segment, especially in GWP growth in lifestyle (the main segment), during the 3-year transition period. The combined ratio remains high at 102.7%, with the inclusion of the Tenang policy. And dependence on third parties for growth, such as AirAsia and other airline partnership, has led to a (2) lack of pricing power in long term.

For the first time revealed the revenue from (3) white-label products B2B platform, though growing from 4.5M or 1% of total insurance revenue in 2020 to 11.9M or 3.18% in FY 2023, remains insignificant to impact the total insurance revenue over past 3 years. The B2B platform market size doesn’t have a huge revenue and profit contribution to the group. The rising competition from Touch 'n Go app, especially in lifestyle insurance segment, poses a significant challenge. As Touch n go holds a more substantial moat and advantage over Tune, with its app functionality expanding more rapidly and offering a more user-friendly and well-integrated experience than Tune's app. In conclusion, although the share price may recover, it will take longer time. (4) Their moat is at risk in near future, and slower growth represents a (5) considerable opportunity cost to investors investment return.

In short, the main decision to sell is driven by reduced efforts to sustain profit margins and weaken competitive advantage. The company after 3 years restructuring is not getting better that I previously thought. These factors suggest the stock is unlikely to achieve 10x gains. Accordingly, I will liquidate all my position. This action aligns with my selling principles: sell when a company's competitive position weakens and then reallocate resources to alternatives offering better quality and higher safety margins than the current investments. 

This is what I call a stock selection SYSTEM to eliminate the losers and let the winners run. The quarterly review serves as a refining process to identify the true winners. Howard Marks, the legendary investor, often uses the example of a lottery ball game with a fixed number of balls inside. The more you draw the balls, the more you understand what is left inside, enabling you to place bets when the odds are in your favor. The more you know about the company, the better you can assess the odds of it becoming the next 10X investment.

Why opt for QES? The decision is informed by two main factors:

Cycle Positioning: Currently, we're observing an upward trend in AI infrastructure, notably in data centers. This trend is poised to extend to IoT devices and networks shortly. Positioned within the Semiconductor and E&E sectors, QES stands to significantly benefit from these developments in the near future. For more in-depth research, please refer to the link below. I am awaiting the optimal timing to invest, likely between the second half of March and April, a period typically characterized by seasonal weakness, as indicated by four bullish cases that match the conditions.

Value Investing: QES's valuation underscores its solid fundamentals and exemplary management. Targeting a minimum 26% annual return to double our investment within three years—and eyeing a tenfold increase within seven—necessitates acquiring shares at a minimum 50% margin of safety. This strategy is designed not only to double the investment upon reaching its fair value but also positions us well for substantial returns, given QES's long runway in the small-cap ATE market. The current share price of QES presents an enticing opportunity for a tenfold return, enhanced by the potential for additional gains.

Referring back to my previous analysis:

>The Snowball Effect to Uncover 10X Stock Opportunity

 How can one still win big with a higher failure rate, when most selections fail?