A Slight Shift in Investment Strategy

By Nick Hobgood (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

I’m still very blue-chip stock oriented and I’m still hedging based on some form of indicator on market sentiment.

The only difference is that I’m much more diversified (44 stocks as of May 10th 2016), I only exclusively hold world class companies’ stocks (Wide Moat + Exemplary Stewardship Rating by Morningstar) and I hedge not only on market sentiment but also on market valuation as well (Fear & Greed Indicator and Shiller P/E).

The reason behind this shift in investment strategy were as follows:

  • Even though I was generating 30+% annualized returns between the period of March to May 2016 for my stocks (I was ~2/3 hedged in cash, so ~10+% actual returns), the volatility that came in investing heavily in the most undervalued stocks still made feel very uneasy
  • Another thing that made me uneasy was that even though majority of very undervalued stocks I invested were blue-chip stocks (wide moat or narrow moat by Morningstar definition), I still had a sizeable portion of no moat stocks as well which made me uncomfortable as they could easily die during an economic recession
  • The shift to a diversified portfolio of world class companies was simply because of two statements that Charlie Munger and Joel Greenblatt made (I unfortunately can’t find the sources for both statements, but I definitely remember reading them):
  • I’ve also taken market valuation into consideration when considering how much cash to hedge because even though the overreaction of market sentiment is good (over-fearful = great buying opportunity and vice versa), I could have easily mistook an over-fearful reaction to the beginning of a bear market as a great time to go all in, when it would’ve been more prudent to wait longer while the bear market kept raging on
  • Every time I wrote an equity research report and compared it with Morningstar’s equity research report, I’ve always been impressed at how much better their research is versus an amateur like me. So to not let my ego get in the way, I now use Morningstar’s research extensively so that I can focus on portfolio management
  • Since I am heavily relying on research not from me, it provides a further reason to be widely diversified since I can’t guarantee that Morningstar is right on each stock, but I know on aggregate that Morningstar would be right based on my due diligence on each equity research report.

Until I somehow have a lot of time to research companies in-depth myself and beat Morningstar in their game of research, this will be the investment strategy that I will deploy.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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