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Curious if you can share any more about your approach to fundamental investing. What stage/size companies do you focus on and how do you find an edge? I looked

by ccostes 10y ago

Curious if you can share any more about your approach to fundamental investing. What stage/size companies do you focus on and how do you find an edge? I looked into fundamental investing for a while but came away with the impression that you're trying to guess what the consensus of the market will be rather than finding some "right" answer. ie you can think the price should be x but if nobody else will buy/sell at x then you're wrong. I've instead been subscribing to the notion that price movement can be thought of as random and selling option premium accordingly (the whole tastytrade mantra) but haven't been super successful and would be interested in hearing other approaches.

dharmon 10y ago
Sure. I agree that in the short-term (daily, weekly, even monthly) it's largely random, or at least effectively random, as in its no use trying to predict it. My starting point is what I call the Fundamental Theory of Value Investing, the well-known belief that price eventually reflects value. Or, rather, they tend to move in tandem. You can't really prove this, but it has been observed empirically. Really internalizing this is important for sleeping well during volatile times. :) So that means you need to find places where price doesn't currently reflect value. There's the usual list of places to look where the big players can't go, including micro and nano cap companies, low-priced companies, companies not followed by analysts, troubled companies, 52-week low companies, spin-offs, etc. As far as fundamentals, I like reliable FCF, or better yet, what Buffett calls "owner's earnings" (slight difference from FCF). "Reliable" being a key word, and where experience and clear thinking are important. I spend 90% of my research time looking for things that will threaten cash flows. I stay away from growth companies. The market just bids them up way too high. FB may be a wonderful company, but the current price is priced for perfection; any slip-up and down it'll go. Everybody is chasing growth, and institutional investors want to tell their LPs that they are in on the hot thing, so they buy in at any price. You can't know the exact probabilities and odds, so the most reliable way to make money is to buy good earnings for cheap, check your downside very carefully, and let the upside take care of itself. Obviously there's a million variations on this, but they all generally require going against some consensus, which can require testicular/ovarian fortitude. For me, the most common thesis is of the form, "this too shall pass". Some sort of temporary disruption that doesn't permanently harm the business. Sometimes the dust settles in a quarter, sometimes 3 years. If I start getting a clue that I was wrong in my analysis, I get out. I can go in more detail if you want but maybe should take it offline as people here to read about casino betting may not want their thread cluttered with this stuff. :)
- jacquesm 10y ago
  It's super interesting and collapse threads is in beta so please?
  - dharmon 10y ago
    If you have some specific follow-up questions I'd be more than glad to answer. A general overview could get pretty lengthy. :)
    - spoinkaroo 10y ago
      I'd be very interested in reading it if you decide to post it somewhere. I'm working on honing my own skills by reading a lot of books, through my main portfolio, and various paper portfolios. Do you primarily manage your own money? How difficult is it to achieve long term advantages over indexing?
- ccostes 10y ago
  Definitely interested in continuing the discussion. My email is in my profile, otherwise I'm not sure where you want to take it offline (just realized HN doesn't have private messaging).

by ccostes 10y ago

dharmon 10y ago

Sure. I agree that in the short-term (daily, weekly, even monthly) it's largely random, or at least effectively random, as in its no use trying to predict it. My starting point is what I call the Fundamental Theory of Value Investing, the well-known belief that price eventually reflects value. Or, rather, they tend to move in tandem. You can't really prove this, but it has been observed empirically. Really internalizing this is important for sleeping well during volatile times. :) So that means you need to find places where price doesn't currently reflect value. There's the usual list of places to look where the big players can't go, including micro and nano cap companies, low-priced companies, companies not followed by analysts, troubled companies, 52-week low companies, spin-offs, etc. As far as fundamentals, I like reliable FCF, or better yet, what Buffett calls "owner's earnings" (slight difference from FCF). "Reliable" being a key word, and where experience and clear thinking are important. I spend 90% of my research time looking for things that will threaten cash flows. I stay away from growth companies. The market just bids them up way too high. FB may be a wonderful company, but the current price is priced for perfection; any slip-up and down it'll go. Everybody is chasing growth, and institutional investors want to tell their LPs that they are in on the hot thing, so they buy in at any price. You can't know the exact probabilities and odds, so the most reliable way to make money is to buy good earnings for cheap, check your downside very carefully, and let the upside take care of itself. Obviously there's a million variations on this, but they all generally require going against some consensus, which can require testicular/ovarian fortitude. For me, the most common thesis is of the form, "this too shall pass". Some sort of temporary disruption that doesn't permanently harm the business. Sometimes the dust settles in a quarter, sometimes 3 years. If I start getting a clue that I was wrong in my analysis, I get out. I can go in more detail if you want but maybe should take it offline as people here to read about casino betting may not want their thread cluttered with this stuff. :)

jacquesm 10y ago
It's super interesting and collapse threads is in beta so please?
- dharmon 10y ago
  If you have some specific follow-up questions I'd be more than glad to answer. A general overview could get pretty lengthy. :)
  - spoinkaroo 10y ago
    I'd be very interested in reading it if you decide to post it somewhere. I'm working on honing my own skills by reading a lot of books, through my main portfolio, and various paper portfolios. Do you primarily manage your own money? How difficult is it to achieve long term advantages over indexing?
ccostes 10y ago
Definitely interested in continuing the discussion. My email is in my profile, otherwise I'm not sure where you want to take it offline (just realized HN doesn't have private messaging).