Approaching Stocks Like Venture Capital
My Investment Approach
❤ If you enjoy this post, do throw it a like (click the heart up top) to help more people find it.
I am a fan of the Coffee Can Portfolio, an “Active Passive” approach to investing.
The idea of a Coffee Can is simple: Buy a basket of the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
You can follow and track my stock baskets here, on my Performance Scorecard.
A couple of weeks ago, I gave a Zoom Talk to a class of MBA students at Willamette University in Salem OR, where I shared a brief overview of my investment process.
I thought I’d share the slides below.
To start off, I asked the following question:
As expected, the majority of students knew the answer (60).
This was my next question:
Unsurprisingly, no one knew the answer.
Why is that?
What matters in life is not how many times you fail, but rather, how many times you get up and try again. Similarly, in investing, it doesn’t matter how many bad investments you make, but rather, whether you were able to learn from your mistakes, and hold on to the big winners.
“Success consists of going from failure to failure without loss of enthusiasm.”
-- Winston Churchill
If you listen to famous investors speak about their investment mistakes, they lament not the money they lost on a specific stock, but instead, they talk about the stocks they either didn’t buy or didn’t hold on to, the ones that turned out to be big winners.
As I’ve said before, Investing Is a Homerun Hitters Game.
In a recent interview with Patrick O'Shaughnessy, John Harris, managing partner of Ruane, Cunniff & Goldfarb, a famed investment fund that has outperformed for 50 years, highlighted this exact thing:
Harris said that 10 big winners made up for the bulk of the fund’s outperformance. This should serve as a good reminder that it only takes a few winners to outperform. When asked to discuss his investment regrets, he mentioned his single biggest loss was a Volkswagen short sale (i.e he was betting the stock would go down). The stock did the opposite. It 10X’d in a week! He lost 30% of his fund. It’s interesting that this loss didn’t even make his top 5 investment regrets. Harris said all his biggest regrets were passing on investments that would become big winners.
Many years ago, I read a paper about the Coffee Can Portfolio. This was one of my biggest takeaways:
Many years later, when I joined the investment team at Longworth Venture Partners, an early-stage $125 Million dollar VC Fund, I discovered the Venture Capital Way:
Then I proposed the following question:
By passive index investing in the S&P500, in many ways, we are following the Venture Capital Way.
How? Well... To be included in the index, a company must demonstrate tremendous success. Investors in the index therefore are buying ownership in some of the best companies of our time. They are buying the breakout companies. This is what VCs do. They buy the breakout companies, and they add to the winners.
I’ve written about my investment approach here:
The below slides provide a high-level summary.
I then spoke high-level, about some of the things I look for when evaluating investment prospects. It really comes down to a mix of both the intangibles and tangibles, or what NYU Professor Aswath Damodaran refers to as Numbers and Narratives.
This was followed by a slide on Risk.
The above slide led to an interesting conversation.
We started to talk about their investment club’s return distribution. I learned that the club has a very good hit rate, but unfortunately, they tend to hold on to their losers too long, and take profits too soon: Their average winner is about 15% while their average loser is about 25%.
We didn’t discuss position sizing, but if we assume equal sized investments, those numbers require a >60% batting average, just to break even (see table below).
That’s tough.
Chris, thanks for letting me speak to your class.
Looking forward to doing it again!
❤ If you enjoyed this post, do throw it a like (click the heart up top), and please share it with a friend, they may like it too!
If you’d like to connect, sign up for Office Hours here.
Thank you and Happy Investing!
If you’re New to Playing For Doubles
Read more about my Investment Philosophy here: