From a Reader:
I really enjoy your blog. I have two questions for you. First, given your experience, how do you factor the price an asset into your risk assessment of an asset and the sizing of that position in a portfolio? I have recently re-read Howard Marks book The Most Important Thing Illuminated. It is probably the investment book I have re-read more times than any other except The Intelligent Investor. His approach to risk is the best I have read. Early in my investment career, I lost most of my money buying what appeared to be cheap stocks that were overlevered. So now I make sure the company is not a disintegrating entity (like the directory companies) and have reasonable amount of debt. I have used the benchmarks in How to Make Money with Junk Bonds by Levine. It one of the best books I have read about junk bonds with narratives like Graham’s old Security Analysis. As a result I have tried to size my positions based relative undervaluedness. I have played around with Kelly Formula to estimate relative size of positions but in the end have used a more qualitative approach. Currently, I have large positions (which will become smaller over time) in some radio and TV firms. I was looking at insurance and some financials as the next area to re-balance and you had mentioned AIZ in your blog and it looks good based upon by insurance valuation metric of (growth in BB & dividends/price-to-book ratio) – yielding almost 20%. The only other insurers even close is Fairfax Financial and EGI (a small Canadian auto insurer). You had mentioned and I agree with insurance you need to get to know the management. Do you the management of AIZ? There governance and incentives appear to be set up correctly. Given your insurance background, what is your take on some the life insurers such as Lincoln National (trading at a discount to book) and some of the other hybrids (like HIG and AIG)?
The other question has to do with faith. How do you see your faith playing a role in your investments, vocation and family and the balance thereof? I too am an Evangelical Christian and find it challenging with a job (I am a partner in a business valuation firm), family (2 great kids and a beautiful wife) and a passion for investment analysis.
You may want to check out The Corner of Berkshire and Fairfax if you have not already. If so inclined you may also want to go to Toronto in May for the Fairfax annual meeting, it the best gathering of value investors I have found by far.
I don’t do much with position sizing. Every asset has the same target weight in my portfolio, aside from double-weights, for stocks of which I have certainty. I only have two double-weights: Reinsurance Group of America, and National Western Life Insurance.
Until I find that my trading is hindered by size of the float, I will try to maintain relatively equal allocations.
Assurant is a very well run firm, and the negatives around reducing premiums on force-placed homeowners insurance are overdone. If it sells off significantly, it will become another of my double-weights.
Regarding your early problems with value investing, you have to remember that the core of value investing is not cheapness, it is margin of safety. We make money by not losing it, and having positive surprises on our neglected companies.
As for HIG & AIG, I don’t find them attractive because they have had cultures of under-reserving. Even with all they have gone through, I am reluctant to buy them amid cheapness and low operating ROEs.
Life insurers like LNC, which have written a lot of variable products business, are unattractive because the accounting does not reflect the real economics, and the guarantees they have written are under-reserved.
As for how my faith (in Christ) influences my investing, there is the usual — I don’t invest in any businesses that I could not ethically run as a sole owner. Thus I avoid healthcare, entertainment, legal loansharking, and any company that is widely known to cheat people.
As for my time management, it has always been family first, work second, Church third, and other things behind that. There is no other good way.
Beyond that, my blog is replete with analyses that tell people to avoid scams, and embrace opportunities when they are available. Avoid complexity and invest in vanilla investments. You will do best that way.
Full disclosure: long RGA NWLI AIZ