By Joshua Schroeder
If you are an amateur investor like me, the last few years have presented market moves that are difficult to understand and even more complicated to navigate. The volatility has been unprecedented and the macroeconomic picture never more uncertain. The continuous stream of information from market experts and financial media, that always seem to look for ex post rationalization for the latest move in stock prices, is dizzying. It was enough to make me briefly question whether having a seat on this turbulent ride was really a good idea or not. For me I believe that it is because I ENJOY the process of investing. Or maybe I should say I like my approach.
One of my first investing lessons was from my father, a cattle rancher from Montana. He said invest in what you enjoy and what you know. For me that lesson has been a driving force in developing my investment approach. It drives not so much the companies I invest in, but the overall approach of how I arrive at my investment decisions. For example, I enjoy digging in and learning about companies, while developing longer term macroeconomic theses. It frankly doesn’t interest me (as much as it probably should) whether a head and shoulders formation is taking shape or if a technical barrier has been broken. Furthermore, investment time constraints (family, work, fly fishing) and my longer term horizon would never allow me to monitor and tweak my portfolio on a daily basis. So, I have combined aspects of various investment approaches from others that dovetail with what I enjoy, added a few things and made it my own.
I call it a long term core value/opportunity approach and it consists of a core 15 to 20 stocks or ETF’s of “high quality” companies in emerging or developed countries. I define high quality as strong sustainable cash flows, consistent return of capital to shareholders, strong brands, market positions not easily replicated by competitors, and unique cyclical or secular tailwinds. I then barbell the core with 5 to 10 “cheap” (or trading at a significant discount to intrinsic value) companies with strong financial strength, good revenue growth and no visible catalyst to strong stock price appreciation. Although it is not a requirement, I also prefer them to return at least a small percentage of capital to shareholders in the form of a dividend. Depending on the risk/reward trade off I will either buy the stock outright or use in the money calls to better define my risk. In total, it is a portfolio of between 20 and 30 stocks and ETFs made up of a combination of quality and discounted companies that will pay me to wait and that represent good opportunities for growth.
Lastly, I believe that there are somewhat foreseeable macroeconomic and political events that dramatically increase downside risk, such as the recent debt ceiling debacle (I must admit I saw that a mile away). In order to protect against these risks and take advantage of short term opportunities to the downside I will trade either SDS or the VIX and use gains to average down in both high quality core and undervalued cheap companies. For me, nothing is more frustrating that not making at least some money on large down days. However, it is important to note that I am always significantly net long.
This approach is by no means “buy and hold” and does require continual maintenance, but I ENJOY it which may be the most important thing in a market like this one.
No positions in any of the securities mentioned at time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.
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