Reblog: The Debate Over Position Sizing


“If you wake up thinking about a position, it’s too big” Steve Clarke

“Make your position size more a function of not how much you can make, but really how much you can lose. So manage your position based on your downward loss perspective not your upward potential.” James Dinan

“We will make something a large position if we think there is an extremely low chance of losing money on a permanent basis. Even if we think it might be a 4X return, if the idea could be a zero, it’ll be a small position” Ken Shubin Stein

“I’ll limit position sizes when potential outcomes are too binary” Chris Mittleman

“We do not bet the ranch on any single investment; few positions have exceeded 5% of assets in recent years” Seth Klarman

“We size things based on how much we think we can make versus how much we think we can lose. We’ll probably be willing to lose 5-6% of our capital in any one investment” Bill Ackman

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Reblog: Why Everyone Is a Value Investor


Mention value investing and the phrase brings up different connotations for different people.

Some investors see value as a style as a dead regime, something stuffy old investors like Warren Buffett (Trades, Portfolio) live by, and their devout following of the strategy has cost them big time as they have missed out on some of the market’s best opportunities.

On the other hand, you have the devout value investors, those who remain fully committed to the strategy initially set out by Benjamin Graham and his partner David Dodd, all those years ago, even though this strategy has generated relatively lackluster returns over the past decade.

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Reblog: Seth Klarman – Beware of Value Pretenders


With so many articles dedicated to the debate on value stocks vs growth stocks I think it’s a good time to revisit what Seth Klarman calls ‘Value Pretenders’ in his best-selling book, Margin of Safety.

Here’s an excerpt from that book:

“Value investing” is one of the most overused and inconsistently applied terms in the investment business. A broad range of strategies makes use of value investing as a pseudonym.

Many have little or nothing to do with the philosophy of investing originally espoused by Graham. The misuse of the value label accelerated in the mid-1980s in the wake of increasing publicity given to the long-term successes of true value investors such as Buffett at Berkshire Hathaway, Inc., Michael Price and the late Max L. Heine at Mutual Series Fund, Inc., and William Ruane and Richard Cunniff at the Sequoia Fund, Inc., among others. Their results attracted a great many “value pretenders,” investment chameleons who frequently change strategies in order to attract funds to manage.

These value pretenders are not true value investors, disciplined craftspeople who understand and accept the wisdom of the value approach. Rather they are charlatans who violate the conservative dictates of value investing, using inflated business valuations, overpaying for securities, and failing to achieve a margin of safety for their clients. These investors, despite (or perhaps as a direct result of) their imprudence, are able to achieve good investment results in times of rising markets.

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Reblog: 10 Things You Can Learn From The World’s Best Traders


Today’s lesson is a virtual treasure trove of wisdom and insight from some of the best trading minds of all time. We are going to go on a journey of discovery and learn a little about some of the best traders ever and dissect some of their famous quotes to see what we can learn and how it applies to our own trading.

The way to learn anything is to learn from the greats, have mentors, teachers, study and read; you must make a concerted effort to absorb as much knowledge from the best in your field as possible, for that is truly the fastest way to success, be it in trading or any other field.

Below, you will find a brief introduction to 10 of the best traders of all time, followed by an inspiring quote from them and how I view that quote and apply it to my own trading principles. Hopefully, after reading today’s lesson you will be able to apply this wisdom to your own trading and start improving your market performance as a result…

George Soros

George Soros gained international notoriety when, in September of 1992, he invested $10 billion on a single currency trade when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was reported that his profit on the transaction almost reached $2 billion. As a result, he is famously known as the “the man who broke the Bank of England.”

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Reblog: Successful Investing is Beautifully Boring


If you question how ‘boring’ can be beautiful, you have been following the wrong investment strategy.

Too many people have the misconception that investing is glamorous. The reality is that glamour is the last thing you will find in the stock market, most especially if you plan on being successful.

Hedge fund guru, George Soros sums it up brilliantly: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

Sure, we have all heard of a stock market success story or two. You probably have an acquaintance who made a decent return from investing in a tech stock that tripled in price before selling. Maybe even someone who inadvertently timed the 2008-09 crash correctly. In most cases, these successes are short-lived and can be attributed to pure luck. Although these ‘successful investing’ stories make for good dinner-party conversation, they are by far the exception among prosperous independent investors.

The fact is investors who produce the flashiest returns, time and time again, usually do so in the most unglamorous manner. A great example is Warren Buffett, who built an empire investing in so-called ‘boring’ stocks.

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Reblog: Diversification Overrated? Not a Chance!


In February 2000, a financial advisor named Bob Markman wrote an article that got a huge amount of attention online. Called “A Whole Lot of Bull*#%!” (that’s how the original was spelt) and published by Worth magazine, the article attacked the idea of diversification, arguing that any money put into currently underperforming investments was money wasted. Internet and other technology stocks had been so hot for so long that nothing else was worth owning, Markman argued. He was far from alone in saying that.

Markman and I exchanged long emails and even longer letters (that’s how people communicated in those Neolithic days), but the “debate” boiled down to one point: Can the typical investor predict the future with precision, or not? Markman insisted the answer was yes. I felt then, as I still do, that the answer was no.

In Markman’s defence, there is a case to be made that if you have inside knowledge or superior analytical ability, then you should bet most or all of your money to capitalize on it. Warren Buffett and Charlie Munger have long argued exactly that. If you are as analytically brilliant as Buffett or Munger, diversification will lower your returns. The rest of us, however, should have much less courage about our convictions. And inside knowledge or superior analytical ability are best applied to individual securities, not to broad market views.

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Reblog: Learning From Jamie Dimon


There are a number of letters that I look forward to reading each year. Some of them are well known and Buffett’s are, of course, a classic example. There are also others that have added enormous value to my thinking over the years, and that have opened my eyes to many new and varied investment opportunities. They have also helped me spot emerging themes, new ideas, thought processes and mental models. I mentioned Buffett because his 2011 letter is a case in point. In that Buffett recommended reading Jamie Dimon’s annual letters. And it’s little wonder; Buffett has said this about Dimon in the past…

“I think he knows more about markets than probably anybody you could find in the world.” 

Jamie Dimon, the son of a stockbroker, has been at the helm of JP Morgan [and it’s predecessor firm ‘Bank One’] since March 2000. In that time the tangible book value has compounded at 11.8%pa vs 5.2%pa for the S&P500. Not surprisingly, the stock price has followed, delivering a 12.4%pa return vs the S&P500’s 5.2%pa over that period. A cumulative gain of 691% versus 147% for the S&P500. Not bad considering the multitude of challenges that have faced global banks over that period, including the worst financial crisis since the Great Depression.

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Reblog: What Investors Need to Know About Investing in Low PE Stocks


Man and woman in business attire happily looking at computer screen
Value investing starts with low PE stocks, but it shouldn’t be an investor’s only financial metric.

What do Warren Buffett, Ben Graham, Seth Klarman, and Peter Lynch all have in common? Besides being wildly successful investors, they’re all are adherents to value investing, a method where one attempts to buy securities that have a higher intrinsic value than their current price.

One of the most basic forms of value investing is to find stocks with low price-to-earnings (PE) ratios. The PE ratio is a simple ratio that divides the current price per share of a company by the earnings per share over the trailing-12-month period. The logic behind buying low PE stocks is simple: As an investor, you are ultimately entitled to a pro-rata portion of company earnings, so paying the lowest cost, or multiple, for those earnings is preferable than paying a higher multiple. Essentially, your dollar is buying a larger portion of company earnings than it would with a high-multiple stock.


Reblog: Three Lessons for Investors in Turbulent Markets


The global stocks roller-coaster of recent days reminded me of three lessons I learned many years ago as an investor in emerging markets. If well understood and applied, these precepts can turn unsettling volatility surges into longer-term opportunities.

  1. Long periods of market calm create the technical conditions for violent air pockets. Until last week, the most distinctive feature of many market segments was historically low volatility, both implied and realized. Although several economic and corporate reasons were liberally cited for this development (including the convergence of inflation rates worldwide and eternally supportive central banks, as well as healthy balance sheets and synchronized growth), an important determinant was the conditioning of the investor base to believe that every dip had become a buying opportunity, a simple investment strategy that had proven very remunerative for the last few years.The more investors believed, the greater the willingness to “buy the dip.” Over time, the frequency, duration and severity of the dips diminished significantly. That reinforced the behavior further.The economist Hyman Minsky had a lot to say about the phenomenon of prolonged stability breeding complacency as a precursor to instability. This phenomenon is reinforced by the insights of behavioral finance and can lead markets to embrace paradigms that ultimately prove unsustainable and harmful (such as the idea well more than a decade ago that policy making had totally overcome the business cycle, and the notion that volatility had been flushed or hedged out of the financial system). Continue Reading

Reblog: What Investing Legends Do When the Stock Market Stumbles


Stocks have been all over the map this week.

Here are some top investing tips to consider amid the market volatility.

Ben Graham

Widely regarded as the “father of value investing,” Graham’s surgical analysis of stocks made him and his clients a great deal of money. But before he became Warren Buffett’s mentor or earned Wall Street’s reverence, Graham lost most of what had already become a small fortune in the stock market crash of 1929 and the ensuing Great Depression. It was then that Graham learned a hard lesson about risk-taking.

After that, Graham became one of the first to make investments based solely on financial analysis. Before his death in 1976, Graham’s philosophy was simple: invest in companies whose shares trade below the firm’s liquidation value. He implemented smart analysis of market psychology, investing by numbers when others did so by fear or greed.

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