Sunday, September 11, 2016

Keeping Track of Ideas from This Year

After analyzing my results year to date, I see the need to be more concentrated and find more “investments” as opposed to “trades”.

Here is a table of my write-ups on this blog year to date, and how they’re doing

There’s also stuff that I did not write about that detracted from my returns. Macro trades/hedges killed me this year. Those deserve a separate post-mortem but I think the writing process forced me to think through everything more completely, yielding better results.

What’s interesting in the table above is how active management detracted from my returns. One clear pattern above is “actual return since write up” is much lower than “hypothetical return from buy & hold”. This is because I sold early: either I cut positions early, or traded in and out of the stock.

Why is that? Sometimes a sell is justified – as in when stocks simply reached my estimate of fair value, or when my thesis proved false.

But other sells are more questionable. Sometimes I would sell a position just because new facts came out and I have not had time to assess the situation. So I would sell first, sit on the sidelines until I get around to updating my assessments. This has saved me from losses in the past but can also be costly as stocks fly upward. I think it’s a sign that I have too many positions and not enough focus (I have 30-40 positions going most of the time).

Some Ideas Look Better in Models Than in Real Life

Sometimes it’s the nature of the idea itself that limited the upside. I can explain this better by grouping ideas into categories:

Pure mis-valuations

Examples: FNFV

Problem is that the initial asymmetric risk/reward goes away as soon as price moves up, so you get limited upside. Let’s say I think company A should be worth between $90 to 130. Stock is at $100 so you say “downside is 10% and upside is 30%, and the probabilities are about 50/50, this is nice risk-reward”. So you buy.

Next month the stock moves 10% to $110. But the fundamentals have not changed so your valuation range stays at $90-$130. With stock now at $110 the upside/downside is now at 18% each, and the probabilities are still 50/50. This bet is no longer tilted in your favor, so you exit the trade.

Despite the perceived 30% upside at trade inception, you exit the trade at a mere 10% gain.

Lousy businesses at attractive prices

Example: Omega Protein

These are naturally not going to be long term holds. You’re just looking for fundamentals to shift in a better direction and thus stock price along with it. But ultimately the fundamentals is capped (still a lousy business), so the upside is limited like the above “pure mis-valuation” category.


Examples: Select Harvest, Sterling Construction

The problem with these is you’re looking to catch a cyclical bottom in the industry. In practice there’s also an element of price speculation. That tends to keeps my confidence low and my positions small.

In the case of Select Harvest that I missed the move completely (waiting for a pull back that never happened). In the case of Sterling Construction, I cut stakes early because I didn’t have enough conviction, only to buy back later at higher prices. Perhaps I will learn to get more conviction and bet bigger one day.

Going forward, I want to have a lower number of positions be more focused on each. And also less of these “this is a crappy to ok business but it’s cheap” ideas, and find more companies with structural growth prospects. 

"Investing" is preferable to "Trading". “Value investing” does not have to be “cigarette butt investing”. These are, of course, easier said then done and will depend on what the market gives you. For now I have been forced to look into smaller companies and foreign stocks.