Month: June 2016

Tax & Cost Efficient Fundamental Trading Strategy

See page for author [CC BY 4.0 (http://creativecommons.org/licenses/by/4.0)], via Wikimedia Commons

I must admit, my temperament isn’t suited for Charlie Munger’s Sit On Your Ass investing style or Joel Greenblatt’s Magic Formula style.

The reasons are as follows:

  • (Charlie Munger) In theory it’s great (only buy great businesses at great prices and be idle most of the time), but in practice it’s damn hard regarding the “great price” aspect. I don’t have Charlie Munger’s golden touch of sitting idle in cash for a decade and suddenly buying stocks at the perfect rock bottom of the 2008-2009 bear market. Attempts at this strategy myself with the lack of Charlie Munger’s aptitude, temperament and experience would be near suicide as I’m most likely going to keep second guessing on whether prices can get any better and miss out the whole bear market entirely.
  • (Joel Greenblatt) I also can’t execute Joel Greenblatt’s strategy because his strategy essentially forces each position to be 3% – 5% without the option to average down lest you become overweight. This drives me crazy because every time a stock’s price drops my head keeps telling me “Buy more! It’s even more of a bargain!”

So I have to adopt my style to suit my temperament while still incorporating the principles of both styles.

My strategy now is more of a high turnover strategy that still takes company quality and valuation into consideration, but instead now takes market sentiment into consideration as well to approximate Charlie Munger’s golden touch of hitting perfect rock bottom:

  • (Charlie Munger) Still identify great businesses that I would be comfortable to invest 90% of my net worth in. That way I can happily average down like crazy on the most under-valued of the great businesses shortlist of mine if the stock market keeps dropping
  • (Tax Efficiency) Further filter the list of great businesses shortlist by taking out any company that pays dividends. As a non-US investor I pay 30% tax on dividends and 0% on capital gains, and in a long term it would absolutely kill my compounded returns if I had to keep bleeding away with dividend taxes
  • (Charlie Munger) Let market sentiment guide half the decision on how much of your portfolio should be in stocks or cash. This will be my proxy to Charlie Munger’s golden touch by overweighing my portfolio more and more into stocks as the market sentiment turns sour. I won’t hit perfect rock bottom, but by the time rock bottom happens my cost basis has been averaged down so much it would good enough for my purposes.
  • (Joel Greenblatt) Let valuation guide the other half of the decision on how much of your portfolio should be in stocks or cash, with the potential upside (1 / discount %) of the most under-valued of the great businesses shortlist being the yardstick.
  • (Joel Greenblatt) Rebalance constantly as market sentiment and valuation changes, so that my investments always reflect the most up to date information and is concentrated in the most under-valued opportunity. Rebalance frequency is ~bi-weekly to monthly, which is similar to Magic Formula’s rebalance frequency
  • (Cost Efficiency) Only rebalance in increments of fees being max. 10% of returns [1]. I determine the returns based on typical amount of stock market fluctuation in a month, which is 2.6%.

As for my list of great businesses that don’t pay dividends, I’ve only identified 3 that I would be comfortable investing 90% of my net worth in, namely Amazon, Berkshire Hathaway, and Fiserv (why these 3 would probably be for another post).

What I’ll be doing in the next couple of months is read the annual reports since inception of each of these 3 companies, books / videos about these 3 companies and their management team, and just any dis-confirming evidence I can gather to better assess the catastrophe risk of these 3 companies.

Since Berkshire Hathaway’s the most undervalued of the 3 right now, I’m starting to read Warren Buffett’s letters to shareholders since 1965. I’m currently up to 1978 and it’s been a wonderful gateway to understanding why Warren Buffett operates the way he does today, and how Berkshire Hathaway’s competitive advantage that he’s built over half a century will endure now and beyond Warren Buffett.

[Footnotes]

[1] Determined by my best alternative, which is S&P 500. If I used Vanguard’s S&P 500 which costs 0.05% annual management fee and also costs 0.9% in dividend taxes if S&P 500 was 3% dividend yield and the potential S&P 500 return is 9%, then essentially my best alternative’s implied okay amount of costs is fees being max. 10% of returns

[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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Reflecting on Four Burners Theory

I’ve been constantly thinking about the Four Burners Theory since James Clear released an article about it 7 days ago. The gist of the theory is that everyone has to juggle with four burners in life, namely family, friends, health and work. The dilemma that everyone has to face is that if you want to be successful you need to turn one burner off, and if you want to be really successful you need to turn two burners off.

The reason why I kept thinking about the Four Burners Theory was because it coincided with a recent period of feeling lost, where I was and still am in a middle of a period of reflection upon where I am in life and where I want to go in life.

So where am I in life? Actions speak louder than words, and so when I look at how my days are scheduled, I see a pattern emerging already on what my current habits implicitly prioritize:

[Weekdays] – 8 hours of sleep (Health), 1 hour of walking + calisthenics (Health), 30 minutes of filtering menus for the most healthy food option (Health), 75 minutes of eating healthy food (Health), 9 hours of work (Work), 1 hour reading / thinking about investing (Work), 3 hours 45 minutes of doing random things (Neutral)

[Weekends] – 8 hours of sleep (Health), 1 hour of walking + calisthenics (Health), 30 minutes of filtering menus for the most healthy food option (Health), 75 minutes of eating healthy food (Health), 3 hours reading / thinking about investing (Work), 2 hours chatting with mum (Family), 60 minutes chatting with friends (Friends)

So what do we have? 45% of my time spent on health, 33% of my time spent on work, 18% of my time spent on random things, 3% of my time spent on family and 1% of my time spent on friends.

Time Spent
I must say I’m surprised for the family and friends part. For someone who always publicly espoused that relationships are important to me (heck I even did a Europe trip just to exclusively meet friends), I look very like a hypocrite. Even if I merged family time with friends (I consider my mum to be a very close friend), that still only makes up a meager 4% of my spent time.

And I think that’s why I’m in a period of feeling lost. The recent combination of being friend zoned and getting promoted within a very short time frame made me really question my priorities.

Maybe it’s the pent up sadness / frustration that came from being friend zoned by someone you explicitly told you liked and whom reciprocated and was willing to try out but eventually found out that being in a relationship wasn’t for her that’s still affecting how I feel, but I can just sense how hollow I felt ever since even though I don’t really feel it since I’m very good at subconsciously disguising my emotions even to myself.

And that hollowness is telling me that something’s wrong, and that what’s wrong is my priorities aren’t aligned with what I want.

I think what it boils down is that I have no intention to be very successful in two aspects of life (which I am implicitly doing by spending 78% of my time on work and health), but rather be successful in three aspects of life (work, health and friends). And I am failing miserably on the latter.

One reason why I’m failing miserably is that I’m looking for heart to heart friendships in the wrong places. The workplace is a horrible place to find such relationships due to the need for professionalism and the huge amounts of conflict of interests between colleagues. Going to interest groups in meetup.com hasn’t been satisfying so far as they usually just end up being very small talk oriented. Overall my experience since university graduation is that it’s been very hard to get to know new friends which might develop into more heart to heart friendships.

Another reason why I’m failing miserably is that I seem to attract people who don’t like spending too much time together all the time. I mean sure that means that I can keep the friendships of a lot of people while I spend personal time with myself. But the downside is that I’m just never close to any particular friend. And come to think of it, I’ve never had any close friends in a conventional sense since I’m never always thinking of someone when I make plans or want to find someone to talk to.

Which leads to the other reason why I’m failing miserably. I’ve become very reclusive. I don’t know if it’s because the amount of time spent being by myself when outside of work, but whenever there’s a problem (emotionally, financially, physically etc.), my first reaction is never to ask for help or reach out – my first reaction is to deal with it myself. And the thing is, I’m usually able to solve it almost all the time. Even for the friend zone incident, sure it hurt like hell and I sure would like to cry those negative emotions out and get it over with, but I never sought out anyone for a crying shoulder or attentive ear, I just dealt with it just like how I deal with any other adversity I’ve faced since university graduation – with Stoic calm. I just acknowledge that the negative emotions are there but I’m able to keep my composure and keep my performance level or decision making at the same level. And this to a certain extent makes me less human as I just rarely share with others how I really feel, and thus it’s hard to expect anyone to reciprocate and share with you how they really feel too, so I just end up not having close heart to heart relationships.

So for all the success I’m having so far in my career, it’s as I expected, not fulfilling. I always knew I didn’t want career to be my only focus in life, but ironically it has been. For someone who keeps defending himself as not a workaholic but an unwilling person who’s working workaholic hours, I sure do act like one.

So I don’t know. I’m stuck. It’s not the first time where I kind of feel lost and sad about being lonely. The only difference is I would really break down and cry during high school or university while now I’m just calmly typing up this article and being very callous to my emotions.