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Track your decisions to trace what helps or hurts – with Jake Taylor

Rather than fretting over a few glaring missed opportunities, podcast guest Jake Taylor suggests investors would do better to track the progress of every stock they end up rejecting – and the reasons why

13/01/2021

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

Investors are fated always to remember ‘the one that got away’ – the big tech IPO or cut-price bargain that, for whatever reason, they chose not to buy at the time. But what about all the decisions to pass that came good because the price of the stock ended up going through the floor? According to our most recent podcast guest, Jake Taylor, investors could well benefit from being more scientific about tracking the stocks they reject.

The versatile Jake Taylor is not only chief executive officer of value manager Farnam Street Investments but also the host of a number of podcasts, including ‘Five Good Questions’ and ‘Value: After Hours’ – not to mention the author of the unlikely sounding novel The Rebel Allocator, whose plot he likens to “The Karate Kid but where Mr Miyagi is Warren Buffett”.

“We readily remember the big, bright data points but tend to ignore all the close calls – the things we maybe thought about buying but didn’t and they turned into a zero,” he says. “So when we then try to assess our opportunity cost, we are not doing so in a very scientific way. These little anecdotes float around in our brains but what are the things we rejected? And what did that mean?”

The anti-portfolio

To that end, Taylor keeps what he calls an ‘anti-portfolio’. “It is all the things I thought about and I rejected but the real magic happens when you start to track why you rejected something,” he says. “What filter was used to screen that out? That is when you can start to see, as you gather data, where your filters are helping or hurting you.

“Personally, I know I am wired to be wary of too much leverage in a company but I cannot yet say for certain if that helps or hurts me. Eventually, though, when I have a big enough data-set from tracking my opportunity cost, I will know.” Another area where Taylor suggests the anti-portfolio could help is if there are certain types of investment that seem too complicated to be worth investigating further. Is that really the case?

“Warren Buffett famously has this tray on his desk he calls the ‘too hard’ pile,” he notes. “Well, especially if you are just starting out in investment, it is very possible that everything could go into a ‘too hard’ pile, right? But what if you were tracking the opportunity cost of what you were putting in that pile and you realised you had been rejecting all these returns? Maybe this is the impetus you need to put in a bit more work.

Properly calibrated

“Or maybe it turns out it was smart to reject the things in the ‘too hard’ pile and you are properly calibrated – the thing is, you won’t know until you actually keep track of those numbers. So it is good practice to track the returns of what you rejected – and also why – then draw correlations between your filters and the eventual outcomes and use those as a way to adjust your process.”

As we also acknowledged in Now is a great time to visit your ‘investment gym’, this is of course much easier said than done – which is why Taylor suggests it may be a step too far to make the anti-portfolio more real by investing tiny amounts of money. “It is tough because we all only have so much time in the day and only so much bandwidth of research time to dedicate to this,” he reasons.

“I also sometimes wonder if these small tracking positions serve more as a distraction. I like the idea in theory and I agree having a little bit of skin in the game definitely makes you more of an interested party. But you risk ending up trying to track a thousand different things and not minding those big eggs in your basket so well, which will be much more material to your eventual outcome.”

 

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

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