Twitter Spaces: Deep Value Investing w/ @BuyCheapAndPray and @theotheraharon
Aug 16, 2024
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@BuyCheapAndPray, a deep value investing contributor, and @theotheraharon, an expert in investment strategies, dive into the world of undervalued stocks. They cover position sizing, emphasizing diversification and risk management in portfolio construction. Listeners learn valuable lessons from past mistakes and gain insights into current investment opportunities, including AQN and Porsche. The duo discusses the importance of a contrarian mindset and the critical metrics needed to identify hidden potential in cheap stocks, making this conversation a treasure trove for aspiring investors.
The podcast explores contrasting investment strategies of concentrated versus diversified portfolios, highlighting their respective advantages and risks in fluctuating interest rate environments.
Participants emphasize the significance of a systematic stock screening process rooted in Benjamin Graham's teachings to identify undervalued companies with substantial growth potential.
The discussion underscores the emotional complexities of deep value investing and the importance of maintaining a detached focus for successful decision-making.
Deep dives
Contrasting Investment Strategies
The discussion highlights two distinct investment strategies: concentrated portfolios and diversified portfolios. One camp favors buying and holding a small number of stocks, which historically thrived in a low-interest-rate environment. Conversely, a contrasting approach involves creating a diversified portfolio, inspired by Walter Schloss, focusing on purchasing undervalued stocks in greater quantities. As interest rates have increased, there have been challenges for those who maintain concentrated positions, emphasizing the potential risks involved.
Learning from Key Figures
The podcast features insights from influential figures in value investing, particularly Keith Gill, known as RoaringKitty. He introduced the idea of a diversified portfolio, utilizing small allocations for high-risk stocks and larger weights for more stable investments. This method proved successful and encouraged one participant to adopt a similar strategy after recognizing past mistakes tied to concentration. The conversation emphasizes the importance of learning from successful investors and adapting their principles to one’s own strategy.
Research and Stock Screening Processes
Participants elaborate on their stock screening methods, incorporating quantitative metrics rooted in the teachings of Benjamin Graham. They identify companies trading below book value, tangible book value, or working capital as potential investment opportunities. Additionally, they emphasize the importance of thorough due diligence, assessing financial health factors like revenue growth, debt levels, and free cash flow generation. This well-defined screening process aims to highlight undervalued opportunities that may offer significant upside potential.
Portfolio Construction and Risk Management
The discussion advances to portfolio construction, where one participant reveals managing a diverse array of stocks while allocating minimal capital to high-risk positions. This strategy minimizes exposure to potential losses, allowing for greater flexibility in decision-making. The speakers argue that a well-diversified portfolio can cushion losses from failed investments, contrasting with the risks associated with a concentrated approach. They emphasize that thoughtful allocation can help investors navigate volatile markets while seeking lucrative opportunities.
Challenges and Opportunities in Deep Value Investing
The conversation acknowledges the complexities and emotional challenges of investing in deep value opportunities, like underperforming stocks. Many investors hesitate, fearing losses in stocks deemed 'trash', but the speakers suggest there's potential for substantial gains if these stocks rebound. They stress the necessity of maintaining focus and detachment, allowing investors to sell positions shortly after assessing their value, rather than holding out of fear of admitting mistakes. The discussion concludes with a recognition that value investing in distressed companies can yield substantial rewards if approached correctly.
I hope you guys enjoy my Twitter Spaces conversation on all things Deep Value Investing.
Big thanks to my two co-hosts @BuyCheapAndPray and @theotheraharon for making this Spaces worth the listen.
We cover a ton of ground during the conversation, including:
Position sizing
Research process
Portfolio construction
Investment criteria
Lessons learned from mistakes
Deep value mentors/idols
And more.
You're going to love this episode.
Finally, a big thanks to our sponsors for making this episode happen.
Mitimco
This episode is brought to you by MIT Investment Management Company, also known as MITIMCo, the investment office of MIT. Each year, MITIMCo invests in a handful of new emerging managers who it believes can earn exceptional long-term returns in support of MIT's mission. To help the emerging manager community more broadly, they created emergingmanagers.org, a website for emerging manager stockpickers.
I highly recommend the site for those looking to start a stock-picking fund or just learning about how others have done it. You'll find essays and interviews by successful emerging managers, service providers used by MIT's own managers, essays MITIMCo has written for emerging managers, and more!
TIKR
TIKR is THE BEST resource for all stock market data, I use TIKR every day in my process, and I know you will too. Make sure to check them out at TIKR.com/hive.
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