A few of my quirky (and sometimes inconvenient to some) investing opinions. A thread. 👇👇👇
1) Net worth should be calculated after all potential taxes. After paying taxes on their latent gains and inheritance/estate taxes after dying, the picture wouldn’t really look the same for many people. Real wealth is built over multiple generations (and after paying taxes).
2) Your investing strategy should take into account the tax benefits you have access to, your AUM and the rotation (and therefore resulting fees) of your portfolio. Potential and abstract gross returns don’t mean anything if those 3 factors are not considered.
3) Private equity returns expressed as IRRs are BS returns. The only real return is the cash-on-cash return expressed as a MOIC over the life of a fund. You can’t eat IRR. If you think differently, good luck reinvesting those early returns at the same « high » IRR...
4) The best investors in history (in terms of % returns) are people you don’t know and they don’t want to be known. They all share the same traits: they are frugal, humble, honest and independent. They all play the long game and love what they do.
5) When investing in a new company, it’s better to approach valuation in terms of expected annual return than multiple (always invert). Keep it simple no matter what: 10% after-tax return will always make sense.
6) One bird in hand is worth 2 in the bush. I’d rather invest in small but established companies with proven/difficult-to-disrupt biz models as well as stable/moderately growing earnings bought at good prices. Future and high LT growth in new industries is often a mirage...
7) Simply put, I’d rather have a 10% earnings yield with stable earnings (and a big pile of cash spent overtime in the form of dividends/buybacks) than relying mostly or totally on an uncertain future growth. Call it a lack of ambition. I call it taking care of the downside...
8) You should have at least 20-30% of your net worth in cash to manage your personal « tail risk ». It’s a laughable statement until s... hits the fan in the form of a health problem, job loss or having to help a family member.
9) This cash can also be used to seize opportunities when markets tank. How many times have I heard in March 2020: « But I am fully invested... ».
10) Leverage is good when it’s very long-term, limited vs. your total assets, low-cost, with no margin calls attached to it. Otherwise, forget about it.
11) Don’t marvel at Medallion (or anyone else for that matter) 40% p.a. returns. It’s done with a 5-10x average financial leverage and strategies also using questionable tax leverage / loopholes. In short, don’t try this at home...
12) Don’t marvel either at the average private equity returns. Assuming an IRR could be trusted, the average 12% IRR is not even 6% unlevered (and pre-tax). Yuck.
13) Don’t own a house or a property as an investment. The only upside is being at home, paint the walls your favorite color and not to be kicked out by a landlord. Plus, the long and cheap available leverage. Without an unfair advantage, you can ignore this asset class entirely.
14) The most interesting asset class in terms of potential unlevered returns for the small investor is listed microcaps. You can fish deeper and fish alone. Almost no competition from smart and sophisticated pro investors. Plus, much more liquid than PE or RE.
15) PE and VC are just microcap investing with either too much leverage or too much hype/risk.
16) Don’t buy into the « daily 500 pages reading », « reading entire annual reports » or « 15-page research reports are the best ». With modern tools, common sense and an obsession about protecting the downside, all this is BS to brag and impress the beginner.
17) Some AR / 10-K footnotes or DD elements are important but not all of them are. Don’t miss the forest for the trees. Keep it simple. Protect the downside: first and always.
18) Don’t listen to the pros, ever. They play a different game, mostly fraught with career risk and BS. They wish they could play yours. Stick to the amateur game, which is made of plentiful opportunities, a long runway and no institutional imperative / BS.
19) Don’t listen to anyone. Not even me of course. Be and stay an independent thinker. Draw inspiration and listen to others only if they are transparent (especially about their failures) and walk their talk with their own money (skin in the game, always).
20) If someone writes something about investing and says « it’s not advice », it should then be what they do with their own money. If it’s not, tell them to shut up and stop writing. You should own what you write.
21) The best investing approach for you is that when you sleep well at night. If it keeps you awake with anxiety, just drop it.
22) Risk is not volatility. Risk is not beta. Risk is the downside that makes you lose everything overall or in a single investment. Managing risk is protecting this downside by avoiding too much leverage and keeping a cash cushion. No matter what.
23) Munger is fond of saying that 3 things can cause your ruin: ladies, liquor and leverage. Manage those 3 properly and you will protect your downside, avoid catastrophe and survive.
24) Survive. Survive. Survive. That is the first goal of investing. That should have been the first tweet of this storm. That’s the ultimate downside protection.
25) Don’t respect the smart investor. Don’t respect the bright investor. Respect the investor who has survived and thrived for multiple decades. This is the only reason you should worship (if you have to) Buffett and Munger.
26) I have a simple heuristic with investments as a buyer. If I can’t figure out the payoff and it’s mechanics, I pass. Especially when the seller is smarter than I am. Which is most of the cases.
27) If you’re still with me by now, you should at least like or RT the first tweet of this thread!
28) Investing is so difficult because you make it so. Because you want to belong. Because you want to follow. Because you want to be liked. It’s not about bragging about what you own. It’s about doing the right thing.
29) Intelligent investing is about focus. Focus on an asset class. Focus on a geography. Focus on a market segment. Focused portfolio. That’s the price to pay to outperform.
30) Ignore the financial advisor’s advice. He’s a salesman and lives to get paid a commission (and he needs it to pay for this latest Mercedes model). If there’s someone whose interests could be further aligned from yours, it’s him. So don’t pay the 1%. Ever.
31) Your ultimate financial goal (and one of the primary life goals as there is no real freedom or happiness without this) should be financial independence or a position of f*** you. John Goodman sums it up better than any “expert”.
32) I repeat this just in case John Goodman wasn’t clear enough (if there is such a thing). The goal is not to own things (as they always finish by owning you) but a position of f*** you. And taking risks from such a position becomes even more of a game than a burden.
33) Alternatively, you could also watch (again and again because it’s so good) this scene of Moneyball where John Henry explains to Billy Bean the merits of being wealthy / financially free and playing the game differently when you’re the little guy.
34) Because the little guy can’t play the game the same way as the pro. I already said that earlier but “the ten feet of crap” speech from Billy Beane / Brad Pitt is priceless!
35) Target Asset allocation? No more than 30% of your net worth in your home equity (if you insist on owning it!), 20-30% in cash and 40-50% in equity. But that’s if you already are a HNWI. Before that: save, save, save. And invest while also building a rainy day fund.
36) An average performance with a long runway is more valuable than a great performance over a few years. Think Buffett’s “Snowball”. Obviously, a great performance over a long period of time is the best.
37) Therefore, the earlier you start investing the better. The longer you keep at it, even better. But to get there, you have to love this game. Think Federer or Nadal. At some point, it’s no longer only about money.
38) If you know a little bit what you’re doing, your portfolio will be somewhat concentrated and you’ll do at least as well as the best pros in your niche. If you don’t, diversify, like a lot (think low-cost global total market index fund). Buffett said it. But it’s just logic.
39) If you’re still with me, you’re not just into investing, you’re a real nerd. I can tell one when I see one...
40) I’m often asked the question: why don’t you invest in startups? Because the maths of angel investing/VC is: a third of your investments go to 0 and another third makes 1x. So you need to make a 10x on the last third if you want your portfolio to return 3x over 10 yrs...
41) If you’re not connected and based in the Valley, you’ll never have access to the deal flow that makes the 10x. Building a diversified portfolio to put the odds in your favor will also be extremely costly. I’m not lucky, smart or connected enough to play that game over the LT.
42) I believe that 99.99% of angel investors also fall into the same category as me. But, as mentioned earlier, in a dinner, you look 100x better discussing your latest early-stage SaaS start-up investment than my shares in a weighing equipment manufacturer based in Ardèche.
43) Try an unsexy space where you don’t compete with the smartest people living on this planet. I’m sure the outcome should be better. The guys @Chenmark wrote a wonderful thread on « how to bring sexy back to the unsexy » over the week end.
44) There’s no such thing as value or growth investing. Buying an asset (especially of quality) at the right/good price will never go out of fashion as it is as old as our world. It made sense for Ancient Greek traders. It still makes sense today.
45) Oops. Wrong Chenmark in 43). Try this @chenholdco rather. Sorry @chenmark! 😂
46) Don’t take yourself too seriously. You will make mistakes. You will underperform. You will learn along the way. If your approach makes sense rationally and intuitively (not in models), you’ll do well over time if you’re patient and stick to it. It’s simple but not easy.
47) To step up your game, you must learn. To learn you must read and/or have mentors. Twitter and forums are fantastic tools where you can learn from the best in the niche/space you decide to pick. Build your small network and make friends. It makes the game even more fun.
48) I’ve already touched on this but beware of smart people. Finance and investing attract some of the brightest people I’ve met. You’ll be amazed at how smart their approach, their models and their investments sound like. Chances are you can do better with a little work.
49) Because smart does not win the investing game. Patience, research, consistency and humility do.
50) Podcasts are an invaluable resource to learn about companies and investing. One of my favorite is @InvestLikeBest of @patrick_oshag. Patrick is an outstanding interviewer who has hosted a diversity of guests. I learnt so much from these discussions.
51) Don’t fall for get-rich-quick formula. If it sounds too good to be true...Especially when they make use of charts, models and pseudo-complexity.
52) Avoid the crowded trade of the month. The nifty fifty in the 60s-70s. The dotcom and large tech in the 90s. Large tech / SaaS today. Something else tomorrow. It always ends in tears. You may suffer from FOMO short term. But long term you will develop your own style.
53) If you’d like to try and outperform the market, your portfolio needs to be different from the market. Of course, you run the risk of underperforming. But if you want the market performance and have no passion for the game, buy a low-cost index fund. That’s OK.
54) Don’t fear illiquidity as a small investor. You don’t have to deal with daily redemptions like the pros after all. That said, make sure you also have enough cash to weather storms and don’t have to fire-sell when the market tanks. Both go hand in hand.
55) Always look for skin in the game in your investments. You will rarely be disappointed by an owner-operator with a demonstrated track record of value creation and treating his stakeholders fairly. You might be disappointed by a large corporate suit CEO...
56) I said stakeholders. Not shareholders. An owner-operator who treats his employees, customers, suppliers fairly and pays his taxes timely, will most likely treat you well as a minority shareholder. A CEO obsessed with short term shareholder value...Not so much.
57) In investing, as in life, saying no and filtering are sometimes more important than the things you do or say yes to. Set the bar high based on your own standards. Don’t compromise. All in all, the opposite of what would make you successful in a corporate career.
58) What makes investing so hard is the absence of permanent positive feedback. You need to have the faith (or the arrogance) to believe your approach will eventually prevail. You also need to have the humility to admit you’ll make mistakes and will often be wrong.
59) Don’t compare or benchmark yourself to anything or anyone. It’s a recipe for unhappiness. Pick a rational and ethical investing approach. Be consistent. And patient. Play the long game. Avoid ruin. You should do well enough in the end.
60) There’s a price to pay for investing success or any success for that matter (no matter how you define it). It’s mostly paid in loneliness. You can be around like-minded investor friends but, ultimately, you face your decisions and their outcomes alone.
61) Luck plays a huge role in any financial success. In the microcap space, it often shows up in the form of a catalyst (M&A, one-time dividend...) that unlocks value. Sometimes (most of the times?) unexpectedly. Have the honesty and the humility to acknowledge you got lucky.
62) All the good investors I know also share another common trait: an insatiable curiosity. Investing has often become a hobby through which they can learn daily about various topics and thus quench their thirst of knowledge. Without it, you might want to leave the game early.
63) There is a tendency to see biases everywhere today. An entire publishing and consulting industry has been recently built around it. Save some money / some podcast airtime and stick to a rational approach and ignore the BS. Generations of investors have done so successfully.
64) There is no way you’ll get each year your LT average return of x%. Some years will be great. Some terrible. The more concentrated the portfolio, the lumpier the payoff. Prepare and plan accordingly.
65) Never look at returns / performance in isolation. Look at the downside risk first. Is it protected by low/no leverage, hard assets (cash is best), stable/recurring earnings in a non-disruptable industry, a reasonable valuation, only a partial or no reliance on future growth?
66) Suddenly, so many listed companies have become ESG-conscious and discuss how much good they have made for the world. The most responsible companies don’t talk about it. They have been doing it, forever.
67) Respect the real entrepreneur. He’s a hero. Beware the fake entrepreneur, as Taleb explains. He celebrates a new funding round loudly. His only objective is to burn OPM, sell the company or do an IPO, and do that as many times as possible. That’s not skin in the game.
68) Find your investing niche. I love niches. I mostly invest in companies dominating a small niche. Because there are riches in niches. It’s that simple.
69) To further clarify on 67), fake entrepreneurs are mostly found in startups these days. Some seem to spend more time self-promoting on TV and podcasts than doing the work. In some countries, they graduated mostly from the same top schools. Red flag.
70) Holding a stock forever (and buying more when it’s down) makes sense because good ideas are scarce and this is the best way to achieve low transaction costs and taxes over a lifetime. Sound simple. But not easy. At all.
71) More and more large cap funds resort to looking for “super compounders”. Since they often pay (very) dearly for these stocks (which might suffer multiple compression at some stage anyway), they’d better compound for a long time.
72) There are a few issues with this approach. The first one is to sell too early at the first sign of weakness and suffer from both a multiple compression as well as a short compounding horizon. The second is mean reversion where your compounder actually stops growing quickly.
73) Compounding at portfolio and company level is obviously a great idea. But I’d rather play it safe and pay less for a good or moderate (not great) durable ROCE/growth with more downside protection, skin in the game and less possible disruption/regulatory issues.
74) The problem with my approach is this is a very small and illiquid space. Not available to the big guys. It also requires patience as returns can be lumpy and often take time to materialize. A pro has no time and can get fired based on last year’s performance.
75) The other problem with my approach is you can suffer long streaks of underperformance (especially during bull markets). You have to be comfortable being uncomfortable. You often doubt yourself and believe you’ll never make up for the lost ground. In short, not for everyone.
76) Tools of the trade before starting a position: last annual report (financials and management discussion), Yahoo Finance, @theTIKR (for LT historical metrics), press releases, shareholder table and insider transactions. Plus a few forums to get the feedback of LT shareholders.
77) Some people like to write their thesis. I don’t. In any case, keep it short and sweet (one-pager max). You should be able to explain it to anyone in a few sentences. 15-pages are for dummies or pros who try to play the CYA game in case they’re wrong.
78) Yesterday I read a 30+ page professional equity research report on an under-followed company I have had in my portfolio for several years. Have I learned much? Nope, a little but not so much. Did it change my thesis? Not at all. #no15pagereportsplease
79) The worst kind of investors I know? Those that talk only about the successes (usually most recent) without mentioning the failures or overall results. So you end up believing they’re always successful and you feel miserable. Don’t envy, compare or discuss: run your own race.
80) When I see what value investing has become, like Marx saying he was not a Marxist, I can proudly declare that I’m not a value investor.
81) Don’t trust anything that Warren and Charlie recommend publicly. Look at what they DO. They have used leverage, derivatives, got involved in financial services, underwritten the most complex insurance policies and hired or invested with questionable managers...
82)...They even let 2 ex HF managers play with a few billions (it must be fun to watch). Why? Because they can. They have the size, balance sheet, brains to do it. Chances are you (we, sorry) don’t. And they know it. Hence the low-cost-index-fund-for-dummies advice. And it’s OK.
83) Gold? Bitcoin? I don’t know. It’s not my game. Maybe it’s where I come from but I’d rather play the upcoming scarcity game buying farmland or water. Some have done so successfully. But it’s not my game either.
84) Investing is 99% reading, thinking and learning. So read! Buffett, Graham, Greenblatt, Greenwald, Lynch...Philosophy, history, science...Twitter, forums...Read, read, read. If you don’t like reading, there’s not much anyone can do for you as an investor.
85) A personal theory. A CEO or a fund manager whom you see a lot more on TV, social media...is generally not a good sign for investors. He must have performed well lately (hence the media coverage) but now spends less time working on what matters and more self-promoting...
86) Should you invest in a hedge fund (if you qualify as an accredited investor)? After paying the 2/20 management/performance fees, not many hedge funds will outperform the market/index funds or a good private investor over the long term. Unless you pick the next Buffett...
87) Personally, I’d rather eat my own cooking (which is, to be fair, what most HF managers also do), avoid fees and understand the risks I’m taking. At some point, most HF become too big to outperform. And their managers too arrogant for their own good.
88) Let me clarify my stance on average (some are very good but chances are you’ll never have access anyway) PE funds further. It’s usually microcap investing with too much leverage and lousy net unlevered returns. Cf the work of @lphalippou81 @PELaidBare
89) PE funds’ supposed lack of volatility is a joke. Let me mark my listed equity portfolio once every 6 months with multiples of my choosing and I too can show you a stable (when the market tanks) or constantly growing portfolio.
90) Chances are allocators love PE as much for this “lack of volatility” as the actual performance (which always looks good when measured in IRRs). When the fund proceeds have been fully distributed, they will most likely be in a different job anyway...
91) Volatility is fine. Illiquidity is fine. But they are double-hedged swords. They are the 2 of the reasons you will compound your wealth. But they will also kill you if you are over-levered and can’t afford to be patient.
92) As some think it’s better to learn to fish than being given fish, I do believe it’s better to learn investing than placing your money with a fund manager who might not manage the fund a few years from now or whose most recent streak of outperformance might stop abruptly.
93) Funds are designed to be very diversified and provide smoother returns over the long term (better to stay in the job longer). An individual investor portfolio should be more concentrated and provide lumpier returns over time. Time arbitrage is your strength.
94) There are multiple ways to compounding wealth nicely over a long-term horizon but they all come in the form of cash-flow generating assets. The best of these assets are resilient family-owned or owner-operator businesses.
95) There are a few ways of getting wiped out. Get-rich-quick-easily schemes are one of them. Over-leverage is another one. The combination of the former and the latter being the most toxic.
96) I’ve called it successively managing risk, downside protection, position of f*** you, avoiding ruin / too much leverage...Graham called it margin of safety. The three most important words in investing and a great book by Seth Klarman.
97) Block the noise. Don’t get influenced. Follow your own path. If it’s rational, although you might feel alone and contrarian, you will do well. That’s all I have to say.
98) And never forget: 10+% annualized returns over a long period of time in your equity portfolio achieved with a lot of downside protection (think no leverage and high earning yields) is a fantastic result.
99) Always look at unlevered returns. You don’t have that many (if any) HFMs capable of making 10%+ p.a. unlevered returns over a long period of time. Chances are their LT performance include a sizable leverage and/or FX upside. Nothing to brag about.
100) Read the Stoics (especially Seneca and Marcus Aurelius). It’s timeless wisdom. They said it all. You don’t need “mental models” or any behavioral psychology BS. All roads definitely lead to Rome. Always.
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