How I think about the investment process these days

 

I chanced upon this short Manual of Ideas video earlier in the morning, in which Brad Hathaway of Far View Capital Management was interviewed. While it is a short excerpt, I found what he said to be true and very succinctly captures what has worked for me in terms of having simple thesis generating profitable outcomes in most cases historically.

He spoke about how if you are not able to put all the pluses and minuses of the investment thesis in less than a page, then you don’t fully understand the attractiveness of the opportunity. That is exactly what I have observed over time personally and as such, have shifted the structure of my writeups to a single page.

In a way, the approach acts as a check on my conviction and thesis. If I can’t put what I think about an opportunity within a page, alarm bells in my head start to go off and self doubts start to set in. That is more or less a signal to myself that I need a rethink the validity of the opportunity. The video is certainly a good reminder for me to stick to the knitting.

 

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Past investment writeups

Over the last few years, I did several writeups on investment opportunities which I thought were compelling at the point of writing. I was/am vested in them all. Some worked out well while others were alright. You can find the links below.

  1. Dolby Laboratories, Inc. – October 28, 2012 (NYSE) (USA)
  2. Billabong International Limited – June 13, 2013 (ASX) (Australia)
  3. Sedgman Limited – September 13, 2013 (ASX) (Australia)
  4. Fu Yu Corporation Limited – September 30, 2013 (SGX) (Singapore)
  5. American Eagle Outfitters Inc – November 6, 2013 (NYSE) (USA)
  6. EBIX Inc. – March 14, 2014 (NASDAQ) (USA)
  7. Verisign, Inc. – July 18, 2015 (NASDAQ) (USA)
  8. YouGov – May 2, 2016 (LSE) (UK)

Positions fully exited

Billabong, Sedgman, Fu Yu and American Eagle have been completely sold down.

Billabong worked out well and was among the best investments made, in terms of percentage in returns.

Sedgman was taken private and generated a pretty good return though it was impacted by forex losses from the depreciation of the AUD.

Fu Yu was a case where I got it right and still ended up wrong. It was trading way below the liquidation value and I exited at various points during the investment, including at prices around where it eventually landed near liquidation value. However, at 1 point, it went down a fair bit below the price I paid for it and self doubt creeped in. That led me to exit the investment partially. The investment was initiated along with a basket of several other similarly stocks at below liquidation value. While the rest (not documented in writeups) were profitable,  on an overall basis for Fu Yu, it was breakeven. The lesson to be reinforced from this episode is to not panic when the thesis and situation remains intact, and to have a need for a strong stomach. Easier said than done, but utterly essential for investment success.

For American Eagle, even though I went in with my eyes wide open on the dangers of fickle retail trends, I still underestimated the extent of how the market views retail stocks with a broad brush. That resulted in an investment loss.

Existing positions

Dolby and the 3 latest writeups are still within my portfolio

Lessons from writeups

I have found that by writing the investment thesis down, the benefits go beyond having an anchor and reference point to recheck my assumptions when the going on the stock price gets tough. That is invaluable. However, I realised that by writing in a certain organised and concise format, it forces me to be honest about my assumptions and in mitigating the risks of not blindsided by excess optimism. Eg. Listing the risks, coming up with probabilities and bear case valuations. Basically taking care in assessing the downside and in instilling a disciplined approach.

Very often, as in the case of past investments where I did not lay my thoughts out as clearly as I had done in the writeups, they have typically led to dismal performance. I suspect I was swept up by waves of euphoria and threw caution to the wind in the process. Either that or I rode on coattails of famous value investors and got pretty burned by the blind faith of outsourcing due dilligence to ‘gurus’.

Evolution of structure

As you can see, the structure of the writeups evolved along the way. From the first ones being somewhat lengthier to the later ones squeezing all the key points into a single page. I have found the one pager format to be alot more palatable for my own rereads and agreeable to the attention span of friends whom I disseminate to (though most would likely have to squint just to read).

Watchlist

I will be attempting to embed a Google Spreadsheet investment watchlist into Leith Street. My original watchlist has undergone several iterations and was left for dead due to the complexity and onerous amount of data to be keyed in. I basically ran out of steam and motivation to update it. Furthermore, there were quite alot of behaviourial friction in having to call it up via Google Docs to update it.

In the next iteration, I will try to streamline it such that only the key metrics required for decision making are shown while automating as much as my amateur spreadsheet skills allow.

Leith Street investment journal

This is my first post on Leith Street. I began my investing journey in 2005 when I came across the first books that sparked my interest – Rich Dad, Poor Dad by Robert Kiyosaki and Buffettology by Mary Buffett. Along the way, I invested in public equities using a relative’s brokerage account and only began buying stocks under my own account in 2008. Over the years, I picked up some valuable insights from reading, interacting with like-minded investors and from going through the actual investing process.

Like everyone else, I am subjected to a whole rollercoaster range of emotions when participating in investing. These included the joys of being right and making money, misplaced joys of being wrong and still making money, doubts when a stock moves against me while thinking my thesis is intact, and despair and denial when I am wrong. I felt that I was unable to keep track of these episodes accurately since the biases embedded in the human mind has a habit of deceiving itself and in painting a rosier but distorted memory than actual reality in most cases.

What I lacked was a platform to channel these thoughts and insights gleaned from my own experience, as well as those from my reading and interactions. There were little ways I could refer to subsequently in an organised manner. In a way, Leith Street acts as a reality and performance check, and as a repository.

I am confident that by putting pen to paper (not exactly accurate since the medium you are reading this on is a screen) for my thoughts, I can gain better clarity on the subject of investing and consequently, become a better investor. I also hope that Leith Street can serve as a discussion platform for readers who agree and more importantly, disagree with my entries, so that the net gain from the Leith Street initiate is a collective learning experience for all who chanced upon the site.