Strategy for the new year

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.

  1. Read blogs to gather ideas.
  2. Once I have a investment candidate, run it through the checklist. If it passes *all* the tests, buy a 2% stake in the company.
  3. 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.
  4. 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

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