Investing Process - or how to think about investing

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trfie
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Re: Investing Process - or how to think about investing

Post by trfie »

frommi wrote:
Wed Feb 07, 2018 11:49 pm
suomalainen wrote:
Wed Feb 07, 2018 3:13 pm

@frommi (and maybe also @jacob?) I think you mentioned Buffett doing this in the 60s in the other thread. Aren't those the "cigarette butts" he'd pick up off the ground for a one or two puffs and he said something like Munger was the one who "cured" him of this approach? But you're saying that if you stay small, you're content with one or two puffs? And Munger's "cure" was really only useful in the sense that they went "upmarket" with greater AUM?
Yes, WB had no choice, he had too much money.
This is not really what they meant, it was more of a philosophical difference. Imagine buying a company for $80,000 that was heading toward bankruptcy but could be liquidated for $100,000, versus a company that could be bought for $80,000 because of some market inefficiency and had an intrinsic value of $100,000. These are very different cases. Buffett was initially interested in the former.

It's not only about being "content" with one or two puffs. As there is greater AUM, there is more competition.

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Sclass
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Re: Investing Process - or how to think about investing

Post by Sclass »

I should start by saying a lot of this depends on the individual. It may or may not work for you. I have several protégés and what I’ve found is I can teach my style but they aren’t always able to replicate my results. A lot depends on temperment.

I’ve tried writing something down here but I keep deleting it because it gets long and sounds stupid. So I thought I’d try some bite sized chunks.

This primarily applies to individual stock selection which is what I do.

First I don’t trade unless I know something other people don’t know. Markets are more or less efficient. I like to find the less efficient ones by acquiring data that is not available to the regular players. In the Internet age this is hard and easy. It’s hard because we are bombarded with a deluge of 24/7 info that is quickly digested by the players. It’s easy in that’s if you do find something outside of the regular info flow you will know something outside the groupthink. It may help or not, but I’m basically saying I need an edge.

A friend asked me why I don’t spend more time on SEC quarterly filings and my reply is everyone else is reading them for me. I skim them to see if anything is really wrong, but if there is anything remarkable it is almost always priced in. They pay Harvard grads good salaries to do this for us.

So I can read income statements and run my discounting software all day long an pretty much come up the consensus price. Because, everyone else can. What I need is something else. So I have some methods for gathering intelligence.

This means talking to people. Reading professional journals. Reading trade magazines. Going to trade shows and talking to sales people. Chatting with friends about the big challenges in their industry. And following my old industry (signal processing hardware). Fake job interviews so I can see the challenges and the team from inside.

I try to make a guess where an industrial trend is going. Very often the sales people know first, certainly they have inklings years before the finance people catch wind of a trend.

I’ll develop a target list of potential buys. Look over the available financials for glaring problems...don’t worry if they are glaring others have already found them.

Then I make a guess. I think this is what turns EMT on its head. When you guess you are actually synthesizing new information that doesn’t exist yet. As time passes it becomes genuine information. It may be bad information or good but it changes the game. At the end of the day when you click “execute” it all comes down to a guess. So at the end of this funnel you kind of reduce the game to a binary decision (buy, hold or sell). Ok, not quite binary.

So this is the part where it comes down to the investor. Do you guess like me? Do you click the mouse (pull the trigger) like me? Do you bleed like me while you sit alone in your blind being slowly eaten by mosquitoes and ticks for a period before you see any game wander down the path? Do you pick off the first young buck or do you wait for the trophy deer that never comes? Do you wait for a hedge fund to invest or do you wait for Yale or Fidelity? You can get varying results depending on how you combine the terms. Remember the hunting analogy? Predictions. Anticipation. Staking. Waiting.

Jim Rogers said it well in one of his books. He always talks about things in terms about winnowing people down. Like, you hold a class and say “how many of you wanna be rich?” Every student, say 100, raises their hand. “You’re gonna lose your friends and that partner you’re with will divorce you.” Half of the hands go down. “You’re gonna work day and night and have no social life. You’ll be lonely and unhappy”. Ten hands are left. “You’re gonna have bad times. You’ll lose half, maybe all your money.” Now only five hands are up. The sad part is maybe two or one of the five will become wealthy.

Jim said of stock research “read the annual report and you are ahead of 50% of the people.(this is sad). Now read a quarterly SEC filing and listen to the entire earnings call from start to finish. Now you’re ahead of 75%. Now go read some trade journals in the area of business. You’re ahead of 80%. Now go to a trade show and speak to the company salespeople about their products, industry and market. Now you’re ahead of 90%.” (Sclass interjection “now get a fake job interview with the company and tour their place. Find out what they’re trying to do or solve when they’re least likely to lie. Now you’re in the 1%”.)

I don’t think Rogers is exaggerating. He rode a motorcycle around the world in the 80s to find nascent markets. Learn something that nobody else knows. Even better, learn something that everyone else thinks is wrong. At the end of the day your goal is to outsmart the other animal spirits and relieve them of their stored capital. It won’t be easy.

Oohh. That’s long. Maybe I should hit delete.

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Re: Investing Process - or how to think about investing

Post by SavingWithBabies »

@Sclass So based on your post, I assume you buy and generally hold until you decide to sell. What prompts selling for you? Does it vary a lot or do you always sell at a certain return? Based on your hold strategy, if I'm reading between the lines correctly and you sometimes go long term even if short term losses, I'd hazard you evaluate selling like holding. Have you ever done a fake interview when deciding on whether to sell?

I'm glad you didn't delete as it was interesting to read and informative.

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Sclass
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Re: Investing Process - or how to think about investing

Post by Sclass »

I sell for a variety of reasons. Mostly I sell when I no longer want the shares. I’m lousy at selling BTW. I sell to raise money to pay bills. I sell because I don’t think I’m going to make much more money if I stick around. Sometimes I get it right sometimes not. The way I pick my entry I seldomly regret not selling. I more often regret selling.

As silly as it sounds I don’t like to sell because I like to defer taxes. I’d rather keep my money in a compounding asset. Pulling it out means I’ll have to start over. If I have to be alert for the sell signs (like a product line collapse) I’d rather not own the stock in the first place even if it is a rocket today. I learned this on one of my first profitable trades IOMG. Not worth it in the big picture. Even though I made money I couldn’t repeat the process reliably.

I’ve never done a fake interview in a sell scenario. Always when I’m looking to acquire.

What I was trying to get across is I like to know something nobody else knows. At least no other share owners. Salespeople and low level managers don’t count because they don’t hold a lot of stock compared to the disproportionate amount of inside information they unknowingly possess. Fake interviews, fake sales calls, whatever it takes to talk to a soldier on the front line.

Sometimes I’ll get an idea together and it’ll take a long time to come to fruition. Things go sideways or down for awhile before others come around. It can be frustrating waiting for institutional interest. This is where knowing how to bleed is important. It gets even crazier with tightly held family controlled businesses. They don’t always want their stock to go up and they have ways to make it go sideways for extended periods. Some of America’s most valuable businesses are like this. It literally takes a Buffet or Icahn to wring the hidden value out and it is foolhardy for a small investor to think they can make money off their small lots.

This can get really long. Know something nobody else knows or even better, know when everyone else is wrong.

Edit - when a big dog comes in and takes over a small company I own it comes with a feeling of vindication and at the same time it’s robbery. Very often I get pushed out when a big dog figures out the same thing I knew and just takes the business private.

Also, I used to be more conscious of selling/timing when I traded off tips. I can recall investing in F in the 90s and happily dumping the stock at a good price. I bought off an old timer’s tip. I didn’t know why I bought it but I knew why I sold it. The cars sucked. Now that I buy off my own tip I’m much less worried about getting out as long as my original thesis still hold water. When buying off a tip I don’t have an original thesis.

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Re: Investing Process - or how to think about investing

Post by Farm_or »

Way back in my day trading days, I used to follow insider trading. (The legal type.) With the advent of internet, computers, and the timely information, I thought that was a sure thing. Just do what the CFO or CEO does.

There were subscriptions for better timely information, but I simply used their price as the indicator. If it was still good to buy or sell based on the insider action at their price vs market.

Long story short? Didn't work. There were simply too many untold reasons for insider executive buying and selling. Life happens to them too. And you could never discern the timelines that they had in mind.

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Re: Investing Process - or how to think about investing

Post by Smashter »

jacob wrote:
Wed Feb 07, 2018 11:50 am

Instead they had developed hundreds and hundreds of experiential rules from which they could intuit when to put a position on and how much. The best amongst them were somewhat consciously aware of these rules and capable of changing their behavior and trying the opposite even if it didn't "feel" right to them. They were de facto capable of rewiring their own intuition. This level of mental self-awareness is impressive to say the least.
I was skeptical of this until I had dinner with a friend of mine last night who works at a big NYC hedge fund. He was the star performer last year and is anticipating a big promotion. I had a ton of questions about his process. His answers sounded like he was quoting Jacob's posts in this thread :)

He said he only works a few hours a week. During those hours, he tries to "see the matrix" (his words.) From what I gathered, this was some sort of holistic, hard to define flow state in which he uses rules, feel, timing and data to come up with his ideas.

Other interesting tidbits:

- The absolute prodigies in his business are only right 60% of the time.
- He spends a million dollars on data every year that no regular person would ever have access to, which he deemed "unfair"

IlliniDave
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Re: Investing Process - or how to think about investing

Post by IlliniDave »

Smashter wrote:
Wed Feb 28, 2018 12:29 pm
He said he only works a few hours a week. During those hours, he tries to "see the matrix" (his words.) From what I gathered, this was some sort of holistic, hard to define flow state in which he uses rules, feel, timing and data to come up with his ideas.
I wonder how our distant ancestors would have described the process of reading a random pile of small animal bones, or tea leaves, to augment predicting future events. That sort of semi-divination certainly doesn't sound like something I'm going to successfully pick up as retirement hobby, even if I had $1M/year to buy data with. The more I hear about how beating the market can be accomplished, the happier I am putting on my dumb money t-shirt.

That was an interesting account.

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Re: Investing Process - or how to think about investing

Post by SavingWithBabies »

@IllniDave I feel the same however I take some comfort in the thought that I'm small enough that I can do well taking "drags off of discarded cigarette butts" to kind of paraphrase one interpretation of what was mentioned in the recent Warren Buffett thread. By that, I mean I'm not trading many millions or billions of dollars like WB or the above mentioned trader so smaller opportunities are of interest whereas they can't give them the time of day. It's only a slight consolation though but it does give me hope.

@Sclass Thanks! Your main point came through loud and clear but I was curious about that aspect of selling. It makes sense

Edit: whoops, I'm distracted. I realized the whole cig butts thing is in this thread :oops:
Last edited by SavingWithBabies on Wed Feb 28, 2018 5:33 pm, edited 2 times in total.

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Re: Investing Process - or how to think about investing

Post by jacob »

Smashter wrote:
Wed Feb 28, 2018 12:29 pm
I was skeptical of this until I had dinner with a friend of mine last night who works at a big NYC hedge fund. He was the star performer last year and is anticipating a big promotion. I had a ton of questions about his process. His answers sounded like he was quoting Jacob's posts in this thread :)
Funny how that goes, eh? :ugeek:

There is, unfortunately, a huge gap between practitioners and academics in the field of finance. This incidentally is not unusual. Gaps also exists in many trades. Try to find a book about how to find the right pressure regulator for an old gas stove, for example. Or try learning karate from reading a book. In finance, there are academics studying the field in a way that's quite removed from how things are done in practice. I suppose it parallels philosophy in that regard. Try learning karate from people who read books about karate and formalize their knowledge with math. Then you'd describe much of the field of academic finance.

The problem is that it's very hard to intellectualize experiential knowledge. Distilling it into a narrative or a couple of memetic talking points is harder still. Indeed, one might say, the only investment strategies that attain popular adoption are the few where this is possible. "Real estate never goes down. After all, they aren't making more land."

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Re: Investing Process - or how to think about investing

Post by IlliniDave »

SavingWithBabies wrote:
Wed Feb 28, 2018 12:50 pm
@IllniDave ... It's only a slight consolation though but it does give me hope.
It sounds like it could be fun (despite the metaphor) so long as winning at it (beating the market over the long haul) is not required to put food on my table and keep a roof overhead. It just happens that for me I'd rather cast about for walleyes and pike than discarded butts. If I thought market returns would jeopardize my future I'd just keep working until that was no longer the case. I'm sort of a coward that way. :D I suspect it is also easier when you are getting paid to bet someone else's money rather than betting your own pro bono. Further indication of my cowardice.

I hope you have great success!

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Re: Investing Process - or how to think about investing

Post by jacob »

Smashter wrote:
Wed Feb 28, 2018 12:29 pm
- The absolute prodigies in his business are only right 60% of the time.
- He spends a million dollars on data every year that no regular person would ever have access to, which he deemed "unfair"
I should also mention that academics rarely have access(*) to this data and therefore have to assume that the market figures out the right prices. The EMH is an extremely convenient assumption for academic research. It's the job of traders to assume it's it doesn't hold and then proceed to make it hold.

(*) Closing prices are universally available and practically free since decades. Intraday, not so much. Level2 data, not at all, and still super expensive.

As for numbers ... so mathematically, WLOG, you only need 50%+ correctness to make money. Below 50% no money can be made. How the monies are made depends on the distribution of the outcomes. Lets first suppose the distribution of outcomes is uniform, that is, you can't really tell whether one trade is better than another. In such a case, you can make money on a 50.1% correct model by spinning and hedging. That is, trading as rapidly as possible while ensuring you remain fully hedged at all times (or as much as possible). This is in the main how most algorithms work. They're just a few epsilon smarter than "random" (aka 50%) but they capitalize on that by trading a lot. A typical algo trades more in a day than humans do in a decade.

If you were a human, you can do the same, but you could also diversify (aka poor man's hedging). If you're winning on 60% of your positions and losing on 40%, you put equal amounts in each position. You're now beating the market (alpha) while cutting risk through diversification. This would be a very typical way to go about it.

Now, if you actually have a distribution of the outcomes, that is, you have more faith in some trades than others. Now you can start swinging for the fences. Normally mutual funds are constrained to diversify ... but if you look at so-called "conviction" buys from managers, you'll see they do better than random. If you were a private investor or representing private money (not public) you'd be smart or/and brave to concentrate on your conviction buys. Insofar your conviction is correct, then you can do much better.

Add: I should also say that those 60% would vary not necessarily by positions but possibly by years or even eras. There are many value-investors that have thrown in the towel because with CAPE10>30+, they've been wrong for years now. Conversely, momentum indexers have been right for almost a decade now and can seemingly do nothing wrong. Often you need to have not only the right talents but also have them at the right time.

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Re: Investing Process - or how to think about investing

Post by SavingWithBabies »

@IlliniDave I should have footnoted my post but my experience in active investing so far has been okay-ish and I only tried to actively invest a small amount of our savings. So I put active investment on the backburner until I've read the books recommended by Jacob (and have more time). I'd rather invest my time/effort into side businesses as I feel like those have better risk-reward. Almost all of our investments are in mutual funds for better or worse. But I'm still curious which is I read this thread.
Last edited by SavingWithBabies on Wed Feb 28, 2018 5:31 pm, edited 1 time in total.

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Re: Investing Process - or how to think about investing

Post by daylen »

@SavingWithBabies The problem is that the whole economy is severely overvalued right now due to our ideological obsession with technological advancement.

No worries.. Elon will save us all! :lol:

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Re: Investing Process - or how to think about investing

Post by IlliniDave »

SavingWithBabies wrote:
Wed Feb 28, 2018 5:01 pm
@IlliniDave I should have footnoted my post but my experience in active investing so far has been okay-ish and I only tried to actively invest a small amount of our savings. So I put active investment on the backburner until I've read the books recommended by Jacob (and have more time). I'd rather invest my time/effort into side businesses as I feel like those have better risk-reward. Almost all of our investments are in mutual funds for better or worse. But I'm still curious which is I read this thread.
Mine's actually been good if you count trying to pick active-managed mutual funds and some contrarian market-timing moves (both in my younger years) as "active investing". But coming out ahead versus "the market" for a decade or so is not enough to distinguish skill (or some sort of indescribable intuition like that mentioned in the hedge fund anecdote above) from luck. When I'm retired I probably will continue to have some play money where I break all my rules, but it is essentially the money where a typical person of my means might take a series of luxury cruise trips or otherwise "enjoy". However, what I believe would give me the best odds of topping the market is in the buy/hold family of strategies rather than trading or playing with derivatives. And spending serious $$$ every year for data is out of the question. It will involve holding individual stocks though, which will be a big break from tradition for me. I don't want to have to touch or pay attention to it more than once a year, which does limit the universe of possibilities I consider. And even if I lose every penny my lifestyle shouldn't be affected, which means I won't have to contend with amped-up emotion clouding my judgement.

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Re: Investing Process - or how to think about investing

Post by Sclass »

jacob wrote:
Wed Feb 28, 2018 4:50 pm
Now, if you actually have a distribution of the outcomes, that is, you have more faith in some trades than others. Now you can start swinging for the fences. Normally mutual funds are constrained to diversify ... but if you look at so-called "conviction" buys from managers, you'll see they do better than random. If you were a private investor or representing private money (not public) you'd be smart or/and brave to concentrate on your conviction buys. Insofar your conviction is correct, then you can do much better.
Agree. Good stuff to consider when using active management.

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Re: Investing Process - or how to think about investing

Post by Mister Imperceptible »

jacob wrote:
Wed Feb 28, 2018 4:50 pm

Add: I should also say that those 60% would vary not necessarily by positions but possibly by years or even eras. There are many value-investors that have thrown in the towel because with CAPE10>30+, they've been wrong for years now. Conversely, momentum indexers have been right for almost a decade now and can seemingly do nothing wrong. Often you need to have not only the right talents but also have them at the right time.
I have read of fund managers returning cash to investors.

So do the old Ben Graham basket of net-net stocks and similar value strategies no longer work, or is it just harder to find bargains? I would think value investing is still viable, but perhaps just not compared to how FAANG stock investors are doing? And if the momentum indexers are winning today, does that not mean the value investors might win again tomorrow?

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Re: Investing Process - or how to think about investing

Post by jacob »

@MI - Apparently, it's near impossible to find deep value these days. According to the people who do value investing (I don't), the Graham deep value screen has been empty or near empty for a few years now. Of course if you look at the regular market, some stuff certainly is more overvalued than other stuff, but there's not much of anything undervalued. Not really surprising when the market mean valuation is 2x+ historical norms.

Mean-reversion is not a guaranteed thing insofar the distribution changes [permanently]. New era arguments, etc. You can imagine how it's pretty hard for prices to decline into value territory when people who sell [supply] stocks arguing they're overvalued are being met with people who buy [demand] stocks arguing that price doesn't matter because stocks always go up [in the long run].---Especially considering the former are exciting the market (for cash) and the latter are probably over 50% of the market now. (Last number I have is from 2016 and at that point passive or price-insensitive investors comprised 42% of the market having grown from 10% or so just a handful of years earlier.)

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Re: Investing Process - or how to think about investing

Post by frommi »

I do deep value with a part of my portfolio and while opportunities in the US are rare there are still some good netnets in other parts of the world. But even in the US i was able to build a larger position in a netnet at 20% below net cash levels and at 50% of NCAV (so the classic 50 cent on the dollar). That was a stock from puerto rico shortly after the big storm there, roughly 3 months ago. Its already up 30%, so i would argue that deep value has always worked and will always work, you just have to be willing to work hard to find these situations.
And right now it is easy to find value in REIT`s, i found a hand full of them trading below liquidation value (which is similar to the NCAV approach). And when you expand to the shorting side you feel like in paradise right now, lots of opportunity and lots of people afraid to do it. ( But i must admit this area is not for everyone. :) )

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Re: Investing Process - or how to think about investing

Post by IlliniDave »

Mister Imperceptible wrote:
Thu Mar 01, 2018 2:44 pm

So do the old Ben Graham basket of net-net stocks and similar value strategies no longer work, or is it just harder to find bargains? I would think value investing is still viable, but perhaps just not compared to how FAANG stock investors are doing? And if the momentum indexers are winning today, does that not mean the value investors might win again tomorrow?
I think the so-called value premium is one of those things that tends to work on multi-decade cycles. In other words there are long periods of time in the historical record where value underperforms growth and blend overall, as well as similar periods where the converse is true. So odds are it is not gone forever, though right now does not seem like a great time to shoot for relatively short-term profits from a value strategy. It is not guaranteed (nothing is) but I think we'll see valuations return to at least post-GAAP norms at some point. That may not provide opportunities like the authors of the 1930s-1950s wrote about, yet there's always some stock out there which will grow the most in the next 25 years, and it just might reside on the value side of the continuum once we go through the next turbulent shakeout.

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Re: Investing Process - or how to think about investing

Post by NPV »

Farm_or wrote:
Tue Feb 27, 2018 8:01 am
Way back in my day trading days, I used to follow insider trading. (The legal type.) With the advent of internet, computers, and the timely information, I thought that was a sure thing. Just do what the CFO or CEO does.

There were subscriptions for better timely information, but I simply used their price as the indicator. If it was still good to buy or sell based on the insider action at their price vs market.

Long story short? Didn't work. There were simply too many untold reasons for insider executive buying and selling. Life happens to them too. And you could never discern the timelines that they had in mind.
I wonder how this works for following / mimicking the trades of people with impressive track records (the Buffets and Soroses of the world - or pick your favorite investment guru). Has anyone tried this? What are some pros and cons?

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