My goal as an investor is to increase my purchasing power in real terms over time.

That requires a.) deciding on what an acceptable level of return to shoot for might be and b.) comparing the return periodically to some alternatives to see how it stacks up.

To make such a pursuit worthwhile versus say just buying an S&P 500 Index fund (arguably the cheapest and least time consuming way to go about it) I figure I’d have to generate returns of 12% a year, on average. I’d also like to incur fewer and smaller periods of negative performance than the Index. In other words, I’d like to generate very high rates of absolute performance of 12%, outpace the results for the S&P 500 and do so while incurring smaller and less frequent drawdowns – and I think that is possible.

As a point of reference, over the last 20 years ended 2019 the S&P 500 delivered a cumulative annual return of 6.05%. The max up and down year for the index over that time was 32.37% and -37%, respectively, with a simple average annual return of 7.68% and a standard deviation of +/- 18.06%.

My approach begins by calculating the expected return imbedded in an investment idea and comparing it to both my hurdle rate and the reasoned probability of incurring a permanent loss of purchasing power. I believe firmly in the construct that there are no bad assets, just bad prices. The purchase of every asset has a return built into its price and it is my job to determine what it is (or, sometimes, what it is not) and whether it meets my objective. When I can’t find a suitable investment, I hold cash.

I make use of multiple strategies. This includes common stocks that fall under a wide range of classifications (i.e. value, growth) and market capitalizations (i.e. small, large) as I think these are often arbitrary and incidental to the true performance drivers. I do not consider myself a value or growth investor but rather an absolute investor. I invest in a very broad range of opportunities across the investment spectrum including what are commonly referred to as special situations, options and fixed income securities, as well.

Over time, I expect a portfolio of such positions will come to reflect a sort of lumpy compound interest generator, earning returns in excess of my hurdle rate while performing favorably versus a broad market average like the S&P 500 and increasing my capital in real terms.

I have seen others describe behaving as private investors but in public markets. In a recent letter we found on Twitter, Elliott management described what it calls “really active money management”…”which actually represents trying to make money in a different way, by attempts at clever combinations of securities…by combining disparate bodies of knowledge, by manual efforts.” I find these descriptions describe my own approach.

Summing it all up:

I’m looking to earn 12% a year over time (or 600 basis points in excess of the 20 year cumulative average return for the S&P), with fewer and smaller drawdowns than the index.

I expect to do this by putting absolute return and probability of loss estimates ahead of other considerations, using hedges and incorporating multiple investment strategies.