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8 July 2016
Lessons learnt Part 4. A lot has been learnt by market pundits since what is widely acknowledged as being the world’s first stock exchange commenced business in 1602 in Amsterdam. This week I’ve aggregated the thoughts, rules and principles of a number of the world’s most decorated investors and traders (and some bloggers) – this is the fourth batch of lessons I’ve compiled in recent years. Links to the three t hree previous editions are on page 2. As you might expect there are numerous divergences in the views of these financial practitioners but there are also more than a few overlaps. Some have ha ve been highlighted in previous editions but return in this one with additional lessons. Hopefully you will find a couple of extra financial mantras to work by as I once again did.
“Capitalism without failure is not capitalism at all, but a kind of socialism for the rich.” rich.” James James Grant “Some people get rich studying artificial intelligence. intelligence. Me, I make my money studying natural stupidity.” Carl Icahn “Prices fluctuate more than values—so therein lies lies opportunity. Why do the prices fluctuate so so widely when values can’t possibly? I will tell you the answer I have come up with: The answer is I don’t know and I don’t care. We could waste a lot of time about a bout psychology but it always happens and it continues to happen. I just want to take advantage of it. We could sit there and figure it all out, but I like to keep it simple. It happens; it continues to happen; the opportunities opportunities are there ….. Remember, it’s it’s the quality of your ideas not the quantity that will result in the t he big money ….. Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with w ith a burning match. You may live, but you’re still an idiot.” Joel idiot.” Joel Greenblatt “The intelligent investor is a realist who sells to optimists and buys from pessimists ….. Mr Market’s job is is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.” Benjamin Graham “Investing is a popularity contest, and the most most dangerous thing is to buy something at the peak of its popularity.” Howard Marks “Ick investing means taking a special analytical analytical interest in stocks that inspire a first reaction of ‘ick.’ I become interested in stocks that by their very names or circumstances inspire unwillingness – and an ‘ick’ accompanied by a wrinkle of the nose on the part of most investors to delve any further.” Michael Burry “A great investment opportunity occurs when a marvellous business encounters encounters a one-time huge, but solvable problem.” Warren Buffett “You never know what the American public is going to do, but you know that they will do it all at once”. Bill Siedmen Siedmen “History doesn’t crawl; it leaps.” Nassim Taleb “Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected ….. I’m only rich because I know when I’m wrong ….. I basically have survived by recognizing my mistakes” . George Soros “A price drop in a good stock is only a tragedy if you sell sell at that price and never buy more. To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise. If you can't convince yourself 'When I'm down 25 percent, I'm a buyer' and banish forever the fatal thought 'When I'm down 25 percent, I'm a seller,' then you'll never make a decent profit in stocks.” Peter Lynch “One of the best rules anybody can learn abou aboutt investing is to do nothing, absolutely nothing, nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up ….. a situation that is like the proverbial shooting fish in a barrel.” barrel.” Jim Jim Rogers “Most investors are primarily oriented oriented toward return, how much they can make and pay little attention to risk, how much they can lose.” Seth Klarman Klarman Plus •
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Damian Kestel
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Lessons learnt - Part 4 A lot has been learnt b y ma rk e t pundits since w hat is widely acknowledged as being the world's first stock exchange commenced business in 1602 in Amsterdam. This w e e k - I've aggregated the thoughts, rules and principles o f a number o f the world's most decorated investors and traders (and some blogg ers)
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As you might expect there are numerous divergences in the views o f these financial practitioners but there are also more than a few overlaps in how they approach investing. Hopefully you will find a couple o f additional financial mantras to w ork by as I once again did.
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James Grant thinking •
Capitalism without financial failure is not capitalism at all, but a kind o f socialism for the rich.
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To suppose tthat hat the value of a common stock stock is is determined purely by a corporation's earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches. gone to war on a whim. risen to th e defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed. HA The art art of banking is always to to balance balanc e the risk of a run with the reward of a profit. The tantalizing factor in the equation is that riskier borrowers pay higher interest rate rates. s. Ultimate safety - a strongbox strongbox full full of currency - would avail avail the banker nothing. Maximum risk - a portfolio of loans to prospective prospective bankrupts bankrupts at usurious interest rat es es-- would invite disaster. A good banker safely and profitably treads the the middle middle ground. Central banks have gotten out of the central banking business and into the central planning business, business, meaning that they are devoted to raising up-if they can-economic growth and employment through the dubious means of suppressing interest rates and printing money. The nice thing about gold is that you can't print it. Growth at an exceptional rate is a red flag in banking. It is hard enough to manage an ordinary bank; to control a sprouting weed is well-nigh impossible. If loans are expanding too quickly, the lending
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officers have probably been saying 'yes' too frequently. frequently. Credit is money of the mind. Every debt is ultimately paid, if not by the debtor, then eventually by the creditor. In general, markets know more than the people who write about them. In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices. Hope sustains life, but misplaced hope prolongs recessions. The Fe Fed d can chang e how things look, not how things are Successful investing is about having people peop le agree with you ..( [a eD I believe that there is an important kernel of truth in the idea that financial errors recur every other generation. The first bad bank loan was no doubt made around the time o f the opening o f the first bank. It is an axiom nowadays that no no bank fails for lack of capital; unprofitable unpro fitable lending is always the underlying cause. Progress is cumulative cumulati ve in science and engineering, but cyclical in finance. Nothing beats little cash a bear course, and oldest and formall of you cashhave isvegold. gold. To me the goldaprice takesinthe form market, of a veryofuncomplicated uncomplica tedthe formula, formula, hais to do is divide one by 'n.' And 'n', I'm glad you ask, 'n' is the world's trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller 'n', the bigger the price. One divided by a receding number is the definition of a bull market.
Dr. Michael Micha el Burry o on n Investing Dr. Michael Burry is the founder of Scion Capital Capital.. He was recently recen tly mad e famous with the general public as a character in the movie adaptation of Michael Lewis' book The Big Short, but even before then he was famous in investing circles for his astute investing during times like the financial crisis of 2007. He is a physician by training and has diagnosed himself as having Asperger's Syndrome. Burry is particularly dapted ted value valu e investing principles prin ciples to his personality, sk skil ills ls and interesting for investors in that he has a dap nature.
BUNDLE THEM UP
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SELL THE DEBT
My weapon o f choice as a stock picker is research; it's critical for me to understand a company's value
before laying down a dime. I really had no choice in this matter, for when I first happened upon the writings o f Benjamin Graham, I felt as if I was born to play the role of value investor." "Investors in the habit of overturning the most stones will find the most success." "The late 90s almost forced me to identify myself as a value investor, because I thought what everybody else was doing was insane."
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"All my stock picking is 100% based on the concept o f a margin o f safety, as introduced to the world in the
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I try to buy shares of unpopular companies when they look like road kill, and sell them when they've been polished up a bit." "Fully aware that wonderful businesses make wonderful investments only at wonderful prices, I will continue to seek out the bargains amid the refuse." refuse."
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book "Security Analysis," which Graham co-authored wit with h David Dodd. By now I have my own version version of their techniques, but the net is that I want to protect my downside to prevent permanent loss of capital. Specific, known catalysts are not necessary. Sheer, outrageous value is enough." "My firm opinion is that the best hedge is buying an appropriately safe and cheap stock." "It is a tenet o f my investment investmen t style that that,, on the subject of common stock investment, maximizing the upside means first and foremost minimizing the downside." "Lost dollars are simply harder to replace than gained dollars are to lose"
If you are going to be a great investor, you have to fit the style to who you are. At one point I recognized
that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but bu t rather set out on his own path, and ran money his way, by his own rules .... .. .. I also also immediately internalized the idea that no school could teach someone how to be a great investor. If it wer weree true, it'd be
the most popular school in the world, with an impossibly high tuition. So it must not be true." lck investing means taking a special analytical interest in stocks that inspire a first reaction reaction of 'ick.' I tend to become become interested in stocks that by their very names o r circumstan circumstances ces inspire unwil unwillin lingne gness ss - and an 'ick' accompanied by a wrinkle of the nose on the part of most investors to delve delve any further. f urther. •
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"I prefer to to look at specific investments within the inefficient inefficien t parts of the market." "The bulk of opportunities remain in undervalued, smaller, smaller, more illiquid situations situations that often represent average or slightly above-average businesses." "In essence, the stock market represents three separate categories of business. They are, adjusted for inflation, those with shrinking intrinsic value, those with approximately stable intrinsic value, and those with steadily growing intrinsic value. The preference, always, would be to buy a long-term franchise at a substantial discount from growing intrinsic value." ~ A I ? £ U l ~ l J -roo "How do I determine the discount? discou nt? I usually focus on free cash flow and enterprise value (market of companies capitalization less cash plus debt). I willthe screen largetonumbers by looking at the and enterprise value/EBITDA ratio, though ratio through I am willing accept tends to vary with the industry its position in the economic cycle. I f a stock passes this loose screen, I'll then look harder to determine a more specific price and value for the company. I also invest in rare b i r d s - asset plays and, to a lesser extent, arbitrage opportunities and companies selling at less than two-thirds o f net value (net working capital less liabilities). I'll happily mix in the types o f companies favored by Warren B u f f e t t - those with a sustainable competitive advantage, as demonstrated by longstanding and stable high returns on invested
c a p i t a l - if they become available at good prices."
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1. "Some people get rich studying artificial intelligence. Me, I make my money studying natural stupidity. I sit on a lot of boards .. I don't have to watch Saturday Night Live anymore, I just sit at the board meetings." 2. I f the system wasn't so messed up, guys like me wouldn't make this kind of money." money."
3. I look a t companies as businesses, while Wall Street analysts look for quarterly earnings performance." 4. I buy assets and potential productivity." 5. I n life and business, there are two cardi nal sins, the first is to act precipitously without thought, and the second is to not act a t all." 6. The card inal rule is to have enough capital at the end of the day." I n takeovers, the me tapho r is
war. Th e secret secre t is reserves. You must have reserves stretched way out ahead. You have to know that you could could buy the com pany and not be stretched."
7. I made an awful lot of money not having plans. Ask a running back 'what was your plan when you
hav e a life life of saw three guys coming a t you?' He doesn't say, 'well Jesus I had a plan.' These things have their own."
8. The consens consensus us think ing is generally wrong. I f you go with a tren t ren d, the m omentum ome ntum always fall fallss apart
on you. So I buy companies that are not glamorous and usually out of favor. I t is even better if the whole industry is out of favor."
9. I will tell you, a t the r isk of being immodest, that we have one of the best records around over the last decade, over o ver the la st year. I will will tell you this: I've learne d one thing: Don't micromanage. Don't go in and tell somebody else else how to run their business. I look at it from the big picture: We go into companies and we tell them how to run their finances, we tell tell them th em how to buy pencils instead o f buying from their cousin Vinnie, for example. But we don't tell them what to do in this situation." 10. Ideas comes to you ... not necess necessarily arily workin g and sitting a t a desk." 11. I enjoy the hunt much more than the 'go od life' life' after the victory." 12. I n the takeover business, if you want a friend, you buy a dog."
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A Dozen Things I ve Learned Le arned from Joel Greenbla Greenblatt tt about Valu Valuee Investin In vesting g Posted by trengriffin Joel Greenblatt is a successful value investor and the founder o f Gotham Capital. H e has written several books on value investing identified in the notes below. M l : IYJA l.I J
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You've all all heard stories about professional professiona l investors investo rs underper underperformi forming ng index funds, funds, but economists economis ts Ron Ron Acquits, Lutz Kilian, and Robert Vigfusson took this humiliation to the next level. The trio showed that forecasts of the price of oil one year out made by the Energy Information Agency and survey firm Consensus Conse nsus Economics were no more accurate than just assuming whatever oil oil's 's price is today is what it will be next year. Literally, not having any forecast was as accurate as a professional forecast. What is true for oil is undoubtedly true for economic growth, corporate earnings and industry trends. Most of us can't stand the thought of it, but anyone looking honestly at the evidence knows we are spectacularly spectacula rly awful at predicting the future. future. This might seem disturbing to investors. How do you invest in the future while holding a nearly fatalist view that we can't predict the future? Luckily, the world's world's smart est investment minds came ca me up with an answer, and it might contain the three most import important ant words in investing It's called the margin of safety. Margin of safety is simply the distance between your predictions coming true and needing those predictions to come true. You can still try to predict the future, but a margin of safety gives you room for error to be wrong. Benjamin Graham summed it up when he said, The purpose of the margin of safety is to render the forecast unnecessary." You don't want to buy a stock you think could grow earnings at 10% a year but needs to in order to make it a good investment. You want to buy the stock that could grow earnings at 10% a year but would sti still ll make a decent investment i f it on only ly grows earnings by 5%, or 2%, with anything beyond that being cream cheese. Take this example from Warren Buffett biographer Alic Alicee Schroeder. Schroeder describes how Buffett analyzed a stock h hee purchased in the 1960s 1960s in a company compa ny called Data Da ta Documents. Rather R ather than forecasting what the company might earn in the future, future, Buffett looked at the company's current figures and asked if he could get a good return even if they deteriorated. "There was a big margin of safety built into these numbers," Schroeder says. The company "had a 36% profit margin. [Buffett] said, 'I'll take half that."' In the end, Data Documents Docume nts did f
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and Buffett made a fortune, but that's not what's important. What made the company a great
won,, tails he did OK. investment is that it didn't need to do fantastic for Buffett to still have done all right. Heads he won The whole concept of margin of safety is possible because there's a difference between the price of a stock and the value of a company. It pops up when you don't have to pay a high price for the possibility of good news, or when possible bad news is already priced in. in. This what Graham meant mea nt when he wrote: The margin of safety is always dependent on the price paid. I t will be large at one price, small a t some higher price, nonexiste nonexistent nt at some still still higher pric e."
This goes beyond stock-picking. Those who save the exact amount of money they think they'll need to retire are one bear market, hospital hospit al visit, visit, or divorce away from trouble. trouble. Any one who thinks they have ultimate job security, or don't need to save because they have an inheritance coming, or think they can handle a lot of debt because a Christmas bonus awaits will eventually learn that the quote, "You plan, God laughs," can be painfully true.
You're going to be wrong a lot. It's part of investing, and it's part of life. Insisting on having a wide gap between what you think will happen and what could c ould happen if you're wrong is the only way to hedge against it
Richard Branson's lessons on leadership 2015-09-08 04:45:33.800 GMT By Jamie Freed ( )surround yourself with good people and delegate well Sir Richard says it is very important to know your strengths and your limits and to not try to do too much yourself.
Instead, you need to get the best people with great ideas ideas to join your team - an and d then avoid second-guessing them all the time. "Sometimes "Some times they will fall flat on their face," he says. "Sometimes they will do incredible things. Obviously I have been at it for a long time. Based on experience, sometimes I can say whether I like something or not based on many years of doing things. things. But surround yourself with great peopl people. e. "And delegate. I think too many people are· are· building build ing companies, they are not delegating. The absolute key is early on as you are building companies try to put yourself out of business. Find one or two people that are better than you to do everything."
(Y It's okay to fall flat on your face, as long as you get back up again
Sir Richard views failure as a learning experience. He points to the Virgin Cola product, launched in 1994, as an example. The product did well in the UK market for around 18 months, but that attracted the attention of Coca-Cola, which had deep pockets with which to fight back. Suddenly, Virgin Cola disappe disappeared ared fro m the shelves of major retailers retailers like Tesco. "A lot of people fall flat on their face," he says. "The key in life is to learn from that experience and pick yourself up and keep reinventing yourself until you succeed. Most successful people have. It is learning from that and not giving up when it hap happen pens. s. Hopefully ulti matel y you come out on top." @ M a k e sure you have a better product than the incumbent
Sir Richard says the key lesson from the Virgin Cola debacle was to always ensure you have a product produc t that is "much, much better" than your competitor. "Obviously with a soft drink there is not much you can do to differentiate it," he says. "When British Airways tried to do the same same thin g to Virgin Atlantic because the quality of our produ ct was better they couldn't do it. Or when Qantas tried to do it to Virgin Australia, they inflicted so much damage on themselves to themselves that the they y finally backed backed up. They even had to go begging to their government, having having lost hundreds of millions o f dolla dollars rs trying to drive us out o f business. The main thing was to make sure we kept the quality up." anything you can to promote you yourr business business for free Sir Richard says Sir Freddie Laker, who had gone bankrupt fighting British Airways, had an important bit of advi
