There is this video that I get pinged a fair bit this week and I decide to watch it. Basically Howard Marks interviewed Joel Greenblatt on Value Investing in front of a bunch of Wharton students. The volume is very low but it was rather worth it.
I would say, this video is good for folks who are doing active investing and that you might have some questions on your mind after reading some of these value tilted books how they apply to real world investing. This is a good video as it talks simply how Joel interpret value, and goes into one level down some manoeuvres of assessing value. He also debunks the stuff folks talk about that “I buy this stock for growth, I buy this stock for value”, review of Warren Buffet’s strategy, the problems with managing other people’s money.
2 Takeaways that stuck with me.
The first was in 22 min where Joel talks about one of his previous bigger positions. He explains that, unlike what most look at how much they will make in terms of returns for a particular stock business, they tend to look the opposite way. They would rather put the majority of their money in proposition that they know they can never lose money. Getting better returns is an option not something that must come,
It makes me reflect on the way I allocated the size of my capital:
- Majority of the capital should go to propositions that provide the most margin of safety. Basically I need to look for fixed deposits. In the worst case scenario, the capital is intact
- The size of the propositions should reflect the confidence in the safety of the proposition, not the outsize growth of the prospect
- Value with a conservative return rate that I can accept for the risk of the business.
- Anything better than no losing money and this conservative return is a bonus option
- In order to find these fixed deposit, I have to sharpen my prospecting skills, my risk assessment skills
- When I find these fixed deposits, must have conviction to allocate MORE to it.
- To allocate more, I need conviction, to have conviction, I need near certainty, to have near certainty I need to improve the prospecting skills
- I am not a full time investor. When my portfolio is $500,000, I cannot have 125 stocks with $4,000 each. Hell I cannot have 62 stocks on $8,000 each. I have a life out of managing wealth that I cannot monitor so many stocks. To concentrate, I need conviction in the businesses. to do have conviction, I need to have better skills
The second takeaway was at 26 min, when he talks about one of his past prospect, where operation leverage actually work against it. What turned out to be a very good proposition became bad. I forget that for companies like Straco, SARS and a significant event, would easily push the company into losses.
A good video for me to reflect upon.