The biggest thing that OM has learned during
his career in finance is that investing is a very personal endeavour. When it is done well the investment
philosophy reflects the beliefs, skill set and personality of the
practitioner. Furthermore, the best investors understand themselves and
their strategy; they can clearly articulate their strategy, and explain why it
suits them.
So, what is OM’s strategy?
Our Man believes that the markets offer three distinct ways to make outsized returns; (i) by investing in idiosyncratic opportunities especially where there are structural inefficiencies, (ii) by participating in long-term themes, particularly secular trends, and (iii) by taking advantage of sizable dislocations in markets. The natural consequences of these beliefs are that the portfolio will be concentrated and will likely see mark-to-market volatility, and thus a long time-horizon is a prerequisite.
Long-time readers (commiserations y’all!) have seen the evolution of Our Man’s portfolio over the years. The changes reflect a variety of things most notably the constraints of OM’s then employment and his maturation as an investor, which over time has led to a more defined investment approach. In particular, the 2009-2011 period (when OM worked for an equity focused hedge fund) saw a portfolio that was more macro driven while the 2011-2014 period (when OM returned to allocating capital to others) saw a more stock-specific portfolio. From 2015 onwards, the portfolio’s strategy has been largely unchanged, though the way the investments were broken down was less clearly defined.
So, dear readers, expect the portfolio to be broken down more clearly along the following lines in the future.
- Thematic
This will likely be the biggest component of OM’s investments, as it reflects how OM thinks about the world. He believes that many seemingly independent stock-specific positions have a common driver, or theme. The themes are likely to be secular in nature, so they should be in the portfolio for a multiyear period unless OM is wrong/early. Expect an articulation of the theme early on, including some flags on the risks, that OM will build on over time. These descriptions should help keep OM honest and limit thesis drift, as well as making it easier to identify any commonality of risks across the portfolio. Themes are likely to be largely be expressed using ETFs, though single names may be used where that makes more sense (and yes, OM should be able to explain why it makes more sense!).
So, what is OM’s strategy?
Our Man believes that the markets offer three distinct ways to make outsized returns; (i) by investing in idiosyncratic opportunities especially where there are structural inefficiencies, (ii) by participating in long-term themes, particularly secular trends, and (iii) by taking advantage of sizable dislocations in markets. The natural consequences of these beliefs are that the portfolio will be concentrated and will likely see mark-to-market volatility, and thus a long time-horizon is a prerequisite.
Long-time readers (commiserations y’all!) have seen the evolution of Our Man’s portfolio over the years. The changes reflect a variety of things most notably the constraints of OM’s then employment and his maturation as an investor, which over time has led to a more defined investment approach. In particular, the 2009-2011 period (when OM worked for an equity focused hedge fund) saw a portfolio that was more macro driven while the 2011-2014 period (when OM returned to allocating capital to others) saw a more stock-specific portfolio. From 2015 onwards, the portfolio’s strategy has been largely unchanged, though the way the investments were broken down was less clearly defined.
So, dear readers, expect the portfolio to be broken down more clearly along the following lines in the future.
- Thematic
This will likely be the biggest component of OM’s investments, as it reflects how OM thinks about the world. He believes that many seemingly independent stock-specific positions have a common driver, or theme. The themes are likely to be secular in nature, so they should be in the portfolio for a multiyear period unless OM is wrong/early. Expect an articulation of the theme early on, including some flags on the risks, that OM will build on over time. These descriptions should help keep OM honest and limit thesis drift, as well as making it easier to identify any commonality of risks across the portfolio. Themes are likely to be largely be expressed using ETFs, though single names may be used where that makes more sense (and yes, OM should be able to explain why it makes more sense!).
- Dislocations
OM believes that public markets reward contrarianism, so expect him to hunt around in sectors or regions that show dislocations. The best time to invest in these is when it looks the worst and others have given up hope; they are fatigued with the situation and have a visceral reaction to it. On first read, these ideas will look ugly. Hopefully, your initial reaction will be “WTF??? Are you insane!” but will slowly trend towards “that’s weird, but kinda interesting!” over time. They key will be to invest when valuation/fundamentals and narrative are aligned; the first two provide some ‘margin of safety’ while the latter is what will draw other investors in. OM has seen some good research that the average/median for a dislocation to move from its trough to a peak is 18-24mos (e.g. Brazil 92-94, Greece/Spain 11/12-14, Argentina 15-17, etc.). Thus expect a dislocation position to be in the portfolio for 1-3yrs. In some minority of cases, if the dislocation leads to a significant long-term change, a dislocation idea could eventually move to become a thematic one. If this happens, expect an update to explain the move and a change in the position size!
- Idiosyncratic
This bucket contains 2 things; (i) individual stocks and (ii) the Funds book. The individual stocks are likely to be very limited in number since OM’s day-job, and skill-set, isn’t sitting around taking advantage of structural inefficiencies to pick stocks. However, OM does see a LOT of things and he has two big structural advantages over most professional investors; small size and a longer time horizon. Thus expect OM’s idiosyncratic names to have some combination of limited sell-side/investor coverage and a longer time horizon. OM’s putting the Funds book here since it seems like the best fit; the Funds take advantage of some structural inefficiency be it through active stock picking or using a combination of (valuation) factors to systematically allocate capital.
- Technical Book
OM is retaining this as its own separate item. One of his many life-flaws is that OM is naturally cynical; investment-wise, this means he has a propensity to be under-invested and the Technical book was developed to be a systematic hedge to this. More on the rationale behind and construction of the technical book can be found here.
- Shorts/Hedges
Finally, Our Man intends to keep shorts in a separate book to help track how they do. However, they will be generated in the same way as the strategies above, with most likely to be themes or perhaps predicted dislocations. The positions are likely to be executed through Short-ETFs or by buying puts. For the vast majority of time, this book will be empty.
Finally, OM also is hoping to start a semi-regular feature called “Half-Baked Ideas”. The main reasons are that OM has many more ideas than ever make the portfolio and he doesn’t do a great job of tracking/sorting them or returning to revisit those ideas. Hopefully, this should help resolve that and impose some discipline on OM re. tracking and following up on his ideas.
Next Up: Breaking the existing portfolio down into this structure.