As a side point, you do not really need that much money to start a hedge fund. While most people believe you need millions to start one, it is possible to get away with spending as little as $200 to $500 on all of the above points. You do need to have capital to invest, but the overall structure of the hedge fund is fairly easy and inexpensive to setup. If you do have questions about setting one up, please don’t hesitate to contact me so I can point you in the right direction.
Now, with money sitting in my brokerage account and my fingers getting itchy I decided to concentrate on the following Value Investment Strategy.
- Find substantially undervalued stocks (companies) selling at a significant discount to their intrinsic value.
- Such companies must either be growing rapidly, about to grow rapidly or have some sort of a catalyst in the works to release value in point #1.
- Concentration. These types of investments are hard to find. As such, you should concentrate on having only 3-5 stocks in your portfolio. This is what Warren Buffett does as well. Diversification is a myth.
- Do an enormous amount of fundamental research to confirm points 1 through 3.
- Watch your investments like a hawk in case of any change.
The first three years were amazing. While the DOW remained basically flat in net terms during this time (2002-2004), my fund returned an astounding +149.75% net of fees. I was on fire, I could do no wrong. Most of the things I touched turned to gold.
I was starting to get more clients, more money and making contacts in the industry. I was now making fairly good money, but I was getting restless. I was growing sick and tired of the strategy above. It was not exciting enough for me. There were only a few stocks/companies that matched my criteria and after a while I knew everything there is to know about them. There is only so many times you can look at the balance sheet of any given company before getting bored out of your mind
Yet, I couldn’t sit still. I knew there had to be a better way to invest. A more advanced way. One of the major problems with value investing is timing. While you can identify a substantially undervalued asset, it might take years before its value is realized. You don’t know when it is going to happen. It might be tomorrow it might be 2.7 years from today. In the meantime you have your investors calling you and questioning everything that you do.
The competition for capital in the investment industry is fierce. While I am telling my clients about the balance sheet, fundamentals, valuations and why this company should appreciate significantly given enough time, their Lehman Brothers broker is screaming how NOW is a “Generational Buying Opportunity.” I think they teach that phrase in the stock broker school.
I shouldn’t complain, I had great and understanding clients. Yet, I wasn’t naive, all they wanted from me is performance. If I couldn’t outperform this quarter or the next one, they would be gone.
At that time it was easy for me to figure out WHAT will happen, but next to impossible to try and figure out WHEN it will happen. As such I shifted my research work on TIMING. I wanted to see if it was possible. I have studied everything I could put my hands on. Technical analysis, cycle analysis, planetary movements, physics, mathematics, various other sciences and even witchcraft. At the end of the day and after a tremendous amount of work I found what I was looking for.
Let me state this in no uncertain terms as the whole premise of this book relies on this statement.
Yes, it is absolutely possible to time the markets and/or individual stocks. I have proven that fact to my entire satisfaction. Math doesn’t lie.
To be continued tomorrow…….
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