Investment Process Explained by David Markel, CFA of The Aleph Blog.
I received a survey in the mail on Trading/Investing. I felt that if I was going to answer it, I may as well do it for my readers. Here goes:
1) How long have you been trading?
I’ve been investing for my own account for 25 years. During that time, I’ve done a lot of different things:
- Played around with closed-end funds, and shorted overvalued companies 1989-1993
- Value investing for myself 1993-98, with a lot of microcap value thrown in. (Weird stuff, and very illiquid.)
- Created multiple manager funds for group pension business 1995-1998 — got to interview many of the best managers at that time.
- Set investment policies for a some major life insurers 1993-2003
- For major life insurers — Mortgage bond manager 1998-2001, Corporate bond manager 2001-2003, Investment risk manager 1993-2003.
- Small deal arbitrage for myself 1998-2000
- Settled on my current value investing strategy, as expressed by my eight rules 2000-2014
- Buy side analyst for a financials only hedge fund 2003-2007. Managed the firm’s profit sharing and endowment monies using my value investing strategy.
- Started my RIA in 2011, to offer clients my value strategy — they get a clone of what I own in my value strategy. I am my largest client, and I eat my own cooking.
2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?
Mostly fundamental. Most of my trading is governed by these rules:
I tend to resist momentum in the intermediate term. From my era of hiring managers, those that used this technique said it added 1-3% to performance. I think that’s about right.
I limit changes to the portfolio, because it takes time for investment ideas to play out. I turn over the portfolio at a ~30% rate. I try to be as businesslike as possible when I sell a company and buy another. Investors can be very good at evaluating whether a company or group of companies, is better than another company or group of companies. What is harder is asking, “Would I rather hold cash than this company?”
3) How do you feel when a trade goes against you?
Good. I get to buy a little more at a lower price, after I check my investment thesis, which if it does not check out, I sell the whole thing. For the few trades that do badly for a long time — 20 of them over the last 25 years, of course it hurts, but the gains far outweigh the losses, so I ignore those, except to memorialize why the failure happened, and feed that back into my investing processes. Every time I have lost badly, it was because I violated at least one of my rules.
4) How do you feel when a trade goes for you?
I like it, but I let my rules govern my trading. Everything is done by rules; there is almost no discretion in my trading.
5) How have these feelings changed over your trading career? (Can you recall how you originally used to feel and elaborate on how this has changed over time?)
When I was 20-25 years younger, every move in the markets would make me excited. By the mid-90s, I got my emotions under control. I learned to focus on eliminating risk on the front end, so that I would have fewer problems on the back end.
6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading? (e.g. meditation, yoga, running, Tai Chi, kicking the dog, hitting the bottle etc)
I pray to Jesus Christ every day, but that is not a means to handle trading. I ask Him to guide my decisions, and that I would do my investing to glorify Him.
Because I use my rules, there is little, if any, stress over trading. My processes are designed to take my emotion out of my infrequent buying and selling.
7) Have you always done this?
I’ve done this for the last 14 years. Prior to that, I was experimenting and developing my methods.
My time managing bond assets for life insurers taught me a lot about trading 1998-2003. I traded over $10 Billion in bonds over that short window of time. I was far more active as a bond manager, because it was simpler to ascertain when value-enhancing trades could be done. That fed into my value investing processes, which are designed to mimic the way a bond trader would look at stocks.
8) If not, how have you learnt to deal with the feelings that come up when trading?
Look, first, it’s only money. If you don’t take some significant losses during your life, you probably aren’t taking enough risk.
Second, investing takes time. I hold my positions three years on average, and the longest positions have been there for 5-10 years. A tree in my backyard won’t grow any faster if I worry about it. The same is true of my stocks. I review them quarterly. Between those times, I try to muffle the nose, aside from rebalancing trades which resist the market.
9) Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors?
As a value investor, I don’t worry much about trading. In 2000 & 2008, I did detailed studies of my trading. In 2000, I found that many of my best trades stemmed from getting the industry right. In 2008, I found that my top 11 gains paid for all of my losses, 2000-2008. That was with a 70/30 win/loss ratio, and 180-190 stocks held over the period.
10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?
If we are talking traders, it would be this: start out each morning looking at the disasters of the day, and then wait for volume to climax, and price to nadir. Wait about 5-10 minutes, and then buy. Close out the trade within a week, maybe at the end of that day.
That said, I would encourage traders become investors. There is too much competition at the short time horizons of the market, and not so much over 3+ year periods. Study the greats: Graham, Buffett, Munger, Klarman, Price, Heine, Neff, Soros, Dalio, and many others. Learn to recognize long-term value, and wait for it to be realized. There are no barriers of entry to trading. Long-term value investing has natural barriers to entry, because it is work, and as such, few do it.
I don’t worry about my stock portfolio. Because my time horizon is long, day-to-day fluctuations don’t mean much. That makes me free to research ideas that can benefit me and my investors in the future. That’s a great place to be.
