Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Graham Osborn who wrote (56525)	1/1/2016 10:37:43 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78763

...any position I buy should have a decent shot at a triple That rule could work. All you need is a few good winners and you can retire. (So it seems) You face a number of hurdles: If you have only a small $ portfolio, you would be limited in the number of possible triples you could invest in with a decent size position. You may have to wait several years to see a triple. (Assuming you hold that long and don't sell even as you have waited for the double stage.) About 3% of the stocks in my general portfolio show a gain of 250% or more. The fastest I've reached that gain is about 3 years. Maybe though I've reached it faster with some stocks and have sold 'em out, so there's the survivorship issue. Perhaps you are saying, regardless of the dd you do, you lose more on the downside than you want or expect, so you will only from now on invest in your best ideas (those with a decent chance for a triple, --even if held only for a smaller gain than that). You may have read here though that I'm not the only guy to post that his best idea stocks almost never turn out to be the best performing stocks. Maybe, instead of seeking "a large upside to compensate for all the times (you) screw up on the downside", you might consider altering your research methodolgy/dd. If you keep it as is, you might very well make the same judgment errors in betting on a stock that you believe passes your three rule section. jmo

To: Graham Osborn who wrote (56525)	1/1/2016 11:51:46 PM
From: Jurgis Bekepuris	Read Replies (2) \| Respond to of 78763

It's not a bad rule. The risk is that you gonna go for moonshots and crap the results out. I'm not gonna say it's a bad rule though. :) Currently, I have a similar rule: any position that is not owner-operator-hold-forever, should have at least 2x potential. Ah, one more comment about your rule. It's easy to say "hey, this company is microcap, so sure it has 3x, heck, 10x potential". Perhaps try to quantify that. What's the probability that it would go 3x in next 2-3 years? Why and how? Another comment: in mature bull market, it's tough to expect that even microcaps are both decent/good in terms of business/moat/etc. and they have a chance for triple. Something to keep in mind. It was easier to find candidates for your rule in 2010-2011. Good luck

To: Graham Osborn who wrote (56525)	1/2/2016 1:09:46 AM
From: Spekulatius	Respond to of 78763

3x is pretty much a moonshot. I think the risk with this strategy is that one goes only for moon shots and results will be very erratic. I do think that having the likely return being 3 X the loss is a better rule - it forces hard to think about the downside (which is almost worse than one can imagine), so a 3x factor should provide some margin of safety. I don't use any such rule - I think more in terms of value vs price paid. The risk (that depends on how sure an am of the value and how close the company is to my circle of perceived competence) determines the margin of safety applied. FWIW, I wish I were better in betting on right sector - if one bets in the wrong sector, even finding he best stock in said sector is probably still giving you an underwhelming performance , while even a mediocre stock within a strong sector will do OK.

To: Graham Osborn who wrote (56525)	1/3/2016 6:05:06 PM
From: Shane M	Respond to of 78763

Graham, I was thinking about your post, and initially was going to post to try to encourage you to consider companies with less the 3X upside, but I couldn't really put together an argument other than it seems really hard to find situations that are mis-priced by that much - but I realize that stems from how I look for companies, and you're probably investigating in completely different spaces. I'm super-happy if I can find 50%. On the point of always underestimating downside. I do the same thing. I often think the risk/reward ratio looks good, but like you point out, the downside is often far bigger than I anticipate. This seems especially true in stocks that show up in value screens. There are "kicks in the gut" a-plenty out there hiding in the bushes. (Curiously, I think the upside is often larger than I anticipate as once prices get moving they keep moving higher for longer than I anticipate.) So I guess I think what you're seeing with underestimating the downside is a crucial insight about process. I do think some value search processes can lead to companies on the verge of unexpected difficulties.