What is your approach?

[blakehampton]

Some Questions

 

• Generally, how long does it take for you to figure out an idea?
• How do you know your comfort level regarding a position?
• Is your strategy with position sizing based on feel or is it more systematic?
• Do you think it's possible to have a systematic approach, or must it be tuned to your personality?

 

I understand these are sort of basic but I'm still curious. I'm relatively young and I always think it's a good idea to get more perspective, especially when you're asking people who've played out more hands than you. I also think this investment game is hard. Not just because it's inherently hard, though it is, but because it takes a vast amount of experience to understand how you personally react to market stimuli. It's very much an emotional game as it is an analytical one, possibly even more so. Thoughts?

[Sweet]

I’m not consistent but I’m trying to be 1) fully invested unless there is an exceptional reason not to be, 2) to ignore the noise and compelling doomsday macro predictions which are nearly always wrong, 3) to be patient and buy good companies when they are on sale, 4) to buy something I know and I’ve thought about owning before, this way I can stomach the swings, and to 5) hold it as for as long as there are no better opportunities.

 

In terms of how that is implemented in practice Vinod1 recently described my thinking almost exactly.  I don’t think I can write it up better than he did so here is what he wrote:

Quote

 

“I assume I have no ideas and there is not much value I can add unless I can make compelling case otherwise.

 

So I start with a 100% index portfolio.

 

 

If I find a really compelling investment, I would invest up to my position sizing limit for that specific investment risk that I tolerate. I would sell that much of index fund to fund this investment.

 

 

The more stocks I find, the less I have in index funds.

 

 

Starting with 100% cash instead of 100% in index funds has many disadvantages.

• It puts pressure on you to find ideas. Many many ideas and really really quick. Not a recipe for patience and acting only when you have overwhelming evidence in your favor.
• If you do not have many ideas, you do not end up making crappy investments. No "I like this, seems pretty good, let me take a 1% stab at this".
• You do not have cash drag 
• You are not tempted to market time or reduce allocation because "markets seems rich" and I cannot find anything in my competence. This is actually the bane of many value investment managers.”

 

 

After many years I’ve come to the same view as Vinod1.  Sitting with a cash position hasn’t worked for me.

 

When choosing a stock it has to be has to pass the ‘holy shit why are people not buying this’ gut check.  If I’m cracking out the excel sheet and cranking numbers into a DCF just to make sure I’ve a ‘margin of safety’ then I almost certainly don’t have a margin of safety.  It should be obvious.

 

Generally I don't like small positions.  I had a five bagger in a month once, but the position was less than 1% when I took it - so who tf cares - I was still poor.  I normally size stocks at 10% - 25% but sometimes I’ve been 100% into a sector index that’s been hit by a wrecking ball.

 

I’m generally adverse to leverage but I might use it one day.

 

I’m not that old either so I can be fairly aggressive when an opportunity arises, but I’ll have to turn it down as the years slip by.

 

I also don’t tell people the stocks I actively own.  My insights aren’t that interesting, but more importantly it allows me to be detached from the stock.  I can pull the cord on that sucker anytime I want and don’t have to defend that decision to anyone.  If I’m pimping said stock it makes it much harder to sell it.

 

 

Edited January 31 by Sweet

[Hektor]

38 minutes ago, Sweet said:

I also don’t tell people the stocks I actively own.

 

39 minutes ago, Sweet said:

 I can pull the chord on that sucker anytime I want and don’t have to defend that decision.

 

I like this approach :)

[Eldad]

2 hours ago, Sweet said:

I also don’t tell people the stocks I actively own.  My insights are that interesting, but more importantly it allows me to be detached from the stock.  I can pull the chord on that sucker anytime I want and don’t have to defend that decision.  If I’m pimping said stock it makes it much harder to sell it.

I don’t do that anymore either, it’s bad luck.

People won’t buy the weird little stocks that usually do great, but they will buy the beaten down large caps you recommend that usually take more patience than they have. 

[RichardGibbons]

3 hours ago, Sweet said:

I also don’t tell people the stocks I actively own.  My insights are that interesting, but more importantly it allows me to be detached from the stock.  I can pull the chord on that sucker anytime I want and don’t have to defend that decision.

 

Yeah, this is generally my approach too, for the same reason.  I mostly don't share unless someone asks about a specific stock, or if I want to give back to the board by throwing out something I see as a something that has an extremely good chance of being a big winner.

[gfp]

4 hours ago, Sweet said:

I’m not consistent but I’m trying to be 1) fully invested unless there is an exceptional reason not to be, 2) to ignore the noise and compelling doomsday macro predictions which are nearly always wrong, 3) to be patient and buy good companies when they are on sale, 4) to buy something I know and I’ve thought about owning before, this way I can stomach the swings, and to 5) hold it as for as long as there are no better opportunities.

 

In terms of how that is implemented in practise Vinod1 recently described my thinking almost exactly.  I don’t think I can write it up better than he did so here is what he wrote:

 

“I assume I have no ideas and there is not much value I can add unless I can make compelling case otherwise.

So I start with a 100% index portfolio.

If I find a really compelling investment, I would invest up to my position sizing limit for that specific investment risk that I tolerate. I would sell that much of index fund to fund this investment.

The more stocks I find, the less I have in index funds.

Starting with 100% cash instead of 100% in index funds has many disadvantages.

- It puts pressure on you to find ideas. Many many ideas and really really quick. Not a recipe for patience and acting only when you have overwhelming evidence in your favor.

- If you do not have many ideas, you do not end up making crappy investments. No "I like this, seems pretty good, let me take a 1% stab at this".

- You do not have cash drag 

- You are not tempted to market time or reduce allocation because "markets seems rich" and I cannot find anything in my competence. This is actually the bane of many value investment managers.”

 

After many years I’ve come to the same view as Vinod1.

 

When choosing a stock it has to be has to pass the ‘holy shit why are people not buying this’ gut check.  If I’m cracking out the excel sheet and cranking numbers into a DCF just to make sure I’ve a ‘margin of safety’ then I almost certainly don’t have a margin of safety.  It should be obvious.

 

Generally I don't like small positions.  I had a five bagger in a month once, but the position was less than 1% when I took it - so who tf cares - I was still poor.  I normally size stocks at 10% - 25% but sometimes I’ve been 100% into a sector index that’s been hit by a wrecking ball.

 

I’m generally adverse to leverage but I might use it one day.

 

I’m not that old either so I can be fairly aggressive when an opportunity arises, but I’ll have to turn it down as the years slip by.

 

I also don’t tell people the stocks I actively own.  My insights are that interesting, but more importantly it allows me to be detached from the stock.  I can pull the chord on that sucker anytime I want and don’t have to defend that decision.  If I’m pimping said stock it makes it much harder to sell it.

 

 

good post sweet - lots of wisdom here

[Sweet]

Regarding not telling others what stocks I own.  That might seem like a strange approach on an investing board, even selfish, so let me clarify.

 

It’s not that I won’t share an analysis, my views or an idea on a stocks.  It’s just I won’t actively broadcast that I own a specific company because I don’t want to defend it.  If someone asks me directly what I own I will of course tell them probably via PM.
 

I’ve a lot of respect for the many great posters here who can tell others their exact stock positions, their respective weightings, and still have a clear frame of mind when looking at the stock.  I’m afraid I’ve found out that I’m just not good at that yet.

 

PS - I once told my in-laws what I owned and they were checking the my stock price every day and sending me articles.  They used to tell my wife ‘I think he should sell it’.  It pissed me off.  I never told them I sold it so they probably still think I own it .  Lesson learned.

 

 

Edited January 31 by Sweet

[Cod Liver Oil]

15 hours ago, Sweet said:

When choosing a stock it has to be has to pass the ‘holy shit why are people not buying this’ gut check.  If I’m cracking out the excel sheet and cranking numbers into a DCF just to make sure I’ve a ‘margin of safety’ then I almost certainly don’t have a margin of safety.  It should be obvious.

Yes, yes, yes this is a very good heuristic. If you are using a microscope, you are in the wrong profession.

For instance, it seems obvious that Nintendo, Joe, FRPH and Alphabet will grow nicely over the next 5 years and the stocks

should do ok.

 

Edited January 31 by Cod Liver Oil

[Gregmal]

I generally just try to be an absolute pig in situations where I can’t lose. In order to not lose you need something that is iconic, indestructible in terms of its capital structure, and riding the wave of long term secular tailwinds.

[pricingpower]

If you're young and doing this on the side Buffett's advise has usually been to mainly focus on your career.  I like targeting only making one excellent investment per year's savings that you've deeply researched (read all SEC filings, transcripts, media coverage and know all competitors deeply) and intend to never sell.  A high standard is about 500 hours on an investment,  at 1-2hrs a day and not investing in everything you look at it's hard to have a know-what-you-own approach and buy more than 1 a year... but as knowledge compounds so does your bandwidth over future years.  It's puzzling people look at investing in stocks (large businesses) so massively different than they would approach buying a small business.

 

If you look at Buffett as an example he's probably spent about a quarter million hours at the investment game (=70hr weeks sustained for 70 years?) against maybe <1000 cumulative buy decisions?  

[Eldad]

Buy the monopolies during bear markets MCO, SPGI, V, MA, MSFT etc. and hold forever. 
 

Buy what Mark Leonard calls the High Performance Conglomerate type stock at opportune times (CSU and spin-offs, TDG, ROP, BRK, etc.) and hold forever. 
 

Spend most of my time when it is not a bear market looking for the next High Performance Conglomerate that is still a small or micro cap Terravest, CSWI, etc. I guess like Charlie says do this to keep me out of bars. 
 

Hopefully as I get older and richer I will be more like Charlie and just play golf and fish and not even look at markets until bear market time. But sadly I am an addict. 

 

 

 

[brobro777]

My approach focuses on recognizing that I am not smart enough to come up with good ideas and I am too lazy to put in the work necessary to get brilliant insights. 

 

So I try to free ride on other people's good ideas. Who has good ideas? This is a personal observation but I think people who know what they're talking about tend to readily admit to what they don't know - it seems they know what they know and they really know what they don't know. 

 

Another way to get good ideas is to find guys who always buy at the top, kinda like the shoeshine boy giving stock tips to Joseph Kennedy, and bet against them

 

 

[backtothebeach]

6 minutes ago, Eldad said:

Buy the monopolies during bear markets MCO, SPGI, V, MA, MSFT etc. and hold forever. 
 

Buy what Mark Leonard calls the High Performance Conglomerate type stock at opportune times (CSU and spin-offs, TDG, ROP, BRK, etc.) and hold forever. 
 

Spend most of my time when it is not a bear market looking for the next High Performance Conglomerate that is still a small or micro cap Terravest, CSWI, etc. I guess like Charlie says do this to keep me out of bars. 
 

Hopefully as I get older and richer I will be more like Charlie and just play golf and fish and not even look at markets until bear market time. But sadly I am an addict.

 

 

 

+1

 

Pretty much what I figured out about 5 years ago. Only two steps, with an optional third:

 

1. Buy Berkshire and/or other reliable compounders when they are relatively cheap.

2. (optional) when they are really really cheap add a little leverage, take off leverage when they seem slightly expensive

3. Do nothing

 

Questions to figure out: Which companies are compounders? Which are reliable? What yardstick to use for "cheap". Not too hard for Berkshire. Or even the S+P500 if you happen to catch it in a bear market.

 

Sadly that is boring AF, so I have not been able to stick to only these. Getting better at it though.

[oscarazocar]

17 minutes ago, backtothebeach said:

 

+1

 

Pretty much what I figured out about 5 years ago. Only two steps, with an optional third:

 

1. Buy Berkshire and/or other reliable compounders when they are relatively cheap.

2. (optional) when they are really really cheap add a little leverage, take off leverage when they seem slightly expensive

3. Do nothing

 

Questions to figure out: Which companies are compounders? Which are reliable? What yardstick to use for "cheap". Not too hard for Berkshire. Or even the S+P500 if you happen to catch it in a bear market.

 

Sadly that is boring AF, so I have not been able to stick to only these. Getting better at it though.

 

An approach that I have seen that seems to work pretty well for portfolios like this is to build up a group of larger positions in high quality companies over time (say 5-10% positions for 80-90% of portfolio) and then have 10-20 1% positions in other stuff.  I heard Bill Miller mention this approach years ago, as he had the same problem of getting bored.  The smaller stuff keeps you occupied and active and perhaps makes it easier to wait until a fat pitch comes along.  Another rule would be not to take a bigger position unless the VIX is at some predetermined level, say above 30 or 35.  It is remarkable when you look back how closely VIX above 30 correlates with stocks being cheap.  You can see the daily price history of VIX on Yahoo Finance going back for decades.  Pretty much anytime something like BRK was really cheap, the VIX was at those levels, with two notable great opportunities in BRK being in August 2011 and May 2020.

[Masterofnone]

1 hour ago, backtothebeach said:

 

+1

 

Pretty much what I figured out about 5 years ago. Only two steps, with an optional third:

 

1. Buy Berkshire and/or other reliable compounders when they are relatively cheap.

2. (optional) when they are really really cheap add a little leverage, take off leverage when they seem slightly expensive

3. Do nothing

 

Questions to figure out: Which companies are compounders? Which are reliable? What yardstick to use for "cheap". Not too hard for Berkshire. Or even the S+P500 if you happen to catch it in a bear market.

 

Sadly that is boring AF, so I have not been able to stick to only these. Getting better at it though.

+1

I started in this game in my late thirties. My actions were ill informed and results reflected this. Things worked out when finding Berkshire. It was my "best idea" and really only idea based on deep understanding. In the subsequent 30+ years the bulk of my investing was adding when it was cheap and never selling, resulting in returns a couple of percentage points better than the underlying stock. But during this time, Berkshire was a unique company- total downside protection with Buffett at the helm. (I wish I could say that my other ideas kept me out of bars...) I have done much better over the years buying good companies when they were too cheap than "betting" on stories. The allure of quick riches can incinerate capital that otherwise could have slowly and surely led to riches.

Edited January 31 by Masterofnone

[blakehampton]

47 minutes ago, oscarazocar said:

 

An approach that I have seen that seems to work pretty well for portfolios like this is to build up a group of larger positions in high quality companies over time (say 5-10% positions for 80-90% of portfolio) and then have 10-20 1% positions in other stuff.  I heard Bill Miller mention this approach years ago, as he had the same problem of getting bored.  The smaller stuff keeps you occupied and active and perhaps makes it easier to wait until a fat pitch comes along.  Another rule would be not to take a bigger position unless the VIX is at some predetermined level, say above 30 or 35.  It is remarkable when you look back how closely VIX above 30 correlates with stocks being cheap.  You can see the daily price history of VIX on Yahoo Finance going back for decades.  Pretty much anytime something like BRK was really cheap, the VIX was at those levels, with two notable great opportunities in BRK being in August 2011 and May 2020.

The VIX has seemed to hug twelve forever now, besides that whole Silicon Bank fiasco last year. 

 

That's an interesting way to think about it. Owning 10-20 1% positions just so you can soothe that drive to be active.

[oscarazocar]

14 minutes ago, blakehampton said:

The VIX has seemed to hug twelve forever now, besides that whole Silicon Bank fiasco last year. 

 

That's an interesting way to think about it. Owning 10-20 1% positions just so you can soothe that drive to be active.

 

VIX hasn't closed below 12 since November 2019.  It hit 26 in March 2023 and 21 in October 2023.  For 2023, VIX averaged 17.  It was over 35 for 1 day in 2021 (Jan 27) and 2 days in 2022 (March 7/8).

 

Fortunately, if you are a non-institutional investor, you can usually buy a full position in a day of most liquid stocks.

 

Anyway, setting a rule like this is one way to take the pressure off - it's an external signal that tells you, "Don't worry about buying anything today, better opportunities will likely come along".  Sure, you can end up waiting 5 years like 1992-1996 or 3 years like 2012-2014, and of course there are sometimes great opportunities in parts of the market when VIX is low, but as simple rules, I've found it hard to beat.

 

[blakehampton]

7 minutes ago, oscarazocar said:

 

VIX hasn't closed below 12 since November 2019.  It hit 26 in March 2023 and 21 in October 2023.  For 2023, VIX averaged 17.  It was over 35 for 1 day in 2021 (Jan 27) and 2 days in 2022 (March 7/8).

 

Fortunately, if you are a non-institutional investor, you can usually buy a full position in a day of most liquid stocks.

 

Anyway, setting a rule like this is one way to take the pressure off - it's an external signal that tells you, "Don't worry about buying anything today, better opportunities will likely come along".  Sure, you can end up waiting 5 years like 1992-1996 or 3 years like 2012-2014, and of course there are sometimes great opportunities in parts of the market when VIX is low, but as simple rules, I've found it hard to beat.

 

You obviously know your VIX. What do you think about the whole 'someone is manipulating the VIX' narrative?

[oscarazocar]

That's just looking at the history on a spreadsheet, not terribly complicated and available to anyone with Excel and Yahoo Finance.

 

I have no idea if someone is manipulating VIX.  I am skeptical, it sounds like one of those stories that people like to tell themselves.  If you look at the numbers, nothing is terribly out of line from history.  I first started looking at this a few years ago after reading something about how low VIX was and how it was being supressed, and it turned out the 5 year avg was actually a tick above the long-term average.

 

Weird behavior in what are essentially volatility indexes is often a sign that a big player is doing something dumb and suppressing the market.  More or less, Nick Leeson blew up Barings in 1995 and you had the London Whale losses at JPM in 2012 from players making big dumb bets, and in both cases smart operators caught wind and bet against it.  In terms of the VIX market itself, my guess is that it's too big for that kind of manipulation, but probably does move over time based on systematic behavior by market players.

 

In terms of how I look at it, it's an effective and crude rule of thub.  When VIX is over 35, it's not a surprise why, people are freaking out about something and markets are tanking.  I picked 35 because it matches up almost perrfectly with my bottoms-up view of good buying opportunities over the last 20 years.  GFC in 2008/2009, Europe panic in August 2011, briefly in late 2015, Christmas Eve 2018, Covid in spring 2020, Russian invasion in spring 2022.  In that period, I have never seen markets tank without VIX reacting in the way you would expect.

[Spekulatius]

How can you manipulate the VIX?  It is a calculated number based on pricing changes (=volatility) of the stock market. Stating that the VIX is manipulated is the same than stating the the movements of the entire stock market is manipulated (I think). It makes no sense.

[oscarazocar]

My understanding of the actual mechanics is crude, but I believe that the quoted VIX index is based off an expectation of forward 30 day market volatility derived from option prices, so it's not definitionally impossible for it to differ from market prices if you had odd and systematic behavior in the options market.

 

Practically, I think this only happens in single companies or other, more narrow indexes.  If someone was systematically selling options or CDS in huge amounts, you might see a volatility number that is artifically low (and which in turn, might present a great buying opportunity).  I recall that Berkshire CDS has seen some beavior like this at times in the past.  In terms of the CBOE VIX, I think the market is too big to see an impact.

 

[coc]

On 1/31/2024 at 9:17 AM, pricingpower said:

If you're young and doing this on the side Buffett's advise has usually been to mainly focus on your career.  I like targeting only making one excellent investment per year's savings that you've deeply researched (read all SEC filings, transcripts, media coverage and know all competitors deeply) and intend to never sell.  A high standard is about 500 hours on an investment,  at 1-2hrs a day and not investing in everything you look at it's hard to have a know-what-you-own approach and buy more than 1 a year... but as knowledge compounds so does your bandwidth over future years.  It's puzzling people look at investing in stocks (large businesses) so massively different than they would approach buying a small business.

 

If you look at Buffett as an example he's probably spent about a quarter million hours at the investment game (=70hr weeks sustained for 70 years?) against maybe <1000 cumulative buy decisions?  

Would you share the investments made in the last few years with this approach? Thanks in advance.

[CassiusKing1]

You better know and truly realize what your circle of competence really is.

It doesn't take much.  Getting to truly understand the ins and outs of a few great companies will do.

 

[pricingpower]

18 hours ago, coc said:

Would you share the investments made in the last few years with this approach?

CVET was main one during covid (a spin-off profitable vet distribution business that reverse morris trust'd with an unprofitable software company) but it got taken private already.  LEGH and EWBC I added more recently.  Spent a lot of time on some names only to not pull the trigger (Netflix at almost the exact recent lows!) which is the frustrating downside to a concentrated approach.  My largest positions are Progressive and Berkshire which I view as semi-permanent.  

[scorpioncapital]

avoid bad businesses at all costs and avoid industries that you don't feel comfortable with. how do you get comfortable? you have to figure it out. see what kinds of industries (that don't suck) you feel compound gains as you like. For example i just can't really get comfortable with watch paint dry insurance, financial, and oil stocks. just not for me. i'm sure they're great for someone. however i do love garp, tech-industrials, consumer franchises, up and coming end markets, saas. be very skeptical all the time. have a high threshold for new action. position size is feel and trying to avoid overlaps. always moving higher position size to increase quality. How do you get comfortable? i'm afraid for me its a bit reflexive. while stock price is not only indicator if a company does badly for a while or the stock doesn't have some gains over time you have to ask what you are missing about the company - usually worse business than you thought or poor management decisions or bad end markets. Sometimes its temporary but usually the market is more right than not. don't fall for the value investing stuff about price is not right. price is very useful information over time. it isn't the only criteria and you should have internal views about company and industry dynamics but use the price action after purchase, or while watching, as some input to "learning" about what markets like and dislike about various companies. Reverse engineer that to understand business better. That wisdom is key to comfort with positions and adding to them or discarding them.  Finally I would be diversified. I own about 20-25 positions. Try to spread it so there is not too much overlap. Doesn't mean you shouldn't specialize in some fields but if you have tech, have some brk or something perhaps. All tech or all healthcare , even if the trend now, is too risky. But you can't miss it out either. find a vehicle if you aren't comfortable picking in that area. 

Edited February 7 by scorpioncapital