“Returns and Lessons Learned” wasn't self-flagellation; my objective was to highlight how mistakes planted the seeds for an evolution in my investment philosophy and research process.
Great stuff, thanks Alex. I've been thinking a lot about this recently, especially as I've learned more about someone like David Gardner's approach (in comparison to learning the "Buffett methodology" originally). In the end, I've landed in an extremely similar place to you. Very grateful to have crossed paths! Here's to some big opportunities in the future, as we wait patiently :)
I wonder why you prefer this vs say, 90% passive and 10% the stocks you like? or 50/50? I understand single stocks are fun but do you really need to be 100% in a concentrated portfolio?
RabbiJacob - The answer is that I expect my portfolio to generate better than average returns over the long run. To your point, if that was not the case, it would be logical to have a large (~100%) passive allocation. I hope that answers your question!
Thanks Alex for sharing your investment philosophy !! I have been thinking a lot recently with regards to appropriate philosophy for my own portfolio based on my emotional traits and this post was right on time to help me with that ..
Alex - As usual, wonderful job of expressing your investment philosophy so clearly. You have helped me shape an approach that is truly long-term (so many folks just pay lip service to the concept). I had the daunting task of allocating some of my family's assets into publicly traded securities (we were fortunate to monetize our family business several years ago at a value that few of us could have imagined), and your posts have been a wonderful resource and a "sanity check" on my previous ideas about investing for multi-generational family members.
That said, I would appreciate your thoughts on two ideas/concepts:
1) I think FCF/Share growth as the best proxy for the intrinsic value growth of a business. If you think about what is included in FCF/Share, it includes so many important value drivers - revenue growth, margins, ROIC, balance sheet management, etc. So if I had to distill my approach down to the most important metric, I look at long-term FCF/Share growth.
2) I tend to reverse-engineer DCFs to back-solve for the required terminal multiple of FCF that I need to earn my cost of capital (I use 10%). So my FCF growth estimates and the 10% discount rates are my inputs, and the terminal multiple is my output. I feel that the actual terminal multiple is unknowable, so I want to make my decision as easy as possible, without any false precision. It is like an over/under. If I think the actual terminal multiple will be greater, then my IRR will be > 10%, and vice versa if I think that actual terminal multiple will be less.
I appreciate your kind words. It's great to hear that this service has been a "wonderful resource" for you (and your family), that's the highest compliment I can hope for.
1) I agree with you on FCF / share growth. It can exhibit short-term variability given its calculation, so I tend to use measurements like EPS as a proxy for long-term business improvement, but I agree with you. At the end of the day, it's cash flows that matter.
2) As you know, valuation is where the rubber meets the road. I increasingly find myself shifting towards a relative valuation framework on similar companies (like I did with COST vs DG), along with sensible levels of diversification. It aligns with my structural asset allocation framework, and it also addresses the difficult of trying to comp different companies / industries (it's much easier to compare COST / DG to each other than it is to comp either of those businesses to SPOT). This approach is far from perfect in theory - but in practice, I've found it to be a workable solution that gets me close to the "right" answer.
Hi Alex, I hope you're doing well. Massive fan of your Substack/Twitter.
I am a founder of Zeed (https://zeed.ai/). We're helping creators transform their written content (like this Substack) into dynamic video pieces using AI to capture new audiences.
Would love to show you an example and jump on a call if you're interested in hearing more! Best, Rohan.
Thanks, Alex! Any chance I can have a look at them without first becoming the paid subscriber? Exactly so that I can decide if I'd like to subscribe :)
Great stuff, thanks Alex. I've been thinking a lot about this recently, especially as I've learned more about someone like David Gardner's approach (in comparison to learning the "Buffett methodology" originally). In the end, I've landed in an extremely similar place to you. Very grateful to have crossed paths! Here's to some big opportunities in the future, as we wait patiently :)
Thanks for the kind words Nick! Now let's get to work finding those big opportunities :)
I wonder why you prefer this vs say, 90% passive and 10% the stocks you like? or 50/50? I understand single stocks are fun but do you really need to be 100% in a concentrated portfolio?
RabbiJacob - The answer is that I expect my portfolio to generate better than average returns over the long run. To your point, if that was not the case, it would be logical to have a large (~100%) passive allocation. I hope that answers your question!
Thanks Alex for sharing your investment philosophy !! I have been thinking a lot recently with regards to appropriate philosophy for my own portfolio based on my emotional traits and this post was right on time to help me with that ..
Balaji - That's why I'm here! :) Glad to hear you found it helpful, have a great day.
Alex - As usual, wonderful job of expressing your investment philosophy so clearly. You have helped me shape an approach that is truly long-term (so many folks just pay lip service to the concept). I had the daunting task of allocating some of my family's assets into publicly traded securities (we were fortunate to monetize our family business several years ago at a value that few of us could have imagined), and your posts have been a wonderful resource and a "sanity check" on my previous ideas about investing for multi-generational family members.
That said, I would appreciate your thoughts on two ideas/concepts:
1) I think FCF/Share growth as the best proxy for the intrinsic value growth of a business. If you think about what is included in FCF/Share, it includes so many important value drivers - revenue growth, margins, ROIC, balance sheet management, etc. So if I had to distill my approach down to the most important metric, I look at long-term FCF/Share growth.
2) I tend to reverse-engineer DCFs to back-solve for the required terminal multiple of FCF that I need to earn my cost of capital (I use 10%). So my FCF growth estimates and the 10% discount rates are my inputs, and the terminal multiple is my output. I feel that the actual terminal multiple is unknowable, so I want to make my decision as easy as possible, without any false precision. It is like an over/under. If I think the actual terminal multiple will be greater, then my IRR will be > 10%, and vice versa if I think that actual terminal multiple will be less.
Curious to hear your thoughts.
50W-AT,
I appreciate your kind words. It's great to hear that this service has been a "wonderful resource" for you (and your family), that's the highest compliment I can hope for.
1) I agree with you on FCF / share growth. It can exhibit short-term variability given its calculation, so I tend to use measurements like EPS as a proxy for long-term business improvement, but I agree with you. At the end of the day, it's cash flows that matter.
2) As you know, valuation is where the rubber meets the road. I increasingly find myself shifting towards a relative valuation framework on similar companies (like I did with COST vs DG), along with sensible levels of diversification. It aligns with my structural asset allocation framework, and it also addresses the difficult of trying to comp different companies / industries (it's much easier to compare COST / DG to each other than it is to comp either of those businesses to SPOT). This approach is far from perfect in theory - but in practice, I've found it to be a workable solution that gets me close to the "right" answer.
I hope that's helpful. Happy Holidays!
You are my favorite writer on Substack! Enjoy reading your investment philosophy and research process.
Thanks Tuttle! Have a great day 👍
Hi Alex, I hope you're doing well. Massive fan of your Substack/Twitter.
I am a founder of Zeed (https://zeed.ai/). We're helping creators transform their written content (like this Substack) into dynamic video pieces using AI to capture new audiences.
Would love to show you an example and jump on a call if you're interested in hearing more! Best, Rohan.
Hi Rohan - please send me an email. Thanks!
Hello! Do you publish your portfolio perfomance somewhere? Or performance of this Substack recommendations, or something to that effect?
Hi Dmitry,
Yes, I update the portfolio performance quarterly.
Here's the link to the Q4 2023 Portfolio Update:
https://thescienceofhitting.com/p/q4-2023-portfolio-update
And you can find other portfolio updates at this link:
https://thescienceofhitting.com/t/tsoh
Let me know if you have any additional questions.
- Alex
Thanks, Alex! Any chance I can have a look at them without first becoming the paid subscriber? Exactly so that I can decide if I'd like to subscribe :)
I shared that information publicly when the service launched (in April 2021), which you can view at the link below. I hope that's helpful!
https://thescienceofhitting.com/p/returns-and-lessons-learned