1) I rarely get much out of “philosophy” or “process” investment writing, which is generally overrated and highly correlated with mediocre results outside of Buffett.
But this is such *great* stuff from @John_Hempton
I reread it at least 1x/year.
2) Paraphrasing his post:
Thou shalt not average down in businesses that are highly leveraged or at risk of technological obsolescence.
My long only annual alpha generation would’ve been 150 bps higher had I just avoided the first mistake and I only made it once.
3) Might add thou shalt not average down in businesses where there is increasing and potentially existential regulatory risk.
That mistake - just once - cost me another ~125 bps of annual alpha.
4) Really boils down to avoiding big losses and truncating the left tail so the right tail can drive your returns.
5) Also love the idea that a good research note should be 15 pages on the business, 1 page on management and at most 1 paragraph on valuation.
Everyone on this planet can run a sophisticated valuation analysis. It is the inputs that matter. Being both different and right.
6) Maybe I will write a Medium post sometime on this mistake with a leveraged business.
It was so painful. Might be cathartic.
Spoiler: I owned 10% of the company and wrote a letter advising them to increase the buyback when the stock was down 75%. Less than a year before BK.
7) I reread the post regularly because I am generally buying stocks on pullbacks, often near 52 week relative or absolute lows, and then averaging down.
So I have to be particularly careful and need to sear - and resear - these lessons into my mind.
You can follow @GavinSBaker.
Tip: mention @threader_app on a Twitter thread with the keyword “compile” to get a link to it.
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