An interesting, a tumultuous and an utterly horrifying year for the developed world has come to an end and even though I am thankful the year was extremely kind to me personally I find it difficult to shake off the nasty feeling that something terrible could be about to unfold in the world. More on that in my follow-up post. In it I will outline an investment mistake that I will make in 2017 and there is nothing I can do to prevent it due to a flaw in my mental constitution…
For now though I’d like to focus on the one giant mistake that I know for sure that I committed in 2016 because I think it is one many of us make and I think it is very much avoidable. At the end of my post I will also get into my current top positions.
Preparation, damn it!
Trump wins and I sit and sweat like an idiot researching military defense companies and pharmaceuticals after the fact instead of putting in the work ahead of time. This isn’t merely one of those excusable mistakes we all make during a year. Instead this is one that cannot be brushed off lightly because it is one of few areas where there is a significant edge to be had by individual investors who are free to ignore the day-to-day noise as opposed to many money managers who get measured on quarterly performance.
Frantic research leads to fuzzy thinking, which again tends to lead to rushed, subpar decisions. (I bought one company, Invisio Communications, after only a few hours of research only to sell it the next day after further research. Great company, stretched valuation in the near term.)
So the lesson is: Plan ahead or prepare for getting pushed around by the market and expect mediocre results.
Definitely easier said than done as many events will be of the ”thief in the dark”-variety, i.e. completely unknowable ahead of time. But there are others that are dimly available to our eyes out there in the distance.
Think ahead – examples
Suppose, for example, that China is forced to devalue their currency by a massive amount, say 25%. This would send violent shock waves through the global markets but it would probably also cause many Chinese stocks to become extremely attractive right after the devaluation (as opposed to before!). And I imagine in the first few hours of the panic one may be able to pick up some nice bargains while the markets are searching for their footings. This presupposes that one has done the work on the potential individual companies and that money can be moved to those markets quickly.
For individual companies there will often be ”trigger events” where one can calculate the value of each outcome ahead of time. This road is perhaps a better one to take, especially with regards to smaller companies, than trying to get ahead on the macro front.
Time is of the essence
You will notice that I am preoccupied by time and tactics here. The reason being that I have a lot of respect for the market’s ability to correct mispricings quite quickly and so often they will only appear for short periods of time before the gap is closed.
Many value investors will not bother with such tactical maneuverings preferring instead to search for compounders and worry less about hitting them at the point of maximum pessimism. This strategy relies on superior analytical ability and patience (the mother of all edges) and it is a fine one.
It isn’t one that is ideally suited to my personality though as I tend to look more in the deep value and ”special situations” space where mispricings are more temporary in nature and where my superior tolerance for pain (if I may say so myself!) can create potential edges in the market. A more opportunistic mindset.
For those wondering about my tolerance for pain… Yes, your suspicions are correct: This skill was carefully crafted over years as a slave in a sadomasochistic relationship giving in to the needs of the wife! That plus a side career playing cards characterized by violent volatility on a daily basis helped as well.
Strategic focus
If I had to put percentages on my general strategic focus I’d say somewhere in the range of 60% deep value, 25% tactical/special situations, 15% buy-and-hold compounding and 0% momentum. So compared to many buy-and-hold value investors I usually turn over my portfolio more than most, often in the 100-200% range.
Unusually low portfolio turnover for me in 2016
In 2016 my big positions in Wilhelmsen Holding and Arise Windpower (which at one point constituted 80% of my overall portfolio, unfortunately I sold off 1/3 in WWIB following Trump) called for lots of waiting, so I did almost no buying and selling until mid-September – 11% of my portfolio was turned over altogether, unusually low for me. By the end of the year that had climbed to 40% due to rearrangements in the portfolio following the US election, which I believe to be a game changer event.
My top 6 positions going into 2017
As of this moment my top 6 positions and their weightings are:
Wilhelm Wilhelmsen Holding (WWIB, NO) – 32% weighting
Cash and equivalents – 18% (including time arbitrage positions)
Mylan (MYL, US) – 13%
Arise Windpower (ARISE, SE) – 11%
Protector Forsikring (PROTCT, NO) – 8%
AO Johansen (AOJ, DK) – 7%
(Smaller positions – 11%)
Cash = optionality
The plan is to increase cash to about 30% in the following month or two as I am becoming more and more fearful of the mounting risks on multiple fronts and want the optionality that cash provides.
It won’t be fun to watch the market likely go higher while sitting on cash but there are meditative ego lessons to be learned in the process of sitting on one’s hands…
My next post
In my next post I will get into the risks that I see as well as go into the mistake I am inevitably going to make in 2017.If you are in the mood for some gloom and some doom stay tuned for For Those About to Trump – I Salute You!
hammerinvesting 
Hi, I like reading your posts. I have been a shareholder of WWIB for a large part because of your analysis. I have read the agreement on the upcoming merger and think there will be an arbitrage opportunity when the merger happens. Could you send me an email so we can discuss in private? (I can’t find your email)
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Interesting thoughts. I believe the exact contrary. I think it is impossible to be prepared for everything and act in seconds when the event you have prepared for occurred. There are simply so much different things and so many macro variables that can change. Combined with company specific events I find it much more effective to be reactive and start digging when the shit already has hit the fan, or the contrary.
This is very much a question about “what is your edge?”. If your edge is supposed to be to be able to act fast on arbitrage situations when something has occurred (before the reacive guys like me has been able to catch up) then it is reasonable to prepare for everything. Otherwise, it is better to focus on what you know and prepare for nothing.
This post on Oddball stocks is quite interesting on the subject:
http://www.oddballstocks.com/2017/01/why-i-dont-use-watch-lists.html
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Thanks for a thought provoking reply, Kenny. Definitely a lot of merits to the “here and now”-approach as well and digging AFTER the shit has hit the fan is certainly the more time efficient (and mindful!) method and it also one I practise a lot myself.
However, I’d argue the “always on alert”-approach is also a fine one if one enjoys the process of always bouncing ideas around and I’d also argue it improves sharpness of the mind. In this process one is bound to get a lot of ideas one otherwise would not have had. I’d guess someone like Warren Buffett gets much of his sharpness from his constant reading. An additional benefit is that for those who have difficulties keeping their emotions in check when big stuff happens I’d also argue that staying on top of fundamentals keeps those indivduals from acting when they should not.
One downside to the “always on the alert”-approach that I preached is that to some degree it can breed a negative feeling of “always something to do” and never being completely relaxed…! But I’d also argue that top performers almost always pay that price. In that respect I don’t really see eye to eye with the oddball article which believes in genius more than in hard work. The harder I work the more ideas I produce (and incidently that also goes for music ideas, a top he brings up in his article). But I guess we are all constructed differently and thank god for that! Would be a boring world otherwise.
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