Investing strategy for individual equities
Investing strategy for individual equities
Discover a strategy that focuses on minimizing decisions and maximizing investment returns. By selecting dominant companies and making small initial positions, the approach aims to protect your psychology and utilize compounding effectively. This presentation explores how to evaluate companies with strong fundamentals, avoid emotional mistakes, and make informed investment choices for long-term success.
Investing strategy for individual equities
@jonathan2 months ago
Investing for the Long Haul: A Strategy to Minimize Decisions and Maximize Returns
Investing is 90% a game of psychology. The biggest challenge isn't the market-it's controlling your own emotions, biases, and impulses. One way to master this is by creating a strategy that minimizes the number of decisions you need to make. Fewer decisions mean fewer opportunities for mistakes, and in the long run, this can translate to better outcomes. My approach focuses on selecting dominant companies, building small initial positions, and protecting my psychology while letting compounding do the heavy lifting. The foundation of this strategy lies in choosing companies you can envision holding forever. These aren't "value" plays that look cheap today but might have uncertain futures. Instead, they're large-cap, world-beating companies with dominant market positions- that have a negative around them that is incorrect. They only come around a few times per decade, often when the market misjudges a company's future. The market doesn't reward being right: it rewards being right when the majority are wrong.
You are looking for dominant companies where the market is pessimistic due to a negative narrative that doesn't hold up under scrutiny. For example, there was a time when people argued Apple's iPhones would be commodified like desktop computers, Netflix could never make its own content, or Facebook was doomed by TikTok and overinvesting in VR. Each of these narratives had a kernel of truth, but the fundamentals of these businesses were strong, and they continued to dominate their markets. Finding these opportunities requires digging past the surface story and understanding the real drivers of the business.
There probably isn't an amazing opportunity like that in the market right now, and that's OK. There is nothing wrong with all of your money being in index funds. When opportunity strikes, it will be impossible to ignore. In 2022 it was impossible to miss that $META had crashed and was selling at a PE ratio of 12. It was still running a social network with over a billion daily active users. Twelve years ago it was impossible to miss that $AAPL have an ex-cash PE ratio of 12. It was still the dominant mobile computing platform for affluent customers. You don't need to do 'research' to find these situations, you just need to be vaguely aware of stock market news and open-minded enough to be skeptical of the current narrative.

When entering a position, the idea is to keep the initial investment small- much less than 1% of your total portfolio. This not only minimizes concentration risk but also helps manage your emotions. If the investment doesn't work out, the impact on your overall portfolio is negligible. However, if it takes off, you have a signal that you may have identified an interesting opportunity.
I buy into a position in a way that removes emotional friction. I start with a limit order and follow up with descending limit orders of increasing size. On a drop, this averages your cost basis down faster than the price goes down. For example, buying 100 shares at $100 and 200 shares at $90 yields an average cost of $93.33. Do this until it stops dropping or your position has hit maximum size (I never invest more than 4-5% of my portfolio in any one equity).
Once the position starts to grow, you protect your psychology by adding to it only when your existing position is already up 30-40%. However, once your total investment reaches maximum size (4-5% of your portfolio), stop adding and let your winners run FOREVER. At this point, your position is significant enough to meaningfully impact your portfolio. And if it keeps growing a lot, it's OK for your portfolio to be imbalanced that way. Because you're risking your gains, not your original capital.
One of the biggest risks in long-term investing is holding onto a company that loses its mojo. Even the strongest businesses can falter, and it's important to reassess your positions regularly. This is why yearly evaluations are a cornerstone of the strategy. The key is to look at the company's competitive position, market share, and innovation pipeline-not its valuation. Cheap stocks can be value traps, as seen with companies like Intel or IBM, which were once dominant but lost their edge. The question isn't 'Is it cheap?' but 'Is it still a world-beater?' If so, keep holding. This approach would have gotten you out of a company like Intel when it became clear that they had lost their dominant position in computing.
My personal experience has been primarily in mega-cap tech. Companies like Apple, Google, and Microsoft demonstrate how
network effects and scale allow dominant players to overperform for long periods. However, this approach isn't limited to tech. Winners 'over-win' in other sectors as well, from Pharma and Consumer Brands to Oil and Gas. The same principles apply: look for dominant businesses with clear competitive advantages, regardless of the industry.
By capping your initial investment size, you address concentration risk. If the position grows significantly beyond its original size, you treat it as found money and hold on, even through years of underperformance. Selling a stock to buy something else might seem tempting, but every decision introduces the risk of making mistakes. This strategy prioritizes minimizing decisions to avoid unnecessary errors. Liquidity ensures you can always sell if you need cash, but the goal is to hold for the long term and let compounding do its work. In a world filled with noise, hype, and short-term thinking, this strategy provides clarity and focus. By selecting dominant companies, keeping initial positions small, and relying on structured processes to protect your psychology, you give yourself the best chance of long-term success. The fewer decisions you make, the fewer mistakes you'll make-and that's the real secret to winning the investing game.




Related Jaunts

VC Portfolio Modeling: Determining Portfolio & Investment Size
@davemcclure

The AI Crown Jewel Nvidia - Why is Nvidia so important.
@financepresentations

How Did Our 2024 Mid-Year Outlook Views Play Out? | J.P. Morgan
@financepresentations
