This post I’m putting out is in the interest of transparency and openness. I think it is only fair when I eventually talk about investing, that you are able to understand my investment philosophy, goals and strategy.
Overall, I strongly believe that my or any other sole investment strategy is not the only one that works. I think there are number of ways to beat the market. I’m not a value investor who believes that value is the best, only way to beat the market and everyone who disagrees is a moron. I think as long as you have a certain edge and stick to it, you can outperform. I’m still 23 though so what the hell do I know anyway. I advise you to take any of my thoughts with a grain of salt.
A lot of my dot points have been grabbed from other sources yet still reflect my opinions. Off the top of my head Seth Klarman’s book Margin of Safety provides a lot of dot points mentioned here. So, if you have seen some of these dot points before I apologize. Also, a lot of these were found from this document I found on Reddit called Investment Principles & Checklists. I’ve tried searching through Google and Reddit search (which sucks) and I’ve been unable to find the OP so I’m incredibly sorry I can’t give proper credit. Please don’t get the idea I’m trying to take credit for any of the below linked document.
Click here or on the image to download the PDF of the Investment Principles and Checklist that a lot of this list was based off.
Where to Find Investment Opportunities:
- Smaller companies with less broker and analyst coverage.
- Graham-and-Dodd deep value situations (e.g., discount to break-up value).
- Overreactions due to the madness of crowds, less desirable looking investments due to number of reasons.
- Spin-offs and Divestures.
- Forced selling by index funds.
- Forced selling by institutions (e.g., big mutual funds selling “tainted” names).
- Disaster (e.g. earnings disappointment and other type of setbacks. Adversity and uncertainty create opportunity).
How I Identify Quality:
- Understandable & robust businesses with a high level of recurring income (Sorry but no speculative companies (eg biotech/ resources).
- I want a simple, predictable free cash flow generative business. Simplicity, durability and predictability.
- Track record of profitability & positive cashflows (Again no speculative, loss-making companies, obviously doesn’t apply in all cases but most of the time.)
- Good visibility and understanding around future profit growth and drivers.
- Trading on below market multiples, I want a price that affords a margin of safety (aka sensible purchase price).
- Aligned management or family companies (No unaligned, self-centred management).
- Strong balance sheet (No highly leveraged balance sheets, usually not worth the risk or shows poor financial management).
- Tailwinds supportive of business growth.
- Capable, trustworthy & shareholder friendly management.
What’s My Edge?
- Risk Control: Superior investment performance is not my primary goal, but rather superior performance with less-than-commensurate risk. Above average gains in good times are not proof of a manager’s skill; it takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk. “If we avoid the losers, the winners will take care of themselves.”
- Psychological edge: Willingness to bear pain and delay gratification; avoidance of (or ability to exploit) fear and greed; lack of interest in one’s popular perception; willingness and ability to go against the crowd when appropriate.
- Time Edge: Longer time horizon, never have to buy or sell in any situation because of others’ decisions. Ability to let compound interest do its work.
- Intellectual humility: Acknowledging what I don’t know and staying within a well-defined circle of competence.
- Enjoyment: I enjoy the process. I’m more than happy to put more hours in and spend time researching and reading than others.
- Don’t buy into promotional companies.
- Don’t invest in what I don’t know.
- Don’t ignore a good stock just because it trades “over the counter.”
- Don’t buy a stock just because you like the “tone” of its annual report.
- Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
- Don’t quibble over cents on the purchase price.
- Don’t overstress diversification.
- Don’t be afraid to buy on a war scare.
- Don’t be influenced by what doesn’t matter.
- Don’t fail to consider time as well as price in buying a true growth stock.
- Don’t follow the crowd. “If you behave the same as everyone else, you’ll achieve the same as everyone else”.
What are my Investment Goals?
My aims when I make investments is obviously to generate superior returns. But without taking large risks.
The possibility of permanent loss is the risk I worry most about. But overall I really just want to set up myself, potential future and current family up financially. I’m not poor, I have been fortunate in life to have been born where and when I have. But we are not objectively wealthy or well off. I want to be able to have a financial net so that I am not forced to do things I do not want to. Money won’t solve all my problems. But it just might solve some. I would rather have rich people problems than poor ones.
To summarise, I want to be set so that I can do whatever I want, whenever I want. Whether that is to travel, go fishing on the boat or play golf every day, I don’t care. I’m trying to get started early and let the power of compounding do its work. Buffett *only* became a billionaire after 50, but the compounding has since accelerated it. Even after a 40% drop to net worth during the subprime crisis he just kept at it, playing for the long run.
Why have an Investment Strategy?
I believe in the thought that without an executable investment strategy, I would be no better than a monkey throwing darts. That still may be the case don’t get me wrong. But at least if someone were to ask my thoughts on why or why not I didn’t invest, I’ll be able to refer back to this.
Obviously when deciding on an investment, it doesn’t have to tick off every criterion listed. That just wouldn’t be possible. But if it starts failing more than it passes, then it should probably be ruled out. It’s a nuanced thing I know but I hope you understand. The world is not black and white, and only a Sith deals in absolutes. Deciding on an investment is a perfect example of that. You can never be 100% sure an investment will work out and I’m perfectly ok with that scenario. That’s life.
Further to my category of investing, personally I don’t like to box myself in and define myself as a pure value or a growth investor. Although I would admit I lean heavily towards a value type investor. I just don’t want to be pigeonholed only as that. Maybe being labelled as an opportunist, I would be comfortable with. I don’t really know though. I am what I am, and I just follow my investment strategy.