Tax & Cost Efficient Fundamental Trading Strategy

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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.


[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


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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