In Howard Marks’ memo called “Risk Revisited“, he mentions the idea that to outperform the market, you must be contrarian or face getting average or below average results. He then goes onto mention that the ways one can be contrarian is to take on four types of risks, namely credit risk, illiquidity risk, concentration risk and leverage risk.
Another thing that’s very contrarian in the modern day stock market is investment horizon, where the average holding period of stocks has been decreasing over the years to less than a year holding period. In the words of , “ ” For me, that would be impatience risk, the risk of being impatient and doing too much trading as a result.
This is one of the reasons why I’ve always said it makes perfect sense to invest in NCAV stocks as an amateur investor (“If you’re not professional, you are thus an amateur” – Warren Buffett), since it’s illiquid, which in turn scares away lots of competition.
However, the beauty of Charlie Munger’s “Sit on your ass investing” style is that compared to only illiquidity risk of NCAV stocks, I have the option to also take up concentration risk, leverage risk and impatience risk as well.
When offered a big fat pitch (eg. bear market), most retail and institutional investors are forced to sell thus making me take up illiquidity risk as I would be buying stocks that would be very hard to sell immediately, and also I would be tying up cash into stocks thus increasing my own illiquidity risk. At that critical moment of time, I can also safely leverage up to a maximum and go into only a concentrated few of the greatest companies in the world. The fact that the companies I would invest in are the best of the best reduces the probability of them blowing up while offering spectacular returns if held for a long time.
Another situation where you eliminate almost all competition is to invest in distressed debt during a bear market, since by then you would be taking up credit risk as well besides illiquidity risk, concentration risk and leverage risk, but unfortunately not impatience risk as the strategy involves selling bonds after reaching ideal value. That is something that most amateur investors (eg. me) don’t have the expertise in unfortunately, so I’ll be sticking with great companies for now.
Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)