Question to DesertCat

[r3vbr]

I really respect your opinions and from what I read you really seem to have an edge at buyin stocks.

Can you list what you are currently invested in, and what you think are the best opportunites out there?

And also how much % of your portfolio you allocated in each investment.
Thanks

[DesertCat]

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I really respect your opinions and from what I read you really seem to have an edge at buyin stocks.

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You are easily impressed


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Can you list what you are currently invested in, and what you think are the best opportunites out there?


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Not really. First, my best ideas are extremely illiquid and may only trade a few shares a week. Secondly, if I give you my more liquid ideas, the idea itself is incomplete. I have to explain my reasoning, which requires a lot of detail and I don't have time for that. And later I might find out I was wrong, and probably never remember to update everyone about my mistakes.

Ideas I've talked about here have mostly drifted into the mistakes category. My basis in KGHI is much higher than when I posted about it, so anyone who bought then is in okay shape, great shape if you have less than 20 shares because you'll likely get cashed out at $36. But I see a lot of capital tied up in an idea that's gone nowhere for me.

NICK isn't a mistake as much as missed opportunity cost. I still like the idea and think it will be a nice long term profit (I'm actually ahead here, my basis is under $10), but I would have done much better putting that money in my "deep value" illiquid ideas for the last year.

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And also how much % of your portfolio you allocated in each investment.
Thanks

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I look at two factors, my expected return, and risk of the investment. There are some ideas that are binary, offer a very attractive return, but they also have a very real risk of going to zero. Those ideas I limit to about 5% each, I don't mind taking a 5% hit on something that's equally or more likely to be a double or triple. But I don't want to lose a big chunk of my portfolio on a stock that had a 25% or 50% risk of going bankrupt.

Other ideas I rank by potential return and try to put at least 10% of my portfolio into each idea and up to 25% of my portfolio in my best one or two ideas. There is a small risk of any stock going to zero, but I'm okay with taking a 25% portfolio in cases where the stock's bankrupcty risk was remote, because even in that case I believe my annual returns will more than pay for one loss of that magnitude.

One way to look at it is to assume you have two stocks that each have a 50% risk of going to zero within a year, but will quadruple if they don't. If you put half your portfolio into each idea, you have a 25% chance of a 300% gain in a year. You also have a 50% chance of a 150% gain. But you have a 25% chance of losing everything. Your EV is +150%, but one quarter of the time you are starting over. Starting over would be very, very, hard for me, so I don't want to take any realistic risk of doing it, even if my expected gains for the year are +150%.

Instead I'd keep those ideas to 5% each, meaning they'll add on average 15% per year to my return. One quarter of a time they'll cost me 10% of my annual gains. I can live with that.

My recommendation for most investors is to just totally skip anything with real bankruptcy risk. No matter how much research you do, your percentages are just guesswork and you need to give yourselve a huge margin of safety.

And it makes sense to focus your portfolio only if you are very confident your stock picking skills are strongly +EV, otherwise you can just increase your losses faster. But if you are a good stock picker, owning less than 10 stocks can be safer because you can understand eight businesses much better than you can twenty, and more profitable because you are only investing in your highest expectation ideas and not diluting your returns with lessor ideas in the name of "diworsification".

[yellowbastard]

What advice would you give to someone who is interested in becoming a professional investor?

Most of the ones I've heard of raised their initial capital through friends and family members. Is this how all professional investors get their start or are there other ways? How did you raise your initial capital?

[DesertCat]

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What advice would you give to someone who is interested in becoming a professional investor?

Most of the ones I've heard of raised their initial capital through friends and family members. Is this how all professional investors get their start or are there other ways? How did you raise your initial capital?

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Friends and family is probably the #1 route unless you work on wall street and have connections there. I actually canned my clients because it was getting unworkable, I only manage my own funds (which I earned through a software startup) and two family members at this time.

[r3vbr]

If you are trading illiquid equity, I assume microcap. If so, how do you get the data for analysis? I really dont trust annual reports from 50M$ companies, also, I think only insiders can have an edge trading microcaps, because information is so poorly disclosed in relation to companies like GE and IBM.
Also, what kind of resources do you use for analysis? i.e. Bloomberg terminal, link to some exchange, phone call to friendly CFOs, or just some online finance site like advfn, morningstar.com etc?

[Evan]

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I really dont trust annual reports from 50M$ companies

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If you don't trust a company's audited financials that's probably a a good sign to not invest.

[yellowbastard]

What would be a good way to get experience to start as a private money manager? I just graduated college and am completely broke so I don't even manage my own investments. All the finance jobs I've looked into in Atlanta are all either administrative or sales. I would like to find something where at least 25% of my time will be spent in the investment decision making process but pickings are very slim (if not nonexistent). Any suggestions?

[DesertCat]

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If you are trading illiquid equity, I assume microcap. If so, how do you get the data for analysis? I really dont trust annual reports from 50M$ companies, also, I think only insiders can have an edge trading microcaps, because information is so poorly disclosed in relation to companies like GE and IBM.

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You are making blanket assumptions here. All companies typically report a balance sheet, income statement, and cash flow statement. Someone like GE has huge divisions where they give you incredible detail on operations, but you don't need that with a microcap.

And microcap insiders have the same trading restrictions as big company insiders. That all said, your chances of running into fraud in the microcaps is much higher than in larger caps. But you can use your own analytical abilities to alert you.

1) Is the company promotional? Does it hype it's products/potential? Is someone else hyping it? I immediately pass on anything that smacks of promotion.

2) Are insiders selling or buying. Is there a good explanation why if they are trading counter to your interests? Most insider trades are just noise, the trades that are most meaningful are insider purchase, but they have to be of a significant size. One company that I knew was a POS suddenly all top managers bought $1,500 worth of stock each. I laughed, it was clearly because they knew that insider trading services that tout companies with insider buying would tout them even if they only bought trivial amounts.

Insider sales could mean they are buying a new house. Many insiders don't really understand how to value their business, and some are heavily invested and want to diversify.

3) Do the financials make sense? Are they making real cash earnings? Krispy Kreme is an example where you have to dig in and test your assumptions about what their earnings are. Beware companies that aren't generating cash in proportion to their earnings.

4) Do they have real solid assets, land, cash, property, etc?

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Also, what kind of resources do you use for analysis? i.e. Bloomberg terminal, link to some exchange, phone call to friendly CFOs, or just some online finance site like advfn, morningstar.com etc?

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SEC filings or just company financials in the cases where they don't file with the SEC anymore. Occasionally I will call the company and ask clarifying questions. I don't have any friendly relationships with them, and in fact take most of what they say with a grain of salt.

Company calls are most useful to me when I've misinterpreted their financials, the CFOs can often explain how the financials were constructed and clarify my interpretation. I'm not asking them to sell me on the future, though I might ask business level questions of how easy expansion will continue to be based on certain factors, etc.

Occasionally I will visit company stores, but that is pretty difficult for me as I have two young children and few of the companies are in my neck of the woods. I eventually expect to start visiting some HQ's directly, to meet with these guys and see if I can get better reads in person.

[DesertCat]

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What would be a good way to get experience to start as a private money manager? I just graduated college and am completely broke so I don't even manage my own investments. All the finance jobs I've looked into in Atlanta are all either administrative or sales. I would like to find something where at least 25% of my time will be spent in the investment decision making process but pickings are very slim (if not nonexistent). Any suggestions?

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Scorpion Man and others on this board are actually in the business, and can offer better advice than I. I'm really outside the profession, I run (manage) my own money and certain specific clients in the past.

But I would guess they might tell you to get in the door at an investment management company any way you can. Admin or sales to start, but dedicate yourself to understanding investment management, work with those people when you can, and strike up friendships with the investment managers. Show them you are well read, smart, hard working, and ask them how to get transfered into their groups.

[DcifrThs]

DC,

do you have a market bias? if so, do you track it? if not, how do you verify that you have symetric leeway?

Barron