Sunday Finds + 3 Thoughts From Last Week
Penn National Gaming + Google
3 Thoughts From Last Week:
Global financial sanctions against Russia. We’re going to find out how powerful the global financial system truly is. Throughout the last week, the U.S. and European countries (the West, as you might call it) put on increasingly harsh financial sanctions against Russia in retaliation for its invasion of Ukraine. This culminated in cutting off Russia from SWIFT (communication software that connects the world’s banks), restricting its central bank from deploying reserves, and a threat to go after the assets of powerful Russian Oligarchs. I’ll be the first to tell you I’m no expert on any of this stuff, but I am fascinated to see what kind of effect this soft power will have when wielded so aggressively. Will it crumble the Russian economy and cause hyperinflation? Are Putin and the Mafia State ready to avoid these measures? Should laws/regulations be put in place so governments cannot abuse this power against their own citizens, as we saw happen in Canada? When you control the financial system, especially one that is almost fully digitized, you can ruin people’s livelihoods at the click of a button. I don’t envy any (non-Oligarch) Russian citizens who are going to have to live through this.
What is the proper way to use 13Fs? 1 - 2 weeks ago was peak 13F season, the time when all investors can see what the big dogs in the industry are up to. If you aren’t aware, a 13F is a form that investment managers have to file every quarter if they have over $100 million in assets under management. The form discloses all their long positions listed in the United States (for a full breakdown of what it is, check-out Investopedia). Aggregators like Whale Wisdom make it easy for other investors like myself to see what activity these funds are up to. Personally, there are about a dozen funds that I check up on every quarter to see what they are buying and selling. But what is the right way to use this information? You don’t want to become a blind copycat, because that means you likely don’t understand what business you are buying. And you also don’t want to avoid buying something just because it is popular. I like to use 13Fs as a springboard for ideas to research, but not anything beyond that. For example, in recent quarters I’ve seen Stanley Druckenmiller load up on Coupang stock, a company I’ve had on my watchlist for a while. This tells me it might be smart to put my head down and do more research on the idea. But it doesn’t mean I buy just because someone else did.
Why are there no standard methods for portfolio management? Maybe I’m just not reading the right stuff, but it seems to me there isn’t nearly enough energy focused on portfolio management. We have dozens and dozens of books written on deciding what to buy, but not nearly enough focused on deciding how much. Maybe it is too ambiguous of a process, but I think so many people would benefit from learning what works and what doesn’t in portfolio management. Over the last few years, I’ve come to the conclusion that if you have a basic, long-only portfolio of individual stocks, holding less than 5 or more than 20 stocks is suboptimal (the only exception to this is if you own more than 20 stocks but have the majority of your investments concentrated in 10 -15 companies). Why? Because at over 20 stocks, you’ve already got all the benefits of diversification but lost almost all the benefits of concentration. You're also lying to yourself if you think you have 20 good ideas at one time. With under 5 stocks, that’s just too much concentration risk, unless of course the individual businesses are highly diversified themselves like Berkshire Hathaway. There’s a lot more to portfolio management than just the number of stocks to own. I’m still learning plenty myself. But I wish there was a book or any resource that went in-depth on the art of portfolio management because it seems like everyone is unnecessarily learning inefficiently through trial and error.
See you next week,
Brett
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Catch-up on Our Shows From Last Week:
Deep Dive: Gianni Di Mattia Discusses Alphabet (Google) Stock
Bonus Interview: Quantitative and Quality Investing With Tobias Carlisle
3 Good Reads:
1 Good Listen:
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