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Individual Investor
Concentrated Risk
My primary goal is preservation of capital with significant appreciation. I will only purchase stock of companies with a significant perceived discount to intrinsic value. Proper value investing requires discipline, which may result in my holding a relatively large cash position over extended periods. This may cause under-performance during speculative markets. My goal with this model is to outperform the S&P 500 over an entire business cycle, typically 8 years.
I look for cheap, ugly, obscure, or just plain boring companies that have a durable competitive advantage and are temporarily suffering from headline risk. When markets are in freefall and all companies are being sold indiscriminately, I aim to buy high quality companies with the largest durable competitive advantages (moats), as long term holdings.
The model does not have a particular capitalization bias or a sector bias.
The model does not have a particular capitalization bias or a sector bias.
I screen databases such as Morningstar and Value Line for companies with a dramatic fall in per share price (approximately 20% in a week). If the drop is a result of a fall in short term earnings, temporary market share loss, or if the company is suffering from headline risk, I will perform a more in depth investigation of the company.
I review SEC filings and participate in conference calls and webcasts to determine the shareholder friendliness of management. I will only initiate a purchase if I find that management is sound, the problems temporary and valuation compelling.
I review SEC filings and participate in conference calls and webcasts to determine the shareholder friendliness of management. I will only initiate a purchase if I find that management is sound, the problems temporary and valuation compelling.
This model is not diversified, and will usually only hold a handful of stocks. One stock may constitute the majority of assets (for example, the model may allocate up to 50% of the portfolio in a single long term holding). Turnover is extremely low except in times of financial panic, when I may accelerate purchases due to a plethora of attractive opportunities. The typical holding period is 4 to 8 years (or one full economic cycle). During bull markets the portfolio may hold a large portion of its assets in cash due to unattractive valuations.
The model may own ADRs as well as ETFs (both leveraged and inverse).
The model may own ADRs as well as ETFs (both leveraged and inverse).
As a company approaches my calculated intrinsic value, I will begin selling the position. With regard to companies that have wide moats (durable competitive advantages) I plan on holding the stock forever, and am unlikely to sell the position unless the company's competitive advantage is reduced or the market values the security too richly - at several multiples over its intrinsic value.
Although the model uses fundamental analysis to select companies, if my analysis indicates a strong secular macro condition I will use ETFs to profit from the trend.
Model commentary
We like housing plays Wells Fargo and USG in 2013
20 December 2012
The housing recovery is gaining traction and offers opportunities.
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