In short, my capital has been depleted by some poor capital allocation decisions. The question of whether I am to become one of the better capital allocators about, is still a significant one for me. However, there is an unequivocal answer as to the question of whether or not I have recently been a significantly better capital allocator than average, using speculation/trading as my means to monetise market insights. And that answer is no.
As is often the case, an inverse of my actions would have brought about some excellent trading results this year. I have been short the Great British Pound, as well as short the Equity Indicies. But my true failing has been to be short shares in Apple Inc.. In this final regard, the tragedy is in the lack of work performed prior to making the decision. It was based on almost no research, and an underlying belief that the company was sound and had good long-term prospects.
Some quick calculations this afternoon led me to conclude that the company would be cheap at around $60bn ($67/share), reasonably priced at around $100bn ($111/share) and expensive at $140bn ($155/share). So, as a value investor, I can only ask myself what was I doing going short at $90/share? And as an aspiring trader, what was I doing doubling up at $100/share?
Well, the losses have run as the stock has risen to around $125 today. Not good.
But, to invert. Had I done the work and seen the shares at around $80, I wonder if I'd have realised that the share price being offered was a bargain, especially given my views about the long-term prospects for the company. And what do INVESTORS do when offered a bargain price for a great company. They buy shares, of course.
All this logic of markets overshooting and trends persisting, I have learned, is nothing when compared to the true test of whether or not someone is a good, or great, trader. It is essentially all about making sure that you loose very little when you are wrong and make a great deal when you are right. In both of these regards, I can now regard myself as having failed over the period in which I've been trading/speculating.
And yet, I feel no sadness or remorse. Indeed, I may find, once the analysis is done, that the lessons have come relatively cheaply to me. And if the lessons have been finally internalised and if I am to go onwards with a renewed focus on my true style and niche area for outperforming in the financial markets, then indeed it will be a valuable lesson. It's just a shame to have not learnt from other people's mistakes.
So, the answer as to whether Mr Buffett or Mr Soros is the one to follow has been answered. And Mr Buffett's lessons hold the key to my future.
His key thoughts on investing, as I understand them, are as follows:
- It's not what you know and what you don't know that matters, but rather how well you define your circle of competence
- The key to investing is to close the doors and be greedy when others are fearful and fearful when others are greedy
- Rule number one - don't lose money. Rule number two - see rule number one
- A great company at a fair price is better than a fair company at a great price
Will this translate into the seeds of an Investment Partnership by May 2010? Well, interestingly it's now just 8 days until May 2009. Buffett clearly stated that he could make 50% with a million dollars of capital. So constraints on performance with 1/10th of that would seem limited. The key is simply to read hundreds of annual reports, to think of the value of these businesses and then compare them to the prices being offered by the market. Where a large discount is offered, or a small discount for a great business, there is an opportunity to invest.
Today I downloaded the past 5 years of annual reports for Apple, Berkshire Hathaway, Man Group, Hallin Marine, Michael Page and William Hill. So there's a fair amount of reading already. I'm currently listening in to the Apple 2nd quarter results conference call. If I was long, especially at $80 or so, I'd be very happy right now(!) But I'm not sad, or angry, or worried. I'm excited.
Here I am in Chamonix, with a depleted capital base from highs less than 4 months ago, and yet with enough to live off for a few years. I have a few months to get some exams over with (and hopefully enjoy a few days out in the mountains). Then I am looking at either working for a major Investment Bank, or setting up Sherman Asset Management. Whatever I've been through in the past is gone now. All that remains is what's ahead. 30 is approaching, and the greatest thing that I have in my favour is that I know where I want to get to. Some days clarity is obscured, and details are unclear, other days the bigger picture returns. But, broadly, managing capital away from the crowds is a huge and inspiring goal. How I will get there is uncertain, but the journey is enjoyable, and that's what counts.
Planning to climb for two days up high now - a last jaunt before hitting the books hard for the CFA in June. To date I've managed 4 routes in 4 months, which is nothing really to write home about (or blog about). But I've met potential climbing partners and have sorted out what life here is like, so if I make a long-term life out here, then the 4 months that have passed so far will not have been in vain. And even if that is not the case, I'm sure that living out here for a winter will be a very special experience that will leave me feeling more whole as a person forever.
Expectations may have not met reality, but the past is always something that should teach you how to live your life better. Dwelling on mistakes, or wishing for a different history is not going to change it. All you have is your future. One life. Live it well.
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