Tuesday, July 25, 2006

Welcome to the Worst-case Scenario Investing blog!

This is the first entry in what I hope to be a very illustrative blog used for documenting my own investment decisions. I graduated from college two years ago and am currently a software engineer in a large corporation. I've been investing for a little over two years, have had some luck, but also have made some investment mistakes along the way. I am by no means an expert in the investment field, but i have been an avid reader over the last two years of great investors like Warren Buffet and Benjamin Graham. I am currently ploughing through Damadoran's Investment Valuation textbook to familiarize myself with common valuation models instead of just using black box implementations available from the web.

Every investor has an investment philosophy. I want to be a value investor who runs a concentrated portfolio with 75% Buffet-type investments and 25% Graham investments. In other words, 75% of my portfolio should be in my top 10 best investments for the very long term. These should be companies that have wide moats and throw off tons of cash. The remaining 25% of my portfolio will be diversely invested in either small Grahamian NCAV cigar-butt companies or possibly special situations like the ones documented by Greenblatt. These allocations are not hard rules, but I intend to stay close to them. The main motivation of a concentrated portfolio is to avoid my own tendency to collect different stocks, i.e. diworsification.

As a student of machine learning and pattern recognition, I am also interested in taking advantage of the short-term through programmatic technical analysis, but I realize that long-term movements are mainly governed by fundamental qualities of a company. This means that I will reap the most benefit from concentrating on fundamental analysis while I am starting out. Technical analysis will be a hobby that gets very little of my investment dollars.

To distinguish this blog from the other value investing blogs out there, I will attempt to pinpoint what the worst-case scenario could be for different stocks that i am interested in. This type of floor analysis will give me the confidence I need to run a concentrated portfolio. For cigar butts, I'll probably look at what's on the books to calculate a liquidation value. For growing businesses, we can perform a discounted cash flow valuation with a range of possible growth estimates. The lower end of the range will constitute what might be the worst case scenario.

I hope I have piqued your interest with my investment philosphy and background. The next post will disclose the components of my current portfolio and I will briefly explain my top picks.

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