Q&A

How much should I allocate to this strategy?

Set a comfortable cap for a maximum amount that this “fund” represents within your overall portfolio. This number will be different for everybody based on temperment and investment time horizon.

How many stocks should I hold?

Aim for 20, give or take.

What benchmark do you measure results against?

Since these are all equitities for companies of various sizes, the benchmark is a total market fund. I use VTI. That said, the time horizon for comparison should be at least 3 years, preferably 5.

What about the Magic Formula or the Aquirer’s Multiple?

These are excellent systems that have been hugely inspirational for me. Here are some areas where I wanted to diverge.

• These systems recommend selling winners annually (after a year and a day to avoid capital gains). I prefer the approach of letting winners to allow for long-term growth and compounding. So I’m comfortable with holding gainers but reducing their weight.
• The calculation of these screens are not transparent. It’s not clear to me what calculations and assumptions they make and when things may be changed. I prefer basing my system around the independent analysis of Morningstar and using the 3M Screen as proxy for finding quality on sale.
• If you really want to do these systems right, they require some manual calculations (unless you want to pay for the convenience). I don’t want to calculate earnings yields or operation earnings, so I wanted something that would allow for as much automation and simple rules-based adjustments as possible.

What about companies you don’t like?

Try to suspend judgement and donate a percentage of proceeds to causes that counter negative effects.

What books should I read?

These books have been particularly informative and inspirational for me: (These are Amazon affiliate links.)

• The Little Book That Beats the Market (Greenblatt)
• The Acquirer’s Multiple (Carlisle)
• The Dhandho Investor (Pabrai)
• The Education of a Value Investor (Spier)