The past, the present and the future

“Yeah, but we’re making great time!” — In reply to “Hey Yogi, I think we’re lost.”

– Yogi Berra

Past: The cost of being restless

I was doing a bit of introspection recently. I had browsing through Ben Graham’s Intelligent Investor and I became a bit conscious of my recent hyperactive trading. Recent volatility agitated me and this was clearly to be seen when I took a look at my transaction costs.

Year Euros % of total
2007 24,81 7%
2008 54,05 15%
2009 74,74 20%
2010 213,61 58%
Total 367,21 100

Since I started 58% of the transaction costs are from transactions in 2010 (and my broker has actually lowered the fees this year). Of the charges in 2010 €118 (32% of the total costs) were between mid April and the end of May. However, in my defense, I have been restructuring the portfolio, which accounts for a considerable portion of the transactions.

Also, when I examine my past performance I think I can safely assume that the increase in value has mainly been caused by pure and simple luck. When the financial crisis wiped out the value of the stocks I had, only 75% of my investments were in cash, simply because I had just gotten started and I hadn’t really found anything that I was comfortable investing in. Then when I decided to put my conjectures into practice, it accidentally was 5 minutes before the big bull run in the later half of 2009. I hadn’t foreseen any of this, I was lucky.

Present: Staying sober

“Good Artists Borrow, Great Artists Steal”

– Picasso (allegedly he stole it from someone else though)

After some careful introspection I have decided to steal Jim Roth’s “10 Beliefs of Rational Investing” and incorporate them as my own investment mantra, reciting it whenever I feel a surge of panic entering my consciousness, like an AA member reciting the Serenity Prayer:

1. I do not know if the market will go up or down tomorrow, next month or next year. Neither do the experts.

2. I do know that capitalism is a good thing and long-run investing rewards good risks of capital. The market is downright predictable in the long-run.

3. If the market goes up dramatically, I will not buy more stocks. If the market goes down dramatically, I will not sell my stocks. I may, however, do the opposite.

4. I will not chase the hot stock or fund or act on the next hot stock tip.

5. I will acknowledge my intuition, feelings, and emotions, but I will not act upon them.

6. When I am shown a compelling story of how I can beat the market, I will examine the nature of the evidence being presented as well as the financial incentives for the presenter. I will display healthy skepticism, no matter how badly I want to believe it.

7. When I read a disclaimer that says “past performance is no guarantee of future performance,” I will also understand it is no indication of future performance and is probably due to random variation (luck).

8. I will keep costs dirt low so that I can get what I don’t pay for.

9. I understand others will view my strategy as dull and boring. I accept that stigma and will find other things to talk about at parties. I can live with the fact that I’m trouncing most investors year after year and building wealth.

10. If I need some more excitement in my life, I will not seek it through investments – I will try skydiving or go to Las Vegas.

The future: Updates and research

“Soccer is simple, but it is difficult to play simple.”

– Johan Cruyff

Currently I am working on refining my valuation method. In short, the basic framework will look something like this:

Industry analysis

  • Aggregate growth (revenue/profit)
  • Relative market share

Balance sheet value

  • Margin of safety (debt)
  • Common share development

Past-performance value

  • 10 year trailing sales, earnings, cash flow, dividends

Sustainable competitive advantage

  • Porters 5 forces

Future values

  • MC simulation

I’m still working on the details.

Once I’ve finished that I’ll continue working on an analysis on a few industries that I have been focusing on recently and on some of their companies in greater details, namely:

  • Textiles, apparel and shoes (action, outdoor, sport)
  • Nutrition and supplements
  • European Football

The Intelligent Investor: A Book of Practical Counsel

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