Hanging on and Enjoying the Ride

An update on the portfolio and some personal news

For some one reason or another, I haven’t published any content since the end of June. Looking back the S&P bottomed out a few days before (of course we didn’t know it at the time). Was it the ultimate bottom of the 2022 drawdown? I have no idea, time will tell. Do I care if it is? Not really.

With Labor Day weekend here I thought it would be a nice moment to give a little update on a few things personal and portfolio.

Personal

TLDR: I accepted a job offer that has cemented me on a given path I didn’t expect at the start of the year.

Since coming home from the Berkshire weekend I have spent quite a bit of time thinking about where I am in my life and reflecting on where I might want to go. It was overwhelming to be around so many great people; by the time I got back, there were plenty of new relationships to kindle.

These new friends were in a career position I thought I might like to achieve at some point, most of it revolved around the idea of running a fund or setting up an investment advisor’s office. Either way, the majority of my efforts have been focused on trying to put myself in a position to manage money for others. For a long time, this is what I wanted. The plan coming out of school was to get a bridge job to make enough money to pay the bills and stack up the savings and then make the next move.

About two years ago I started a job working for a stone mason and we began to work on and off with another crew doing 17th-century house restoration. Trust me, it sounds a lot more interesting than the reality of the job. To put it simply, we restore old buildings as close to what they initially looked like. After a year of switching back and forth between masonry jobs and house restoration, my colleague and I decided to make the full pivot to working in house restoration and leave the stone and brickwork behind. This was happening all while I was pushing to eventually make a move to working for myself in the investment world.

A real actionable plan came into my sights after listening to an investment podcast in the middle of January. The guest spoke about how they saved a certain amount of money and set off on their own and how to set up shop. This blueprint was interesting so I reached out and asked for his advice.

He opened with, “So you’re trying to figure out what direction you want to go huh?”

As the conversation progressed the question came down to, I didn’t know whether I wanted to try and open a fund to get a track record going or keep writing Substacks, investing my own money, and eventually have enough money to make the jump into becoming a full-time private investor.

“You’re a carpenter?”

“Yes’

Excitement filled his voice, “Oh you have to talk to my buddy. He is also a carpenter and really got into real estate and also invests really well. He was kinda in the same predicament you are in now.”

The overall conversation was helpful and when he connected me to his buddy who then proceeded to melt my face off with how he flips real estate and invests in stocks. He poked around asking me what I do and don’t know in regards to carpentry skills and came to a conclusion.

“You should quit your job and start doing real estate. Quit Monday.”

I am bold but not that bold.

After he laid out to me how he went about creating wealth for himself using real estate and his carpentry skills this path looked attainable and sparked a deep curiosity for me to pursue real estate investing in a similar fashion. Before this point, I never gave Real Estate the time of day. It was all stocks, all the time.

We talked on the phone for 2 hours and it Tok me a few seconds to gather my thoughts when we hung up. After this conversation, I came to two conclusions. 1) I would not be quitting my job on Monday and 2) I needed to look into this further.

After spending time educating myself around the space it became clear flipping and owning real estate could be a viable path to making enough wealth for myself that I could pursue any path of investing I wished whether it meant opening a fund or just sticking to being a private investor. The destination didn’t matter. What was important was the connection in my mind to leverage the skills I was learning to push me further down a path to achieving the level of freedom I desired. At the end of the day, I want to generate wealth for myself instead of relying on someone else to pay me a paycheck for my services.

These thoughts percolated and became the backdrop as I went into Berkshire Weekend. With the weekend 85% over I went to my final event on the itinerary, The Markel Brunch. I walked in by myself, grabbed a sausage egg and cheese with jelly; odd but okay, and found a table with an open seat.

Across the table, a gentleman reached out and introduced himself. Noticing I was alone and it was my first year, he asked if I wanted to sit with him at the meeting which was a nice gesture. We continued to get to know each other and he mentioned he ran his own fund and before that worked at PIMCO and more recently under Lou Simpson. My eyes immediately widened. I told him about my day job and gave him a sense of my “figuring it out” direction.

After the meeting, he told me to add him on LinkedIn and we could set up a call.

A few weeks later we got on the phone and talked strategy both life and investing and he laid it all on the table in terms of the reality of managing money for others.

This is paraphrased a little, I don’t recall what he said exactly but it was along these lines.

“Alright so I am going to give it to you straight. I worked under two very successful names and thought this would really help me when I started out. But I haven’t raised any money from people who I didn’t already know before starting my own fund. This is with all the namesake. Rasing money in this business is hard and then you take the money without a real deal of how things will work in 10 years. You won’t know if the product you sold was worth buying until 5 to 10 years later. I am still figuring that out for myself."

“I am not saying you can’t do it. I am just saying if you decide to go this route here is the reality and you don’t have namesake so it’s going to be even harder. If I was you I would look into this real estate game a little more because with the skills you have and your financial background you could really build a big, profitable business and it will be easier than trying to build an investment business.”

The conversation then turned to the idea of compounding equity and stocks vs real estate which he told me,

“If you have a real estate deal we’re you can double your equity you should sell your stocks and plow the whole thing into the deal. The game is compounding equity and you should be indifferent towards the assets that can bring you that.”

This conversation brought me around to the idea from before which was, that maybe stock market investing is something I will do by myself now and get into flipping and owning rentals to supercharge my wealth.

After sitting on the conversation it became obvious that flipping houses would be the path in which I had better odds of success than if I tried to break into the fund business. It was a hard pill of reality to swallow but there was one sentence kept in mind while thinking about the whole thing,

“Do I want to get independently wealthy or do I want to buy stocks?”

I love stocks and I want to buy stocks but in terms of turning it into a career, it probably isn’t the right path for me, right now. I want to become independent financially more than I want to buy stocks.

With this in mind, I leaned into this direction and began to put focus on stacking cash with the intent to use it on a flip house or multi-family within the next few years. After coming back from a beach vacation at the beginning of July I felt refreshed and excited to make the small daily moves that would eventually get me into a position to achieve my goals. Then on Sunday night before heading back to work on Monday I received a text from my landlord who is currently doing what I wanted to do.

He noticed I worked in construction and asked if I would be interested in coming on board with him to flip houses and work on his rentals. He is looking for a #2 guy and thought I would be a good fit. I think the universe is trying to tell me something. I start next Monday.

Portfolio

Here is the Family Fund’s current makeup (This is not investment advice, do your own research):

Performance YTD As of Labor Day (9/5/22): (8.8%) vs S&P YTD (18.19%)

If you asked me on Jan 1 what I thought the year ahead looked like, it didn’t look like this. But I do remember being a bit skeptical about the Russian “military exercises” on the border of Ukraine and a veteran friend of mine made it a point to highlight what he thought was going to happen and for the most part, he has been accurate.

I started managing the Family Fund at the end of February and since then have been able to swim well against the tide. I write these words tongue in cheek because we all know investing with a concentrated portfolio can take a massive swing at any point.

The other line of thought flowing through my head at this moment is comparing the portfolio performance to the benchmark on any given YTD time frame is too short so why even bother? I didn’t make the investments within a year time frame so it feels wrong to check the performance “early” like checking on a cake baking in the oven before it’s done. It might look good but might come out and taste terrible. In the end, time will tell.

Now, do I think the outperformance up to this point is luck? Maybe? I am not sure. I definitely got lucky when I bought a small position in a company and it proceeded to double less than two weeks later. I didn’t hesitate to unload the position in increments after a massive run-up. The moment made me think about what Bill Brewster and Mike Mitchell talked about on a podcast and the idea of “never selling”. I am paraphrasing but Mike said something along the lines of, “If I bought my house for 300K and you offer me $350K I am probably not selling it to you. You offer me $2 Mil and I am gone.”

It might not have been that drastic but the run-up in price was well above what I thought the intrinsic value was of the business and the small base hit added a few percentage points to the P/L. So yeah, I got lucky.

I do my best to deploy capital into specific situations where the companies are being valued in the market well below a conservative value to a private buyer or to what I believe is the long-term FCF per share will be for owners.

The portfolio itself is quite the mix of ideas and positions. I have my given thesis for each of them but I will be the first to admit, that it’s unlikely they all work out. Do I think I was able to buy them below intrinsic value and protect capital? Yes. Will they all deliver market-beating returns from their original purchase price? I am not sure, probably not. I believe they have the potential too and wouldn’t have staked money if I didn’t believe so but I also know making quite a few bets in a short period of time can mean there are a few that might not go as planned. This is on top of the base rate of being wrong 1/3 of the time, I don’t consider myself in the area of being able to use that base rate so I adjust it up to 1/2. All I do is try and stack the chips in my corner by purchasing equities I have studied for a while and trade below their real worth, in my eyes. They might not all be home runs but I am confident there will not be a big permeant loss of capital.

Thoughts on Owning

The action report for the fund was full during the months of March through May and since the end of May, there hasn’t been much. I have been doing my best to adhere to the principles of stock ownership with low turnover and giving your ideas plenty of time to grow and work. This means that when you begin accumulating potions in the manner we did during the beginning months of this year there is a bit of downtime after the dry powder is used. There is a gap in activity. So when there is nothing to do, what is there to do?

Well, the best part about equity investing is the ability to tailor your investment style to your own personality. I am a big fan of the short really hard sprints followed by long rest periods. At the end of the day, I see the job as not moving much but rather being able to pounce when necessary and go away the rest of the time. A reminder to the Buffett adage, “We don’t get paid for activity, we get paid for being right”

When it comes to letting ideas work I have a pretty hands-off approach. Each seed was sown. I know what I am looking for in terms of tracking the performance of the companies we own, here’s a hint, it isn’t the stock price. But when there is nothing to do, I try my best to step away from the portfolio and fill my time with other material. I have been reading a little more widely this summer like The Godfather for example and plenty of Rick Bragg. Are these books making me a better investor? Debatable. If they keep me from doing something dumb like forcing an idea just to “look busy” then they are worth their weight in gold. Another fun thing I have been giving some time to is trying Brazilian Jiu Jitsu and let me tell you there is nothing more humbling. For my investor friends who enjoy sports, this is one you might find enjoyable.

To me, this is what stock ownership looks like. There are periods of intense study and work. Then there are periods after the planting season when all there is to do is check in on them every once in a while and make sure they are getting enough water.

A few months ago Jason Zweig published this article about Wilmot Kidd in The WSJ, https://www.wsj.com/articles/wilmot-kidd-central-securities-goes-toe-to-toe-with-warren-buffett-11639153164

In the article, Wilmot Kidd explains how he has been able to build a track record that over 50 years has turned a 10K investment since the beginning into $6 Million vs the S&P’s $1.9 million result. In it there were two quotes that have stuck with me since initially reading the piece in December of last year.

The first

“We want to own growing companies during as much of their period of growth as we can,” says Mr. Kidd. That enables compounding to work its magic. “It takes time to learn to live with an idea,” he says. “All these portfolio managers [who sell stocks within a year], I don’t believe they even know what they own.”

I have thought about this idea of “living with a company” since first reading this and it’s an interesting thought. Being an investor is heavy on quantitative analysis. We can spend days thinking through the financial statements and metrics. But how often in the process does one ask themselves, will this company be easy to own? I am guessing a small majority of investors ask this question and now this filter of “easy ownership” is another filter I use. If I feel that this company is likely to give me headaches, it’s likely I will pass. There are plenty of companies who can check “yes” so can just focus on those. Will this cause me to miss the huge bargains which can be found in the deep value arena? Yes but that isn’t my game and I don’t want to play it.

The second even stunned Jason: “When I ask Mr. Kidd if he attributes his long success to luck or skill, he lets out a long, quiet, dry laugh before saying something I don’t think I will ever forget: “Skill is just recognizing when you’ve gotten lucky.”

He explains, “It’s when you’ve been fortunate enough to make an investment in a great company, and suddenly you realize just how very lucky you were, and you buy more. That’s skill, I suppose. That—and holding on to what you have and not chickening out.”

So there you have it. I am doing my best to model my portfolio management after Mr. Kidd’s. At the very least if my time frame for investments continues to lengthen I will consider it a win. We all say we are long-term investors but when is the last time you checked your portfolio turnover ratio? I’ll be the first to admit mine could be lower. It always can be lower.

Peace and Love,
Michael

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Please be advised, Wall St Gunslinger is not an investment advisor and does not give personal investment advice. All content is for educational and entertainment purposes only. Investing entails a lot of risks and should be managed appropriately. Please do your own research and consult with an investment professional before making any investing decisions. Thank you.