I have a loong timeframe for my investment theses…like 5-10 years, and I’m ready to wait that time (I think). I just want to find stocks that are going to compound value over many years.
However that gets boring, so I also spend time looking for short term situations like net/nets and microcaps.
I like value + momentum.
One issue is when do you sell a position. Seems to me one should sell once it has reached a fair price and lost momentum (noting that momentum loss could happen well above fair price). There are those like Frank and Buffet who say that you should just hold them forever, and that’s not necessarily wrong, but it seems to me that one might as well hold the market portfolio if a stock is fairly priced. And if it was undervalued and has become fairly priced, what’s to say that it can’t become undervalued once again?
Buying something is actually relatively easy. It’s knowing when to sell that is the tricky part.
i need to work on my selling skills…so far, i have sold mainly to buy other stocks or liquidate a mistake…its not necessarily forever, i have only been doing it for about 3.5 years which isn’t long at all…i don’t see anything under 5 years as being particularly long…
Buffett does NOT say that you should hold them forever. He says that his *favorite* holding period is forever, and it makes sense, but that does not imply you should hold all stocks forever…so many people have that mistaken impression it’s not even funny.
This is a completely logical position to take (very bchadwickian) but again – you are thinking like the reasonable man. The most successful person in the stock market is the reasonable man who understands how the UNreasonable man thinks and can exploit that.
Obviously this is easier said that done, but the theory is that you would actually wait until it is overpriced if the momentum appears ready to continue. If you have a fair price in mind, there is a good chance that 90% of the other people in the stock don’t have that exact same view. If the stock is experiencing growing EPS and multiple expansion, it will tend to attract other investors as well as possibly sell side coverage. Initiation of coverage, company road shows, mention on blogs, etc. have the potential to boost the stock well in excess of fair value. The stock will only become undervalued again if you have a major market pull back or the company disappoints its investors (so figure out what the unreasonable men are focused on and make sure that is moving in a favorable direction).
The best stocks are value stocks that become momentum (multiple expanding) stocks.
I would only hold something forever if it were a growing annuity with high barriers to entry.
MLPs?
MLPs – like oil & gas MLPs?
I don’t do anything with those. The firm I work for is an investment partnership. So it would be a partnership investing in a partnership which doesn’t really make sense IMO (although plenty of people disagree with that thinking). I also systematically avoid things that are highly commodity dependent. I have no clue what the price of oil is going to do in the next 1 month / 6 month / 12 month / 3 year / etc. period of time and I don’t want my investment returns to be based on that. I almost always tend to focus on operating businesses, with a strong preference for industrials and service businesses (both consumer and business services).
The interesting thing about O&G is that a lot of companies have a demand spike somewhere around $75-80 a barrel in oil and the Street knows that, so you get increased volatility at certain price ranges. I just want to focus on operations, not some guess about black goo.
I never look at O&G, financials or biotech – waaaaaaay to much guess work for me.
I’m with you bromion. I’m fine with a value criterion for selecting stocks, but using momentum for entry and exit decisions. And I think you’re right that there’s no reason to sell something at fair value if the momentum is still going upwards.
Curtis Faith says in “The way of the turtle” that you should only exit a trade after it has started going against you, rather than have a profit target (like fair value) because once it’s gotten to your target, you never know exactly how high it can go. I know that that’s trading versus investing, but active management decisions often have a trading component to them.
Would you recommend the turtle book, bchad? I have looked at the reviews on Amazon but never purchased it. I did read William O’Neill’s book on CanSlim and I guess I don’t really get that book – the IBD approach always strikes me as pretty risky, in part because I usually end up trying to short some of the top performers on that list (anything with an unsustainable business model). I like the idea of trend following but want to be on the early side of the trend, not late trend, in other words, although clearly much easier said than done. It always strikes me that the momentum guys get involved in the most dangerous part of the stock’s upward trajectory, and it’s fine and good to say you have stops in place, but what if the stock opens WAY down? MAKO is a good example – how well would stops have worked there? Not so much.
I like the Curtis Faith book, though I read it early in my career, and don’t subscribe to it hook, line, and sinker. The bit about waiting for a drop from the peak to close a position stuck with me, although I have sometimes considered modifying it to close out half a position at a profit target and letting the other half follow the “wait for the top” rule. The problem with doing it half and half is that it then makes it far more complex to do the position sizing, because you have to figure out if you have a full position on or half a position that is waiting for a drop to close out. I just haven’t thought through how to do this.
I find Van Tharp’s book better and more systematic in its coverage, but Van Tharp covers a much wider set of trading criteria. I think that reading Faith first was helpful because I could focus only on his system, and then when I read Van Tharp, I could see how the things that Van Tharp talked about were themes and variations on Faith’s stuff.
What virtualy all the trading books I’ve read have emphasized (Van Tharp, Faith, Elder, etc.) have emphasized is how control over your emotions is so critical in both investing and trading. They just chalk it up to rewards from discipline, and I find it easier to be disciplined when I’m relying on some kind of quantitative tool rather than trusting my subjective evaluations of stuff.
But I think there is more to it than just “being disciplined.” The fact that other investors are reacting emotionally itself creates the profit opportunities, so the discipline is in being able to maintain a clear head in the midst of panic. This squares up with some of your earlier observations in this thread about being able to take advantage of other peoples’ irrationality.
As for stops, I’ve found that there are two levels of risk control.
Stops… this is for ideas that prove themselves wrong early on or just never go anywhere. It takes you out of a bad trade, but it also frees up capital to be deployed to better ideas.
Position sizing… this is actually your first level of risk control… ideally your position sizing is done so that your portfolio can withstand very large mistakes in any one trading/investing decision. So if you have something that gaps through your stop, yes, you will get hurt more than your stop makes you think you would, but the impact to the portfolio itself is not lethal. This might reduce some of the participation on the upside, but as long as you aren’t getting your stops gapped through on a highly regular basis, you can keep those returns skewed positively.
Yes, I think position sizing is widely misunderstood. I’ve written about running a very diversified book. I think it’s patently insane to run a concentrated book with 10 names. Friggin insane. But people do it. It probably works great if you’re never wrong. On the other hand, there is a lot of embedded margin of safety in a highly diversified book of roughly equally sized bets that focus on 3-year opportunities where the investor / team can develop a “house advantage” through diligent research focusing on structural issues and other good probability bets (not guessing about the quarter).
the problem with running a diversified book for me is twofold: one you have to keep up with a ton of names and the other is, how can you possibly have that many good ideas?
I can understand if you run a 1B fund or more you might need like 30-40 securities…
but i hear you when you say you have to be right all the time but why would you do all that work to get a mediocre result (not saying you’re)…
I believe in roughly equally weighting 10-15 names max, you’ve already eliminated a lot of security-specific risk, and even if one holding sinks totally, the hit is not that much…I don’t think concentrated portfolios are dangerous, bur rather I think the real trouble comes is when you overweight one specific security within a concentrated portfolio, say one stock takes up 30-40%, and 10 other stocks are equally weighted…like when Berkowitz put 18% of his portfolio into AIG…balls of steel…
I know Peter Lynch thought its better to own a few stocks you know well, versus a bunch you don’t know so well.
I helped manage a 600ish million dollar fund my senior year of college. I think we had 30 or so stocks, because ultimately our job wasn’t to do fundamnetal analysis – so we wanted that margin of safety AND to more easily track against the market, to keep clients happy.
I think there is a false comfort in diversification – generally using an Index fund would be the most logical choice if your portfolio exists to just match the market. That’s why I think Peter Lynch advocated his style – he wanted alpha. This is just my perspective, though.
No, that’s wrong. Peter advocated that style for arm chair investors at home. At times, his fund at Fidelity owned as many as 1,400 stocks.
That’s what I meant. I imagined the personal investments of posters here may be more similar to the former than later. May be wrong though.