By Axel Steinmetz
The summary of this post is the following. We deploy a long only approach because:
- That’s what the founders were trained in.
- We are full time students who can only spend so much time carefully watching the market
- Our whole image of investing in Michigan companies wouldn’t look as good if we were betting that they would fail.
In this post, I’ll go through those three reasons in more depth, hopefully answering any questions about us on this issue you may have.
- What the founders were trained in
The first and most obvious reason for why we are long only is because that’s what we know best. I personally only know about stocks, and even within stocks, I only feel like I can kind of speak intelligently about value investing (and even with just value investing, there’s still so much I need to read and study).
My knowledge on short term stock investing, day trading, shorting, and crypto is extremely limited. I’m sure each strategy has its own pros and cons, and value investing as well has its pros and cons which make it attractive for some and unattractive to others.
For me personally, I like value investing partly because of how established it is. There’s the most material out there about fundamental company analysis, and it’s been proven to work through all U.S. market cycles so far, and I think that will still be the case going forward as well.
I also like it because I’m pretty risk averse. Earlier this year, I tried to get into day trading just to see what it was like. My friend and I used as app called Robinhood to trade an initial value of $100 in the market. Robinhood, for those who don’t know, allows you to buy and sell stocks without any brokerage fees. They take a penny off of every trade for themselves which is where they get their commission. If you have a stock of BRK.B and it’s trading for $100, they sell it for $99.99.
When my friend and I first started playing with the app, it was too tempting for me not to try day trading as the no brokerage fee thing made it a lot cheaper to do so. We mostly traded Rite Aid, which seemed to always hover between $2.00 and $2.07 (which led my friend to believe the true value of the stock was right around that $2.00 mark). So, we would buy at $2.00 and sell at a $2.07. That worked for a little bit, and I saw my networth on the app increase to just over $117, or a gain of 17%. Then, just like that, Rite Aid announced terrible earnings, and the stock fell to $1.50. My friend lost some money, but recovered quickly after trading the volatile stock “at its new true value” of $1.50 (any value guy reading this is probably fuming at my friend’s “new true value” comment or the “old value” stuff, so maybe I’ll write about why in another blog post).
Partly because of my own skepticism, I didn’t put all $117 in Rite Aid, but my curiosity got the better of my when I bought 25 shares of Rite Aid for right around $2.03 just before they announced their earnings. When the stock fell, I was back where I started at $100, after all the work I put in to carefully watching the price hover around $2.00 for over two weeks.
After the Rite Aid incident, I bought a few “value” type stocks without trying to time the market at all, and I’m up 25% less than a year later after making only one trade during that time. Day trading can be great I’m sure, but stories like these have helped define my own investment philosophy and thus VVI’s as well.
There’s a famous Seth Klarman quote that reads,
“It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.”
When you put it that way, it sounds a little pretentious, but I think he’s right in saying that value investing is not for everyone. My friend went back to day trading, and has done modestly well. Plus, there’s plenty of evidence that trading works for some, so more power to them.
As for the other founders, I know Jack is interested in banking and Frank dabbles in crypto for whatever reason, but I think I’ve brainwashed them enough to also convince that value investing is interesting enough for their time. Plus, they’ve done enough reading to know way way more than the average student about value investing at this point.
2. The problem with being full time students
As full time students, we can only dedicate so much time on this stuff. Thus, it makes watching the market super closely a lot more difficult. It’s a lot more practical for us to be confident enough in our investments to give them time to mature without having to watch the day to day small fluctuations. Of course, we’ll pay some attention to quarterly earnings to question or reaffirmed our initial thesis, but that’s a lot different than trading our position because a stock went up or down in the short term. Of course, there are special situations that would make us reevaluate a stock immediately. For example, when the Equifax hack was announced, if VVI owned Equifax then we should probably get together and decide what we are going to do (although, even that can be impractical with everyone’s busy schedules). I think the point I’m trying to get across is that unless the event requires special attention, it’s a lot easier to be pretty hands off with our investments which pushes us to a long-only value investing strategy.
Additionally, as student with limited time, I think evaluating a single company as opposed to a whole industry is a lot easier. If we are limiting our focus to Upper Midwestern companies, then we aren’t going to try to predict which industries may be more attractive in a given investment period. And we are certainly not going to try to predict regionally if the Midwest will do better than other parts of the country. So that’s why we aren’t long-only macro investors.
3. Protecting our image
Part of our image is we say we invest in Michigan companies, so it’s probably not a good idea to short them. Additionally, we aren’t trading very frequently, so we can kind of say we are supporting the business for the long term.
I say kind of because there are a couple flaws in this thinking. First, we have so few assets that owning something like $1000 worth of stock isn’t a big enough positions to do much of anything with. Second, if we didn’t own the shares, someone else would at exactly the same price because our buying activity doesn’t affect the market in any way. So it’s a bit of a stretch to say we are supporting Michigan companies for the long term, but it’s enough to say we do it anyway, thus protecting that image is important.
Because of these three main reasons, being a long only stock fund makes the most sense to us. The founders don’t know much about any other type of investment, we are all full-time students first and investors second, and it looks better for us if we are long only.
I want to stress the fact that I’m not advocating against other investment strategies, nor am I saying that clubs at Michigan who do short stock or are macro investors have any flaws in their strategy. Value investing happens to be what Jack, Frank, and I were trained in, and if we were trained in something else, then we would probably be convinced that the other way is the best way to manage money and we may well be in one of the many other wonderful business clubs that Michigan has to offer. When founding this club, we saw a gap in the investment clubs in Michigan for a particularly long-term focused club that only specializes in value investing and actively tries to implement the philosophy in every way. Plus, founding a club sounded fun.
We haven’t been around long enough to prove it yet, but I’m envisioning our average holding time to be at least 3 years, where the companies have time let their competitive advantages lead to above market returns, past the day-to-day fluctuations of the stock market. The only reason who our average holding time should be less than that is if we were wrong about out hypotheses about why a company will do well, or because the market that whichever company is in has changed. The first option is probable for some companies, as we cannot possibly have as in depth research as analysts who do this full time can have. We don’t have to be right on everything, but if we are right on even just a few companies that we can hold for 10 years, then our average holding time will increase despite those companies where our assessments were wrong.