HLChin (90.53)

Of Lynch and the 95+ ratings club - Part 2

July 14, 2009 – Comments (3) | RELATED TICKERS: F , LOGI , FOSL

Continued: 

My diverse reading has bought me to think on how my CAPs ranking can turned from good to great. If memory serves me right, I have been hanging around the 90+ level up till May which in my eyes was "good". But I want more - I want to be great in CAPs. 

This is where Lynch comes in.

How does this guy Lynch manage to deliver a 29.2% annualized return from 1977 to 1990 regardless of the size of his portfolio? How can I further increase the level which seems fairly good at the 90s to simply awesome at the 95s or even the holy grail of the 99s? Here are my the traits which I have noted from my reading:

1) Lynch places fairly highly concentrated bets on best companies in temporarily troubled sectors (borne of out size of his fund). Majority of his fund is said to be concentrated on his top 50 companies. 

- My takeaway is to bet heavier i.e. on more companies which reside in industries which are either troubled or showing signs of recovering. Currently, the semicon industry shows signs of recovery while the auto and retail industry remain challenging. 

2) Lynch has a knack of figuring out the idiosyncracies of the company and its industry without the help of a excel projections. It's stunningly simple but highly efficient - a great example is his simple projection of "pent-up demand" for auto vehicles is a seems very relevent to the current environment.

- My interest in strong companies in the auto industry will be my next assignment to study. The key question to me is what will the industry look like after the carnage of GM (+around it) and Chrsyler?

3) Lynch uses industry comparables to size up the growth potential of small caps. TMF1000 use of Applebees as one of the datapoints to gauge to ultimate growth potential of BWLD - it's not perfect, but as real as a data point comparison that can be done without too much fuss. Just plain common sense.  

4) Lynch tends to move against mainstream information. His wildly successful bets on Chrysler and Ford was surprising for me since auto companies almost universally the whipping boys of value investors.

- My bet on Ford is what I see mirroring his bet on Chrysler's recovery under Lee Iacocca.   

5) Lynch's best winners are on companies or industries with dour consensus. Lynch in particular mentioned betting on cyclicals during a recession for multibaggers (IIVI and SNHY comes to mind) while switching to blue chips during the bull run as his general approach to investing.    

 ... if anything Lynch puts in hell of a lot of work. It's not for everyone - certainly, I do not think I can match his level of commitment.    

As a result, I have taken some CAPs bets on seemingly out-of-fashion blue chips with great dividend yields as well as increasing my portfolio weightage on auto industry via Ford as well as the semicon industry via ATHR. I have placed some prior bets on the retail industry via LOGI and FOSL and plan to look at companies like UA and Nike to further increase my weightage on seemingly weak indsutries. Also LLTC and maybe even some contract manufacturers (!) 

Anyways, after a brief intelude with a 89+ rating, my CAPs rating has slowly moved up to a respectable 95+ level. Sure, I am placed a woeful 3000th+ position but it sure feels good to be in the top 5% percentile.

Fool on!