ROE - your posts always make me smile. You always nail the required psychology and temperament with your comments. Good workthat just to show with the right business you don't need to worry too much...
and don't get too hang up with exact IV and all the exact calculation stuff...Keep it simple, invest in the right business when you think it reasonable to enter and don't mind paying that price for long term holding....
your timing may or may not be spot on but holding good business for long term 95% of the time it will pay off.... Good business require time to expand and prosper, it doesn't work like stock stickers where it change value every day ....true value will be recognised over a long period of time ....
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...
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.
Hi Craft,
To clarify, I am not suggesting that all you need to do is filter out the bad businesses
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.
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
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
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.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?
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?
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?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.
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?
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%.
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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