Matthew Schifrin is a long-time editor of Forbes magazine. From his position at the forefront of American business journalism, he had exposure to famous investors such as Buffett, Lynch, Soros, and Templeton, but it was the unknown investors with equally strong track records that drove him to write The Warren Buffetts Next Door. Schifrin used social investing website Marketocracy, which provides professional-level portfolio tracking and analysis to retail investors, to find ten investors with outstanding returns spanning the last decade.
Schifrin’s ten profiled investors don’t have MBAs or CFAs, yet they have found success in investing strategies as varied as deep value investing to short-term options trading and from elliott wave swing trading to biotech special situations. For each investor, Schifrin explains his background (sorry ladies – all of those profiled are males) and how it influenced his current strategy, and how that strategy has performed. Given the breadth of styles covered, Schifrin doesn’t go into depth into the strategy (the reader is left to explore appealing strategies on his or her own time) but he does provide a significant number of links to useful websites for learning more.
Consider book a combination between a pep rally for retail investors (You can do it!) and a sampler of different investment styles. Not to be too optimistic, Schifrin, and I think every investor profiled, notes that success is predicated on commitment – no one will be successful with any of these strategies in the long term by dipping in and out when it is convenient. Each investor spends several hours a day committed to their portfolio (surprisingly, some of those profiled in the book manage only fake money portfolios on Marketocracy – doing so with fervour over many years without matching the gains for real!).
Although Schifrin doesn’t do this, I am going to group the investors by strategy. In reality, the categories are fuzzier than I have made them (at least one of the global/macro guys could easily be in the value category too).
Value Investors
Three of the profiled investors fall in this category: Christopher Reese, Mike Koza, and Jack Weyland, who had returns of 25%, 34%, and 36% since 2000, 2001 and 2002 respectively. These are extremely impressive results, considering these investors are all self-taught and troll for opportunities in fairly complex areas. Weyland, for example, has earned his returns from biotech companies that have been temporarily beaten down, after determining that there is a temporary disconnect that will resolve itself when the market comes to its senses.
Key takeaways from this group:
Bob Krebs is the only investor in the options category. Though he is a long-term income investor, he improves his returns substantially by writing covered, out of the money call options and selling naked out of the money puts on companies he is bullish on. This strategy has earned him a CAGR of 25% since 2003.
Key takeaways:
Three of the profiled investors fall in this category: Alan Hill, Randy McDugg, and Andrew Swann. Hill and McDugg develop macro themes and then hunts for specific companies to best take advantage of the theme. Swann focuses on gold, oil, gas and other hard assets. The three have found great success in their respective strategies.
Key takeaways:
Three of the profiled investors fall in this category: Kai Petainen, Justin Uyehara and John Navin. I was iffy on Petainen, since he trades based on a proprietary model he developed that focuses on fundamental characteristics derived largely from Piotroski’s academic research (found here), but he largely trades based on technical movements (e.g. sells if it drops 20% in a month, buys if it goes up 10%). Uyehara and Navin were easier, as they are traders through and through, focusing on volatility and technical movements rather than fundamentals (Navin actually uses Elliott Wave Theory and Fibonacci retracing as his key decision points).
Key takeaways:
Schifrin’s ten profiled investors don’t have MBAs or CFAs, yet they have found success in investing strategies as varied as deep value investing to short-term options trading and from elliott wave swing trading to biotech special situations. For each investor, Schifrin explains his background (sorry ladies – all of those profiled are males) and how it influenced his current strategy, and how that strategy has performed. Given the breadth of styles covered, Schifrin doesn’t go into depth into the strategy (the reader is left to explore appealing strategies on his or her own time) but he does provide a significant number of links to useful websites for learning more.
Consider book a combination between a pep rally for retail investors (You can do it!) and a sampler of different investment styles. Not to be too optimistic, Schifrin, and I think every investor profiled, notes that success is predicated on commitment – no one will be successful with any of these strategies in the long term by dipping in and out when it is convenient. Each investor spends several hours a day committed to their portfolio (surprisingly, some of those profiled in the book manage only fake money portfolios on Marketocracy – doing so with fervour over many years without matching the gains for real!).
Although Schifrin doesn’t do this, I am going to group the investors by strategy. In reality, the categories are fuzzier than I have made them (at least one of the global/macro guys could easily be in the value category too).
Value Investors
Three of the profiled investors fall in this category: Christopher Reese, Mike Koza, and Jack Weyland, who had returns of 25%, 34%, and 36% since 2000, 2001 and 2002 respectively. These are extremely impressive results, considering these investors are all self-taught and troll for opportunities in fairly complex areas. Weyland, for example, has earned his returns from biotech companies that have been temporarily beaten down, after determining that there is a temporary disconnect that will resolve itself when the market comes to its senses.
Key takeaways from this group:
- Look for companies with low debt (D/E less than 50%), are profitable (or have a clear path to profitability), and high tangible assets relative to the current price.
- Focus on risk rather than reward. The upside will take care of itself if you have protected your downside.
- Look for short-term market disconnects that are causing a mispricing
- Success takes a major time committment, and you’ll have to learn how to adjust financial statements to better reflect reality
- Be quick to take profits, rather than getting greedy.
- Don’t over-diversify. 10 – 20 stocks max, otherwise you’ll just match the broad indexes.
- avoid investing with emotion.
Bob Krebs is the only investor in the options category. Though he is a long-term income investor, he improves his returns substantially by writing covered, out of the money call options and selling naked out of the money puts on companies he is bullish on. This strategy has earned him a CAGR of 25% since 2003.
Key takeaways:
- Keep your ego in check. This means avoiding doubling down and selling when you are wrong.
- Sell when the short term moving average crosses below the long term moving average.
- Dont’ be lulled by high dividend yields – you have to focus on sustainability (this was the key thesis I wrote about for World Wrestling Entertainment)
- Don’t be afraid to run a concentrated portfolio if you’ve done your research.
Three of the profiled investors fall in this category: Alan Hill, Randy McDugg, and Andrew Swann. Hill and McDugg develop macro themes and then hunts for specific companies to best take advantage of the theme. Swann focuses on gold, oil, gas and other hard assets. The three have found great success in their respective strategies.
Key takeaways:
- Due diligence is key for macro investing. You have to be sure you’ve got the macro theme right, and then you’ve got to be sure you’ve done enough research into the companies you’ve chosen to play on that theme.
- Ride on the coattails of smarter people for clues as to macro themes
- Focus on cash flow over net income and EV/EBITDA over P/E
- For riskier areas, like Chinese stocks, you can never be sure the documents are accurate, so you are best to buy baskets of these stocks knowing that one or two will go bust.
Three of the profiled investors fall in this category: Kai Petainen, Justin Uyehara and John Navin. I was iffy on Petainen, since he trades based on a proprietary model he developed that focuses on fundamental characteristics derived largely from Piotroski’s academic research (found here), but he largely trades based on technical movements (e.g. sells if it drops 20% in a month, buys if it goes up 10%). Uyehara and Navin were easier, as they are traders through and through, focusing on volatility and technical movements rather than fundamentals (Navin actually uses Elliott Wave Theory and Fibonacci retracing as his key decision points).
Key takeaways:
- Listen to what the market is telling you
- Be flexible with your investing strategies
- Buy at support levels, sell at resistance
- Pay attention to moving averages and sentiment indicators
- Sell 1/3 of a position when you get a 25% gain, then another 1/3 when you get to a 50% gain.
- Avoid double-short ETFs. Too risky!
- Avoid story stocks
- Develop a sell discipline and stick to it
