10 Takeaways From a Year of Investing
Note: this article is not financial advice and is simply my thoughts. It’s also important to note that none of these are hard rules. Almost every one of these opinions has exceptions.
Position sizing is an underestimated tool that investors should use more often. In its simplest form, position sizing expands the number of opportunities that you can invest in. Find a high-growth company that you believe can 10x, but also has a lot of uncertainty and could go down 50% or more? A 1% or 2% sizing is enough to make a difference in your portfolio here, while significantly protecting you from downside.
Any strategy that consistently beats the market is a valid strategy. Too many investors, including professional investors, think there’s a right or wrong way to participate in the market. Personally, any strategy that delivers consistent market-beating results is valid for me. I often think people get stuck following some book or other opinions, not realizing that there are many strategies people have successfully employed to generate market-beating returns. If investing in your 3 best-of-ideas works, great. If investing in 50 high-growth companies works for you, again, great.
There is always opportunity in the market. Microcaps and small caps are not nearly as covered, and hedge funds usually don’t bother because they’re too small. Massive dislocations in value occur quite regularly in smaller stocks. There’s also thousands of available stocks outside the United States that often receive less attention. The people who believe there is no opportunity are simply not trying very hard.
When investing internationally, the best place to start is first-world countries with a strong currency and a reliable rule of law. Canada, New Zealand, and Australia are all great examples of this. I generally include Western Europe here as well. Korea and Japan also deserve an honorable mention. In these markets, you should apply a modest discount relative to U.S. businesses. A high-quality business in these markets will still demand high multiples and move appropriately on good earnings reports. If it’s not a first-world country, you should be much more generous with your margin for error and much more skeptical of growth. Many developing countries experience higher inflation, which results in higher revenues and earnings. Kaspi is a great example of this. It’s a company in Kazakhstan that has inflated numbers due to the inflation rate. It appears to deliver 20-30% annual growth, but in reality, it’s much closer to 10% real growth when accounting for inflation.
If your thesis on a business changes, you should sell immediately and move on. It is almost always a massive mistake to continue bag holding when you realize you are wrong, as you’ve already picked a losing horse. By bagholding a loser, you’re essentially doubling down on that losing horse instead of moving to a higher-quality or better opportunity. Kaspi is a company I bought at all-time highs last year and sold around $100/share earlier this year (30% loss). I transferred those funds to Brookfield ($BN) and Hims. I generated a 100% return on my Hims investment and 20%+ on my Brookfield investment. Kaspi is now down to $75 a share.
Only sell your winners for clear and obvious upgrades. Even if you invest in something that is slightly better upside, you’ll still have to pay taxes to make that investment, and as a result, it reduces your margin for error. That’s why I have so much focus on clear and obvious. It’s also worth noting that winners are typically winning for a reason. It means the business is doing well. Every time you take a new bet, you take a chance at switching to a company where that’s not the case. While it’s inevitable to make bad decisions on selling too early, you can at least mitigate the damage by trying to focus on only making investments that you believe to be a clear upgrade.
A company’s moat is best used as a pricing function, not a binary “yes” or “no”. Too often, I feel investors pass up on genuinely good opportunities because they don’t think the company has a good enough moat. Exceptional moats are hard to miss, and they usually end up being priced into the multiples of the business. So while you do get a great moat, you pay up for it, which reduces your future returns. I’ll personally invest in anything, but the weaker the moat the less the multiples I’m willing to pay for the business. For example, if a company has zero moat (something such as fashion), I’m still willing to invest if the company’s cheap enough. For me, that would probably be at 5x earnings. A payments business, such as PayPal, that’s very competitive, I’d be willing to invest at 10x earnings. So on and so forth. This is also helpful for understanding what multiples the business will trade at when the company reaches maturity. There’s a reason why a company like Apple, with no growth, still trades at a premium. That’s because it has an incredible moat.
Sentiment is often the best gauge for when it’s a good time to buy. The more negative sentiment, the more likely you are to enter at a large discount. That’s because price tends to follow sentiment, so the more substantial the sentiment, the bigger the price disparity from intrinsic value. Sentiment also works in the other direction. The better the sentiment, the more likely the business is closer to fair value. Google this year pretty much epitomizes what I’m talking about. There was a ton of negative sentiment regarding AI, Google’s AI offerings, and the antitrust case against Google. When it became clear that Google’s business would continue to excel and might even accelerate because of AI, and that it had a favorable outcome in the antitrust case, the company swung from lows of $150 a share to highs of $250 a share. For a company the size of Google, a 50% swing in a year is absolutely massive. The time to buy Google was when its sentiment was at its lowest, not when it’s at its highs today.
Turn over every stone, regardless of your preconceived beliefs. This might surprise many people, but Robinhood was trading at a slight premium to tangible book value early last year (they had $6B in cash on the balance sheet). A lot of the narratives around Robinhood being a meme stock or a company used for trading meme stocks might have been true in 2021, but were no longer true in 2024. Because investors didn’t give a second look, they missed out on much of the good work Robinhood was doing and failed to invest in a great company at a fantastic price. I make an effort to regularly read the quarterly earnings of many companies I am unlikely to invest in, such as Tesla, just because you never know when things might change.
The macro environment absolutely matters, but it’s a mistake to try and time the market. A much better, more practical strategy is to be more defensive when the market is hot and more aggressive when it is cold. Right now, for instance, whenever I’m considering an investment, I’m asking myself, “If we have another 2008 crash tomorrow, do I think this company can weather that crash?” “Do I have enough conviction in this business to hold through two, three, or four years of a depressed market?” etc. You can also look for companies that still do reasonably well in a market crash. Pawn shops, for instance, are anti-cyclical and actually do well in recessions. Healthcare and insurance are necessities. The last thing people tend to cut back on is their doctor visits, regardless of the overall economy. The point I’m making here is that a creative investor will find ways to succeed in every macro environment.