What I think I know About Investing (April 2016 Update)

General

1. Know yourself — strengths, weaknesses, emotions.

2. Align strengths, weakness, and personality w/investing style — and investing style w/trading strategy (short- vs. long-term).

3. Think hard & honestly about what you fear most in your portfolio. Be open about it.

4. Admit when you’re wrong and don’t know why.

5. Be flexible. If you never change your mind (in embarrassing ways) you’re doing it wrong.

6. Consider “return on brain damage.” Sometimes it’s worth it — but often not.

7. Be cautious when your investment narratives sync up with your political views.

8. Study past wins/losses. Know and admit where you were lucky. If honest, should be a decent % of wins.

9. Simpler is almost always better — financial model, business model, portfolio construction, trading.

10. Don’t be defensive.

11. Give peers the opportunity to save face.

Portfolio Management

12. My ideal portfolio has 15–20 positions.

13. Assume you’ll frequently be wrong and size accordingly. 10% max @ init for single name longs seems right. Half that (at most) for shorts.

14. If you have big losses and can’t ID the culprit, get out. You can always get back in.

15. ETFs are not exempt from sizing “rules.”

16. Hedging single-names with ETFs is often a poor strategy — and gives zero license to ratchet up single name concentration.

17. The only thing worse than using index shorts is poorly-executed single name shorts. The bar needs to be higher (research, return expectations, timeline) vs. longs.

18. Foreign stocks often have poor visibility — consider mkt cap minimums (~ proxy for level of info. flow and — perhaps — incrementally better shareholder protections).

19. Know the basics of technical analysis — and keep in mind for position entry/exit timing.

20. Don’t ignore momentum. Know which, if any, names you’re in that are momentum-driven.

21. Know the investor base (and trends) for your investments — keep an eye out for potential style shifts.

22. Cutting gross is almost always better than adding hedges.

23. When you start getting cocky, cut back.

24. It’s better not to enter a fully-sized position in one trade (even if you don’t move the market).

25. It’s usually ok to fully exit a position in one trade (assuming you don’t move the market).

26. Do a timeline.

27. Have a catalyst for all shorts (valuation doesn’t count).

28. Have a catalyst for exiting longs (better use of capital counts) to force yourself to let them run.

29. Covered calls are not free money.

30. Relative outperformance means nothing when you’re losing money. Don’t lose money.

31. Relative underperformance isn’t deadly if you’re making money.

Valuation

32. Changes in fundamentals (trajectory) are more important than “valuation.”

33. “Cheap” or “expensive” (e.g. “low/high” multiple) alone is never a reason to go long or short.

34. FX is unbelievably important. Sell-side often flat-lines FX assumptions (FX is not their job!).

35. Assume sell-side estimates are probably wrong, but still most accurate available. Don’t deviate too far unless you can ID specific sources of groupthink/error.

36. Avoid melting ice cubes — except for the occasional & very specific catalyst-driven trade (can be LT).

37. High margins are often a sign of business strength/moat — but can also be a sign of a top.

38. Be wary when consensus trots out abnormal valuation methods (e.g. disc’d future value based on 2020 P/E)

39. Things I’ll pay a premium for (not exhaustive):

a. Top decile — or improving — management

b. Scarcity value / elevated take-out odds

c. Sustainable growth (big runway)

d. Sustainable, high margins

e. Expanding margins

f. Under-utilized balance sheet

g. Simplicity

40. Things I want a discount on (also not exhaustive):

a. Acquisition-driven growth

b. Fully-utilized balance sheet

c. High capital intensity

d. Unchanging complexity

41. Beware of beloved IB clients.

42. You are not alone in preferring “quality” over garbage names. Understand the performance implications.

Idea Generation & Process

43. Are you betting on what you think you’re betting on (e.g. does YNDX move on fundamentals or on oil/RUB)?

44. Contrarian doesn’t = smart (usually the opposite).

45. Crowded trades usually end poorly. You might be able to make money before that happens.

46. Some of the best short candidates are large cap and/or low multiple value traps.

47. IPOs can be a great source for value dislocation.

48. Organize your thoughts on each position in a concise, written manner: ideally 1-page written + comps — with ~20 pages of info upstairs for answering Q’s.

49. Write a ‘pre-mortem’ for all investments.

50. Some of your risks should not have mitigants.

51. If you’re tempted to use the terms “inevitable” or “paid to wait,” move on to something else.

52. Midcap ($1B-10B) seems like a sweet spot for longs.

53. “Turnaround stories”: when consensus gets on board with the “story” logical valuation rules go out the window. Know when to get on board — and when to get off. Recent ex: SEE, MCD.

54. Be suspicious of “story” stocks.

55. Don’t overestimate how much insight you’ve gleaned from meeting management.

56. One week of research is enough to enter a starter position — but process beyond that ~24/7.

57. Just because those with an opposing view (bull/bear) are defensive morons, doesn’t mean they’re wrong.

58. You’re usually worse off putting on an options trade vs. underlying. Avoid complexity of execution, wherever possible.

59. Be overweight (gross) in sectors you know well. Deliberately expand that list (of sectors) over time.

60. Probability of a take-out should be a secondary consideration for longs — but a priority for shorts.

61. Family-run & controlled businesses can be a great — or terrible — thing. How do they get paid?

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