The 12 Million Dollar Man
You will of course not remember this, but we met at the seminar you held in Perth a few years back. I then asked you your opinion on the, then budding, lithium market and you were positive towards it. You said that there is a lot to be said for focusing on ONE company alone and know everything there is to know. I did that.
To be continued in a Minute…
What our esteemed Member was referring to was a series of Advanced Educational seminars I held around the country in 2018 called “ACTIVE STOCK PICKING” which were great but completely wore me out and took me away from the newsletter, so we haven’t done them again. Maybe I should. Anyway. In those seminars, one of the subjects was called “THE ONE STOCK PORTFOLIO”. You might remember this one, this was the article that, when published in the Age and the Sydney Morning Herald one Saturday morning back in October 2010, caused Patersons (the broker I worked with at the time) to approach me the next Monday and tell me to put a disclaimer on every article I wrote from now on saying "The opinions in this article are those of Marcus Padley and do not represent the views of Patersons Securities". Chickens. Broking was a hostile environment for someone like me and anyone in the media like Charlie Aitken. In broking, they cut down the small poppies, let alone the big ones, so ego-charged are some of those desks.
So as I explain this investing approach, you should know that the licensed advice community would never endorse it for fear of being irresponsible, and as such, this is not a recommendation, it is an idea.
The One Stock Portfolio is the opposite of diversification. It is about the odds being better for the investor if they know a lot about a little rather than a little about a lot of stocks. The last time I wrote about it, it stirred up a storm.
(You don’t need to read the whole article but you really should skip to the end to read the rest of the MEMBER EMAIL and his experience operating the one stock portfolio technique).
THE ONE STOCK PORTFOLIO
Let’s start with diversification.
Captain Cook, the first of a long line of successful English captains to tour Australia, will tell you one certainty of life. Discover any group of human beings, no matter how remote, and they will have a God and a religion. It was not someone’s idea; it is a human need, to huddle under an omnipotent being and a connected creed. To have all our biggest questions in life, any question in life, answered not by logic, but by faith, in a guru and his teachings.
Net result, from religion to financial advice, our insecurity endows our symbols with vastly more trust and belief than they could ever realistically possess or deserve. It has been going on since the depths of time. Blind faith born of insecurity.
In the remote wilderness of portfolio construction, we have a lot of gurus but one religion. It’s called diversification.
We have all heard the cry. A spread of equities, bonds, property and cash. A spread of international and domestics investments. A spread of sectors including resources, financials and industrials. In fact, by the time you leave the average financial planner these days, you may think you’ve bought five managed funds, but in fact, you have a portfolio of 14 asset classes and 3,000 stocks domiciled in half a dozen countries.
But those 3,000 stocks won’t save you in a bear market and will dilute your returns in a bull market. It is the chicken little approach and worse than that, it fools you into thinking you are safe. It is a “Matrix” that prompts laziness and inattention from your financial professional and, on that basis, diversification is arguably riskier.
So let’s depart for a moment. Cut across all the consensus preaching and consider the blasphemy (according to Patersons) of “The One Stock portfolio”.
Why wouldn’t you pick just one stock? If you want low risk, what’s riskier? Knowing a little bit about twenty stocks you’re not watching or everything about one stock you are. Diversification is insurance against ignorance for people who don’t know what they are doing. But if you are not ignorant? If you do know what you are doing?
So imagine this: If you were forced to sell all your stocks, liquidate your SMSF for instance, and buy just one stock, what would you do?
I’ll tell you, a heck of a lot more work getting to know that stock than you are doing now.
You would find out everything you could about that stock. You would ring the management. Go and see the company. Find any research you possibly could. With one hours work you’d be in the top 0.1% of people who knew anything about that stock. With ten hours work you’d be in the top 0.000001% of people who knew anything about that stock.
You would have the share price up on your screen every second of the day. You would question every fluctuation. You would develop trading skills, a stop-loss mechanism. You would learn all about its volatility, trend, habits and nuances. You would watch it like a hawk, spruik it mercilessly and if anything went wrong you wouldn’t tell anyone you’d just sell. Over time you would have a sixth sense about where the share price was going and you’d take advantage of it. You would become ‘the expert’.
You would develop a relationship with the company. Go to every company presentation, get to know the CEO, the other shareholders. You would come to understand the drivers and in so doing pick up on anything that's relevant to your stock. And if you don't trust it you are going to be sitting outside their headquarters with a pair of binoculars
Investing in one stock is more intense; it focuses the mind. You pay attention and paying attention is good. You do a lot more work before you buy. You think harder about every trade. You plan. You set levels. You develop a strategy. You are more disciplined, more vigilant. With so much at stake, you are more risk-averse, not less; you have to be. You are sensitive to bad news. You are in touch. With one stock, trading is not necessarily more risky at all, or more short-term. It is less risky because you have your head in the game, you only have one stock to focus on after all.
And when it goes wrong, you will notice not ignore, understand, not sit in denial, assess not panic. You will be equipped to exploit any share price fall, more relaxed and unruffled, you will sell more readily. And when you get out…it is only until you get back in again. It’s not a divorce; it’s a holiday. You will control, not trust to luck. It is something that twenty stock investors rarely do; cash out. You will find that cleansing, entering the eye of the storm. Clarity returns. The world is at your feet, and you then have the time and the cold emotion to put your total effort into something too few of us spend any time doing, looking for the re-entry point for the stock you have come to know and understand.
So back to our MEMBER EMAIL:
Incidentally, and you will of course not remember this, but we met at the seminar you held in Perth a few years back. I then asked you your opining on the, then budding, lithium market and you were positive towards it. You said that there is a lot to be said for focusing on ONE company alone and know everything there is to know. I did that.
$156,000 went in to first Kidman Resources (KDR – taken over by Wesfarmers) – and $800,000 came out, which I was SUPPOSED to pay off debt with – but put into Liontown (LTR) instead. That investment hit $12,000,000 yesterday.
A good move.
As I wrote above – if you do the one stock thing you are going to be going to company presentations and getting to know the CEO. Here (by permission) is our Member doing just that. A level of due diligence that clearly works. And it may just work for you too.
By the way – this is a slide from an LTR presentation last week. They are about to de-merge their Lithium assets from their other assets to release value.
Now comes what seems like a big question but is actually a small question – how do you pick your one stock?
Theoretically, you should be looking for the best single investment in the whole wide world at any particular moment in time, but get hung up on that, and you will get paralysed. What you need is a stock that suits your risk profile, is volatile but not too volatile for you – and that depends on your risk profile – which is not a number, it is a feeling, of comfort. There are a lot of stocks to suit every investor, not just one; you just need to pick one. It may not be the best stock, but good is good enough, and with focus, you will quickly learn if you have picked the wrong one, and move on to another.
When I was broking in 2014, I had a very good year trading Webjet (WEB) using my one stock portfolio approach to investing.
WEB was the only stock I traded; I was all over it. I was in and out, out and in. I picked up on it because (and here’s a tip) it had just started advertising on TV. Companies that suddenly appear in the media advertising can obviously afford a decent advertising budget, can afford to advertise on television. That told me that they were achieving a level of cash flow and profit, it also told me that their management wasn’t greedy (paying it all out as dividends) but saw the future growth and were prepared to invest in it heavily. I have run Marcus Today for 23 years now, but we are yet to throw serious money at advertising, we’d love to but until we’re making serious money we’re reluctant. So we understand the success companies must be having if they do.
WEB was also a stock moving from the small investor’s radar to on the institutional radar – fund managers had to buy it as it grew and as it joined their benchmark indices. So I had picked a stock “running with the tide” (at the time).
So I bought it, and ran it, and tripled my money. It’s a lot easier to invest when you focus. You get used to a stock, the volatility, their calendar, the management, how they release information, when they release information, what the drivers are, how the market affects them, how liquid they are, how quickly they move, who the big players are in each stock, when they are selling, when they are buying. Your antennae are ‘up’ at all times, feeling the air for anything that will affect the share price. You are interested, you understand, you know. Eventually, you develop an edge, and your fortunes improve. As Geoff Wilson once told me “The one with the most information wins”. You can’t have an edge if you go from stock to stock.
They say the reason people get addicted to online gaming, first-person combat games, in particular, is because as you improve the feeling of dominating newbies is a drug. You can find that in the stock market, but only if you have a focus.
One good stock. As Mae West said “Too much of a good thing can be wonderful”.