Portfolio

Portfolio

Below is a hypothetical model portfolio, started August 1, 2014 with $100,000 of initial capital.


Write-Ups

Cox & Kings, Ltd.

Philosophy

The strategy which best suits my idiosyncrasies, has withstood the test of time, and makes common sense, is the one largely outlined by Buffett and Munger.  It’s extremely simple, very logical, and easy to follow, yet only a very few people today adhere to this approach because it goes against human nature.  More than intelligence, Buffett and Munger’s approach requires the right temperament, something which I believe can be developed and practiced with the proper process and checklist.  Below are a few high level principles which I try to follow.

  • Loss prevention: Filter out any opportunity which, even if the probability is low, can result in a permanent loss of capital; avoid greed when evaluating an opportunity
  • Understand the underlying asset: This is a simple concept, yet very difficult to put into practice; our minds can trick us into thinking we have a model for understanding the underlying reality of the asset when in fact we do not; we need to be able to predict, with reasonable certainty, what the asset can produce on a 10 year time horizon; this requires a deep understanding of a number of variables including quality of management, economic moat, competitive dynamics, and potential black swan threats
  • Bet infrequently: Unless we are in a once in 40 year crisis like that seen in 2008/2009, there simply aren’t enough no-brainer opportunities available to us to make weekly or even quarterly trades; all we need are 1-2 good ideas per year; Munger takes it to an even greater extreme wherein he’s content to sit in cash for years before playing out a hand (when he does play, he goes all in)
  • Heavily concentrate investments: Most portfolios follow a power law wherein the top few investments produce 80%+ of the portfolio’s alpha; a portfolio of 3-5 high conviction ideas is sufficiently diversified; this approach also forces us to develop extremely strong filters for investments and bet only when we have the right hand
  • Ignore short term results: The only way we can ignore short term results is if we think independently; we must pay attention to new information as it comes out, but what we must not do is allow short term market fluctuations to dictate our thinking
  • Invest for the long term: A frequent mistake people make is to sell their winners too soon; we get excited when a security has moved up 50%-100%, but real wealth is built through compound interest; if we have a potential 10-20x investment identified, it doesn’t make much sense to sell after one or even two years, even if a correction is overdue; only a very few people in the world are smart enough to predict short term price movements
  • Seek dis-confirming evidence / challenge thinking: We are human and our minds don’t always work right; we need to be aware that we don’t have perfect information and that the future is very dynamic; in a very Darwinian way, we need to challenge our best loved ideas; we need to understand the bear case better than the bears do; finally, we need to understand and correct for the psychological tendencies which may have caused us to make a misjudgment

During market environments where the 10-20x investments are difficult to find, there are opportunities to capture in special situations and other areas, where the time horizons are much shorter than what I typically seek.  It makes sense to dedicate a portion of the portfolio to a few high conviction ideas in these areas and I surely will be writing about such opportunities as I discover them.

Below, I’ve included select quotes from great investors which guides a lot of this thinking.

“An investor has to do very few things right as long as he or she avoids big mistakes.” -Warren Buffett

“A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables.  And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past.” -Charlie Munger

“The ones that have the edge are the ones who really have the temperament to look at a business, look at an industry and not care what the person next to them thinks about it, not care what they read about it in the newspaper, not care what they hear about it on the television, not listen to people who say, “This is going to happen,” or, “That’s going to happen.”  You have to come to your own conclusions, and you have to do it based on facts that are available.  If you don’t have enough facts to reach a conclusion, you forget it.  You go on to the next one.  You have to also have the willingness to walk away from things that other people think are very simple.  A lot of people don’t have that.  I don’t know why it is.  I’ve been asked a lot of times whether that was something that you’re born with or something you learn.  I’m not sure I know the answer.  Temperament’s important.  If you don’t know the answer yourself don’t accept somebody else to tell you.  If you don’t know the answer yourself and somebody else says they know the answer, don’t let that fact push you into coming to a conclusion about something that you don’t know enough to come to a conclusion on.” -Warren Buffett

“Part of the reason we have a decent record is we pick things that are easy. Other people think they’re so smart that they can take on things that are really difficult. That proves to be more dangerous. You have to be shrewd and you have to be patient. You have to wait until something comes along which, at the price you’re paying, is easy. That’s contrary to human nature, too. Just to sit there all day doing nothing but waiting.  For an ordinary person, can you imagine just sitting there for five years doing nothing? It’s so contrary to human nature. You don’t feel active. You don’t feel useful, so you do something stupid.” -Charlie Munger

“In the United States, a person or institution with almost all wealth invested, long term, in just three fine domestic corporations, is securely rich.” -Charlie Munger

“Our philosophy was simple – we found the twenty best companies in the world and went long, and the twenty worst companies and went short; then we made sure to let our winners run for years, while quickly cutting our losers.” -Julian Robertson

“With so many people waiting for others to make the first move, it’s amazing that anything gets bought.” -Peter Lynch

“It’s interesting to note that the professional short sellers, who profit on stocks that go down in price, usually take their positions nearer to the bottom than to the top.  The short sellers like to wait until a company is so obviously foundering that bankruptcy is a certainty.  It doesn’t bother them to get involved at $8 or $6 a share instead of at $60, because if the stock goes to zilch, they’ll make exactly the same profit in either instance.” -Peter Lynch

“When you’ve decided the story is no longer intact, it does not make sense to wait a second longer to sell.” -Peter Lynch

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