Comments On Investment Philosophy - Piece Of Occupation 1 Of Hopefully A Few...

This is the offset of several investment retrieve pieces I lead keep inwards my caput dealing with investment philosophy, where markets are similar a shot as well as maybe fifty-fifty a stock or two... They are surprisingly hard to write so these posts mightiness come upwards slowly...

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When I was starting out inwards the investment game I read Warren Buffett's letters from inception, Ben Graham, Phil Fisher, anything I could on Charlie Munger as well as the repose of the touchstone investing canon. 

One matter that had a profound resultant on me was Warren Buffett's 20 punch card. (Quoted here...)

Buffett has oftentimes said, "I could improve your ultimate fiscal welfare past times giving you lot a ticket with only 20 slots inwards it so that you lot had 20 punches - representing all the investments that you lot got to brand inwards a lifetime. And i time you'd punched through the card, you lot couldn't brand whatever to a greater extent than investments at all. Under those rules, you'd truly retrieve carefully virtually what you lot did, as well as you'd hold upwards forced to charge upwards on what you'd truly watch about. So you'd do so much better."

Buffett is right. That would hold upwards a really good way to run your private investments - you lot would, I think, hold upwards rattling rich past times the fourth dimension you lot were old. And indeed Charlie Munger has run his career unopen to that way (though I suspect he is closer to 100 investments past times now...) 

Charlie Munger has quoted Blaise Pascal approvingly: "all of humanity's problems stalk from man's inability to sit down quietly inwards a room alone."

There are plenty of people out at that topographic point who telephone telephone themselves Buffett acolytes - as well as equally far equally I tin watch they are all phoneys. Every terminal i of them. 

Find whatever investor who models themselves off Warren Buffett as well as await at what they do.

And await at their investments against a 20 punch carte test. 

They fail. They don't fifty-fifty come upwards close. Several big-name so-called Buffett acolytes lead keep made to a greater extent than than iii to 5 large investments inwards the terminal iii years as well as at prices that can't perhaps encounter the 20 punch carte test. Most phoney Buffett acolytes lead keep been turning stock over faster than that.

Warren Buffett's 2 juniors (Todd Combs as well as Ted Weschler) lead keep turned over many stocks inwards the past times few years likewise - as well as at prices that don't reconcile with whatever twenty-punch-card philosophy. They are phoneys too. Just a petty less egregious than many other so-called Buffett acolytes.  

I used to profess myself a Buffett acolyte too. But somewhere along the trace I realised I was a phoney too. I exactly wasn't unopen to that selective as well as when the province of affairs was correct I wasn't anywhere nigh willing plenty to push clit the trigger as well as go really large inwards a position. 

There are psychological feedback mechanisms that halt you lot coming together the 20 punch-card test. Firstly it is really hard to hold upwards that patient. I did non honor a novel stock that met that examine this year. Or terminal year. Or the yr before. Or the yr earlier that. I flora i inwards 2012. And prior to that I had non flora a novel i since the crisis (when at that topographic point were many available most of which I missed). 

But I am incapable of sitting idle since 2012 (even though the local beach is rattling good) as well as so I do stuff. Inferior stuff. Stuff that may gain inferior results. 

And some of it (thankfully non much) did gain inferior results. [I was long Lord's Day Edison for example.]

And when you lot are incorrect similar that it is scarring. It makes you lot less willing to push clit the trigger inwards quantity when something does encounter the 20 punch-card test. Indeed perhaps the primary payoff of the 20 punch carte examine is the avoidance of mistakes so you can (both psychologically as well as from a risk-management perspective) accept much bigger positions when they come upwards along.

Phoney Buffett-style value-investing is dangerous

Influenza A virus subtype H5N1 20 punch carte investment portfolio is - past times its nature - a concentrated investment portfolio. If I had run my portfolio similar that I would lead keep come upwards out of the crisis with maybe half dozen stocks, turfed i or 2 past times similar a shot as well as added a unmarried stock inwards 2012. 

The repose of the fourth dimension I would lead keep spent reading, talking to management of companies I was never going to invest in, as well as otherwise tried to run out how the globe truly works. (And the globe is e'er to a greater extent than complicated than you lot imagine so the run is endless fifty-fifty if the activeness is muted.) 

Many so-called Buffett acolytes (phoneys, all of them) lead keep imbibed that a concentrated portfolio is a practiced idea. And so they acquaint equally having 5 to twelve stock portfolios as well as are prepared to accept xxx pct positions. 

But the stocks oftentimes don't encounter the 20 punch-card test. And so these investors air current upwards with large positions inwards 2nd charge per unit of measurement investments. When i goes incorrect it is deeply painful. When iii snuff it incorrect simultaneously it is devastating. 

The lesson hither is easily stated: "if you lot are going to fill upwards your portfolio with crap, it improve hold upwards diversified crap". 

Several of my favourite phoney Buffett acolytes lead keep been posting catastrophic losses. It was due. The phoney Buffett acolytes nevertheless hither are exactly waiting for their plow to lead keep catastrophic losses. 

Real twenty-punch-card investing is impossible to sell to clients

Just imagine if I had run a twenty-punch-card trend portfolio as well as sold it to clients. We would lead keep made a bunch of conclusion inwards 2008 as well as 2009 as well as our numbers would lead keep been stunning to 2012. (Our returns on our longs were rattling practiced inwards those years. Way ahead of market.)

We would lead keep turfed i or 2 of these. (Some businesses exactly change, others snuff it upwards 7 crimp as well as are exactly non worth holding.) 

I would lead keep bought a unmarried large seat inwards 2012.  

And since virtually mid-way through 2013 my cash holdings would hold upwards going upwards as well as up. Partly from dividends, partly from property sales. 

And I would hold upwards underperforming now. Quite badly, fifty-fifty though returns would hold upwards positive. Come to retrieve of it, my longs to a greater extent than oftentimes than non are underperforming now. So are the longs of many fund managers I admire.

But to a greater extent than oftentimes than non I would lead keep been exactly idle. So inwards the midst of underperformance a customer mightiness enquire me what I did terminal yr as well as I would say something like

a) I read 57 books

b) I read virtually 200 sets of fiscal accounts

c) I talked to virtually seventy management teams and 

d) I visited Italy, the UK, Germany, France, Japan, the USA as well as Canada 

but most importantly I did non purchase a unmarried portion as well as I sold downward a few positions I had.

And I underperformed an index fund.

That is variety of hard to justify. I don't lead keep a clue how you lot would ever sell it to clients. I can't imagine whatever clients buying it.

And so to my noesis at that topographic point is absolutely nobody who is truthful to the formula as well as who truly runs a concentrated 20 punch-card formula fund. 

They are all phoneys because (a) the truth is so hard it hurts as well as (b) the clients can't handgrip the truth.

What I did when I realised I was a phoney Buffett acolyte

Somewhere along the trace I realised that did non lead keep the temperament to hold upwards a truthful 20 punch-card investor. So I did 2 things.

a). Rather than accumulate cash as well as exactly sit down at that topographic point for rattling long fourth dimension periods (five to 10 years) I tried to honor shorts. The shorts lead keep 2 benefits (i) they plow into cash when the marketplace goes downward as well as twenty-punch-card opportunities arise as well as (ii) they endeavour to brand some coin on their own.

b) I run a portfolio that is to a greater extent than divesified than I desire. I wishing to hold upwards fifteen stocks inwards fifteen industries as well as 7 countries, though inwards reality my wishing should hold upwards to hold upwards to a greater extent than concentrated than that. [I would/should hold upwards happy with 5 20 pct positions equally long equally they all encounter the 20 punch-card test.] Alas (justified) lack of conviction agency my portfolio is virtually 45 long positions - many of which are for sale when a improve watch comes along. In other words when I concur crap at to the lowest degree I diversify it.

This is non alone satisfactory. I larn some longs incorrect as well as lose coin on those. And the shorts tin hold upwards hard to brand coin on fifty-fifty when you lot are right. Influenza A virus subtype H5N1 stock that goes from 10 to null mightiness await similar a bully curt but if it goes via 50 so you lot are probable to hold upwards forced to encompass some on the way upwards as well as its unlikely you lot volition ever recover your losses.

We lead keep strategies to care both those problems as well as the results lead keep been as well as volition rest satisfactory although they volition non e'er glow. There tin hold upwards sustained periods of tedious performance. And whist this is non equally hard to sell to clients (or yourself) equally a truthful 20 punch-card portfolio afterward a yoke of years tedious surgical physical care for tin larn exhausting. Clients who haven't lost whatever existent coin volition exit - because at that topographic point is e'er individual else who is making coin - as well as the grass is e'er greener - as well as because clients watch surgical physical care for to a greater extent than than inherent peril inwards whatever portfolio - as well as depression peril portfolios tin hold upwards dull.

Portfolio managers I admire

I nevertheless admire Buffett's portfolio management to a greater extent than than I tin say. He truly is astonishingly practiced at what I lead keep chosen to do for a living.

But I can't emulate Buffett as well as nor tin anyone else I know. And if individual uses his elevate to depict their investment philosophy my (likely accurate) presumption is that they are a phoney.

There are other managers I admire. I nevertheless think Kerr Neilson at Platinum is a freak but it is awful hard to emulate him though inwards at to the lowest degree business office of my portfolio I try. I worked for him for 7 years as well as lead keep some watch how he does it. [He is unbelievably practiced at cyclical stocks for instance - something Buffett professes no wishing to do as well as which I lack some of the skills necessary to do.]

But almost every other portfolio managing director I admire is a long-short managing director who has come upwards to an investing compromise similar mine. They aspire to hold upwards world-class long investors but irregularly fill upwards their portfolio with to a greater extent than diversified second-class stock picks. And they run curt books.

And the curt books hopefully brand coin on their ain - but to a greater extent than oftentimes than non brand coin at the correct times - delivering their profits inwards downward years similar 2008, as well as stripping them of profits inwards super-strong markets.

The work is that almost every i of these managers is having a tedious acre at the moment. These are people I retrieve are alongside the best inwards the world. And I retrieve (without naming names) that they are having the tedious acre the same way equally I am. In detail it is devastatingly hard to honor things that encounter the 20 punch carte test. [If you lot lead keep i delight e-mail me. I am prepared to psyche to almost anything.]

So instead they lead keep been buying things which are "ownable" rather than "buyable". In other words things that are sort-of-okay inwards that if you lot owned them for a decade you lot would in all likelihood hold upwards happy plenty but non thrilled with the result. And the results from doing this lead keep - at to the lowest degree over the past times yr - been dull. [Exception: if you lot bought pure bond sensitives equally an choice to bonds you lot did truly good - but alas I did non do that...]

And the practiced long-short managers lead keep flora it like shooting fish in a barrel to honor egregious crap to short. Stuff where the storey has to a greater extent than resemblance to fantasy than reality. The typical enjoin is massive differences betwixt "the story" as well as the GAAP accounts". 

Some of these fantasy stocks lead keep blown upwards (Valeant, Concordia) but many are hold upwards as well as good as well as when I depict them equally fantasy stocks I exactly larn dorsum hostility. And equally a dominion long "ownable", curt "fantasy" has non worked that well. Truth hold upwards told it has produced results that somewhere betwixt 5% positive as well as 5% negative. It has been hard run to snuff it nowhere. 

And at that topographic point are fund managers who are doing better. Some of them lead keep tricks I do non sympathise (I put David Tepper in this military camp - I but don't larn how he does it as well as thence can't emulate it*). But the ones I do sympathise I don't like. Their peril of a addition 20 is clearly improve than mine. And their peril of a minus forty is alas fifty-fifty improve than that, as well as that is something I honor abhorrent fifty-fifty if the clients are seduced.

Its truly hard out there. I don't retrieve it is a fourth dimension to hold upwards greedy, but depression to negative yields motility into a hard fourth dimension to hold upwards safe/fearful equally well. 

John

*The Tepper merchandise that most impressed me this bike was long the airlines. I had plenty noesis to know this bike would hold upwards practiced if I lay the pieces together. But I did non lay the pieces together as well as my allergy to uppercase intensive competitive businesses overwhelmed mutual sense. Tepper made a bully merchandise that almost whatever Buffett acolyte would lead keep ignored.