Tag: The art of Sprezzatura

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Patience is paramount for reliable investment performance

Investing is easy

At least some say it is.

You just buy and hold, and then you retire rich.

Well, it’s not quite that easy – at least not for mere humans, since we tend to lack the required patience.

A history, and future, of waiting for Godot

In just the 8 years between 2009 and 2017, the S&P 500 index surged from 666 to almost 2400. Including a few per cent a year as dividends on top, the annual total return of some 17% (including dividends of ca. 2% p.a.) turned one dollar into around four.

On the other hand, if you bought at the peak in March, 2000, you would still have been down by about half even nine years later, and just about break-even after a full 13 years. Over the full 17-year period, 2000-2017, your annual return before dividends would have been 2.5% (compounding into a 50% return), and approximately 4.5% including dividends.

I’m tempted to include that the NFMC/GVA multiple for the median company in the S&P 500 index is now the highest it has ever been. Were it to revert to its mean within a year or two, you would still be down on your investment in S&P 500 from almost 20 year earlier.

Were it to undershoot as it has done many times before when financial bubbles have unraveled, an even quarter century is probably the eventual tally of years for getting exactly nowhere. The positive news is that after that you can look forward to some 5-10% annual returns on average.

Fortunately, there is another way.

Several actually.

They all require patience though, just slightly different strains.

Instead of investing blindly and waiting for decades upon decades for a half-decent return, you could start with the waiting.

Bide your time and wait until the target manifests your desired margin of safety

Never rush your decisions

Chasing an investment means you’re already too late

You don’t have to write monthly reports to investors, just a life report to yourself

Use that advantage

Whether investigating an index position for an industry, an entire market, or for an individual stock, don’t rush after the impatient fools. The inexperienced investor is more easily led astray by the herding instinct and social proof bias. In addition he tends to think, or feel rather, this is the last opportunity to get on the train.

Since everybody is rushing to invest every last dollar, and then some (borrowed), it’s easy to get the impression this really is the last chance. That, however would imply future generations will be left out altogether, a wholly implausible postulate in an industry that is known for its volatility and fluctuations if for nothing else.

Instead, wait for a good opportunity, nay a great opportunity. Keep your powder dry while accumulating useful knowledge, and turning data into information and reliable investment decision support. When the time is right, for the single stock or an entire index, you pounce. When others are selling in panic at bargain basement prices, when margin calls make bubbles revert to the mean, or invert to even lower levels, you make good use of your patient cash.

Wait

Study

Wait

Pounce

 

n my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Over a period of two weeks, I’m going through and explaining some of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits, not to mention a tool for post-mortem analysis, should an investment turn sour.

 

Patience means being able to withstand the herding instinct when the fundamentals are wrong. It means the ability to wait for a good entry point as well as a good exit opportunity. It means trusting your own system enough to actually invest according to the applicable time horizon, not just paying lip service to it.

 

There is no one optimal investing strategy, but you need patience to reap the rewards from the one you’ve chosen.

If time runs out on one investment,

simply turn the hourglass

and

investigate another

Patience

As a value investor I’m used to waiting; sometimes when buying a cheap company in the middle of a bursting bubble, sometimes when other investors are chasing story stocks instead of deep value, sometimes when everything is expensive, sometimes when cheap stocks get cheaper by the day or stay cheaper for longer.

Patience:

Right now the stock market is insanely expensive and technicals point to a trend change downward. Hence, I’m underweight listed stocks (actually net short including my XACT BEAR position). Nevertheless I’m long a few gaming companies with strong momentum, a hype/hope biotech stock, a nuclear energy consultancy stock and the Uranium ETF: URA. In my portfolio of private companies I have high hopes for my gold mining options, my jet engine driven surfboard company and my HR software company, not to mention the mortgage broker start-up and the investment company (small family-owned manufacturing and services companies) I’m about to invest in later this month)

P.S. You can buy the TAOS artwork here

 

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Sticking to your strategy is much harder than forming it

Investing isn’t easy.

Investing involves a multitude of various investors, consumers, companies, managers, employees, fiscal and monetary policies, weather, disasters, your own psychological biases, and not least chance. Investing is thus like playing a multi-dimensional board game, with considerably more moving parts than in a game of Go.

n my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Over the coming weeks, I intend to go through and explain twelve of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits.

Strategy means having, and systematically and consistently complying with a system for investment decisions, rather than relying on intuition and gut feeling.

Some prefer a fundamental, value-based stock-picking strategy. That insures against permanent losses if market momentum suddenly turns negative.

Others prefer value-agnostic methods, based on, e.g., momentum or specific share price patterns. In theory, you could make money that way in any market environment. Yet others rely on asset class diversification with fixed rules for adjusting the relative weights.

Some investors focus on macroeconomic information, while some prefer pair trading, focus on special situations or risk arbitrage. A select few have chosen more or less complicated derivatives strategies.

There is no one optimal investing strategy. You can get rich or poor fast with any of the mentioned strategies.

Many strategies can carry the required load on the financial markets; and different strategies work better for different individuals or institutions. It’s consistent execution of the chosen strategy that leads to exceptional results.

Hence, you should choose a strategy – logical, rational and back-tested – and modus operandi that you are comfortable with trusting in good times and bad, neither amending your sizing, risk tolerance, asset allocation or positioning during streaks of good luck, nor in streaks of bad luck.

Practice

Form a strategy

Stick to it

However, do adjust the strategy deliberately if needed; but don’t deviate from it in ad hoc fashion based on emotional reactions to particular circumstances or stress.

Strategy.

My own strategy is based on thorough fundamental research on individual companies. I want to buy fair companies at a fantastic (low) price, including unproven start-ups with great ideas at very low market capitalizations. I tend to find it difficult buying great companies at great prices, mostly since I find it difficult to identify truly great companies without their prices being insane – a price point I’ve never been able to stomach.

I typically trade (buy or sell) in increments over a fairly long period (sometimes weeks, sometimes years), mostly to avoid the psychological blow of buying or selling the entire position at the wrong price right before an important (unknown) event, partly to enable trading on share price overshooting, and finally in order to learn more about the company before becoming psychologically stuck.

In addition, I trade around long-term positions whenever the share price overshoots or undershoots due to news or movements in the general market.

I’m always prepared to lose money, albeit not bond-pit trader style like Mark Spitznagel, but rather as part of reality’s natural tendency toward an unpredictable range of outcomes. To insure against too large losses, I diversify across a range of assets, such as my apartment, physical gold and platinum options, private companies in a range of industries and stages, private bonds/loans, and listed stocks in various sectors.

I combine my bottom-up investment style with a top-down view of the general economy, as well as an overall view of the stock market (in particular the median valuation level, and trend convergence of technical gauges), in order to decide on my overall risk level and how to weight the various slices of my investment pizza.

In short, my strategy can be summarized thus:

  • Fundamental bottom-up value-based stock picking
    • Averaging in and out
    • Position trading
  • Overall market valuation
  • Overall market trend
  • Top-down macroeconomic overlay
  • Quattro Stagione asset class diversification pizza portfolio

My Strategy:

Right now the stock market is insanely expensive and technicals point to a trend change downward. Hence, I’m underweight listed stocks (actually net short including my XACT BEAR position). Nevertheless I’m long a few gaming companies with strong momentum, a hype/hope biotech stock, a nuclear energy consultancy stock and the Uranium ETF: URA.

Real interest rates are negative, and fiat currencies seems overdue some kind of re-set, explaining why I’m overweight precious metals (options on physical) as insurance against long term mayhem.

I have lent out money, with a large margin vs. policy and market rates. If the economy improves and interest rates rise, my rates rise too. If the economy weakens, I’ll just have to hope my friends can keep their jobs. I’m overweight this kind of junk/friend private bond market due to extremely good rate margins, despite a half-decent macro outlook for Sweden.

I’m neutrally weighted private companies, even if it sometimes feel like I’m overweight – probably due to my low current weight for listed stocks. Listed stocks are expensive, while certain sectors and classes of small private companies are quite cheap – not to mention restricted to few well-connected investors. Hence, I have focused my investments during retirement more and more toward private companies within, e.g., HR software, consumer motor/water sports, medtech, retail and a few others.

My guess is I’ll keep increasing my weights in private companies in tandem with the economy getting weaker at some point in the future, and me thus getting more and more calls for investments. After that I hope to reap handsome rewards starting in 2020 and going forward. Hopefully several of my private investments will become public around then. In 2022 I’ll turn 50 and some time around then, my strategy is to do more travelling and spend less time on risky investments again… for a while.

P.S. You can buy the artwork here

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Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it’s free, and it includes my book about hedge fund investing), if you want to make sure you don’t miss out on freebies, offers and subscriber-only discounts on special products.