The DIY Investing Podcast
A focus on eliminating your investment mistakes is the easiest way to improve your investment returns. Don't repeat the same mistake twice by making sure you learn the right lessons. Signal vs Noise. Process vs Outcomes.
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Both momentum investing and value investing provide excess returns. This episode outlines how I plan to profit from both forms in my investing process. Specifically, price and business momentum will be added to value investing. The use of price momentum should limit my losses when mistakes are made. Meanwhile, by analyzing business momentum I am likely to reduce the probability of making mistakes.
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The process of researching stocks requires a significant amount of time investment. You should optimize the time you spend researching by focusing on three questions: Cheap? Good? Safe? You should be able to answer in ten hours or less.
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In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.
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In this episode, I outline my top investing goals for the new year. I aim to identify 2 new companies worth buying and my goal is to attain a 20%+ annual return for 2021. I also cover process-based goals relating to how to go about investing research. Finally, I would like to pass the Series 65 exam so that I can begin managing money for outside clients.
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Many value investors lack a clear strategy on when to sell stocks in their portfolio. This decision ought to be based on opportunity cost, potential investment mistakes, intrinsic value, and return differential between old and new companies.
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An investment is any investment operation that utilizes a margin of safety, provides an adequate return of 10% or more, earns that return from fundamental cash flows, is a positive-sum game, and bounded by a range of prices and terms.
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Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. Intrinsic value is fixed, but your estimate of intrinsic value will change over time.
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The Deflation Myth has been accepted primarily because economists have used false assumptions in their analysis and because debtors, namely world governments, tend to hold massive political and cultural power. It is in their best interest to convince you that deflation is bad so that they can inflate away their debts. Yet, most investors are harmed more by inflation than they would be by deflation.
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Be conservative when valuing companies. Don't give managers credit where they don't deserve it. Enterprise value should only be used when companies hold debt. Yet, you should only buy companies with net cash.
info_outlineMental Models discussed in this podcast:
- Deferred Tax Liability
- Skin-in-the-game
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Show Outline
The full show notes for this episode are available at https://www.diyinvesting.org/Episode108
Coffee Can Portfolio
- Seeking "Never Sell" stocks - only certain companies qualify
- Benefits from a deferred tax liability (Can become quite significant over time)
- Preferable for individual investors. Hard to implement professionally
Characteristics of a Coffee Can Stock
- An industry that lacks disruption risk
- Banking (Example)
- Stable and high returns on capital/equity (15% or higher)
- Long-term sustainable organic growth of at least 5% but preferably 10-15%. (You don't necessarily want 20%+ growers that will eventually lose all growth)
- Low competition, could be regulated monopoly or oligopoly
- Founder led company or a long-term CEO with skin-in-the-game
- Zero or low debt/leverage policies
- The ability to be a ten-bagger or a 100-bagger
- Usually small with the ability to grow large.
- A small competitor with a competitive advantage (cost perhaps) over larger competitors in a big market.
- Think early Walmart, Costco, Home Depot, GEICO
- Intelligent capital allocation strategies that benefit shareholders
- Lack of dilution
- Growing dividends or buybacks over time (Dividend Champion type stocks)
- Unless it is a roll-up strategy, an average to acquisitions can be helpful, because they often destroy shareholder value.
You can't think of your stocks as a "Portfolio"
- You are a true business owner
- Judge your success by the performance of individual companies, not the overall portfolio return.
- Logical point: If every individual company compounds at 10% per year or more, then the portfolio as a whole by definition must also compound by at least 10% per year.
- Position sizing no longer matters. Your greatest winners may eventually become 50%, 75%, or 90% of your total portfolio. That's okay. That's how the strategy works. This is how the strategy outperforms.
How to implement a Coffee Can Portfolio (The Process)
- Buy one new stock a year, each year you work.
- Put all of your savings for the year into that company.
- Never sell.
- Ideally register for the shares in direct certificate form. It can be electronically held at a transfer agent, but after the year, don't hold the shares directly with a stockbroker.
- This limits your ability to sell the shares and is a huge psychological boost in implementing the strategy.
Summary:
In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.