Averaging, Berkowitz and ECRI
I’ve been busy preparing our SMSF’s accounts (statement of financial position and operating statement) and tax return. The results were better than I expected and as I’ll post them in the next day or so.
Roger Nusbaum talked straight from my play book today. “As a matter of philosophy I am not comfortable being so reliant on one outcome… I try not to let the consequences of being wrong be ruinous which is done by not overly relying on one outcome.”
That is the essence of why I average in and out. Averaging gives you a lot of latitude to be wrong. It lets you be early and still get some skin in near the bottom and out near the top. Averaging gives you time to see the error of your position and time to adjust and change path. If you’re right then averaging gets you in and out at good prices with less stress that single decision investing. Here’s a couple specific examples. In October 2008 I decided to start investing in US financials. My plan was to invest 10% of our funds, in 1% increments spread over ten months. Two months in I realised the error of my ways and never made the December investment. Luckily for me fortune favours the brave or in my case perhaps it was dumb luck that I decided to also invest in Australian financial stocks and the same time and my investment in Macquarie, ANZ and Westpac more than made up for Indy Mac and Washington Mutual.
Another example was investing into the recent decline, or gaping chasm if you prefer. At each price point where I believed the market was at a new low I invested. My plan was to get to around 150% invested by early in the upswing. As I’ve previously said I did choke a little near the lows and never got above 110% invested. Yet by averaging in I did manage to get close enough to my investing target and never felt too exposed or too stressed by making one outcome decisions. With each investment I was happy for the market to keep heading lower or bottom and head higher. Averaging lets me set up win win situations. It doesn’t matter if they are real win win or simply my perception, because investing is primarily a mind game and if you win the mental battle then the money comes easy.
Right now I’m selling down, trimming my positions. Once again this averaging gives me time to change tact if I’m wrong and ensures I don’t do too much damage if that is the case. I am not relying on one outcome, I’m now in a position to win whether the market goes up or down.
Changing tack to Berkowitz.
Bruce Berkowitz, the founder of Fairholme Capital Management and Fairholme Fund, marked his ten year anniversary with an interview at Forbes. I love Berkowitz’s investing philosophy and his integrity.
On fees “No front loads, back loads, trailing. Just a simple 1%. The only fee we have is, we want to avoid speculators and traders, so we give a 2% redemption fee that goes to the shareholders of the fund if someone buys and sells within 60 days. That’s it.” For a guy who has outperformed the markets for as long as he has that is fantastic. Of course 1% on $10B is still a cool $100M in fees a year! If only Australian fund managers could perform as well as Berkowitz and charge as little.
On strategy. “Normally 15 to 25 companies at the most. We’re non-diversified so we focus our energies. And we try and get the concept of why not buy more of your best idea than your 60th best idea?”
“And of course, from my days in math, I remember the central limit theorem. Once you get much more than 25 securities, you’re gonna be lucky to, you know, you’ll be approaching the averages.”
“17% of the portfolio is in T-bills”
On cash “ That’s what we’re looking for, free cash flow. I think Benjamin Graham called that “owner earnings.” Yes, what can be given to the owners of the company. I know that’s a concept a lot of people aren’t using these days, especially management. But yes, we’re looking to see what the shareholders will receive over time.
And so, capital allocation’s important. We look at all the different ways where money is squandered, or how earnings aren’t really earnings. We stick to cash ’cause it’s hard, so a dollar is a dollar. It’s hard to disguise a dollar in the bank as opposed to a dollar of gap earnings where it could be a dollar, maybe it’s nothing.”
On buying bargains. “Almost by definition we are running towards that which most people are running away from because how else are you gonna get a very reasonable, cheap price on a good company unless the marketplace believes something is terribly wrong?”
On individual investors. “I tell potential investors that they should look at a mutual fund the way I would look at a company because, you know, we do this 24/7. And I don’t know how anyone can look at individual companies on a part-time basis, especially if they don’t have anything to do with the companies. And you know, I wouldn’t think of performing surgery on someone even if I thought was a talented amateur at it. And I think it’s, for a well balanced life, I think it’s better for most to just, you know, stick to maybe four or five rules of investing. You want to find someone who has had a good paper trail of investing, a record, you know, of someone who’s done very well.”
Berkowitz also discusses health-care, defence and some of his favourite companies like Pfizer.
Tacking back to giving myself time to be wrong. Remember I’ve been trimming.
From Reuters via Carpe Diem. ECRI says a strong recovery is already underway. So as usual the market leads the way by is 6-9 months.
A gauge of future economic growth made steady gains in the latest week, sending its yearly growth rate to a fresh 26-year high and suggesting a strong recovery is already in motion, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to nearly a year-high of 125.0 in the week to Aug. 14 from an upwardly revised 124.4 the prior week, which ECRI originally reported at 123.9.
The index’s annualized growth rate ticked up to 17.5 percent after hitting a 26-year high of 14.3 percent last week, which was also revised higher from 13.4 percent.It was the highest yearly growth rate the index has seen since the week to July 29, 1983, when it was 17.8 percent.
‘It is high time to break from the herd of pessimistic analysts, who will continue to bemoan economic weakness long after the Great Recession is history,’ said Lakshman Achuthan, Managing Director at ECRI.
Achuthan told Reuters last week that he expects the recovery to take hold at a stronger pace than any the U.S. has seen since the early 1980s.
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