this started as a focused response, but turned into a brain dump on Jim Clarke's investment strategy. Its long, but if you're not into streams of consciousness, hit NEXT. This may just be me talking to myself. I'm still going to post it because I think it might stimulate some thought, in light of Paul's and Wayne's thoughtful posts on their ways of approaching value investing. There is no one right way to do this.
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I generally like to buy good businesses too, but at some price I will buy anything. (I like to put it this way, "I will buy dogs%*t as long as it sells for half the going rate from dogs%*t." Yeah, its "cigar butt investing" but cigar butt investing can be very profitable if you know how to do it. If I make $1000 after tax, I really don't care if its from Coke or from Cyprus Amax. Actually, a dollar from Cyprus would give me more satisfaction because I know a lot of morons who have made money on Coke, and I know a lot of geniuses who have lost money on copper stocks.) As you know from my posts, my roots are in Graham and Buffett and am willing to employ both strategies when opportunities present themselves. Paul invited me to post a little more about how I pick stocks with upside and little risk - he made me think - I have never really laid it out, there is a lot of habit and instinct involved. (Not that I haven't made some huge mistakes that fortunately I did not post here. Unfortunately, those all seemed to end up in my institutional recommendations!)
Unlike Paul I do not diversify - I rarely hold more than ten positions. And considering my portfolio is usually divided half and half between Graham and Buffett (that means three true Buffett opportunities, three true Graham opportunities, and four stocks I bought for stupid reasons. Those four are usually the ones I wind up losing money on. I can't think of a stock I have invested in for Grahamish reasons I have lost serious money on. Most of them have been 30-75% gains within six months. Why do I not feel the need to diversify and how have I gotten away with it?
1) I don't have enough money to own 50 stocks meaningfully;
2) I usually have a catalyst in addition to the valuation (Penobscot, St. Joe and Tejon all had strong strong catalysts. CYM has a different sort of catalyst in my view);
3) I've been real lucky
4) I don't take bankruptcy risk - if the downside is zero, I don't care what the upside is. (Cyprus Amax bonds are still BBB, investment grade.)...and one more I think is very important -
5) I don't get greedy with lousy companies - if the thing spikes 40%, which I have found is usually how it happens - I sell immediately. And 3/4 of the time it goes right back down.
Cyprus is clearly on the Graham side. When the price for a bad business gets so low as to be virtually without risk, I'll buy it. (read: Saucony, Hyde, Tejon Ranch). But when that bad business happens to be a cyclical where the cycle is as far down as it has been in the last 20 years, things are even more interesting. There you are looking at a relatively quick double if you're right. If it takes two years to double your money, fine, so long as you are reasonably sure about the downside risk.
I have posted this before because it represents two of my favorite investors' wisdom. Ben Graham told this story in his class and Warren Buffett related it in an annual report. I offer it the best I can remember, though I'm sure it loses a lot in translation.
** A farmer brings his mule to the veterinarian and says, "I don't know what to do with this mule. Some days he walks perfectly, and then other days he's completely lame."
The vet looks the mule over and tells the farmer, "Its pretty simple. When he walks, sell him." **
That's how you make money on a cyclical. Buffett points out that unlike a Coke or a Gillette, you've got to be right twice on a copper company. You've got to buy it within 20% of the bottom and you've got to get out before you round trip the damned thing. Only when the valuation becomes incredibly compelling will I mess around with one of these - I do not make it a habit of investing in companies which can't earn their cost of capital consistently. But at half of book value, all I am betting on is that the company is not going bankrupt. Cyprus is not going bankrupt, unless the bond rating agencies are asleep at the switch - its bonds are investment grade.
But that is not my strategy on CYM. I want to be out of this stock by March. Metals stocks consistently outperform from December to March. The worse the company, the bigger the bounce in the new year. Its not just January effect - there is something about crappy cyclicals that I can statistically document, but I cannot explain. I am looking for $13-15 on this stock then I'm gone. I think that's virtually risk free money. If it doesn't happen by March, I'm gone. And I don't think the price will be very far below where I bought it even if I'm wrong.
Hope that sheds more light on what a nice guy like me is doing in a copper stock (it is my second largest investment).
Sorry for the long post - hope it was worth reading.
JJC |
