Tim McElvaine explains his simple but effective process.
2016-05_conference_transcript_McElvaine Fund An excellent tutorial on Graham-like investing. Note his simple four-pronged approach. Read more below:
Tim McElvaine explains his simple but effective process.
2016-05_conference_transcript_McElvaine Fund An excellent tutorial on Graham-like investing. Note his simple four-pronged approach. Read more below:
A portfolio manager who will manage the Dogs of the Dow Portfolio.
Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results after fees and expenses delivered by the great majority of investment professionals. –Warren Buffett.
A minuscule 4% of funds produce market-beating after-tax results with a scant 0.6% annual margin of gain. The 96% of funds that fail to meet or beat the Vanguard 500 index Fund lose by a wealth-destroying margin of 4% per annum. “Unless an investor has access to incredibly highly qualified professionals, they should be 100 percent indexed. That includes almost all investors and most institutional investors. –David Swensen, chief investment officer, Yale University.
“In modern markets, most institutions and almost all individuals will experience better results with index funds.” –Benjamin Graham.
Those who have knowledge, don’t predict. Thos who predict, don’t have knowledge. — Lao Tzu, 6th Century B.C.
I am reading, The Index Revolution: Why Investors Should Join It Now by Charles D. Ellis
The author presents a compelling case why most individuals should index:
Articles proliferate such as: https://www.fool.com/investing/general/2016/04/05/the-numbers-are-in-actively-managed-mutual-funds-a.aspx and research for the past few decades has shown that Index Funds Outperform.
Now lets journey into the real world: https://www.mackenzieinvestments.com/en/prices-performance. I picked this fund family at random. Look at each of their funds’ long-term performance compared to their comparable benchmarks. Not ONE outperforms. Not one. Who in their right mind would invest? As money managers become desperate to beat the index, they tend to mimic their benchmarks, so their amount of underperformance closes towards the index, but GUARANTEES underperformance due to fees and slippage of commissions and taxes.
Time to pack it in and index? First, do not underestimate how difficult it is to “outsmart” the market. I personally believe that the ONLY way–obviously–to do better is to be very different from the indexes. You will either vastly UNDER-perform or OUTperform. You have to be different and right. So how to be right? You must do things differently like use all available information in the financials (read footnotes and balance sheet), have a longer-term perspective such as five to seven years–at a minimum–three years to give reversion to the mean a chance to work or time for franchises to compound. You have to pick your spots where you are confident that you are buying from mistaken, uneconomic sellers. And when you do find a great opportunity (assuming that you can distinguish one) you heavily weight your position. NOT EASY.
Here is what Seth Klarman recently said about current conditions (New York Times, Feb. 7th, 2017:
Most hedge funds have found themselves on the losing side of trades over the past several years, a point Mr. Klarman addressed in his letter (2016). Noting that hedge fund returns have underperformed the indexes — he mentioned that hedge funds had returned only 23 percent from 2010 to 2015, compared with 108 percent for the Standard & Poor’s index — he blamed the influx of money into the industry.
“With any asset class, when substantial new money flows in, the returns go down,” Mr. Klarman wrote. “No surprise, then, that as money poured into hedge funds, overall returns have soured.”
He continued, “To many, hedge funds have come to seem like a failed product.”
The lousy performance among hedge funds and the potential for them to go out of business or consolidate, he suggests, may become an opportunity.
Perhaps the most distinctive point he makes — at least that finance geeks will appreciate — is what he says is the irony that investors now “have gotten excited about market-hugging index funds and exchange traded funds (E.T.F.s) that mimic various market or sector indices.”
He says he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit.
“One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Mr. Klarman wrote.
“When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership),” he wrote. “Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings.”
To Mr. Klarman, “stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it.”
“This should give long-term value investors a distinct advantage,” he wrote. “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”
What do YOU think?
“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of errors into which great minds have fallen in the pursuit of truth can never be uninstructive… Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one… Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome… Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.”
Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds, 1841
My prior post on Charts and Technical Analysis is here: http://csinvesting.org/2017/01/04/chartists-and-technical-analysis/
The point is to realize that charts are a tool but using them to predict is a fools’ game. You can try to find disconfirming evidence,but make sure the sample size is a large one. More on market inefficiency from Bob Haugen.
LESSON: IGNORE “EXPERT” PREDICTIONS
A relatively new guy on the PM analysts scene, Bo Polny was, to my knowledge, first mentioned by Jim Sinclair (Yes, Mr. Gold of the “Gold will never go below $1500” – fame) as his chartist. He used that notoriety to open a website (2020 Gold Forecast), establish a following and charge exorbitantly for a newsletter – which I believe is now has a less-detailed, more reasonable price structure option. He is characterized as passionate, animated, can speak technical-analysis double-speak using chartist-lingo and numerology, is occasionally religious (Shemitah) and has made ambitious, dated, calls – some of which we will include that have not been resolutely judged correct or not. He’s been around less than 3-years but has some wildly poor predications. Let’s see:
May 7, 2013 – Bo Polny: Silver Extremely Vulnerable to a Break of $22 Bottom – in this Polny stated that silver’s final bottom of $22 was ‘in’ but vulnerable [?!?] kind of riding the fence (it was $14.93 last I looked April 4th, 2016 – almost 3 years later – so, yeah – $22 was indeed ‘vulnerable’)
May 31, 2013 – Bo Polny: Gold Has Bottomed at $1321, to Rise into June 5th Turn Date – the following month after he stated this it went to $1190.
June 18, 2014 – Bo Polny: Gold- Up in June, Down into Summer & a Moon Shot to $2000 before Year END! – Gold closed that year at around $1205.
June 27, 2014 – Bo Polny: Gold Cycle Top June 27, Next a Summer Low Buy-Of-A-Lifetime Before $2000 Gold in 2014! – Actually, Gold never went above $1400 in 2014 and finished the year at $1205.
July 15, 2014 – A Final Summer Low Still Ahead as Gold’s Sabbatical Rest Comes to an End & Gold Heads to $10,000+! – a continuation of his more exaggerative predictions…
August 11, 2014 – BO POLNY: A 3-Year Gold ‘BEAR’ Market Ends & a 7-Year Gold ‘BULL’ Market Begins – no, Bo…
September 9, 2014 – BO POLNY: $2000 Gold, Next Stop! 7-Year Gold Cycle Targets $5,000 & $333 Silver – absurd but it tends to peak the interests of the gold and silverbugs who immediately start mentally converting their stacks into mega-dollars imagining their new wealth and what it can buy them… silly really.
October 9, 2014 – BO POLNY: Triple Bottom a Prelude to Runaway Gold & Silver Bull Markets – not surprisingly, nothing happened except a minor spike in the beginning of 2016 – over a year after he said it. More PM version of ‘Hopium’… which is how most of these charlatans extend their livelihood.
December 22, 2014 – BO POLNY: 2015, The Year of Devastation – it wasn’t… it was another year of Bo Polny’s incorrect predictions. I think he later claimed he was a year early because of some numerology faux-pas – what-ever.
January 12, 2015 – BO POLNY: Gold and Silver, a Parabolic Rise in 2015 – ‘Parabolic’ refers to something in the shape of a Parabola (‘U’) – analysts love this term as a fancy way of saying things will turn-around from lows back to highs. I’m sure you are aware – it didn’t transpire in his 2015 time-frame.
January 20, 2015 – Bo Polny – Are Precious Metals Getting Ready To Go Parabolic? – there’s that ‘parabolic’ word again. In retrospect, Bo – I can answer: “Ummm… No – not ready yet”.
March 27, 2015 – Bo Polny: BREATHTAKING Crash in USD Before Summer? – if ‘crash’ involves a lack of confidence – then the crash was in Bo Polny’s credibility.
May 18, 2015 – Bo Polny – It’s All Down from Here, Except Gold and Silver – Bo was calling for a major sell-off on the dollar and treasuries…. and being complimentary – he is, at best, premature.
June 4, 2015 – Bo Polny – Silver Short Squeeze Imminent! – ‘imminent’ is one of those less-fluid words that indicates immediacy – in fact Bo said in this article “In June 2015 the shorts will run to cover as Gold and Silver spike!” – Ohh Bo…sigh
June 14, 2015 – Majestic Gold & Silver Breakout, June 2015- Bo Polny – “Majestic”; possessing majesty; of lofty dignity or imposing aspect; stately; grand; not a word associated with Bo Polny.
‘June 18, 2015 – Three Digit Silver In 2016!’ – Bo Polny – of course, the year is not over but it seems less and less likely as each day goes by… the term ‘Three Digit” gets the Silverites brains congratulating themselves that they can mentally calculate that it means a minimum of $100. Bravo! Actually, at this point, the general consensus was that Bo was full of it…
August 4, 2015 – Bo Polny: $9000+ Gold & $1000 Silver if $1072 Holds! – $1072 held – Bo’s prediction didn’t.
August 13, 2015 – Bo Polny – Fasten Your Seat-Belt, Gold’s Next Cycle Targets $8000 – $10,000 – it must have been a slow-subscriber week for Bo… he did the equivalent of putting caffeine in the water cooler. “We love you Bo! tell us more about our millionaire status future!”
August 24, 2015 – Shemitah 2015, the Year of Jubilee and 3-Digit Silver…Putting it All Together! – 3-Digits again! Your Eagle coins are going to make you rich, guys and gals!
August 26, 2015 – $2000 Gold & $50 Silver this year! | Bo Polny – Bo goes out on a limb… of desperation. I think the tactic backfired as he was proven VERY wrong in only a few months… tsk, tsk. Silver never even got to 1/2 his called prediction.
September 23, 2015 – Bo Polny: September 23, 2015 – THE SHIFT BEGINS! out of ‘Bo following’
October 27, 2015 – All Hell Could Break Loose in Gold/Silver Prices, $100+ Silver 2016 – the best predictor of future behavior is past behavior and Mr. Polny has had too many of these absurd predictions.
January 17, 2016 – What Follows Will Be The BREAKOUT OF THE CENTURY FOR SILVER! – Bo Polny – okay, Bo… we will wait and see but your call is documented. But I think even the most hardcore Silverbug has lost faith in you…
February 16, 2016 – Gold to DOUBLE in 2016 – Bo Polny or Bo’s credibility takes its final plunge, agreed?
March 1, 2016 – Polny Sticks His Neck Out: “Gold to Double, Silver to TRIPLE in 2016!” – only triple for Silver? Bo’s really toned down from those triple-digit days – perhaps Bo doesn’t realize Silver is only $14+ change right now.
For laughs: https://www.gold2020forecast.com/
Take a look at other precious metals “analysts”
Stewart Thomson writes the Graceland Updates.
I’m not a fan of Stewart Thomson – I find him arrogant, and a wholly inaccurate PM analyst – I consider him one of the worst. Let’s allow his wayward predictions speak for themselves:
“In late 2013, I predicted the Fed would taper all the way to zero in 2014, and suggested that taper would turn the Dow into a “wet noodle”, while creating a rally in gold prices. That’s the opposite of what most analysts thought would happen in 2014, and it’s exactly what has transpired!” -Stewart Thomson Oct 2014
“Gold Set to Surge, Silver Looks Even Better! I think gold could charge beyond $1325, and on towards the $1347 and $1390 area highs. Silver, which is perhaps better referred to as “gold on steroids”, looks even better.” -Stewart Thomson August 2014
“…any gold-negative news is not likely to move the price of gold lower than $1275. The upside numbers of importance are $1325, $1347, and $1392.” -Stewart Thomson July 2014
“Gold: “Let the Good Times Roll!” During the first six months of 2014, there have been quite a number of events that are positive for the gold market, and there was a big one yesterday. Gold staged a nice breakout from a small bullish wedge pattern last night, and the entire chart has a very bullish look. Why is that? Well, the month of August can see Indian citizens buy enormous amounts of gold, as they begin preparations for the wedding season and Diwali. Expectations of those liquidity flows into gold are likely why the gold chart looks so bullish now.” -Stewart Thomson July 2014
“Gold: The Worst Is Over, What’s Next? The time to be heavily invested in the precious metals sector is not later. It’s now.” -Stewart Thomson June 2014
“While the short and intermediate trends for gold are greatly influenced by Fed policy, events in China and India are now the key drivers of gold’s primary trend…. and sends gold surging towards my target of $1432.” -Stewart Thomson July 2014
“A persuasive argument can be made that gold staged an upside breakout last night. The range of $1305 – $1326 was decisively penetrated to the upside, and gold traded as high as $1335. Monday’s close was critical, because it was not just the end of the month, but the end of the quarter. Junior gold stocks staged a spectacular ending to the first half of the year, on massive volume. The chart suggests the second half of 2014 will be even better!” -Stewart Thomson July 2014
“Gold Stock ETFs: Outrageously Bullish! If I’m correct, the “bare minimum” arithmetic target is: $2663. I think my target price is absolutely justified by the global fundamental and geopolitical price drivers.” -Stewart Thomson June 2014
“Technically, all sectors of the gold market look bullish. Regardless of whether a daily chart, weekly chart, or a monthly chart is used, all technical lights are green. The weekly charts suggest that investors who are waiting for gold to bottom in July are at risk of missing an enormous rally that appears to already be underway.” -Stewart Thomson June 2014
“I’ve outlined a rough scenario for summer rally enthusiasts on the daily silver chart below. I’ve suggested silver could move up to about $22. Much higher prices are possible.” -Stewart Thomson June 2014
“Gold now seems to be forming an inverse head and shoulders bottom pattern, and that’s good news for bullish investors.” -Stewart Thomson April 2014
“Indian National Election is the Most Bullish Event for Gold in Past 100 Years!” -Stewart Thomson April 2014
“Gold market technicians should be open to the possibility that in the bigger picture, this rally has only just started.
Many of PM investors are likely to sell on a rally back to the $1500 area, to cut the huge losses they sustained in 2013.” -Stewart Thomson February 2014
I like to have a reference to refer back to a year or five years from now capturing certain points in time. The market seems to be placing peak confidence in financial assets (stocks) vs. gold.
This post continues from a prior post: http://csinvesting.org/2016/11/17/when-no-one-wants-em-search-strategy/
The Bearish Gold Articles keep on coming: http://www.businessinsider.com/heres-why-you-should-never-buy-and-hold-gold-2016-12
http://bloom.bg/2hWukKn Running out of metal.
Even bullish mining investors expect “waterfall declines” and gold going below $1,100. Momentum creates the news: http://www.kitco.com/news/video/show/Gold–Silver-Outlook-2017/1456/2016-12-22/Mining-Stocks-Could-See-Waterfall-Declines—David-Erfle To be fair, he is long-term bullish, but note the “certainty, inevitability” of gold falling in USD below $1,100 or even to $1,000. Since he is probably considered strong hands (better capitalized with more experience in precious metals miners) his view indicates VERY bearish near-term (1 day to two/three months sentiment). As I interprete this news.
Financial risk is increasing on US company balance sheets, but then who cares while confidence is high?
Luiz Alves Paes de Barros is something of an enigma in Sao Paulo’s financial circles. At 69, he’s known around town as the “anonymous billionaire” for quietly amassing a fortune by wagering on stocks almost no one else seemed to want.
In Magazine Luiza SA, Barros may have made one of his best bets yet.
Starting in late 2015, Barros’s Alaska Investimentos Ltda. made the battered retailer one of its biggest holdings, a brazen move in a nation stuck in the middle of its worst recession in a century. It paid off. Magazine Luiza has surged more than 1,000 percent since reaching a record low about a year ago, making it the top stock in one of the world’s top-performing markets. That turned Alaska’s Black Master, which Barros co-manages with Henrique Bredda and Ney Miyamoto, into the No. 2 fund among 569 peers focused on Brazilian equities, according to data compiled by Bloomberg.
Barros’s latest success only adds to the intrigue surrounding one of Brazil’s most storied, but media-shy, individual investors. Early in his career, he traded commodities and was a partner of star fund manager Luis Stuhlberger at what is now Credit Suisse Hedging-Griffo. Barros then spent the next half century investing only his own cash, almost exclusively in Brazilian stocks, and regulatory filings show he personally holds 1.2 billion reais in equities.
When it comes to managing other people’s money, Barros is a rookie, having co-founded Alaska in July 2015. But his investing method remains the same. He only holds a handful of stocks, favors companies with bottom-of-the-barrel valuations and usually jumps in as everyone else is bailing.
“Perfecting patience is all I’ve done over the past 50 years,” Barros says. “I love when things get bad. When it’s bad, I buy.”
During two interviews, first in Alaska’s shoebox office in the heart of Sao Paulo’s financial district and then at his personal office on the city’s oldest business thoroughfare, the silver-haired asset manager explained what drew him to Magazine Luiza and went over the stocks he likes now: Fibria Celulose SA, Braskem SA, Marcopolo SA and Vale SA.
“The market has forgotten these stocks,” he says.
Alaska started building a stake in petrochemicals maker Braskem about four months ago (the stock has surged 48 percent since mid-August after tumbling 20 percent this year before then) and pulpmaker Fibria a few months later. Barros likes both companies because they’re fundamentally sound — and valuations are low. Braskem’s price-to-earnings ratio is 8.3, less than half the level three years ago. Fibria’s valuation is less than half the average of the past two years.Marcopolo, a maker of trucks and buses, is a play on Brazil’s rebound from recession, while miner Vale will benefit as global investors start seeking value again over safety. There’s no economic expansion in Brazil without infrastructure investments, he says.
“Vale won’t be a disaster for anyone. When iron-ore prices rise again, Vale will fly,” he said.
If those stocks return just a fraction of what Magazine Luiza did, they’d count as stellar investments. In all, Alaska acquired almost 40 percent of Magazine Luiza’s free-floating shares, regulatory filings show. In 2016’s third quarter, Alaska unloaded half its stake. What’s left of Alaska’s holdings in Magazine Luiza is now worth about 111 million reais ($33 million).
Asked how he knew Magazine Luiza would do as well as it did, he says he didn’t. “I just knew it was cheap.” The fact that the retailer of appliances and electronics had a market value of 180 million reais even though a bank had offered to pay 300 million reais for the right to offer extended guarantees on Magazine Luiza products made that clear.
“Either the bank was crazy or there was value there,” Barros says.
Alaska’s Black Master fund has returned 143 percent in 2016, compared with a 33 percent gain for Brazil’s benchmark Ibovespa stock index. The gains were also driven by a stake in Cia. de Saneamento do Parana, the water utility known as Sanepar that’s almost tripled this year.
Alaska is still a relatively small player in Brazil’s 2.38 trillion-real stock market. The asset manager employs 11 people (“That includes the lady who serves the coffee,” Barros says). While Alaska oversees about 1.6 billion reais, three-quarters of that is Barros’s own cash. But the fund is actively seeking new clients.
Why now, after 50 years of going it alone?
“Because I’m positive that the market is going to rise,” he says.
Each of four cards on a table has a letter on one side and a number on the other, but you can only see what is on the side facing up. What you see are two letters and two numbers:
A 4 D 7
Suppose the rule governing these cards is that if a card has a vowel on one side, it has an even number on the other side. Which two cards would you turn over to find out whether the rule is true? Take no more than twenty seconds.
Now go to the real world: Can you name at least two psychological/analytical errors that you see in this clip.
https://youtu.be/Cxjdj5_5yNM Take no more than 4.5 minutes–length of the clip. The investment bankers each have MBAs, CFAs, Accountng degrees etc. They are SMART!
Total time for test 5 minutes.
2016_templeton Hand-out to go with the above talk in 2016. A good discussion of the psychological strength needed to apply value investing principles.
It is the emotional nonprofessional investor who sends the price of a stock up or down in sharp, sporadic and more or less short-lived spurts. The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or the panic of the speculators and nonprofessionals have been spent.” –J. Paul Getty
Can You Explain This?
Starting on page 4, this money manager explains his firms consistent underperformance. Do you agree or disagree? Why? A lesson for investors.
wedgewood_view_3rd_quarter_2016_client_letter (Start on page 4)
There’s no such thing as “passive investing.” As Ben Graham defined it in his magnum opus, Security Analysis, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Because passive strategies entail zero analysis of either of these qualifications they are, by definition, speculative. And those adopting them are speculators, not investors.
Like “jumbo shrimp,” “virtual reality,” “old news,” or “living dead,” the term “passive investing” is thus an oxymoron.
My point here is not to shame everyone who has embraced passive in recent years. There are plenty of good reasons to go passive, namely to dramatically lower your costs. My point is that if you want to call yourself an “investor” you need to do a little bit more thinking about the prices and fundamentals of risk assets than just buy at any price and hope. I think Jesse Livermore said it best in Reminiscences of a Stock Operator:
The average American is from Missouri everywhere and at all times except when he goes to the brokers’ offices and looks at the tape, whether it is stocks or commodities. The one game of all games that really requires study before making a play is the one he goes into without his usual highly intelligent preliminary and precautionary doubts. He will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile.
Embracing passive investing is exactly this sort of ‘cover your eyes and buy’ sort of attitude. Would you embrace the very same price-insensitive approach in buying a car? A house? Your groceries? Your clothes? Of course not. We are all very price-sensitive when it comes to these things. So why should investing be any different?
Value Managers Discussing Performance With Customers
Notice the flawed thinking and view of history by the “brilliant” bankers. Being laughed at is often a good sign if you are trying to avoid the herd.
Portrait of a contrarian
Steel Partners: Value Investors and Operators.
Is the unit cheap now? What do YOU think and why?
https://www.thestockmarketblueprint.com/asset-based-analysis-does-it-work/ A great blog for NCAV stocks and more!
A while back you took my Investment IQ Test questionnaire. As you may recall, it was based on the character traits of the world’s most successful investors I outlined in my book, The Winning Investment Habits of Warren Buffett & George Soros.
Here, very briefly, are a few of the “highpoints” of the investment behaviors that made them so successful.
I trust you enjoy it and I appreciate your comments.
PS: If you prefer to read it in your browser just go here.
7 Investment “Tips” From the World’s Richest Investors
Warren Buffett, Carl Icahn, and George Soros are the world’s richest investors. Their investment styles are as opposite as night and day. Buffett buys companies that he considers to be good bargains; Soros is famous for his speculative forays into the currency markets, which is how he came to be known as “The Man Who Broke the Bank of England.”
But—as I have shown in The Winning Investment Habits of Warren Buffett & George Soros—they both practice the same 23 mental habits and strategies religiously. As do Sir John Templeton, Bernard Baruch, Peter Lynch, and all the other successful investors I’ve ever studied or worked. It doesn’t matter whether you buy stocks, short currencies, trade commodities, invest in real estate, or collect ancient manuscripts: adding these mental strategies to your investment armory will do wonders for your bank account.
To make it easy to get going, I’ve distilled these 23 mental habits into these seven simple (though not always easy to follow) rules:
1. If you’re not certain about what you’re intending to do, don’t do it
Great investors are always certain about what they are doing whenever they put money on the table. If they think something is interesting but they’re not sure about it, they do more research.
So next time, before you call your broker (or go online), ask yourself: “on a scale of 1 to 10, how certain am I that I will make money?” Choose your own cut off point, but if it’s less than a 7 or an 8, you definitely need to spend more mental energy before making a commitment.
Remember: the great investor’s sense of certainty comes from his own experience and research. If your sense of “certainty”doesn’t come from your own research, it’s probably a chimera.
2. Never take big risks
Warren Buffett, George Soros, Peter Lynch . . . they only invest when they are confident the risk of loss is very slight.
Okay, what about that person you heard about who made a bundle of money in copper or coffee futures or whatever by taking on enormous leverage and risk? A few simple questions:
If not, chances are that’s the only big profit he ever made.
(And what did he do with the money? If he spent his profits before he got his tax bill . . . )
The great investors make money year in year out. And they do it by avoiding risk like the plague.
3. Only ever buy bargains
This is another trait the great investors have in common: they’re like a supermarket shopper loading up on sale items at 50% off.
Of course, the stock exchange doesn’t advertise when a company’s on sale. What’s more, if everybody thinks something is a bargain, the chances are it’s not.
That’s how Benjamin Graham, author of the classic The Intelligent Investor, averaged 17% a year over several decades of investing. He scoured the stock market for what he considered to be bargains—companies selling under their break-up value—and bought nothing else.
Likewise, Warren Buffett. But his definition of a bargain is very different from Graham’s: he will only buy companies he can get at a discount to what he calls “intrinsic value”: the discounted present value of the company’s future earnings. They’re harder to identify than Graham-style bargains. But Buffett did better than Graham: 23.4% a year.
Even George Soros, when he shorted sterling in 1992, was convinced that the pound was so overvalued that there was only one way it could go: down. That’s a bargain of a different kind, but a bargain nonetheless.
4. Do your own leg work
How do they find investment bargains? Not in the daily paper: you might find some good investment ideas there, but you won’t find any true bargains.
The simple answer is: on their own. After all, almost by definition, an investment is only a bargain if hardly anybody knows about it. As soon as the big players discover it, the price goes up.
So it takes time and energy to find an investment bargain. As a result, all the great investors specialize. They have different styles, they have different methods, and they look for different things. That’s what they spend most of their time doing: searching, not buying.
So the only way you’re going to find bargains in the market is the same way: by doing your own legwork.
5. “When there’s nothing to do, do nothing”
A mistake many investors make is to think that if they’re doing nothing, they’re not investing.
Nothing could be further from the truth. Every great investor specializes in a very few kinds of investments. As a result, there will always be stretches of time when he can’t find anything he wants to buy.
For example, a friend of mine specializes in real estate. His rule is to only buy something when he can net 1% per month. He’s a Londoner so—aside from collecting the rent!—he’s been sitting on his thumbs for quite a while.
Is he tempted to do something different? Absolutely not. He’s made money for decades, sticking to his knitting, and every time he tried something different, he lost money. So he stopped.
In any case, his real estate holdings are doing very well right now, thank you very much.
6. If you don’t know when you’re going to sell, don’t buy
This is another rule all great investors follow. It’s a major cause of their success.
Think about it. You buy something because you think you are going to make a profit. You spend a lot of time so you feel sure you will. Now you own it. It drops in price.
What are you going to do?
If you haven’t thought about this in advance, there is a good chance you will panic or procrastinate while the price collapses.
Or . . . what if it goes up—doubles or triples—what then? I’ll bet you’ve taken a profit many times only to see the stock continue to soar. How can you know, in advance, when it’s likely to be the right time to take a profit? Only by considering all the possibilities.
The great investors all have; and will never make an investment without first having a detailed exit strategy. Follow their lead, and your investment returns should soar.
7. Benchmark yourself
It’s tough to beat the market. Most fund managers don’t, on average, over time.
If you’re not doing better than an index fund, then you’re not getting paid for the time and energy you’ve spent studying the markets. Much better to put your money in such a fund and spend your time looking for that handful of investments you are so positive are such great bargains that you’re all but guaranteed to beat the market.
Alternatively, consider the advice from a great trader. When asked what the average trader should do, he replied: “The average trader should find a great trader to do his trading for him, and then go do something he really loves to do.”
Exactly the same advice applies to the average investor.
Find a great investor to do your investing for you, and focus your energy on something you really love to do.
One other thing:
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As always, I try to also post the criticisms of investing legends:
Victor Niederhoffer, tireless critic of Benjamin Graham, Graham’s investment idea, and Warren Buffett, is blown up once again —to the tune of some 75% losses for his funds —as reported for a story in this week’s The New Yorker. Whereas Niederhoffer’s latest catastrophic losses might serve as schadenfreude for some students of value investing, this self-described Ayn Rand Objectivist is a living testament to the lethal nature of some spectacularly subjective biases, including a disdain for anything resembling a margin of safety.
The New Yorker article is a bit heavy on Niederhoffer’s personal life, but is still worth a read. Here’s the link:
Several years ago, Victor Niederhoffer was questioned during a radio interview about his rejection of the value investment paradigm as espoused by Benjamin Graham. The interviewer asked Niederhoffer how he might then explain the half-century success of Graham students such as Walter Schloss and others, given his rejection of Graham’s ideas. Niederhoffer replied that such success was “random.”
In Niederhoffer’s book, Practical Speculation, an entire chapter is devoted to refuting Graham’s pursuit of bargain issues. Only Niederhoffer hardly gets around to doing so. Instead, this sophisticated statistician attempts to stigmatize Graham and dwells on a small, essentially anecdotal sampling to prove his points about the lameness of value investing. One fellow Niederhoffer knew bought a stock below book value and watched as the stock proceeded to trade lower.
See? Graham’s ideas are useless.
When he is done expounding on the value investment discipline’s futility and ineffectualness, Niederhoffer allows as how he is troubled by the discipline’s ostensibly cynical premise: a dollar bought for fifty cents means that the seller is exploited. It seems odd that this cultivated observer of free-enterprise fails to recognize a couple of cold, hard facts: the business that fails to sell at half-price is likely to be sold for even less, and buyers of these ailing businesses are, in effect, upholding a competitive counterpoint to stronger businesses that might otherwise have a stranglehold in a capitalist system.
“Random”, the quality that Niederhoffer attributes to successful value investors and any successful value investments as defined by Benjamin Graham, might more aptly be attributed to Niederhoffer’s own quest for an intellectually sound speculative framework. This tendency is displayed in living color by Niederhoffer and other participants on dailyspeculations.com, the website Niederhoffer hosts, as these traders engage in frothy examinations of the parallels between non-related phenomena, such as the evolved habits of exotic animals seen while on safari, and “trading”. Niederhoffer himself is especially fond of drawing wisdom from Captain Jack Aubrey, the main hero in Patrick O’Brian’s 18th century British Navy epics, as that wisdom might pertain to the markets. But after reading Practical Speculation, it is painfully obvious that if Captain Aubrey ever sashays into Niederhoffer’s trading-room and hands him a copy of The Intelligent Investor, Niederhoffer will politely accept the book, and promptly throw it overboard when the good Captain is out of site.
It’s easy to take potshots at this outspoken speculator gone off his trolley. But in the spirit of inquiry that Niederhoffer offers in his book, MSN articles and website, it seems reasonable to ask whether two catastrophic losses and one near-catastrophic loss offered to investors over a 10 year investment period —nearly 4 years of which were spent on hiatus— are more or less “random” than the market-beating investment success that Schloss, et al, offered to investors for over 50 years using a value framework. In any case, the simple fact is that the alternatives to a value framework in the securities markets frequently lead to misery, and by all accounts, Victor Niederhoffer is currently altogether miserable. In the manner that Walter Schloss’ 50-plus years of risk-averse investment returns are “random”, it may be safely said that Victor Niederhoffer’s self-inflicted misery is also randomly rendered.