Your investment strategy

[lazyway]

Nice to hear @Tyhjatasku that you’ve looked at my portfolio with some thought and that it has evoked positive feelings.

@Tyhjatasku

Perhaps a bit of an exaggeration, but I certainly don’t aim for that. I enjoy learning new things, researching companies, reading books, following investment discussions, and laughing at investment memes. I think the right way is to be slow to act, but active in learning.

100% agree. Reading, discussing, learning (and laughing!) is useful and developing. Slow to act, active in learning – well summarized!

@Tyhjatasku

One would preferably like to find companies with a strong competitive advantage that strengthens over time. At the same time, these companies should have the opportunity to invest significant cash flow back into their own business (with a good return) so that they grow year after year. To top it all off, you want to find a company whose operations are reasonably predictable, they have reliable management that acts in the interest of the owners, and the business should be reasonably boring—meaning something that doesn’t attract competition or isn’t disrupted the day after tomorrow. Not exactly easy Additionally, one should be able to say “no thanks” to rapidly developing industries; so if you like to invest according to trends, then this is not the right way.
What I’m aiming for is that mistakes can happen quite often.

Very well reasoned! Indeed, I’ve certainly made mistakes myself. If only one could get rid of them. And then there was that 2020-2022 experiment with wild growth companies that rose a lot (and some did fall later), and there was more market-driven luck and tailwind involved than my own wisdom.

And it’s no wonder that mistakes happen. I’m an average Joe who has been investing for a while. I’ve read a few books over the years, followed the market, investment discussions, analyses, and tried to understand investment targets with my own limited understanding. You don’t become a master investor who deeply understands different industries and companies with these methods yet. This is pretty basic stuff for many retail investors.

At some point in my investment journey, I realized that these investment companies also exist. And some of them have done particularly well. I remember reading a column in Viisas Raha magazine discussing investing in Investor [AB]. The idea was simple: Wallenberg’s successful investment company and its diversified portfolio are hardly a bad option compared to an average private investor’s own picks. It sounded rational and simple and stuck in my mind.

I’ve also occasionally managed to pick some quite good companies for my portfolio. For example, Konecranes and Wärtsilä. At the time, I thought of them as cyclical companies that should be bought when sentiment is weak and sold when it’s better. I didn’t see their long-term value creation potential, which has now materialized. I sold them then with a 50-100% profit and then had to think of a new investment target (which was almost certainly much weaker than holding these would have been). I sold Harvia, on the other hand, when it dropped from 60 euros to 24 euros. That would have been worth holding onto as well.

So, somehow I should solve the problem of making poor picks and, if I succeed better, not necessarily being committed to owning them (for the right length of time).

Gradually, the idea matured that (especially proven and established) investment companies and serial acquirers can at least partially solve these problems of mine. Of course, you can make a mistake with any company. But if a company in this niche has a track record of its operational performance and capital allocation skills, you can think that it has found a fairly well-functioning “formula” that it can utilize year after year. It invests capital on my behalf and probably better. I need to make investment decisions less frequently. It also removes timing problems because these companies compound over the cycle. It has turned out to be profitable to simply own many of these year after year.

The third benefit is that if I start following the portfolio and investment discussion too intensively, I get hooked. When hooked, I open the portfolio and refresh investment forums too often (just like with any online addiction). It’s no longer useful and I waste my time. Investing in boring companies is better for an addictive person like me (in addition to the hoped-for reduction in mistakes), and there’s no need to monitor investment developments so closely.

It might be that my portfolio gradually turns into a collection of these “investment-company-like” capital allocators, and other types of investments will be fewer and fewer.

What kind of methods have you, @Tyhjatasku, come up with for reducing missteps?

@Tyhjatasku

Do you feel @lazyway that the age of the company matters when you consider it for your portfolio? Or what do you think about turnaround companies, for example—do they have a place in a so-called eternity portfolio?

Yes, I think long life is an achievement for a company and proves that it has been able to keep up with the times and hasn’t permanently fallen behind. Nowadays, I generally try to avoid turnaround companies (even though there are several of these in the portfolio) because I usually don’t succeed with them (for example, Neste was a mistake because I didn’t understand the industry in a situation where the company fell deeper than anyone expected). And those mistakes should be avoided. But it certainly depends a bit on the turnaround company’s situation (how deep it is) and profile. I guess Fairfax and Berner are also counted as turnarounds, because both had weaker times just a few years ago (at the moment the numbers are good, though). Not to mention Boreo. And there’s also something called Lindex in the portfolio (is it more of a special situation nowadays?)

What do you think about turnaround companies?

[Tyhjatasku]

@lazyway

So, somehow we need to solve the issue of picking bad stocks too often and, if we succeed better, not necessarily committing/knowing how to hold for the right amount of time.

Great point! Often, I’ve only assessed my commitment once a position is down 20%, and that has obviously led to poor results. When buying, it’s easy to think that the portfolio can handle something more speculative, but if a bear market catches me off guard, I’ve noticed that my commitment to such a company quickly weakens, and soon I just want to get rid of it at any price.
That’s why, before buying a new company, I’ve tried to think about how I would act if the stock price dropped 20% tomorrow. If I feel like I wouldn’t dare to buy more or continue holding, then I know my commitment isn’t at the right level, and I should either skip the purchase or research more. This is a very emotion-based analysis, but it serves as a final check before I add a new company to the portfolio.

Another thing I’ve been considering lately is only buying new companies for the portfolio during a broad market decline. That way, I could be more certain that positive price development hasn’t created a false perception of the company’s quality. It can often be difficult to break down the reasons why you think a company is high-quality. It’s easy to come up with excuses to justify it to yourself, but if that perception is fundamentally based only on the rising share price, it shatters quickly when the price trend reverses. Writing about the investment case also helps; that’s when I notice whether I truly understand the company and if my perception matches the facts.

@lazyway

What kind of methods have you, @Tyhjatasku, come up with to reduce misfires?

There will always be misfires. One thing I’ve found helpful is simply doing more research. The more you learn, the easier it is to weed out companies you don’t want in your portfolio. For me, increasing research also means making fewer decisions.

Another method is following the right information sources. I’ve cut out a huge number of newsletters and industry influencers so that I won’t be influenced by sources that would weaken my hit rate. For example, I’ve removed newsletters that hype trends or constantly publish lists of “5 companies that are future compounders.” Browsing these increases my temptation to act, and I try to resist that temptation. On the other hand, I spend more and more time on newsletters that teach me how to identify EPS manipulation or how to analyze return on capital.

I think it’s difficult to distinguish noise from signal. As an investor, one should be able to make independent decisions and be alert to changing one’s mind if the facts show that their opinion is wrong. Take the Alphabet case as an example. I had owned and bought more of the company when it was cheap. Almost every outlet was shouting that Alphabet had lost the AI game. My own reasoning was that the company has tons of money; they won’t just sit on their laurels, they will solve this. Eventually, however, I started to believe the narrative that Alphabet had fallen behind in development and sold at the absolute bottom. Now, surely the same people who trashed Alphabet as garbage are telling stories about how they bought it at the bottom and have always believed in the company. The end result was that I was the one left wearing the dunce cap. The other side of the coin is that sometimes you have to believe that there’s no smoke without fire, but how do you tell the difference? Narratives drive price action strongly, but how do you know when a narrative is correct and when to trust yourself?

@lazyway

What do you think about turnaround companies?

Nowadays, I try to avoid turnaround companies. I used to own quite a lot of them, and I’m starting to agree that few companies actually turn around. It’s easier to own companies that surprise on the upside than those whose turnaround you’re always waiting for. The potential returns are certainly promising, and in hindsight, they look excellent for the companies that eventually succeed. But being able to pick the right turnarounds and having the patience to hold them long enough without losing commitment through the lean times is so challenging that it doesn’t seem to suit me anymore.

I would say, though, that a well-diversified portfolio can have one turnaround company to add optionality to the returns, but I don’t think the entire portfolio should be invested in turnarounds. So, they can work as a seasoning, but not as the main ingredient

[lazyway]

@Tyhjatasku

There will always be missed shots. One thing I’ve found that helps is simply doing more research. The more you learn, the easier it is to weed out companies you don’t want in your portfolio. For me, increasing the research also means making fewer decisions.

Exactly, the more thoroughly you research and do the background work, the better you understand what you are investing in. At the same time, you learn what kind of companies you feel you understand in general. And which ones are difficult for you to grasp. You mentioned Alphabet. For me, for example, it falls into the category of very difficult-to-understand companies (since I don’t have my own knowledge base in the industry). It would more likely be filtered out as too difficult an investment. Unless I found some stellar (diamond) analysis that would make me interested in researching the firm again and forming my own view. In any case, rapid turns happen in fast-developing industries, and I would probably find it hard to stay long-term if dark clouds appeared on the horizon (because I don’t understand the industry and its development better than others, and very little compared to the industry gurus).

What do you think of Buffett’s Coca-Cola investment, for example? The industry is easier to understand and the potential market is huge. Do you think you can avoid mistakes more easily by investing in “simpler” companies?

@Tyhjatasku

That’s why I’ve tried to think, before buying a new company, how I would act with the company if its price dropped 20% tomorrow. If I feel like I wouldn’t dare buy more or continue holding, then I know my commitment isn’t at the right level and I should either skip the buy or research more. This is a very strongly emotion-based analysis, but it works as a final check before I add a new company to the portfolio.

That’s a good test. That way you know you’re making an investment for the longer term and won’t give up based on minor fluctuations (as long as your investment thesis remains intact).

@Tyhjatasku

The other side of the coin is that sometimes you have to believe there is no smoke without fire, but how do you know the difference? Narratives drive price development strongly, but how do you know when the narrative is right and when you should trust yourself.

A very important question. In my experience, when your investment thesis is simple and clear, it’s also easier to assess whether the thesis is broken or still intact. If the thesis is hazy at the time of investment, there’s a risk of inventing investment justifications for yourself because you want a “high-quality” or “super potential” company in your portfolio (you also wrote about this). When the price drops, you then have to admit that you can’t judge the company’s situation because you have no idea if the price drop is due to a broken thesis or something else.

This brings us back to the idea of investing only in what you understand as well as possible and what makes it easier for you to act rationally even when weaker times come. Minimizing bad decisions. You mentioned staying away from hyped stocks as one example; I can easily sign off on that.

How much time are you willing to spend getting to know a new company? Do you rule out companies whose industry you don’t know much about because you don’t want to spend a huge amount of time understanding it? Or do you enjoy company research so much that you’re perfectly fine spending a lot of time on it?

[Clark_kent]

Regarding the amount of DD, I think Soros had thoughts that hold a grain of wisdom:

”I don’t like working. I do the absolute minimum necessary to reach a decision. There are people who love working. They amass an inordinate amount of information, much more than is necessary to reach a conclusion. They become attached to certain investments. because they know them intimately.

I am different. I concentrate on the essentials.

When I have to, I work furiously because I am furious that I have to work. When I don’t have to, I don’t work.”

I personally interpret this to mean that if you have to do an unreasonable amount of research, including DCFs and so on, to know whether a company is a good investment or not, it isn’t a good investment. There is also a risk of becoming psychologically anchored to a stock when performing excessive DD.

Then, when you sell the stock and admit your mistake, it is time to work hard to understand what exactly went wrong.

[Tyhjatasku]

@lazyway

Anyway, in a fast-evolving industry, turns happen more quickly. I would probably find it hard to stay patient if darker clouds appeared on the horizon (because I don’t understand the industry and its development that much even if I spent time on it).

You raise excellent questions again!
One thing I’ve paid attention to is the popularity of my companies among other investors. I’ve found that the less discussion and interest a company generates, the better. I’m often bothered by the amount of noise if, for example, there are 20 unread messages in a company thread here overnight about a company I own. It’s certainly good to get opinions and info from fellow investors, but I think there’s a limit where info/discussion becomes more noise than helpful for analysis. That’s why I like it when a company doesn’t evoke much emotion or discussion but just performs quietly in the background.

@lazyway

What do you think about Buffett’s Coca-Cola investment, for example? The industry is easier to understand and the potential market is huge. Do you think it’s easier to avoid mistakes by investing in “simpler” companies?

Yes and no. The old wisdom is to invest in what you understand. If you invested in Marimekko on this principle, it surely went quite well; on the other hand, Nokian Panimo and Posti still have something to prove because they are so new to the stock exchange. In familiar and easily understandable companies, it’s certainly possible to fall into biases where you don’t research the company enough. Even if you know the management and products, you must also focus on value creation opportunities, etc. You can also easily overestimate the potential by believing others will like a product just because you do. So there can be traps in familiar companies as well, but I still think if you do sufficient DD, I’d rather choose an easy and boring industry than one that is very hard to understand.

Continuing with the same example, I’d say I could make a decision faster regarding Nokian Panimo if I wanted to invest, because I know the products (burp) and can focus more on the numbers than understanding the business. If I wanted to research Canatu, for example, a lot of time and effort would go into just understanding the business. It’s definitely a competitive advantage for someone who inherently understands the company’s business.

@lazyway

If the thesis is hazy at the time of investment, there’s a danger of inventing investment rationales just because you want to buy a “high-quality” or “super potential” company for the portfolio (you also wrote about this). When the price drops, you have to admit you can’t assess the situation because you don’t know if the drop is due to the thesis breaking or something else.

Exactly!
I bet we quite easily create different narratives for our positions subconsciously. I think Terry Smith wrote aptly about momentum/AI investors.

Good momentum investors in my experience buy shares which are going
up and sell them when they start going down. They do not convince
themselves, for example, that because they have bought Nvidia
shares when they are going up, they know what is going to happen
with AI or GPUs.

It’s perfectly okay to be a momentum investor or invest in the AI narrative, but I think these two shouldn’t be confused. One good way to remind oneself is to document the theses before investing. This way you can go back and read what the original investment idea was.

@lazyway

How much time are you willing to spend when getting to know a new company? Do you rule out companies whose industry you don’t know much about because you don’t want to spend a lot of time understanding it? Or do you like company research so much that you can easily spend a lot of time? (others are welcome to answer too)

It varies a lot. My starting point is that I want to be interested in the company’s product or industry. I know several good companies that would fit my portfolio profile, but I find their business so incredibly boring that I don’t bother looking into them. The reason for this is that if researching feels repulsive from the start, I don’t believe I’ll succeed in the analysis.

A new industry can be fine to study, as you always learn something new about the world, but I limit the risk by only buying a small position at first and only one company from that industry. This way, I can study the industry with low risk.

As I feel I’m starting to understand the industry a bit better, I dare to add to positions and look for synergies in research work. For example, Medtech is an interesting industry in my opinion, where companies can have good competitive advantages, high profitability, and good growth paths. My competence in evaluating a product’s potential is negligible; I have no healthcare background at all. Therefore, I prefer to invest in companies that have proven they can conduct profitable business. That is, companies must be clearly profitable. That way, I at least reduce the risk of rights issues or the company failing to reach profitability. But in the Medtech industry, I’d say I benefit from a certain kind of pattern recognition. When I research a new company, I already know a bit what to look for. It speeds up the research.

Tracking positions have worked well for me. I start with a 1-3% position that I hold for a quarter. At the same time, I continue researching the company and let ideas mature. When the new quarterly report comes out, I often start considering additions, or on the other hand, if I’ve found something that prevents holding, I end up selling.

On average, I’d say it takes me a week when I first read about a company, while putting numbers into Excel, etc. But then I follow the company more closely for about a quarter, after which I reduce the research. The process isn’t as structured as it might sound However, now I’ve tried to create a sort of shortlist of companies I’ve owned but sold because of price, or companies I’d like to own. I research these, follow them more closely, and then sit and wait for a suitable price…

What does your investment process look like? And what do you pay special attention to when you invest heavily in serial acquirers and investment companies?

[lazyway]

@Tyhjatasku

What does your investment process look like? And what do you pay special attention to when you invest a lot in serial acquirers and investment companies?

My investment process is quite simple. I don’t screen stocks. I practically get all my ideas from the discussion forums I follow. Someone writes about a stock they’ve researched or invested in. That’s where it starts.

If the company is interesting, I go through all the forums I can find about it. Then I look for analyses. These days, I might also take a look at X if information about the company is hard to find elsewhere.

Once this is done, I research the investment thesis (why it would be worth investing in this). And I think about what could go wrong. Do I agree with the information I’ve found? I also study the company’s own materials.

I consider whether the upside and downside are symmetrical (is there a margin of safety). I check the stock’s valuation and forecasts. ROE. If growth potential can be had cheaply or almost for free, that’s a positive (e.g., Aallon Group now). If the company’s products are needed in both good and bad times (a so-called necessity service), that’s a positive.

Investment companies can’t necessarily be looked at the same way. They are often (to generalize slightly) more or less a mixed bag. For them, historical track records are the most important (-> trust in management). I look at the NAV discount. What investments and sectors are in the company’s portfolio. If I can get a handle on earnings-based valuation somehow, great (but at least I can’t always do that).

I’m sometimes a bit impatient, and if I get really excited about something, I might buy it into the portfolio quite quickly. I don’t feel like spending a huge amount of time studying a new company. It probably shouldn’t take more than a couple of workdays, or otherwise, the investment is too difficult for me to understand.

Of course, once you own it, you learn more about the company by following its journey. Fairfax is a dream investment in this sense, as there’s a dedicated discussion forum for it where a lot of high-quality investment discussion is written.