In trying to be a better investor, I frequently self-assess to determine what has worked (and why) and what has not worked. Surprisingly, I recently came to the conclusion that my investing successes (and comfort in individual positions) is largely tied to making investments that present a value proposition consistent with how I operate in my day-to-day life. Or as Shakespeare wrote so succinctly (in Hamlet) over 400 years ago, "To thine own self be true."
High End, Low Cost
In my day-to-day life, I like to own and utilize high quality goods and services (I drive a Mercedes, live in a respected neighborhood, enjoy staying in nice hotels, have a theater subscription and willingly provide whatever is necessary to enhance the education and future success of my children, etc.). For better or worse, I do not live the "cheap skate" lifestyle. However, I do pay as little as possible for the goods and services I consume, frequently using clever and occasionally extreme tactics to ensure my success (I considered writing a book, "How to Live Above Your Means Without Debt"). I do not buy lottery tickets nor pay more tax than legally required (maximizing contributions to tax deferred accounts, etc.). In short, I enjoy high quality acquired at below-market prices.
I'm sure you have little interest in my personal life. What may be of interest is the correlation between my personal biases and investing behavior. The stocks I buy tend (though I am looser in my investing life than in my personal life) to have the common attribute of being strong, quality companies that offer a compelling value in the form of an expectation of delivering market-beating expected returns (adjusted for risk). I tend to appreciate low earnings multiples, high growth, understandable and surmountable competition, and macro-economic factors that can be considered and modeled.
Expected Value Trumps Static Rules
My philosophy lets me consider a riskier stock [like GoPro (NASDAQ:GPRO) last fall] with a 30% chance for a 100% return, a 50% chance of a 30% return and a 50% chance of declining 50% (expected value 20%; my expected return profile). Drilling further down, I most often prefer equities whose net (dividend and capital) expected return has a high likelihood of occurring (lower standard deviation of results, and generally a somewhat lower expected return). For example, I believe General Motors (NYSE:GM), has a 50% chance of returning 30%, a 20% chance of returning 15%, a 10% change of being flat and a 20% chance of declining 15% (expected value of 18%, 15% from capital appreciation and 3% from dividend). In investing parlance, I am generally partial to GARP (growth at a reasonable price) stocks. In daily life parlance, I like quality acquired on sale (or clearance).
I Avoid "Lottery" Tickets
I have found my behavior guides me further. As I do not buy lottery tickets, I am not comfortable with "story" stocks and would likely never own [at least under today's multiples) stocks like Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) or Twitter (NYSE:TWTR)]. I do not begrudge those clever folks who have made money in extreme growth stocks; it just is not a style that is personally comfortable. If achieving a satisfactory return is predicated on the investing equivalent of nailing four separate "tricks" on the high dive (in front of an international audience), the stock is not for me. Others with more risk taking personalities may be comfortable with the high potential reward (and high risk) that tends to characterize story stocks.
The World Keeps Changing
I have also found in my investing, as in my personal life, a lack of comfort in making twenty year decisions (aside from getting married). Professionally, I have held numerous "C" level positions with multiple companies. In my experience, companies change, competitive environments change, cultures change and leaders change. In business, if I do not like what I see in the future (beyond my ability to control), I will consider, and often make, a course adjustment. Similarly with stocks, if the facts change, I will adjust accordingly. I simply do not believe it is possible to make a twenty year decision with high confidence.
I recall being very upset when, in reading comments on an article I recently wrote about General Electric (NYSE:GE), a reader chastised another reader for selling GE, basically saying the stock should never be sold. One of the differences between the 19 year old me and the older version is I no longer believe the words "always" and "never" have much use in daily life. And here I strongly differ from many of my fellow authors who advocate researching a cadre of "dividend aristocrats" or other screened criteria, purchasing a subset and sitting back (basically forever) to collect dividends. While not a "trader" (at least not according to my broker), I consider myself thoughtful enough to reconsider my underlying investment thesis and objectives as 1) positions appreciate (if the reward diminishes relative to the risk), 2) stocks perform materially differently than expected, 3) the macro environment changes and 4) "sector rotation" occurs.
For example, I believe the economy will continue to grow, making defensive stocks ill timed (coincidently, the Barron's that arrived on my doorstep this morning cited Jonathan Glionna as noting, while consumer staples outperformed the broader market by 50% over the last 25 years, these stocks have underperformed by 63% excluding recessions). I believe financials are the next sector to benefit from a growing economy and the increase in interest rates that will eventually occur. Following suit, I have purchased multiple "financials", though diverse the way they participate in the market, to take advantage of this rotation. When the economic recovery looks "tired", I will consider rotating into consumer staples.
You Invest Best As You
In looking back, many of my ill-fated investments were based on being inconsistent with "me". Trying to catch a high flier, because it was already irrationally high, I talked myself into thinking, "why could it not go irrationally higher"? I call that my "greater fool period (I was the greater fool). Of course, many investors made money with the same stocks on which I lost money. Why? Perhaps, their investment decision was in synch with their personality and they understood the potential at the right time. On the other hand, making investments counter to my intrinsic thinking was forced, and often failed.
Going back to the link between my investing and my personality; I appreciate quality, but almost always insist on a "deal". I take an active view of the world and believe companies change due to both internal and external factors. If something new and interesting comes along, I am not reluctant to try it. I usually buy good stocks (companies with a track record, a positive future and well positioned for the near and medium term) at value prices that provide the reasonable expectation of above-average returns (obviously I am not always right!). Investing in Netflix (NASDAQ:NFLX), whose products I use and admire, would have made me a bunch of money, but there was too much risk, uncertainty and valuation (expected value) concerns for me to be comfortable. Netflix was not "me". I congratulate those who invested, and am comfortable with having watched from the sidelines. Conversely, I am very happy to have bought Apple (NASDAQ:AAPL) and Blackstone (NYSE:BX) within the past year. Both (at the time of purchase) had great expected returns, were "cheap" and were positively positioned given competition and the market. And I still make a lot of mistakes, misread data, trends and management. But I am better than I used to be!
The point of this article is not to suggest you, the reader, follow my strategy. It is to suggest that you will be a better investor if your investing is done in an intellectually consistent way that is true to your personality. The market is comprised of many ways to make money; playing to your strengths should yield increased wealth in your financial life just as provides increased happiness in your professional life!
Disclosure: The author is long GE, APPL, GM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.