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Investment Philosophy and Strategy

Updated: Jul 8, 2021

My investment philosophy has changed over time. Let me start off with what is not a part of my investment philosophy.

I disagree with the Efficient Market Hypothesis that posits that stock market is completely efficient so there is no point in trying to pick stocks. I will admit the market does a good job of pricing out what investors on average think a stock may be worth at any given time, but not what a stock should be worth. Like Warren Buffett, I believe there is a difference between price and value. Price is what you pay but value is what you get. What you get by investing in a stock is a share of a companies future cash flows. Unfortunately there's no surefire way to calculate that because the future is unknowable.

Also I do not use technical analysis as a source for investment decisions, but I will look at a stock chart to see if a stock a priced higher or lower relative to its own history. If a stock that I like was at $100 and it falls to $80 without any change to the fundamentals, I should like it even more at $80. How the chart looks on its path from $100 to $80 doesn't much matter to me. Price will dictate whether I'm willing to make a trade or not. It's like going to the grocery store and buying a pound of steak. It wasn't on my grocery list, but it was on sale for $8/lb instead of the normal $16/lb, so I decided to get steak for dinner. Think like a savvy shopper and buy when things are on sale.

I believe its best to keep it simple and invest in what I know. For example, I haven't used options in the past decade. I'm not saying I'll never use options again, but I was burned before. Once bitten, twice shy. So right now my portfolio is comprised of individual stocks, ETFs and cash. That's it. Also I avoid stocks of companies if I can't understand even a dumbed-down version of their business model.

Nowadays I have a much faster decision making time for picking new stocks to buy. This has probably been the biggest change to my investment strategy over the years. I used to want to take hours pouring over stock details before coming to a decision to buy a new stock. After all, shouldn't you invest in what you know? But after missing out on countless opportunities over the years I decided that wasn't optimal. I would put a stock on my watchlist to do more research on later, but before I got a chance, the stock shot up and then was no longer a good buy. I've learned from that and now I'm willing to buy a new position with only 5 minutes worth of research. I will limit the position size to under 1% if that's the case though. Often I will initiate a small position at first and increase the position as I get more comfortable with the holding. I realize this sounds like it goes against the principle of investing in what your know, but I'll get into that in a different post later.

Not only has the speed of the decision making process increased over the years, but my portfolio turnover has increased as well. This is in large part due to $0 commissions. Back in 2005 when I first started investing, Schwab charged a $19.99 commission per trade. And given that my portfolio was tiny back then as a teenager, that was a significant fee, so I couldn't afford to trade in and out of positions. For instance, if I did a $1000 trade, I would need to earn 4% just to break even ($20 to buy + $20 to sell). Eliminating fees is the easiest way to increase your portfolio's performance.

Also as my portfolio size has grown, I've held more positions to be more differsified. When I had a $30,000 portfolio I was fine with holding only 5 - 10 positions. But now I currently have over 50 positions for a more diversified portfolio. But my portfolio is still a highly concentrated portfolio with the top 10 holdings making up >50% of the portfolio. If I have high conviction on a position, I'm willing to keep it as a large core position. But if I don't have high conviction on a position either because I'm uncertain of the underlying value or it is very risky, then I'll keep it as a small position. The size of my conviction in a position is directly proportional to the size of the holding in my portfolio—higher conviction = larger position size.

I believe overall portfolio allocation come from a mix of risk tolerance, goals (and the timing of said goals) and the current market environment. Personally I have a high risk tolerance so I'm willing to invest 100% in equities. Also most of my portfolio is invested in retirement accounts so I have a long time horizon before I need money for that goal. Lastly on current market environment, I'm willing to hold large amounts of cash if I can't find any good investment opportunities at the time. I'm not trying to time the market because I make investment decisions from a bottom up perspective first, rather than top down. Usually when things are expensive I'll be more prone to hold cash and when things are cheap I'll be looking to deploy excess cash. But that's not always the case. Even if the market has a very high valuation (as it does now), as long as I can find an individual position that is a good buy at the time, I'm willing to make the buy trade.

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