Whats A High Conviction Idea Worth?

[Gregmal]

Thought this would make an interesting topic. 

 

Theres good ideas, and then there's punch card ideas. I think any reasonably capable investor, if they sit down for an hour, can find ideas that are good enough, and actionable enough to make money. But those are just general ideas, hardly bet the farm type ideas. 0-3% allocations. However, every so often, we all come across a company, a sector, a theme, or just a super high probability setup where you know you're going to make money. My question for folks is, whats the most % wise you've put into a high conviction idea, and whats your typical high conviction allocation?

 

For me, I think if you're not doing at least 5%, but probably at minimum 10%....you're wasting your time. You can compound 1-2% ideas at 50% annually and your still not going to get rich any time soon. But generating alpha on 10%+ positions gets things done. A once every couple year type idea I'll generally be comfortable going up to about 40%. But average, 1-2 type situations a year, Im generally in between 10-15%. The only things I weigh when doing this are probability of a profitable outcome, and cost to fund the idea. For example, a SPAC at 9.80 may take 18 months but is a guaranteed 2%. To me, a waste of time because my Margi costs 1% and the net IRR sucks. But Berkshire at $230 with any decline a buying opportunity means buy hand over fist. Or FRPH cruising into a decade long tailwind trading still at covid prices. Or ALCO trading flat for a decade and at a 20% discount to a 2013 change of control deal despite the core biz about to inflect at 10x earnings and the land value going parabolic. These are 12-40% allocation ideas Ive put on in the past 12 months. Curious how others express themselves when they find a money tree.

[hasilp89]

Def an interesting topic. Probably a different conversation for me as I’m not LS and don’t know much about the strategy. Curious how you think of things on that front - 12 names at 40% (assume not all at the same time) but you must running a pretty large short book?

 

I try to be at least 5-10 on anything I’m planning to hold. Ill do 1-5 for things that are asymmetric (by my calculation). I have gotten up to 20 for Stelco, 15 for DPZ and above 30 for gtx after the rights offering. Generally agree with you though and am actively trying to be more concentrated. As Buffett says “Very few people have gotten rich on their seventh best idea.”

[BG2008]

42 minutes ago, Gregmal said:

Thought this would make an interesting topic. 

 

Theres good ideas, and then there's punch card ideas. I think any reasonably capable investor, if they sit down for an hour, can find ideas that are good enough, and actionable enough to make money. But those are just general ideas, hardly bet the farm type ideas. 0-3% allocations. However, every so often, we all come across a company, a sector, a theme, or just a super high probability setup where you know you're going to make money. My question for folks is, whats the most % wise you've put into a high conviction idea, and whats your typical high conviction allocation?

 

For me, I think if you're not doing at least 5%, but probably at minimum 10%....you're wasting your time. You can compound 1-2% ideas at 50% annually and your still not going to get rich any time soon. But generating alpha on 10%+ positions gets things done. A once every couple year type idea I'll generally be comfortable going up to about 40%. But average, 1-2 type situations a year, Im generally in between 10-15%. The only things I weigh when doing this are probability of a profitable outcome, and cost to fund the idea. For example, a SPAC at 9.80 may take 18 months but is a guaranteed 2%. To me, a waste of time because my Margi costs 1% and the net IRR sucks. But Berkshire at $230 with any decline a buying opportunity means buy hand over fist. Or FRPH cruising into a decade long tailwind trading still at covid prices. Or ALCO trading flat for a decade and at a 20% discount to a 2013 change of control deal despite the core biz about to inflect at 10x earnings and the land value going parabolic. These are 12-40% allocation ideas Ive put on in the past 12 months. Curious how others express themselves when they find a money tree.

 

Before this turns into a circle jerk for FRPH.  I'll say this.  FRPH was a 23% at cost for me in late 2016.  Sold everything in 2018 when it traded at about 85-90% of NAV.  Last year, let's just say it is a more than 23% after it became obvious that 1) 40% of market cap is in cash.  2) Dock 79 and The Maren leasing well.  3) Possibility of infrastructure plan 4) Homebuilding surprisingly strong 5) and good management team that I know for 6 years 6) Share buyback at 50% of NAV roughly and 7) Good thematic play on homebuilding, DC MF, and infrastructure.  It is not a 5 bagger.  But it is back the truck up and buy hands over fist.  Imagine if there is a billionaire family in your town with a diversified collection of asset.  They go "hey, you can buy into my portfolio at 1/2 price." This is the situation.  It's not a 10 bagger like Carvanna from March 2020 lows.  But when MLM, Vulcan, and even US Lime have all hit all time highs and EQR and Avalonbay hit high and you can still pick it up for low to mid $40, you just have to be greedy and back up the truck.  Greg and I probably put 30-40% of our net worth into our first private RE property.  That's with leverage and single tenant concentration likely.  Here you can buy a good portfolio with little leverage, 40% excess cash and a good operator.  That was the moment.  

 

These are rare.  Unlike Pupil and Greg who seem to be able to find multiple companies.  I am a little stunted. I can only find 1 company a year.  Typically 2-3 year doubles. But I tend to bet over 10% each time.  

[SharperDingaan]

The more concentrated you are, the less 'buy and hold' you are - as every concentration is a core position, PLUS a trading position.

Margin used to work down average costs, and paid down from trading gains.

 

Very few people are immune to the excitement when their 'conviction' is playing out.

You have the trading position for a reason.

 

And while the ideas are rare .....

they are a lot more frequent than one might think.

 

SD

 

Edited July 24, 2021 by SharperDingaan

[Gregmal]

50 minutes ago, SharperDingaan said:

The more concentrated you are, the less 'buy and hold' you are - as every concentration is a core position, PLUS a trading position.

Margin used to work down average costs, and paid down from trading gains.

 

Very few people are immune to the excitement when their 'conviction' is playing out.

You have the trading position for a reason.

 

And while the ideas are rare .....

they are a lot more frequent than one might think.

 

SD

 

I feel like this entire comment is so on the money the only thing to do is +1 it. 

 

And to @BG2008 points, yea...I definitely think RE is a great way to wade oneself into the unraveling of many popular misconceptions about debt and concentration. I also think the people who are afraid of concentrating in a stock do so out of lazily accepting a narrative. "Its just a stock"....Well, when you get down to the nitty gritty, if you're able to conceptualize your ownership as assets...same as privately owning a SFH, this sort of mentality gets put to rest. The key of course is to make sure its bulletproof...no lingering liabilities or debt that can take your asset away, no albatross obligations, etc. But its one of the reasons I tend to stay focused on small caps. Its easy for me to internalize owning 900 acres of an MPC and the water rights with PCYO. Fuck if I know deep down what I really own with some $10B+ software company who issues stock like its going out of style. Thats why one could be a 20% position and the other might just be 2-3%. 

 

Also to SDs point, I consider myself kind of the king of the 25-50% move, but outside of the MSG universe and HTL....couldnt hit a real compounder/multi bagger to save my life in terms of doing so with a 5%+ position. My way of compounding is basically taking 10-20% and going from(just using last year as an example) GRIF 35-50, to ESRT from 7-10, to AIV from high 4s to low 6s, to ALCO from $30 to 40s....I just dont have the skill or the vision others have in that area to see how tech co ABC goes from 14 to 400 over 10 years. 

 

Also important I think for folks with concentration is to leave money out of it. Investing really is about odds and percentages. Its the same as playing poker. If you react to the amount of money being bet, you'll suck a fat one. If you react to what the setup and probable outcomes are, you'll do well. Too many people get mental when they start thinking in terms of "six/seven figure amount of money" vs, super high probability 25% allocation. 

 

Just some thoughts. Good commentary so far. 

[RVP]

Assuming appropriate skill and understanding, I think as much as possible (even 100%) if you can gain full control and the company's capital allocation destiny is in your hands. Otherwise, 10% - 30% tends to be the sweet spot for me. And I try to frame the idea through the lens of a recessionary/ depressionary environment, not vs. whatever the opportunity set may look like today.    

[hasilp89]

8 hours ago, Gregmal said:

Well, when you get down to the nitty gritty, if you're able to conceptualize your ownership as assets...same as privately owning a SFH, this sort of mentality gets put to rest. The key of course is to make sure its bulletproof...no lingering liabilities or debt that can take your asset away, no albatross obligations, etc. But its one of the reasons I tend to stay focused on small caps. Its easy for me to internalize owning 900 acres of an MPC and the water rights with PCYO. Fuck if I know deep down what I really own with some $10B+ software company who issues stock like its going out of style. Thats why one could be a 20% position and the other might just be 2-3%. 

Definitely agree with this, wouldn’t you say that the other key (along with being bulletproof on the downside) is ensuring management is going to make sure the $ accrues to owners. Ie I assume you’re very comfortable with PYCO because if you personally owned it you would do x which is exactly what mgmt is going to do if not x+1. Maybe this is a given, but important to me in determining what to own in a concentrated portfolio.

 

[JRM]

For me, anything over a 15% position must pass the test of 'would I be comfortable putting 100% of my net worth in this investment\asset for the next 10 years' (without the ability to sell in the interim).  This includes smaller positions that grow into larger ones.  

 

My highest conviction idea ever was Apple in 2012.  I put 2/3 of my net worth in AAPL at the time.  I made a bunch of rookie mistakes, and I learned a lot of valuable lessons.  My position size was way too big.  I couldn't handle the volatility, and I ended up selling most of the position at the wrong time.  I sold the rest way too early, as well (right after Buffett started buying).  Apparently I was dumb and decisive at the time because the rest of my capital (and some margin) went towards a basket of utilities.  Sold those way too soon, too.

 

I also think of cash as a position.  My cash balance has grown to around 15%, and it's starting to make me nervous because it doesn't pass the test stated above. 

[DooDiligence]

1 hour ago, JRM said:

For me, anything over a 15% position must pass the test of 'would I be comfortable putting 100% of my net worth in this investment\asset for the next 10 years' (without the ability to sell in the interim).  This includes smaller positions that grow into larger ones.  

 

My highest conviction idea ever was Apple in 2012.  I put 2/3 of my net worth in AAPL at the time.  I made a bunch of rookie mistakes, and I learned a lot of valuable lessons.  My position size was way too big.  I couldn't handle the volatility, and I ended up selling most of the position at the wrong time.  I sold the rest way too early, as well (right after Buffett started buying).  Apparently I was dumb and decisive at the time because the rest of my capital (and some margin) went towards a basket of utilities.  Sold those way too soon, too.

 

I also think of cash as a position.  My cash balance has grown to around 15%, and it's starting to make me nervous because it doesn't pass the test stated above. 

 

Having some FOMO cash keeps me from selling something (that I shouldn't) just to generate some FOMO cash.

[SharperDingaan]

Just to add  some take-aways.

 

Concentration. 20% on purchase (day-1) is the size of the pile of sh1te you bought. 20%, 9-months out, means your pile has grown at the same rate as the rest of the portfolio (ie: you've failed). You took on risk, the pile has to grow FASTER than the portfolio; all else equal - 9-months out, it should be MORE than 20% of the porfolio.   

 

Day-1 weights understate. Most times you are going to have to average down, materially raise the concentration, and pay for it with margin. After which you will sell enough at your now lower cost-base to repay the margin; many months from now. Typically NOT a topic in any 'diversification' discussion!

 

Round trips. A trading position allows you to round trip, and the gains can be taken out in EITHER cash, or a HIGHER share count. The same investment divided over more shares, lowers the cost base.  Withdrawing cash lowers exposure to the name, and enables deployment into the 'next' idea.

 

Every dog has its day. What are you investing in today, so as to be where you would like to be in 3-4 years? Ideally tommorrows stars are todays dogs, and cheap! Hence your 'new' 20% positions should really be in these, they should be paid for out of recycled risk capital, and existing positions funded from house money. Obviously, some trick!

 

Good luck.

 

SD

    

[Ice77]

2 hours ago, JRM said:

 I couldn't handle the volatility, and I ended up selling most of the position at the wrong time.

 

For me this is the single biggest challenge to sizing big (30-50% of your liquid portfolio at cost). In any given week or month on its way to price discovery, the price may move 10-20-30% against you for any justified or unjustified reason and that 3 to 15% M2M erosion of liquid networth can feel brutal even if mentally you treat it as just a paper loss. I can tell from experience that it gets easier after the first time you've done it successfully and especially once it moves significantly in the money (for whatever reason our minds can handle house money loss a bit better than dips in original capital..Hence the preponderance of sell half on double regime among many). And I WOULD NEVER size that big on Margin unless you have special funding that can't be withdrawn/terms changed easily. Otherwise it is just crazy talk. 

 

There is a second aspect to it that is not well understood even if patently obvious. It is far easier to find a 2x than to find and ride a 6x or a 10x. So investing big in a "sure" 2x is preferable to investing peanuts in a probable 5-10x move. The $ impact is not dissimilar even if ROI on the ideas are different.  

 

Finally, black swans by design are not predictable or measurable. Look at TAL the Chinese education company that is generally perceived as a solid company but has fallen more than 90% in this Chinese tech crackdown. One fine day the CCP decides to render a large part of the industry not for profit. So you have no idea of knowing your specific unknown unknown that could render a business worthless overnight or put it in heavy distress. You just can't. The only remedy is to be prepared for the worst case which is a total loss of the capital (even if completely unlikely). If that outcome is not palatable for your individual context then don't size as big. 

 

 

[Gamecock-YT]

I think a lot of it comes down to how you function as an investor...are you able to trade in and out of positions or are you someone that wants to see the thesis play out. Myself, I struggle to sell and tend to go down with the ship so I need to focus on staying away from cyclical plays. But when I see something that passes my standards, I need to make a big swing. I kind of like what altarock does with large, infrequent bets and just letting the position sit. Right now I try and focus on having around 6-7 positions with around an equal weighting so somewhere between 15-20% each. I used to play around with the 3% punts but I've found my standards drop and I'm not as focused as when I'm going to put a big position on. 

 

Lots of different ways to skin a cat, ultimately you have to understand yourself and find what works.

[Gregmal]

4 hours ago, hasilp89 said:

Definitely agree with this, wouldn’t you say that the other key (along with being bulletproof on the downside) is ensuring management is going to make sure the $ accrues to owners. Ie I assume you’re very comfortable with PYCO because if you personally owned it you would do x which is exactly what mgmt is going to do if not x+1. Maybe this is a given, but important to me in determining what to own in a concentrated portfolio.

 

I think it depends on a few things. Mainly, your time horizon for the trade and also secondarily the liquidity of the investment. For instance, there was some concern about ESRT management when I made that investment. I found that to be misplaced, but nonetheless ultimately figured that given the dynamic of what was occurring in the world, and the uniqueness of the ESRT assets, that a 1-3 year investment didnt need a good management because at such depressed valuations, some value could be destroyed and it could still work out. 

 

Also, I think how good or capable a team is, is largely subjective. Theres the upper 5%, IE the Buffetts, Bakers, Lourenco Goncalves types....and there's the lower(won't name names)...but most companies fall in between. I used to speak with management teams and NEOs all the time. But its a waste. No one tells you, hey Im a scumbag just looking to line my pockets. They all generally say the right things and by nature, even the bad ones, spend most of the time doing the right things because why not? Its only in rare situations where theres a conflict of interest that can cause a lot of damage, IE making a terrible acquisition just to grow the size of the company, issuing shares, etc....So while I look for management Im comfortable with, IE PCYO Mark Harding is a boss....I dont place as much weight on it as you would think. I mean perfect example is Dolan....hes so polarizing. Tons of people run their mouths about Dolan in a negative way, however when pressed for examples of bad behavior...I haven't heard anything of merit...What? He's an asshole to Charles Oakley? Whereas I can name tons of things he s done that put him in elite company in terms of creating value...nevertheless, maybe the haters are correct? Hard to tell and ultimately, when I look at MSGS(another 10%+ position for me) I just see the Knicks and Rangers as indestructible, one of a kind assets that even an idiot cant destroy. 

[Libs]

Greg, I think you are in your 30's, so it's entirely rational for you to swing big. You can easily make it up if you're wrong. I had a cast-iron stomach for risk... but at 59 my max is now just 10%. You know the saying of old golf pros- " I left an ounce of blood in every hole." After so many three-foot par putts, their nerves aren't what they were. That's me. Having a 40% position tank would probably rattle me now. And, I've had enough surprises to wonder if there are many 'sure things.'

 

I'm in awe of bartenders who will bet their last $1,000 on a horse, and investors who will risk their retirement on a single position.

 

Great topic.

 

Edited July 25, 2021 by Libs

[SharperDingaan]

'Every dog has its day. What are you investing in today, so as to be where you would like to be in 3-4 years?'

 

Tombstone marker. It is periodically usefull to side-pocket 'vintages'. Simply because current/near term investments in portfolio A, and the 3-4 year stuff in portfolio B; require very different approaches and controls. Most people will also perform far better if their original capital is kept within some range - typically the cummulative initial contribution to portfolio B. Total cost of portfolio B, MINUS round trip gains invested in additional shares, about equal to the optimal capital limit. Thereafter, dividends/sale proceeds pulled out and either reinvested in FI, repatriated, or fed into the next 'vintage'  Repatriation to repay debt, simply being FI investment done a dfferent way.

 

Different approach.

 

SD

[Xerxes]

My 2 cents,

 

My largest holdings are not high conviction idea, rather they are your-conviction-level-does-not-matter

BAM, BRK, AMZN etc.

[IceCreamMan]

On 7/23/2021 at 6:44 PM, Gregmal said:

A once every couple year type idea I'll generally be comfortable going up to about 40%.

 

Some folks might find this interesting:

 

https://en.wikipedia.org/wiki/Kelly_criterion