During his recent interview with Tobias, Joshua Brown, CEO of Ritholtz Wealth Management, and author at The Reformed Broker Blog, discussed how you can successfully adapt the Peter Lynch style of investing in 2019 saying:
Q2 hedge fund letters, conference, scoops etc
Tobias Carlisle: First question: your own personal investment strategy. I’ve read your great post, How I Invest My Own Money. And you’ve got a very sensible approach, of course, because you’re a financial planner. But when you’re thinking about… the most interesting thing for me in that list is the individual stocks, the individual names. When you’re thinking about choosing those names, how do you go about doing that? What’s your process?
Joshua Brown: So I started trading stocks when I was like 18 and I just love it. But I don’t trade really any more.
Tobias Carlisle: You said you buy and you don’t sell.
Joshua Brown: I try. I mean, sometimes. If I sell something it’s because I went into it with a stop-loss. I went into it saying all right, we’re going to take 10% downside to make 30% upside. For the most part, what I’m doing is buying and having the dividends be automatically reinvested. So it’s a lot of blue chips. A lot of large cap growth stocks. And I already have a lot of exposure to some of these stocks anyway because they’re big in the indices. And my real money is invested in my firm’s models. So I have exposure to all this stuff already. So these are just names I want to own individually. And I will only do it in tax-deferred accounts. So I’m not doing any individual stocks or bonds or anything in a brokerage account. It’s all rollover IRAs, SEP IRA, etc.
Joshua Brown: But what I’m basically trying to do is make sure that I’m staying on top of what’s going on with the individual names. And so the mechanism by which I do that is having some skin in the game. I’m not looking to change my life with individual stocks, like my real investment is in this firm and then my secondary real investment is in my retirement account, which again owns the same models that my clients own. So this is really just something on the side I’m doing to keep myself sharp and plugged in and engaged. So I have a bunch of stocks that I bought years and years ago, never sold them, with Apple and all this stuff. And they’ve just gone up and up and up. And I just, I follow the news because I have a little bit, you know, more invested in these companies. But I’m not like, measuring alpha versus a benchmark-, I don’t care about that stuff.
Joshua Brown: And then a lot of the stuff I own is like boring, and I like it that way. So, you know, I’m in Verizon, I’m in a bunch of weeds. Like these are things that are just paying dividends, accumulating more stocks, slow and steady and it makes me happy. I like to watch that process happen in my accounts.
Tobias Carlisle: In Verizon, to make the cable payments a little bit less painful.
Joshua Brown: Well that’s a good point. A lot of stocks I own, just not on purpose, by default of the companies I spend money with. Like I own Dunkin, I own Shake Shack, I’ve done really really well with those stocks. I spend money there, like I feel like I should be getting something back. And I actually think that that’s a really good tool-
Tobias Carlisle: That’s the Peter Lynch.
Joshua Brown: Yeah, it’s a little bit, so. Ah. I feel like Peter Lynch got kind of mis… I mean I’m sure you’ve read the same books that I read. I feel like he said like, “That’s a good starting point.” And people took that to mean like, “Oh, just buy whatever I’m a customer of.” But I think there’s some element of that and it’s also like, it’s a good reminder, like, when you have the volatility that we had a week and a half ago. You see stocks go down 9% in four days or three days and you’re just like “Yeah, but I know the business didn’t decline in value by 9%.” These are just the pieces of paper that represent that business.
Joshua Brown: So it’s a helpful reminder, when you own stocks where you actually interact with those companies in the real world because you realize, “Oh, I’m still probably going to pay my Verizon bill next month. Like most likely I’m still going to get a cup of coffee this morning when I wake up.” I think that that’s an interesting psychological tool. Harder to do that with things that are a little bit more divorced from your life like semiconductor stocks or, you know, railroads or things that you’re not directly interacting with all the time.
Tobias Carlisle: I think Peter Lynch said, “Find the things that you use everyday and then the things that you like and then do a valuation and then buy them if the valuation is sensible.”
Joshua Brown: Right, people didn’t like the valuation part. They just skip to-
Tobias Carlisle: Well, that hasn’t worked-
Joshua Brown: They just skip to buy it. Right.
Tobias Carlisle: If you, if you-
Joshua Brown: I mean actually it might have worked. I use an iPhone everyday-
Tobias Carlisle: If you cut out the valuation step I think you’ve done better over the last five years.
Tobias Carlisle: There’s an ETF ACSI Australia. Ah, Australia. American consumer, something. Basically what they look at the data that, point-of-sale data for people who’re buying these things and then they extrapolate that out and go and buy those underlying stocks. So they’re trying to ahead of the next earnings. And there’s a UK version, or a European version, and a US version. And the UK, or European version, they try to do a valuation before they buy it.
Joshua Brown: That’s the worst part.
Tobias Carlisle: Well it’s underperformed the American version that doesn’t worry about the valuation, just buys it on, sort of pure underlying earnings momentum.
Joshua Brown: I wrote a post about that phenomenon. I said, I’ve still got price to book. And I basically said like, there are no asset managers who put in their literature, or sit in front of a client, anything to the effect of, “Here’s what we do: we buy the biggest winning stocks and we add to them as they win even more. And we pay absolutely no attention to valuation.” There is nobody saying that that’s their process. I just spent the last 10 years doing that, you absolutely fucking destroyed everyone else who’s like “Oh, we’re looking for value and we’re looking for bargains.” The idiot who just buys the SPY they’re like “Well, what the fuck are you doing that for? Like, you’re not making any money doing that. So is this like a pride thing?”
Joshua Brown: So I’m not joking like this is going to go on forever but I just think its interesting that we been in that sort of moment, for more than a couple of years. It’s been going on for almost 10 years now.
Tobias Carlisle: Well it’s a-
Joshua Brown: And I don’t know when it stops.
Tobias Carlisle: It’s a momentum strategy, right. It’s a legitimate momentum strategy and we’ve both got friends, Alpha Architect, Wes Gray and AQR. They have explicit momentum strategies where they’re buying the things that have gone up the most and that’s a very good long-term, well-performed strategy, over a very long-term scope, better risk-adjusted characteristics than value does, particularly at the moment.
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