For active investors using fundamental approach for stock investing, there are two species of them: the hunter and the farmer. Both the Hunter and Farmer attempt to obtain extra-ordinary return from the market, each using his own method.
The Hunter
The hunter tends to fall into the ‘focus portfolio’ camp believing that he should put all his eggs in just a few baskets and watch them like a hawk. He gets deeply entrenched in the story of the company, analysing, and performing in-depth study its business, the sector it is in, its peers, its management, moat and competitive advantage, prospects, financial performance, and position etc. He then carries out various valuations, relative as well as absolute and then invest in them if it is a great business selling at a fair or cheap price. He then holds them for long-term of more than 10 years, or even for a lifetime, with the hope to strike some multi-Baggers stocks and becomes very rich.
It is such a wonderful experience of being right and knowing that he is so skilful and knows all along that he is such a successful stock picker, and as a result, makes a great fortune. In this, such luminaries as Philip Fisher, Bill Miller, Seth Klarmen, Warren Buffett, Chares Munger etc. have become legends in our time as the long-term greats of the art.
How to become a skilful Hunter?
Christopher Mayer, in his book, “100-BAGGERS, STOCKS THAT RETURNS 100-TO-1 AND HOW TO FIND THEM” found 365 100-baggers over a 52 years period from 1962 to 2014 in the US Stock Exchange. A 100-baggers in the stock market is a stock which becomes 100 times its initial value. The return of a 100-baggers is not 100%, or even 1000%. It is 9900%!
The average number of years a stock became a 100-bagger was 26 in Mayer’s research. That was equivalent to an average compounded annual return (CAR) of about 20%, twice the CAR of the broad market over the same 26 years period.
If you have a capital of $100,000 now and wish to become a multi-millionaire, you just need to find ten potential 100-baggers stocks and invest $10,000 into each of them. If some of the bets turn out right, you will fulfil your wish to become a multi-millionaire some years down the road. Is that doable?
First, one must have the ability to identify the 100-Baggers, or even 10-Baggers will be great; what are their characteristics, and then how to go about finding them, and invest in them for the long-term.
In our local market, there have been a few 100-Baggers stocks in the last twenty years. Are you interested to know which are the few?
Are you also keen to find out the characteristics of those 100-Baggers in order to provide you with soe guides on how to go about searching for them?
The next group of active fundamental investors are the farmers. Who are they?
The Farmer
The other approach of fundamental investing is that espoused by the farmers who seek to ‘harvest’ the systematic mispricing from the rough of the stock market through quantitative techniques.
Ben Graham, the original guru of value investing and his close disciple, Walter Schloss, can be regarded as successful farmers in those early days. They bought up a large portfolio of excessively beaten down assets selling at less than their liquidation values which successively re-rated and they made huge amount of money over a long period of time, repeatedly doing the same thing.
In recent time, one well know successful farmer, Joel Greenblatt uses his incredibly successful technique of the ‘Magic Formula’ of buying a basket of about 30 good companies at cheap prices, using the two metrics of high return on capital and high earning yields with the highest ranks, and rebalance it annually. Greenblatt beat the return of the broad market by a wide margin with CAGR of 23.8% over 22 years, beating the return of 9.6% of the broad S&P500.
Which approach is a better one, the Hunter, or the Farmer approach?
The irony and evidence are that many retail investors like you and me with limited time and resources are not able to perform the kind of deep analysis; visiting the factories, interviewing the management and employees, the suppliers and customers etc., that is required by a successful Hunter to turn stock picking into a highly profitable activity in this changing market environment.
May be a better approach is a combination of hunter and farmer. It is by doing some detailed-enough-but-not-not-deep qualitative analysis and applying some proven quantitative criteria to invest in a diversified-but-not-overdiversified portfolio of stocks. Those quantitative metrics include return on capital, cash flows, and relative and absolute valuation techniques. That is what I have been doing in investing for the past years.
My personal experience in investing
My strategy in fundamental investing is to buy a basket of 10-15 stocks of good companies selling at cheap prices, with a margin of safety high enough above their estimated intrinsic values.
I would like to summarize all the portfolios of stocks which I shared in i3investor over the years and their returns after the portfolios were formed. They were all published records since 7-8 years ago.
In my article, “Investing in Bursa for 5 years: 5 年的等待”in the link below,
https://klse.i3investor.com/blogs/kcchongnz/138098.jsp
I have shown that the portfolio of 10 ordinary stocks named “GE13 Watch” established in i3investor on 21st January 2013 returned 146%, more than seven times the return of the broad market of just 20% in the same period of about 5 years.
My second portfolio of 11 stocks named “2013 2H Stock Pick Challenge” established in i3investor on 1st August 2013 and as shown in the link below, “Search for The Holy Grail in Investing: The Magic Formula” returned 175% in about four years against the return of the broad market of just 10% during the same period.
https://klse.i3investor.com/blogs/kcchongnz/127825.jsp
The excess return of the portfolios of stocks was huge.
The stocks in the two portfolios were chosen following the principle of the Magic Formula of Joel Greenblatt; buying quality companies with high return of capital of the firm when they are selling cheap as valued at the enterprise level.
My third established portfolio in i3investor was done at the end of year 2015 for investing for year 2016. This was using a different quantitative investing strategy; the high dividend yield investing strategy as documented in the link “Tips for Dividends Investing: A sure cash flow for investors” below,
https://klse.i3investor.com/blogs/kcchongnz/122285.jsp
This portfolio of 5 high dividend stocks has gained an average of 67.4% for the one-and-a-half-year period as on 5th April 2017, compared to the gain of the broad market of just 3.8% during the same period, again with huge excess return.
My fourth established record in i3investor was in the stock pick challenge for 2017. I did not do that well in this portfolio of stock, but it is still a positive return of 5% at the end of the year.
My latest portfolio published in i3investor was for the year 2019 Stock Pick Challenge as shown in the link below, using a combination of qualitative and quantitative analysis.
https://klse.i3investor.com/servlets/pfs/116402.jsp
The portfolio of seven stocks returned 25% for the year, outperformed the return of the broad market of a loss of 3% during the same period. Seven months later as on to date on 13 August 2020, the portfolio was up by 118%, beating the flattish market of KLSE by a wide margin during the same period. Just a couple of weeks ago, the return was more than 180%.
Conclusions
There are different paths in value investing. One could invest following the Hunter’s method, buying a focus portfolio of excellent companies after thorough qualitative and quantitative analysis and hold it for the long-term (unless situation changes). This can potentially unearth some multi-Baggers. The other path is to follow the Farmer’s approach using quantitative investing strategies in buying a basket of good companies at cheap prices and reviewing it periodically.
All roads in investing lead to Rome. Both strategies will yield good results. The later Farmer’s strategy may yield better return, but it requires more monitoring and rebalancing. For most investors, especially those with a busy career or business of their own, the earlier strategy of buy-and-hold excellent companies for the long-term may be better. However, both strategies require the knowledge, experience, and hard work.
If you wish to acquire some knowledge and experience in either of the above strategies, you may contact me at the following email address,
ckc15training2@gmail.com
There is no free lunch in the stock market. Success depends on knowledge, experience, a proper investing mindset and most of all hard work.
KC Chong
https://klse.i3investor.com/blogs/kcchongnz/2020-08-13-story-h1511703766-Stock_Picking_The_Hunter_and_the_Farmer_kcchongnz.jsp
