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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Jurgis Bekepuris who wrote (56510)	1/1/2016 7:11:41 PM
From: Graham Osborn	2 Recommendations Recommended By Jurgis Bekepuris Shane M Read Replies (4) \| Respond to of 78763

This board hasn't blown up like this in years to my knowledge :) I hope the enthusiasm lasts. It's great to see this board a bit closer to what it was in the 90s. I still find the stream of consciousness format more useful than COBAF which is very fragmented although there are some great ideas there. For myself I can say most of the stupid things I've done this year involved churning, which I define as trading based on market action rather than fundamentals (excluding occasional prudent stop losses). For this reason I've implemented a new rule that most on the board will adamantly disagree with but that I find establishes the right personal mindset. I call it the "rule of 3s." The rule says that any position I buy should have a decent shot at a triple. What I have found is that no matter how good my due diligence is I always underestimate the downside (this has been the case regardless of industry or market cap). So I try to view my portfolio more the way a venture capitalist would, and demand large upside to compensate me for all the times I screw up on the downside assessment. The upshot of this is my longs are pretty much exclusively under 250M MC nowadays. I'd feel bad about this except that it is close to Buffett's constraint in the 50s.

To: Jurgis Bekepuris who wrote (56510)	1/1/2016 11:06:02 PM
From: Shane M	1 Recommendation Recommended By Jurgis Bekepuris Read Replies (2) \| Respond to of 78763

Mechanical methods like magic formula try to address this by saying "the method is good, it's back tested, so all bad results are just good method/bad results". This is fine as long as you trust that the method is good and continues to be good. But what do you do if it enters long stretch of underperformance? The article you pointed to recently that showed 10+ year periods of underperformance by P/B or P/S or P/E at different times is a good example... How do you keep the belief in good method after 10 years of underperformance? Cliff Asness was asked this question somewhere recently and responded along the lines of he keeps his mind "ajar" - not open, but "ajar" just in case something really is different, but knowing it's likely not. I hope the super forecasting works for you. I haven't read it yet, but seen it recommended several places. I think I sent my name in to participate in one of those projects but was not selected (either that or I was unable to commit sufficient time). Seemed they were particularly focused on events, esp. geopolitical type events. On predictions, Howard Marks has a quote that I love that's related to this - something like "More things can happen than will happen" ON OIL - maybe some folks can learn from this big divot in my portfolio this year ;-) I went back and read through some of my comments preceding my energy investments. My core thinking revolved around the marginal price of production, and that ultimately oil price had to rebound. I also was in the camp of thinking seeing Saudi Arabia/OPEC driving price down to put "scare" into energy investments globally, but specifically to target US shale production. (this has certainly worked with big decreases in capx budgets globally). There was also consideration for SA, Iraq, Iran, Russian, ISIS geopolitics. At the same time, I thought it didn't make sense from a budget standpoint for these players for low prices to be permitted to persists for as long as they have. It seemed there should be strong reason for most players to want higher prices of oil. (I was clearly wrong about the willingness to run budget deficits). I think one of the key learnings I take from this this was encapsulated in one of the "what I learned" year end series: thereformedbroker.com "Simone Foxman (Bloomberg): just because a price is unsustainable doesn’t mean it can’t be sustained. (Oil, anyone?)" To show my thinking at start of the year, here's a post I had recorded on 1-7-2015 "My prevailing view at the moment is that most people expect oil prices to recover by year end. If I had to guess – most would say $70-75 oil by year end seems reasonable. So my thought is – if most people are expecting $70-75 oil by year end, then even the oil shale companies can make money at $70, so they won’t be expected to be choked out except for the weakest/most in debt. So it’ll take more pain than that to push out oil shale – if that’s what Saudi Arabia/OPEC is trying to do. So if shaking out shale oil is the goal – it’ll take worse to achieve that goal. Be patient." In March I started putting on my positions, and thru April/May added in small chunks here/there as sizeable position accumulated. During this time it seemed like oil was "bottoming" similar to what was seen in other price collapses, and there seemed like a shift in psychology happening. I tried to note my feeling of greed/fear when I made buys, and noted lots of mention of fear still, but I began worrying that I might miss a rally (greed) at one point. From my comments I'm aware that I accelerated my investment schedule vs. my plan during the April/May timeframe. In hindsight, I would've been better to be more deliberate throughout the year as more lows were to come. At the end of May and early in June I'm commenting that I should probably sell on rallies to create more opportunity at lower prices. I sensed a shift in sentiment again, but in hindsight did not respond to it as I could have. Oil prices were either making new lows or on way to making new lows again. 6.5.2015 "I’m gradually coming to feeling that it might make sense to sell a bit of strength in oil. Looking at charts though, many companies are at or near 52 wk lows – so I don’t want to sell here. I probably should be buying, but I don’t think I want to increase exposure more. A strategic mistake I made was buying at higher prices thinking we’d already made lows and wouldn’t revisit. Should’ve saved a bit more powder for scenario like this. I am a bit uncomfortable with the concentrated impact that energy has on my portfolio." From that point on I'm mostly just sitting on my hands. The downturn in prices has lasted longer than I expected and even sticking to plan I would've been fully invested by now, but I'd have gotten better prices. = = = I guess overall, this call to move overweight into energy and the way I failed to manage it on the downside were what hurt my returns for the year. I'm negative approx -10% for the year, so pretty disappointing for what to me seemed to be the key value sector opportunity for the year. The energy call (along w/ BBL loss that I lump into similar category) more than offset everything else I had going on. Making a sector call really isn't that much different than going significantly overweight an individual stock - they all go up/down together. But on positive side, I learned much about oil and commodities and their cycles this year - probably more than any other. In the past I've largely stayed away from these type cos, but trying to learn to bring them into my usable universe. But they do account for virtually all of the downside in my portfolio this year. Psychologically going overweight a sector has to be taken with care, because once you're overweight you really don't want to add more. It kindof feels similar to when I was buying into the crash back in 07-09. I kept buying but when I ran out of cash it mkt was still dropping, so nothing left to do but hold on. Buying into energy had some of that feel this year, only smaller scale. Anyhow, that's my story on the calamity of the year for my portfolio. ;-)