Knowing your investment style
How discovering the fracture points between my investment goals and investment style has helped me outperform.
Knowing what investment style best suits an investor is a critical concept I first came across reading Jack Shwager’s Market Wizard’s books. It sounds simple. A Sun Tzu' “ism” of ‘know thyself’. But it’s not that simple or easy. It’s taken me 12 years of investing to internalize just how hard it is. A personal investment style isn’t as easy as mimicking some successful investor whose ideas sound right. It’s evolving an investment style that fits your personal traits. Lacking this alignment has been the cause for a lot of failed investments. Recognizing the points of alignment and misalignment of my own personal style is what has allowed me to outperform the market for the past few years.
Finding my investment style
My investment style has coalesced around being able to answer three things:
What are my goals and time horizon.
What are my personality traits: such as being calm, patient or contrarian.
What are my “investment business” advantages: information, work process, fund size and time horizon.
To succeed you need who you are (question #2) to fit with what you want to achieve (question #1). Once you have that, question #3 helps you figure out the how.
Goals and time horizon
“Beating the market” or “making money” is an easy goal to have, but narrowing and focusing it down is more important: by how much do I aim to beat the market? Am I looking for capital preservation or appreciation? What’s my time horizon for reaching these goals? What real life goals or situations are impacting my financial decision making?
It’s taken me a few years to coalesce around my present goals and time horizon: to compound my portfolio at 30% for five years. That goal has tangible life impacts for me. This hasn’t always been my goal or time horizon. For example when I started university I knew I’d have less time to deal with stocks and therefore went for a more passive ‘hold and forget’ approach in companies I believed in for the next five years, but didn’t necessarily want to mange “to beat the market” (a few examples being Starbucks, Google, Yum Brands, Enbridge).
Is this a goal that’s set in stone? No chance. Achieving a CAGR of 30% over five years is nigh on impossible, but it’s better to have big goals to shoot for, as long as I don’t forget Buffet’s first rule of investing: not to lose money (or the second rule of investing which is to not forget rule #1)
Personality traits
Understanding my personality traits and how they interact with my goals is where the first step of magic happens. It took me a long time to zero in on this interplay as the cause for many of my failed trades and investments. Simply, when goals don’t align with personality traits, portfolio fracture points occur.
I’ve found over the years that I have a few key traits that impact investing greatly:
I’m relatively calm and detached during market turbulence.
I can be impatient and bias towards action.
I’m very comfortable being a contrarian (although I’m also fine being part of the herd).
These aren’t advantages or disadvantages per se, but manifest in various ways that can be either a plus or a minus in investing and being self aware of them has proven critical to performing well.
A few examples of where I’ve felt these traits play out: I’m calm during market turmoil, which helps me ‘buy the dip’ and I’ve never panic sold yet. During the Covid 19 sell off when fear roiled the markets, I was able to think objectively about the impacts of what we knew about the Covid 19 virus and this led me to double down during the Covid lows. This also helped me to sell out later that year when the market was euphoric. The same detachedness prevented me from holding until the very highs as it helped me buy the lows.
Impatience has led me to over trade and take profits too early on multiple positions over the years in my desire to book a win. It’s also led me to scale into companies too early, as I long to ‘do something’ about a company that’s dropping when I think it’s internal value is worth more. I bias towards action. The dissonance between my investment goals and longer term investing style and my personal trait towards impatience have been one of my portfolio fracture points.
The last main personality trait I consider to have a large impact on my investment style is that I’m very comfortable being contrarian. Sometimes even being very very contrarian. Not everyone likes or feels comfortable going against the grain, but for some reason I am. I’ve noticed that I don’t like being a contrarian for contrarianism sake, simply that sometimes I think very differently than the market and that’s ok. Being contrarian has led to my greatest gains (Spotify) and losses (Magnum Hunter Resources) and both stem from the same thing: the ability and comfort to bet big against the market.
Process (dis)advantages
Investing is a business. A competitive business. How do I manage it, especially in light of my fracture points? What are my edges and processes? Over the years I’ve learned that there are a few distinctive parts to my investment process.
I do a lot of homework on companies, but rarely more than the best in the business. I’ll read all the financial filings, listen to conference calls and watch media appearances. However I’m not likely to be as rigorous as professional analysts and legwork is hard to do for someone with a day job. I also don’t have access to proprietary data.
I have a unique understanding of technology trends and markets due to my day job investing and building startups. Network effects, aggregation theory, technological disruption and the customer adoption lifecycle are all theories that were in my lexicon from early days, far before they became talking points in ‘the market’. AI started gaining huge traction in 2016. Autonomous vehicles were clearly a longer term play than the market was assuming already as early as 2019. There are trends that one sees early on in startups that take years to impact public markets.
I’m a private investor with no reporting duties, no fixed time horizon or benchmark to beat. I can afford to take a long term view and not deal with ‘mark to market’ issues. This has helped me ride high volatility assets. My ‘fund size’ is tiny — I can invest in any asset and have it be a meaningful part of my portfolio without any liquidity concerns.
I’ve lacked discipline in managing my investment process: making sure I do the homework at the highest level, set boundaries, buy and sell targets.
Discovering fracture points
Fracture points occur when investment goals and personality traits don’t align and proper processes haven’t been put into action to mitigate these fracture points.
Most of my personality traits align with my goals. I’m comfortable holding a company I believe in for the long term despite market turmoil. I’m very comfortable with higher risk and higher volatility positions. I’m comfortable being very concentrated. All these traits are needed to achieve 30% returns in the market in my opinion.
However I also have some fracture points. My investment goals have never been short term in nature. I’ve never felt like being an active trader is right for me, yet my bias is always towards action. I struggle with being patient.
I understand compounding in theory but feel that I need to do something now. That I can speed up the process by doing something. If I had a shorter term investment style of active trading, impatience could have been a boon. Instead it’s something that I have to pay attention to and overcome with process decisions.
Being contrarian is also a fracture point. Being contrarian and right have led to my biggest gains, helping me achieve my goals. Being contrarian and wrong however…well…that’s been a mistake.
When I’m right, I’m very right. When I’m wrong, I’m very wrong. To achieve outsized returns I almost have to have a belief that the market is missing something big, which is contrarian in nature. However, without proper process management, this can become a huge detractor — therefore a fracture point.
It’s recognizing these kind of fracture points that I wasn’t aware of during my early investing years, that I’m now on the lookout for, and have put process into place to mitigate, that have helped me outperform.
My investment style
Combining everything above, my investment style is centered on my areas of strength: Mainly technology/growth companies with a long-term focus spattered with a few contrarian bets and ample cash to take advantage of market dislocations.
I’ve learned to focus on long term growers as I’ve experienced losing out on upside because of impatient short-term gain taking. Above all things I believe the market rewards long term growth, and the stability and riskiness of that growth.
Another aspect of my investment style that’s evolved is a focus on technology. Initially, I invested in various industries, including heavy machinery and energy, with significant stakes in companies like Caterpillar, EOG Resources, Magnum Hunter Resources, and Enbridge. However, due to my lack of understanding in these sectors, and my lack of being able to forecast the commodity cycles that often underpin them, my results were mixed. My background in technology, both as an entrepreneur and investor, provides me with the insight to align my investments with long-term industry trends. I understand the metrics much better, the risks and the value chain.
Contrarianism can play out in different ways. It can be believing in a turn around story, a company that I think the market doesn’t ‘get’, a large market swing or simply a shorter term mis-pricing that has outsized risk/reward. This can be risky, as going against the consensus can lead to significant losses, but it can also be highly rewarding when my contrarian views prove correct.
Areas of improvement
Throughout my investment journey, I’ve learned valuable lessons from esteemed investors and authors like Howard Marks and Chris Mayer (and many many others). Marks’ concept of focusing on either having more winners or fewer losers has been particularly influential. As a contrarian, I’m comfortable with temporary losses in the belief that I’m correct and the market is wrong, even if it means facing substantial losses. Consequently, my strategy relies on securing large gains, as frequent trading isn’t my forte. This necessitates significant wins when I double down on a position.
However, being comfortable with losses and recognizing when I’m wrong is challenging due to my contrarian nature. Risk management doesn’t come naturally to me, for this exact reason — when price is the main indicator of being right or wrong, and I’m a contrarian, how do I know when I’m wrong or simply ‘more right’?
Therefore having fewer losers might be something that I can’t actually improve that much on. Risk management will help me decrease the size of the lowers. I believe the way to mitigate that is to make sure that my winners really do outperform by letting them compound.
To quote yet another Howard Marks memo 'Something of Value' (italics are mine):
Here's how Andrew puts it today:
"It's important to understand the paramount importance of compounding, and how rare and special long-term compounders are. This is antithetical to the "it's up, so sell" mentality but, in my opinion, critical to long-term investment success...
In other words, if you have a compounding machine with the potential to do so for decades, you basically shouldn't think about selling it (unless, of course, your thesis becomes less probable). Compounding at high rates over an investment career is very hard, but doing it by finding something that doubles, then moving on to another thing that doubles, and so on and so on is, in my opinion, nearly impossible. It requires that you develop correct insights about a large number of investment situations over a long period of time. It also requires that you execute well on both the buy and the sell each time.
When you multiply together the probabilities of succeeding at a large number of challenging tasks, the probability of doing them all correctly becomes very low. It's much more feasible to have great insights about a small number of potentially huge winners, recognize how truly rare such insights and winners are, and not counteract them up by selling prematurely."
So holding on to winners for a long, long time is the way to go. Which is why I’ve also been working on improving my patience. Both on holding but also particularly with the timing of making my investments, aiming to space out my purchases over months or even years.
In summary, my investment approach is a tech-centric portfolio with a bias towards long-duration and durability growth, focusing on companies that have the potential to deliver substantial returns over a two to ten-year period. This includes an allowance for short-term losses and contrarian plays during market disruptions. The areas I aim to improve are managing the size and timing of my purchases, improving when to sell and enhancing my risk management for contrarian investments. If this approach resonates with you, you might find value in my investment analysis and writings.
Good article!