OM changed jobs this summer and the process
helped hone his view of what’s important investing and makes for a good
investor. Rather than discuss all of the thoughts in this post, OM
is going to touch on a couple of items and hopefully tie it to himself and this
portfolio. For long-time readers, it will hopefully offer a deeper
explanation as to the evolution of this portfolio (especially over the last
24-30 months), and some hints at how it might continue to evolve going
forwards.
Successful investing is about the marriage of skillset and personality
To those folks that know OM well, the following should all be quite familiar – (i) OM is a very skeptical fellow, (ii) if you ask OM about any idea (not just financial) and expect an immediate answer, it will be “No” (Mrs. OM heartily attests to this one), and (iii) OM knows lots of random crap and loves a good analogy. What does that mean investment-wise? Well, OM tends to start his investment thinking at “No” and work his way towards “Yes”. He is pretty good at putting together disparate pieces of information (data, anecdotal points, history, liquidity and/or chart information, etc), and combining them with some heuristics to get to an investment theme. This means that you should see that the majority of ‘positions’ in the book are thematic, with the non-thematic positions* largely residing in the Equity book.
Personality-wise, the most important trait is that Our Man is very comfortable being miserable, especially if he thinks he’s going to be correct AND get rewarded for being right! This ties-in with the thematic approach, since hopefully the reader’s first reaction to a new thesis will range from “Really?” to “Ugh”. OM thinks that investing, despite rising belief to the contrary ironically from both ‘value’ investors and quantitative investors, is a mix of analyzing data and understanding psychology; knowing when (and how strongly) to apply each is vital. Themes are likely to seem largely psychological initially, but should require confirmatory data (both ‘fundamental’ and price) as they progress and hopefully grow in the portfolio.
This also leads to a couple of things that OM hopes you won’t see in the portfolio going forwards (and long-time readers will certainly recognize them, unfortunately).
- The best way to play a theme, especially on the short-side, is often through the second or third derivative due to the convexity or better risk/reward. So, while OM may astutely and correctly recognize that Australian swaptions was a great way to play on a China slowdown back in 2010, he has no ability to trade Australian swaptions in this portfolio. Furthermore, trying to put on an inefficient bastardised version of the trade (EWA puts, in that case) negated all that was great about the original idea (such beautiful risk/reward) and turned a ~10x return into a small loss! Thus, while you might hear from OM about weird and exciting ways to play an idea (I’m looking at you L Michigan/Detroit CDS for those that want to short Autos), a poor man’s version will not appear in the portfolio. If you see one, don’t hesitate to let OM know!!!!
- For OM’s style, it’s vital to determine between something is out of favor (or where OM early) versus just being wrong. Those who’ve read this blog over the years will know that OM has increasingly used technical analysis to help with this. Too many of the positions where OM has lost money had technical signals suggesting it was a bad idea (or certainly wasn’t a good idea), be it Greece (version 1) or OM’s willingness to stick with his US Dollar bull thesis through 2017 (let alone foolishly adding to it). The performance of the currency book this year indicates it’s clearly a work in progress, but expect it to continue becoming a more prevalent piece of the decision-making.
* But what of the Technical and Funds books I hear you cry! And you have a valid point; both books both exist to help counter OM’s skepticism, an unfortunate side-effect of which is under-investment. As OM has noted, the hope is that the books will outperform the market over the long-run with the base case being that they should provide long-term quasi-market exposure for a part of the portfolio which otherwise would be held in cash.
Position sizing is the most under-appreciated skill in investing
The older OM gets, the more he finds himself agreeing with Stan Drunkenmiller that “the only way to make long-term returns...that are superior is by being a pig.” The key is to understand both when you have an idea that truly excites you and when to bet big on it.
For OM this means accepting that every investment position has a beginning, a middle and an end, and being patient enough to wait until the middle to size a position up and ruthless enough to start cutting it back and exiting as we get towards the end. Thus for OM the risks are being too big too early (i.e. in the beginning phase, leaving you only bad choices going forwards), not being big enough in the middle period, and having too big a position for too long when an investment is coming towards its natural conclusion. The bullish US Dollar trades during 2017 were a conspicuous failure to be ruthless enough on cutting back a position that was in its end-game – a bull market that’s in its 6 year (historically it’s about how long USD bull markets have lasted) with a technical picture that was deteriorating.
OM suspects this will be the primary ongoing battle for the rest of his investment life. However, to try to help matters and force himself towards the best decision, he’ll hopefully be clearer in stating where he thinks investments are in their lifecycles. Initially, the assumption will typically be that OM is early to the investment and they’re all in the beginning. Increasingly confirmatory data (both fundamental and price) is likely to signal a move towards the middle and should be reflected in an increased position size. Finally, as we get to the end the theme will hopefully be very well worn (and things like this will appear in and on the cover of the Economist) the bar for adding to a position should be significantly higher (perhaps impossibly so) as OM should be exiting stage left.
Hopefully, this post will serve as a nice appetizer to hopefully add some context to the main course of the coming portfolio update.
Successful investing is about the marriage of skillset and personality
To those folks that know OM well, the following should all be quite familiar – (i) OM is a very skeptical fellow, (ii) if you ask OM about any idea (not just financial) and expect an immediate answer, it will be “No” (Mrs. OM heartily attests to this one), and (iii) OM knows lots of random crap and loves a good analogy. What does that mean investment-wise? Well, OM tends to start his investment thinking at “No” and work his way towards “Yes”. He is pretty good at putting together disparate pieces of information (data, anecdotal points, history, liquidity and/or chart information, etc), and combining them with some heuristics to get to an investment theme. This means that you should see that the majority of ‘positions’ in the book are thematic, with the non-thematic positions* largely residing in the Equity book.
Personality-wise, the most important trait is that Our Man is very comfortable being miserable, especially if he thinks he’s going to be correct AND get rewarded for being right! This ties-in with the thematic approach, since hopefully the reader’s first reaction to a new thesis will range from “Really?” to “Ugh”. OM thinks that investing, despite rising belief to the contrary ironically from both ‘value’ investors and quantitative investors, is a mix of analyzing data and understanding psychology; knowing when (and how strongly) to apply each is vital. Themes are likely to seem largely psychological initially, but should require confirmatory data (both ‘fundamental’ and price) as they progress and hopefully grow in the portfolio.
This also leads to a couple of things that OM hopes you won’t see in the portfolio going forwards (and long-time readers will certainly recognize them, unfortunately).
- The best way to play a theme, especially on the short-side, is often through the second or third derivative due to the convexity or better risk/reward. So, while OM may astutely and correctly recognize that Australian swaptions was a great way to play on a China slowdown back in 2010, he has no ability to trade Australian swaptions in this portfolio. Furthermore, trying to put on an inefficient bastardised version of the trade (EWA puts, in that case) negated all that was great about the original idea (such beautiful risk/reward) and turned a ~10x return into a small loss! Thus, while you might hear from OM about weird and exciting ways to play an idea (I’m looking at you L Michigan/Detroit CDS for those that want to short Autos), a poor man’s version will not appear in the portfolio. If you see one, don’t hesitate to let OM know!!!!
- For OM’s style, it’s vital to determine between something is out of favor (or where OM early) versus just being wrong. Those who’ve read this blog over the years will know that OM has increasingly used technical analysis to help with this. Too many of the positions where OM has lost money had technical signals suggesting it was a bad idea (or certainly wasn’t a good idea), be it Greece (version 1) or OM’s willingness to stick with his US Dollar bull thesis through 2017 (let alone foolishly adding to it). The performance of the currency book this year indicates it’s clearly a work in progress, but expect it to continue becoming a more prevalent piece of the decision-making.
* But what of the Technical and Funds books I hear you cry! And you have a valid point; both books both exist to help counter OM’s skepticism, an unfortunate side-effect of which is under-investment. As OM has noted, the hope is that the books will outperform the market over the long-run with the base case being that they should provide long-term quasi-market exposure for a part of the portfolio which otherwise would be held in cash.
Position sizing is the most under-appreciated skill in investing
The older OM gets, the more he finds himself agreeing with Stan Drunkenmiller that “the only way to make long-term returns...that are superior is by being a pig.” The key is to understand both when you have an idea that truly excites you and when to bet big on it.
For OM this means accepting that every investment position has a beginning, a middle and an end, and being patient enough to wait until the middle to size a position up and ruthless enough to start cutting it back and exiting as we get towards the end. Thus for OM the risks are being too big too early (i.e. in the beginning phase, leaving you only bad choices going forwards), not being big enough in the middle period, and having too big a position for too long when an investment is coming towards its natural conclusion. The bullish US Dollar trades during 2017 were a conspicuous failure to be ruthless enough on cutting back a position that was in its end-game – a bull market that’s in its 6 year (historically it’s about how long USD bull markets have lasted) with a technical picture that was deteriorating.
OM suspects this will be the primary ongoing battle for the rest of his investment life. However, to try to help matters and force himself towards the best decision, he’ll hopefully be clearer in stating where he thinks investments are in their lifecycles. Initially, the assumption will typically be that OM is early to the investment and they’re all in the beginning. Increasingly confirmatory data (both fundamental and price) is likely to signal a move towards the middle and should be reflected in an increased position size. Finally, as we get to the end the theme will hopefully be very well worn (and things like this will appear in and on the cover of the Economist) the bar for adding to a position should be significantly higher (perhaps impossibly so) as OM should be exiting stage left.
Hopefully, this post will serve as a nice appetizer to hopefully add some context to the main course of the coming portfolio update.
