Trading surgery

My investing strategy has two stages. The first is to identify a watchlist of the highest quality businesses I can find. This takes advantage of the ‘big idea’ underpinning my strategy – that I can identify high quality businesses that are likely to be materially undervalued when their long term growth is properly accounted for. The second stage is to trade the businesses on the watchlist based on their current momentum, valuation and news flow.

In practice, it’s been the first stage rather than the second which has delivered most of the returns. This is demonstrated by the strong relative performance of my benchmark buy and hold portfolio, which simply holds all of the shares on my watchlist for the long term. My approach to the second stage is less clearly defined and has evolved over time as I have experimented with different approaches. If I want to improve my results, I think this is what I need to focus on.

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Horizon scanning 2: internet wars

A couple of years ago I wrote a post about horizon scanning: taking a big picture perspective on how the economy as whole is changing and what this implies for future growth opportunities. The main theme was how the internet is transforming the economy – while some sectors of the economy are being disrupted, others are growing rapidly. This transformation is the most significant change happening to the economy by far and there’s still a long way to go. From an investing perspective, I think it’s critical to understand as much as possible about who the winners and losers are going to be. So I’m following up on my previous post with a more detailed look at the dynamics of competition between internet-related businesses…

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S curves: watch out for the bend!

More and more of our economy revolves around information technology. A handful of tech giants have experienced unprecedented success in seizing control of large parts of our increasingly internet-dependent economy in just a few years. This trend is only going to increase.

Technology businesses can make excellent investments – many are inherently highly profitable and can scale very quickly. However, assessing the valuation of this sort of high growth business can be challenging.One of the most important and obvious determinants of valuation that seems to get less attention than it should is what the growth profile will look like. Is it likely to accelerate or decelerate and how long will it persist?

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Too late to panic?

Stock markets have taken another steep tumble since my post last week. People say that the bottom of a market crash happens when everyone gives up, at the point of maximum pessimism. My emotions have taken a bit of a pounding too and I’ve started to feel the urge to capitulate. Maybe that means we are near the bottom? I fear not. I’m trying my best to remain level-headed in deciding the best course of action from here. This probably isn’t helped by the fact that my wife and I are locked down in self-isolation in our London flat with mild symptoms of the virus…

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Avoiding perfectionism: investing without conviction

The classic, though now dated, ‘right answer’ to the job interview question, “what is your biggest weakness?” is to say that you are a perfectionist. The thinly-veiled subtext is that perfectionism is actually a strength, though perhaps one that has been taken a bit too far: “I’m just so focused on making sure I get everything right all the time that sometimes I work too hard (sigh).”

Of course, attempting to achieve the unachievable can lead to harmful outcomes for you and those around you. But there is more to it than that. The underlying drivers of perfectionism affect pretty much everyone and can interfere with your ability to make rational decisions. In investing, where so much is about maintaining Spock-like rationality, this is probably one of the most common and important psychological issues investors face.

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Copycat investing

Since I’ve been writing this blog quite a few friends have asked me for investing advice. Being a conscientious sort, I’ve always felt obliged to warn them that I’m no professional and in no place to advise them. However, part of me really just wants to say: ‘it’s all there on the blog. Why don’t you just copy me?’

These days the portfolios of many smart and industrious investors, both professional and private, are no more than a few clicks away. Perhaps taking advantage of this should be part of your strategy? Especially if you have less expertise or time to spare yourself… Continue reading

Flexible strategies

I’ve started to notice a disturbing trend in the number of investors in my Twitter feed that share the same quality investing philosophy as myself. This was brought quite starkly to my attention recently by some light-hearted mocking and memes of ‘compounder bros’. Other than the mildly uncomfortable feeling that you are part of the group being mocked, the main reason this is disturbing is that it suggests the quality momentum trade may be becoming more crowded. The dot.com bubble and subsequent crash is a sobering example of what might be in store at some point. As I flagged in one of my recent posts, I’ve been thinking a bit harder about whether and how to adapt my strategy to this possibility. Continue reading

Is small beautiful?

I can only post fairly infrequently at the moment as I have a lot on my plate, what with planning our DIY summer wedding and simultaneously embarking on the most important work project of my career so far. It’s been a lot harder to make time for the blog. I do intend to keep it running, but at a slower pace for the time being.

A recurring issue I’ve been grappling with recently is whether I should be trying to shift my focus more to smaller businesses. Instinctively, it feels like the smaller cap space should be a more productive hunting ground for a small private investor like me. I’d expect small caps to be less well researched and the markets more illiquid, giving greater scope for shares to be mispriced. On top of that there should be greater scope for growth when you start from a smaller base. However, in practice I’ve found that identifying high quality is much harder in the small caps space. Should be trying harder? Continue reading

Invest in the best (no compromise)

In my view, the most important empirical result in equity investing is just how unevenly long term returns are distributed across different businesses. This has important implications, yet is often overlooked. It provides the clearest rationale for why focusing on quality is the main, or perhaps even the only, thing that matters in the long run. Continue reading