Investing is an evolutionary process. Invariably, investors learn new strategies based on experience. However, there is one constant: buying securities that trade for less than their intrinsic value.
What does change are the strategies employed to exploit pricing differences. If one needs a sterling example of how investors evolve over time, look at Warren Buffett's investing career. The Warren Buffett of the 1950's and 1960's partnership years is far different than the Warren Buffett we have come to know today.
Yes, we should buy companies that we can reasonably assess intrinsic value and buy at prices that will hopefully lead to 15%+ compounded annual returns. But Warren clearly was not a buy and hold forever investor in the early years. In fact, people might look at his decision to allocate 75% of his net worth to GEICO a misguided and risky decisions. Seems to have turned out all right. Investing, after all, involves a bit of luck (the market must agree with you at some point!) and the appropriate mental approach.
There is no question that Mr. Buffett is an investing role model to aspire. However, many self-proclaimed value investors on the web today appear to be missing the point. Buy undervalued securities, but keep it simple. I've seem some amazingly complicated commentaries regarding going long certain senior debt and short subordinated debt in complex bankruptcy cases. As far as I can tell, upside is limited to less than 10% without a well-defined holding period.
And these are guys running less than $10 million in assets. What I can tell my readers without hesitation is that while these value guys have their heart in the right place, they are mucking up Mr. Buffett's most important contribution to investing: that it should not be difficult. Stated differently, the company should not be difficult to understand -- how they make money, the background of management and so forth.
I own 3 stocks. That's it. I can explain the investment thesis in 3 minutes or less on each subject company, what I believe the upside potential to be and the downside risk involved. I can also tell you why I believe the company is mispriced and why I believe the mispricing will relieve itself in short order which I define within 12 months.
For investors running a small book, they should be only focused on ideas that can at least double in the next 12 months. They should be acutely aware of building their track records which is based on results -- the numbers -- the most complicated ideas don't show up in numbers. Just like in baseball, no one knows if a hitter smashed a screaming line drive or a Texas League blooper to right field -- a single is a single in the box score.
In my opinion, young investors trying to build a track record and client base feel compelled to invest in complex situations to implicitly build credibility among their investor base. Rather, young managers should keep it simple and be able to write a concise letter to investors regarding just a few positions that have an asymmetric risk/reward profile. It is almost impossible to come up with more than two or three compelling ideas a year. Your investors will understand that if they are the right clients/partners. And your investment results will likely improve, not too mention your quality of life because managing a handful of investments is easier than a long/short book of a couple dozen positions.
I jokingly tell a fellow value investor @ejburnside that we should only be on the lookout for doubles and babes. Anything else should be rather prosaic and unappetizing. If an investment idea is not a double in 12 months, time to move on. As for the babes, the best long-term companion in the portfolio / life is the girl no one noticed but turned out to be a fox. Those are the investments you should be searching for -- fat pitches to hit out of the park.
People can certainly tell the difference between a single and a grand slam.
Disclosure: Long OSTK, RDCM and RST