Strategy Adaption & New Ideas

[Blake Hampton]

How has your investment strategy changed throughout your life? I see a lot of older people posting on this forum and I find it really interesting that there are some of you that have played this game for many more years than I have. For context, I am a 21-year-old accounting major that has been studying investment for only about two years now. I seem to have new ideas about my investment strategy every day, I can only assume that other people on here are the same. I used to primarily look at book value but now believe earnings to be the most important factor regarding an investment. This is of course if both the balance sheet and management support the company behind given earnings. For some of you experienced investors, I'm sure that this seems very trivial. For me however, it was a breakthrough. I'm wondering what are the eye-openers some of you have had, either recently or in the past, that have changed your view on investment. Being that there are many that haven't experienced an investing environment outside of the low rates in the recent past, adding age for context would be nice. But of course, you don't have to.

[Luke]

That megacaps have a way harder time moving the needle than smaller companies. Imagine what Apple has to Spawn to increase their Marketcap by 10%, a 200b Valued Business. Sure they can do it and they have a massive audience but the returns are just way harder to achieve on that Level. Too much focus is on the big names and i worry there is not as much growth left as the market thinks

[Blake Hampton]

1 hour ago, Luca said:

That megacaps have a way harder time moving the needle than smaller companies. Imagine what Apple has to Spawn to increase their Marketcap by 10%, a 200b Valued Business. Sure they can do it and they have a massive audience but the returns are just way harder to achieve on that Level. Too much focus is on the big names and i worry there is not as much growth left as the market thinks

You’re definitely right. I find myself analyzing multiple billion dollar companies when I can just look at something smaller that is selling way cheaper, plus the additional runway for growth. It might be because the bigger ones are the spectacles that you hear all about in the news.

[Blake Hampton]

Also Apple is selling at more than 29x earnings. Buffett kinda hailed them at Berkshire’s meeting but they still seem very expensive. What do I know though.

[Sweet]

3 hours ago, Luca said:

That megacaps have a way harder time moving the needle than smaller companies. Imagine what Apple has to Spawn to increase their Marketcap by 10%, a 200b Valued Business. Sure they can do it and they have a massive audience but the returns are just way harder to achieve on that Level. Too much focus is on the big names and i worry there is not as much growth left as the market thinks

Don’t you own Amazon?

[Luke]

26 minutes ago, Sweet said:

Don’t you own Amazon?

I do own megacaps and I think the same phenomenon applies to amazon too. I think regarding amazon or tencent, the runway is still big enough for shareholders to profit but the bigger the marketcap and the more expensive, the more risk and less upside (quite the nobrainer ok) Just as a general mental model i think its good to consider marketcap in that way. 

Edited May 7, 2023 by Luca

[SharperDingaan]

A few 'investment' words from an accounting 'heretic' ... coming up on conventional 'retirement' in a few years.

 

'Investing' is nothing more than managing the chequebook. Run your business/life well and there will be ongoing positive cashflow from operations, to put into either growing the business, or paying back to yourself. You can grow the business as cashflow allows, borrow/repay to expand the business quicker, or borrow/acquire to achieve scale, efficiencies, and diversification; and along the way, you will have to hire and rely upon people. As an 'investor' you get rich by trading the shares of companies managed by other people, as an 'accountant' you get rich by building/running those companies. For proof, look at the traditionally ethnic big trades and building companies in your community... and who owns them.  

 

The good accountant, plans today for where the company should be 4 years out, and executes according ('Strategic Planning' in MBA school). The accountant brings independent thought, a longer term mindset, expectation of continuous change/cyclicality, and a plan by which to grow todays tiny enterprise into something much mightier. Add an investment background to this (CFA) and you get both very good risk management, and ability to take on the inherently risky without the commensurate inherent risk. Todays fleet of 1, becomes tomorrows 3, and 8 the day after. 

 

The good accountant is also a master at the accounting 'fiddle'. That 'how to knowledge' allowing a rapid 'look through' the numbers to reality, ability to detect 'smell' many quarters away, and ability to assess the essentials on little more than a napkin. It's often very entertaining, and if there's also an options market .... both refreshing and very rewarding! Accounting and finance are friendly rivals, but different 'tribes' on either side of the same coin. Each sings its own song and manipulates popularity metrics to its own ends. 

 

Your first few 'jobs' will set your 'circle of competence'; simply because to invest successfully in sausages, you need to have worked in a sausage factory. At the entry level, that factory could be anywhere in the world, so take advantage; whether you choose to stay in that industry, or move on - that 'inside' knowledge stays in your head. Thereafter, YOU are the critical asset; and the more effectively that you can apply your toolkit, the more valuable you are. Demonstrate the chops/ability, and the money will find you; there are lots of investment dollars in the world, but talent? ..... not so much!

 

Good luck! ...  after your first million, habitually donate something sizeable to a charity every year.

 

SD

 

 

 

 

 

 

Edited May 7, 2023 by SharperDingaan

[Sweet]

1 hour ago, Luca said:

I do own megacaps and I think the same phenomenon applies to amazon too. I think regarding amazon or tencent, the runway is still big enough for shareholders to profit but the bigger the marketcap and the more expensive, the more risk and less upside (quite the nobrainer ok) Just as a general mental model i think its good to consider marketcap in that way. 

Yep, makes sense. 

[Libs]

Blakehampton,

 

You are wise to ask this question at such a young age. When I was 30, just starting out, I was naively running my thumb down a list of P/E's and declaring Washington Mutual a great bet because it was only 8X earnings. I thought that was all that mattered. My point is, you're going to learn a lot about how to value  stocks; it's not going to be just cash flow or just the balance sheet. It truly depends on the company and industry.

 

I'm 61, and have been doing this for 31 years. Lots of lessons learned along the way, tons of mistakes, but it's worked out very well (unless I blow it in the home stretch).

 

Here are some specific things I've experienced.

 

1) I lost 25% of my net worth in one day in a single stock. Turned out instead of selling used cars in to Africa, it was a an arms-smuggling operation. The whole thing was too good to be true, of course.....the numbers were made up. I still feel like an idiot admitting to it today. I had gotten caught up in group-think and wishful thinking. 

 

2) Many years later a company called Valeant had, in their reports, a table showing the growth of some of their divisions, or possibly their recent roll-ups. It doesn't matter. What matters is how they presented it. It went like this:

 

division / growth

 

A 20%

B 30%

C 15%

D 1%

E  22%

------

Avg = 18%.

 

Sounds great, right? Except Division  D was huge and dwarfed the others in size. The weighted average, which is what matters, was really like 3%! Had I owned that stock I would have sold it right there, based just on that piece of chicanery. And it did collapse from fraud. I guess I had learned something...

 

3) I was poking around XPEL and found a post where someone described their moat. It all suddenly made sense to me. I did some modest industry checks that confirmed it, and voila, a few years later it was a 70- bagger. You never know, if you read enough, where you will find that nugget of info that clinches the idea for you. It might even be Jim Cramer ( I know, I know).

 

General lessons, mostly learned the hard way:

 

1) There are some people on this board who can make you rich if you learn from them. The posted stock ideas are a great place to see how ideas are vetted.

2) Never buy a stock based on a guru. Always do your own DD, or you will have weak hands and sell at the first sign of trouble.

3) Hold on to your best ideas like grim death. The coffee can approach works. See Dealraker's posts on this.

4) When your thesis is broken, sell. Avoid style drift.

5) You're young enough to test out different strategies. Do it, with money. You need to have skin in the game to learn anything.

6) Post ideas. Be grateful if someone tears apart your thesis. They did you a favor.

7) There is always someone smarter than you in this game. Try to identify them and learn from them.

8  Unethical management - avoid no matter how cheap the stock looks.

9) Melting ice cubes- same

10) It hurts to spend days / weeks on an idea, fall in love with it- then the last thing on your check list is a deal-breaker. Just move on anyway.

11) As Gregmal says, the spreadsheet people will miss out. Getting the core idea right is always more important.

12) Don't let macro fears stop you from buying something good.

13) Be open-minded. Principles are forever but landscapes change. 

14) Accept that great investors can have polar opposite opinions on the same stock. That's ok.

15) Know the bear case. Why is it wrong?

16) Read Buffett and Munger, then read them again. The best posters here have adopted their foundation and built on top of it.

17) Temperament > brains in the long run. If you have both- look out!

18) Review your winners and ask if you were just lucky. Review your losers and take full accountability.

 

I wish I'd started at 21. Good luck to you!

Edited May 8, 2023 by Libs

[Whensthepaintdry?]

That was a great post. Thank you for sharing. 

[Blake Hampton]

Indeed. Thank you @Libs.

[sfbm21]

16 hours ago, Libs said:

Blakehampton,

 

You are wise to ask this question at such a young age. When I was 30, just starting out, I was naively running my thumb down a list of P/E's and declaring Washington Mutual a great bet because it was only 8X earnings. I thought that was all that mattered. My point is, you're going to learn a lot about how to value  stocks; it's not going to be just cash flow or just the balance sheet. It truly depends on the company and industry.

 

I'm 61, and have been doing this for 31 years. Lots of lessons learned along the way, tons of mistakes, but it's worked out very well (unless I blow it in the home stretch).

 

Here are some specific things I've experienced.

 

1) I lost 25% of my net worth in one day in a single stock. Turned out instead of selling used cars in to Africa, it was a an arms-smuggling operation. The whole thing was too good to be true, of course.....the numbers were made up. I still feel like an idiot admitting to it today. I had gotten caught up in group-think and wishful thinking. 

 

2) Many years later a company called Valeant had, in their reports, a table showing the growth of some of their divisions, or possibly their recent roll-ups. It doesn't matter. What matters is how they presented it. It went like this:

 

division / growth

 

A 20%

B 30%

C 15%

D 1%

E  22%

------

Avg = 18%.

 

Sounds great, right? Except Division  D was huge and dwarfed the others in size. The weighted average, which is what matters, was really like 3%! Had I owned that stock I would have sold it right there, based just on that piece of chicanery. And it did collapse from fraud. I guess I had learned something...

 

3) I was poking around XPEL and found a post where someone described their moat. It all suddenly made sense to me. I did some modest industry checks that confirmed it, and voila, a few years later it was a 70- bagger. You never know, if you read enough, where you will find that nugget of info that clinches the idea for you. It might even be Jim Cramer ( I know, I know).

 

General lessons, mostly learned the hard way:

 

1) There are some people on this board who can make you rich if you learn from them. The posted stock ideas are a great place to see how ideas are vetted.

2) Never buy a stock based on a guru. Always do your own DD, or you will have weak hands and sell at the first sign of trouble.

3) Hold on to your best ideas like grim death. The coffee can approach works. See Dealraker's posts on this.

4) When your thesis is broken, sell. Avoid style drift.

5) You're young enough to test out different strategies. Do it, with money. You need to have skin in the game to learn anything.

6) Post ideas. Be grateful if someone tears apart your thesis. They did you a favor.

7) There is always someone smarter than you in this game. Try to identify them and learn from them.

8  Unethical management - avoid no matter how cheap the stock looks.

9) Melting ice cubes- same

10) It hurts to spend days / weeks on an idea, fall in love with it- then the last thing on your check list is a deal-breaker. Just move on anyway.

11) As Gregmal says, the spreadsheet people will miss out. Getting the core idea right is always more important.

12) Don't let macro fears stop you from buying something good.

13) Be open-minded. Principles are forever but landscapes change. 

14) Accept that great investors can have polar opposite opinions on the same stock. That's ok.

15) Know the bear case. Why is it wrong?

16) Read Buffett and Munger, then read them again. The best posters here have adopted their foundation and built on top of it.

17) Temperament > brains in the long run. If you have both- look out!

18) Review your winners and ask if you were just lucky. Review your losers and take full accountability.

 

I wish I'd started at 21. Good luck to you!

Great post.

[Blake Hampton]

On 5/7/2023 at 7:36 PM, Libs said:

Blakehampton,

 

You are wise to ask this question at such a young age. When I was 30, just starting out, I was naively running my thumb down a list of P/E's and declaring Washington Mutual a great bet because it was only 8X earnings. I thought that was all that mattered. My point is, you're going to learn a lot about how to value  stocks; it's not going to be just cash flow or just the balance sheet. It truly depends on the company and industry.

 

I'm 61, and have been doing this for 31 years. Lots of lessons learned along the way, tons of mistakes, but it's worked out very well (unless I blow it in the home stretch).

 

Here are some specific things I've experienced.

 

1) I lost 25% of my net worth in one day in a single stock. Turned out instead of selling used cars in to Africa, it was a an arms-smuggling operation. The whole thing was too good to be true, of course.....the numbers were made up. I still feel like an idiot admitting to it today. I had gotten caught up in group-think and wishful thinking. 

 

2) Many years later a company called Valeant had, in their reports, a table showing the growth of some of their divisions, or possibly their recent roll-ups. It doesn't matter. What matters is how they presented it. It went like this:

 

division / growth

 

A 20%

B 30%

C 15%

D 1%

E  22%

------

Avg = 18%.

 

Sounds great, right? Except Division  D was huge and dwarfed the others in size. The weighted average, which is what matters, was really like 3%! Had I owned that stock I would have sold it right there, based just on that piece of chicanery. And it did collapse from fraud. I guess I had learned something...

 

3) I was poking around XPEL and found a post where someone described their moat. It all suddenly made sense to me. I did some modest industry checks that confirmed it, and voila, a few years later it was a 70- bagger. You never know, if you read enough, where you will find that nugget of info that clinches the idea for you. It might even be Jim Cramer ( I know, I know).

 

General lessons, mostly learned the hard way:

 

1) There are some people on this board who can make you rich if you learn from them. The posted stock ideas are a great place to see how ideas are vetted.

2) Never buy a stock based on a guru. Always do your own DD, or you will have weak hands and sell at the first sign of trouble.

3) Hold on to your best ideas like grim death. The coffee can approach works. See Dealraker's posts on this.

4) When your thesis is broken, sell. Avoid style drift.

5) You're young enough to test out different strategies. Do it, with money. You need to have skin in the game to learn anything.

6) Post ideas. Be grateful if someone tears apart your thesis. They did you a favor.

7) There is always someone smarter than you in this game. Try to identify them and learn from them.

8  Unethical management - avoid no matter how cheap the stock looks.

9) Melting ice cubes- same

10) It hurts to spend days / weeks on an idea, fall in love with it- then the last thing on your check list is a deal-breaker. Just move on anyway.

11) As Gregmal says, the spreadsheet people will miss out. Getting the core idea right is always more important.

12) Don't let macro fears stop you from buying something good.

13) Be open-minded. Principles are forever but landscapes change. 

14) Accept that great investors can have polar opposite opinions on the same stock. That's ok.

15) Know the bear case. Why is it wrong?

16) Read Buffett and Munger, then read them again. The best posters here have adopted their foundation and built on top of it.

17) Temperament > brains in the long run. If you have both- look out!

18) Review your winners and ask if you were just lucky. Review your losers and take full accountability.

 

I wish I'd started at 21. Good luck to you!

I still come back to read this from time to time, though I got a question.

 

Is "the coffee can approach" that you refer to come from a book? I found "Coffee Can Investing: The Low-Risk Road to Stupendous Wealth," by Saurabh Mukherjea and was wondering if they are correlated.

[KCLarkin]

I believe this is where the "coffee can" term originated:

http://csinvesting.org/wp-content/uploads/2016/12/the-coffee-can-portfolio.pdf

 

[Saluki]

I've been thinking a lot about longterm holdings.  Besides the advantage of not paying taxes, if you are still in your working life, there is no reason that you have to sell to invest in something else.  You just keep investing paycheck to paycheck in whatever is available at the time.  Three examples recently got me thinking about this. 

 

• Buffett talks about Citi Services preferred, which he sold shortly after he bought it, for a small profit and it went on to be a multibagger. He did fine, but if he held onto it, it would've worked out fine too. 
• Munger's mention last year of the oil royalty that he bought for himself for $1,000 in the 1960s and it still pays him $70k a year even decades later. 
• Joel Tillinghast still has the first stock he bought when he was a child (!), which went through several mergers, but currently pays a dividend that is much higher than his original purchase price.  And one of his 1000 baggers was Hansen's Natural, which later became Monster Beverage.  At times it got pricey, but he just had the patience to sit on it because the company was getting better. 

If the company isn't in decline, and you have capital available to buy the other things you see, why sell when the compounders are so few and far between? Some of Peter Lynch's best returns came from things like Dunkin Donuts which he held for years, not ones that he sold after a quick pop.  Even Phil Fisher's record wouldn't be worthy of talking about if he didn't hold Motorola until the day he died.  

 

I can understand dancing in and out if you're going to invest in a cyclical business like energy or shipping, but I definitely think that there is something to deciding which stocks are Tinder dates and which ones are marriage material.  If you are getting a deal in a cheap stock, in an industry with bad economics, then it's a trading sardine. But if you managed to get into something with a long runway and in a business with a higher than average return on invested capital, then as Munger said, over time your return should match the returns on the business.  If those businesses are rare, then why sell and pay taxes to look for quick hits when these businesses come up so rarely? 

 

 

[ValueArb]

Buffett’s best returns were when he traded in and out. He only abandoned that approach when his portfolio got so large it made it difficult or impossible. Same reason he stopped buying net-nets.

 

If you understand the intrinsic value of a thousand bagger well, you should be able to do even better with it by sitting out periods of overvaluation and returning when undervalued.

 

The problems with this approach include:

 

1) It makes investing a full time job. You have to stay in top of pricing and IV changes to be able to respond quickly to opportunities.  You can’t just sit on cash waiting for a specific stock to reach a large discount to IV that may never come, you need to have a full bench of attractive opportunities to redeploy cash into.
 

2) Tax costs. As you pointed out if you are investing in a taxable account you need to account for tax costs. If you sell a long term holding at IV you will only net around 75% of IV (depending on state tax rate), so if you reinvest proceeds at a 25% discount to IV that was a wash.

 

And it’s worse if you only have short term gains. For long term investments in taxable accounts this strategy only makes sense if you wait to sell at significant premiums to IV such that you net close to IV.  That also ensures that you do it rarely and aren’t constantly generating short term capital gains. 
 

Obviously in tax deferred accounts the strategy works much better.

[Blake Hampton]

47 minutes ago, Saluki said:

I've been thinking a lot about longterm holdings.  Besides the advantage of not paying taxes, if you are still in your working life, there is no reason that you have to sell to invest in something else.  You just keep investing paycheck to paycheck in whatever is available at the time.  Three examples recently got me thinking about this. 

 

• Buffett talks about Citi Services preferred, which he sold shortly after he bought it, for a small profit and it went on to be a multibagger. He did fine, but if he held onto it, it would've worked out fine too. 
• Munger's mention last year of the oil royalty that he bought for himself for $1,000 in the 1960s and it still pays him $70k a year even decades later. 
• Joel Tillinghast still has the first stock he bought when he was a child (!), which went through several mergers, but currently pays a dividend that is much higher than his original purchase price.  And one of his 1000 baggers was Hansen's Natural, which later became Monster Beverage.  At times it got pricey, but he just had the patience to sit on it because the company was getting better. 

If the company isn't in decline, and you have capital available to buy the other things you see, why sell when the compounders are so few and far between? Some of Peter Lynch's best returns came from things like Dunkin Donuts which he held for years, not ones that he sold after a quick pop.  Even Phil Fisher's record wouldn't be worthy of talking about if he didn't hold Motorola until the day he died.  

 

I can understand dancing in and out if you're going to invest in a cyclical business like energy or shipping, but I definitely think that there is something to deciding which stocks are Tinder dates and which ones are marriage material.  If you are getting a deal in a cheap stock, in an industry with bad economics, then it's a trading sardine. But if you managed to get into something with a long runway and in a business with a higher than average return on invested capital, then as Munger said, over time your return should match the returns on the business.  If those businesses are rare, then why sell and pay taxes to look for quick hits when these businesses come up so rarely? 

 

 

I really like this advice, it makes me think about Buffett's ownership of Apple. He understands that he has very few oppurtunities and would rather hold on to an expensive yet great business. I found myself selling and taking profits early when I still had cash to invest, and this is even on top of still liking the business I was selling. I think that you are right and selling too early could definitely be a problem.

[ValueArb]

6 hours ago, blakehampton said:

I really like this advice, it makes me think about Buffett's ownership of Apple. He understands that he has very few oppurtunities and would rather hold on to an expensive yet great business. I found myself selling and taking profits early when I still had cash to invest, and this is even on top of still liking the business I was selling. I think that you are right and selling too early could definitely be a problem.

We don’t have the massive handcuffs Buffett has now. If Buffett’s portfolio was the same size it was in the 90s, he would have sold Apple long ago.

 

We all have immensely more opportunities than Buffett of today has and should invest accordingly.

[ourkid8]

2 hours ago, ValueArb said:

We don’t have the massive handcuffs Buffett has now. If Buffett’s portfolio was the same size it was in the 90s, he would have sold Apple long ago.

 

We all have immensely more opportunities than Buffett of today has and should invest accordingly.

He did hold on to KO when it was significantly overvalued so don’t think the cash pile / universe of stocks  are forcing him to stay in apple. 

[ValueArb]

14 hours ago, ourkid8 said:

He did hold on to KO when it was significantly overvalued so don’t think the cash pile / universe of stocks  are forcing him to stay in apple. 

 

Yep, KO peaked around 45 times earnings in 1998. How did that work out for him?

 

Edit: Obviously it worked out very poorly. Returns since then for KO have been poor and it lost over half its value in the next 6 years. Buffett also owned over 8% of KO at the time, so this may also be an example of heavy handcuffs leading to poor decision making. He couldn't get out quickly, and its possible he thought as soon as his 13F filing showed he was selling the stock would get crushed before he could get most of the way out.

 

This is a perfect example of why you don't hold stocks "forever" if you are a value investor who understands how to calculate intrinsic value.

Edited August 1, 2023 by ValueArb
less snark, more clarity

[Ulti]

https://www.oaktreecapital.com/insights/memo/fewer-losers-or-more-winners

 

Excellent memo about investing phil. in bonds as well as stocks\port. overall

[jks327]

I know you're only 21 but take your life experience and work with it.  Whatever industries you've worked in, use the inside knowledge to your advantage.  Invest in industries that interest you, companies whose products interest you, and it won't feel like work at all!  In most sectors there's an opportunity to be right over time, for instance a lot of people say the auto industry is a tough place to make money but it also coincides with my specific knowledge, and is an area where I've made money in the past.

[Blake Hampton]

21 hours ago, jks327 said:

I know you're only 21 but take your life experience and work with it.  Whatever industries you've worked in, use the inside knowledge to your advantage.  Invest in industries that interest you, companies whose products interest you, and it won't feel like work at all!  In most sectors there's an opportunity to be right over time, for instance a lot of people say the auto industry is a tough place to make money but it also coincides with my specific knowledge, and is an area where I've made money in the past.

I don't understand why it would be so tough considering auto is a huge line item in the average consumer's budget. I don't know much about it though.

Edited September 14, 2023 by blakehampton

[ValueArb]

I didn't truly understand value investing until I was 37 years old, and barely invested in anything before then (other than sweat equity in startups). Since then what has changed is mostly different ways of finding good ideas and a better understanding of market mechanics (options, warrants etc) and an increasing circle of competence in understanding how different types of businesses earn their profits.

 

For one embarrassingly dumb example, I didn't really understand until my 40s the obvious fact that current earnings were almost immaterial to the value of resource based companies like miners and oil companies, what really counted is how much they have left in the ground, what it would cost to get it out, how long it would take, and what it would sell for when they did.

[Paarslaars]

The most important thing I needed to realize was Buffets comparison to baseball.

 

"The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, 'Swing, you bum!,' ignore them."

 

The only thing is, I'm the idiot yelling 'Swing, you bum!'. I needed to learn to shut myself up..