My Approach to Investing

My overall asset allocation is very conservative.  My Investment Goals are not about “beating the market” but rather about achieving my goals with a reasonable degree of certainty.  At my age, I am perfectly happy making a consistent 5% annual profit after costs and inflation, with as little risk as needed.

I only invest in stocks, bonds, and real estate since they are the only opportunities classified as investments since they have positive expected returns.  That expectation is statistically reliable because these investments usually generate income in the form of dividends, interest, and rent.

I don’t trade Commodities.  Commodities are a speculation – they don’t generate income.

I don’t try to figure out “What happens next?” – I concentrate on “What is an investment’s Fair Value?”.

I don’t trade on an individual stock unless it is mispriced based on its Fair Value.

I hold cash when I can’t find any mispriced opportunities.  Cash is a call option with no expiration date, an option on every asset class, with no strike price.

When I trade options, I follow a predetermined set of rules – no exceptions.

I don’t short stocks, bonds, or real estate – the market risk you face as a short seller is potentially unlimited.

I also don’t hedge my portfolio with Puts, VIX calls, or Bear Funds.  They are too expensive and require the ability to time the market.  Instead, it is far more efficient to simply substitute riskless assets for risky ones when the market presents the most risk (i.e. when it is the most expensive).

This quote from James Montier sums up my approach to investing very succinctly:

“There is a simple, although not easy alternative [to forecasting]… Buy when an asset is cheap, and sell when an asset gets expensive…. Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.” – James Montier, GMO