During the trading day Thursday, I tweeted the following:
Let me begin by saying that I am by no means your typical value investor that will simply rely on the aura surrounding improving fundamentals to allow me to hold onto a position. I bring a trading mentality to fundamental investing because I have seen far too many brilliant fundamental managers get absolutely pummeled by completely ignoring price. And don't give me the "what about Warren Buffett" excuse. He has an infinite time frame and equally infinite access to permanent capital that can weather any storm. 99% of investors, whether professional or otherwise, do not enjoy that convenience. Playing this game while ignoring price is like playing football while ignoring your opponents offensive and defensive formations. Sure, you'll still be on the field. But you won't be very good and you won't win many games.
With that said, I have been steadily disassociating investor capital from HH over the past two months. The company has very little risk at these levels. However, the small-cap market has witnessed a significant enough degree of injury that numerous opportunities with a higher degree of upside potential now exist. I want cash available to take advantage of those opportunities in Q4. Currently up to 30% cash, giving me enough dry powder to take on 1 or 2 new positions over the next few months. 70% invested in four names total, including WMIH and KFS.
Every couple of years an investor is faced with decisions that possess a disproportionately significant influence on future, long-term portfolio performance. This chain of decisions has the potential to positively or negatively influence portfolio performance not just in the coming months, but perhaps years down the road. Every investors chain is different based on their strategy, focus and timeline. However, every investor, whether they realize it or not is disproportionately influenced by decisions made around key points with respect to their specific traits.
I have a strong feeling that I am entering one of those periods here in Q4. Being conscious of what I think will be a key point in my chain of decisions already gives me one leg up, I believe. The scope of opportunity being presented paired with what I have found to be significant probability of small-cap outperformance in 2015 and 2016 means that the buying opportunity brought by the current mood of the market can't be misjudged or squandered. I'll be presenting the data for my conclusion that small-cap outperformance will significant in the years ahead next week.
Back to writing my client letter for September.
