On April 1st, 2007 Clyde Milton of Cheap Stocks answered 20 questions. Today, he answers seven more.
Clyde Milton became enamored with deep value, off the beaten path investment ideas through years of fundamental research, and ultimately, as a writer/editor for a now defunct personal finance magazine.
He strives to research stocks that few others will, using valuation techniques based on Ben Graham's ideas (such as stocks trading below their net current asset value) as well as some ideas he has developed himself.
Milton freely admits that his site is written under a pseudonym; Clyde and Milton being the first names of his beloved grandfathers, to whom the site is dedicated. While Cheap Stocks was originally launched primarily to keep Milton's research and writing skills sharp (and not as a public site) it has developed a following.
Which do you tend to invest in - high quality businesses or cheap stocks? Why?
Well, in a perfect world you'd want a hybrid: high quality businesses at cheap prices. In practice though, I tend to invest in stocks that are cheap, and honestly, they are not always high quality businesses. There is huge risk, however, if you don't do your homework. You've heard it before: Stocks are often cheap for good reasons, and the art is to not fall into the value trap that you can easily become prone to.
What have your experiences with each been? What have you learned?
I've learned not to jump in too quickly, not to fall in love with an idea, to limit initial position sizes, to stagger purchases, and that it's prudent to throw in the towel on a bad idea before it fails. As investors, we are all prone to behavioral biases. Some are hard to shake, others you can learn to deal with through experience...usually a bad experience.
How focused a portfolio do you tend to keep?
My current portfolio is about 20 names, and there's definitely an asset focus toward water, land or other assets that I believe are not properly valued.
What are your views on diversification and concentration?
Diversification is a great word: it tends to disappear from investor's vocabularies during a great bull run, then re-appears when the market tanks. But the truth is, it is imperative to be well diversified. While my stock portfolio is somewhat concentrated, and not well diversified, it is just one piece of the puzzle: My portfolio’s beta exposure comes from other sources.
Diversification is the word you did not hear in the late 90's, and it's made a huge comeback! I say that in jest, but it's amazing what a bear market will do to investors. I am a huge believer in diversification, especially in the context of building a portfolio designed to meet an investor's goals. It's not a one size fits all proposition.
How do you deal with general market risk and specific business risks?
I'm not all that concerned with market risk in terms of my stock portfolio; most names have fairly low correlations with the overall market. In terms of business risk, I limit initial position sizes, and will occasionally use trailing stops. Keep in mind, though, a portion of my portfolio is in thinly traded issues, where trading is rare--a trailing stop is of little use here.
Do your very best investment ideas tend to greatly outperform your inferior investment ideas?
Any self respecting portfolio manager might say that all of his ideas are the very best, but it certainly is not true in my case.
There are times when I am taking additional risk, perhaps the business is not great, and is selling for $5, but I believe it is worth $10, regardless of whether the business improves. Those situations usually take longer to pan out, if they pan out at all. I am less inclined these days to take a position in such a situation — that’s from experience, and learning lessons about value traps, and poor assumptions.
Can you normally identify which ideas you are most confident in – in other words, do you often have "higher conviction" ideas and "lower conviction" ideas?
Definitely. Part of that comes through analysis, but you also develop a gut for it as well. You learn to separate truly good ideas from those where the risks are much greater.