Buy and Hold vs. Churn and Burn

[scorpioncapital]

All investing is giving your money to somebody else to make you more money. Delegation is assumed. The question is who do you give your money to and what do you expect the return to be and what is the optimal strategy given one's knowledge? When you own a owner-manager holding co., you are delegating to an investor who in turn delegates to other managers. If you think this double delegation procedure will return 15% (and all "doubly-delegated" portfolios are diversified) but that direct delegation based on your own research will do 20% (also diversified among 5-10 stocks) the only argument to hold the former is that you are unsure about the second diversified portfolio. Why are you unsure? Diversification is supposed to reduce bad luck, so the only possibility is bad selection - in fact very bad selection. I'm just saying that it would seem a better strategy to know what you want to do - a) become a better stock picker and take all the rewards - and downside of your own delegation or b) let a highly trusted partner do this. Note, however, that in b) you still have to be good at selecting partners! Which in the end may be the same thing as selecting your own investments.

[rmitz]

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays. The question is what is rational. Either you know what you are doing 100% or you don't. If you don't you hold the owner-managers or an index, if you do, you hold 0%. There is no hedging your bets with knowledge. It's not a gambling proposition, a weighted portfolio of well selected value plays ensures against 1 negative outcome, I just don't see how the two "styles" are compatible, it almost seems like people are hedging if they know nothing and gambling that they know something, just learn it well, know your limitations and there's no gamble. Problem solved :)

 

I mostly agree, but there are two factors I think left out of this.  One is tax concerns.  Sometimes tax churn could tip the scales in favor of holding the lower-appreciating security.  The other is risk.  Having some portion of your portfolio in the lower risk categories makes sense to me, especially if, as discussed in this thread, you are willing to sell once the securities are overvalued.

[rmitz]

Scorpion,

 

Why do you think it is irrational to use both approaches? To take your statement to the ultimate, I should only hold one stock - the one I think will give me the highest return. However, I hold more than one stock because I might be wrong. I don't think of that as irrational, rather I think that is prudent. Not being confrontational but interested in your reasoning.....

 

There's tons of uncertainty in any stock--doesn't matter what the situation is.  You don't even have to be wrong, given the current knowledge and situation.  At the very least you have timing uncertainty--which is why you'd want some number of deeply undervalued stocks.  You don't know when the catalyst may come.  Otherwise, you have the vagaries of life throwing wrenches in the way.

[rmitz]

myth, how much do you feel you need to get out of the rat race?

 

I know this wasn't addressed to me, but I think that the amount probably fluctuates based on the current market environment.  I think I'd be OK with 2M in open, taxable accounts.  I would be expecting to take out 100k/yr, so that should account for pretty significant downturns.  My comfort level goes up rapidly after that point, and I'm sure it could be done with less, but that's about where my comfort level is.  Realistically, I would have other sources of income (perhaps startups, or part-time work) so it's a conservative number.

[Ross812]

I am young, 24, but have a decent amount of capital to invest.  70% of what I buy are deep value companies I feel can double or more when a catalyst is presented; I have held a few of these deep value companies for several years.  The remaining 30% are short term miss pricing and arbitrage plays.  I am very selective of short term plays and only buy when I am confident I will make 10%.  I would buy jockey stocks if they are selling at attractive valuations which is often not the case.  I have only owned two jockey stocks which I bought back in 2009; Bidvest BDVSY and Danaher DHR (DHR was just called away from me).  I may start investing in jockey stocks when my capital grows to a point where it becomes difficult for me to deal with the high volatility of a concentration in small caps.  I seem to have a problem scaling.  Instead of now investing 10k in an idea where I would have invested 5k two years ago when I had half the money, I tend to still invest 5k in twice as many companies.  For some reason this makes me feel more comfortable but finding twice as many ideas becomes harder and harder.

 

I will say my returns are not outlandish because I hold 30%-50% cash most of the time.  It is close to 60% right now.  Does anyone have any ideas on scaling your investments.  I am not sure I lack confidence because I often double down, but I reach a point where i feel enough is enough and I don't feel comfortable allocating a huge portion to one idea.  I own 12 companies right now.  Bidvest is my largest holding but only because I can't find a reason to sell it yet.    

[SharperDingaan]

 

We don't buy common unless we can reasonably see at least a double within 3-5 yrs, & when there are no opportunities we're in fixed income instead. The upside is that it forces profit taking & makes you more conservative as valuations rise. The downside is bias to larger than normal opening positions.

 

Example. FFH at 70 was a great investment, simply because the outcome was virtually certain (collapse or recovery) within 1 yr,  & you could limit your loss with an option (call, or LEAP). At 140 it was still good, but to get a double was going to require at least 2-3 yrs & some changes in the corp approach/structure. At 280 it became iffy - simply because to get to 560 (ie: double) there would have to be some very big wins, & a potential acquisition (assuming no increase in div). While 'Churn & burn', & margin, could improve your return - it can not change the reality that another double within 3-5 yrs is far less certain.

 

At present, almost every pond is crowded with doubles; they just aren't as cheap as they were, & their price stability is uncertain - which is why averaging & hedging was invented. But not all doubles are the same ... ie: FFH @ 70 is very different from FFH @ 140 & very different again from FFH @ 280.

 

Show us some long dated zero coupon euro guaranteed sovereigns though, & we might change our mind!

 

SD

[Myth465]

What I'm suggesting is that it is irrational to hold owner-managers and personally selected deep value plays. The question is what is rational. Either you know what you are doing 100% or you don't. If you don't you hold the owner-managers or an index, if you do, you hold 0%. There is no hedging your bets with knowledge. It's not a gambling proposition, a weighted portfolio of well selected value plays ensures against 1 negative outcome, I just don't see how the two "styles" are compatible, it almost seems like people are hedging if they know nothing and gambling that they know something, just learn it well, know your limitations and there's no gamble. Problem solved :)

 

Thanks Scorpioncapital. I have decided that you are right. I will be repositioning my portfolio to 80% Deep Value, 5% Owner Manager (I plan to put about .5% in each stock for tracking purposes and will move in big when they are significantly undervalued, right now its about 2.5% of my portfolio for 5 stocks (I dont think any of them are doubles currently)), and hopefully about 15% cash by the end of next week.

 

Hopefully I know what I am doing.