Investment philosophy: How to cope with less time available ?
For several personal reasons (don’t worry, all of them VERY positive !!), I already have less time and will have even less time for detailed company analysis in the future. So the question for me is: What do I need to do with my portfolio (and the blog)?
A few questions I have been asking myself were:
- have more positions to diversify or should I have less positions to concentrate on the remaining ones ?
- allocate more money to other money managers or even start investing into ETFs ?
- try to focus on less risky stocks ?
- just do shorter company analysis and focus on the essentials ?
- or even go back to a more mechanic approach (BOSS Score) ?
- focus more on my Circle of competence and skip trying to extend it ?
- Or even focus only on a small universe of the highest quality stocks ?
- increase my minimum holding period to slow down turnover ?
- Avoid “Higher maintenance” positions like M&A arbitrage etc ?
- Do more “shadowing” of investment managers I admire ?
- What should I do with the blog ?
So let’s look at these thought in some more detail:
Re 1: have more positions to diversify or should I have less positions to concentrate on the remaining ones ?
At first, it would be natural to concentrate more on fewer positions as with less time it should be easier to follow a fewer number of stocks. However, I think the number of stocks in a portfolio should not be dependent on the time available but it should fit to the individual investor’s risk profile. Myself, I feel comfortable with ~20-25 stocks, so I don’t think it would be a good idea to change this just because aI have less time.
Re 2: Allocate more money to other money managers or even start investing into ETFs ?
This is something i need to reconsider. At the moment, I only have allocated ~5% to my Friend Mathias (TGV Partner). There are 1 or 2 other managers that I trust and where I might allocate some money in the future. The downside is that it costs fees, the advantage is that I do not have to pay tax on realized gains within the fund.
ETFs clearly makes sense for many investors, however for me it is just a little bit to boring to put money into a general ETF. I don’t like “Theme” ETFs, as this often indicates that exactly that theme is already over when ETFs are created.
Re 3: try to focus on less risky stocks
Paul Hartmann, the last stock that I bought was a stock that I consider as boring and “relatively safe”. Often stocks such as Nestle or Coca Cola are recommended as safe stocks for the long-term. However in my opinion it is very difficult to say what is “a priory” a safe stocks as many things can happen. Bad management, fundamental changes etc. make it difficult.
GE for instance was considered a “safe” stock for almost 100 years until recently. So in my opinion the focus should be rather on “good” stocks than “safe” stocks. A good stock with good chances for long-term success has in principle 2 main factors:
- good management
- good business model
In the long run it is less important how cheap the stock is. Clearly it should not be ridiculously over priced, but +-20% do not matter over the years.
Re 4: just do shorter company analysis and focus on the essentials ?
Sometimes when I look at a company, it becomes pretty clear that the stock is very interesting and I have to restrain myself to buy even without having finished the analysis. On the other hand, there were many cases where further analysis showed that there are significant issues which i would have underestimated in my first analysis.
Doing just short analysis in my opinion is quite dangerous because it exposes the investors to many behavioural flaws. Jumping to conclusions without doing the work is clearly risky, so compromising on the level of analysis is not a good idea either.
Re 5: or even go back to a more mechanic approach (BOSS Score) ?
In the beginning of my blogging time, I have used much more “mechanical” tools such as screeners, I even developed my own method, the “BOSS Score” which worked quite well for some time.
Since a couple of years however I stopped using screeners. Why ? I think that these days one needs to put significant effort into any quant model to have a better than average chance of success. With so many quant funds out there, the “simple” formulas have been already arbitrated out, Plus it is a lot of work to maintain a database with “clean” data. Therefore a mechanic approach will not help me with my issue of less time.
Re 6: focus more on my Circle of competence and skip trying to extend it ?
In the past, I looked at a lot of companies that were sometimes far outside my circle of competence, mostly because it was a lot of fun. Often this didn’t generate any investable ideas (e.g. the “watch series”). Looking at totally new sectors and/or countries takes a lot of time and as we have seen with for instance Silver Chef, the first attempts often fail.
I think in the future I will concentrate more on my “core” areas and I hope that this compensates to a certain extent the reduced amount of time I have available. On the other hand, I do have the luxury that my “day job” actually forces me to continuously extend my circle of competence so I think using my spare time to look at stuff I already know makes sense.
Also, revisiting stocks that I have analyzed makes a lot of sense especially if I found them interesting at some point in time.
Re 7: Or even focus only on a small universe of the highest quality stocks ?
This is a strategy that some well-known investors follow, for instance Tom Gayner from Markel and of course to a large extent also Warren Buffett (as far as I recollect).
The idea would be to concentrate on only 50-100 stocks where one knows that the business model, management and everything else is really good, only monitor these stocks and then invest into a smaller subset which shows the most attractive valuations.
Over time this then hopefully leads to a very deep understanding of theses companies and to hopefully superior investment returns.
The biggest issue I see with this strategy is the fact that we are currently in a time period with seismic shifts. Business models which were successful in the past get killed in an ever-increasing pace by new companies like Google, Netflix etc. This approach also makes it difficult to see these “disruptors” early. There might some business models that might survive or even prosper, but in general I think this approach is a little bit too narrow for my taste.
Re 8: increase my minimum holding period to slow down turnover ?
Those readers who read this blog since the early days might have noticed that transaction frequency has slowed down significantly. From several transactions per week, I went to max. 1 transaction per month and now in 2018, I only had 2 new positions in 6 months,
This reflects my goal to increase my holding period. My aggregated average holding period has now reached around 3,2 years. The nice side effect of targeting a longer average holding period is that it forces me to slow down and really think about if I want to add a new position or not, but even more if I really want to sell an old position which contributes a lot to my average holding period. TFF Group for instance, my largest Holding, contributes 0,72 years to the 3,2 years. So I will think twice if I sell them.
Lower turnover also allows deeper analysis even with less time available. It also works against many behavioral biases.
Finally, a really long-term investment focus is one of the easiest competitive advantages that a private investor might acquire. Looking out not only a few quarters but maybe 5-10 years is something that very few investors actually do. Talking about yes, but many professional investors jump ship quickly if there are some hick ups on the way.
I think a longer time horizon also makes it easier to do really contrarian investments. In the past, I timed often my purchases quite well in this area, but then I got nervous too quickly and sold out before it got interesting,
Re 9: Avoid “Higher maintenance” positions like M&A arbitrage etc ?
Point 8 directly leads to this points: With the goal of longer holding periods and less time on hand, short-term arbitrage situations will have clearly less priority in the future. These situations require a lot of time and attention but turn over quickly. In order to gain a statistical edge, one has to look at many of these situations and I simply don’t have the time for this.
What could be interesting are longer term liquidation plays or specific spin-offs that are fundamentally attractive.
Re 10: Do more “shadowing” of investment managers/ bloggers I admire ?
One issue with less time is clearly idea generation. In the past, I was very proud of the fact that most of my ideas were “original” which means I developed them mostly all by my own. This however takes time and requires a lot of reading and research.
It’s pretty clear that I can do less of this going forward. One way to “short cut” this is to look at what other people are doing. The biggest problem with this is in my opinion, in trying to follow ideas of managers that have a very different way and style of investing. Some readers might remember that I “shadowed” David Einhorn for some time but I didn’t understand what he was doing (and maybe he didn’t either….).
So I think it is pretty essential to focus on investors that have a certain degree of overlap with my preferred way of investing. Luckily there are some and I will use them much more as “Inspiration” than I did in the past. Just to be clear: i would never buy a stock just because another investor has bought it. But I intend to use this morethan in the past to see if such a stock could be potentially interesting.
One observation form my side: Maybe it is subjective but I have the feeling that in the blogosphere, there are not many good investment blogs left. Maybe I should go and search for new ones, but a lot of the old ones rarely post anymore.
But don’t worry: There will be some original ideas here in the future as well, but maybe not just as many as in the past.
Re 11: What should I do with the blog
Clearly, the blog requires some of my precious “extra time”. If I would end the blog, in theory I would have more time to look at investments. On the other hand, the blog and my great readers are a great motivator to keep going. Without the blog I don’t think that my portfolio would have performed as it has in the past.
What I will need to do is however to also reduce the blogging frequency and posts might get shorter. But we will see how this turns out as blogging still is great fun for me.
Summary – in a nutshell:
With less time available, I will need to change the way I invest in the future. Most importantly I will:
- try to increase my average holding period further and slow down trading frequency even more
- focus more on my core areas of expertise (e.g. financial services, Europe)
- reduce research on high maintenance special situations
- Shadow some investors that I admire most
P.S.: Maybe some readers wonder why I wrote such a long post after claiming I have so little time: This post was in the making for more or less 4 weeks 😉