In October last year I wrote a post called Feedback Loop. As discussed in that post, I keep a detailed record of all decisions to look for areas of improvement. This research provided some key insights that have laid the foundations for me to become a significantly better investor.
Of the process review, I initially spent the majority of my time on individual stocks: looking at winners and losers and my rationale for taking or not taking trades. Over time another factor also became apparent: capital allocation. What I have caught myself doing, and seen others do, is make capital allocation decisions inconsistent with the investment idea.
The text book example is doing some good analysis, deciding a stock is going up, and then buy an insignificant amount. If the idea is good, the risk is low and there is plenty of upside, it makes no sense to get gun shy and just buy a little bit.
It's easier said than done. The preferred format that works for my psychology is to build into a position. I'll buy an initial amount and then just keep buying - either because it has got cheaper, or even buy more as it is going up and I have more evidence to support the investment case.
However there are times when you just need to pile in. A good company may be getting sold off for no particularly good reason, so you may not get the chance to buy more if you just dip your toes in the water. Or, if you know decent buying is about to arrive, then chances are it is best to get more aggressive. So there are times for building and times for piling in - it depends on how fast things are moving.
Since establishing Sapient Capital to run family money, I have been a lot more assertive with allocating more capital when the odds really stack up: with good results. A friend recently forwarded me an article from Stanley Druckenmiller outlining the importance of betting big when the right opportunity comes up. Druckenmiller notes that he and George Soros bet 21.4% of their fund on the British Pound short in 1992 and the great investors like Icahn and Buffett allocate aggressively when the time is right.
This all sounds good, but what happens if it all goes wrong. The key question I asked myself was "what do I need to do to get the confidence to allocate decent amounts of capital?" This is far more than assessing the upside and downside: I needed to have the confidence the assessment of upside and downside was pretty reliable. It's easy to get seduced by thinking the downside is X. The downside could be 2X if you are wrong. Malcolm Gladwell notes it takes 10,000 hours of deliberate practise to become world class. So my confidence came from researching and reviewing over five hundred previous decisions. It's not fun going back and looking at losers (I've had plenty), but it's a lot more fun than losing money now. This provided a much clearer insight into winning stocks and understanding where I could have an edge. Building different templates of winning situations and losing situations makes it much easier to make good quality and confident decisions when they come along.
Kristian
Of the process review, I initially spent the majority of my time on individual stocks: looking at winners and losers and my rationale for taking or not taking trades. Over time another factor also became apparent: capital allocation. What I have caught myself doing, and seen others do, is make capital allocation decisions inconsistent with the investment idea.
The text book example is doing some good analysis, deciding a stock is going up, and then buy an insignificant amount. If the idea is good, the risk is low and there is plenty of upside, it makes no sense to get gun shy and just buy a little bit.
It's easier said than done. The preferred format that works for my psychology is to build into a position. I'll buy an initial amount and then just keep buying - either because it has got cheaper, or even buy more as it is going up and I have more evidence to support the investment case.
However there are times when you just need to pile in. A good company may be getting sold off for no particularly good reason, so you may not get the chance to buy more if you just dip your toes in the water. Or, if you know decent buying is about to arrive, then chances are it is best to get more aggressive. So there are times for building and times for piling in - it depends on how fast things are moving.
Since establishing Sapient Capital to run family money, I have been a lot more assertive with allocating more capital when the odds really stack up: with good results. A friend recently forwarded me an article from Stanley Druckenmiller outlining the importance of betting big when the right opportunity comes up. Druckenmiller notes that he and George Soros bet 21.4% of their fund on the British Pound short in 1992 and the great investors like Icahn and Buffett allocate aggressively when the time is right.
This all sounds good, but what happens if it all goes wrong. The key question I asked myself was "what do I need to do to get the confidence to allocate decent amounts of capital?" This is far more than assessing the upside and downside: I needed to have the confidence the assessment of upside and downside was pretty reliable. It's easy to get seduced by thinking the downside is X. The downside could be 2X if you are wrong. Malcolm Gladwell notes it takes 10,000 hours of deliberate practise to become world class. So my confidence came from researching and reviewing over five hundred previous decisions. It's not fun going back and looking at losers (I've had plenty), but it's a lot more fun than losing money now. This provided a much clearer insight into winning stocks and understanding where I could have an edge. Building different templates of winning situations and losing situations makes it much easier to make good quality and confident decisions when they come along.
Kristian
