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Justifiable Investment Strategy
Old 01-29-2011, 10:17 PM   #1
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Justifiable Investment Strategy

Because I love wading in the thick of it I ask how do you justify your investment strategy? Is all you need to support your lifestyle? Is it minimizing risk and what is risk related to investing?

My justification for my investment strategy is that it allows me to maximize asset accumulation and minimizes risk. Risk is the failure to maximize the return on your investments taking into consideration your ability to replace anything you lose before you absolutely need it.

How does investing in bonds over a 20 period reduce risk? I would maintain that it doesn't. You are likely to have a smaller portfolio if you use the past as your guide. You risked potential returns in exchange for a smoother trip.

I have outperformed the market in 10 of the 11 years I have been invested solely in individual companies. Cumulatively I am up 340% versus a 5% rise in the S&P 500 over the 11 years. Investing in bonds would have greatly increased my risk.

I have no trouble holding 20% in a single security I understand completely. I regularly have companies that start as 10% of my portfolio grow to more than 20%. At no time do I hold more than 15 companies. I can't actively follow any more than this.

I limit my risk by favoring companies that have huge amounts of current assets or better yet hidden assets. I also invest in a small number of select companies that have more of a growth tilt. I don't limit myself by market cap, industry or any other characteristic other than they be a US company. Living near the Canadian Border I treat Canada as the same as the US and have considered Canadian Companies, but have yet to own one.

I have never owned an internet company, but have owned companies in exciting industries like mattress fabric, coal crushing equipment, fish farming and a number of companies that have large holdings of raw land.

My portfolio has achieved my objective of maximizing my return while minimizing my risk of failing to generate the largest amount I can.
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Old 01-29-2011, 11:05 PM   #2
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I have never owned an internet company, but have owned companies in exciting industries like mattress fabric, coal crushing equipment, fish farming and a number of companies that have large holdings of raw land.
Reminds me of my mother investing in House of Fabrics when I was little. She always said to invest in things you participate in, understand, or think is cool. As a result, Mom's portfolio has always been amusing: Starbucks, Harley Davidson, Waste Connections...and more mundane things! As a result of working in the heat treating industry, my Alcoa stocks were my pride & joy for a bit!
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Old 01-29-2011, 11:17 PM   #3
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I have never owned an internet company, but have owned companies in exciting industries like mattress fabric, coal crushing equipment, fish farming and a number of companies that have large holdings of raw land.

My portfolio has achieved my objective of maximizing my return while minimizing my risk of failing to generate the largest amount I can.
Warren, is that you posting here?
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Old 01-29-2011, 11:34 PM   #4
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Old 01-30-2011, 01:17 AM   #5
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I have outperformed the market in 10 of the 11 years I have been invested solely in individual companies. Cumulatively I am up 340% versus a 5% rise in the S&P 500 over the 11 years.
Congrats! Have you considered starting or running a mutual fund?
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Old 01-30-2011, 03:36 AM   #6
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Since you have stated that you do not believe in MPT or any type of asset allocation... I can see why you change the definition of risk...


But if you go with the definition of risk that the majority of people use... and the one that seem to get people Nobel prizes... then maybe your return is not as great as it seems...

Modigliani Risk-Adjusted Performance - Wikipedia, the free encyclopedia

I like risk adjusted returns rather than just plain returns....

As an example... I just started to watch a TV show about gold mining in Alaska... these people invested (from what they say) $250,000 plus into gold mining.. (don't spoil it for me... I am still watching ).. now, if they hit that mother load they believe in.... their return on investment is very high... but since they seem to be fools now, the risk is very high... even if they return 1000%.... I would never invest in a company like them (they are not... just using them as an example)...... the risk of me losing everything is way to great even for the possible reward of 1000%.... I would much rather have a lot less risk and earn 100%.... or even 20%...

But using your definition... "Risk is the failure to maximize the return on your investments taking into consideration your ability to replace anything you lose before you absolutely need it."... I should invest in this gold mining operation because I am not maximizing my return if I did not...

Sure... and extreme example... but if a theory can not work on the extremes then maybe it is not a great theory...


PS.... you sent me a PM on one of my other comments... and I did not answer this part.. so I will put it here... I am not defending any investment style... just commenting on your posts...
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Old 01-30-2011, 03:50 AM   #7
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Congratulations on achieving some great returns.

With respect, I find myself unable agree with your definition of risk. For most investors, risk is not about failure to achieve maximum returns (even with your qualification), but about either (i) achieving the best risk adjusted returns consistent with your investment objectives and risk tolerance or (ii) avoiding loss (in either real or nominal terms).

While I am not a fan of bonds as an asset class either, I am happy to concede that they do have a place in most portfolios as a means of reducing risk - especially for people who need to draw down capital to fund living expenses - as well as providing rebalancing benefits. There have been periods, sometimes long periods, when bonds have out performed equities as an asset class.

By definition, for every dollar that is invested which beats the underlying index, there must be a dollar which does worse than the underlying index. Unless you live in Lake Wobegon or have some other justification for believing that you can consistently beat the professional investors, it cannot be assumed that you will be one of the winners of the beat the index game instead of one of the losers and going with a low cost index is usually the best option for most people.

(And this is from someone who does way too much some stock picking himself.)
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Old 01-30-2011, 04:33 AM   #8
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Wow! And we actually got lucky and met you on the internet!

I can't wait to tell all my friends.
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Old 01-30-2011, 08:12 AM   #9
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PS.... you sent me a PM on one of my other comments... and I did not answer this part.. so I will put it here... I am not defending any investment style... just commenting on your posts...
The Community Rules do not allow members to drum up business from others. If members start getting bothersome PM's then you can report the PM using the report PM icon or post them here like TP has done.

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Old 01-30-2011, 09:01 AM   #10
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As they say. "Past performance is no guarantee of future returns" Interesting if somewhat self-serving definition of risk.
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Old 01-30-2011, 09:42 AM   #11
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... Risk is the failure to maximize the return on your investments taking into consideration your ability to replace anything you lose before you absolutely need it.
... investing in bonds ... You risked potential returns in exchange for a smoother trip.
I think this is saying that during the accumulation phase of a retirement plan, you needn't be concerned about large market volatility, if that gets you a higher expected return.
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Old 01-30-2011, 09:46 AM   #12
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I have this thing that I can take outside and it will blow leaves,yard debris, or light snow away. I've decided to call it a vacuum cleaner. Or maybe a coffee pot.
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Old 01-30-2011, 10:11 AM   #13
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bcinvest,
Are you this person?
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I am the publisher of the market beating Commonsense Investletter investment advisory newsletter.
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Old 01-30-2011, 12:10 PM   #14
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Because I love wading in the thick of it I ask how do you justify your investment strategy? Is all you need to support your lifestyle? Is it minimizing risk and what is risk related to investing?
Congratulations on the 340% in eleven years. Your investment strategy certainly seems to be working for you....

The definition I use for stock picking and real estate investment are what is the likelihood of 100% permanent loss and that defines my "bet" size. With stocks this has limited me to about $7000 per year. Whereas with real estate I will use leverage for a heck of a lot more... and unleveraged index funds would be roughly half real estate so I guess my investment strategy is based on my personal risk assessment of my ability not to lose it all... and that is based upon my past performance... acknowledging that index funds are the sensible approach and "letting my winnings ride" in stocks and real estate over the last decade.

If truth be told I had to restart my stock bankroll ($3k) 3 years ago... as if I'd kept a running tab including blown stock options... I'd never get to play again. In summary, I would love your 340% (compared to my ~10% CAGR), but I know my limitations and thus my investment strategy works for me.... though still hoping I can roll that $7k into something big... one day!
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Old 01-30-2011, 12:23 PM   #15
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bcinvest,
Are you this person?
Betcha he is.
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Old 01-30-2011, 02:31 PM   #16
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Congrats! Have you considered starting or running a mutual fund?
Yes and I decided I have no interest. I do have a blog that has been in development for way too long that expresses my views without visiting it; Open Source Investing. I think to much money is being me off of other peoples money. just like open source software promote working together for a great result I think similar minded investors can do a great job educating themselves.

Peter Lynch was fond of writing about following his kids to the mall and seeing which stores had heavy traffic as part of his investment strategy. It seemed to work for him. I am so out of touch with pop culture that I don't even think the mall could help me.

"But if you go with the definition of risk that the majority of people use... and the one that seem to get people Nobel prizes... then maybe your return is not as great as it seems... "

I don't use this definition because it only works in theory, not in practice. Value investing has a lower risk with higher returns when compared to growth investing. The modern finance definition of risk says this is impossible. When empirical evidence proves a theory wrong it is no longer worth relying on. Check the work by Cooper and Gubellini:

Cooper, Michael J. and Gubellini, Stefano, The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth (September 12, 2010). Available at SSRN: SSRN-The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth by Michael Cooper, Stefano Gubellini

The people that received the Nobel Prizes also managed to blow up Long Term Capital Management as further confirmation that their ideas usefulness never made it past the theory point. It could not survive real markets meaning their theory was wrong.

The modern finance theory of risk comes from the same people that warn about using past results to project future gains. At the same time they base calculations of risk on past performance and use that as if it is meaningful projection of future risk. I find that hard to rationalize.

While I don't measure my risk using modern finance theories I would suspect my risk is below average. If you have an affinity for companies that are worth more dead than alive you are not exposed to a whole lot of risk.

"the risk of me losing everything is way to great even for the possible reward of 1000%"

Would you judge your gold mining example any different for an investor who has $250 k to invest compared to an investor who has $100 million to invest. It is not the investment that is the risk it is the context in how that investment fits into each investors circumstances. I have no idea to what degree of precision you can project the payoff on a gold mine, but that would also influence my idea on how risky it is. It would also depend on how valuable that investment might ultimately be. If that $250k invest had a 60% chance of being parlayed into $50 million that is a much different proposition than a 10% chance of turning $250k into $2 million.
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Old 01-30-2011, 02:45 PM   #17
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Congratulations on achieving some great returns.

With respect, I find myself unable agree with your definition of risk. For most investors, risk is not about failure to achieve maximum returns (even with your qualification), but about either (i) achieving the best risk adjusted returns consistent with your investment objectives and risk tolerance or (ii) avoiding loss (in either real or nominal terms).

While I am not a fan of bonds as an asset class either, I am happy to concede that they do have a place in most portfolios as a means of reducing risk - especially for people who need to draw down capital to fund living expenses - as well as providing rebalancing benefits. There have been periods, sometimes long periods, when bonds have out performed equities as an asset class.

By definition, for every dollar that is invested which beats the underlying index, there must be a dollar which does worse than the underlying index. Unless you live in Lake Wobegon or have some other justification for believing that you can consistently beat the professional investors, it cannot be assumed that you will be one of the winners of the beat the index game instead of one of the losers and going with a low cost index is usually the best option for most people.

(And this is from someone who does way too much some stock picking himself.)
Thanks for the kind words. You bring up some good points. For every dollar that beats someone does worse. I often think of that when I am selling shares of a company that has become obviously overvalued. TSRI was my most recent example this past December. I have mixed feelings in this case. I understand that every investor is entering freely into these transactions, but at the same time can feel like I am making out to good on the deal. I am not completely comfortable with how to deal with this.

My results are posted above. Can I beat the markets long term. If not what results are needed to show that this can be accomplished. I am convinced investors can beat the market and I don't think it is all that hard. Whether I can do it long term I don't know. I ask the question to myself regularly. If it is one great run of luck I hope in continues. I have been besting the market by 14 percentage point per year on average. I think what it comes down to is that it can't be proven that an investor can beat the market while it is easy to determine they can't. The way I see it is using what I consider a similar analogy. I can't quantitatively test quarterbacks to determine which one is the best performer. However, I know it when I see it.
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Old 01-30-2011, 03:01 PM   #18
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I think this is saying that during the accumulation phase of a retirement plan, you needn't be concerned about large market volatility, if that gets you a higher expected return.
I think we are on the same page. Risk is a variable thing. As I posted above value investing has lower risk and better returns than growth investing styles. Volatility causes me no concern, it makes my job much easier. With the price of the average equity varying by more than 50% in a given year volatility is plentiful. If I buy at the low end of the range (value investing) I remove much of the risk. Yeah expected return is huge. You always wantto tilt the odds in your favor.
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Old 01-30-2011, 03:15 PM   #19
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I am convinced investors can beat the market and I don't think it is all that hard.


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Old 01-30-2011, 03:23 PM   #20
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Bonds are taking a hit here.
Take a look at these returns.

http://ttheory.typepad.com/.a/6a00d8...8223b70970c-pi

Best bonds is if you switched between the two types.
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