These are some notes I took listening to a CO/nversations podcast episode featuring Artem Fokin, from Caro-Kann Capital LLC. I enjoyed it, and Artem is clearly a smart and thoughtful guy.

  • Be more demanding on the upside. Look for plausible 4x to 5x baggers. 50% upside is lame. Because you can be wrong, management’s execution can be off, bad luck can happen…so you end up with +20% after a few years, which sucks. Whereas even if you’re wrong on the 5x opportunity, even if it takes longer, even if you’re unlucky, you can end up with 2x or 3x in 2 years.

  • You wanna maximize return on your invested efforts! Doing hours and hours of due diligence for an expected 25% total return is unlikely to be your best option.

  • You wanna derisk your investment by betting on companies that do something exceptional on the product or service front.

  • 7%-8% max positions at cost: minimizes impact of being wrong OR something weird happening in the world (think about taking a 30% position in a restaurant brand as covid hits). Even 7%-8% must be high conviction, little downside and very big upside. Upside potential filters what enters in the universe, downside potential determines sizing. Incredibly rare to go full 7%-8% position on day one, because you need to live through earning calls, product launches, changes in management…company is a living organism, but you only researched its history. When you own the position, you learn so much more about the business than you did through historical study.

  • The bigger the business, the more it is about the horse. The smaller the business, the more it is about the jokey. In a small business, poor management decisions can be deadly. A big established good quality business can survive and overcome management’s mistakes.

  • Cash position is an output that depends on the number of good ideas found. More good ideas means small cash position. You’re trying to balance two costs: 1) market goes down and you dont have free capital to take advantage of bargains 2) opportunity cost of not being fully invested (cash drag)

  • You can learn from mistakes and successes but mathematically the impact of successes is bigger on the portfolio (+1000% vs -100%)

  • A company’s success is ultimately decided by its consumers' satisfaction.

  • As a small investor, your biggest edge is game selection: play games where the competition is weaker. Invest in small companies where big funds can’t or aren’t willing to invest.

  • There is almost no way to avoid the periods of doom and gloom on the market. How do you deal with those and keep your sanity? Develop a mental and emotional muscle. Put things in perspective. Everything will eventually come to pass. If you have good quality in your portfolio, you shouldnt be worried long-term. Djokovitch quote: “Pressure is the priviledge”.

This conversation had me thinking about my latest small bet, where I’m explicitely targetting +25% short-term return. Either I should review my target, or abandon ship. I thought of a possible 3rd option however, which is a “better-than-cash” position, and I think $SUNL might fit in there. I don’t have high expectations for it, but at the current price, I think the odds are tilted in my favor and I have a positive expected return on it in the short-term. And since I won’t be needing that cash soon anyway, it seems reasonable to me to put it there, while I search for my next multi-bagger. At which point I’ll dump it.

Until next time, stay cool & stay invested!