Guest Interview: ValueStockGeek
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Guest Interview: ValueStockGeek
(Edition Number: Three)
Good morning,
Today we shall be sharing the third instalment of the Investment Talk Guest Interview series, whereby I bring you some discussion with a selection of my favourite investors on the Fintwit hemisphere.
One of the first 10 people I followed on Twitter was ValueStockGeek. I have found that, during a year of volatility and irrational exuberance, VSG’s voice has been a refreshing anchor that keeps my feet on the ground and reminds me not to get carried away.
Today’s piece was one that I thoroughly enjoyed, as there is a lot of depth and candid transparency with this one.
ValueStockGeek
VSG is a meticulous blogger, and shares in an open and transparent fashion, which is something I personally respect.
Stretching back to December 2016, you can find a plethora of articles on VSG’s website, which can be found here. There is a host of content there, covering insights into who VSG is, articles, the strategy, great books, and so forth. I am an avid of reader of what VSG has to say. The style of writing that I personally enjoy is that which is honest and self-reflective, which is what allured me at first. I stayed for the dry sense of humour. Its a difficult feat to make writing about investing fun to read, especially in the technical manner that VSG does, so I’d recommend checking it out. I’ve learned a lot.
In addition to that, there is also some fascinating insights into the ‘Weird Portfolio’ which is an allocation strategy that seeks to “deliver a consistent return through multiple environments with minimal pain”. The pleasure of owning a portfolio that will provide a good nights sleep.
Built from US small cap value, international small caps, real estate, long term treasuries, and gold, the strategy boasts some impressive back-test results. You can find an explanation of the weird portfolio here.
If you are looking to get even more granular, then you are in luck. VSG scribed a book, publicly available, which documents the thesis for the weird portfolio. The subheading for the book is “How To Avoid Bubbles, Limit Drawdowns, and Safely Grow Wealth”. It says what it does, on the tin.
I had the pleasure of reading this in the late-summer of this year. You can find the link below the book below.
Anyways, lets get in to the interview. I think you will really enjoy this one.
The Interview
Investment Talk:
Hello VSG, I’d first like to thank you for accepting the invitation to partake in this interview-style newsletter, your time is greatly appreciated.
First, I think it would be a great ice breaker, for some of the readers who may not be familiar with your work, if you could introduce yourself, perhaps detailing some of your background, what sparked the attraction towards investing, and take us through the sequence of events that led to you where you are today, and perhaps some flavour on the kind of work that you do.
ValueStockGeek:
I’m 38 and I’m a corporate drone that is pursuing financial independence. I’ve had an interest (obsession) with investing since I have been a teenager. I was in high school during 1996-2000 and became very interested in investing during the internet bubble.
I was the most bulled-up believer in the internet bubble that you ever met. I started using the web when I was 13 around 1995 and was convinced it was going to change the world.
I thought that older people didn’t get it and that they didn’t comprehend the seismic shifts that were about to take place. I thought the best way to take advantage of that exponential growth was via Cisco Systems, which I thought was a guaranteed winner as they were basically paving the roads of the exponentially growing information superhighway.
The first time I learned about Warren Buffett, I dismissed him as an old man and a fossil who didn’t comprehend the changes that were happening to the world.
By the tail end of my senior year in the spring of 2000, I started to have my doubts. Some of these companies don't make any money or have much of a plan? Why are they trading at such high multiples? I still didn't question my Cisco investment. I owned a "real" company but I was still betting on the future growth of the internet.
It was around this time that a family friend recommended the Intelligent Investor. I dismissed it at first. However, when I read it, I thought it made a lot of logical sense. I also read Buffettology that summer and thought that was very logical. I quickly realized that I didn't know what I was doing and that my entire internet thesis was wrong.
Once I went off to college, I dabbled in the market, but I mostly put investing on a shelf. It was something I would do someday when I had “real” money.
I majored in Finance in college, but nothing really resonated with me. I kept thinking back to Graham & Buffett. In college, I was just checking off a box so I could get a job. I’d invest $1k here or there in a stock that I thought was interesting, but never really had enough where I could do it in the correct way.
My interest in investing further became derailed in the mid-2000’s.
I really became lost as a person. I’m an alcoholic and that had a detrimental effect on my life and my finances. I accumulated debt during those years and was living paycheck to paycheck.
I quit drinking in 2008 and then made a decision to change the situation.
When I got sober, it was really hard to look at the mess that I had made for myself. I swore to myself that I never wanted to live paycheck to paycheck again. I never wanted to be one paycheck away from living in the streets and that’s where I was back then.
The debt was an incredible and stressful burden. I took extreme measures to limit my expenses and begin to chip away at it and save money. I’d try to limit myself to living on less than $10 a day. I lived in someone’s basement for cheap rent. I used the debt snowball and worked really hard to pay it all off. I then started to apply the same intensity towards saving money so I could start investing in a more serious way.
By 2011, I was mostly out of debt. By 2012, I began to save “serious” money by my standards. I decided that it was time to get back into investing.
From 2012-2014, I spent a lot of time reading investing books and trying to formulate an approach. I agreed with the value methodology from my days reading Graham & Buffett, but I wanted a more systematic approach that was backed by evidence. I like systems & processes, so I was naturally drawn to a more quantitative school of thought.
In 2016, I decided to set some money aside and pursue a stock-picking strategy.
I thought it would be cool if I wrote a blog about it. There were a lot of generic blogs about value investing, but I wanted to differentiate myself by making a blog where I tracked my actual portfolio. I wanted to record every trade on the day I did it. I figured that doing it publicly would help me. I thought that a public blog would help me learn from my errors.
Investment Talk:
For me, I have always invested in a style that aligns with my personality, and I would believe it is the same for most retail investors. So, I am curious, what factors initially attracted you to a ‘value’ discipline of investing?
ValueStockGeek:
Value investing makes total logical sense to me. Figure out what something is worth. Pay less than that. Look at stocks as ownership shares of businesses and not tickers that jump around on a screen.
This logic resonates with me. I lived through the internet bubble and intensely believed in it. The bubble and the aftermath always stuck with me. I'm fortunate that I learned those lessons early in life when I didn't have a lot of money to lose.
Investment Talk:
So, I follow your blog, and have done for some time now since discovering it. In the last question, I was going to follow up by asking how your investing style has shifted over time. However, I already have some insight into this from reading your blog. Back in September this year, you posted some transparent revelations, if you will, concerning the difficulty in predicting macro shifts, your perceived risk tolerance, and your ability to think like a business owner.
You stated that you have shifted your strategy from a basket of quantitative bargains, to a “a concentrated portfolio of high quality businesses that are temporarily selling for cheap multiples”.
I guess my question would be can you explain what factor acted as the last straw on the camel’s back in your decision to shift strategy? Moreover, if you could discuss the importance of self-awareness as an investor.
ValueStockGeek:
To get to my current strategy, I need to talk about what I have been doing over the last four years which hasn't worked very well.
When I started the blog in 2016, I decided that I would use the "Simple Way" strategy outlined by Ben Graham in the 1970’s and add to it.
Put simply, the Simple Way strategy is buying a portfolio fo 20-30 low P/E ratios with low debt. He also recommended holding stocks for 2 years or a 50% gain, whichever comes first. Graham showed that this strategy returned a 15% CAGR. Alpha Architect backtested that strategy and also showed that it delivers these results. I did my own backtests and verified it as well.
In terms of position sizing, Graham recommended a minimum of 20 stocks. I quickly filled that account up with 20 stocks that had low P/E’s and low debt/equity.
I added my own twists on to Graham's strategy, but I wanted to stay within his framework. I did qualitative work, I added my own trading rules, and I looked at other metrics besides a simple P/E.
My plan was to do that Simple Way strategy, but then pivot to net-net's once they became available in bulk. I knew that to make net-net investing work, I’d need a massive crash to find them in large numbers and of high quality. I figured that I would camp out in the low P/E strategy and then make my move into net-net’s once they became available in bulk. In a year like 2009, a net-net strategy can deliver 250%+ size returns.
Looking at macro valuation metrics, I thought that another 2008-style crash was inevitable.
As time passed, I started to doubt how these low P/E companies would perform in a recession. These were all highly cyclical companies that would get crushed in a 2008-style meltdown. I wanted to avoid that at all costs so I would have cash to buy net-net's.
I wanted to find a way to predict when the collapse would happen. I thought that I could use an indicator like the yield curve to predict when a recession was coming about a year ahead of time. When the yield curve inverted in mid-2019, I started selling and accumulating cash. I felt confident because I bought aggressively at the December 2018 lows and was already up 30% or so by that point. I was about 50% cash going into 2020, which I thought was going to shake out like 2008.
Then, March 2020 came along. Bear in mind that I thought the market would crash 50% with a normal, run-of-the-mill recession.
With the entire economy locking down, I started thinking in terms of "this isn't going to be 2008, this is going to be like the Great Depression."
I sold even more aggressively, taking myself to 80% cash, intending to buy a full portfolio of net-net’s in when the macro averages were back down near their historical averages and the yield curve had steepened.
That’s not what happened. Instead, the market bounced off of those March lows like a rock of concrete. Unemployment peaked in the summer and had a decline in four months what took four years post-GFC. I was totally wrong. It wasn't 2008. It wasn't 1930. It was like 2009 happened and I missed it.
The experience made me rethink everything that I had been doing for the last four years. I tried to predict macro and failed at it. The extent of my error made it clear to me that I needed to go back to the basics and re-think my approach.
I re-read the Buffett letters. I read Robert Hagstrom’s book, the Warren Buffett Way.
I made a decision to put this macro stuff away. Obsessing over that sort of thing did not help my process at all.
Thinking about it, I decided that I should own the kind of businesses where I wouldn't need to take on the impossible task of predicting the macroeconomy. I wanted to own the kind of companies where it wouldn't be terrifying to own them if faced with a serious recession. The stocks I owned in March 2020 wouldn't have made it through a bad recession.
I wanted to build a portfolio that I could hold through a March 2020 event. When something like that happens again, I want to go through my portfolio, one-by-one, and be able to say with confidence that they will be able to survive. I want to buy the kind of companies where it wouldn't be terrifying if the stock market were closed for 10 years.
To do this, I would need to find stocks that were worth holding for the long-run, not stocks that I was trying to flip for a quick 50-100% pop.
I gave up on trying to predict crashes and trying to predict recessions. I want businesses that are worth holding for the long run.
With that said, I'm still a stingy value investor. I don't want to pay any price for these kinds of businesses.
Buffett buys quality, but he is still stingy when it comes to price. He doesn't buy high fliers at 50x sales. Apple was purchased at 10x earnings. See’s Candy - the example often cited of Buffett paying up for quality - was purchased around a 5x P/E.
I then looked at many of the top performers of the last 10-20 years. I found that many of them sold with a margin of safety at many points in recent history. There are many who say that you have to pay up for quality - but I was able to find plenty of examples where quality could be purchased at deep value prices. In other words, wonderful companies can be available at wonderful prices.
Of course, the market isn't filled with 20-30 wonderful companies at wonderful prices. If I was going to limit my search to this arena, then I would have to become more concentrated. Instead of owning 20-30 stocks, I’d need to run a smaller portfolio.
I have bought a number of businesses at compelling prices that I am interested in owning for the long-haul. Schwab, General Dynamics, and Biogen are examples of this. I also have a shopping list of businesses I’d like to own if Mr. Market gives me the opportunity to invest in them.
Investment Talk:
The Weird Portfolio. For those that do not know, you operate a, in your words, ‘lazy’ portfolio which contains built in protections for different economic environments. The objective is to deliver a consistent return through multiple environments with minimal pain. The weird portfolio boasts some impressive back testing results, offering similar returns to owning 100% US stocks, but with a fraction of the drawdowns.
For those of you interested, VSG lays out the thesis very explicitly in this blog post (Link will be inserted). For those of you keen to learn more, he also wrote an entire book on the subject matter.
My question to you, for those that may not be aware of the weird portfolio, is can you briefly sum-up what the weird portfolio is, why you utilise it as your primary savings vehicle? Lastly, what sparked the idea for this portfolio, and can you take us through the process of you decided upon the allocation of US small cap value, international small caps, real estate, long term treasuries, and gold.
ValueStockGeek:
My stock picking account isn’t all of my money.
In 2018ish, the rest of my money was in a real soup of random stocks, ETF’s. I wanted to get this money organized and into a more systematic approach. I also didn't want to buy individual stocks with this money. I wanted a safer approach that was less effort. This caused me to research asset allocation strategies. I wanted to formulate an approach that would work for me.
I needed an approach that met some critical criteria.
First off, I didn’t want to invest in market-cap weighted indexes. I know that at current valuations, US indexes are poised to deliver low future returns.
I wanted to invest in products with low fees.
I didn't want to have to forecast macro or pick stocks. While I was engaged in forecasting and stock selection in the gunslinger account that I track on my blog, I didn’t want to do any of that with the rest of my money.
Even though I don't want to predict macro, I still wanted protection for different economic environments.
I also wanted to own asset classes all over the world and not have a home country bias towards the United States.
This led me to spend a lot of time researching different asset allocation strategies. The strategy resonated most with me was Harry Browne’s Permanent Portfolio - 25% US stocks, 25% Gold, 25% Long Term Treasuries, and 25% Cash.
While I agreed with Harry Browne's philosophy, I didn't agree with the permanent portfolio. I thought that the portfolio owned too much in cash and bonds. I didn’t think that made sense because interest rates are so low. I also didn’t want to own market cap weighted US equities, because I know that at current valuations they probably aren’t going to deliver a high rate of return.
I then set out to develop my own approach that matched my own risk tolerances and beliefs. That's where the weird portfolio comes from.
Like the permanent portfolio, the weird portfolio is designed to deliver a satisfactory return in all economic environments without needing to predict them. Will we have prosperity? Small value, international small, and real estate should do well. Will we have inflation? Gold and real estate should do well. Will we have a deflationary bust, like 2008 or the early 1930’s? Long term treasuries should perform best in that environment, as the Fed will cut interest rates and there will be a flock to safety. Will there be some type of extreme disaster - nuclear war, cyberattacks, a technology-killing solar flare, a mega natural disaster, hyperinflation? In that kind of environment, gold should do well and at least preserve a portion of my savings.
Meanwhile, the portfolio is overweight to prosperity (small value, international small, and real estate), because that’s the state of the world 90% of the time. The “prosperity” slice of the portfolio also isn’t market-cap weighted, so it avoids the boom/bust cycle that plagues market cap weighted indexes. Market-cap weighted stocks seem to gyrate between euphoria and extreme greed. They also experience lost decades following those bouts of euphoria.
That’s not really a concern for the weird portfolio. It doesn’t participate in those bubbles.
Instead, it delivers a return every decade because of the way it is designed. Because it’s not all-in on “risk on” assets, drawdowns are reduced when the world goes to hell. Because it has protections for different economic environments, there isn’t an economic environment that will crush the portfolio. Meanwhile, it’s easy to implement and requires minimal effort. It’s an approach that I’m comfortable plowing most of my savings into while I pursue financial independence and save most of my income.
Investment Talk:
Last question before we move on. I referenced the book that you scribed in the previous question. I had the pleasure of reading it at the tail-end of summer this year, and really enjoyed it.
What incentivized you to create this allocation strategy into a text, and how has the response been thus far?
ValueStockGeek:
I spent a lot of time thinking about and refining this approach and I thought it would be useful for other people struggling with similar questions.
Whenever I talk to people about the stock market, they seem lost. Most people have anxiety about going 100% stocks and worry about a crash. They seem to think you either need to be “all-in” or “all-out”.
I wanted to show people that there is a different path then simply being 100% all-in or all-out. An individual investor can develop their own asset allocation strategy for their own risk tolerance and beliefs that doesn't need to be as volatile and risky as owning the market.
Even if you don’t like my asset allocation strategy, there are plenty of other options. I wanted to show people how to think about different asset classes and how they are useful in a portfolio to help them develop their own approach to investing.
Investment Talk:
A lot of investors start with classics like Phillip Fisher, Ben Graham, Lynch, and so on. For me, it was The Intelligent Investor that got the ball rolling.
Today, I like to aim to grab some insights from a range of styles, from value-orientated, to quant, to trading, to 100 baggers. Despite not being much of a deeper-value investor, nor a technical trader, I find it beneficial to absorb the insights, nonetheless.
Which investors, past or present, or even mentors outside of the investing space have had the most significant impact on your own approach? Additionally, with regards to your literature ingestion, how far along the spectrum to you tend to travel?
ValueStockGeek:
Most of what I know about investing has been learned via books.
The best book about investing I’ve ever read is Tobias Carlisle’s Deep Value. That book was a real lightbulb moment for me. For years, I always intuitively agreed with the concept of value investing. What that book really showed to me was the mechanics of how that value is actually realized. I’ve conversed with him on Twitter and he has been a great supporter of my blog and I’ve learned a lot from his work.
Another major influence on my thinking is Joel Greenblatt. I usually recommend “The Little Book That Beats the Market” to people who are interested in the stock market. There are problems with the magic formula strategy, but I think it gives people the right template to think about the stock market. Plus, he has a very breezy writing style that you can wrap your brain around.
In terms of asset allocation, I would recommend two books: “Fail Safe Investing” by Harry Browne and “Unconventional Success” by David Swensen.
Investment Talk:
I am a huge advocate for considering your library as an asset. Some of my favourite books, which I often go back to, are: The Intelligent Investor, The Innovator’s Dilemma, Stress Test, The Dark Side of Valuation and Common Stocks & Uncommon Profits.
If you had to choose three books, of any genre, that you found either; changed your outlook, or were just fun reads, which would you chose and why?
ValueStockGeek:
I just gave my list of investing books, so it’s probably a good time to talk about some non-investing books.
My favorite fiction book of all time is “Dune” by Frank Herbert. The imagination and world building in that single book are without equal. There are so many science fiction books that are derivative of other books, but that one is almost completely original and it’s a compelling story. It’s probably the most unique vision of a future that I’ve ever read.
I’m also a huge fan of “The Fourth Turning” by William Strauss and Neil Howe. I picked up that book in high school and it transformed the way I see the world. Even if you don’t buy into their ideas about the cycles of history, it still provides a great way to think about history. They communicate American history not as a list of events or great people, but as generational biographies and shifting cultural attitudes.
Whenever you read conventional history, it’s either stories about great people or great events. That book is more about how the culture reacted to different moments in history. It’s not about Lincoln, Washington, Eisenhower - it’s about how the culture creates historical moments based on the attitudes of the generations that are alive at that moment in different phases of their life. Strauss & Howe try to predict the future in the book - and many of their predictions haven’t come to pass - but even if you set that aside it gives you a great template to think about history.
Another book that I love is “Hyperspace” by Michio Kaku. It’s from the ‘90s and it’s a tour of different concepts in theoretical physics. That’s an intimidating subject matter, but Kaku communicates it without a lot of math and jargon. He takes you through concepts like parallel universes and higher dimensions and explains it in layman’s terms.
Investment Talk:
I like to ask all guests this question, but I already gauge from your writings that you are partial to some level of concentration.
Concentration in high conviction positions is one of the most efficient ways to earn outsides returns. However, it can also be an excellent way to blow up your account. What is your take on position sizing, or allocation in general?
ValueStockGeek:
I’ve done some research and backtesting on this point.
The main takeaway I've come to is that more stocks doesn't lead to more diversification. If you want true diversification, then you need to diversify among asset classes. There is little difference between owning 30 stocks and 500. Add in some bonds, gold, real estate, etc. - then you start to actually succeed in reducing the volatility of a portfolio.
For individual stock portfolios, each stock that you add to a portfolio adds exponentially declining benefits in terms of reducing standard deviation and maximum drawdowns.
A 1 stock portfolio is insane. Adding an additional stock adds massive benefits. Each stock adds benefits, but each stock contributes less than the last one to the reduction of volatility.
In terms of reducing volatility and drawdowns, I've found that the sweet spot is around 12 stocks. Sharpe ratios get maximized around 20-30 stocks. More than 30 is pretty much a waste of time. Each additional stock beyond 30 adds hardly any benefit. At that point, I think you might as well buy an ETF with the style you're trying to achieve. As I found in my own efforts, trying to properly manage and follow 30 stocks is an extremely difficult effort, especially if you're a part time investor like me.
Now that I am being more concentrated, I am aiming to own at least a dozen positions. That gets me down to the bare minimum suggested by research. It should also be a lot more manageable.
Investment Talk:
Some will claim that being able to sleep at night, in respect to the positions you hold, is an important aspect to investing. It seems like this was one of the elements that led to you creating the weird portfolio.
What is your take on that?
ValueStockGeek:
I 100% agree with that. If you’re not comfortable with your portfolio, then you’re not going to stick with it. The weird portfolio is designed with that in mind.
March was a good test of my resolve on that point. In my stock-picking portfolio, I panicked and sold and tried to time the market. I did exactly what you shouldn’t do.
In contrast, I stuck with the weird portfolio. I was only down about 13% in the depths of the crash.
I knew that if the market fell further, I’d have gold and LT treasuries to blunt the impact. If all of the stimulus and quantitative easing unleashed inflation, I had some protection in gold and real estate. I also owned enough global small cap value to benefit if prosperity resumes.
The portfolio did exactly what it was supposed to do. LT treasuries and gold did the heavy lifting in the first half of the year, then the "offense" piece came to the rescue in the second half. The portfolio is up for the year and had less volatility than the market with a more shallow drawdown. Most importantly, I knew that there was enough protection within it that I wasn't tempted to sell.
It worked for me. You have to find a portfolio that works for you.
Investment Talk:
This is largely a speculative exercise, but it can be fun to speculate. When we consider some of the trends taking place, perhaps in the early innings of their trajectory, many will cite e-commerce. For me, I would think that areas such as Payments, Cyber Security, Traditional Banking and Healthcare appear to be ripe for disruption. That is my belief, but I don’t necessarily hold positions that align with that belief.
What are some of the areas that you feel will be most disrupted, or perhaps shown the most promising disruptors over the next decade, and why?
ValueStockGeek:
The problem with trends is that - typically - everyone already knows about the trend and bids up the prices of the stocks & asset classes that will benefit from it. When I was fooling around with internet stocks as a teenager, I thought that I had a unique insight. I didn’t. Everybody knew the internet was changing the world. That’s why we had an internet bubble!
With that said, a trend that I think is underway is a move away from the cities. I think COVID has made it clear to companies that remote work isn’t as dangerous as they thought. The same work can get done at home as it does outside of the office. At the same time, there are workers who want to move to cheaper parts of the country but don't move because they want to be close to work. That's breaking down.
Sure, there will be people who cling to their $4,000 apartments because they hate Applebee’s, but for the most part I think there will be a migration from the cities. Most people live near and work in cities because they have to and not because they actually like it.
For that reason, I think it makes sense to think about which stocks will benefit from growth in rural and suburban areas. There are companies like Tractor Supply that would benefit. I also have to imagine that people will purchase more pets as they migrate from cities, so that's another area I have been looking at.
Investment Talk:
Another question that I like to ask every guest. There are three variables that exist in investing: luck, skill, and mindset. Of course, there are more variables, but what is your opinion on the relationship between these variables, and to what extent would you say each is important?
ValueStockGeek:
In terms of investment returns, they are probably ranked like this: 1) Luck, 2) Skill, 3) Mindset.
The problem is that you have no control over luck. Limited control over skill. Mindset is what you have the most control over, so it probably makes sense to put a lot of effort into establishing a good one.
Investment Talk:
Lastly, my favourite quote, comes from Graham. The one concerning the short term voting machine and the long term weighing machine. I find it helps me reconcile the irrational price action in the near-term. I do not know who first coined it, but another of my favourite quotes is “If you don’t laugh, you’ll cry”. I find this quote helps me appreciate the randomness of life and the lack of control we have over external factors.
What is your favourite quote, and why?
ValueStockGeek:
Security Analysis starts off with a quote from Horace. I think it’s a great way to think about markets and life: “Many shall be restored that now are fallen, and many shall fall that now are in honour.”
Ray Liotta also communicates the same concept in the movie Blow: “Sometimes you're flush and sometimes you're bust, and when you're up, it's never as good as it seems, and when you're down, you never think you'll be up again, but life goes on.”
Questions from Twitter:
In this segment, we collected questions from the Twittersphere, and present them to VSG.
@vetleforsland: “Favourite business moguls/investors/entrepreneurs?
ValueStockGeek:
I would say Warren Buffett, but that would be pretty cliché.
I’m actually a huge fan of Mr. Money Mustache. I learned a lot from that blog and he gave me a great template to think about life. I have a different approach to investing, but I think that his mindset towards life is the right way to do it. I am not nearly as hardcore as him in terms of being frugal, but I think he has the right approach.
@TRPNInvest: “How do you assess a company’s moat? How do you think rapidly growing companies can most effectively be valued? Who do you think is the GOAT investor (besides Buffett)? Thoughts on Technical Analysis?”
He also states that he is sorry for the flux of questions, but states you are one of his favourite follows.
ValueStockGeek:
Moats - I think Pat Dorsey has done the best work on moats. He has a good book on it: “The Little Book that Builds Wealth”
There are many sources of moats and he discusses many good ones in the book: Intangibles (brands, patents, licenses), regulation (cigarettes, pipelines), high switching costs, network effects (Facebook), scale advantages (Costco), geographic moats (Waste Management).
There are moats that exist beyond these categories, but I think that book is full of great examples of moats in the real world.
Valuing growth - It’s very hard to value rapidly growing businesses. I say buy growth at a value price. It sounds crazy, but growth is often available at a value price. Why settle? That way, if you're wrong about the growth, then at least you didn't pay too much where you can suffer a 90% drawdown.
I think it's also worthwhile to find growth off the beaten path. Try to find Taco Bell in the 1970’s, Activision in 2000, or Monster Beverage in 2005. Believe it or not, all of them were available at value prices simply because they were ignored early in their development. Try to find growth before everyone else already knows about it.
Technical analysis - After reading Graham and Buffett, I dismissed technical analysis like most value guys.
You can dismiss technicals if you’re buying businesses for the long haul. Returns are going to come from the growth of the business & not from lines on a chart.
With that said, technicals are pretty useful if the time horizon isn’t 5-10 years. If you’re only going to own a stock for six months or a year, then I’d say technicals are important. I think value investors are a bit too dismissive of them. For short-term swing trading (which is what a lot of value investing is, even though we don't own up to that), then technical analysis can add a lot of value.
Technicals are essential for dealing with volatile assets. In fact, they probably add more value than the complicated thesis. It's amazing how a simple trend following strategy works extraordinarily well with a volatile asset like Tesla or Bitcoin. I don't play that game, but if I did, I'd use some bare bones technicals and trend following rules to control the risk.
@limosrossi: “What's your 'Samurai Cop' stock and it's thesis. (should be bad and YET it's doing great against all odds.)”
ValueStockGeek:
That’s like half the stock market now! There are plenty of companies that have done tremendously that make no sense to me. Nikola was probably the most egregious example this year.
Also, everyone should see Samurai Cop. It is the funniest "so bad it's good" movie ever made. It makes "The Room" look like "Citizen Kane."
Summary
That wraps up today’s guest newsletter, which marks the third edition of this series. I want to thank VSG for providing such lengthy and detailed answers, and taking the time to contribute, and make us all a little but smarter after reading that.
Stay tuned, as we have some excellent calibre guests lined up for you in the coming weeks.
You can find previous editions of the guest interview series below:
You can find previous editions of the guest interview series below:
• Edition One: Bill Brewster
• Edition Two: Kris FromValue
• Edition Three: ValueStockGeek
• Edition Four: AdventuresInFI
• Edition Five: Brian Feroldi
• Edition Six: Brad Freeman
• Edition Seven: Mostly Borrowed Ideas
• Edition Eight: Richard Chu
• Edition Nine: Kermit Capitál
• Edition Ten: Liviam Capital