SumZero: What advice would you give to someone interested in pursuing investing?
Torin Eastburn, Monte Sol Capital: Read The Intelligent Investor. Then read every word Warren Buffett has ever written, starting with his partnership letters. If you lack a business education, take Level 1 of the CFA exam to learn the basics of accounting, valuation, and corporate finance.
Start investing as soon as possible. Lose money quickly so that you can experience first-hand the humiliation of being wrong and paying a monetary penalty for your stupidity. Never, ever forget that feeling.
Keep reading and investing. Read everything. Each moment you spend not reading, you lose ground to your competitors who are reading. Undertake a lot of deliberate practice by making actual investments and putting your theses down in writing, even if you’re the only person who ends up reading them. You can’t just buy XYZ because you think to yourself, “this seems cheap”. That is not investing. You must have concrete reasons for believing that your differentiated view is the correct view. You must be able to explain those reasons clearly to yourself and to others. You must have a strong understanding of the unit economics of the business, and a well-reasoned opinion about how they will change in the future. You must know how the private market values businesses in the industry where you’re investing.
Nobody will be good right off the bat. Investing is hard. By definition you are unlikely to beat the market. You stand no chance at all without thousands of hours of practice. But personally I believe it is possible to consistently outperform provided that you have a contrarian temperament and you are eager to put in the work.
I have decided to formally try a new strategy this year. This has been coming since I joined my new job after finishing my PhD and don’t get much time to do in-depth investment analysis.
The main change is to move from few large best to many small bets.
The “many small bets” strategy was already rejected by me a few years ago. The two main reasons for the rejection were as follows.
- It is difficult to follow and be on top of a portfolio if it reaches a certain size. For me, this number was around 10. A bigger portfolio belies in depth knowledge of the candidate stocks. The risk here is that you will not notice deteriorating conditions and end up paying dearly for those bets.
- It is better to bet big when the odds are in your favor.
Unfortunately, I don’t have time to even follow as little as 5 companies.
I have hence come up with a fix. Instead of having positive filters, I have compiled a list of negative filters. If a company fails on even one of these filters (there are exceptions in certain cases, like if I think I know the business), I will not invest. Otherwise, I will take a small bet in the company. These filters are as follows.
- Don’t buy unless you feel that it is worth at least 1.5 times the current price.
- Don’t buy if you see threats to the business model of the company(cf. BestBuy, HP, Tesco — lost nearly 40% over a few years when the discounters like ALDI and LIDL were slowly eating away its market share).
- Don’t buy if the company has too much debt (Prosafe, NADL — lost more than 70% in a few months because of collapse in crude oil price from ca. $100 to $45. The debt made everything worse).
- Don’t buy if you can’t even describe the business in one sentence (ASPS, OCWN — lost 40% in a few weeks because of regulatory problems, meanwhile I had no idea about the value of the business).
- Don’t use options unless the company is worth at least 3 times the current price.
The strategy can be simplified in the following set of steps.
- Read blogs to gather ideas.
- Once I have a investment candidate, run it through the checklist. If it passes *all* the tests, buy a 2% stake in the company.
- If the stock falls by 30% then make a decision to either sell OR buy another 1% stake. This decision must be made after personal due diligence.
- Do not buy a larger stake, unless you are really confident. Buying a larger stake will mean running through the usual Buffet checklist of “management”, “value”, “margin of safety”, and “good business”.
I have taken new (small) stakes in the following companies.
~ 50% undervaluation, know the business, will qualify for Buffet kind of investment
IBM, MAT, NOV, WTW
~ 100% undervaluation, ran through the first checklist
QIWI, NWH, BCOR, MTL
Summary: I bought Fortress Paper (FTP.TO) starting Oct 15, 2013 and exited my position on Jun 5, 2014. The average buy price was CAD$4.57 and the sale price was CAD$2.83. I lost CAD$881 on an investment of CAD$2,291. This post will detail some of the lessons I learned from the fiasco.
Investment case: The investment case for Fortress was not very complicated. It was a jockey stock with significant amount of assets. The owner had already successfully turned around the wallpaper making factory in Dresden (Germany) and was close to doing a similar thing with the note printing factory at Landqart, Switzerland. The company owned a Dissolving Pulp mill at Thurso, which was facing some operational difficulties and a threat from China about duties. Both of the issues seemed overblown — if the management were to be believed. It turned out that the first one was but the second one was not. The company had a book value of CAD$25 per share when I started buying.
The Chinese levied a charge of 13% on Thurso mill and near 50% on the yet to be developed LSQ mill — completely making LSQ unviable. The continuing low cost of DP persisted, making the Thurso mill unviable for long. Fortress sold the Dresden mill at a significant profit. But now, they could use the profits to continue investing money in their loss making mills i.e., Thurso, Landqart, and LSQ.
- The company was one of the low cost producers of DP. Price pressures would have made the competition disappear and at some point FTP would have generated significant cash. Unfortunately, the Chinese duty took away this significant advantage. It was believed that China will not risk putting duty because it will open up opportunities for duties by Canada on Chinese goods. But, they did it anyway. The lesson here is to be wary of government intervention.
- The jockey i.e., the CEO had some questionable compensation practices. He rewarded himself amply with stock options and such. I do not back away from paying a good management well. But it seems that the greed puts the manager in a questionable light.
[On banks] “They go crazy occasionally on the assets side, and what they do is they start copying what their dumb competitors are doing. […] I don’t know why we keep looking for new ways to lose money when the old ones were working so well. […] If anyone comes to me and says we want to do this because the other guy is doing this then I tell him to go back to square one and come back with a better reason.”
I am going to Zagreb, Croatia this weekend.
I needed to exchange some money for it. When I bought the tickets SBB, the Swiss railways, gave me a coupon which waives their commission if one wants to exchange money. I used it today and ended up paying 447 sfr for 2600 hrk. If I use Google now, I find that it is worth only 412 sfr. All in all, a loss of 35 sfr !
Interestingly, there were several options open for me. It seems that the banks give better rates and I could have used my ATM card to take out money directly in Croatia. I could also have called the bank in advance and informed them about my need. They provide exchange for a reasonable spread of 2-4%. I would have lost around 17 sfr then … probably.
It is interesting that I started thinking about these options only when I was done making the exchange. I felt that SBB is the only option while I was on the counter.
You may write me down in history
With your bitter, twisted lies,
You may trod me in the very dirt
But still, like dust, I’ll rise.
Does my sassiness upset you?
Why are you beset with gloom?
‘Cause I walk like I’ve got oil wells
Pumping in my living room.
Just like moons and like suns,
With the certainty of tides,
Just like hopes springing high,
Still I’ll rise.
Did you want to see me broken?
Bowed head and lowered eyes?
Shoulders falling down like teardrops.
Weakened by my soulful cries.
Does my haughtiness offend you?
Don’t you take it awful hard
‘Cause I laugh like I’ve got gold mines
Diggin’ in my own back yard.
You may shoot me with your words,
You may cut me with your eyes,
You may kill me with your hatefulness,
But still, like air, I’ll rise.
Does my sexiness upset you?
Does it come as a surprise
That I dance like I’ve got diamonds
At the meeting of my thighs?
Out of the huts of history’s shame
Up from a past that’s rooted in pain
I’m a black ocean, leaping and wide,
Welling and swelling I bear in the tide.
Leaving behind nights of terror and fear
Into a daybreak that’s wondrously clear
Bringing the gifts that my ancestors gave,
I am the dream and the hope of the slave.
I figured I will change the layout of my monthly updates. I was giving useless information at the cost of clarity.
I was not posting anything for a while and the situation will remain quite similar for a few more months. On the positive side, my thesis defence date has been fixed and I also landed a job at a reputed firm. They also pay an insane amount of money and so I am quite happy with the time I wasted on preparing for their job interview.
I started two starter positions. One in Coach and another in ITE plc. I am also looking seriously at GEA SA. Unfortunately, I do not have time to go into the details of my investment thesis.
I hope I will have more time once I join my new job.