This the editorial of our monthly Quant Value Investment Newsletter published on 2022-05-03. Sign up here to get it in your inbox the first Tuesday of every month.
More information about the newsletter can be found here: This is how we select ideas for the Quant Value investment newsletter
This month you can read about the ONE thing separates good from great investors – strategy vs. logistics.
But first the portfolio updates.
Portfolio Changes
Europe – Sell One
No new recommendations this month as the index is below its 200-day simple moving average.
Stop loss - Sell
Vertu Motors Plc +86.1%
North America – Sell Two
No new recommendations this month as the index is below its 200-day simple moving average.
Sell
Sell Green Plains Partners LP (+31.0%) as it no longer meets the newsletter’ selection criteria.
Stop loss – Sell
Gray Television, Inc. -21.1%
Asia – Buy One – Sell One
The Japanese market is below its 200-day simple moving average so no new ideas there this month.
The Australian market is bouncing around at its 200-day moving average level. As I found a great idea in Australia, I am including it this month.
The idea is an Australian electrical installation and maintenance services provider. It is attractively priced, trading at a Price to Earnings ratio of 10.8, Price to Free Cash Flow of 8.7, Price to Book of 1.0 and has an attractive Dividend Yield of 6.0%.
Sell
Sell IVE Group Limited (+55.8%) as it no longer meets the newsletter’ selection criteria.
Corona Crash Portfolio – Sell One
Sell Exco Technologies Limited (+47.3%) as it no longer meets this portfolios’ selection criteria.
No more ideas: +56.4% average return
To date the Corona Crash portfolio has done extremely well with all 26 investment ideas returning an average of +56.4%.
What separates good from great investors
In these challenging investment times, I was thinking of how I can convince you that it is not the best investment strategy that will give you the best returns (it must of course be one of the great time-tested strategies) but the way you implement it.
How these things sometimes happen this month I read this great article Strategy vs logistics by Joachim Klement that it explains it perfectly. (His newsletter Klement on Investing is well worth signing up for!)
Please read the whole article (at the above link) as I am only showing parts of it in the following comments.
I am a fan of history and if you dabble in military history for long enough you may come across a quote attributed to General Omar Bradley:
“Amateurs talk strategy, professionals talk logistics”.
Great investors think logistics
If you think about it, investing is very easy.
You buy undervalued good companies, wait for them to go up and then sell them for a profit. If they do not go up or fall you sell them. (This is an amateur talking strategy)
You know the BIG problem in following the above steps is we have emotions, and STRONG emotions when it comes to losses!
So, if you are going to be a successful investor you have to find a way to manage your emotions so that you can stick to your investment plan. (This is a professional talking logistics.)
Logistics let you stick to a great strategy
In the investment world, it is a common complaint that people don’t talk about strategy and strategic asset allocation enough, which is true, but it is also an unfortunate reality that too often little to no thought is given to the logistics needed to sustain a strategy over time.
In my career, I had to learn the hard way that one needs to have the logistics in place to sustain a strategy. When I was advising private clients that meant having enough liquidity at hand to ensure the client could cover her cash flow needs for the next three to five years without having to touch their equity portfolio.
This was one of the main things I implemented when I started advising my parents on how to invest in retirement.
You must have a cushion
The idea was to have a cushion in place, so they do not need to sell stocks, in a correction.
In good years the cushion is filled up so that they always have three years of cash to sit out a market correction.
I do the same. I keep less cash as I still have income but I make sure I have enough cash (and NO leverage) so I can sit out a market correction without being forced to sell.
How to put good logistics in place
When I was managing equity portfolios for institutions, I introduced stop losses and other risk management techniques even in value portfolios.
Why? Because this way I could make sure underperformance wasn’t going to last many quarters in a row. This way, my investors didn’t have to suffer through several quarters of reporting discussion and explanations of why I underperformed. This obviously meant giving up some upside in cheap stocks in the short run, which is why I complimented my stop losses with re-entry triggers based on the price momentum of these stocks, so I would buy cheap stocks again, once they showed signs of a sustained recovery. All of that is to ensure I have enough logistics in place to help my investors through a soft patch of extended underperformance.
Throughout much of my career, I was guilty of being in love with strategy and thinking constantly about it. Over time, I have learned to love the seemingly mundane tasks of logistics.
The term logistics is more like a metaphor.
What I mean are techniques that help you not run out of money, like stop losses or ways to frame your investments so you are not scared when they do something different than expected.
Or ring fencing your play money from your long-term investments in a separate portfolio, so you don’t change your strategy to save your play money. The possibilities are many.
As you know this is exactly what we do with the newsletter.
We have a strict trailing stop loss system, and we stop buying when markets are falling and only start buying when they are moving up again.
Only get in if you know you can get out
I'm sure you have experienced it too; it is a lot easier to buy a stock if you know you can get out with a small loss should you be wrong. This is important as it lets you act even if you are worried, because you have the right logistics in place!
The most difficult thing
One of the hardest things for me is to send you the newsletter this month with no new ideas because all markets are below their 200-day simple moving average.
But I know it is the right thing to do because there's nothing worse than investing into a falling market and having to sell your stocks soon because they've hit the stop loss levels.
I'm sure you agree that we will NOT be able to stick with a strategy that leads to results like that.
So, to make sure that we stick with a great investment strategy over the long term we must build in these safety features.
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