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@dillon_jacobs
Dillon Jacobs
$13.8M follower assets
I'm probably writing about stocks 📈 while jamming to Metalcore 🎸and sipping black coffee ☕
39 following192 followers
Time For A Change
During this year's tumultuous market activity, I've done a lot of self-reflection. Is my portfolio worse than I thought? Did I get sucked into the hype of certain stocks? I should have sold sooner, right?

So I started looking for ways to simplify my investing process. To be honest, I don't have any formal guidelines or goals for my portfolio, which in hindsight seems like a bad idea. In the past, I thought that creating a "market beating platform" was good enough, but now I realize it's not really constructive.

I'm looking to change that.

Several key motivators helped me think of a better way. It started with Value Stock Geek's Weird Portfolio. VSG's content is great, especially his conservative Weird Portfolio if you haven't read it.

After making poor investment decisions and going through the motions of the stock market, VSG decided to take a more conservative approach. Most of his money goes into five low-cost ETFs, while cash is built up and put into very high quality companies.

I think this is a great idea from a personal and behavioral standpoint. Any investor would do well to create a plan while reinforcing barriers to destructive behaviors.

I also read a really honest article on Nick Maggiulli's blog Of Dollars and Data around the same time. The article talked about something I knew way back in the recesses of my mind, but hadn't integrated into my day-to-day investing process.

Here's a quick snippet of Nick's article that sums everything up quite nicely:

"But here is where things break down between buying an individual company that has declined a lot and buying an index that has declined a lot—there is no guarantee that the individual company will ever recover. Netflix may never get back to its old highs. It may slowly decline into the graveyard of market history.

However, with an index fund like the S&P 500 this is unlikely to occur. Though there are exceptions to this rule (i.e. Japan since 1989, Greece since 2008, etc.), the probability of the S&P 500 never recovering from a crash is quite low."

Once again, you and I know this stuff, but we may have forgotten it during the last bull market. Despite their flaws, indexes can offer more protection than we give them credit for.

It was decided. As a result, I started researching how I could make my own low-cost and simple portfolio where I could set my own rules and standards.

During my search, I came across this very helpful blog: Optimized Portfolio.

Optimized Portfolio is a site whose name makes it pretty obvious what it is. The site has tons (more than 50) of low-cost, easy-to-build index fund portfolios that anyone can create.

Even though this may seem simple to most of us, there's something about its simplicity that now attracts me.

My favorite piece of advice from the site was writing your own investing policy statement. It's so simple, but so effective. In the past, I have never defined my investment goals, created a solid asset allocation, or decided on how to manage my cash.

Big mistake; huge.

I haven't done this part yet, but it will definitely be part of my process eventually.

I set out with a simple goal: Build a low-cost, all-equity, index portfolio with less risk, more diversification, and outperforms the S&P 500 (with at least a two decade backtest). Is it even possible?

Turns out, yes it is! After a couple months of research and backtesting, I'm excited to share the results of my experiment here soon. Keep an eye out!
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Optimized Portfolio
How To Write an Investment Policy Statement - Template & Example
An investment policy statement defines one's investing objectives and strategy. Here we'll look at why and how to write one, a template, and an example.

Love this— makes me think it could be fun to ask people to think about and then post their own personal "investing policy statement"
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How to Reject a Good Story
"Valuation is the intersection of numbers and stories".

The mantra of NY Stern's Dean of Valuation, Aswath Damodoran, is often repeated.

My investment philosophy has been profoundly influenced by the professor's lectures and musings on markets.

It is human nature to love a compelling story. Information has been passed down in this way throughout history. By using narrative-based storytelling, we can access a different part of our memory systems and can also trigger emotional reactions.

One of my favorite books on this topic is Annette Simmons' Whoever Tells the Best Story Wins. In it, she points out the following:

"The emotional payoff of a powerful story warrants the act of letting go of critical thinking long enough to find a story."

This passage immediately chilled me. Having the ability to think critically is something I take great pride in. In the process of enjoying a fascinating story, I realized I may be killing a part of myself subconsciously.

In other areas of life, this may be a strength (such as memory), but in terms of investing this is a weakness.

As much as anyone, I love a fascinating story. A well-written novel is often difficult for me to put down.

As humans, we're prone to getting swept up in the latest craze, or attaching our ideas to whatever's hot or sexy at the moment.

Inflation, for example, is ravaging the entire globe. It was only six months ago that Web3, NFTs, and your average shitcoin were going to change the world forever and would survive any macroeconomic uncertainty.

This is the "Millennial Gold". You better buy now before inflation hits and the Fed starts hiking interest rates! There's no doubt that it's the premier store of value!

Ooof.

Furthermore, you don't even have to rely on these big overarching macro narratives. Specific company narratives are just as powerful.

I remember the good ole days of 2021 when Netflix was THE stock to buy, since it basically had the whole world as its TAM. What's that? You're worried about profitability, margins, and the business model?

Nah, it'll all come later. Just keep buying.

Again: Ooof.

A positive story is hardwired into human nature to make us eager to believe it. What person wouldn't want to be part of the electric car revolution? What are you, a caveman?

Of course, I too am vulnerable to mythical narratives despite my facetious tone. But I try to insulate myself from these stories by doing one thing: looking at numbers first.

Like a lot of other investors, I occasionally screen for favorable metrics on certain platforms. What do I like to look for?

Pretty simple really:

  • Increasing annual net income/FCF without excessive dilution

  • High profitability and quality metrics (ROIC, ROE, and ROAs)

  • An acceptable asset/liability ratio

Of course, this is just a small sample of what I am looking for in an investment, but this is as appropriate a place to start as any. If I find a business that seems viable to me numbers-wise, I will start looking at the story of the business.

I'll start to ask questions like:

  • Is this a sound business model?

  • How has it performed in the past?

  • Is it sustainable?

  • Does management understand what makes the company successful? If so, what are they doing to continue/better the success of the business?

  • Do I trust the management?

  • What are the risks to the company?

  • Can they reinvest with high returns?

Annual reports (sometimes a few) usually provide the answers to these narrative-based questions. A while later, I'll be able to tell if an idea sounds good or not. I know I’m onto something when I get a warm and fuzzy feeling.

A prime example of this is Johnson Outdoors ($JOUT), one of my favorite businesses. The research I have done on that company doesn't leave me excited, but simply comfortable.

Now, if I get hyped after research, that's a sign to take a step back and think about it. I'll go for a walk and have a think. I'll ask questions like:

  • What has me so excited about this story?

  • Why does it excite me so much?

  • Is it the potential profit?

  • Do I just want to become a part of the story?

  • Is the story actually realistic?

  • Is it a profitable venture?

  • Does management demonstrate competence, or do I just like how they look or sound?

After taking a step back and giving myself a chance to settle down, I almost always reject the story and move on to the next idea. This has saved me from a lot of unwise decisions.

But here's the thing. Putting myself through this process has almost always yielded me the same results: (seemingly) boring investments.

What may seem like a boring type of stock (or story) often yields the greatest returns.

Investing in a dull company with a high potential return should make you more excited than an interesting story.

For example, I can't think of a more boring business than insurance. Investing your money in a company that receives cash from you every month for something you feel like you never use is not exactly an exciting story.

I get it.

But here's the truth. Progressive Insurance ($PGR) is one of the nation's largest P&C insurers. The story over the past decade has been anything but exciting. Write premiums, collect those premiums, pocket the difference. Boring.

But over the same time period, the returns are anything but boring.

Referring back to Professor Damodaran's quote, the last piece of the puzzle for me is to then craft my own story for the future of the company I am researching. The key to this is to compare risk and reward, use management's own words and estimates, and then return to the raw data and numbers.

Asking questions like:

  • Are profits/expenses likely to increase or decrease?

  • What growth rates are acceptable to assume?

  • What if the company suffers through a rough patch in year five of my ten year valuation?

  • What returns am I willing to accept?

  • How much risk am I willing to accept?

I'll ask myself these questions as I plug in numbers into my spreadsheet for valuation. If the company clears my 15% hurdle rate, I buy immediately.

Just kidding!

I venture out for another walk. Take a day to think about it. A week. Maybe a month or more. I do my utmost not to rush a decision. Those usually end up being the wrong ones.

Nobody wants a boring life; the same holds true for our investments. But the truth is that the most boring stories and investments are often the ones that provide the most stability and profits to our portfolios.
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I love this insight: "If I find a business that seems viable to me numbers-wise, I will start looking at the story of the business."

I find myself wanting to tie myself to the "sexy & new companies" but most times they're not making any money! Maybe this is ultimately a reflection of the fact that as a society we want things to look good on the outside, while at the same time we refuse to be honest & deal with the real issue. Either way, I'm definitely going to start asking myself some of the questions you presented before making any investment, and thank you for this well-thought out post!
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Is Ray Dalio Wrong?
A very interesting and eye-opening take on Ray Dalio's newest viral video on the Changing World Order.

MMT is a complex topic, but I think the host and guest explained it as best they could here for the layman.

Spotify
The Changing World Order DEBUNKED (Ft. Andrés Bernal)
Listen to this episode from 1Dime Radio on Spotify. Debunking Ray Dalio's viral video (and book) titled "Principles for Dealing with the Changing World Order." Ray Dalio is a billionaire investor who recently released a video titled "Principles for Dealing with the Changing World Order" (which is based on his book of the same title): https://youtu.be/xguam0TKMw8 The video put together by his team has been heavily promoted by the YouTube algorithm, reaching a a staggering 15 MILLION views. However, the video is filled with bad economics, blatant contradictions, ideological myths, misleading generalizations of history, and a backward neoliberal understanding of how money and inflation work. Dalio's flawed assumptions about economic history and the nature of money shape his problematic implications and neoliberal technocratic "centrist" political prescriptions. This episode of the 1Dime Radio podcast aims to debunk this Ray Dalio's video by deconstructing his talking points. In doing so, I am joined by Andrés Bernal, a MMT advocate, researcher, lecturer, and policy adviser (former advisor to Alexandria Ocasio-Cortez). You can find his links and some of his work here:  Andrés Bernal Twitter: https://twitter.com/andresintheory Andrés Bernal on MMT as a theory of Inflation: https://www.global-isp.org/wp-content/uploads/WP-132.pdf Andrés on the Green New Deal: https://www.huffpost.com/entry/opinion-green-new-deal-cost_n_5c0042b2e4b027f1097bda5b Money on the Left: https://moneyontheleft.org/2022/04/09/economics-as-discourse/ The Modern Money Movement: https://mronline.org/2019/08/15/the-modern-money-movement-with-andres-bernal/ Podcast Timestamp:  0:00 Intro 6:10 Who is Ray Dalio?   10:55 Ray Dalio's False Assumptions 1:03:50 Ray Dalio's contradictory politics 1:41:20 Imperialist Realism Support 1Dime on Patreon and get access to bonus episodes: https://www.patreon.com/OneDime Be sure to give 1Dime Radio a 5 Star Rating on Apple, Spotify, or wherever you listen to podcasts!

@dillon_jacobs admittedly haven’t been able to listen to the podcast yet but I did read the changing world order. Are you asking if he is wrong about the demise of the US and rise of China? If that’s the question.. tough to answer but as an American I’m not just gonna go quietly into the night on this one lol so a big part of me wants him to be wrong on that.
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Back in the Saddle
Please check out my poll below!

It's been a long few months of inactivity on Commonstock. I've had limited time to do anything but focus on transitioning back to civilian life this spring/early summer.

I spent most of April and May in Germany preparing for the overseas move back to the US. I also had to complete a seemingly endless amount of paperwork in order to separate from the military.

After arriving back in the US in early June, I completed the separation process for the military (although I'm technically on terminal leave until 14 August, but I digress...). We moved to Knoxville, Tennessee in mid-June and have been settling in.

Right now, I'm preparing all the paperwork for college. I've also had some time to reconnect with my investments and the community.

The busyness I've had over this crazy market period has actually been a blessing. I've probably made better decisions (I haven't bought or sold anything since the declines began) because I've been too busy to focus on my portfolio's performance.

Coincidentally, my six month non-compete clause is about to expire in mid-July following my sale of VVI earlier this year. With more time to think and write, this couldn't come at a better time. Over the past few months, I've had some ideas for a brand-new publication. Unfortunately, I haven't been able to put much brain power into them lately with all the distractions.

Here's where I turn to you, fellow Commonstock(-ers)? Below is a poll to help me narrow down some community thoughts. I didn't want to use the poll function since it only allows for one question and I want more of a nuanced discussion. Let's talk in the comments.

  1. What kind of content do you feel is lacking in our community?

Note: Our community has lots of different types of content (weekly newsletters, equity research, content curation, etc.) but what do you feel is neglected?

  1. What content brings most value to you as a reader?
Note: I know the most popular answer here is probably actionable equity research, but that kind of content seems to be very bloated at the moment. If that really is the true answer, then fine, but I encourage you to try and think more outside of the box for a better answer if you please.

For instance, is it really the research itself that you enjoy, or the specific author's take? Maybe both?

  1. What type of content cadence or schedule do you prefer (or do you not care at all as long as the content is good)?

Note: The focus here is what do you find to be more of value. Something that's regular, repeatable, and digestible? Or maybe something quite less infrequent, but you know will be high quality every time.

  1. Do you prefer newsletter type publications or more lengthy story based content?

Note: I know which I prefer to read and/or write, but I am curious to what you all think.

Thanks everyone for helping me out and glad to be back!
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Welcome back man, lets catch up when you are all sorted!
+ 13 comments
$NFLX Drama
I awoke this morning to the stock market massacre on $NFLX.

$NFLX was the stock to buy like 6 months ago, right?

Investor sentiment never ceases to baffle me.
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Every book I read taught me to do the opposite of what “they” recommend. They told me Apple was done @ $75, said Microsoft was done & $42🤦‍♂️. Now that $NFLX is down 57% and sanely valued for the first time ever, I’ll start looking into it, now that everyone hates it😉
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$GPRO: The Biggest Turnaround Story of 2022?
$GPRO could be one of the biggest turnaround stories of the past couple years.

Business model is pivoting towards highly profitable subscription models, gross margins are increasing, the CEO's stake is large, and management is buying back shares at a big discount.

I am doing more research, but here are some quick numbers on the business and turnaround.

FCF has grown rapidly since switching to a subscription model business.

In 2016, FCF was at -$151 and now is at an all-time high of $224!

In spite of moderate share dilution, $GPRO has grown FCF/share in a very impressive fashion over the past few years.

Similarly, ROIC has increased significantly as a result of the increased investment and sits at 30% currently.

The company's capital allocation looks promising too, with the buyback of $100 million while shares remain at historical lows.

Nick Woodman, founder and CEO, owns over 16% of the company.

This is the kind of leadership stake I like to see.

From 17 to 7 P/FCF has fallen steadily since GPRO's remarkable turnaround.

In essence, the market has yet to re-rate the company's shares, which have remained in the $8 range for the same time period.

I have calculated an intrinsic value of $33 per share based on a DCF model with conservative growth rates (while also leaving out incoming buybacks).

If the market caught on within the next couple of years, one would easily be able to double or triple their money.

I'm still doing more research, but the numbers look promising.

At the end of the day, CEO Nicholas Woodman decides whether $GPRO will be successful.

What do you think? Yay or Nay?
Is $GPRO undervalued and due for a re-rating?
38%Yep!
61%Nope.

18 VotesPoll ended on: 4/10/2022

@diggity04/07/2022
interesting analysis. always gotta wonder why a high tech “high growth” co would be doing a buyback. can they not get a higher return on internal opportunities? as a gopro user i know their platform has improved but still leaves much to be desired.
+ 15 comments
Quick $ALGN Valuation
Just like $ADBE yesterday, this is a high-level, numbers only type of valuation. I didn't take the business or management into account.

Let's dive in!

Pros

The company's value has compounded at 21% annually over the past decade, on par with the company's FCF growth of 23%.

$ALGN has almost zero debt and reinvests nearly all capital back into the biz. ROIIC is high at 24%.

This amazing growth has translated to an amazing 30% CAGR in the stock price, even with the recent drawdown.

Annual ROIC is high, almost always remaining above 20%.

Capital Structure is almost flawless, with nearly zero debt and 88% equity. Goodwill is surprisingly low for a company of this caliber.

Cons

Stock issuance is $ALGN's main method of raising capital.

This is not necessarily a bad thing, but nearly all of the FCF is spent on buybacks, decreasing their value.

Share count has not risen significantly because of this, but hasn't shrank much either.

Unsurprisingly, $ALGN has traded at a very high premium, reaching nearly 60 P/FCF.

The recent pullback has brought the stock back down to (a still expensive) 45 P/FCF.

DCF

Assuming a very slow and gradual decline in FCF and no significant share buybacks, $ALGN remains overpriced with an intrinsic value of $408.82 per share.

I also assumed a pretty high P/FCF of 30.

FCF Growth

Assuming the same numbers as the DCF, it seems $ALGN could compound at around 10.8% per year.

Conclusion

$ALGN seems like a really solid cash flowing business, but the capital allocation leave me wanting.

The buybacks aren't doing much and there has only been one recent acquisition.

Capex also increased significantly last year, which could hinder FCF growth.

In fact, I think taking on some debt would help management add some value to shareholders.

Their solid business history makes them well positioned to do so.

Still a bit too pricey for me to buy at these levels.

Feedback welcome!
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Quick $ADBE Valuation
Did some quick pros and cons on $ADBE today due to the recent pullback.

This is a high-level, numbers only type of valuation. I didn't take the business or management into account.

Pros

Great cash flow and low capex. R&D is really the capex here, but it's still growing perfectly along with revenues.

$ADBE also requires very little reinvestment and only requires 5% of FCF back into the biz.

FCF has compounded steadily at 19% CAGR.

ROIC has been consistently very high, but in part due to limited reinvestment.

The stock has compounded at a stunning 29% CAGR, even with the recent drawdown.

Cons

Stock-based compensation accounts for 15% of FCF.

My preference would be 10%, but luckily it's getting lower every year.

Most cash deployments have been acquisitions and buybacks, but annual stock issuances hinder buyback effectiveness.

Goodwill makes up nearly half the assets, and almost as much as the equity base.

Over the last 5 years, value ratios have steadily risen above 40 P/FCF and up to 60 P/FCF.

Quite pricey indeed.

DCF

Here's my base case DCF.

FCF growth starts at 19% and continues to decline slowly.

With a 15% discount rate (my required rate of return) and no buybacks, $ADBE is worth $491.36, or a 1.3% CAGR.

FCF Growth

In the same scenario, no dividends are assumed, and P/FCF is estimated at 25, $ADBE may offer a 12% CAGR.

Conclusion

It's pretty obvious most people consider $ADBE a growth stock.

Personally, I don't like to bank on growth without a baseline for rewards (meaningful buybacks, dividends, etc.).

The margin of error in my valuation is too wide, so I need to do more research.

Feedback welcome!
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Looking at 10 year historic value might be a little deceiving for ADBE, because they switched from a License to a Subscription model around 2014 or so. Great post though. LONG $ADBE :)
+ 4 comments
Portfolio Management Books/Resources
I'm looking for recommendations on the best books/resources for portfolio management.

My strategy needs to be more sound, especially across multiple accounts ( A Roth and 401k account each for my wife and I, and normal joint taxable, so 5 accounts total).

Any advice and recommendations are welcome!
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I was recently gifted a copy of "In pursuit of the perfect portfolio" by Andrew Lo and Stephen Foerster, enjoying it so far.
+ 3 comments
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