First, I run 100% equity in my trading account. I aspire to get good enough at stock-picking to run a concentrated portfolio (still remember Greenblatt having all his money in only 4 stocks!) but haven’t yet had the courage to drop below 20 positions.
So that’s my general model: find 20 stocks and put 5% of my money in each.
Now if you’ll recall, I’m doing a little statistical value experiment with 5% of my money (horrible! horrible! more on that later), so that left 19 “5% slots” for 2015.
Bruce Greenwald tells a story about a time he, or maybe it was some fund he consults for, had a really fantastic equity researcher, but they couldn’t get the guy to pull the trigger on any of his ideas (analysis paralysis). They solved the problem by forcing the guy to make a trade every Friday!
In a similar vein for 2015, I forced myself to rotate out of an older, less attractive position and into a new one on the last day of each month. There was only 1 month I didn’t do this and it was because my research hadn’t uncovered even a lukewarm idea in the prior 4 weeks.
My big theme for 2015 was seeking companies that had a high fundamental return (quantitative), were attractively priced (quantitative), and had an apparent sustainable competitive advantage (qualitative). I was looking for compounders that I ideally might never sell. Just lock ’em in the vault and let them balloon, creating as few future tax events as possible.
By the way, I can’t tell you how much I’ve come to appreciate that margin of safety is not a number. MOS used to be a number for me – it was the discount to intrinsic value, of course! Now MOS is a “Yes” answer to a qualitative question: “Is there some barrier to entry in this company’s business model that I can put my finger on that should keep look-a-like competitors at bay?”
Why do I need to be able to put my finger on it? Because all companies occasionally experience high cyclical demand. You can’t just see historically high ROE or high EPS growth and assume it’s evidence for a moat. Ask, “what exactly is the moat, and why should it persist?!”
That’s what I tried to do in 2015. And I made a 10.6% total return from my nineteen 5% slots. I even managed to put 5% into Precision Castparts a few weeks before Buffett bought it.
As for the 5% statistical value slot, that returned -28%! And it’s off to a nauseating start too for 2016 (the final year of the experiment).
Still, beating the market by 7.4% feels like satisfactory compensation for all the hours spent. And maybe once I get this statistical value impairment off the balance sheet things will look even better. How did you do in 2015?