A path to wealth for individual investor.

[king888]

I recently watched an interview with one investor in my country ( for those who doesn't know ,I live in Thailand) . He was famous in value investment webboard in Thailand.

 

He is Thai and will be 31 year old this year. This guy started investing in 2003 with a borrow money from his father at around 500K baht (about $16K) . And last year his investment achieved 100 million baht mark($3.5 million).He made 200x gain during his eight years in stock market. His investment approach made me somewhat intrigued.  In Thailand ,we don't have single stock option.So the leverage choices is limited. 

 

1. He bought only one stock at a time.

2. He use margin account at extreme.

3. He expects 2-3x upside for one stock only.

4. He uses EV/FCF as a criteria to enter long position.

 

When the market was in panic mode in 2008 , he bought one stock at 3 baht and then stock plunged down to 2 baht , he got a margin call. So he asked his mother to mortgage her their house to compensate the margin call. He came from middle class family so house is only asset his family got.  He believed this security is massively undervalued and at 2 baht it would soar eventually. Finally, he was able to exit at 11.5 baht because this security received tender-offer in 2009.  His portfolio grew to around 20 million baht from this position .He continued to use his strategy to pickup stock and using margin to buy only one stock.  And 2 year later he grew it 5 times more to reach 100 million mark.

 

 

He read many value investing book. He said he has not been wrong in stock picking because he choose only the stock that is in his circle of competent (easy to understand FS,etc) and and has cheap EV/FCF multiple. He is willing to take risk by holding only one stock and buy as much as possible. He did make a loan with loan-shark once. He believe this is best way to accumulate wealth for individual investor. He said if he only expect 20% return a year,it will not worth his time because his initial investment is low.

But now when he has enough money (100 million baht), he became less aggressive using less margin.

 

I think his approach is very risky. For me ,it looks like gamble more than investing. In the last financial crisis, if the market was not picking up fast. That mortgage would kill him and brought his entire family down. But  he is right that if you want to get rich by being individual investor and not having large initial capital ,you have to be very aggressive. Or else you have to manage other people money (like Buffett formed his partnership). This guy was very lucky to avoid many pitfall until reaching his financial goal.If he picked any wrong stock ,he would get wiped out. And he is lucky that Thailand stock market has the greatest bull run in previous 3 years.

 

What do you guy on the board think ? Any of you using the same aggressive strategy like this guy.

[scorpioncapital]

This is a good strategy. I posted it here somewhere else but Ian Ayres and Barry Nalebuff  from Yale have done a study that shows young people should absolutely use margin to invest and that even accounting for all the margin calls and having to sell out, the net gain was still higher than a cash only account. I've always wondered why people are so afraid of margin calls. You get a call, you sell stock, and when the stock recovers, you buy it back. *All of this assumes you choose the right, relatively solid companies, and not basket cases headed for bankruptcy*

 

 

[alwaysinvert]

If my nest egg was as small as his from the beginning I might have used some leverage, but never to that extent and obviously not borrowing from loan sharks.

 

At least his gambling is rational in the sense that he cares about the odds, as opposed to the regular Averages Joes that are betting at the latest biotech craze or whatever. His risk of ruin has obviously been sky high, though.

[Gopinath]

I think this concept is worth thinking about except the leverage part :-).. What is the one company that you are willing to bet your net worth(potentially tripling your net worth or more in few years)? I think Charlie Munger's concept of checklist reveals some possible ideas,

 

A company produces a product which is necessary to the consumer in nature, some what different from competitors & can sell more in the future with increase in price without increasing the capital employed in direct proportion(less increment capital to produce more sales/profitability)

High return on total capital employed, Efficient capital allocation

Management in charge both competent & honest

Cheap price(possibly 5-7 times fcf)

 

I think this is superior search strategy to almost all of them employed by all the investors today. Investors should be able to increase their wealth substantially by doing that. What do you think? Do you have any companies in your watch list/ portfolio passes the above screen?

 

Of course with leverage, you get astronomical results!

 

[Guest misterstockwell]

That's what I did(minus the massive leverage).  I can think back on twenty years of concentrated positions(25-100%)...Allied Group, Reebok, Verifone, ChrisCraft, Qualcomm, Echostar, ViaSat....those multibaggers can really help out wealth creation. I like to immerse myself in a company when I take that position, follow it like a hunter, and make sure my original thesis was correct. I like to pull out Phil Fisher's 15 points to look for in buying a stock and revisit my decisions from time to time, and sell when things change. I also sell when things get nuts*Qualcomm*

[bookie71]

Be very careful, early losses hurt your wealth big time because of compounding.

[CONeal]

I do not agree with the way the guy got his wealth.  It's one thing to take a small personal loan with a family member.  It's completely different when your parents put up their house b/c your underwater.  One minor glitch and your parents are homeless. 

[turar]

I have a feeling that for every spectacular success story like this, there are two or more epic failure stories that never get told.

 

I think that slow and steady approach is just as good. Live frugally, save a sizable portion of income, invest prudently. Boring and predictable.

[AZ_Value]

I do not agree with the way the guy got his wealth.  It's one thing to take a small personal loan with a family member.  It's completely different when your parents put up their house b/c your underwater.  One minor glitch and your parents are homeless.

 

Agreed. We're reading about one guy who made it this way, how many blew up doing that?

Always remember that quote "markets can stay irrational longer than you can stay solvent". So his parents put up their only asset because he received a margin call... What if the stock had continued to drop? Then what?

 

I always liked the Buffett quote "Never risk something you do have and do need for something you don't have and don't need";

So just to juice up your returns from 2X to 4X, 5X or 6X you constantly run the risk of being wiped out entirely and taking your family down with you. It didn't work too well for the LTCM guys.

 

 

[Liberty]

http://en.wikipedia.org/wiki/Survivorship_bias

[original mungerville]

I seem to usually have most of my portfolio in 1, 2 or 3 stocks at a time. I won't leverage up in the manner described however.

 

I think if you want major leverage with some downside protection, for one good idea buying long-term LEAPs say 10% in the money and exposing 30% of your portfolio to this would provide 3x leverage on your portfolio's value. If the underlying doubles in 4 years, your portfolio goes up 5x.  That's not bad, and you can't lose more than 30% of your portfolio.

 

If you did a similar thing with another uncorrelated position or two, that could make some sense...but all of these things have to be almost sure bets, and if you do three exposing your whole portfolio, they better be uncorrelated. So if it were 3 stocks, you would need to pick different industries and I would want to hedge general market correlation.

 

You have to be at least 80-90% sure this things going to double in four years. You need to have experience with a 1, 2, and 3 stock portfolio leveraged 2x before you start trying to leverage up 3x, 6x, etc because you just won't be able to handle it. There are merits to this because no-brainers come along often: Amazon.com bonds after Internet bubble, Overstock.com bonds in 2008, Fairfax, Berkshire, Odyssee Re common, preferred. These have been clear no brainers in my mind at certain times in the last 10 years where I could see exposing 30% of my portfolio to them in a levered way however I still would not expose 100% of the portfolio leverage up 5x on any of these. You just don't know how long the market can keep your positions undervalued. You need to figure 3, 5, even 7 years of staying power worst case.

 

In summary, there are elements of this strategy that make sense but we aren't talking any old investment here.

 

 

[original mungerville]

Many investors on this board seem to have invested in BAC LEAPS. This is one form of levering up along the lines I would suggest provides downside protection with big upside potential. Again, having said that, you don't want a portfolio entirely invested in 2-year LEAPs because if the entire market drops 50% and stays there for two years, you are toast.

[SharperDingaan]

Same as munger, we're usually in just 1-3 stocks, married to them, & each stock is in an unrelated & totally different industry.

 

You might want to look at risk parity. The basic concept is to overweight the low risk (T-Bills) vs high risk (equity) so that the total risk from the T-Bills is the same as that from the equity. Then margin the entire portfolio to get to the design return you want.  A 60/40 equity portfolio essentially becomes a 40/60 equity portfolio with 25% margin, but risk is now spread evenly across the portfolio vs concentrated in just the equity allocation. If your stocks go down there is cash to buy, but you give up opportunity in return for less risk. Using leaps minimizes/eliminates margin & allows a higher equity allocation.

 

Sounds sexy, but you’ve probably been doing something roughly similar for many years.

Back then we just called it ‘gut instinct’

 

SD

 

[rranjan]

He was very irresponsible. Taking a chance that he might go to zero is one thing but taking a chance that his parents might be homeless is height of stupidity.

 

On personal level it is ok to take that kind of risk when starting amount is very little.

[beerbaron]

It seems to me that our friend was overbetting and got lucky. Some might suggest to learn about the Kelly formula in order to optimize wealth creation.

 

BeerBaron

[original mungerville]

This guy may have been irresponsible however modern portfolio theory, biz school and the CFA program are just as irresponsible with over-diversification, focus on betas (short-term movement is an indicator of risk), etc which lead to 99% odds of mediocracy with too many investments focused on the short-term.

 

The trick is to take elements from both the former and the latter to derive and optimal approach. There are kernels of truth in each, however each on its own is more than a little crazy.

 

[alertmeipp]

key element is luck I think. At least for short term.