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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • How To Source Investment Ideas - Imitation Is The Sincerest Form Of Flattery 31 comments
    Jul 14, 2013 8:22 PM

    During a recent investment forum on my blog, one topic dominated conversation: In a world of roughly 70,000 publicly traded companies, where should one begin their search for actionable investment ideas?

    Unfortunately, there is no magic solution for finding good investments. The markets are perimutual, so obvious strategies and mispricings are arbitraged away quickly. I spend most of the hours in my day hunting for buried treasure in the markets, and usually end up digging a lot of dry holes. We read SEC filings, company press releases, proxies of announced corporate events, etc. For those who are more time constrained, perhaps there are methods to stream line?

    One could alphabetize the list of publicly traded companies and go through them methodically. That is probably a waste of time, unless of course there are some phenomenal values to be found in businesses that start with the letter A. Quantitative value screens are a common tool that some investors use to find ideas, and are less arbitrary than alphabetizing. However, any tool that's easily accessible is probably also easily priced in to the stock.

    Where does that leave us… How about imitation?

    One should always do their own work on an idea, and never rely on a third party's premises or conclusion when making a decision. However, other investors' thoughts, opinions and ideas may offer an excellent place to start your own ideas list.

    Through sources such as Seeking Alpha, there are hundreds of potential ideas posted every day. As an author and avid reader of investment ideas, I thought I would share my criteria for how to translate ideas into a useful form for potential consideration.

    Tense Agreement

    Convert any reference to stock price movement from present to past tense when reading any commentary about an investment idea. For example, "Tesla is going up" implies an urgency to get in now, but in reality the stock price already went up. The observed stock price move is in the past already. What is happening now or will happen in the future remains to be seen and should be viewed with a level of uncertainty. The more accurate description is "Tesla went up" and now one must prove whether or not it remains an attractive investment at the new price. Past tense is the grammatically correct tense and a reminder that the writer does not know what the stock price is doing or will do.

    In the Press is in the Price

    Two core questions to ask when reading any article are, i) what does the writer know that the market does not? and ii) how is this not already in the price? A variant perception will have something unique about the information source or the judgment applied to that information. Such sources probably took a long time, serious effort, and great expense to cultivate. If you don't know your edge, you probably don't have one.

    Is it Prospectively Actionable?

    There is nothing inherently wrong with someone telling you war stories, but they should do it at night and in person so that you can buy them a drink. An investment idea should involve a security that you can buy at a market price that is worth paying.

    There Are Things in Life More Important than Money

    But there is nothing in investing more important than money. Your investments don't care about you; they don't even know who you are. So, your relationship should be utterly transactional and devoid of any sense of loyalty to a given investment conclusion. Many investment ideas are presented with the conclusion implicit within the premises. Watch for that, and try to eliminate these biases from your own process.

    Incentives Matter

    I read psychology and history and apply game theory to the capital markets; I know that human nature is massively impacted by incentives. I try to remain skeptical at all times. About once a month or so, I still find myself thinking "incentives really matter!" having been insufficiently wary of how incentive structures can cause people to believe anything, say anything, and do anything that is consistent with their own interests.

    When researching an investment and speaking with management, industry competitors, or analysts, consider how they are incentivized. When reading an article, ask who is the writer: an owner, seller, management, or a high priced helper of one variety or another? You are almost always being manipulated; it is unavoidable. But you can recognize it and partially neutralize the impact by knowing how a given writer is motivated.

    Stories are for Children at Bedtime

    You know what happened this one time in the market? Anything. Everything. There has probably been at least one permutation of nearly every conceivable phenomenon. Who cares? The past does not necessarily forecast the future, and the recent past certainly does not. Markets mislead and they are unpredictable.

    If It Can't Be 100% Wrong, It is 100% Useless

    If it can't be wrong, it can't be right for an investor. Investment ideas should be quantified: the upside value in dollars per security, the downside value in dollars per security, the probability of success, and the date. One key part of the definition of science is falsifiability. The reader needs to know how and when a thesis is wrong. If there is no catalyst or standard to judge that catalyst, the thesis is outside of science. If it is an article of faith, you can say, "amen", but you shouldn't ever say "buy" or "sell".

    Where Does that Leave You?

    Hopefully, with a much smaller list of ideas to research. Over 99% of investment articles fail these most basic standards. But, one in every few hundred is a real idea. Then what? If it is able to define a value, point to a price at a significant discount to that value, and can identify a flaw in the price system that confirms that the mispricing is real, then you can act. More frequently, articles contain useful but incomplete factoids that can be tucked away and used in conjunction with other sources.

    Regardless of how good the article, we always start from scratch, redo the analysis, read primary sources and come up with our own premises and conclusions. Typically, we find that although the article meets many of the criteria, the security itself is not meaningfully mispriced. This is where I find it very useful to create an alert list, so that I can reengage at a price I've determined to be attractive. I have found many a mediocre investment thesis that becomes a terrific investment 25% lower. The key is to be patient and avoid mediocre investments, so that you don't have to lose that 25% before the investment becomes terrific. Professional investment managers have activity bias and outside investors to pressure them to act, principals have a great advantage in that they can avoid those pressures and wait for the best ideas to come along.

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Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (31)
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  • Mike Arnold, CFA
    , contributor
    Comments (1760) | Send Message
     
    thanks, Chris.
    14 Jul 2013, 08:39 PM Reply Like
  • KJP712
    , contributor
    Comments (448) | Send Message
     
    I wish I had more time to read articles on Seeking Alpha.Time management seems to be at the top of the list for improvement.I also have a young daughter who I would like to spend more hours with.It is a tough choice most days and I do the best I can.Thanks for your articles they are at the top of my reading list every week.
    14 Jul 2013, 08:57 PM Reply Like
  • J Boogie
    , contributor
    Comments (13) | Send Message
     
    A very nice logical breakdown.

     

    All of these points make good sense and should assist people both in writing and determining how much stock to put into a particular article.
    14 Jul 2013, 09:29 PM Reply Like
  • wretchedturkey
    , contributor
    Comments (503) | Send Message
     
    Delectably delicious. Very much appreciated.
    14 Jul 2013, 10:35 PM Reply Like
  • Gainz Burger
    , contributor
    Comments (17) | Send Message
     
    Excellent article Chris- keep up the good work.
    14 Jul 2013, 10:44 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » You're welcome. Thanks for reading.
    15 Jul 2013, 06:50 AM Reply Like
  • SA Editor Samir Patel
    , contributor
    Comments (163) | Send Message
     
    Great set of criteria, Chris. More thoughts to follow in the AM, but until then - you say "we find that although the article meets many of the criteria, the security itself is not meaningfully mispriced." How mispriced does a security have to be to pique your interest?
    14 Jul 2013, 11:12 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Samir,

     

    Thanks. Great question. I have a strong preference for “crude” ideas – ideas that can withstand imprecision but still be profitable as long as they are essentially correct. So, in order to dedicate any resources to beginning a research project, a price should be over twenty-five percent away from the expected value of a given security. There is a margin of safety that can withstand a ten percent move (or miscalculation) in the value and a ten percent move in the price. Investment safety is always and everywhere a function of price.

     

    If an idea hangs by the thread of “right of the decimal point” precision, it is a good idea to skip the investment. That is because the world is wild – statistically wild – and characterized by uncertainty. So it will change much more than one’s precise measurement and precision-based ideas will be overcome by noise.

     

    During the financial crisis, some of the most precise analysts ( such as described here: http://vnty.fr/p8PuW8) were comforted by their precision in overpaying for securities. Tragically, where they paid $1 for their highest rated ideas, securities declined to $0.03, their middling ones went to $0.02 and their lousy ones went to $0.01. This is impressive precision, but it is also horrible investing.

     

    I try to do exactly the opposite – while I may be fuzzy about whether the $1 of value may ultimately really be $1.10 or $0.90, I know that I pay only $0.75 for it and occasionally am even able to find it for $0.10 or $0.20. Oh, and one last thought: while I never rely on it, I have nothing better to do, so try to be really, really precise anyways.
    15 Jul 2013, 08:46 AM Reply Like
  • SA Editor Samir Patel
    , contributor
    Comments (163) | Send Message
     
    Crude ideas are my favorite as well. Out of curiosity, generally speaking, how conservative are you when modeling valuation? I like to be pretty conservative; I figure if I can buy a dollar (that's probably worth $1.20) for $0.75, I'm doing pretty well. I expect the dollar; the $0.20 from more aggressive growth/valuation is optionality.

     

    Somewhat related, and apologies if I've asked you this before, but - what's your stance on exiting positions if their risk/reward is no longer as favorable as other positions on your watchlist? To use an extreme example, take security A and security B, which in your estimation are both worth $1.00 and have identical risk/growth profiles, etc. Assume you can only hold one at a time. On Jan 1, A is trading for $0.50, and B is trading for $0.80. You obviously choose A. By July 1, A is trading for $0.75, but B has sunk to $0.50. Obviously, there's still upside left in A, and it does still meet your 25% discount rule and would be eligible for a fresh purchase, but all things considered, B looks much more attractive. Again, assuming you could only hold one, would you be willing to sell A to buy B?

     

    I realize it's a very cleanly defined hypothetical and things are much messier in the real world. Perhaps there's a better analogy, but I'm just trying to get a sense of how you operate there. (Personally, I like having a margin of safety, so once the stock appreciates, causing it to vanish - and the risk/reward to no longer be quite so asymmetric - I start looking for other opportunities that have more of a margin of safety built in.)
    15 Jul 2013, 10:40 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
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    Author’s reply » I am draconian when modeling valuation. 2008 was a pretty typical year for us in terms of good outcomes and bad. We made some money here and we lost some money there. But nothing traded beneath our downside valuation. So, we’re comfortable with imprecision, but imprecise upsides.

     

    We’re responsible for exiting positions when the price and value converge – whether that is converging upwards, sideways, or downwards. We set up positions with a variant view and exit them when the view is no longer variant. In your example based upon your premises: yes I would be willing to sell A to buy B with two caveats. The first is that we make some furtive efforts towards tax efficiency. All else being equal or approximately equal, we prefer tax efficiency which sometimes moderates otherwise sound trading tactics. Secondly, “assuming you could only hold one” is not typically the case. I think that it is ideal to have at least $100 bucks of buying power on the side so that one can simply have A and B when they are both attractive and available (which looks like somewhat kinky dating advice). We let our exposure fluctuate with the set of attractive opportunities.

     

    We don’t like to hold onto ordinary opportunities. We don’t like to hold onto ordinary opportunities even in companies that we love. So over time our best loved positions bought at incorrect market prices tend to get phased out. This process requires only a modest amount of fairly sleepy trading because most positions are exited via the private market – in the form of special dividends, m&a, and so forth.

     

    One of my favorite securities analysts often tells me, “lets let someone else make their money there” in regards to plausibly priced securities. There is nothing wrong with cleaning house of exposures that are price about right, even if they go up a lot later. There is always something to do and we focus all of our energy and resources on research and investing in the mispriced securities.
    15 Jul 2013, 10:57 AM Reply Like
  • Squeeky Wheel
    , contributor
    Comments (317) | Send Message
     
    I often think of this 'crude' measure as being 'a good story'. The analysis should not depend on a lot of complicated math and nitpicking numbers to result in a gain. That sort of analysis is too sensitive (in the scientific sense) - small measurement errors wipe out the results. An explanation of why the security should price higher in the non-distant future tends to be more robust. Your GPT article is a good example. Another example was that last couple years most of the market talked about STX & WDC in terms of PC sales, but it's clear to any IT guy that HDD sales are booming outside of PC's, hence an underpricing in the market (not so sure about now though - word has gotten out).
    15 Jul 2013, 11:39 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Exactly. I agree 100%.
    15 Jul 2013, 11:42 AM Reply Like
  • EJT
    , contributor
    Comments (32) | Send Message
     
    Chris, very thoughtful- additional thought from a SA enthusiast. I see a lot of so called investors writing about new investment ideas 3-5 times a week! These idea factories should not be taken seriouslyn my opinion this is just like spam! Thank you for ONLY sharing truly interesting and thoughtful ideas!
    15 Jul 2013, 12:25 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Excellent point; I wish I had included that.

     

    What is a reasonable expectation for investment idea generation? Buffett has often referred to “twenty” and that is over the course of a lifetime. I think that one might hope for a half dozen or so per year. However, in my experience about a third of my ideas have bad outcomes regardless of how much care and research goes into them. So, I may make a given return on four but give back a third or so of that with the other two (and of course don’t know ahead of time which two they are). I typically will have read all of the SEC filings, talked with each board member and senior manager, as well as the customers, vendors, competitors, auditors, and regulators. This takes time. When people breezily mention how “the market” or “stocks” will do, I conclude that they either do much less work or they have just spent tens of thousands of years of man hours researching before coming to their conclusion. Given average life expectancies and staff sizes, the former is probably more likely.

     

    Another way to say this is that the gearing between input and output is typically extreme for good ideas. They require a ratio that is probably 10,000:1 in terms of pages read to pages written. Most new ideas are bad ideas. Most strong reactions are overreactions. So, real progress – including progress in investing – tends to be modest and incremental. When we are finding ideas that I love, where I can put a lot of money to work, they typically result from a iterative process of building on cumulative understanding of a given firm and much of that work has been done before me by someone else. It is a humbling thing: by 5 AM, I often have an idea that seems original and good… but much of the rest of the day is spent falsifying one of those two attributes.
    15 Jul 2013, 07:10 AM Reply Like
  • byslkwd
    , contributor
    Comments (114) | Send Message
     
    : You mention your tendency to talk to "each board member and senior manager". Obviously, they are not answering my phone calls. What did you do before you had as much clout as you do now? Surely, small investors are not doomed in your eyes (or are they?).
    15 Jul 2013, 10:13 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Good question. One option is to focus on small cap companies where managers and directors tend to be more accessible. When I was young and undercapitalized, I was still audacious about taking executives’ time. My strategy was to be helpful and relevant. My model was Bob Woodward and his elicitation tactics. Woodward was talking to everyone else in the room, so his sources might as well get their word in edgewise so that their side of the story was represented. My perspective was similar. Everyone knew I was talking to everyone else. So they wanted to at least tell me their version of events. A lot of this was brute force effort. I spent a lot of time over target. But I never scrimped on research. And for anyone who does, it is probably helpful to know that you could be trading against someone who doesn’t.
    15 Jul 2013, 10:35 AM Reply Like
  • SA Editor Samir Patel
    , contributor
    Comments (163) | Send Message
     
    Regarding another point you made - "A variant perception will have something unique about the information source or the judgment applied to that information. Such sources probably took a long time, serious effort, and great expense to cultivate. If you don't know your edge, you probably don't have one."

     

    I agree with the underlying idea but wouldn't have phrased it quite so strongly. I believe simply paying attention and being willing to come to your own conclusions (regardless of what everyone else may be saying) is an edge in and of itself given many market participants' short-term mentality and over-focus on sell-side commentary, newsflow, etc. A recent example: in the wake of Autonomy and other such things, HPQ was trading in the low teens (and at the bottom, down to the $11s). I'd been following the company for a while but would never claim to be an expert on its industry, business model, etc. Nonetheless, a very "crude" and imprecise valuation with massive haircuts suggested dramatic undervaluation even absent a turnaround - turnaround success was pure optionality. The only "edge" I had was looking past the news flow at the real fundamentals (succinctly: the current problems were caused by old management, earnings were distorted by accounting writedowns, the company's numerous product lines offered nice diversification of revenues, and cash flow relative to market cap was more than solid). Since then, as bad news ran out and investors started looking at the fundamentals, the stock revalued to a much more sensible price (more than double the bottom). Still own some, but not nearly as much as I would have liked to have bought at half the current price... ah well, hindsight's 20/20.

     

    Anecdotal, to be sure, but I'm curious why you set the bar so high here, since there are plenty of examples (many far more impressive than mine) where just a bit of sound thinking and analysis led to substantial returns, even absent some sort of "special edge." In the data-rich world we live in today, I think market participants focus too much on incorporating all of it, when a few simple factors are likely the greatest drivers of success/failure (think 80/20). Figuring out what those drivers are is an edge in and of itself, I think.
    15 Jul 2013, 10:49 AM Reply Like
  • Wilson Wang
    , contributor
    Comments (847) | Send Message
     
    I know this question is for Chris, but I can see why Chris said the quote you put up there.

     

    When I meet with investors these days, they are trying to figure out the if the manager is either "skilled" or "lucky." In a raging bull market, it's pretty easy for a manager to outperform even if his whole thesis was wrong.

     

    For example, I bought BBRY (or RIMM) when it was below net-net, but that's only because it was net-net. Now did I know it was going to go to 14 in 2 months? No, so was it skill or luck that got me the return? I think it would be attributed to luck more than skill.

     

    Same examples could be used for HPQ and BBY. Just because I bought them around 52 week lows, does that make me skilled? A lot of investors would attribute this to emotional discipline, but I think companies like HPQ, BBY, and BBRY could have stayed at those levels for the foreseeable future if it wasn't for this bull market.

     

    So I think it's fair to say that while it does take skills to pick bottoms in beaten up names, I think it has more of a luck element to it than skill.

     

    But on that notion, most times beaten up names offer an element of margin of safety, and to quote the Rothschild, "Buy when there's blood on the street, even if it's your own."

     

    P.S. the only reason I brought up what I said is because I'm reading a book, "The Success Equation." Samir, if you ever get a chance, read this fine book. It really helps you differentiate what's luck and what's skill. And I've been relatively lucky in the market.
    16 Jul 2013, 03:43 AM Reply Like
  • byslkwd
    , contributor
    Comments (114) | Send Message
     
    Another question- why is it necessary to do your own work if you have someone else really reliable that has already put his own reputation on the line? Example: Bruce Berkowitz on BAC/AIG. He is a certified guru in financials, he is a research fanatic, and has put ~50% of his portfolio in two names(!) that you were able to buy not long ago at 1/2 the price he paid for them. If they were to collapse, his amazing career is all but ruined. I think it is impossible for your average JOE (get it?) to analyze those two companies given the complexity involved- but isn't that already a great risk/reward ratio? I wouldn't have a problem giving money to Bruce, (or Rangeley if I had the million!), so why not piggyback on guys that know what they are doing? (I do try to analyze these things anyway, but more for the learning experience).
    15 Jul 2013, 12:16 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » This is a good question.

     

    While I think that doing your own work is best, the second best option is to rely on either passive investments or active management by one of the few available great value investors, investors such as the great Bruce Berkowitz. Investing at Fairholme is a fine idea (as was BAC or AIG at half the price that Berkowitz paid). The key, in my mind, is to either 1.) know what you are talking about or 2.) throw yourself at the mercy of someone who does. I know little about medicine, but rely on top medical minds to care for my family. I would either do the work myself or rely on the best minds. But I would want to be solidly in one camp or the other. So, for the most part, I agree that it is okay to be reliant as long as you have picked the right person to rely on – and your example of Berkowitz is a great choice.

     

    That being said, there is a specific virtue to self-reliance: it is easier to have fortitude when there is a crisis. It is akin to packing your own chute. When it matters, you can enjoy first-hand confidence in the underlying work. When there is a scare in a particular name, I have already read the SEC filings and talked to the principals, so I need only to do the incremental work of trying to get smart on the recent development. If I have relied on someone else and have some dramatic drawdown, I am lost. I have to second guess their work, replicate their efforts to date, decide whether or not to fire them, all while the market is racing to get on top of the new developments. So, I tend to trade other people’s ideas poorly while I trade my own adequately. I know why I did what I did and only rarely do subsequent events undermine the original thesis.
    15 Jul 2013, 01:55 PM Reply Like
  • Meatball Bob
    , contributor
    Comments (38) | Send Message
     
    Chris,
    Great piece. Thank you for contributions to SA. I thoroughly enjoy them. On the idea presented here, you talked about your acceptable discount to expected value to make an idea interesting, but on the downside how do you and your partner think about risk/sizing? I find one of the toughest things to do is build a big position when "there is blood on the streets".
    Thanks,
    R
    16 Jul 2013, 08:45 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » As a rule of thumb, our typical original invested capital at risk is around 3% per position. However, we use the Kelly Criterion to size, which typically means that more variant views and positions with smaller downsides are larger and more conventional views and positions with larger downsides are smaller positions.
    16 Jul 2013, 09:41 AM Reply Like
  • Joshua Heller
    , contributor
    Comments (215) | Send Message
     
    Surprised nobody is reading between the lines here. Along with your comment (linked below) about keeping busy, are you secretly calling a market top?

     

    http://seekingalpha.co...
    20 Jul 2013, 12:14 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » This is a good question. Is it a market top? I don’t know. When I am at my current level of comfort with market levels, it is typical for it to subsequently go up another 10-20% first and then lose all of that gain and then to lose that gain again several times over. My record of timing market turns is generally early, poor, and skittish. So, take this with a boulder sized grain of salt. But I was operating with 200% equity exposure in March 2009 and never hit that level since. I was around 100% in 2010-2012. In 2013 I have been short bonds and my equity exposure was cut in more than half today. I have some of my first equity shorts that I have had in a very long time.

     

    Here is what I think that I see: prices seem high relative to earnings and earnings projections seem high relative to factual actuals. Prices seem high relative to GDP and GDP growth estimates seem high relative to factual actuals. Revenue numbers appear light. Profitability is white hot – and must stay that way for several quarters to justify current prices – and is extremely likely to mean revert in coming quarters. Prices seem high relative to economic surprises. Prices seem like compared to fund flows. What justifies current prices if not earnings, revenue, profitability, gross domestic product, or economic surprises? Nothing really… except liquidity. Liquidity from the Fed explains almost the whole thing. Liquidity from margin accounts (a Fed byproduct) explains a lot too. If/when one takes away nearly infinite liquidity, we are somewhat worse than back where we started.

     

    Oh, and while I don’t see a recession anytime soon, if we do see one we will never have had less monetary or fiscal flexibility to deal with it. I want to be lightly exposed because the opportunity cost of inflexibility will be enormous. Late 2008 through early 2009 was the time of my life for finding opportunities that I loved, where I could out large exposures into positions where my confidence was close to 100%. The world appears to be well-positioned to offer up such opportunities again sometime soon and I want to be certain that I am well-positioned too.
    20 Jul 2013, 11:38 AM Reply Like
  • Special Situations and Arbs
    , contributor
    Comments (559) | Send Message
     
    Great thoughts Chris. I will say from personal experience (currently) it is painful to be early (macro bearish) and only semi-invested. Do you have an oversized sized cash position or is your cash parked somewhere else?
    20 Jul 2013, 12:36 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » I am writing on the subject at the moment. Spoiler alert: I reject the premise that there is such thing as an oversized cash position.
    20 Jul 2013, 01:58 PM Reply Like
  • Joshua Heller
    , contributor
    Comments (215) | Send Message
     
    It is hard to call tops and bottoms, but thanks for the detail in your current positioning. I have a lot of shorts myself, but I am still finding plenty of stocks on the long side. I think this is a function of better sourcing of ideas. The coverage of HFs are better (both on websites and investment conferences going on video and/or presentation materials online) and good authors on seeking alpha (although have to sort through some of the bad articles. I still have long exposure but the net long position has been declining.

     

    In the Press is in the Price - Reading between the lines again, I would say explicitly that the author thinks the market is wrong, very wrong and lay out the reasons.
    20 Jul 2013, 02:46 PM Reply Like
  • Joshua Heller
    , contributor
    Comments (215) | Send Message
     
    Since your first priority is capital protection, do you ever take a position that has small downside risk (say 5-10%) but has strong upside risk (50-100%)?

     

    It sounds to me like you would rather wait until you have zero downside risk (at least other then short term volatility) and know that you will miss a few trades because the investment didn't get cheap enough.
    20 Jul 2013, 02:50 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Small downside and strong upside? OUTD ( http://seekingalpha.co... ) was probably a decent example, although not quite as much upside as you define it. Yes, I prefer zero downside risk. I tolerate somewhat more from time to time as necessary.
    20 Jul 2013, 03:24 PM Reply Like
  • sheldond
    , contributor
    Comments (1127) | Send Message
     
    Chris,

     

    I love to research but have my own independent criteria. My positions are small enough not to make too many waves. I feel that if I was investing larger amounts I would need more specificity but I would rather be generally right then specifically wrong.

     

    I like the crude right theory. I often have found that the more academically disciplined in financial theory one's mind is allows for some complex rationalizations. Sometimes knowing all the details blinds you to the basic reality. It also can promote group think and a lack of independence. If everyone uses the same tools, they will come to similar conclusions or they argue over a penny difference. If I sell too early, that is okay by me.

     

    The key is buying at a great price to value when people are running from the stock for the wrong reasons or because of dilution or forced exits. I think that there are many opportunities out there and they pay you to wait. That next disaster might be my opportunity.

     

    And there is nothing wrong with cash!
    Considering increasing my cash flow soon.

     

    As per any Author (Chris included), you need to consider their possible motivations and invest accordingly. I think it benefits certain parties to act as if financials were rocket science. In my opinion the most difficult complications that investors must face are the one's they carry with them. I follow authors that have covered stocks that I have discovered independently and then look at their other ideas. I set a value but it has a large range and then buy when it is below my lowest value....I also enjoy volatility.

     

    There is also so much information available to people that was much more difficult to get previously. Sometimes you just get lucky reading through a report and discover an unloved gem other times you let a good company go by because it never hits your target.

     

    Do you ever worry about paralysis by analysis? Investing has become a larger part of my life because I enjoy analyzing situations and companies.

     

    Thanks again for sharing.

     

    Best,

     

    D
    20 Jul 2013, 04:25 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » I agree 100%.

     

    Do I ever worry about paralysis by analysis? No, because I enjoy the analysis and I am not worried by paralysis.
    20 Jul 2013, 05:23 PM Reply Like
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