My Ideal Portfolio

My ideal portfolio

I follow the way Warren Buffett invested while running his partnership. I also mix it up with his newer investment style and some of the riskier stuff the younger gurus do. Many other gurus that I follow have their portfolios set up this way. They have a few differences from Warren, but the foundation of their investment ideas is the same. This is the way my ideal portfolio will be set up.

A few of the differences that other gurus have from Warren are cigar butts, options trading, shorting, IPO’s, etc. Charlie Munger pulled Warren away from investing in cigar butts. I have seen some horrible looking companies that gurus buy into and I have to assume there are some cigar butt investments happening. Options, shorting and purchasing of recent IPOs are in the portfolios of a few gurus as well.

Risky Business

I got the risky business idea from Phil Town. His daughter, Danielle Town, and him talk about it in their book Invested. Risky business will be a category in my portfolio. It will contain all the things that I can’t comfortably place a value on, I’m not comfortable in the future prospects, there’s not enough history to research, etc.

The categories contained in the risky business portfolio will be cigar butts, sophisticated options trades, shorting, IPOs, and anything new I learn but haven’t tested. Risky business will make up 10% of my portfolio. The only way I will go above 10% is if I have a lot of confidence in an investment that I consider risky. I’ll have to be as confident as Michael Burry was about shorting the subprime market, which isn’t very likely anytime soon.

Cigar Butts

Cigar butts are companies that you can buy at a sufficiently low price. There will usually be a hiccup in the price and that gives you the chance to unload it at a decent profit, even though the long-term performance of the business may be terrible. Charlie convinced Warren that this approach wouldn’t scale, because the cigar butt opportunities wouldn’t have a meaningful impact on Berkshire Hathaway. Berkshire had grown too big.

Cigar butts won’t be a category in my portfolio. I don’t have plans to buy any cigar butts right now. I am more focused on wonderful companies. If I do find a cigar butt investment, it will go into the Risky business category of my portfolio.

A great business at a fair price is superior to a fair business at a great price

Charlie Munger

Options

Warren has used options, but he is too big now. Years ago, he sold puts on Coca-Cola and made an instant $7.5 million. The brokers have contract limits though. For the amount of stock he wants to buy, he would have to go through multiple brokers to sell enough puts on a security. It’s a waste of time for him, even though he can make some extra money.

I have to learn more about options before I attempt some of the more sophisticated trades. I don’t understand enough about Bull Put Spreads, Bear Call Spreads, Iron Condors, etc. These more sophisticated trades will be part of the Risky Business portfolio.

I understand selling puts and calls though. I do not consider these risky trades. Selling puts and calls is used in all of my portfolio categories.

Selling Puts

Selling puts can be a win-win situation. You know the price you want to buy a stock at and you sell a put option. If you get put the stock, that’s great because you wanted to buy it and you get paid a premium. Sure, you could have bought it at a lower price, but you’re already buying it at a margin of safety and you’re not worried about getting the last nickel. If you don’t get put the stock, that kind of sucks because you wanted to buy it, but it’s great because you get to keep the premium. Win-win.

Selling Calls

Selling calls can also be a win-win situation. You are now willing to sell the stock, at a great profit, and you sell a call option. If the stock gets called away, that’s great because you wanted to sell it and you get paid a premium. Sure, you could have sold it at a higher price, but you’re already selling it at a great profit and you’re not worried about getting the last nickel. If the stock doesn’t get called away, that’s great because you get to keep owning this wonderful company and you get to keep the premium. Win-win.

Waiting for the bottom is folly. What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap, based on the relationship between price and intrinsic value, you should buy, and if it cheapens further, you should buy more

Howard Marks

Shorting

Warren believes that eventually shorting works out, but it’s painful. It’s a lot easier to make money on the long side. Making big money shorting is tough, because the risk of big losses means you can’t make big bets. It has ruined a lot of people and you can go broke doing it. There are some gurus that successfully include shorting in their portfolios though. Michael Burry is maybe the most famous for this. The Big Short was the book that put him on everyone’s radars. Then The Big Short movie really put him in the spotlight.

Being short and seeing a promoter take the stock up is very irritating. It’s not worth it to have that much irritation in your life

Charlie Munger

I have to learn more about shorting before I attempt it. My research with my gurus that have successfully done it. I’ll see what they have to say about it and look for books recommended by them on the subject. 

IPOs

The purchasing of recent IPO’s is something else I see in the portfolios of some of my gurus. This really interests me. It’s tough to get into venture capital or early stage investing with no money, so purchasing recent IPOs is the closest thing I’ve found to it. It’s exciting to buy that new, up-and-coming, hot stock every now and then.

Venture capital is so exciting because you get to help build or assist a startup for a portion of the company. The companies are usually cutting edge innovations that everyone loves. One day I hope to have the financial capability to get into venture capital and/or angel investing.

Recent IPOs will consist of small positions (around 1% of total assets) in each of five to ten IPOs. I want IPOs to make up 5% to 10% of my portfolio.

The Buffett Partnership

During the Buffett Partnership, Warren killed the market. He was able to kill it because he wasn’t managing nearly as much money. The law of large numbers states that as a company or fund grows, it becomes more difficult to sustain its previous growth rates. Many investors follow his partnership’s investment style, because it is applicable even today and many investors see the same returns.

You can see Warren’s investment style while managing his partnership by reading his Buffett Partnership Letters. In the letters, he split up his investments into three categories: Generals, Work-outs and Controls.

Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was managing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that

Warren Buffett

The Generals

The “generals” were generally undervalued securities where he had nothing to say about corporate policies and no idea when the undervaluation would correct itself. This was the largest category of investment and the category that made the most money. The generals were made up of larger positions (5% to 10% of total assets) in each of five or six generals, with smaller positions in another ten to fifteen.

The generals are what make up the largest percentage of all my gurus portfolios as far as I know. They will also make up the largest percentage of my portfolio. I will have large positions (5% to 10% of total assets) in each of five or six generals, with smaller positions in another five to ten. The generals will make up around 50% to 60% of my portfolio.

The Smaller Positions

I believe I am going to split up my position totals by years since IPO. If there is 1 year of data, I’ll put up to 1% of my portfolio into that position. If there’s 2 years of data, I’ll put 2% of my portfolio into that position, and so on. When it gets to 10 years of data, I’ll put 10% of my portfolio into that position.

I like to see a company with at least ten years of data before I put double digit percentages into that position. You don’t really know how a company will act or the risks it’s taking until faced with adversity. I believe ten years gives a company sufficient time to face adversity and prove its durability.

Roughly every ten years our stock market has seen a crash of sorts. Warren calls them economic storms. This means the average company will face an event every ten years. Seeing how a company has handled an event in the past gives me the comfort of putting 10%, or maybe even more, into one position.

The Work-outs

The “work-outs” consisted of securities whose financial results depended on corporate action rather than supply and demand of buyers and sellers of securities. He could reasonably predict when he could get how much and what might prevent it from happening. Work-outs included mergers, liquidations, reorganizations, spin-offs, etc. He would have ten to fifteen work-outs in the portfolio. When he borrowed money, it was only as an offset against work-outs, and never more than 25% of the total portfolio.

Work-outs can be seen in the portfolios of gurus also. A great example is Fiat Chrysler Automobiles and the spin-off of Ferrari. The work-outs will consist of five to ten positions in my portfolio. The work-outs will make up around 20% to 30% of my portfolio. When I borrow money, it will only be an offset against work-outs and to do perform a control situation. I will never borrow more than 25% of the total portfolio.

The Controls

The “controls” were companies that he took control of or bought a large position and attempted to influence policies of the company. He would sometimes buy into a general with the thought in mind that it could develop into a control. I don’t see myself having the funds to perform any controls in my near future, so this category is on the backburner until I have the funds available.

Cash

Most of the gurus I follow keep cash. They want to be prepared when an opportunity arises to pile in to a company. Warren calls this being prepared with a bucket instead of a thimble when it rains gold.

Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble

Warren Buffett

The Deceiving Public Portfolios

Guy Spier has said in the past that he likes to be fully invested. More recently, in one of his The Education of a Value Investor podcasts, he has said that he is selling off some of his profitable investments to get to 20% to 30% in cash.

You wouldn’t know that Guy was doing that without him making it public knowledge. 13F filings don’t require a manager to release how much cash they have. In the case of Guy, he jokingly said on the podcast that his portfolio size will shrink from $250 million to $200 million. It has been said that Mohnish Pabrai has close to $1 billion under management. According to Dataroma, his portfolio is $262 million. The other $700 million or so is in cash and companies not traded on the American stock exchanges.

I plan to follow Guy and constantly hold 20% to 30% in cash.

It’s Only Ideal

I know the math isn’t perfect, but it’s practically impossible to set up a perfect portfolio. Mine will grow organically and change as I obtain more knowledge. I will make investments as the opportunities arise. This is just my ideal portfolio that I am working towards.

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This is an Overview of My Investment Style

My investment style

My investment style is value investing, but in the way of Warren Buffett and Charlie Munger. It was passed down by Benjamin Graham to Buffett. Buffett, influenced by Munger, put his own take on it. There are many Gurus/Superinvestors who have followed this well beaten path and became very successful. There are even hundreds, if not thousands, of people we will never hear about that have followed this path and found success. Average people. People who are no longer dependent on a job and have the time, money and health to spend with their family. This was accomplished just by following what these gurus teach.

Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.

Warren Buffett

Buffett says, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing”. This was proven when Gerald S. Martin and John Puthenpurackal published the paper “Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway”.

The paper states that if all you did was mimic Buffett’s portfolio from 1976 to 2006, buying what he bought and selling what he sold on the last day of the month that it became public knowledge, that you would have had a compounded annual growth rate of 20.43%. The S&P 500 returned 12.86% during that same time frame. You would have outperformed the market 26 out of the 31 years. The paper also states that the average money manager would have beaten the market 15.5 out of the 31 years.

Beta and modern portfolio theory and the like – none of it makes any sense to me

Charlie Munger

You could have brainlessly followed Buffett and outperformed the market and the majority of fund managers that believe in Efficient Market Theory (the crap they teach in school). This is what Charlie Munger has to say about EMT, “Corporate finance is beneath contempt. Believing just by buying volatile stocks you make an extra 7 percentage points per annum, I mean those people still believe in the tooth fairy and yet it is taught to children”.

The Great Gurus

Buffett is not the only person you could have followed and made returns similar to this. Anyone managing over $100 million is required by law to publicize their portfolio (a 13F filing) every quarter with the SEC. There is a handful of gurus who have followed the teachings of Buffett (the path) and made the same awesome returns as Buffett. Now they are required to publicize their portfolios. You could brainlessly follow any of these investors and make better returns than the majority of “professional” fund managers.

Even these investors, who are the best in the world, follow other great investors. I’ve heard it called coat-tailing by Buffett, cloning by Mohnish Pabrai and copycat investing by Phil Town. You don’t have to brainlessly follow them though. I plan to add in a little brain by following what all these investors teach.

How I Clone the Gurus

You can find 13F filings a few different ways. You can find them directly from the source at the SEC’s EDGAR website, but you just about have to be a lawyer to use the website from my experience. You can find them at other websites that compile this data in an easy to read fashion. The websites I use are Gurufocus and Dataroma. You have to pay for Gurufocus to access most of the features on the website, but I think the features are worth the money. I just don’t have the money to pay for it yet, so I use Dataroma for now. Dataroma is free with no features.

I know there are other investment styles like day trading, traditional value investing and index investing. Value investing in the way of Buffett and Munger is just the only way that makes sense to me. 95.5% of all daytraders fail. I have a long-term view, and by long-term, I mean 10 years. As Buffet says, “Only buy something you’d be perfectly happy to hold if the market shut down for 10 years”. I won’t own a company for 10 minutes unless I plan on owning it for 10 years.

This investment style has many names. I’ve heard gurus describe their funds as “event based”, “event driven”, “deep value”, etc. It’s not traditional “value investing” as Graham’s strategy was though.

I am going to go deep into research and find a few wonderful companies that are undervalued temporarily from an event. I will also do more speculative “other things” with a small portion of my portfolio as I learn them. These “other things” might consist of shorting, complex options trades, cryptocurrency, IPO’s, etc. Some gurus have their portfolios set up this way. I will also look to the gurus portfolio holdings as a foundation for mine by coat-tailing their investments, but with a brain by doing my own research to come to my own understanding of why they purchased the company and my own valuation of the company.

I am guaranteed to adapt and change as I learn. I will delve more into my investment style, how it changes, ideas and thoughts in other posts. This is just an overview of my way.

If you haven’t already, check out my previous post “This is Who I Am” to get a little understanding of my background.

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This is Who I am

Who I Am

Who I am first and foremost is an aspiring investor. My dream is to follow in the footsteps of many great investors that walked the path laid by Warren Buffett and Charlie Munger, and start a hedge fund. A hedge fund in the style of Warren Buffett, Charlie Munger, Mohnish Pabrai, Bill Ackman and a few others. Here’s a link to my post “This is an Overview of My Investment Style“. I am also a father, husband, brother, son and friend.

I have listened to The Tim Ferriss show quite a bit. One of the most common shared habits I’ve heard from the top performers of multiple fields being interviewed by him is journaling. Journaling along with meditation, morning routines, exercise and reading. He also summed all of this up into his book Tools of Titans. So, this is my journal. The other reasons for me starting this blog is to keep a fire lit under my butt and force me out of my comfort zone. Maybe me talking about my journey could even help someone else too.

I have been learning investing for years in my free time. My free time has been between full-time college with full-time blue collar work and remodeling a house myself with full time blue-collar work. I have also tried to be a good husband, brother, son and friend. I have lacked in that department. Now I am a father and I realize if I don’t follow my dream now, it’ll never come true.

I Can’t Afford to Not Do It

The least I will let myself accomplish is financial freedom. Financial freedom is what I have to accomplish for my family. My definition of financial freedom is: not having to work a day job that isn’t my passion just to provide the necessities for my family, not drowning in debt, not having to worry about medical expenses and having sufficient time/energy to be there as a father, husband, brother, son and friend.

Where I Come From

I’m not special in any way. My mother was a waitress for most of my life. My father has built cabinets for my entire life. I’ve heard many times that “hard work hasn’t ever killed anybody” and I agree. I’ll disagree with anyone that says a life of standing on a concrete floor for 10-12 hours daily doesn’t take a toll on your body though. Both of my parents have some medical problems now and that isn’t uncommon for blue-collar workers in their 50’s. Although divorced now, I don’t think they ever had a combined annual income of more than $75,000. Neither went to college and one didn’t finish high school.

I followed in their footsteps for the most part, except I didn’t finish college. I work a blue-collar job. I stand on concrete for 10-12 hours daily building cabinets. There’s nothing wrong with being in Georgia and not having air conditioning in the summer months, heat in the winter months, breathing in sawdust constantly or standing on concrete for many hours. Some people enjoy doing just that. My grandfather loves it. It’ll make you tough, to a point, but then it just starts tearing your body down. My body feels that way at least. I might just be weak.

My parents taught me everything they could. Finance or investing just wasn’t one of them. It’s not their fault. Finance and investing isn’t properly taught in school and unless someone has a desire to learn about it on their own, they’ll never learn. You can listen to the greatest investors in the world today, investors who have outperformed the market for 70+ years, agree that proper investing is not taught in school. K-12 or college. I believe I have the desire.

Much of what is taught in modern corporate finance courses is twaddle

Charlie Munger

Since high school I have always dreamed of being a business man. I can still remember a time when some men came to speak in one of my classes and asked me what I wanted to do for a living after high school. I told him I wanted to be a business man and own things. When he asked me what kinds of things I wanted to own, I didn’t have an answer. I just didn’t know what that meant. I didn’t know what kind of business man just owned things or how to get there. I haven’t had anyone to teach me, nor do I know anyone in that position.

The Only Businessman I Really Know

My grandfather is the closest thing to a businessman type role model I have. He is a self-made small business owner, and the hardest worker I’ve ever met. He comes from that hard-working Vietnam war era of men. He owns the cabinet shop my father and I work at. It is a small family business. He enjoys working with his hands and would prefer to be in the shop all the time instead of in the office. I prefer to be in the office treasure hunting for wonderful businesses.

Researching the greatest businesses in the world for a chance to purchase shares of them at a discount fascinates me. I am completely happy spending 10 hours per day doing that. When I spend my weekends doing that, I have energy built up from sitting all day. I can spend that energy doing all the adventurous things I love. Some of the things I love are exercising, cliff diving, rock climbing, snowboarding, swimming, etc.

When I turned 18, my grandfather advised me to get a credit card and build my credit, because “Credit is all a poor man has”. Following that, he immediately advised me to never let the balance get so high it becomes unmanageable. He also advised me to start giving a portion of my paycheck to a mutual fund manager for retirement. This can be solid advice and he has a lot more of it. My passion is centered around investing though and I am confident that I can outperform 96% of the professional fund managers in the long-run. I could be wrong, but that doesn’t stop my confidence that eventually I will outperform them.

I can remember sitting with my grandfather after discovering Warren Buffett. I was telling him that the life of an investor is everything I’ve dreamed of and I wanted to buy businesses for a living. He told me “It’s impossible to manage that many businesses. Someone will take advantage of you”. I just took his advice knowing that he was probably right and even Warren Buffett agrees with him.

Buffett has said that there’s likely some form of corruption in all his businesses, whether it be someone just stealing a pencil. It’s not detrimental to the company though. If it is, the company management will find the corruption and fix it. If management is the corruption, Buffett will just fire them. Although he doesn’t like to, Buffett has had to fire managers before.

I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will

Warren Buffett

Why Haven’t I Started Before Now?

I can come up with a list of excuses to why I haven’t started investing until now. It boils down to me just being lazy. I believe I have also listened to/followed too much advice from others. You can benefit from anyone’s advice, positive and negative. That doesn’t mean to follow it though. Not even the good advice.

Some of the advice I’ve been given has been “You have to be born with money to be financially free”, “You don’t know how to invest and you’ll lose everything”, “People get rich on the backs of hardworking people”, etc. This sort of advice can be given to you by people who genuinely care about you and want the best for you in life. They tell you how they have come to portray the world in the hopes it’ll help prevent you from doing something stupid. Something stupid like losing your entire life savings.

Life also has a way of getting in the way. Especially when starting something new. It probably has something to do with the fact that getting started is the hardest part of anything. You have a dream, a goal, a desire and life throws something at you. Something like having to get a job, losing a job, trying to afford college, having a family to support, a death, etc. The things life can throw at you are endless. The easiest thing to do is put off following your dream and pour your focus into whatever is happening now.

There are people who come from way tougher backgrounds than me and accomplish amazing things. This is why I will just agree that I’ve been lazy.

The Goal of This Website

This is where I come from and where I am in my life right now. I am getting started on my path to becoming a successful investor. I am going to work towards my dream of starting a hedge fund and write about my journey. Showing what I learn and how I think is an attempt to follow my gurus. Many of them have written books, teach classes, have blogs, publicize their letters to investors, etc. this is my attempt to give back as they have.

All the gurus I follow have proven track records. I don’t. So take from this what you will, whether it be my stupidity or success. Most will probably be stupidity, but I have confidence. I hope this will give someone else the courage to take the leap into managing their own money.

The Only Options I Have

I have only 2 options. They are: to become a successful investor or be a complete failure. I’m tired of being the failure, so it’s time to force success upon me. Success to me means that I will be following my dream while creating a financially free life for my family and having the ability to be there as a father, husband, brother, son and friend.

This is my journey. If I become successful, I believe anyone can.

I am no genius. You will see that for yourself. I am confident that I can become a successful investor though. Through this website, I am going to show you what I’ve learned, the process of me learning and how I portray the world in the hopes of this helping someone else to have the confidence to take control of their life through investing. I am putting out there all my successes and failures. I guarantee there will be more failures to learn from.

An essential component of our education is to learn from our mistakes—and if we don’t make mistakes, sometimes we may not learn at all

Guy Spier

Becoming a successful investor is the only path I see for me. Who knows, maybe one day I’ll even take over a public company or take a company public and use it as my investment vehicle to buy both public and private companies.

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Change My LifeChange My LifeChange My Life
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