Investing Strategy Articles

Isaac Newton once said
“If I have seen a little further it is by standing on the shoulders of Giants.”
We know from hindsight that Newton was brilliant, if not genius, in the field of science, physics and mathematics. But as he says, he did not get there by himself. He took the wisdom and knowledge of Giants who paved the way before him and made it into his own.

A a value investor I have often found myself highly dependent on thinking in terms of “margin of safety” when it comes to value. But Michael Mauboussin, Chief Investment Strategist at Legg Mason Capital Management and author of More Than You Know, suggests there is a better way to quantify value and opportunity: Expected value.

Let me share a lesson with you that I learned the hard way, even though Munger has written about it extensively, “invert, always invert”.
One way of interpreting this advice is to ask how, and in what circumstances you could be wrong. You will notice that both my qualitative and quantitative points in my prior post get back to this. So, why don’t we walk through a situation where analyzing free cash flow and FCF growth would be misleading?

It is always easier to read and write about companies that I would buy.
Passing on a company is easy and is recommended by most people. You are told to skip it and move on to a better opportunity.
But I’m learning that it isn’t always the case.

I have gone through in detail the Piotroski criteria and backtested the results to see whether it really did achieve what the academic papers claim. My conclusion? It has resulted in outstanding performance.
While all my other value strategies did poorly in 2011, the Piotroski 2011 performance was very respectable at -1.3%.

It has been a brutal year for many investing strategies. Of the 13 value stock screens that I track, only two were positive for the year and one was breakeven. The remaining 10 value stock screeners underperformed by big margins. I wanted to see whether it was just my strategies that did poorly but it seems like AAII didn’t have a good year as well.

This is what I said a couple of weeks back.

“I have 50% of my portfolio in my top 3 positions. None of the losses has been realized and I’m content to wait it out… 3 out of my top 4 holdings are listed on the pink sheets or ADR.”

What the market gyrations does to you is that it causes stress, and stress puts you on high alert. This alertness and being on edge encourages short term focus.
You’ve experienced this yourself. You have a deadline approaching within a couple of hours and you’re furiously trying to complete a test,assignment or project. You become focused on the short term deadline. Nothing else.

I was going over Buffett’s old letter to shareholders during his partnership years, and it blows me away the level of success he was able to achieve. For 11 years from 1957 to 1968, Buffett not only beat the market, he never had a down year. On a cumulative basis, his partnership achieved 2610.6% gains at a compounded rate of 31.6%!

Here is a 40 point checklist which I have compiled over 20 years of investing. For your reference, I recently came across an interesting article in The New Yorker magazine called The Checklist written by a multi-talented surgeon who is also the author of an interesting book I am reading called “Complications: A Surgeon’s Notes on an Imperfect Science”.