Guiding Principles

This is chapter two of a guide
to REIT stocks. Begin here.

Time frame

It will be a mistake to invest with me if you need dividends or capital appreciation to fund your day-to-day expenses. Mr. Market swings high and low. So will the market price of the portfolio.

I don't attempt to predict the vicissitudes of the market. So you must have a minimum 3-to 5-year investment time horizon.

Circle of competence

There are areas of investing that are beyond my level of competence. So, you will not find stocks in Fintech or Biotech. I rarely invest outside of the U.S. My focus is on smaller companies, with micro- to small-market capitalization of less than $2 billion.

My focus is on stocks domiciled in the U.S. because the SEC requires that U.S. companies disclose more than any other regulatory agencies. The emphasis on micro-cap stocks is because these companies are often more straightforward and easier to understand.

Return objective

My goal is to achieve an average of 15% to 25% rate of return over five years. In numbers: start with $10,000 in marketable securities in 2019, and I will regard my efforts as a success if the portfolio is worth anywhere from $20,000 - $25,000 in 2024.

Investing style

I shop for bargains. What Benjamin Graham called "nets nets;" what Marty Whitman later defined as companies that trade no higher than 70% of the Net Asset Value

I don't look for a specific catalyst, such as a merger announcement or a spin-off. To me, a cheap stock price is a catalyst in itself. It may trigger competitors to buy for the firm or for the management to buy back stock.

I am a distressed/cigarbutt investor.

Portfolio allocation

We own a very concentrated portfolio of stocks. By the time you get to the sixth or seventh name, you owned 70% to 80%o the portfolio.

On selling

Unless the business or industry fundamentals change (think Amazon and brick and mortar retail), I will not sell my stock position in the business for at least a year.

This rule of thumb requires me to think before I invest in a company. I will sell a stock if I feel it reached its intrinsic value, for the tax-loss harvesting, or if I find a better capital allocation opportunity.

I eat what I cook

Perhaps more importantly than any of the other guiding principles is my promise to you that I will not write to you about investment ideas in which I do not personally invest in.

My assumptions about you

I assume that you are an intelligent person who would like some exposure to the stock market and who has saved enough that you can part with capital for a few years, and it will not affect your lifestyle or decisions in life. 

It may be helpful for you to view your Pen & Paper investments as an alternative asset class. Financial advisors often allocate a certain percentage of the investable portfolio for high-risk-high-reward asset classes; say, 5% - 15% of the portfolio. 
And so, you want to allocate 80% - 90% of your portfolio to traditional investing routes, such as ETFs or mutual funds, and leave 10% - 20% of the capital to trade here.

If you have questions, write to me. I typically respond in less than 24 hours.