d.o.g. on Investment Lessons

d.o.g. is my favorite forumer who has provided much great insights.

He probably keeps a checklist on his investment principls as follows:

For points below, I would like to add:

1. When fundamentals deteriorate, sell NOW. - what about if it is temporary decline? I think he would say that good fundamentals seldom decline temporarily.

2. The market leader is not always a good investment - probably it may be a safer investment

8. Bet big on the great deals. - I AGREE! Especially what great deals are hard to come by.

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d.o.g.

Forum Sage

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Posts: 810
Registered: 10-12-2003

posted on 1-1-2008 at 06:33 PM



I hope everyone is having a good start to the New Year.

I have decided to revisit this ancient thread as a means to review what happened in 2007 and see if there was anything new I learned, compared with previous years (2005 and 2006).

1. When fundamentals deteriorate, sell NOW.

For 2007 I made "only" one mistake here, but it was a bad one. I quit too late, after 2 consecutive quarters of poor results. It cost me about 40% of my invested capital. If I had sold immediately after the first poor result, I would have lost "only" 20%.

So I have not gotten better here. Perhaps at least I am not getting much worse...

2. The market leader is not always a good investment.

Same as previous years. Investment outcome was more closely linked with the quality of the balance sheet and income statement, than with market share.

3. AGMs and EGMs are a valuable source of information.

Ditto with past years, but I attended fewer meetings in 2007 due to a shortage of leave (new job = pro-rated leave allowance).

4. The margin of safety must be sufficient.

I sold one of my largest holdings at essentially break-even levels, because I'd bought cheap enough that the dividends over the years covered my final capital losses. A successful escape.

5. Beware companies in cyclical industries.

I still have a large exposure to cyclical industries. I keep up by reading industry journals and tracking price/demand indicators.

As in previous years, no "buy and hold forever" for these companies. Make hay while the sun shines, as it were.

6. Dividends are important.

Many holdings paid special dividends. At year end I ended with a portfolio yield of over 11% on a current market value basis, and over 15% on a cost basis.

I say again: SHOW ME THE MONEY!

Of course, next year may not be so "special" for dividends, but I'll take whatever I can get.

7. Keep some spare investment ammunition.

Some opportunities came up and I deployed my available cash. But on hindsight, I realize I should have sold off my less attractive holdings and put even more money in. Now, the prices have gone up. Most annoying. Oh well.

I will still keep spare cash for immediate deployment. But going forward, I intend to sell inferior holdings in order to make big bets on the great deals.

So my new lesson for 2008 is:

8. Bet big on the great deals.

By "bet big" I mean 5% or more of the portfolio. I've had several 2-3% holdings that returned 100% or more. These had limited impact on the portfolio. The exception was Pan United Marine (PUM), but that was because it returned over 700%, so even a 3% initial weight for PUM could move the needle.

Most of the gains in dollar terms this year came from 2 large holdings. They account for over 50% of my portfolio's unrealized gains despite making up only 33% of the market value. So it seems better to make fewer big bets on outstanding deals, than many small bets on merely good deals.

This is analogous to the principle behind the Kelly formula used in betting: scale your bet to the weighted payoff. The larger the expected return (odds * payoff), the larger your bet should be.

Obviously, caveat investor: if you can't tell the outstanding from the merely good, diversification across lots of good deals would likely be a better strategy.

Other lessons from 2006

8. Watch out for changes in the core business

This is actually part of standard monitoring, so I won't consider it a lesson any more.

9. Watch the gross profit margin

This is part of the initial analysis and not a "lesson" either. So I'm removing this too.

Finally, HAPPY NEW YEAR!

As usual, YMMV.