Before we get into the fun of revealing our portfolio and discussing our specific stock picks, I’d like to share my personal investing philosophy. I’ve been very spoiled with the opportunity to learn a great deal about investment fundamentals, strategy, and history through studies at Wharton, internships at financial institutions, and 8+ years at a private equity shop focused on real estate. This accounts for 25% of my philosophy- the other 75% came from investing my own money and learning what did and didn’t work for me. Below are some personal guidelines for identifying specific equity investments:
- Look for companies that are the best or near the best at what they do and have “moat-like” characteristics.
- Ask yourself if this is a company that you would be willing to invest in for 15 years based on their product, industry, and reputation.
- Pay close attention to a company’s balance sheet and capital investments. A High amount of leverage is not necessarily a bad thing, but make sure you believe the company is properly capitalized to execute their business plan and that they adequately invest in growth and development.
- Once you have identified companies that fit criteria 1-3, filter out the companies that appear to be undervalued relative to their peers and the general market based on factors such as P/E ratio, return on equity, and price to book.
- Pay more attention to how companies perform and the hard numbers than what their executives say or the guidance they provide. As an example, I love buying companies that dip on disappointing guidance and profit beats for the current quarter.
- Once you have picked your investments, track them closely and don’t be afraid to either take gains or cut losses based on the movements of the market. I don’t necessarily advocate short-term trading, but taking advantage of quick, abnormal movements in specific equities is an advantage the individual investor has over institutional investors and mutual funds. I truly believe a disciplined active management approach to specific equities can help an investor mitigate the impacts of larger adverse macro movements and help take chips off the table in an bubble environment.
Anyone who reads investment literature and blogs regularly has probably come across the “trading sardines” story in which a buyer of regularly traded sardine commodities finally decides to eat his sardines and discovers they are rotten upon opening the can. Upon confronting the seller, the buyer is informed that he purchased “trading sardines, not eating sardines”. My guidelines above are intended to avoid this cautionary tale. I believe in limiting your investments to “eating sardines” at bargain values and taking advantage of liquid markets to trade to your advantage as an individual investor.
I’ve traded my favorite stock over 20 times in the last 6 years with the comfort that if sh**t hits the fan and I’m caught in a big loss, I know that I believe in my investment over the long term and am willing to wait out macro market gyrations. This approach to my general portfolio has worked very well over the past 15 years, and I hope that I can help ATG reap similar results in the 15 years to come.