My investment philosophy is to earn a good absolute return, regardless of how the market is performing, while managing downside risk. This philosophy is implemented through the following:
When panic and fear are prevalent in the market, my portfolio leans towards contrarian value investments. This strategy combines a top-down analysis of industries with a bottom-up analysis of specific companies. Institutional investors tend to paint a whole industry with the same narrative. Often the narrative is either untrue or misapplied. It is my job to find individual situations where that narrative doesn’t apply and capitalize on any misinformed pricing.
When greed and risk-taking are prevalent in the market, my portfolio leans towards special situations. These are investments that depend on a specific corporate action to be profitable. For example, spinoffs, sales, mergers, bankruptcies, etc. The return’s in this space are less correlated to the market as a whole and tend to hold up well during corrections.
When I can’t find any opportunities in either space, I have no problem holding large cash balances. Since I cannot predict when the next panic or boom will occur, I tend to stay on the conservative side of things. I accept that under-performance in good times is the price I pay for out-performance in bad times. I feel that this is a reasonable trade off.
I run a concentrated book of my best ideas. My hurdle rate for new ideas is the opportunity cost of reducing my current ideas.
I screen for situations where narratives are being mistakenly applied. Out of favor industries are a great place to look. I narrow my range of analysis to companies with decent free cash flow multiples and manageable debt.
If a company appears to meet these criteria, I proceed to model its intrinsic value. This involves putting a price on its asset value, earnings value, and growth value. Depending on the companies competitive position, I’ll estimate where in the value stack it falls. If the company still appears attractive at this stage, I will run it threw a qualitative checklist for any red flags. The focus here is on management, economic viability, and understanding the arguments against the investment.
I tend to buy 10-15% above a 52 week low. I sell when a better opportunity presents itself, when a company surpasses my estimate of intrinsic value, or when my thesis is proven wrong.