There are only a few ways to really excel in a bull market. And by excel I don’t mean bringing in a few shekels here and there through a disciplined trading strategy that relies on using breakouts or successful tests of a 50 day moving average to enter positions. That type of stuff, frankly, belongs in the amateur hour part of the Wall Street show, having no place in a voracious bull market that has potential to be historical in scope.
What I do mean by “excel” is to create a multi-year period of returns that takes advantage of what a secular bull market is at its essence. And what a secular bull market is at its essence is a period of time when expectations that are black and white are exposed to numerous grey areas that cannot be explained, much less understood. This devastation of prevailing expectations comes in stages, popularly defined as early, mid and a late cycle rally. Each stage has separate significance to the expectations of investors and how they are reacting to those expectations. At its latest stage, expectations not only catch up to stock prices, but then start to move far ahead of price, which marks a finality of sorts to the secular bull market. A mass acceptance takes place of grey areas replacing the standard black and white perception that marks investor thinking.
The realization that I keep coming to terms with after close to 20 years in this business is that there is no better level of returns that can be gained throughout such a period than to take a focused, long-term approach. I don’t mean to sound like a mutual fund commercial when I say that either. It is not the typical focused, long-term approach that the numerous articulate incompetents that populate Wall Street like to dictate to clients as an excuse for poor performance.
By focused what I mean is that your universe of investments is small. Abundantly small. I don’t mean 40 or 50 names. I mean 10-20 names, preferably no more than 15 that you know inside and out. Companies that you are intimately familiar with like a proctologist would be to any asshole. Companies that you can assess on an immediate, real time basis when it comes to earnings report, mergers or managerial changes. You become so familiar with your tiny universe of stocks that you are an expert in everything these companies can do, have done and will do on both a fundamental and technical basis.
You can’t be an expert when your universe consists of a new stock every week. You can be journeyman, a jack of all trades and possibly a profitable investor, but you won’t have that edge that is required to excel. That edge comes with focused expertise.
My universe probably will not exceed 15 names for the next 2-3 years. 10 of those names you guys are already familiar with. I’m sure I’ll find five more over the next several years, as my pace of discovery in new opportunities slows dramatically as the bull market progresses. I’ll still be talking CIDM in 2016 and I’ll know the company better than anybody but the CEO. I’ll still be talking WMIH in 2015 and I’ll know the company inside and out. I’ll still be talking BFCF. I’ll still be talking about EVOL. This is my universe of names, I have no reason to go outside of it when I am so familiar with the opportunities.
Brings me to the next quality needed to truly excel: A long-term approach. It is one thing to be intimately familiar with a handful of companies and jump around in them throughout the life of a bull market. It is another to be intimately familiar with a handful of companies and allow those companies to realize their potential with a disciplined, objective approach.
I will tell you this much. I have observed hundreds, possibly thousands of traders/investors as a result of a career on both a retail and institutional trading desk in the 90s. During that time I can count on one hand the number of investors who really had the right combination of skills. The ability to spot an opportunity, imagine the possibilities and stick to the vision, while utilizing a disciplined method of controlling risk throughout.
Allowing companies within a portfolio to thrive during a secular bull market is the surest path to wealth creation. It is what I keep coming back to over and over again in my current portfolio of stocks. The better your research and vision, the more spectacular the gains have the potential to be. The better your research and vision the more concentrated the portfolio can be. The only reason for abundant diversification is that your research and vision are clouded. Diversification is also a method of handing off risk control from the manager to the market. You basically are giving up your ability to control risk in favor of the market doing it for you through mirroring the S&P 500, in most cases. A subject for another article.
Stay focused. Stay long-term. And for goodness sake, have some vision.
I’ll leave you with this excerpt from the book “Market Wizards” by one of the greatest traders/investors of all-time, Bruce Kovner:
I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.
[Successful traders are] strong, independent, and contrary in the extreme. They are able to take positions others are unwilling to take. They are disciplined enough to take the right size positions. A greedy trader always blows out.
