Hi!
So prompted by this recent reddit post that asks ‘what exactly are non-value investors doing?’ made me contemplate a bit. It’s an interesting question - don’t we generally look for things that go up?
It made me think a bit in regards to my own thesis, where I am in life and how that may translate into a working strategy.
I figured I’m still young, with lots of time to learn and accumulate - so now’s the time to go into individual stocks since in the grand scheme of things, if I go with set-and-forget-it index funds, it wouldn’t make much of a difference if I started by the age of 35 (when, hopefully, I’d have more cash to play with, and my risk apetite would be lower) rather than try and pick individual companies to ride with for the next 10+ years.
Though I guess there’s some nuance to my thinking. Having devoured Buffet’s shareholder letters and Graham’s ‘Intelligent Investor’ book and all I could from the internet, I couldn’t shake some quotes from my head and contemplate on their advice.
I mean, Buffet recommends passive index investing for the average person. Time in the market, DCA, ‘nobody beats the market’, etc. Though it may seem contrary to his strategy - he’s made his money in individual stocks.
You’ve got to be prepared when you buy a stock having them down 50 per cent or more and be comfortable with it — as long as you’re comfortable with the holding.
— Warren Buffett
Check out this guy’s medium for more distilled Buffet quotes. The gist of it is - invest in companies you understand, so you can stomach 50% drop-offs.
„Some people can handle it psychologically. If you can’t handle it psychologically then you really shouldn’t own stocks because you gonna buy and sell in the wrong time.“
These insights together with his quote on how it’s better to buy wonderful companies at a fair price rather than fair companies at a wonderful price have proven to mold my thinking in the background.
I picked for example PLTR at what could arguably be a high price - that said, I understand the business. The software offerings are next-generation, it’s B2B strategy makes it resilient to downturns - so I have no problem if it’s stock price drops. I just buy more. Since nothing bad happened in the business (on the contrary), I welcome the opportunity to lower my cost average. With all the recession talks, I think this company will still be there 10 years from now, so whatever original entry-point I could pick was good enough. Sure, not extraordinary - but satisfying in the long term, especially if I get to DCA way below my entry point.
Having beemwhat I now learned is (from the reddit post mentioned previously - I’ll list the styles at the end for convenience) most of the time a momentum trader, I was looking to invest for the long term by the time I heard of PLTR’s DPO. Up ‘till then, I was riding in TSLA - which I wasn’t at all expecting to deliver such outstanding returns in the short term. I was originally happy for TSLA to reach it’s valuation in 10 years rather than the 2 I’ve been investing in it, so when it got way above my exit point, I considered switching to a different company where I could ride it’s ups and downs comfortably not-panicking.
After having sold TSLA, I’ve directed most of my capital to PLTR and about a 3rd to a local Romanian company that buys and operates farms, which I plan to keep on for the next 10 years+. So, yeah, asymmetric risk - Skynet software and the corn business make up most of my portfolio. Thinking either software eats the world or the guys in charge shut down the internet, I’m covered. Investing in agricultural producers turned out to be a nice idea in regards to a inflation hedge.
I was looking for a ‘value’ stock with room to grow, and this company’s just been started, with ambitious plans of operating 30,000 hectares of land. I thought at the time that chasing the obvious trend of investing in energy stocks would be too late - what I could find on the local market in terms of energy producers I thought to be already inflated, valuation wise, and not much room for it to grow. In 2020 energy prices were already going up - though not as high as nowadays - but I thought the local companies valuations were already pricing this in. Turns out I was right - while companies like NuclearElectrica (Romania’s nuclear plant) or OMV Petrom (one of the big oil-and-gas players) have kept their valuation and posted record profits, they’ve distributed good dividends so far, but weren’t as attractive for me as a young investor. I thought I’d have plenty of time to jump in them 10 years from now and ride out into the sunset on a nice dividend portfolio. Hopefully their valuation won’t get too crazy by then and we’d sort out this energy crisis we’re going through.
Also the president of the agricultural company I mentioned has brought up in an interview that his thoughts are molded by Nassim Taleb’s idea of ‘antifragility’ made me instantly in love with their company and road-map. I’ll cover this in a different post, though this ties in with my idea of having an asymmetric, barbell-type of portfolio that Nassim mentioned so it was almost love at first read.
Okay so Buffet’s been recommending index funds for the average investor. After having rode TSLA’s balooning-up post it’s SP500 inclusion, a different idea started to brew in my mind. What happens if people just buy whatever makes it’s way into the index? At the point of TSLA’s inclusion, it’s market cap was higher than the next 6 automaker’s combined (F, VW, Toyota, etc.). Sure, it’s not just an automaker, different business model, etc. But I couldn’t help but have the idea that most of the gains to be had we’re made - the guys buying the index would get marginal % increases per year at best. And when it got included in to the SP500, it got placed in a top 10 position. That was it for me - I thought most funds were busy buying it up in preparation to it’s inclusion and recalibrating their portfolios to adjust to it’s massive stock price. There are lots of funds that track the SP500 with various weightings, some having been forced to buy in TSLA’s already massive valuation, just to keep track with their portfolio weighting.
I was certainly tempted to just throw my earnings in to a VTI approach (in hindsight, it would have been better now, though I stick with my strategy).
So with these thoughts in mind in regards to passive investing and it’s drawbacks, I’ve started researching items to support this idea. I mean sure - it makes sense in principle; track the index and you’re beating the market. But TSLA’s inclusion made me hesitant to divest to a fund that has TSLA at 10% or so of it’s holdings. Sure, they rebalance and recalibrate so that they keep it at 10% of whatever company’s on that # list.
In my research I found this /wallstreetbets post which points to a similar idea of index bubble. This other one details Michael Burry’s ideas on index bubbles.
So, that nailed it! I’d stick with trying to pick-out winners, businesses that I understand and that I think would do well in both boom-and-bust economic cycles, and then venture back in to index-funds once my money-making skills reward me with more cash to invest in boring index funds. I figured it’s worth the volatility, as most of my career is still ahead of me, I’d reasonably assume I’d make more money in the future, which I’d be able to distribute to boring strategies in order to cement that average 10% gain I could coast on.
Now that I think of it - I’ll likely just bypass index investing altogether after I reach my ‘FI/RE’ goal, and just stick with individual blue chip, dividend paying companies - local and otherwise.
So having learned that I’ve been a momentum-investor for most of my time in the markets, how does that tie in to my current views? I mean, I’m still trying to ‘beat-the-market’ by picking stocks that are outside of the interest of index funds (PLTR due to it’s share-structure is never going to enter the SP500). But I’m figuring I’m riding retail coat-tails with Palantir, having seen how HODL works out with Bitcoin’s crowd - and, to some extent, GME. And in my mind, Palantir’s not going anywhere soon - it’s too entrenched in Uncle Sam’s business (and the New World Order’s business as I’ve briefly touched upon in my previous post). Could it go lower? Sure - though I doubt they have a chance at bankruptcy (the new class-action lawsuits against PLTR are in my mind done by ambulance-chasing lawyers and butt-hurt investors, so no reason to consider that as a systemic risk).
I still think my curent portfolio translates to a momentum sort of strategy, though with a long term approach - taking into consideration market draw-downs which could last years, with a focus on companies that are well equipped to survive recessions. Looking at Palantir for example, main goal is around the year 2025 when we’ll see if they live up to their word. Until then, it’s stock’s been mostly driven by macro environment (which opens up opportunities for players that are long PLTR). If, come 2025, they manage to hit close to their 5BLN revenue, we could still be deep in a recession (or fresh into a bull-market - classical capitalist economic theory trained us to accept these as realities).
That said, my momentum idea is not based on chasing price action, though rather focused on retail sentiment and other indicators (Cathy Wood’s thesis prompted me to fully jump in on TSLA, as I suspected most other retail traders and investing firms alike). Similar to TSLA, I suspect PLTR has a similar cult-like following which will help with providing a nice base, in adition to the institutional investors (that have steadily been buying in). Seeing as they’re likely also young, “just buy the dip bro” mentality will likely translate to PLTR investors, most of us having longer time-frames to recover from bear markets. So lots of people are providing coverage through YouTube, SeekingAlpha, lots of people are looking up palantir stock through google, lots of people subscribed on the pltr reddit. Those, to me, are indicators - albeit thinly based in rationality, I’ll admit. Though I went over my idea that we’re all emotional and moody and the stock market reflects that, so there’s some order that can be inferred through the chaos.
Before reading the reddit article, I never really considered all the possibilities of investing - so it’s an interesting exercise for me to see where I stand on the spectrum. Anyway, listing below the investment styles mentioned in the thread and in the comments, mostly referencing kiwimancy’s and 1tMySpecial1nterest’s comments.
Systematic Value: buy companies that have low price multiples or some other value-oriented screening algorithm. The intent is to capture some of the same features as Fundamental Value but with much more diversification.
Momentum: buy assets that have recently been appreciating in price because they tend to keep rising more often than they turn around, either because other investors are slow to incorporate new information into pricing or because they continue to run assets up after they have already incorporated new information.
Other systematic factors: Systematic value and momentum are both systematic factor strategies of which there are more identified in the literature like size, profitability, illiquidity, carry. You can combine multiple factors, refine them, or try to identify new ones. Blends into more sophisticated quant strategies.
Other technical strategies: Momentum is an example of a price-only technical strategy, and some investors use a range of price-based indicators to identify which assets are likely to go up or down. These strategies are often fractal in the sense that you can use them on long, medium, short, or very short horizons to capture the same general ideas differently.
Pair Trading: Identify similar assets and bet that divergences between them will close (or bet that one is better and will outperform). Doesn't require that either will perform well in absolute terms because you are hedged by shorting one against the other.
Thematic Growth: Looks at broader groups of stocks and bet that certain industries or other themes will become more valuable.
Activist Investing: Identify companies that are being run poorly, buy up a stake in them and run a proxy fight to get them to make changes to make them more valuable.
Dedicated Short Selling: Identify fraudulent and overvalued companies, short and expose them.
Distressed: Find companies that are going out of business and either refinance them at very attractive rates or pick apart their capital structure to find which securities will pay off the best.
Venture Capital: Invest in promising young companies before they have much of a business, acknowledging that many will fail but betting that a few will return large multiples to make up for it.
Index/Risk Parity: No strategy for outperforming the market, just seeks to capture the return of the market with the most diversification and low fees.
Non-economic: Invest in companies in order to support the ones that are benefitting the world, without being concerned with their financial performance. (ESG can be this or it can be a form of factor investing)
Some just automatically deposit into indexes every month. The idea is that overtime you will get 10% returns per year on average.
Some are attempting to time the market by following macroeconomics.
Some are attempting to buy the next hyped stock before the prices are inflated.
Some are purely following the technical analysis of the stock’s chart. They may choose to buy a penny stock that value investors would avoid because the fluctuations look predictable enough to trade.
Additionally, there’s this article that details some other general investment themes (dividend investing, multi-asset investing, small cap investing).
Also, from reddit, there’s this guy on reddit (introducing the white girl index) that ended up setting up a website dedicated to the White Girl Index. As well, I recall someone that was looking at investing in ‘sin’ stocks or ‘vice’ stocks - think gambling, cigarettes and the like.
And now that I think of it, investing styles should be tailored to one’s personality, opportunities, career choice, emotional connection to one stock asset class or the other, geography (Romania for example recently passed a 1% capital gains tax which could prove to be an interesting idea for people looking to retire here), one’s risk-reward apetite (ultra-rich for example or people close to retirement won’t care to earn 1-2% extra per year - they care more about preserving existing cash)
As for the White Girl Index, I think there’s some legitimacy for that - as I_need_a_Nap referenced, “don’t underestimate rich white girls in yoga pants”.