The Investing Confluence
What needs to go right to find success in long term investing
Investing is hard. A confluence of different actions needs to happen in order to realize sustained gains over the long term that beat your benchmark. Often, it takes multiple losers and winners to learn these lessons the hard way. Reading them in a book doesn’t translate to action. It’s when you lose money, or round-trip multibaggers, that you change your approach; you learn.
In investing, a lot needs to go right.
Growth. The businesses you invest in need to grow. In other words, you need to select the right companies.
Conviction. Long term conviction is required to hold through the ups and downs.
Selling. Knowing when to sell is the hardest question. Nobody knows with absolute certainty when to sell. Do you sell when fundamentals change? When you find a better company/opportunity?
Allocation. You need to allocate a sufficient amount of capital. A ten bagger with 1% of your portfolio only becomes 10%. But a 10% position doubles your portfolio.
How do we put this in action? Is there a lasting framework we can build?
No, and yes. In the wise words of Charlie Munger, “invert, always invert.”
Instead of constructing a framework around what needs to go right, we’ll build one for the opposite. What can we prevent or avoid?
Competition. Companies with MOATs are hard to disrupt. Better yet, companies that are monopolies are near impossible to supplant. They grow by default.
Impulses. Take time building conviction. Spend a minimum number of hours researching. Avoid making sudden buys based on a tweet or an article.
Turnover. Create rules for portfolio turnover, and stick to them.
Panics. The best way to never sell is to buy companies that you still hold if they fall 50 or 60% and you still have conviction in the underlying business. Avoid companies that you think you may sell in a panic situation.
Distractions. Don’t take tiny positions that act as distractions. Avoid having a large number of positions that are below 5% of your portfolio.
In the Carnot Fund I, we are putting this into practice.
Companies in the fund are considered monopolies or otherwise category defining.
Positions are thoroughly researched and posted about ahead of any portfolio allocations. A watchlist of companies acts as a staging area for ideas.
Turnover is disallowed for this fund.
Selling is disabled until the fund is closed. That’s 5 years+, after 2030.
The minimum position size is 5%.
Read more about the Carnot Fund I in our launch post.
Keep on Investing,
Refcell Capital
Disclosure: Not financial advice. Do your own research.
P.S. Let us know what you think in the comments, or message us in our chat.
