My investment philosophy is to earn a good absolute return, regardless of how the market as a whole 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 to capitalize on any misinformed pricing.
When greed and risk taking are prevalent in the market, my portfolio leans towards special situation investments. Special situations are investments that depend on a specific corporate action to be profitable. The returns for special situation investments are less correlated to the market and tend to hold up well during corrections. Examples include spinoffs, sales, mergers, bankruptcies, etc.
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 cost for out-performance in bad times. I feel this is a reasonable price to pay.
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 this criteria, I will proceed to model its intrinsic value using simple and conservative models. 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, with a stop-loss in place at the 52 week low. This can, and does, cause me to lose out on even better bargains, but it also keeps me out of any situation that could blow up my portfolio. I am comfortable with this trade off.
Otherwise, I sell when a better opportunity presents itself, when my thesis is proven wrong, or when a company surpasses my estimate of intrinsic value.