Gustavo Ballvé on January 28th, 2010
Corporate Governance, Food for thought, Home, Mental models, Portfolio Management, Risk management

In the first Buysiders article inspired by a reader’s suggestion, we’d like to propose “anti-portfolios”. It’s a vital lesson in humility: our activity involves a certain degree of failure, of missed or simply wrong ideas. Recognizing that we are going to make mistakes over time is extremely important in order to mitigate risk as we define it (the permanent loss of capital). The objective here is to insist, once again, that price is the ultimate measure. Once you realize how hard it is to do what we do, and after you’ve done all the homework, then you still have to demand a price that implies a large margin of safety – and keep analyzing the position everyday with the same skepticism you had before you bought it.

Price is the key, and many investors forget that it’s not enough that the business is great and the managers competent and even that the company has the “outside signs”/ usual “seals” of corporate governance or credit ratings – or even environmental best practices – when it comes to estimating a range of values… Corporate governance and alignment must be great in the real world. Unfortunately, that is very hard to find and hard to quantify, so those seeking algebraic approaches to long-term investing do so at their own risk.

Which takes us to “Anti-portfolio one”. This comes courtesy of a reader who was discussing precisely the issue of price with us a few days ago. Then he found a pearl of an article in the New York Times dated February 20th, 2000 – the peak of the Internet/ Nasdaq bubble – where a few managers listed their chosen stock to own until January 1st, 2010. That is, if you could own only one stock from early 2000 for the next ten years, what would it be?

The answers are interesting because a few of these companies haven’t survived, one was the object of a major accounting scandal, and so on. But we don’t want to focus on the companies themselves, but on the reasons given, the “case” made at the time. The arguments, especially regarding the earnings multiples at the time, seem preposterous and could be dismissed as “bubble talk”, but recent years have proven that we don’t learn this kind of lesson easily… And we go back to the point of price: yes, multiples can be misleading, but regardless of the measure, the price you pay has to take into consideration that even the best-planned strategies executed by the best managers can go wrong in too many ways.

In the other corner, “Anti-portfolio two” was found by a Healthcare analyst when he was researching a relatively newcomer to the sector and found that traditional VC firm Bessemer Venture Partners was one of the seed investors. The firm itself built an “anti-portfolio” section in their website that, well, has to be seen to be believed – and still Bessemer has done quite well… This example is about what Buffett calls “sins of omission” – he often mentions Wal-Mart, which he tried to penny-pinch and ended up losing “Billions” over time as the company became the behemoth it is today.

Finally, we’d like to thank our reader and urge others to follow his example! As always, send us your suggestions via the e-mail editor@buysiders.com .

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