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DAG1996
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I’m a private investor who manages my own three portfolios, and a half dozen more for family members. My focus is long term, but I also trade some short-term opportunities. I'm fortunate to have worked for a NYSE-traded financial firm for the decade up to 2010, but I'm not an adviser and my... More
  • My Approach To Stock Investing, Part 1 8 comments
    Sep 25, 2013 7:49 AM | about stocks: AET, BX, CVX, CWCO, KR, MEG, MWA, RJF, SDRL, XRM

    My Instablog posts expand on my overarching investment approach so that everyone who reads my opinions on specific stocks also has access to the general strategy behind each call. So, even though they're not usually repeated in each individual article, the strategies and tactics discussed herein apply to all of my stock calls.

    I hope that my writings are a helpful resource to complement the due diligence of other investors, but my writings are never intended to replace the due diligence that each investor should do.

    Here are parts 2 and 3 of these ramblings.

    1. Due Diligence

    "Know what you own, and know why you own it."

    Peter Lynch

    I typically follow and research a stock for 6-12 months before committing any capital to it (or commenting on it). My due diligence always starts with financial metrics such as PEG ratio, P/E ratio, etc.; but I tend to be most interested in forward-looking metrics and trends much more than past performance. Once I conclude that the financials are acceptable, my resulting research and thesis tends to focus on the company. An analogy to clarify that point is, if companies were cars, I would consider the performance specifications on the window sticker very important, but I'd consider equally important the information that one can glean from driving the car and kicking the tires, so to speak.

    Similarly, my experience has consistently been that my best investments most often turn out to be ones where I have particular respect for the guy (or gal) who designed or built the car. A few examples that come to mind are Steve Schwarzman of Blackstone (BX), John Fredriksen of SeaDrill (SDRL), David Dillon of Kroger (KR) and Tom James of Raymond James (RJF). By the way, the latter two have retired from the CEO role to become Chairman and Fredriksen has always been Chairman, so Schwarzman is the only remaining CEO of those mentioned.

    In any case, my point is that, as a long-term investor, I tend to focus on companies more so than just stocks. The various financial metrics for each company are readily available on the main Seeking Alpha page for each company, as well as from very many other sources around the interweb, so repeating those metrics isn't really my focus.

    2. Rearview Mirror Analysis

    "Never look back unless you are planning to go that way."

    ― Henry David Thoreau

    If the cliché of history repeating itself were meant literally, I'd have a pet dinosaur. It's certainly important to understand how a company got to where it is today, so I do spend considerable time learning about each company's provenance. But, when it comes to analyzing company and stock performance, I believe the value of rearview-mirror analysis is limited. Companies, markets and economies change too much and too fast for history to have excessive relevance to future stock prices.

    For example, some of my best investments have been turnaround stories that had a hideous chart some years ago, but turned into four or five baggers (BX, CWCO, MWA, MEG, XRM, etc.). So, I do typically look at trailing and historical metrics, but I put far more emphasis on forward-looking metrics. Trailing numbers may be more concrete since they are already reported, but they simply don't tell us much about the future. Similarly, I don't believe in placing excessive focus on a stock's price at any time other than the day(s) that I buy it and the day(s) that I sell it. In my view, obsessing over every daily downtick or basing an investment decision on a stock price from two years ago (or even two months ago) is being a record keeper, not an investor.

    On a related note, I very rarely buy stock in any company that has gone public within a year or three. To each his own, but my belief is that the purpose of an IPO is not to make money for retail investors -- it's to make money for the company and the bankers, all of whom are privy to far more and better information than any individual investor. So, my approach to newly public companies is usually to wait for the inevitable price drop anywhere from one day to one year after the IPO, then buy.

    3. Portfolio Size

    "Bite off more than you can chew and then chew like hell."

    Peter Brock

    I'm not at all recommending that approach for others, but I must admit, that is indeed what I do. I have holdings in literally dozens of individual stocks, across three separate portfolios. In fact, others often tease that I'm my own mutual fund (for the young'ins, that's an old-school thingy kinda like an ETF). I mention that for a couple different reasons. First, while I don't at all recommend so many stocks for most investors, I disagree with the idea that individual investors must limit their holdings to 5 or 10 stocks. In my view, portfolio size should be a function of the amount of time each unique investor is able and willing to dedicate.

    The second reason I mention the expanse of my real-world holdings is to disclose that there are many holdings that aren't included in the actively-managed portfolio I track and refer to on SA. That is by no means an attempt to exaggerate portfolio performance, and is actually just the opposite, since the whole reason the "dormant" portfolios aren't actively managed is that they don't require it. That's because they're remnants from my old "buy & forget" days and haven't been touched in at least ten years. For example, AET and CVX are among the largest and most representative holdings in those other portfolios. As is evident from the differences between the prices of those stocks fifteen to twenty years ago and today, adding such holdings into a current portfolio would greatly distort performance and complicate tracking.

    4. Time Horizon

    "I'm extraordinarily patient provided I get my own way in the end."

    ― Margaret Thatcher

    I'm primarily a long-term investor in the traditional sense of the term so, to me, "long-term" doesn't mean months or quarters. As such, most stocks I buy and write about are ones that I intend to hold for years -- usually at least 3-5 years, but often 10 years and beyond. However, I believe that successful investors must be able and willing to change their opinions or strategies when the facts or circumstances change. So, I do occasionally decide to sell out of a stock that I previously intended to hold long term, though that happens very rarely anymore. When that does happen, I always update the opinions I've shared. I also trade short-term opportunities so, when I comment on stocks that I intend to hold for only a relatively short time, I make that clear as part of my initial investment thesis. For similar reasons, I also make a point to regularly add updates to the comments sections of all of my articles when there is news about the company.

    I've referenced many stocks throughout this series of Instablogs in order to help me make my points more clearly by using actual examples. I own or have owned all of them and plan to write articles about most of them.

    Thanks for reading and please leave comments on the above topics since that's part of the reason I've posted this -- in case those smarter than me are generous enough to explain why I might be thinking about any of these topics in a less than ideal way.

    Here are parts 2 and 3 of these ramblings.

    Disclosure: I am long AET, BX, CVX, CWCO, KR, MWA, RJF.

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Comments (8)
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  • nclsamy
    , contributor
    Comments (104) | Send Message
     
    Thank you, DAG! Waiting for part 2 and 3.
    25 Sep 2013, 08:13 AM Reply Like
  • DAG1996
    , contributor
    Comments (3025) | Send Message
     
    Author’s reply » You're quite welcome, my friend, and thanks for commenting. I truly hope there's something, anything, somewhere in my ramblings that turns out to be of some use to you. Encouraging young guys, the way I wish someone had done for me, is a large part of the reason I decided to start posting after thinking about it for years.

     

    I've just posted part 2 and will be posting part 3 today as well. Then, I plan to start posting actual articles later this week. The first article is taking me forever so I hope I get better at it or I'll end up at a pace of one a quarter even though I've already thought of a dozen I want to write. Thanks again for commenting.
    25 Sep 2013, 08:23 AM Reply Like
  • nclsamy
    , contributor
    Comments (104) | Send Message
     
    I have been following you for some time now. I cannot tell you how happy I am that you decided to become a contributor and that you started with these Instablogs. I am very thankful for sharing your way of thinking. It is very useful for building my investing/trading philosophy. I just finished reading part.2 and I'm looking forward to part.3 and your upcoming articles as well. Thank you again! Have a great day!
    25 Sep 2013, 09:07 AM Reply Like
  • DAG1996
    , contributor
    Comments (3025) | Send Message
     
    Author’s reply » Thank you for following me, as well as for the very kind and encouraging words. I'm so glad that you're finding some of my thoughts beneficial to developing your investing approach. That alone makes it worthwhile to go through the struggle of trying to put what's in my brain down in writing in some remotely coherent way. Thanks again and have a great day too!
    25 Sep 2013, 09:20 AM Reply Like
  • PJCT123
    , contributor
    Comments (6) | Send Message
     
    DAG - good stuff, and good luck with your new SA role.

     

    You explained well your selection, risk management, etc. approach - but where do you find your ideas to begin with?

     

    I personally have good luck with insider buying - ie, there are thousands upon thousands of stocks, bonds, CEF's, etc. (ie, too many to research all of them). My take is that insider buying at least tips the playing field a bit in my favor, or suggests a place to start to reduce the universe. I also believe that stocks to generally avoid are the more "retail" names and/or large-caps. Those are areas where either the market is efficient and/or the pros simply have better data (appropriately or not).

     

    ie, I personally like small cap (but not "hope") stocks with insider buying that are poorly followed. If I can take that stock and find some message board (SA or elsewhere) where there is a credible "expert" who lends his/her thoughts, I like my chances.

     

    So, I am curious as to your stock "screening" approach. Again, good luck with being a contributor.
    29 Sep 2013, 11:50 AM Reply Like
  • DAG1996
    , contributor
    Comments (3025) | Send Message
     
    Author’s reply » PJCT123, Thanks very much for the kind words and for the feedback. Those are great points that you raise.

     

    I find my ideas via a combination of a variety of ways including stock screens, news stories, day-to-day life (I actually look at fine-print on product labels and similar places when something strikes me as interesting), while delving deeper into companies I already hold shares in (partners, customers, etc.) and by reviewing dozens of investment resources on a daily basis (when I'm in heavy buying mode, that is) ... including, of course, SA. I tend to look for stocks that are being ignored ... whether that's because the company is a relatively unknown small-cap or because it's a currently unloved and disregarded large-cap. So, I'm not necessarily looking for companies that are presented as investment opportunities ... I'm looking for ones that I find interesting in any one of many ways, that could also be good investment opportunities. So, even when I use screens, investment resources, and news, I'm really just looking for random hits that spark my interest, rather than base my interest on a particular metric or opinion. Then, I research the companies fairly deeply.

     

    I do like to see insider buying and have indeed read some of the studies that show it has some value as an indicator, but I don't use it as a data point, per se. For one thing, it's too specific to each company's practices and too easily manipulated. For example, insiders know that investors watch insider buying so an artfully-time bonus can artificially bolster investor interest. Plus, it's not uncommon for insiders to understandably have strong conviction in their company, regardless of its prospects.

     

    I know you didn't refer to insider selling, but I want to just because it's the obvious other side of the coin, but in my opinion, has no real implications the majority of the time. In my opinion, insider selling has little value since there is no way I can know the reason for selling, thus whether it indicates anything at all. I've spoken to 'insiders' about their selling habits and, for very many of them, their company shares represent a very large portion of their income and/or wealth so periodic un-timed selling is necessary both to fund their lives and to remain remotely diversified.

     

    Even though most of my comments tend to be about small-caps, that's largely because it's almost impossible to have anything new and interesting to say about large-caps. That is, unless they're 'currently unloved and disregarded'. (HAL) & (KR) last year come to mind as perfect examples. A larger percentage of my holdings are actually large-caps. I think the breakdown is something like 40% large-cap, 30% mid and 30% small. My preference also depends a lot on where the market and sentiment is at a given time. For example, there were many large-cap fire sales last year, but not nearly as much this year, so my focus pivoted to small-caps.

     

    The only concern I have with poorly-followed stocks is that they tend to be thinly traded too and, therefore, often stay range bound for relatively long stretches of time. I like liquidity so I can easily get out at any time I want, even though I rarely sell out of a stock anymore. So, I usually look for average volume of at least 100,000 and preferably above 200,000; although i do have one holding under 50,000.

     

    I hope my responses make sense and are helpful. Thanks again for the well wishes and for the opportunity to ramble on about more of my investment opinions. Cheers.
    29 Sep 2013, 01:34 PM Reply Like
  • just_tom
    , contributor
    Comments (64) | Send Message
     
    DAG1996, thank you once again for mentioning this site. Again any thing I can learn from is music to my ears. I found SA many years ago and have learned so much from all the wonderful writers who are so generous with their knowledge. Please continue your good work.
    13 Oct 2013, 09:51 AM Reply Like
  • DAG1996
    , contributor
    Comments (3025) | Send Message
     
    Author’s reply » @just_tom, Thank you very much for taking the time to comment. That really does mean a lot to me. I do intend to continue writing as much and as long as possible.
    13 Oct 2013, 12:21 PM Reply Like
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