Long Term Investing

[McLovin]

Just wanted to share the Giverny Capital annual letter to investors, which in fact marks their 20th anniversary of running their portfolio.

It raises some pertinent points about long-term investing and why some are successful and why many others are not as successful as they like.

Giverny Capital is a Canadian firm that (judging by their record) seems to be very successful over the last 20 years using a long-term approach.

The letter can be found here.

Interesting. I just read it. Thanks, V.

Might not be a bad idea to start a thread a pile all these memos into them.

Howard Marks most recent letter is a cracker as always.

http://www.oaktreecapital.com/MemoTree/Dare to Be Great II.pdf

 

[Ves]

Might not be a bad idea to start a thread a pile all these memos into them.

I was thinking the same actually. I still haven't built a big watch list for investor letters, but I am finally starting to get around to it.

A list of the Funds / investors and the frequency of their letters, and maybe a quick summary of each is all that it would take for a good header post.

Any discussion on any letter could happen in that thread.

 

[MARKETWINNER]

http://www.thisismoney.co.uk/money/diyinvesting/article-3506527/MINOR-INVESTOR-art-o.html

 

[kid hustlr]

Wanted to re-hash this thread and open up discussion. Over the past 18 months I've taken a focus on longer term investing. In effect I'm still working on a short term trading strategy but as my savings grow I'm finding I have some spare cash to invest for the long term.

My strategy:

I currently have 2 strategies,
- Firstly I've subscribed to Radgey and follow 2 of his trend following systems. I'm ok to outsource decision making at what I deem to be a cheap price in the hope of outperforming the market long term (with regards to both return and draw downs). 1 portfolio is Australian based, the other is USA based
- Secondly I have a long term ETF portfolio. This is in effect several Vangaurd index ETF's VGS, VTS, VHY etc. I don't have the time nor inclination at this point to explore long term stock picking at an investment level.

Two factors play on my mind:
1. I'm wondering how I can bring my 'retirement frontier' forward through increased returns. Perhaps the radgey stuff does well, perhaps it doesn't and if I take ETF performance at long term face value the return is acceptable without being stellar. After doing some compound interest calc's its amazing what a few % can do. How can I get from the 5 to 10% long run performance to the 11-15% level?

2. A draw down is coming. Now one could argue the Radgey stuff might only go through 20-30% max but history says the ETF's will get whacked 50% at some stage, are there any options I can explore to reduce the level of draw down?

Points which cross my mind in order to answer the above questions which may generate discussion:
- Currency exposure and it's impact on the two factors above
- The impact of using some form of leverage (be it during times of heavy draw down or consistently across the portfolio)
- My current views on the investment landscape (largely irrelevant given my current strategy)
- Alternative/Other investments options to smooth the overall portfolio returns

 

[Kryzz]

- Alternative/Other investments options to smooth the overall portfolio returns

I've been adding some alt coins to my long term portfolio. Only a small percentage, but some result in some quite extreme/volatile movements. A good alternative asset class in a flight to safety environment

 

[Faramir]

Hi all

Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?

https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors

The six traits mentioned:

• Highly concentrated portfolios.
• No need to know everything and the ability to avoid getting caught up in the noise.
• A willingness to hold cash.
• Long time horizons.
• An acceptance of bad years.
• Preparedness to close funds.

Is 10 stocks concentrated or too diversed?
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.

This article relates to management funds that I have not heard of (excluding Oakmark).

I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.

This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.

I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?

 

[Triathlete]

Hi all

Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?

https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors

The six traits mentioned:

• Highly concentrated portfolios.
• No need to know everything and the ability to avoid getting caught up in the noise.
• A willingness to hold cash.
• Long time horizons.
• An acceptance of bad years.
• Preparedness to close funds.

Is 10 stocks concentrated or too diversed?
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.

This article relates to management funds that I have not heard of (excluding Oakmark).

I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.

This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.

I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?

It all depends but usually it is between 5 and 12 stocks.

It is closer to 5 stocks in a trading portfolio and between 8 and 12 for a longer term portfolio.

While it is true that diversification reduces risk, a portfolio of shares that is over-diversified is exposed almost exclusively to market risk, which cannot be eliminated by diversification

As a trader, if you are looking to achieve higher returns, you invariably need to take on a higher level of volatility to outperform the market.

Therefore, you need to hold a smaller number of shares around 5-8 to actively manage the specific risk.

If you do not have time to manage the specific risk then holding a portfolio of 8 to 12 shares enables you to reduce volatility without dramatically reducing returns.

You do not get twice the benefit from holding 20 stocks than you do from holding 10,and you certainly do not get 10 times the benefit from holding 100 rather than 10.

It makes sense to simply get rid of the stocks that are going sideways or down. We only want to hold stocks that are rising in price. ( if going long)

Assets that move sideways or fall in price have a negative effect on your overall ability to create wealth.

If stocks are falling in price, it increases your risk and reduces your overall returns.

Triathlete

 

[Cam019]

It all depends but usually it is between 5 and 12 stocks.

It is closer to 5 stocks in a trading portfolio and between 8 and 12 for a longer term portfolio.

I love differing views. I can't speak on behalf of traders, but for investors with long term horizons, theory suggests a portfolio to be diversified into anywhere between 10-25 shares in order for adequate reduction of unsystematic risk. Although, the benefits of diversification become almost redundant after the 20 share mark. Ideally, I plan to hold between 10-20 shares at anyone time.

While it is true that diversification reduces risk, a portfolio of shares that is over-diversified is exposed almost exclusively to market risk, which cannot be eliminated by diversification

This does not make sense to me. I'm reading it as though over-diversification is a bad thing (please correct me if I am wrong). Why would it matter if a portfolio is exclusively exposed to systematic risk? All portfolios are effected by total risk (systematic + unsystematic), and apart from potentially reducing your returns by spreading your investments too thinly, the only thing 'over-diversification' would do is reduce your portfolios total risk.

It makes sense to simply get rid of the stocks that are going sideways or down. We only want to hold stocks that are rising in price. ( if going long)

I have to disagree. In my opinion, this would be dependent on your investment style and time horizon. I would be happy to hold sideways moving or slightly down trending stocks if they were bought at the right price and trading at significant discount to IV.

If stocks are falling in price, it increases your risk

I don't think there is a correlation between share price volatility and total risk for a long term value investor. If anything, I'm of the belief that it is actually the creator of some great opportunities in the market. Sure, for a trader, share price volatility can be dangerous as short term traders are forced to materialize losses when prices bounce around and trigger stop losses, but again, all dependent on your investment style and time horizon.

Just my .

 

[pixel]

Hi all

Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?

https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors

The six traits mentioned:

• Highly concentrated portfolios.
• No need to know everything and the ability to avoid getting caught up in the noise.
• A willingness to hold cash.
• Long time horizons.
• An acceptance of bad years.
• Preparedness to close funds.

Is 10 stocks concentrated or too diversed?
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.

This article relates to management funds that I have not heard of (excluding Oakmark).

I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.

This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.

I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?

if you can, grab hold of a copy of today's Weekend West or locate Marcus Padley's column elsewhere. He pretty much covers the full breadth of your questions in "Commandments not set in stone".

 

[Triathlete]

I have to disagree. In my opinion, this would be dependent on your investment style and time horizon. I would be happy to hold sideways moving or slightly down trending stocks if they were bought at the right price and trading at significant discount to IV.

So you have found a group of shares that you like that are trading at a significant discount to IV based on your criteria and you decide to make an investment.

Over the next 3 years nothing happens and the share goes sideways or slightly down, you would still hold just to pick up a dividend.????

While the shares may eventually come good and begin to rise in price you have lost the ability to use your money elsewhere to increase your wealth.

 

[Triathlete]

This does not make sense to me. I'm reading it as though over-diversification is a bad thing (please correct me if I am wrong). Why would it matter if a portfolio is exclusively exposed to systematic risk? All portfolios are effected by total risk (systematic + unsystematic), and apart from potentially reducing your returns by spreading your investments too thinly, the only thing 'over-diversification' would do is reduce your portfolios total risk.

Each person has there own way of investing that they feel comfortable with....Now you may wish to do your own research, but let us take a person who has 21 stocks in their portfolio or use one of the listed funds.
If you look through the portfolio ( medium to long term) you will find on average that 7 will be going up, 7 will be going sideways and 7 will be going down. In a fund 33% up,33% sideways and 33% down.

So by being over diversified you have 14 stocks at present doing nothing for you except maybe a dividend.

Most have this many shares because they do not have the confidence in there ability or think they have less chance of losing there money overall (a little bit in each basket).

Another investor may have his money in the 7 that are already moving in the right direction and he has the other 14 on his watch list ready for investment when the stocks eventually show signs of moving in the right direction and not just going sideways. I would think trying to stay on top of this many share would take a lot of work.......

It does not matter if you miss out on the first 10% of a move as long as you pick up the next 80%

I try to keep to the rules below as best as possible.
Rule 1:
Irrespective of the amount of money you have invest, you should take the same amount of time researching your options to ensure you are protecting your capital on each and every occasion.

Rule 2:
You should always aim to have between 5 and 12 stocks in your portfolio, although for traders it should be closer to 5.The trick is not to have lots of stocks with small amounts invested in each. Instead, you only require a small number of the right stocks with larger amounts invested in each. This actually lessens your risk and increases your returns because:

* Smaller portfolios are easier to manage and represent lower risk. The more stocks you have in your portfolio the more work you have to do to manage your risk level.

* It is far easier to select a smaller number of stocks that are rising in price. Therefore, the result is increased returns.

* You will have less transaction costs in buying and selling stocks simply because a smaller portfolio will have fewer transactions.

Rule 3:
When you purchase stocks never invest more than 20% of your capital in any one stock. If you invest in the share market you need to accept that some stocks will fall in value, However this rule will help reduce your exposure to risk, while allowing you to achieve good returns simply because you are minimising the amount of capital you could lose at any one time.

http://www.investopedia.com/ask/answers/09/systemic-systematic-risk.asp?lgl=rira-baseline-vertical

 

[craft]

Hi all

Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?

https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors

The six traits mentioned:

• Highly concentrated portfolios.
• No need to know everything and the ability to avoid getting caught up in the noise.
• A willingness to hold cash.
• Long time horizons.
• An acceptance of bad years.
• Preparedness to close funds.

Is 10 stocks concentrated or too diversed?
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.

This article relates to management funds that I have not heard of (excluding Oakmark).

I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.

This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.

I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?

Hi Faramir


Your article is written by Larry Swedroe – a clear advocate for passive investing. It's interesting to read back to the original sources he quotes to qualify his interpretations. I found them at:


The James Montier piece he refers to.
http://www.mauldineconomics.com/outsidethebox/the-perfect-value-investor-427#

The original Loius Lowenstein article referred to.
https://poseidon01.ssrn.com/deliver...1010096096122027015018124003119116123&EXT=pdf

I’m not sure James Montier falls comfortably into a role cast in Swoedroe’s article. I’ve found Montier thoughts much more sophisticated and nuanced than that. I like Montier’s writing, thought provoking – A lot of his stuff focuses on a behavioural investing aspect. I have read his book “value investing” and thought it was a good summary.


His latest stuff can be read GMO
https://www.gmo.com/


Thanks for sharing the article, it turned up a couple of interesting source papers.

Posting here or “A Long Bet” doesn’t matter, there’s obviously lots of overlap, with passive and active value investing both requiring long-term approaches by their very nature.

 

[Faramir]

Hi Craft
Thank you for Louis Lowestein article. When I get a chance, I will read the latest article by James Montier. I am a very slow reader plus my poor time management makes time go against me.

On page 9, when investors were telling Eveillard from Mutual Beacon that value investing was dead, he responded:
“I would rather lose half my shareholders than lose half my shareholders’ money."

Would any fund manager say this nowadays?

This article which was written in 2004, reminded me of many things about myself back from the late 1990's and early 2000's. How I struggled with unemployment and casual work whilst blowing my money on an IT course just before the DOT com crash. Being unable to find an entry IT job. Being manipulated by my franchiser to start a business that I was unsuited for but somehow I made it sort of work into a viable part-time job. (This is a very long story that I don't want to talk about.)

Investing was the furthest thing from my mind. Just being able to pay rent, buy food. Then moving back with my parents so that I could help them. That's why I work part-time instead of full time for all these years.

There's another thread called Wealth Plan but that would be unsuited for me as I am approaching my late 40's and have the slowest saving rate and the slowest reading rate as well. There are some things in my life that are both good and sometimes just an inconvenience. I can only tell younger people what not to do (or think).

At least I am healthy. I guess that goal is my biggest priority. Sounds strange but I would rather go to Swimfit or training before I would pick up a book to read. Off to Wealth Plan thread.

 

[Value Collector]

Hi Guys,

I was just rereading warren buffets 2013 annual letter, and came across this essay he wrote towards the end, I think it is a great take on long term investing.

Some Thoughts About Investing

Investment is most intelligent when it is most businesslike. — The Intelligent Investor by Benjamin Graham

It is fitting to have a Ben Graham quote open this discussion because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small non-stock investments that I made long ago. Though neither changed my net worth by much, they are instructive.

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath than in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

17

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a bubble had popped – this one involving commercial real estate – and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

Income from both the farm and the NYU real estate will probably increase in the decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.

I tell these tales to illustrate certain fundamentals of investing:

• Š You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  
  
• Š Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
  
  
• Š If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
  
  
• Š With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  
  
• Š Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
  

18

Š My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

 

[luutzu]

Hi Guys,

I was just rereading warren buffets 2013 annual letter, and came across this essay he wrote towards the end, I think it is a great take on long term investing.

Good logic. Thanks Warren.

I used the same approach and reasoning, didn't bid for a dump of a house in Western Sydney at (a bargain) $600K 4 years ago. Would have gained at least 300% on the deposit and expenses man.

Yea yea, it's paper profit, but I would feel pretty smart and do a lot of stupid stuff until the music stop.

So you suck big time Buffett

 

[basilio]

Perhaps another option for investors?
The world's rarest single malt whisky just sold for $1.5 million dollars
Less than 24 hours after a 60-year-old Macallan sold for 848,800 pounds (AUD$1.57 million) early October at Bonhams in Edinburgh, auction-house rival Christie's unveiled a single malt from the same vintage which could crack the $2 million mark in November.

Meanwhile, Sotheby's is putting its own bottle from that cask, filled in 1926, on the block in New York on Oct. 12 with a high estimate of $1.7 million.
http://www.executivestyle.com.au/th...hisky-just-sold-for-15-million-dollars-h16c6c