Insightful Interview With A Data Driven Investor – Michael Batnick by Tim du Toit, Quant Investing
I can’t remember how I found his blog but since then I have been at least a weekly reader of his insights and ideas.
He does not make forecasts and seldom gives his opinion but he looks at data, which I am sure is also what you are looking for.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
And I was able to convince him to answer a few questions about his approach to investing, with some surprising insights.
His name is Michael Batnick and you can find his blog here: The Irrelevant Investor
Two of his blog posts I have found worth reading are:
Beware (the Stories) of the Death Cross
Five things I try to do on this Blog
Now on to the interview.
How did you get started in investing?
Michael Batnick: I was working at an insurance agency in 2009. It’s hard to imagine a worse time to get into that business.
My father introduced me to a financial advisor who took a liking to me. He would send me all sorts of industry reports and although I didn’t know understand exactly what I was reading, I fell in love.
From then on, I was on a mission to learn as much as I could about investing.
Describe your personal investment approach and how it developed over time?
Michael Batnick: I was actively trading full time from 2010-2012. I wasn’t doing much intra-day; I also wasn’t doing much in the way of making money. I didn’t take any serious losses, but I didn’t book many gains either.
It takes years to learn what type of trader/investor you are. Luckily, I found out pretty early that I did not possess the rare qualities that make a successful trader.
Describe your investment philosophy?
Michael Batnick: For me personally, I diversify not just across asset classes, but also across strategies.
I’m a fan of quantitative value strategies as well as momentum and trend following.
I think 99% of investors are best off keeping things simple. If a particular strategy can’t be explained in just a few sentences, it’s probably not something that would interest me.
There’s a million different ways to make money in the market, and all of them are very difficult.
Finding a strategy or strategies you can stick with through thick and thin is critical. I believe investor performance is just as if not more important than investment performance.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Michael Batnick: I don’t think individual holdings are especially important.
Since 1980, two out of every three stocks has underperformed the index. Just one of five stocks has been the outlier winner.
I don’t have the ability to figure out which those stocks will be ahead of time so I’d rather own them all.
If you miss the top 25% of performing stocks, you might as well be in T-Bills.
Can you describe your top investing mistakes and what you've learned from them?
Michael Batnick: I never made any big mistakes, but I did make the same mistakes over and over again. I would typically enter stocks on breakouts, and was really bad at taking profits.
I always heard the “let your winners run” in my ear, and what I ended up doing was buying the breakout, and then selling when the stock pulled back. It wasn’t a very good strategy and although I was aware of it, I wasn’t able to correct it.
What I learned is that successfully picking stocks without a repeatable process was virtually impossible.
How concentrated is your portfolio? Do you follow any key risk-management guidelines in managing your portfolio?
Michael Batnick: My portfolio is concentrated in stocks, just not individual stocks.
What is your view on the use of stop-loss strategies?
Michael Batnick: If you’re trading, you need some way to manage risk. Stop-loss strategies are a good way to do that.
However, it does seem that those orders always get filled and then reverse so I would be careful about picking too obvious of a level.
Computers are always getting smarter.
What do you think of short selling?
Michael Batnick: I think it’s a very healthy part of the market.
What is your 80/20 investment strategy or principle?
Michael Batnick: My 80/20 investment strategy, i.e., the most important 20% I do to get 80% of the highest returns is controlling your behavior.
It sounds cliché but I learned the hard way that not having a plan is destined for failure.
Controlling your behavior doesn't mean doing nothing, it just means doing nothing stupid. Changes are fine, so long as they are not emotional responses to short-term market fluctuations.
I know exactly how I plan to be invested regardless of what the market does. You can't control the market, you can only control your reactions to it.
Anything else you would like to mention?
Michael Batnick: I spend a lot of time analyzing historical data.
One of the biggest takeaways is that it’s different literally every time.
Being prepared for a wide range of outcomes might prevent you from making a bad decision when markets don’t behave the way you expect them to.
Michael, thanks for your time
Your interviewing analyst
Tim du Toit