You have brains in your head.
You have feet in your shoes.
You can steer yourself
any direction you choose.
You’re on your own. And you know what you know.
And YOU are the guy who’ll decide where to go.
— Oh, the Places You’ll Go
I have previously written about finding the right companies to invest in. Now let’s think about finding the right style. I think investing style is very personal. It is influenced by your past experience / age, your temperament, your risk tolerance, what you have read / observed / understood, etc.
You can take a day trading / trader / speculator’s approach (momentum investing), a passive value investing approach, value growth investing approach or philosophical/conceptual approach .
For me personally, there are many great investors, and among them, I do classify into genres. There are the pure value investors such as Benjamin Graham, Irving Khan, Walter Schloss, John Templeton, Joel Greenblatt, Bill Miller, Max Heine, and Michael F Price. There are the growth and value investors such as Warren Buffett, Charlie Munger, Peter Lynch, Philip Fisher, Seth Klarman and Edward Lampert. There are the momentum investors such as William O Neil. George Soros and his concept of reflectivity. Jim Rogers the commodity investor. And there are the activist investors like Bill Ackman and Carl Icahn.
I may be wrong in my classifications. However, frankly it is not right to pigeon-hole these investors into different genres. Even within Value Investors, there are different types. For instance, Max Heine was an opportunistic investor with a value-based approach towards investing (distressed investing), while Michael Price takes on an inquisitive approach when looking at the companies to invest in. What he considers is how much the company would possibly be valued and bought by some investor of another party. He takes into consideration the intrinsic value of the company’s stock by adopting conventional metric like price over book value and price over cash flow. Price extensively studied mergers and acquisitions. Also moreover their values & beliefs do change and evolve over time.
Ok, this blog is not a write up on the investment styles of each of these masters. I am sure you can google for it. What I am writing about, is my thoughts on their styles and how I view investing (basically for myself, to rationalize my thoughts). Each master has his strength and I feel that there is a bit of Benjamin Graham, Sir John Templeton, Walter Schloss, Warren Buffett, Peter Lynch, Edward Lampert philosophy etc in my investing style.
In many way, most great investors take their root from Benjamin Graham Value Investing. However ultimately, value investing is base on the pessimistic view of searching for undervalued companies without much thought on the future prospect of the companies. The idea is to buy 1 dollar worth for 50 cents. It is looking at the ground for the cigarette butt with a puff or two left. It is also base on the worse case scenario of what could go worse eg. what the company is worth if it is sold.
Value growth investing is a slight change in view. It looks forward, taking a more optimistic view on the growth prospect of the company base on the management’s strength, future earning growth, defensible moat, etc. In many ways, Buffett is the eternal optimist. When the US is in a recession, he has full confidence in the recovery of businesses with solid fundamentals.
So what kind of investing styles do I apply? What do I believe in?
1) Buying a dollar for 50 cents. At the core of my investing style is to buy bargains.
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. ” Warren Buffett
2) Am I more quantitative (Value) or more qualitative (Growth)? I guess I am both in a way (Value + Growth). In some companies I take a more value approach, in others I take a value+growth approach. At the core, I always like companies with low debt, low price to book value, low P/E and EV/EBITDA (see item 1). I also like high growth companies. Earning growth rates at approx. 20% (or more). Typically considered by Peter Lynch as Fast Growers. However I am skeptical of too high growth of 30% or more. I think the values of today’s companies are more in intangible assets (eg. brand name, patent, efficient management, etc) instead of traditional tangible assets (real estate, equipment, commodity, etc). High profit margins. High management ownership. I believe in intrinsic value and PEG. My only weakness is evaluation of management strength – I base my assessment on readings and not interaction with management (it is much harder to judge a person than financial figures). Kinda like Walter Schloss.
3) Buy and Hold. Market swings are there to serve you. I always believe investing is a “marathon” – it is long term. An investor who made more money than the other currently may not necessarily be a better investor. Market swings sometime can be irrational – bubbles form and someone chasing the bubble can appear better. However, eventually your stake in the better companies will reward you.
Of course this can work against me. Being stubborn in the ‘wrong’ stand. I do hold mediocre companies. Some people may argue that it is better to accept your loss (sell at a lost) and invest your money in better companies. However, I always have the view that if you hold long enough, even mediocre companies can turn in a small profit (well at least break even) – well you lose via “opportunity cost”. Well put another way, you win less. You just keep finding better and better companies. These stocks are there to serve another purpose (to remind me every day of my mistakes or laziness in researching. Stare right back at me). Well we are all not perfect (some like me more imperfect than perfect hah) “p
“Often, there is no correlation between success of a company’s operations and the success of its stock over a few months or even years. In the long term, there is 100% correlation between the success of the company and the success of the stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.” Peter Lynch
4) Do I bottom fish? Yes – 2 situations: In good companies when some bad news, corrections & crashes occur that do not affect their fundamentals and in Cyclical companies during down cycles (it would better to find solid companies in down cycles – but that is not always the case, sometimes fundamentals just deteriorate along with the cycle). For the latter I either go for big companies with a good asset base or good companies with solid fundamentals. Just FYI I have yet to profit from the latter :p
5) My weaknesses.
- I find it hard to amass a big war chest (have never gotten to the ideal 50% in cash). It relates to your level of comfort during market crashes.
- Spend too little time reading & researching the figures of each company I hold.
- Lack Patience. However, I think writing in a blog kind of train me to think more about the companies instead of the stock price fluctuations. I do remember better when I write. Nowadays I read & write much much more than buying or selling.
6) I like stocks with high dividend yield but it is not my top 5 criteria. Ultimately, I prefer high growth companies to slow growth and high dividend yield companies. Well of course there are high growth + high dividend yield stocks, but these are rare (and I would like to feel comfortable enough in their business model before investing). Hence, I didn’t jump into NeraTel or CMP. Also I don’t invest much in REITS, since it is a different kind of valuation as compared to traditional companies (not good at valuing REITs). I believe you don’t have to be good at all kind of investments, just need to be good at a few or just one. There are people who are really good individually with REITs, Utility stocks, Property, Day Trading, Derivatives, etc and they can be very successful.
7) I don’t like looking at my losses during market crashes. As much as I believe these are great buying opportunities – I would rather not think about losses at this period of time (and listen to this song – click here). I do not want to be constantly reminded of my ‘losses’ (If only I can change the font colours to green). I won’t be as extreme as Warren Buffett as “tap-dancing to work”. However, I will probably read much more to confirm my beliefs in these companies. Yes I feel worried and sad at the losses but a weird part in me will be wanting to buy more.
There was a time when I worry over every “loss” cause I do not understand the fundamentals behind the stock. To ‘cut loss’ immediately. However, when you first witness the change from a major loss to a positive, something in your thought process change. You realize this can be possible with good companies (yeah I know we need to have a 100% increase for each 50% decline to just break even) — this is not something you have read or something which someone told you, but something which you have experienced first hand. For good companies, we all play the game whereby the one with the “lowest” aggregate stock price ‘wins’. Of course the inverse is true. eg. you buy when momentum is up, things can go down fast. And of course good companies can turn bad. Nevertheless, over time I became more and more interested in the red losses than the green gains. (read here). In a way, the price I bought (usually related to PEG or intrinsic value) became my guide, as I know anything lower than my buying price may likely mean better gains the future (don’t know when, not important anyway). One recent example is Super Group. At one time in Nov 2014, I was looking at -16% loss, today I am looking at +19% gain. A very volatile stock indeed. Too bad can’t buy anymore.
“We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.” — Warren Buffett, 1977 Berkshire Hathaway Letter to Shareholders
Guess during market downturns, only the companies’ figures / ratios can be the compass.
And yes anything multiple by zero is always zero. So it doesn’t mean that someone who has more profit now is a better investor than you – it is a long marathon. A sprinter can look wonderful at the start but could be running in the wrong direction. The right direction is more important.
“If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over the time you’re patient. You need to find few good stocks to make a lifetime of investing worthwhile.” Peter Lynch