Personal Investment Strategy
- Thread starter galumay
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Re: Personal Investment Strategy Help
Tell me about it! Sold one of my weaker holdings as I found a better opportunity, but price keeps rising
There are 2 business I want to buy this week, it frustrating that everything got sold off and the 2 I want price went up 4%
that just to show with the right business you don't need to worry too much...
Tell me about it! Sold one of my weaker holdings as I found a better opportunity, but price keeps rising
Re: Personal Investment Strategy Help
Galumay,
Read this extract from a speech by Charlie Munger.
“The model I like””to sort of simplify the notion of what goes on in a market for common stocks””is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what's bet. That's what happens in the stock market.
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.
And then the track is taking 17% off the top. So not only do you have to outwit all the other betters, but you've got to outwit them by such a big margin that on average, you can afford to take 17% of your gross bets off the top and give it to the house before the rest of your money can be put to work.
Given those mathematics, is it possible to beat the horses only using one's intelligence? Intelligence should give some edge, because lots of people who don't know anything go out and bet lucky numbers and so forth. Therefore, somebody who really thinks about nothing but horse performance and is shrewd and mathematical could have a very considerable edge, in the absence of the frictional cost caused by the house take.
Unfortunately, what a shrewd horseplayer's edge does in most cases is to reduce his average loss over a season of betting from the 17% that he would lose if he got the average result to maybe 10%. However, there are actually a few people who can beat the game after paying the full 17%.
I used to play poker when I was young with a guy who made a substantial living doing nothing but bet harness races.... Now, harness racing is a relatively inefficient market. You don't have the depth of intelligence betting on harness races that you do on regular races. What my poker pal would do was to think about harness races as his main profession. And he would bet only occasionally when he saw some mispriced bet available. And by doing that, after paying the full handle to the house””which I presume was around 17%””he made a substantial living.
You have to say that's rare. However, the market was not perfectly efficient. And if it weren't for that big 17% handle, lots of people would regularly be beating lots of other people at the horse races. It's efficient, yes. But it's not perfectly efficient. And with enough shrewdness and fanaticism, some people will get better results than others.
The stock market is the same way””except that the house handle is so much lower. If you take transaction costs””the spread between the bid and the ask plus the commissions””and if you don't trade too actively, you're talking about fairly low transaction costs. So that with enough fanaticism and enough discipline, some of the shrewd people are going to get way better results than average in the nature of things.
It is not a bit easy. And, of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And in a fairly low transaction cost operation, they will get better than average results in stock picking.
How do you get to be one of those who is a winner””in a relative sense””instead of a loser?
Here again, look at the pari-mutuel system. I had dinner last night by absolute accident with the president of Santa Anita. He says that there are two or three betters who have a credit arrangement with them, now that they have off-track betting, who are actually beating the house. They're sending money out net after the full handle””a lot of it to Las Vegas, by the way””to people who are actually winning slightly, net, after paying the full handle. They're that shrewd about something with as much unpredictability as horse racing.
And the one thing that all those winning betters in the whole history of people who've beaten the pari-mutuel system have is quite simple. They bet very seldom.
It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it””who look and sift the world for a mispriced be””that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.
That is a very simple concept. And to me it's obviously right””based on experience not only from the pari-mutuel system, but everywhere else.”
Now read this…http://en.wikipedia.org/wiki/Favourite-longshot_bias
Your approach is going to be about finding the “favourite stock” with true odds of 1.5 to 1 but given odds of 2 to 1. Wire your brain to think like this and you should have success with your approach.
Cheers
Galumay,
Read this extract from a speech by Charlie Munger.
“The model I like””to sort of simplify the notion of what goes on in a market for common stocks””is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what's bet. That's what happens in the stock market.
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.
And then the track is taking 17% off the top. So not only do you have to outwit all the other betters, but you've got to outwit them by such a big margin that on average, you can afford to take 17% of your gross bets off the top and give it to the house before the rest of your money can be put to work.
Given those mathematics, is it possible to beat the horses only using one's intelligence? Intelligence should give some edge, because lots of people who don't know anything go out and bet lucky numbers and so forth. Therefore, somebody who really thinks about nothing but horse performance and is shrewd and mathematical could have a very considerable edge, in the absence of the frictional cost caused by the house take.
Unfortunately, what a shrewd horseplayer's edge does in most cases is to reduce his average loss over a season of betting from the 17% that he would lose if he got the average result to maybe 10%. However, there are actually a few people who can beat the game after paying the full 17%.
I used to play poker when I was young with a guy who made a substantial living doing nothing but bet harness races.... Now, harness racing is a relatively inefficient market. You don't have the depth of intelligence betting on harness races that you do on regular races. What my poker pal would do was to think about harness races as his main profession. And he would bet only occasionally when he saw some mispriced bet available. And by doing that, after paying the full handle to the house””which I presume was around 17%””he made a substantial living.
You have to say that's rare. However, the market was not perfectly efficient. And if it weren't for that big 17% handle, lots of people would regularly be beating lots of other people at the horse races. It's efficient, yes. But it's not perfectly efficient. And with enough shrewdness and fanaticism, some people will get better results than others.
The stock market is the same way””except that the house handle is so much lower. If you take transaction costs””the spread between the bid and the ask plus the commissions””and if you don't trade too actively, you're talking about fairly low transaction costs. So that with enough fanaticism and enough discipline, some of the shrewd people are going to get way better results than average in the nature of things.
It is not a bit easy. And, of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And in a fairly low transaction cost operation, they will get better than average results in stock picking.
How do you get to be one of those who is a winner””in a relative sense””instead of a loser?
Here again, look at the pari-mutuel system. I had dinner last night by absolute accident with the president of Santa Anita. He says that there are two or three betters who have a credit arrangement with them, now that they have off-track betting, who are actually beating the house. They're sending money out net after the full handle””a lot of it to Las Vegas, by the way””to people who are actually winning slightly, net, after paying the full handle. They're that shrewd about something with as much unpredictability as horse racing.
And the one thing that all those winning betters in the whole history of people who've beaten the pari-mutuel system have is quite simple. They bet very seldom.
It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it””who look and sift the world for a mispriced be””that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.
That is a very simple concept. And to me it's obviously right””based on experience not only from the pari-mutuel system, but everywhere else.”
Now read this…http://en.wikipedia.org/wiki/Favourite-longshot_bias
Your approach is going to be about finding the “favourite stock” with true odds of 1.5 to 1 but given odds of 2 to 1. Wire your brain to think like this and you should have success with your approach.
Cheers
Re: Personal Investment Strategy Help
The Charlie Munger pari-mutuel analogy is very good.
But it has implications for the line of though that all you need to do is filter out the bad businesses. That won’t give you outperformance unless there is associated mis-pricing of the odds. Ie quality companies are systemically underpriced and poor companies are systemically overpriced. (Historically that systemic error has generally been the norm but not always and not a given for the future)
As we hear regularly, investing or trading needs to adhere to the mathematical concept of positive expectancy to be profitable – which is a factual statement but it needs to be taken further to ask what produces positive expectancy, there is only one universal answer. Exposing yourself to risk only when it is mispriced in your favour.
I only understand two models for exposure to mispriced risk.
Trading: Price does X – I do Y and in doing Y I limit my down side to less than the upside I am exposing myself too. [Can’t avoid a lot of intimate market knowledge (historical and current) and execution skill to know what Y is and get it done within acceptable levels and without too much transaction cost drag]
Investing: Buy future cash flows for less than they are worth based on conservative estimates and realistic probabilities. [Can’t avoid a lot of analysis and understanding of valuation methods and valuation drivers in a business]
There may be more models that can capture mispriced risk – If so they will also adhere to the principle of exposing you to risk only when it is mispriced in your favour. If whatever you do complies with that constraint – you will come out on top after enough occurrences to neutralise the possible impacts of randomness.
The Charlie Munger pari-mutuel analogy is very good.
But it has implications for the line of though that all you need to do is filter out the bad businesses. That won’t give you outperformance unless there is associated mis-pricing of the odds. Ie quality companies are systemically underpriced and poor companies are systemically overpriced. (Historically that systemic error has generally been the norm but not always and not a given for the future)
As we hear regularly, investing or trading needs to adhere to the mathematical concept of positive expectancy to be profitable – which is a factual statement but it needs to be taken further to ask what produces positive expectancy, there is only one universal answer. Exposing yourself to risk only when it is mispriced in your favour.
I only understand two models for exposure to mispriced risk.
Trading: Price does X – I do Y and in doing Y I limit my down side to less than the upside I am exposing myself too. [Can’t avoid a lot of intimate market knowledge (historical and current) and execution skill to know what Y is and get it done within acceptable levels and without too much transaction cost drag]
Investing: Buy future cash flows for less than they are worth based on conservative estimates and realistic probabilities. [Can’t avoid a lot of analysis and understanding of valuation methods and valuation drivers in a business]
There may be more models that can capture mispriced risk – If so they will also adhere to the principle of exposing you to risk only when it is mispriced in your favour. If whatever you do complies with that constraint – you will come out on top after enough occurrences to neutralise the possible impacts of randomness.
Re: Personal Investment Strategy Help
Hi Craft,
To clarify, I am not suggesting that all you need to do is filter out the bad businesses, the point that I am trying to make to Galumay is the approach he is selecting is that the mispricing in the expected return may be subtle in the short-term and only becomes obvious when increasing the holding timeframe to years (compounding needs to take effect). Valuation depends on investment holding timeframe.
IMO, the favourite-longshot bias is a useful tool to add to the toolbox.
Cheers
Hi Craft,
To clarify, I am not suggesting that all you need to do is filter out the bad businesses, the point that I am trying to make to Galumay is the approach he is selecting is that the mispricing in the expected return may be subtle in the short-term and only becomes obvious when increasing the holding timeframe to years (compounding needs to take effect). Valuation depends on investment holding timeframe.
IMO, the favourite-longshot bias is a useful tool to add to the toolbox.
Cheers
Re: Personal Investment Strategy Help
Sorry - didn't mean to impute anything towards you. Just making some generic points that link back to the Munger pari-mutaul peice.
Keep up the good discussion
Sorry - didn't mean to impute anything towards you. Just making some generic points that link back to the Munger pari-mutaul peice.
Keep up the good discussion
galumay
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Re: Personal Investment Strategy Help
Indeed, please do! You and Oddson have once again given me more food for thought. I think largely you have specified with more clarity and in different words what my strategy is. I appreciate the Munger stuff & the links.
Keep up the good discussion
Indeed, please do! You and Oddson have once again given me more food for thought. I think largely you have specified with more clarity and in different words what my strategy is. I appreciate the Munger stuff & the links.
Re: Personal Investment Strategy Help
Avoid becoming a "closet indexer". I have never understood why investors go on about stock portfolio diversification so much, in my view it is diversification of net worth that matters.
Have you thought about what advantages you have as a retail investor?
Have you thought about what disadvantages you have as a retail investor?
I am assuming you want to win. Remember Warren Buffett and Roger the Todger are on the other side of the deal
Cheers
Avoid becoming a "closet indexer"
. I have never understood why investors go on about stock portfolio diversification so much, in my view it is diversification of net worth that matters.Have you thought about what advantages you have as a retail investor?
Have you thought about what disadvantages you have as a retail investor?
I am assuming you want to win. Remember Warren Buffett and Roger the Todger are on the other side of the deal
Cheers
galumay
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Re: Personal Investment Strategy Help
I assume by that you mean diversifying so much within the portfolio that i am basically just an indexer? Certainly not my intention, as I said I am only seriously looking at about 10 stocks.
I havent given a lot of consideration to the advantages/disadvantages of being a retail investor other than the advantages of smaller scale compared to say a large fund that has to find somewhere to invest billions.
I know WB is on the other side of the deal, hope he and his take more from others than I, not so sure which side Roger the Todger squats on!
Avoid becoming a "closet indexer"
Have you thought about what advantages you have as a retail investor?
Have you thought about what disadvantages you have as a retail investor?
I am assuming you want to win. Remember Warren Buffett and Roger the Todger are on the other side of the deal
Cheers
I assume by that you mean diversifying so much within the portfolio that i am basically just an indexer? Certainly not my intention, as I said I am only seriously looking at about 10 stocks.
I havent given a lot of consideration to the advantages/disadvantages of being a retail investor other than the advantages of smaller scale compared to say a large fund that has to find somewhere to invest billions.
I know WB is on the other side of the deal, hope he and his take more from others than I, not so sure which side Roger the Todger squats on!
Re: Personal Investment Strategy Help
Hi Craft,
To continue the discussion…
If an investor/trader does not have the necessary judgement and skill to produce positive expectancy, they should accept that they are gambling and use a betting strategy to minimise their exposure to the unfair game (i.e. the ASX!) whilst trying to achieve their target fortune. The optimal strategy in an unfair game is bold play; bet as much as you can but no more than necessary. The optimal strategy in an superfair game is timid play: bet as little as possible, be cautious.
How does one play the stock market? Here are my thoughts:
-In the long-term (say 20-30 years), the stock market index goes up. The game is superfair; therefore timid play should be used. My interpretation of timid play when applied to the stock market over the long-term is averaging into an index tracker.
-In the medium-term (say 5 years), the stock market index may not go up but certain stocks will go up. The game is unfair; therefore bold play should be used. My interpretation of bold play when applied to the stock market over the medium-term is holding a concentrated portfolio (not the index).
-In the short-term (say less than a month); the stock market may go up/down and all stocks will go up/down. The game is unfair; therefore bold play should be used. My interpretation of bold play when applied to stock market over the short-term is holding one stock.
The key point is that the optimal strategy for an gambler/investor/trader can be worked out by analysing the following:
-Starting capital
-Target capital
-Investment timeframe
-Realistic appraisal of judgement and skill to produce positive expectancy.
Cheers
Sorry - didn't mean to impute anything towards you. Just making some generic points that link back to the Munger pari-mutaul peice.
Keep up the good discussion
Hi Craft,
To continue the discussion…
If an investor/trader does not have the necessary judgement and skill to produce positive expectancy, they should accept that they are gambling and use a betting strategy to minimise their exposure to the unfair game (i.e. the ASX!) whilst trying to achieve their target fortune. The optimal strategy in an unfair game is bold play; bet as much as you can but no more than necessary. The optimal strategy in an superfair game is timid play: bet as little as possible, be cautious.
How does one play the stock market? Here are my thoughts:
-In the long-term (say 20-30 years), the stock market index goes up. The game is superfair; therefore timid play should be used. My interpretation of timid play when applied to the stock market over the long-term is averaging into an index tracker.
-In the medium-term (say 5 years), the stock market index may not go up but certain stocks will go up. The game is unfair; therefore bold play should be used. My interpretation of bold play when applied to the stock market over the medium-term is holding a concentrated portfolio (not the index).
-In the short-term (say less than a month); the stock market may go up/down and all stocks will go up/down. The game is unfair; therefore bold play should be used. My interpretation of bold play when applied to stock market over the short-term is holding one stock.
The key point is that the optimal strategy for an gambler/investor/trader can be worked out by analysing the following:
-Starting capital
-Target capital
-Investment timeframe
-Realistic appraisal of judgement and skill to produce positive expectancy.
Cheers
galumay
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Re: Personal Investment Strategy Help
Given the recent downturn in the market I see a number of stocks on my watch list as being at prices where I am happy to buy in, i intend to put about $100,000 into the market and I have a watch list that sits at about 50 with 20 shares flagged as potential buys, I suspect that is far too many - parcels of $5000 seem a little small.
What sort of strategies do others use to decide on size of parcels relative to total capital and also number of share investments relative to starting capital?
Given the recent downturn in the market I see a number of stocks on my watch list as being at prices where I am happy to buy in, i intend to put about $100,000 into the market and I have a watch list that sits at about 50 with 20 shares flagged as potential buys, I suspect that is far too many - parcels of $5000 seem a little small.
What sort of strategies do others use to decide on size of parcels relative to total capital and also number of share investments relative to starting capital?
Julia
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Re: Personal Investment Strategy Help
No set amount. Will put more into something which I believe has more potential for growth and/or more stability of yield. Would never subscribe to a set allocation of X% of available capital for each share.
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Re: Personal Investment Strategy Help
In my personal situation I do not like to have more than 12-15 stocks in total. Ideally I aim for 8 - I feel this gives me enough diversification without too much burden to keep up-to-date with all the businesses. But I really do not purchase businesses just to gain diversification...
A lot of people don't put large sums into any one investment, but I feel that if you know a business well - this is what you should be doing (at least to some reasonable extent)...
In some of the earlier buffet letters to shareholders he talks about putting 50%+ of his net worth in companies such as GEICO when he was just starting out....I get reminded of this when tech/a talks about finding a train and placing yourself in front of it....
In my personal situation I do not like to have more than 12-15 stocks in total. Ideally I aim for 8 - I feel this gives me enough diversification without too much burden to keep up-to-date with all the businesses. But I really do not purchase businesses just to gain diversification...
A lot of people don't put large sums into any one investment, but I feel that if you know a business well - this is what you should be doing (at least to some reasonable extent)...
In some of the earlier buffet letters to shareholders he talks about putting 50%+ of his net worth in companies such as GEICO when he was just starting out....I get reminded of this when tech/a talks about finding a train and placing yourself in front of it....
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Re: Personal Investment Strategy Help
I usually have 15-20 stocks, 20 is my max. I'm not really sure how to work out a parcel size, so I tend to go with about 5%/position, although I have some over and some under that amount.
I usually have 15-20 stocks, 20 is my max. I'm not really sure how to work out a parcel size, so I tend to go with about 5%/position, although I have some over and some under that amount.
Julia
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Re: Personal Investment Strategy Help
So if you had stock XYZ, having allocated 5% of your available capital to it, and a while later it has risen to the point where it's, say, 10%, but showing no indication of reversing its upward trend, would you sell all or some of it, or let it continue?
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Re: Personal Investment Strategy Help
Wouldn't sell. I guess if it got up near 15-20% then I'd have to reconsider, that hasn't happened yet. My largest position at the moment is about 9% and my smallest is about 2%.
Wouldn't sell. I guess if it got up near 15-20% then I'd have to reconsider, that hasn't happened yet. My largest position at the moment is about 9% and my smallest is about 2%.
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Re: Personal Investment Strategy Help
I agree with McLovin, although I am more risk tolerant - allowing positions to get to 30-40% before I start considering trimming. Some would call this reckless, but I beg to differ.
I think the answer to the question is very personal and should be based on risk tolerance, capital size, relevance of capital to standard of living etc.
For example - someone with $50k in shares who is renting and has no other assets would probably be a lot more adverse to allowing one company comprise 40%....while in contrast - someone with $200k in shares, owns their own home, has $100k in a term deposit and owns an investment property would have a clearly different perspective on the 40% risk allocation.
I agree with McLovin, although I am more risk tolerant - allowing positions to get to 30-40% before I start considering trimming. Some would call this reckless, but I beg to differ.
I think the answer to the question is very personal and should be based on risk tolerance, capital size, relevance of capital to standard of living etc.
For example - someone with $50k in shares who is renting and has no other assets would probably be a lot more adverse to allowing one company comprise 40%....while in contrast - someone with $200k in shares, owns their own home, has $100k in a term deposit and owns an investment property would have a clearly different perspective on the 40% risk allocation.
Re: Personal Investment Strategy Help
I have found this upper limit for portfolio concentration due to market movements to be one of the most challenging aspects of setting boundaries for myself.
You are basically overriding the principle of letting your winners run to protect yourself (Psychologically) from the volatility associated with a major concentration in the portfolio. If you can switch into better perceived value its not so bad - More just a prompt then, to do something you should probably be doing anyway.
Personally I knock the top off anything that pokes it head above 25% of its account.
I have found this upper limit for portfolio concentration due to market movements to be one of the most challenging aspects of setting boundaries for myself.
You are basically overriding the principle of letting your winners run to protect yourself (Psychologically) from the volatility associated with a major concentration in the portfolio. If you can switch into better perceived value its not so bad - More just a prompt then, to do something you should probably be doing anyway.
Personally I knock the top off anything that pokes it head above 25% of its account.
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Re: Personal Investment Strategy Help
The psychology thing is spot on, IMO. I like to sleep at night and I know I make mistakes (although over the years they have become fewer!). So I'd rather take a somewhat lower return with less chance of significant permanent capital loss. Ask me in 10-15 years time and my views may have changed.
I was having a look this afternoon at what I owned back when I was at uni (2000) geez, there are some shockers in there!
The psychology thing is spot on, IMO. I like to sleep at night and I know I make mistakes (although over the years they have become fewer!). So I'd rather take a somewhat lower return with less chance of significant permanent capital loss. Ask me in 10-15 years time and my views may have changed.
I was having a look this afternoon at what I owned back when I was at uni (2000) geez, there are some shockers in there!
galumay
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Re: Personal Investment Strategy Help
thanks guys n gals, i must say its very reassuring to have a number of replies from some of the posters i most admire on ASF!
I think I will have a further sort through my short list and see if i can reduce it a bit to less shares that I like more!
cheers, rick
thanks guys n gals, i must say its very reassuring to have a number of replies from some of the posters i most admire on ASF!
I think I will have a further sort through my short list and see if i can reduce it a bit to less shares that I like more!
cheers, rick
