Why I Don’t Use Guidelines When Investing

As your potential Fund Manager, it is my job to provide you with the best investment decisions that are the most responsible. With that being said, the way I operate at Rockvue Capital is very different than most funds in the sense that I do not cater my investment style to a specific sort of clientele. The way I invest is the way I invest, and if a potential partner understands and agrees with the method and philosophy in which I use on financial markets, that makes a great partnership. I deem this as a much more comfortable way of interacting between Fund Manager, partner, and potential partner. In this way, I will not pressure or corner anyone into joining the Fund. In order to achieve the best results, the Fund and its partners must share the same goals and same mindset. Throughout these weeks, you’ve gotten a glimpse into my investment philosophy with my three part series on the matter, and I would like to take the time now to discuss a much broader, almost personal level to my investment technique and philosophy: Guidelines in Investing.

I don’t like guidelines when it comes to investing. Give me a coloring book and I will more than likely start coloring outside the lines. This is a personality trait that has always been with me, and one that will never leave. I am not one that likes to be told that I have to do something. In elementary school, I never read the books that were assigned, instead I read the books that I chose and wanted to read. In my English classes in high school I would read printed out 10 – K reports from various companies instead of MacBeth or Romeo and Juliet.

There is a tangible struggle between me and authority, which is a predominant reason why I love the idea of having my own fund in which I can make the decisions I think are best. Note, I am not saying that my decisions are the best decisions to be made, rather in having my own Fund I am able to be more confident and free to make the decisions  I think are the right ones. Please understand this difference as it will free you from notions of thinking of me as hubris.

When I found the game of financial speculation at age 13, those same traits and qualities about me translated into this discipline that I love. Although I read everything I could get my hands on on topics such as Warren Buffett, dividend investing, and value investing, a part of me realized that I would never be one to don a cookie cutter ‘style’ about them. I knew I would be a hybrid investor of sorts: One that would take nuggets of information from various investing strategies and trading ideas and boil them down into a personal ethos of investing philosophy. Nine years later, that is exactly what I have done. An investor is always evolving, always learning, and always seeking to become better than they were the day before. Because of this, I never chose to place rules on how I would invest, or how I would trade. My philosophy and mechanisms of investment are built on the years of tinkering and not accepting standard guidelines. But what does this look like ?

For example, I use classical charting principles (think Peter L. Brandt or Edward McGee) mixed in with my deep value Benjamin Graham style of fundamental analysis. Purists of the value investing cult would herald me as a lunatic for using such voodoo work as technical analysis. Likewise, pure chartists would call me crazy for “wasting time” worrying about fundamental data when, according to that crowd, “price is the only thing that matters.” To some, this could be a red flag when it comes to deciding to invest with me. There will be some that think I am dabbling too much into too many fields, and there are certainly people whom might think, “he should stick to one thing and be really good at that.” I hear all of those concerns, but at the end of the day, I have found what works for me. There are many ways to make money in financial markets and there are many ways to lose money in financial markets. By not following guidelines, forging my own path of reason and judgement, I have found a way that a) provides me with the best risk management system, and b) capitalizes on market imperfections and mispricings.

This brings me to the psychology side of my investment decision making process. I have well documented the psychological benefits of my particular way of trading the financial markets, so I will not regurgitate it here. However, I want to stress that it is paramount that a potential partner, whomever they be, have the same psychological logic about the markets as I do. You might be asking yourself, “Why is that? Aren’t I giving you my money so that I don’t have to think about things psychologically about the markets?” To a certain extent yes. But to a much larger extent, it’s more complicated. I will use two theoretical examples to illustrate the importance of psychological symmetry between Manager and Partner.

This first example will deal with an individual security selection that goes wrong. In this example we will also assume the Fund Manager sends out alerts to Partners after each trade made. We will assume I pick a stock in the US market and after going long the stock immediately begins to head towards the stop loss price. Let’s say John Doe receives the alert from me that I have added a long position in the Voyager Fund at $5.00 entry with a stop loss at $2.00. Throughout the week, John is watching my pick go from $5.00 to $4.00 to $3.50. At $3.50 he’s had enough and decides to call me to voice his displeasure seeing the NAV of the Fund and his money decline. After telling John I understand why he is upset, I refer him to the many resources available to read about my investment style, and remind him that my style is set up to lose no more than 1% of capital on each trade. So at worst case, the NAV of the portfolio would decline 1% if the stop loss gets hit. If John still doesn’t understand after explanation, it will only create further strife down the road with each incorrect trade (and remember, I will have more losers than winners).

The second example deals with the amount of cash being held by the Fund Manager at any given point in time. Let’s say the market is reaching all time highs each and every day (sound familiar right?), and the Fund Manager has advised his clients that he is happy with how the portfolio has performed, pleased with the return percentage, and decides to hold a bit more in cash for the foreseeable future, citing lack of pristine investment bargains to be bought. After receiving this email about the plan to hold more cash, one partner, Jane, gets frustrated at the Manager, thinking to herself, “I gave him my money so that he could invest it, not to sit on it and basically bury it in a coffee can.” Jane is right to voice her displeasure only if her Fund Manager wasn’t forward with his views on cash percentages. Jane calls the Manager and proceeds to express her frustrations with him. The Fund Manager lets Jane know he understands, but also lets Jane know that part of his philosophy in the markets is to hold cash when the opportunity cost of a perceived investment is less than the opportunity cost of holding onto cash. If Jane does not understand the logic or if she doesn’t agree with that, Jane might not be the best Partner in the Fund.

The point is to let you, a potential partner, know that I place a tremendous amount of importance on compatibility of ideas and understandings on the markets. I am not one for guidelines, specifics, and certain tinkered portfolio percentages based on what every other institutional investor is doing. If you want to get average results, do what everyone else does. That’s not what I’m about. I believe I can perform better than the averages, so average and ordinary is not what you will get if you invest in Rockvue Capital. It is paramount that you are comfortable with this. As always, I am free to discuss the various aspects of this article, and if you have any personal concerns or questions. I want the Fund to perform to its capabilities. The only way that can happen is to have partners that understand what Rockvue Capital is all about. The Fund is only as good as its Partners, and I truly believe that. I will always strive to be better and to perform better, because like yourself, I am one that loves coloring outside the lines and finding ways to make the standard extraordinary.

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