You Need an Investing System (Here’s Mine)

Investors love to classify themselves. Sometimes these classifications border on ridiculous, other times confusing: "I'm a mix of Graham and early Buffett with a dash of Rockefeller and the temper of Carnegie."

Investors need to have a consistent, repeatable system. But we use and abuse these shortcut labels because often it's easier to identify with an investor's system, rather than developing our own.

What I mean by this is I think we need to approach investments, measure investment success, and view investments in a consistent and repeatable manner. Sometimes I'll encounter investors who say they do a little GARP investing, plus some dividend investing, plus some value stocks and a few moat companies.  

To me, that seems like they're throwing things at a wall and seeing what sticks. It's hard to find investments if we don't have a structure to view things within.

We need to find styles that fit our personality. It doesn't matter if it's investing in small cap growth companies, or distressed credits. There is something out there that will make sense to you and will be almost second nature.

When I meet someone who wants to talk about investments, but isn't that knowledgeable this is how I explain my system in non-investing terms:

I like to go to the older part of town and look for businesses that look like time has passed them by. I will buy them for some amount. When I visit my new property I find that 80% of my purchase price is sitting in cash in the cash registers, and that I can sell the inventory for the other 20%. I can also sell the building for a gain as well, along with the fixtures. Sometimes I let the business run because the cash it generates pays me back in a year or two, but not always.

This is the essence of oddball stocks: finding value in unsexy companies that hide in the boring, dust bunny-filled corners of the market. Most of the time they’re not even that hard to uncover. All it takes is a desire to do a little digging in places where others will not.

Once I find an attractive oddball, I am looking to buy at egregiously low valuations. I'm not buying a Mercedes at 10% off sticker price. I'm buying a Chevy Cavalier on Craigslist and reselling it a week later at double.

This system is consistent and easy to apply. I might not earn a return on every investment. I make mistakes. But over the long term I will earn a consistent return. When I look at a new potential investment I view it through the lens of this system. If someone is pitching me a product or stock that doesn’t fit with how I do things, I will happily pass. That doesn't make it bad, or wrong, it's just not something I have experience with.

If you’d like an in-depth look at my investing system, I’ve put together an email sequence to take you through the basics. It consists of:

• Day 1: Where to hunt oddballs (Is screening dead?)
• Day 2: Assets and book value (Where 50 cent dollars hide)
• Day 3: Earnings (Growth isn’t everything)
• Day 4: Management: (Roach motel avoidance 101)
• Day 5: Catalysts (Who needs em?)
• Day 6: Activism (Can anyone go activist these days?)
• Day 7: Portfolio Management and When to Sell (The system I use to manage 50+ positions)

There’s no hidden secret or “one weird trick” once you sign up. But this is the exact same thought process I follow when researching ideas for my paid Oddball Stocks Newsletter. If you’re a new reader of the blog, this is a great way to get up to speed on my investing style, but there’s a lot of value for long-time readers too.

To sign up for this free email series, just enter your details in the box below and you’ll start receiving them.

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Thanks for reading,

Nate Tobik