My Investment Journey

[KnowThePast]

Hi everyone,

As a long time lurker on this forum, I was inspired by Robusta's thread documenting his investment journey. Therefore, I decided to shamelessly steal his idea and do the same. Opening yourself to public ridicule is a great way to make sure you think things through properly.

I've been learning about investing for a few years now, but kept my investing strictly to my super fund. I have had some professional exposure to analysis of financial statements, risk assessment and software development, skills I intend to use and consider my competitive advantage. I'll post more on this at some point later.

Basic rules:
1. Don't lose money.
2. I have up to $50,000 to invest.
3. No leverage.
4. I will make one $2,000 investment a month.
5. Rule number 3 will be broken if there is a special opportunity, or if there's none with sufficient margin of error.
6. No more than 20% of portfolio into a single stock, but I won't necessary sell down what I already own.

What do I want to own? I am generally of an opinion that selecting stocks not to buy is not only more important, but also much easier to do. At the same time, there's often some very special opportunities in places where no one looks. Also, some companies have special characteristics where standard rules don't apply. For instance, I will tolerate higher debt if a company owns premises it operates on, or other quality assets to back it up.

So I will look at (nearly) everything. But generally, I will only buy companies that have at least some of these:
1. I feel have every chance of being around and doing very well 20 years from now.
2. Company founder or long serving management on board, and owning a large stake in the company.
3. Consistently profitable over many years.
4. Acceptable or higher ROC.

Things I generally won't invest in:
1. Things I don't understand, whether it is the business, the industry, or the annual reports.
2. Companies that are generally not profitable.
3. High debt.

I am also cautious with companies that issue lots of new shares and spend a lot on acquisitions, but I feel these need to be analysed individually to form an opinion.

How much? Cheaper than it's worth. We can discuss the finer details.

When will I sell? Standard criteria:
1. When I made a mistake.
2. When circumstances changed.
3. When there's a better investment.
4. In some special cases, when performance objective was complete. Will mainly apply to less than stellar companies trading below NTA.

I should also mention that I am very much of a "value" nature. Stop losses, charts, momentum, etc. do not suit me for multiple reasons.

Going forward I will document all my trades, and provide my reasoning behind them. I will post some random thoughts of mine every now and then. I hope someone will find it as useful as Robusta's thread was for me.

Thank you for reading.

 

[VSntchr]

I'll be reading your thread!
Judging by the other similar threads to this it will be an invaluable learning experience for you.
The documenting process really makes you accountable for your investing decisions and may prevent you from making silly mistakes.

Good luck!

P.S, Did you mean that rule 4 might be broken (rather than rule 3)?

 

[robusta]

Good on you. I will be reading with great interest. Good luck, not that I think you will need it with those rules and the right attitude.

 

[skc]

Welcome and congrats on starting a thread on your investment. I hope you standby your committment and post here for a long time.

Just some quick comments on your rules:

Basic rules:
1. Don't lose money.
2. I have up to $50,000 to invest.
3. No leverage.
4. I will make one $2,000 investment a month.
5. Rule number 3 will be broken if there is a special opportunity, or if there's none with sufficient margin of error.
6. No more than 20% of portfolio into a single stock, but I won't necessary sell down what I already own.

Rule 1: Really that's your intent, not a rule.
Rule 4: Seems too stringent. Assuming your intent is to stop yourself going all in too early, something like no more than 3 buys per month will do the job while giving you much more flexibility. With $50k and $2k per position you will potentially have 25 different shares which would probably be too many. Not to mention inefficient from a commission point of view. Something like 10% (i.e. 5k) for a low risk play and 5% for a high risk play may be more appropriate.
Rule 6: You are starting with 4% of portfolio per stock so do you anticipate some stock might rise 5x (to 20%) or are you expecting to add to the same stock over time (i.e. making multiple entries). If so, consider writing the rules for re-entry as well.

Anyhow, best of luck with your investments.

 

[KnowThePast]

I'll be reading your thread!
Judging by the other similar threads to this it will be an invaluable learning experience for you.
The documenting process really makes you accountable for your investing decisions and may prevent you from making silly mistakes.

Good luck!

P.S, Did you mean that rule 4 might be broken (rather than rule 3)?

Thanks VSntchr.

Yes, I did mean 4.

 

[KnowThePast]

Good on you. I will be reading with great interest. Good luck, not that I think you will need it with those rules and the right attitude.

Thanks for encouragement Robusta, and for the inspiration to start this thread.

 

[KnowThePast]

Welcome and congrats on starting a thread on your investment. I hope you standby your committment and post here for a long time.

Just some quick comments on your rules:



Rule 1: Really that's your intent, not a rule.
Rule 4: Seems too stringent. Assuming your intent is to stop yourself going all in too early, something like no more than 3 buys per month will do the job while giving you much more flexibility. With $50k and $2k per position you will potentially have 25 different shares which would probably be too many. Not to mention inefficient from a commission point of view. Something like 10% (i.e. 5k) for a low risk play and 5% for a high risk play may be more appropriate.
Rule 6: You are starting with 4% of portfolio per stock so do you anticipate some stock might rise 5x (to 20%) or are you expecting to add to the same stock over time (i.e. making multiple entries). If so, consider writing the rules for re-entry as well.

Anyhow, best of luck with your investments.

Thanks skc, some great advice there.

I'll comment:
Rule 1 - you are right that it is intent, but there's more to it. The expanded rule is that I will try to avoid riskier investments. I will invest in things that I think are safest for preservation of capital. There's a great illustration of Risk/Return I saw in "The Most Important Thing" by Howard Marks:



The rule is that I will stay closer to the left side of the chart. Less potential returns and less potential losses. Risk, of course, has no precise definition, but my hopefully my intentions are now clear.

Rule 4 - Yes, it is very stringent and will cost me more in brokerage. I will start off slowly and review as I go along. Great suggestion for different high/low risk percentages.

Rule 6 - $2,000/month could go into the same stock, I doubt I will ever hold as many as 25 different ones. I don't have any separate rules for re-entry as I don't see them as anything different as my Buy rules. If a stock satisfies my criteria, and I think it is the best use of my money at the time compared to all other stocks, than I will buy more of it. Up to 20%.

 

[KnowThePast]

The honor of my first purchase goes to CAB @ 4.03.

Thoughts in no particular order:

Ticks most of my boxes for a great company:
- original owner
- good ROC
- moat against competition.

Debt is higher than I like, but their revenues are more dependable compared to an average company.

The new regulations are a blessing in disguise, I think, for two reasons:
1. Make it more difficult for competition.
2. Close this chapter and we should hopefully have no more inquiries for many years now.

There's no longer much uncertainty about the future of the taxi industry - and here's what I like: even assuming all of the missed revenue will come out directly out of profit, company should still make about $50m, or 0.41/share. Plus over $2/share NTA.

Assuming the dividend falls by as much as worst case profit scenario, it will still be over 6%.

It is very rare that you see an industry leader with a competitive advantage at these kind of prices.

With any investment there are risks. Investing is about putting a price on the risk that you are taking. First of all, of course, one has to know what the risks are. I see two with CAB. One is competition. That is a risk with almost any company and I believe CAB is more capable than most in staying ahead.

It's the second one that I am more worried about, though - what is it that I may not know? My assumption was always that I will invest in smaller stocks, as larger companies have too many people following them and they are unlikely to be mispriced or misunderstood. Out of 21 companies that I feel are most undervalued at the moment, only 6 have a valuation of over $300m.

In this case, the price seems very cheap to me, but I am aware that I am making a judgement that is different from a very large group of people. Time will tell whether I am an idiot or a lucky idiot. Or perhaps someone on this forum will do so much sooner.

 

[skc]

The new regulations are a blessing in disguise, I think, for two reasons:
1. Make it more difficult for competition.
2. Close this chapter and we should hopefully have no more inquiries for many years now.

There's no longer much uncertainty about the future of the taxi industry - and here's what I like: even assuming all of the missed revenue will come out directly out of profit, company should still make about $50m, or 0.41/share. Plus over $2/share NTA.

Assuming the dividend falls by as much as worst case profit scenario, it will still be over 6%.

It is very rare that you see an industry leader with a competitive advantage at these kind of prices.

Very good contrarian analysis - it's well grounded in logic and numbers. This trade may or may not work out but I can see you will do well if you continue to use this kind of intellectual process.

One suggestion: When you enter a position, write down the knowable and measureable conditions which you will accept you are wrong (e.g. EPS <$xm, more inquiry etc).

 

[VSntchr]

Very good contrarian analysis - it's well grounded in logic and numbers. This trade may or may not work out but I can see you will do well if you continue to use this kind of intellectual process.

One suggestion: When you enter a position, write down the knowable and measureable conditions which you will accept you are wrong (e.g. EPS <$xm, more inquiry etc).

Strongly agree with the bold part, the thought process is evidently good here.

Good suggestion too...investing is a whole lot easier on the mind and the bank account if you can quickly accept situations when you are wrong and take action. Having a set of measurable outcomes to assist this process is a great idea.

 

[craft]

"The Most Important Thing" by Howard Marks:

I see you have also taken on his second order thinking.

Nice thread - hope to read more of it

Cheers.

 

[KnowThePast]

Very good contrarian analysis - it's well grounded in logic and numbers. This trade may or may not work out but I can see you will do well if you continue to use this kind of intellectual process.

One suggestion: When you enter a position, write down the knowable and measureable conditions which you will accept you are wrong (e.g. EPS <$xm, more inquiry etc).

Strongly agree with the bold part, the thought process is evidently good here.

Good suggestion too...investing is a whole lot easier on the mind and the bank account if you can quickly accept situations when you are wrong and take action. Having a set of measurable outcomes to assist this process is a great idea.

Thank you for the kind words guys.

I really like the suggestion of having measurable criteria of when to exit. Had great trouble coming up with one, however.
- Earnings are no good. Plenty of good companies have bad years, which they recover from, as long as business fundamentals are good.
- ROC, ROE and other performance ratios are not good for the same reason.
- Debt growing is a worrying sign, but one that needs be investigated for cause/benefit before being acted on.
- Inquiries are not a loss signal itself - as someone pointed out in CAB thread, what's good for the industry in the long term should also be good for the industry leader.
- market share is a figure that is difficult to obtain, more so for companies that do more than one very specific thing.
- etc.

So I thought I'd look at it another way, inspired by Howard Marks once again. I've only just finished reading it, so it's fresh in my mind.

- When I invest, I think of what is most likely thing to happen to the company long term, and invest at a price that should give me an appropriate return if that "most likely" scenario happens.
- Just how likely that "most likely" scenario is determines the risk of that investment. The less likely I feel that scenario is, the more margin of safety I would require on my price.

So, I think it is a good idea to list what my "most likely" scenario is. Even a better idea is to list all my less likely scenarios. In the future, if I feel that one of them is developing, that will be my exit consideration trigger.

Applying it to CAB:

Most likely scenario: After a dip in earnings over the next 2-3 years, company continues to earn money at the same rate. It may grow, but even if it continues at its current level, paying the same dividends, I am content with that. Bus division continues to grow. Company possibly expands into other related areas.

Less likely possible scenarios:
- Competition knocks CAB off industry leader position. This will likely look result in steady Revenue & ROC declines over many years.
- Government regulations further reduce takings to a point where it's no longer profitable enough.
- Reginald Kermode retires and new management going on leveraged acquisition spree.

Would love more discussion on possible outcomes, although these would probably belong in a CAB thread.

 

[Ves]

The rule is that I will stay closer to the left side of the chart. Less potential returns and less potential losses. Risk, of course, has no precise definition, but my hopefully my intentions are now clear.

Thank you for the posts so far. I have enjoyed reading them and look forward to seeing how you progress. I also stick to the left side of the chart you posted as much as possible. My goal is always to buy and hold companies with strong competitive positions at the right price, for as long as possible (until their economics deteriorate).

The mental process is the most important element to me... you seem to have your own in very good shape.

 

[tech/a]

Can I ask what plans you have for Risk mitigation?

 

[galumay]

Good thread, Knowthepast, i too have started a similar journey as documented in my thread, I also have decided to document my investments for similar reasons.

Interestingly CAB was also my first investment and my analysis was very similar!

I reckon documenting your reasons for buying a stock, your reasons for entry, possible exit strategies and an understanding of risk is a very good tool.

One thing this forum has really stressed for me is developing a strategy and having a system that is consistent with your personality and appetite for risk is imperative.

There are a number of really helpful and switched on members of ASF that are following similar strategies to ours and they are a great resource to learning the game.

Good luck!

 

[skc]

Thank you for the kind words guys.

I really like the suggestion of having measurable criteria of when to exit. Had great trouble coming up with one, however.
- Earnings are no good. Plenty of good companies have bad years, which they recover from, as long as business fundamentals are good.
- ROC, ROE and other performance ratios are not good for the same reason.
- Debt growing is a worrying sign, but one that needs be investigated for cause/benefit before being acted on.
- Inquiries are not a loss signal itself - as someone pointed out in CAB thread, what's good for the industry in the long term should also be good for the industry leader.
- market share is a figure that is difficult to obtain, more so for companies that do more than one very specific thing.
- etc.

All true. But the point of a hard, measurable exit is to prevent further losses from you being wrong with your initial investment. Yes over the years you will get plenty of false negatives - but that's the price you pay for risk management.

In the future, if I feel that one of them is developing, that will be my exit consideration trigger.

This is going to be trick... feeling is by definition subjective, especially with money on the line (and possible already in loss). You need hard objective measures to action, and you plan that ahead before you committ. That's one way to take the emotional variables out of your investing.

 

[odds-on]

This is going to be trick... feeling is by definition subjective, especially with money on the line (and possible already in loss). You need hard objective measures to action, and you plan that ahead before you committ. That's one way to take the emotional variables out of your investing.

Keep it simple. Sell criteria:

1. Dividend cut
2. Dividends do not grow at a minimum rate over a suitable rolling review period (e.g. 10% over rolling 3 year period).

Cheers

 

[tech/a]

Keep it simple. Sell criteria:

1. Dividend cut
2. Dividends do not grow at a minimum rate over a suitable rolling review period (e.g. 10% over rolling 3 year period).

Cheers

So you will wait 3 yrs to determine if there is a sell criteria.
Would you sell if the stock had decline 50% in that time or would you see this as a further buy opportunity?

 

[KnowThePast]

Good thread, Knowthepast, i too have started a similar journey as documented in my thread, I also have decided to document my investments for similar reasons.

Interestingly CAB was also my first investment and my analysis was very similar!

I reckon documenting your reasons for buying a stock, your reasons for entry, possible exit strategies and an understanding of risk is a very good tool.

One thing this forum has really stressed for me is developing a strategy and having a system that is consistent with your personality and appetite for risk is imperative.

There are a number of really helpful and switched on members of ASF that are following similar strategies to ours and they are a great resource to learning the game.

Good luck!

Thanks galumay,

Great minds think alike, obviously.

 

[KnowThePast]

Can I ask what plans you have for Risk mitigation?

On a portfolio level:
- diversify into multiple stocks in different industries.
- invest my capital over 2+ years
- possibly diversify into another market, as I reside overseas at the moment.

On an individual stock level, none whatsoever.

All true. But the point of a hard, measurable exit is to prevent further losses from you being wrong with your initial investment. Yes over the years you will get plenty of false negatives - but that's the price you pay for risk management.



This is going to be trick... feeling is by definition subjective, especially with money on the line (and possible already in loss). You need hard objective measures to action, and you plan that ahead before you committ. That's one way to take the emotional variables out of your investing.

I agree that having a hard, measurable exit trigger would be a very nice thing to have. It's just that I can't logically come up with one that makes sense.

Keep in mind that my objective is to buy shares that will pay me consistent dividends and that I will be able to pass on to my kids in many years time.

Selling if earnings or other performance criteria decline sounds like a great idea, except that when it happens, the share price would be smashed by that point already. And the more "wrong" I was, the harder it will be hit. Unless the company has no prospects of ever recovering (or even temporarily arresting the decline), it is likely that this will be the worst possible time to sell!

Plenty of quality companies have a decline in earnings or share price that they recover from (long term). I would have sold most of my portfolio during GFC, had I followed this. So, with that in mind, I did a quick test. I look at my notes from 2008 and got a list of companies that I thought were top companies at the time. Not now, back then. Not necessarily best investments at the time, just best companies. 16 companies at the time, which met all/most of this criteria:
- Original founder or long serving directors. Preferable with large ownership.
- Consistent profitability over many years
- Acceptable or higher ROC
- Low debt
- Business I understood

I then had a look at the result I would have gotten if I bought exactly 6 years ago, at just about the market peak:
With dividends: +36.32%
Without dividends: 10.37%.
XAO: -23.8%.
11 companies made money, 5 lost, none bankrupt or anywhere near it. Biggest loser, funnily enough, was CAB at -57%. Second biggest: -39%. Two top winners: 209% and 179%.

Not bad for a worst case scenario and no stop losses. What if I didn't just dump all my money into stocks on one day and bought over a number of years, with an average price being 7 years ago:
With dividends: +107.85%
Without dividends: 68.21%.
XAO: -3.2%.
13 companies made money, 3 lost. Biggest loser - 32%. Biggest winner: 323%

What about at 10 years ago? 2 companies did not exist yet, so only 14:
With dividends: 229.64%
Without dividends: 165.79%
XAO: 56.2%
13 companies made money, 1 lost (-22%). CAB made 92.7%

Here's another interesting take on stop losses: I bought CAB now because I think it's great value at the current price. But I own it in my super, having bought it years ago at $5.13. Should I sell it now in my super, even though I am buying it outside of it?