What's a good call worth?

I’ve been reading posts on this board that make “Best of” for a while now, and there’s something I’m curious about. As a lead-in, I’ll say that my investing style is completely different from what y’all are doing. I find a company I believe in, learn everything I can about it, and then put all my money in it and follow it obsessively. And I usually have core shares, but then play high risk options in addition. Nowadays I usually sell far dated way in the money puts. From 2002 to the end of last year, that one stock was AAPL. Starting at the end of last year, it has been TSLA, although I’ve kept a little AAPL around for old time’s sake. In the sense that Buffett uses, these are two punches on my lifetime ticket.

Then I play with a few other things on the side, companies I find interesting but that I don’t want to put too much energy into thinking about, usually using short term options. Lately I’ve been trading mostly AMZN, GOOG, and NVDA with some success. I’ve even taken a small position in KITE after seeing it discussed here (I’m a three time cancer survivor so it seemed apropos). Thanks for that!

So my question is, when you get it right, how much is that worth to you. Near as I can tell you put maybe 10% of your portfolio in a company you feel strongly about, so even if it doubles you’ve made only 10% profit. Is that right? If your portfolio starts at $1M, a truly awesome call nets you $100K in a year. That seems to me as though it requires an awful lot of good calls to do well. I feel lucky just having made two, so are you all just amazingly lucky to make this approach work for you?

-IGU-
(never understood diversification)

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So my question is, when you get it right, how much is that worth to you. Near as I can tell you put maybe 10% of your portfolio in a company you feel strongly about, so even if it doubles you’ve made only 10% profit. Is that right? If your portfolio starts at $1M, a truly awesome call nets you $100K in a year.

Not all my calls are 100% right. Some even lose money (!)

Follow through with your example - next year this position starts at $200,000, 18% of your portfolio. It doubles again (what a gem!). You’ve made $200,000 this year. The position is now $400,000 out of $1,300,000. That’s a 30% gain in two years and likely market-beating if all the other positions were flat. Market-beating is winning.

Of course if you know a sure bet, put your money on it. I don’t know any sure bets.

Graham.

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Follow through with your example - next year this position starts at $200,000, 18% of your portfolio. It doubles again (what a gem!). You’ve made $200,000 this year. The position is now $400,000 out of $1,300,000. That’s a 30% gain in two years and likely market-beating if all the other positions were flat. Market-beating is winning.

But, if I understand what I read correctly, in general y’all trim your positions because they’ve gotten to be a too large percentage of your portfolios. Right? So it doesn’t grow like this.

-IGU-

IGU,

Some investors will trim their winners if appreciation makes it too large of a portion of their portfolio. Others will just keep their winners, no matter how late they grow and sell their losers. And only sell their winners when it is time to sell because the investment is not as good anymore for some reason, or they need the money.

I don’t believe in selling winners to trim a position just because the investment has been too successful. I want to own stocks like these.

But there are pluses and minuses to both strategies, and I would not say my strategy is better than theirs. My thinking is simply I want to keep my winners and sell my losers as winning stocks tend to keep winning and vice versa. other people simply want to reduce risk of loss to a stock that has run so well so far relative to the rest of the portfolio.

What you want to do depends on your preference.

Tinker

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Wow, I find this a fascinating discussion.

Near as I can tell you put maybe 10% of your portfolio in a company you feel strongly about, so even if it doubles you’ve made only 10% profit. Is that right?

So my question is, when you get it right, how much is that worth to you. Near as I can tell you put maybe 10% of your portfolio in a company you feel strongly about, so even if it doubles you’ve made only 10% profit. Is that right? If your portfolio starts at $1M, a truly awesome call nets you $100K in a year. That seems to me as though it requires an awful lot of good calls to do well. I feel lucky just having made two, so are you all just amazingly lucky to make this approach work for you?

What’s your view of the other side of the coin? I know you didn’t overlook it, so I’m curious to hear. Suppose the CEO of your favorite holdings dies in a plane crash and has not only the only key to the company safe, but the only known product formula in his head, and the company stock loses 50% of its value during the course of your 1-week vacation. You only lose 5% (or 10% if it went to zero!) But the rest of your holdings are doing reasonably well and average 15% gains for the year. You still make $85,000. Not great? Maybe not, but better than being wiped out.

So my questions are 3.

  1. What happens if you make a bad call? (I know squat about the affect of your options in this case.)
  2. Have you never had a losing investment? (!)

I’m a three time cancer survivor

  • I’m so sorry to hear you had to tangle with the big C, and so damned glad you’re here to talk about something so mundane as stocks with us mere mortals. I also apologize ahead of time if this is too personal, and please feel free to not answer . . .
    • Does this affect your view on this topic within your investing philosophy?

-IGU-
(never understood diversification)

I don’t believe in OVER diversification, but do understand the need for some for me because I have had several losers over the years and am sitting on a doozy as we speak. I am also pretty sure it won’t be the last.

Dan

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David Gardner explains it that 50% or more of his Rule Breaker picks will actually not work out. It is the few that become 10x like ISRG or AMZN that make up for the losers and allow you to kick the market.

Therefore you should own 10-15 because you never know which ones will inevitably be these winners.

I of course currently hold 3 stocks. But that is another thread and not to be copied, and is transitory I am sure. But I had opportunity so I took it.

Tinker

What’s your view of the other side of the coin?.. Suppose the CEO of your favorite holdings dies in a plane crash…
Well, really unlikely stuff can happen. I don’t protect myself from it beyond obvious stuff like having a paid off house and “forgetting” about a 401K or two from previous jobs that somebody or other is investing for me in some boring way. If everything goes pear shaped with my chosen stock at least I won’t be eating cat food. But I think the chance of tragedies is lower with excellent companies. I’ll note that Steve Jobs died while AAPL was my one and only, and the stock went up. Of course 50% drops in stocks like AAPL and TSLA are not unexpected, so I don’t get too excited if that happens. And if the whole world has a disaster, then diversification won’t save you either.

1. What happens if you make a bad call?
Well, I make lots of bad calls with my playing around money, but the only real tickets I’ve punched are AAPL and TSLA. I don’t admit it’s possible that I made a bad call. The evidence so far is that I didn’t. I suspect that as I get older and the possibility of dementia becomes real that it will be necessary to stop trusting my own judgment so much.

2. Have you never had a losing investment?
Hee hee. Lots! All that really matters is that you win in aggregate. If you don’t make some bad calls you’re not taking enough risks.

2. * Does this [having had cancer] affect your view on this topic within your investing philosophy?
Not sure exactly what topic you mean. Taking risks? No, I don’t see much difference in my behavior before and after. But I admit that I feel a somewhat greater impulse to take risks to see my family well provided for if I die untimely.

I have had several losers over the years and am sitting on a doozy as we speak.
Me too. I made a short term bet on AMZN a few days ago that is getting very ugly. I wrote puts so the downside is pretty much unlimited. Hope it goes up tomorrow!

-IGU-

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Thanks for your reply, IGU. FWIW I didn’t ask to be nosy or because I disagree with you. In fact, I’ve been considering a similar strategy, and am weighing the probabilities of success. I’m finding it harder and harder to play my 10th best idea, let alone my 14th best. I guess the difference between your situation and mine is 1) I’m 64 and my wife retires next year, and 2) while I’ve never tasted cat food, if I really screw up investing everything in (one or maybe two) companies, I might find out what it tastes like. Not to mention, Dear Wife would be rather disappointed. So yes, your experience is indeed fascinating.

Best of luck to you.

Dan

You can keep doubling or tripling up for years going all in with your amazing stock picks, patting yourself on the back and being truly awesome. Then your next all-inner becomes the next Enron or Lehmann brothers and those years of doubling were all for nought.

You said it yourself. Really unlikely stuff can happen.

Putting all your eggs into one basket is gambling. Fine if you only have a few eggs and the potential to earn a lot more. Foolish if you’re retired and not going to earn any more eggs bar your investments.

However, it seems you are diversified with 401ks and a paid off house.
And well done on your APPL and TSLA runs.

I admire yours and breaktinker’s conviction (3 stocks now?). I’ve been constantly fighting the urge this past year to sell everything and put it all into Shopify. I’ll stick with just not selling the position (24%).

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I find a company I believe in, learn everything I can about it, and then put all my money in it and follow it obsessively.

Starting at the end of last year, it has been TSLA, although I’ve kept a little AAPL around for old time’s sake.
Then I play with a few other things on the side…

There’s a difference between running a concentrated portfolio, which is something some of us do, and running a singular portfolio, which is something none of us do.

Near as I can tell you put maybe 10% of your portfolio in a company you feel strongly about, so even if it doubles you’ve made only 10% profit. Is that right? If your portfolio starts at $1M, a truly awesome call nets you $100K in a year.

I bolded a phrase you used there. Doubles aren’t rare. Many of us have multiple doubles. And, many of those doubles are actually triples, quadruples, or more. But, getting the timing exactly right on these is rare. I don’t set short time limits (and for me a 1 year limit is short) on my investments. Whether you want to talk about the market being irrational or just that it can take time for a successful company to build on its own success or just that it can take the market a while to recognize the future success, I’m content to pick companies that I believe will do well - but without setting a time limit.

I bought ANET in 2014 at $66, then added in 2016 at $63, and again in 2017 at $88. I also sold Puts a few times. ANET is more than a double for me now. No-one could predict the Cisco lawsuits when I first bought. But, after the lawsuits, one could predict that ANET would probably win in the end. So, I bought more. I’m up about 150% today, so more than a double, but also longer than 1 year from my first purchase.

I’m comfortable running a concentrated portfolio, but wouldn’t be comfortable running a singular portfolio. And running a diverse portfolio is also not for me, although Anurag did that quite successfully (he subscribed to a number of TMF services and literally bought every rec when recced). Lately he’s been selling, reducing leverage and raising cash. I don’t know that he’ll end up with a concentrated portfolio, though.

I have had a number of doubles and more than doubles. But, I’m not nearly good enough that I could have known which of my doubles was going to happen when. Many of my picks didn’t double, some even went down. For me, what works is adding to winners and cutting losers - and that’s not always determined purely by stock price. I bought TSLA in 2011 and it’s obviously been a great run and I’ve added and played options for profit and today still have what everyone here (except you, obviously) would consider too much in Tesla. Going all in on TSLA in 2011 was not something I could stomach back then.

I also bought NVDA, but back in 2009. It was not my #1 pick at the time, and obviously today it’s done better than anything else I bought that year. Could you really imagine going all in on NVDA in 2009, riding the stock up to a double or more, then having it crash lower, then it crawling up, and then finally exploding? No way. Even in 2015, how many of us bought tons of NVDA knowing what was to come in 2016? None of us. Oh sure, some people bought in 2015 thinking that Nvidia would do great and eventually AI and automotive would take off for them. But, who could have predicted that Mr. Market would recognize that in 2016 and not 2017 or 2018?

I can’t pick winners with 100% accuracy, which is what a singular portfolio requires. I surely can’t pick winners within a limited time frame, which is what I think you’re characterizing as an “awesome call.” I can, however, pick a small number of companies and have enough of those companies do well enough in a reasonable amount of time that my portfolio does very well overall.

In other words, I don’t have to hit a Grand Slam in a one inning game to win. I can hit a several singles, tolerate a couple outs, hit a double or triple or even a home run sometimes, steal a base (with options), and win the 9 inning game instead.

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I haven’t commented in this discussion yet, but the way I see it, if you only have one stock each year, you can make great profits if you pick well, but you only have to be WRONG ONCE to get wiped out (If your stock drops 75% with all your assets attached, you have to grow your portfolio 300% to get back where you started at. That’s not easy.)

If you have 10 to 15 stocks you can be wrong lots of times. You only have to be right more than you are wrong.

I see putting it all in one stock as a little like playing double-or-nothing over and over again. It doesn’t matter how many times you win. Eventually you will lose and get wiped out.

But then again, when I was 25 I might have felt differently about it. Now, being retired and with no additional funds coming in, it would be insane.

Saul

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I wrote:
I made a short term bet on AMZN a few days ago that is getting very ugly. I wrote puts so the downside is pretty much unlimited. Hope it goes up tomorrow!

Well, I’m out of AMZN, but not before riding it down to 960. I gave up 83% of this year’s AMZN gains in just a couple of days. Oh, well. Side bets sometimes don’t turn out well. This is my most expensive mistake in a long time. On the other hand, I’m still better off than if I hadn’t decided to play AMZN a bit so I can’t complain.

People who invest in the way advocated on this board will never have this kind of badness happen, right? Or at least almost never? No short term bets if I understand correctly.

-IGU-

I haven’t commented in this discussion yet, but the way I see it, if you only have one stock each year, you can make great profits if you pick well, but you only have to be WRONG ONCE to get wiped out…

Well, I subscribe to Buffett’s (and Munger’s) theory that you should make choices very carefully and very rarely, and when you do you should bet big. Seems to have worked for him.

But then again, when I was 25 I might have felt differently about it. Now, being retired and with no additional funds coming in, it would be insane.

I’ve been retired for seven years now, and like you I’m living off my market returns. So far being (relatively) insane seems to have been kind to me. It’s good to be lucky.

-IGU-

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“I’m a three time cancer survivor so it seemed apropos”

This made me realize that I have a great interest in accurate non-invasive diagnostic tools (especially for early detection), especially ones that can somehow tell which person would react most favorably to a particular treatment, and which person would be most susceptible to a particular illness.

And whatever reduces the invasiveness and danger of a treatment for a serious ailment.

With regard to diversification, I find so many stocks that seem promising - for many different reasons - that it’s hard to stick to 30. Some I want to buy low and sell after a nice bump; some I want to keep and pass on to my (hypothetical) great-great-grandchildren; some I sell puts on and hope never to actually buy (but won’t freak out if I have to); some I sell puts on, then buy, and then sell calls on; and some I short (usually by buying puts).

We’ve had a bunch of failed bear market scares since early 2016, but there are no guarantees that we will avoid a bear market forever. Then I’ll see how my methods work under stress. The 3/16-8/17 period has been pretty easy for making money by doing almost anything but shorting high-flyers.

The main thing I learned in the past year was not to short popular high-flyers, no matter how overpriced they seem. (e.g., Monster Beverage, Amazon, Netflix, Tesla, Chipotle… and WTF is going on with AMD???) It’s even dangerous to short doomed stocks like Sears and Valeant, because their artificial life support can go on and on and on, and their bulls buy them and their short sellers cave in to every damn squeeze.

The other thing I know (and violate only for short periods) is to use leverage sparingly, if at all. Right now, my leverage is only about 7% of the underlying assets.

“No short term bets if I understand correctly.”

No intentional short term bets is how I understand it. Saul (and the rest of us, more or less) would like to be able to buy something and not have to watch it much, but reserves the right to change his mind whenever, in the light of additional information or contemplation.

I just thought of some interesting questions:

  1. Which stocks are most likely to cost at least as much as they do now 5 years hence? (not necessarily the same question as “be worth at least as much.”) One obvious answer is Berkshire Hathaway. If they don’t, it means that something went terribly wrong with the US economy, the world economy, the insurance industry, or something else extremely big and important. Others are Alphabet/Google, Apple, Costco, Amazon…

  2. Which stocks are most likely to take off and make you lots of money in the next 1-5 years? Shopify is one educated guess of a lot of us here. Maybe Paycom, Kite, Talend,

  3. Which stocks are most likely to do nothing or fail miserably? Oh, maybe Sears, P&G, GE, Ford (cars in general), IBM, Coke…

  4. Which stocks are flip-a-coin as far as success or failure? Tesla, Chipotle, Penneys, maybe Under Armour

  5. Which stocks are really Ponzi schemes or otherwise run by crooks or charlatans or misguided souls who have managed to hide the fact pretty well so far? I would put Valeant in this category, and now the new management is trying to see how much actual value is left. Sears under Lampert is doomed. Penneys under Ron Johnson was that way. Home Depot had some atrocious CEO who undid so much good, and now they’re fine again, years after he was replaced.

  6. Which stocks are the inverse of 5? Probably Gilead, which seems undervalued/underestimated to me. If it were held to the same standards as Valeant by the market, it might sell for $150 a share. Maybe American Eagle (AEO), which should do well in the near future, despite being in the “doomed-by-Amazon” retail sector.

  7. In which sector will a few stocks do very well and a lot of them go sideways or go to zero? Renewable energy

  8. Which stocks keep succeeding even when failure seems to beckon with each twist and turn of reality? Netflix has been in this category for years. Apple, too.

  9. What kind of black swan event will come up next? Likely something involving Trump, who is a walking, talking, tweeting black swan.

and so on…

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One more thing about allocation, percentages, etc. I should mention the Kelly Criterion, which says to allocate more of your money in things which have a higher expected rate of appreciation. For instance, if inflation was only 1% and foolproof treasury bills paid 50% annually, you’d probably put all your money there and not think about Amazon stock or whatever.

The trick is to come up with accurate estimates of expected payouts.

The Kelly Criterion was originally used to help decide on bet sizes in gambling games where you have an edge, such as when counting cards in blackjack. It’s harder to calculate with regard to the stock market, because there are so many unknowns.

It’s common to allocate somewhat less than the Kelly Criterion calls for, in order to reduce volatility quite a bit without losing much profit.

I think the Kelly Criterion was popularized by Edward Thorp, or was popularized by someone writing about Thorp, maybe in William Poundstone’s book Fortune’s Formula.

there are no guarantees that we will avoid a bear market forever
in fact I can petty well guarantee we will have one. They are universal in markets dating back to Imperial Roman grain markets.
The trouble about waiting for a bear is that almost everything is cheap then and some non techs make a better investment because they are the most depressed.

And unless you have actually been an investor in a nasty bear or two is hard to realize how much 40% or 50% or more losses will effect your judgement. Not to mention the prevailing miasma of doom. Which permeates the media, boards, friends, advisors , and family.

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I just want to follow up on my bet on KITE, since that has become a really good example of a good call:
I’ve even taken a small position in KITE after seeing it discussed here (I’m a three time cancer survivor so it seemed apropos). Thanks for that!

My position in KITE is some Jan '18 140 calls, which I bought on July 21. Today they are worth a bit more than 6 times the $6.40 I paid for them. Impressive, and many thanks again! I put only about .37% of my portfolio into this side bet, so the big win adds about 1.85% to my stash. In this same time period, those holding shares went from 109 to 178, a gain of 63%. So if you had a 6% position (which I think is somewhat typical for people on this board) that would have netted a 3.8% gain, over twice what I made. On the other hand, I had much less at risk and was way late to the party. Also note that I was lucky in my choice of strike price; had I bought 180’s they would be next to worthless. So, an interesting example of what I was asking about.

Meanwhile, I continue for the foreseeable future to have essentially all my money in TSLA. It’s a volatile stock, but is destined for at least a triple over the next five years. No, it’s not a car company, it’s an energy company. But it will make tons of money in the transportation business as the world is forced to change how it produces and uses energy.

The side bets are fun, and I’ll continue to follow your discussions for good ideas. But I think I’ll keep investing the way I currently do. This year has been very kind to me. My portfolio has more than tripled so far – up about 13.7% on AAPL, 36.7% on side bets, and the other 159% on TSLA (mostly selling naked puts). I’ll be most pleased if I can end the year without giving much back.

-IGU-
(selling naked puts is very dangerous, so DO NOT do this unless you know what you are doing)

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