Sunday, April 4, 2010

On investment categories and allocaions

As investors, we need to understand what is our aim in managing investments. A clear and meaningful categorization of possible situations allows for better cash allocation as well as active risk management.
I know many have read articles from the 2 investors, please bear with me, it is for the benefit of everyone.

Heres Peter Lynch's categories which in my opinion covers quite pretty much everything

  1. Slow growers - Tracks GDP, high dividend yields, PE is not crucial here (in fact most are high)
  2. Stalwarts - Large firms,10-12% growth (returns <= 50% in 2 years), rotational and 
  3. Fast growers - 20-25% growth, growth / PE >1 (High returns)
  4. Cyclicals - Some mistaken for Stalwarts, follow economic cycles, timing important but hard. Sometimes think buy high PE, sell low PE
  5. Turnarounds - Depressed firms, stages fast comeback when successful 
  6. Asset opportunities - Hidden asset values, requires industry working knowledge

Here' Warren Buffett's categories as stated in his early partnership letters
  1. Control (1956) - situations requiring majority ownership of the firm 
  2. Workouts (1956) - situations involving restructuring, turnaround and others not correlated to market
  3. Generals - very undervalued (1956)
  4. Generals- relatively undervalued (1965)
Overall #4 would have generated some good and some disasters, overall I believe for a small capital, staying 100% vested is important and still result in positive returns versus a benchmark.In times of high valuations, it is hard to find #3, while #1 and #2 historically is hard to find and onerous to manage.

Updates (6 April 2010)
Some of my close friends not in the investment field asked me how to survive with a small capital.
My answer was precisely when you have a small capital base, it is far easier to produce out-sized returns which I will explain in a later post.

I have a small capital base and below are some of the criteria I employ:

  1. Abnormally large margin of safety 
  2. Foreseeable catalyst to unlock the value realization 
  3. Positions that are little correlated to the market
  4. Preferably no institutions cover it 

Happy investing, best regards.
, , , , , stalwarts, cyclicals,


zhongyi said...

hi mervyn, your blog is genius. i'll come by more frequently to check out in the future.

Mervyn Teo said...

Thanks Zhongyi, hopefully in years to come, I can look back at this blog and see the performance of my analysis and the good quality of ideas and informational exchange.


Great asset allocation.

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