@mal85Evolving Investment StyleI will start by saying that my investment style has changed over the years. When I started my investing journey, it was more like random style, i.e. no definable strategy. Through expensive lessons (i.e. losses), it slowly changed into the current strategy which hasn't changed much for the past 5 years, recently the only changes I made was my conscious decision to make the portfolio even more concentrated. I had to let go some good companies, there is nothing wrong with them, it's just that their percentage weighting in my portfolio makes them inconsequential to my overall result.
Current strategy/style- Only invest in companies that are still run by founders/families. If the companies are already run by professionals, then I expect the companies to still be controlled/supervised by significant shareholders whose interests are aligned with mine.
- Only invest in companies with strong balance sheet, i.e. no debt or minimal amount of debt. If the company has significant amount of debt due to recent acquisitions, then I expect to see a history of rapid debt reduction by the company.
- Only invest in companies where I can identify its durable competitive advantage, e.g. brand name, technological superiority, superior business model, low cost operator.
- Only invest in companies that are profitable and generate lots of free cashflows. I don't bother to invest in companies that are still in development phase (junior biotechs/mining companies/junior IT companies).
- I believe the risks involved in running my own investment portfolio is high enough, I don't need to add an extra layer of risks by using leverage, derivatives, shorting, etc.
- I believe that concentration in companies with the above characteristics will be able to produce superior return than a diversified portfolio comprised of so many names which haven't been thoroughly researched.
- I try to really know/understand the companies that I own. For example, through social media and other resources, even though I'm located thousands of kms away from Singapore, I have a feel on how TPG's trial service in Singapore is going, I know how TPG is distributing their SIM cards, how long the queue is at the registration centre, etc.
Psychological FactorsMore important than financial analysis or portfolio analysis is the psychological challenges that every investor needs to overcome. In other words, do we have the right temperaments to become successful investors?
In my opinion, we need to have the following attributes:
- Humility. When our portfolio is flying high, we shouldn't be too proud or boastful. We need to be able to feel nothing about the $$$ gained, because as we all know, tomorrow we might have to return some or all of our gains.
- Calm. Conversely, when things are not going well, we need to stay calm and still be able to sleep at night. Being nervous, angry, scared is not going to help us in deciding what to do next.
- Not greedy. We usually tend to make our biggest mistake when we start to be become greedy. Fear of missing out or jealousy can make us lose our head and do things that we shouldn't do.
- Independent thinking. We shouldn't be impressed/influenced by anyone. We need to think for ourselves and be responsible for our own success/mistakes. Following others, no matter how impressive their credentials are or how wise they sound, is a recipe for disaster.
- Common sense / Keep It Simple. Although analytical ability is important, sometimes it can backfire. Just like investing without conducting any kind of prior analysis is not smart, a person who is blessed with strong analytical ability can sometimes over-analyse things to the point of analysis paralysis. This is also not smart. I believe in the Keep It Simple principle. As an example, I don't need an obese person's full health report to guess that his health is likely to be not good. Similarly, I don't need to have access to the full accounts of a company that have all of the positive attributes that I look for, to conclude that it is probably a good investment candidate.
CaveatsThere are factors which might make my investing style not suitable for others:
- Age of investor
- Full time or part time investor
- Accounting/finance prior knowledge
- Size of capital outside of share portfolio, i.e. property investment, term deposits, private business, etc.
- Whether the investor has any dependents, i.e. children or other commitments
I acknowledge that my investing style can be considered to be risky by most standards.
My current portfolio- After further culling in the past 12 months, my current portfolio is now comprised of 5 names only.
- I reinvest most of my portfolio's dividends into my existing holdings.
- When I reinvest my dividends or any new capital, I don't consider my portfolio's current weighting, I only consider which name is cheapest at that time. As a result, my portfolio's weighting is a by-product of my reinvestment and portfolio gain/loss.
- Sometimes a single name can be purchased multiple times in a year (or even in a month), simply because I believe the value on offer is irresistible. Conversely, a single name can be not topped up for a number of years.
- I intend to hold some of the names in my portfolio "forever" or realistically "for a very long time", subject to any unforeseen developments.
- Currently, my portfolio weighting is as follows:
Reece (REH): 40.7%
Nick Scali (NCK): 31.9%
TPG (TPM): 14.3%
ARB (ARB): 7.9%
Reliance Worldwide (RWC): 5.2%
- Of these names, REH, ARB have been held for almost 10 years, NCK for around 5 years, RWC for 3 years and TPM for 1-2 years.
- Most of the other names that have been culled have been reinvested into the above names.
Summary- I believe that in life, an opportunity to produce life-changing ten-bagger (or more) doesn't come that often. For us to reach our investment goal, It is crucial for us not to miss this kind of opportunity by not investing enough in that company. What's the point of finding a company like JBH when it was still a Melbourne-focused retailer 15 years ago, if you are only going to invest 1-2% in that company. Even if you ride the rally all the way to the top, that 1-2% weighting will only become 20-25%, sure it's nice, but hardly life-changing.
- I also believe that you don't need to catch the latest hottest stock in town to have a decent result. Hot stocks usually come with volatile trading range. Personally, I prefer investing in companies whose share price movement is less exciting but steadily goes up.
- Following on from the last point, I also believe that to get excellent investment result, we don't need to get into a company from the very beginning when its prospects were still not clear. Waiting for 10 years before entering a company, after it has "settled" down, when we have more confidence in its prospects, can still produce more than satisfactory investment result.
- I believe diversification is over-rated. A dentist who puts his earnings in a term deposit, is also running a concentrated portfolio, i.e. his job. In fact, most people are running a concentrated portfolio in their lives without even realising it. As a society, through the ages, human has worked out that the best structure to ensure own survival and successful breeding is through monogamy marriage. In a way, this is also a form of concentrated portfolio. Imagine having to deal with 40 husbands/wives in our lives! We'll go crazy!
I hope the above is useful in understanding my investing style and how it affects my portfolio allocation. There is no right/wrong answer, everyone is entitled to find his/her own formula that works for them.
