What I think I know About Investing (April 2017 Update)

General & Personal

1. Know yourself — strengths, weaknesses, emotions

2. Align strengths, weakness, and personality w/investing style — and investing style w/trading strategy (ST vs. LT)

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

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

5. Be cautious when investment narratives & political views sync up

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

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

8. Don’t be a defensive jerk

9. Give peers the opportunity to save face

Idea Generation

10. The “walking around method” (w/ a little direction) is generally a good process for finding new ideas (vs. screens)

11. Midcap ($1B — 15B) seems like a sweet spot for longs

12. Seek companies that have the potential to be owned “forever” Whether they fit the bill or not should become clear over time

13. Learn to love saying “no — for now”

14. Kill new ideas fast — but not for reasons that can be ID’ed with ‘headline research’ alone

a. In fact, embrace the “ick factor” to populate your ‘to-research’ list

b. But remember: contrarian =/= smart (usually opposite)

15. IPOs, spinoffs, etc. can be a great source for value dislocation

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

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

18. Be suspicious of “story” stocks — e.g. the “next CMG.” Be suspicious of stocks that are the story (e.g. CMG) themselves

19. Don’t short potentially “great” (high/sustainable ROIC, large TAM, etc) businesses — no matter how tempting valuation-wise. There are more than enough lousy businesses to short

Fundamental Analysis & Valuation

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

a. But note: hustling through the research process & quickly opening a position has rarely worked well

21. Be able to organize your thoughts on each position in a concise, written manner: 1-page written + comps — with ~20 pages of info upstairs for answering Q’s

a. A longer, consistently structured, and detailed “pitch” can be useful for keeping your process organized

22. Consider “return on brain damage” — often not worth it

a. “Sosnoff’s Law”: returns vary inversely with thickness of research file. If you find yourself working hard to justify entering a position, it’s probably not worth it

23. Be able to answer: ‘what do you know that someone who has read the filings/transcripts doesn’t?’ (this doesn’t mean you have an info edge)

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

25. Valuation pushback is the best pushback

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

27. Some of your risks should not have mitigants

28. Know what you’re actually betting on (e.g. does YNDX move on fundamentals or on oil/RUB)?

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

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

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

32. 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

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

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

35. “Turnaround stories”: when consensus gets on board with the “story” logical valuation rules go out the window. Know when to get on — and off

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

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

38. High margins are often a sign of business strength/moat — but can also be a sign of a top (does the level make qualitative sense?)

39. Be wary when consensus trots out abnormal valuation methods (e.g. disc’d future value based on 2025 P/E)

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

a. Top quartile management

b. Sustainable, organic growth (big runway)

c. Sustainable, high, expanding ROIC & Econ Profit

d. Under-utilized balance sheet

e. Simplicity

f. Scarcity value / elevated take-out odds

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

a. Acquisition-driven growth

b. Fully-utilized balance sheet

c. High capital intensity w/out pricing power

d. Unchanging complexity

42. Beware of beloved IB clients

43. Avoid co’s that tout how undervalued their stock is

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

Portfolio Management

45. My ideal portfolio has 10–20 positions

46. Availability/quantity of good ideas should guide net & gross

47. 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

48. “Long/Cash” (as opposed to “L/S”) is probably a better strategy for the vast majority of investors tempted to do L/S over the LT

a. That said, right now seems like a great time (from a career/market perspective) to bone up on short- skills

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

a. Size using cost basis for longs — be patient and don’t break your rules here

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

51. Don’t ignore momentum. Know which, if any, names you’re in that are momentum-driven and what the key driver is (e.g. SSS)

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

53. Cutting gross is almost always better than adding hedges

54. When you start getting cocky, cut back. Look at “Wall Street’s Wheel of Fortune” (in the intro to Capital Returns) daily

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

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

57. Covered calls are not free money

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

59. Avoid “trading” in the first/last hours of the day

60. Move slowly (or in small size) when it comes to “trading”