I do not share these introspective pieces but I felt this piece of journaling might be a good one to put into the open.

The Start (2019)

The story starts at the age of fifteen, I had saved up money selling sweets to classmates and completing homework/projects on the side. Generating income for myself felt good, I was emboldened to turn that income into a greater pool of capital. I was aware of the market at the time and acutely so of the great moneymakers – Buffett and Soros, in particular. I took what was then the equivalent of ~100 euros and put it into a brokerage account. My first investment was Amazon, I bought it ahead of earnings (unknowingly) and it went up 2.5% within two days of ownership. I held it ever since and have since doubled the money I invested in the business for a total return of 126%.

Unfortunately, the previous sentence is untrue – I sold the very next morning.

Looking around the brokerage I used, I noticed I was able to put my money in other assets & instruments. I noticed there was an option to trade binary options. Or as I call it now – gambling – and put some of my money on them. My poison of choice back then was forex options. I had spent my summer and weekends learning about Bollinger bands, RSI, and MACD. Through the venture I made some money and then lost magnitudes more. I didn’t like losing money. I abandoned the trading experiment months later, permanently impairing well over half of my capital. I realized then, multiplying more capital in minutes not months/years was simply not my game. I left trading for good (my bank account thanks me) and decided it fit me best to learn from other greats.

Dividend & Value Investing (The Covid Years: 2020-2021)

Losing money is never fun, I didn’t want to experience it again. In my senior year, I stumbled across the idea of dividend investing. I thought it made some sense – it’s pretty hard to lose money when you get paid a portion of it consistently. As long as the company didn’t cut its dividend or go bust you were guaranteed income. However, I didn’t commit any capital to this investment style, simply because further research revealed to me that I could earn higher rates of return on an index fund. I want(ed) to beat the market and compound my capital at attractive rates of return, so I wasn’t too impressed by these findings. So while behaviorally at the time dividend investing was of interest to me, I avoided it. I’m fortunate I didn’t get drawn in by dividend crowd, I believe those type of investors are more susceptible to the endowment effect and end up accepting below average results.

Value Investing

I then decided to step up my consumption of Buffett-related YouTube videos and writing. I figured he knew quite a bit about the investing world looking at his net worth. I actually still remember the first few videos I watched. In true Buffett fashion he continued exclaiming how it’d be much easier to invest in a low-cost index fund and wait. I thought it would be possible to beat the market and get rich faster. To gain depth in my understanding, I then began reading the Intelligent Investor. Controversially, I believe the book is a bit overrated. I did manage to get some key takeaways that kept me in the loop: (1) Investment is most successful when it is most business like (2) An investment operation is one with thorough analysis that promises safety of principal and a satisfactory return (3) A look at the successful investors over the past and their methodologies pointed to there being something special about the value investing approach.

I then read Security Analysis which was almost sort of a revelation to me. I immediately got it. The early pages (3rd Edition) included examples demonstrating the concept of margins of safety and the appreciation that true business value is something one cannot pinpoint. It was a series of examples between pages 18-30 that confirmed my affinity to the approach. Luckily, I’ve kept notes and the book, here a two that I found poignant:

The JI Case Company (pg. 20-25, 1933): Graham laid out the example of JI Case which had a market price of $30/share and asset value of $176/share. JI averaged EPS of $9.5/share over the 10 years prior to 1933 – an unreliable figure given the prevailing economic environment. Graham’s key takeaway was the difficulty in forming a conclusion on the relation of intrinsic value to market value. Was JI’s true value closer to $30 or $176? Contrast this to his next example:

Wright Aeronautical Corporation: Its shares were trading for $8, it paid a $1 dividend, averaged EPS of >$2/share, and had >$8/share in cash assets. In this case it is simple to determine that the intrinsic value per share was substantially above market price. Unlike JI, there is no stress figuring out if you’re getting a bargain or not nor do you need to find the exact price. All one needs to know is that price is well above the market’s offer.

Anyways, I became anchored to finding companies that were trading for ‘cheap’ multiples on current earnings. I opened a paper trading account and a screener on Finviz and began my search. My idea was to form a portfolio of 20 stocks trading at <5x earnings. I built out the paper portfolio and the results were lackluster given the market’s prevailing euphoria. Results did improve relative to the market in 2022 but importantly I also kept learning. I realized I didn’t like buying cheap stocks for the sake of it. How can one put meaningful sums of capital at risk with faith the market will reprice a security before it is too late? Do you only buy cheap when catalysts exist? I don’t think so; Burry was correct when he noted that catalysts are unnecessary in the presence of sheer outrageous value. I learned that the best margin of safety is not just price but quality – and the latter grows in importance as one’s time horizon grows.

Quality Tilt (2021-2022)

It was around the time of beginning this blog I realized for me to commit meaningful amounts of my capital, I had to ensure that the quality of the business would allow me remain unworried by my decision to buy the stock. I began studying businesses, industries, and strategy through history. I familiarized myself with key characteristics and mental models behind enduring competitive advantage. I was lucky enough that the market sold off in 2022/23 and there were many buying opportunities. One that I bought and wrote on this site about was Google. The quality of the businesses within Alphabet are well known – in fact the DoJ at the time brought an antitrust suit against the company illustrating those advantages. With Alphabet you were buying a business that require(d) little to no capital investments for incremental earnings growth. The core product, Search, exhibited all the hallmarks of a wonderful business and it was trading relatively inexpensive, too.

Management Tilt (2022-Present)

I never paid this dimension of investment analysis its due until I got burned by it. I passed on the opportunity to buy Meta for $95/share – an expensive mistake – thankfully, one of omission. I was able to correctly identify the acquisitive and adaptive nous of Zuckerberg but failed to gain conviction in his ability to show operational discipline. He hadn’t need to show this side of his arsenal in an era of easy money. The company was hiring freely, investing speculatively, and winning. I was terribly off the mark on his ability to show operational discipline. I should’ve bought on the uncertainty and trusted that his prior victories in acquisition and mobile refocusing to be translatable to cost discipline. It was an expensive lesson, but one that taught me early just how management can quickly change perception and the importance of trusting the track record of great managers.

Through this I learned it is not enough to have an exceptional business at a cheap valuation. The last thing you want is management actively pursuing value destructive activities. One’s investment returns will vary depending on management’s quality – an quality even Graham wrote on in Security Analysis. Now I dedicate time to evaluating management’s incentives, capital allocation preferences, and operational discipline into analyses. Having trustworthy and capable management turns uncertainty into opportunity and increases the margin of safety in investment opportunities.

Today:

I’ve combined all the learnings I’ve accumulated in the past years to my present strategy. I look for companies with durable competitive advantages, ran by intelligent (and ideally committed) management teams, and all at prices at a discount to a range of estimates of intrinsic value. I continue to improve upon my analysis in each of the three. For example, realizing how operating leverage can result in a business looking expensive today (on a multiples basis) but cheap tomorrow, once you assume look-through margins. Or in the case where management is clever enough to divest away from underperforming business lines and refocus on those in which they have attractive economics. Or even the administrator-type managers with the wisdom to return capital to shareholders rather than let it sit idly by. As Joel Tillinghast put it: “Crisply put, you want low P/E stocks that are also high quality and growing, with a high degree of certainty about the long-term outlook.” The focus should lay in the degree of certainty and time horizon. The best businesses fend off change well and may even surprise on the upside if high-quality managers are present.

With that being said, I absolutely do believe that despite gaining familiarity with ‘compounder’ type stocks one should not forget the cheaper ones entirely. Being ‘short-term’ greedy as Munger would put it and aiming for cigar butts continues to make sense to me too. Paradoxically, as I’ve focused on compounder-type securities I’ve become more comfortable looking for the cheaper (often smaller in size) stocks. The problem with cigar butts is the issue of scalability & time. My capital base allows me to ignore the former, unfortunately. The only real way to avoid the issue of time with these investments are to position size appropriately and perhaps look for near-term catalysts. As I noted earlier, I don’t like relying on catalysts for if they fail to muster a reaction… what next?

I now find myself looking for companies that satisfy both investment styles. I prefer to keep my universe as large as possible and companies as small. I’m not ideological on this though, opportunities can exist anywhere from household names to esoteric industries in foreign countries. Peter Lynch said it best: “The person that turns over the most rocks, wins the game.” I intend to follow his advice.