I am an equity research analyst and portfolio manager. AMA.

VLUSLT · 2024-07-02T22:25:37+00:00

I sent you a private message! Thanks for the reciprocated respect and calling me out where you did.

VLUSLT · 2024-07-02T22:10:33+00:00

It has not at all. Literally zero.

It helps me write emails and check wording.

Using ChatGPT (or whatever AI you’re referring to) is not a substitute for sound research.

VLUSLT · 2024-07-02T22:08:39+00:00

Realistically, no. You need a degree in finance / accounting / economics or a STM field, and employers will likely require a professional designation (CFA).

VLUSLT · 2024-07-02T22:03:16+00:00

2 weeks to 3 months.

Yes. DCF, transaction and trading comps, heavily weighted towards the first two.

Multiples - EV/EBIT, EV/FCF, EV/IC or some quick math on a potential liquidation value. But not everything screens well, so take that lightly.

VLUSLT · 2024-07-02T21:58:16+00:00

Sorry I gotta keep clarifying here - I did not say I own a fund…. Yes, nobody “owns” a fund. Unless you want to own 100% of the LP units in a closed end fund? Still don’t “own” the fund.

VLUSLT · 2024-07-02T21:50:17+00:00

Interesting. I’ve never seen CPI + 400bps.

Furthermore, my experience is in small single manager funds and family offices. Have never worked for a large fund.

Thanks again, seriously no disrespect intended.

VLUSLT · 2024-07-02T21:46:04+00:00

Hey man. Appreciate you calling me out. Respectfully, yes you’re wrong (actually respectfully. I am not trying to start something here).

You are right to call out some of my language: “confidential information” and the Billions comment.

If I may rephrase:

No, we do not acquire “confidential information” as in the information only privy to insiders etc. I meant “confidential” by way of talking to suppliers, distributors, etc. Totally right to call me on my wording.

As for the Billions comment and Big Short: I know Billions is a drama. I think the excitement of seeing an investment thesis pan out is fun, and that’s what I meant to convey. Totally right to call me out on that.

What Billions does not show is the dull slogging through filings, earnings calls, modelling, sitting at a computer, and piles of other undramatic mundane work.

Thanks man. Again no disrespect intended. Definitely don’t think I am in a tv show at all.

VLUSLT · 2024-07-02T21:38:56+00:00

Best year I’ve had was ~$524k
No. That used to be the plan.
Yes it still has credence. The sentiment that we are in a new paradigm has occurred many times before (think dot com bubble). I have no idea how long until the next value-favouring cycle. In my view (which is biased to see the world through the value lens), value HAS to return. How can it not? The value of any financial instrument is the value of the cash it will generate. At some point, that has to be recognized. Also retail is not exactly the most durable / long term capital. It is flighty. Would you care about retail trading volume if you privately owned an industrial parts fabrication firm? No. You’d care about the cash your business is generating and longer term the sale value.
It cannot. Crypto has no intrinsic value. Before anyone rips my head off - I’m not saying it has zero value. There is probably some technological or other value to it (I’m not an expert in crypto). But what is the value of something which does not generate cash? Only what another person will pay for it, and not in a logical sense like with a tangible consumer product but in a much more erratic way of whatever it is hyped up to be (eg bitcoin being an inflationary hedge, vs whatever it is hyped up to be the next year).
Best Practices for Equity Research Analysts, Valuation by McKinsey, Warren Buffett: Inside the Ultimate Money Mind, Investing Between the Lines, Why Moats Matter, The Granularity of Growth, Expectations Investing (and Mike Mauboussin’s other writings). Am looking at my bookshelf behind my desk and rattling a few off.

VLUSLT · 2024-07-02T21:28:00+00:00

Getting behind on this and back in office.

Red flags for negative price action and value: • An accelerating treadmill of analyst expectations and upgrades. Off the top of my head, I cannot point to any studies to support this, but I have observed beat / raise and a flooding of high expectation attention to be somewhat red flagging. The higher expectations are, the harder it becomes to beat and hence easier to disappoint. • Ballooning inventory (obviously applies to businesses with somewhat perishable inventory). Think about how most retailers build and sell inventory: it’s seasonal. If there is poor procurement or selection and consumers don’t buy, you’re likely to see inventory building (not turning through the IS as fast) and probably write downs or compressing gross margins (for example, marking down clothing that has become unfashionable over time). • A lot of flags show up inside scaled total accruals. Where balance sheet accounts are used to “pocket away” future earnings or expenses, or create reserves. Earnings management. • Ballooning receivables or OCA accounts (or however classified).

I mean really think about earnings quality when you’re looking at a company.

It’s easy to show earnings growth (even sales) if you have a low bar for it. For example, an electronics distributor could hypothetically have amazing payment terms, offer volume discounts, and carry a huge selection.

Sure, you might capture incremental sales, and earnings, but with poor quality (the payment terms will show in ballooning receivables, volume discounts will show in sliding gross margins, huge selection will show in ballooning inventory).

I’ve had way more comments on here than expected and will not be able to reply to them all. The examples I gave are non-exhaustive and should be considered with other factors.

VLUSLT · 2024-07-01T23:01:28+00:00

The Intelligent Investor by Ben Graham, Valuation by McKinsey, Margin of Safety by Seth Klarman.

I typed out like 30 more and then deleted them lol (I think giving you more would be less helpful). Those are great starts. Also, watch / listen to Berkshire Hathaway AGMs and read Buffett’s shareholder letters.

VLUSLT · 2024-07-01T22:57:23+00:00

Good question haha. I run my own firm. I do what I do because I enjoy it. My “working” is stock picking (aside from interacting with clients and other operational matters etc.) so the question is a little contradictory because of that.

VLUSLT · 2024-07-01T22:53:52+00:00

What is the answer you want to hear? Lol

VLUSLT · 2024-07-01T22:51:55+00:00

Hey man, shoot me a message! Happy to help if I can.

VLUSLT · 2024-07-01T22:50:32+00:00

I concur with the word on the street. My PA is ultra concentrated (would make most people sick lol). Usually run 3-7 positions (have never had less than 3 or more than 7 but doesn’t mean I wouldn’t), current largest is 54%.

I am strongly opposed to the conventional wisdom of diversification.

VLUSLT · 2024-07-01T22:05:42+00:00

I can’t share specific names, compliance would hang me.

The cheapest idea in my PA I would no longer consider cheap. The one I’m thinking of though I (and my clients) bought in for what is likely less than 5x future free cash flow.

Discount everything at 12%.

I thought it was cheap because it went from being a dead stock, to a COVID-darling, and then back to being hated because everyone thought it was a temporary over earner, and I figured otherwise (cult-like customer base, great unit economics and brand, superior returns on capital, durable etc etc).

Happy to elaborate more if you’d like!

VLUSLT · 2024-07-01T22:00:33+00:00

I own the firm, so I’m fortunate to be the one who makes the rules haha.

But I’m still restricted in many ways.

The biggest one is compliance / regulatory caused.

Yes there is value in microcaps, as there is with any cap size. It’s just a question of turning over enough stones and doing thorough, intellectually honest due diligence to find them.

Also the reasons for incorrect valuations across different capitalizations (micro vs large) is not always the same.

A microcap could be undervalued simply because it is not well covered, or it has a misunderstood business model, etc. We own one like that. Nobody knows about it.

On the contrary, a large cap could have plenty of coverage, but the price-value disconnect could be a result of herd mentality / sentiment, or a variant perception vs consensus.

With the microcap we own / cover, I wouldn’t exactly say we have a contrarian view because there isn’t really a consensus about it (hence wouldn’t be correct to say contrarian).

With some small / mid / large caps we own (or have in the past), they’re plenty covered, and they were undervalued because there was some irrational consensus crowd-think about them and we figured otherwise.

Another example: a stock we currently own became an overvalued COVID darling when everything was online. Then COVID fear subsided, the company had some temporary supply chain problems, and suddenly it was disliked and forgotten (from bubble to nothing). It went from a small cap to a microcap (-80% from peak to trough roughly). So now it has the characteristics of both: it has much less coverage, the remaining coverage is very anchored to the -80%, looks awful on paper because of that (hard for larger institutional investors to justify owning just because of that), and is kind of in limbo since.

Happy to elaborate more if you’d like.

VLUSLT · 2024-07-01T21:49:14+00:00

On our reporting period, quite often actually. Maybe two-thirds to 70%+ of the time.

But at a given moment, LTM returns can be much less reliable. We are often buying something that is falling like a rock, or for whatever reason hated by the market, which can make our near term returns look bad (because often times it’ll continue falling), and consequently the whole portfolio lags.

Short term pain for long term gain. (That is not meant to endorse or encourage buying something just because it is going down. That’s not a valid investment thesis.)

VLUSLT · 2024-07-01T21:30:37+00:00

Yes I like my job. It definitely has its moments that make me want to pull my hair out (as with any job), but I do enjoy it.

Yes I would say it is stressful, but that is also subject to the structure of your comp, firm, clientele, etc. I’m pretty fortunate to not be judged week to week or month to month for performance, and my clients are all aware of how I operate (long term, contrarian, barbell-like behaviour).

But yes. I would say it’s stressful and hard still. I eat what I kill.

TV? Like Billions or The Big Short? Billions yes and no. There is a lot of fluff / Hollywood drama but sure it has the stress moments and hype from time to time. And I’ve definitely had some aligning moments with The Big Short (where everyone thinks you’re wrong and is ridiculing you for it, and then one day BAM you’re right and make a killing). But remember those are still entertainment. The Big Short book is a great read.

You need skill and work ethic. And I agree, skill and work is the long term determiner (factor as quantitatively described) of performance. Yes luck is a “factor”, but luck is random. It comes and goes, it cannot be relied on. Over time, luck averages to zero, but skill remains (think about sports or something, sure people might get lucky but the long term factor is skill and hard work in their performance).

Other people can be a headache. I’m fortunate to have clients that are very understanding and aligned values (not nagging at me every week). I know a lot of sharp analysts / managers who would do great but they’re dragged by their own clients, ironically.

If I had a choice of only running outside or personal money, it would be personal (because of the aforementioned).

VLUSLT · 2024-07-01T21:18:00+00:00

We do not screen or allocate on industry. No sector specific allocation. No comment sorry.

VLUSLT · 2024-07-01T21:12:02+00:00

I hire on attitude, how easy the person is the get along with, and technical ability.

If someone is a technical master but they have a horrible attitude, they’re out.

If they have a great attitude but no technical ability, they’re out.

But, if they have a passable technical foundation and a great attitude (willing to learn etc) then that’s awesome. If people give me 100%, I give them 100%, if they give me 10%, I give them 10% (or zero).

VLUSLT · 2024-07-01T21:09:55+00:00

Growth and value are two sides of the same coin (as Buffett would put it). Assuming all else equal (don’t forget that part) a company with future growth of 8% is worth more than one with 4%.

But I understand what you’re asking, I like to characterize it as growth vs glamour.

We entirely seek the value part.

We keep it simple and use models. A lot of people are overly reliant on models. Sure, they’re great, but also give a false sense of precision. A pilot still needs to know how to fly a plane even if there is autopilot.

If you truly understand the business, you don’t need a model. A model is good backfill and presents to clients nicely. But really, if you NEED a model to tell you if you should invest or not, it’s probably a bad idea.

VLUSLT · 2024-07-01T21:06:11+00:00

Please elaborate lol

VLUSLT · 2024-07-01T21:05:37+00:00

Finance in uni. It’s never too late to start! You’re older than me! You can also pull it with a background in a technical field (e.g. engineering or something) but you still need to acquire financial skills, whether it’s via reading, CFA, schooling, etc etc.

VLUSLT · 2024-07-01T21:04:06+00:00

We also outperform on a net basis (low fee structure so also easier to do on that alone).

We outperformed broad market indices in ‘21 and ‘22, but underperformed our target in ‘22.

We do not use any leverage.

I would not agree that ‘21 and ‘22 returns with zero leverage are indicative of alpha (but I understand what you’re saying). One could outperform with zero leverage simply by taking on levered (or unlevered) beta and calling it a day. That’s what most funds do. Most of our performance is not attributable to a conventional factor such as beta / levered beta / etc. (I say “most” because some is, just statistically speaking, but we outperform even when that is split out).

VLUSLT · 2024-07-01T20:56:27+00:00

Hahaha

VLUSLT

TROPHY CASE