Category Archives: Investor Psychology

Thinking Differently (Money Ball); Munsingwear Analysis


I HIGHLY recommend you go see Money Ball or read the book by Michael Lewis.  A metaphor for deep value investing.

Case Study – Munsingwear Analysis Q&A

Who earned their wingtips?  That case was about approaching the problem as a business person.  First you had to notice the two businesses, then break them out. Stop the bleeding, then leave the rest.  Often, the smartest students struggle to resurrect the uncompetitive business. (Buffett at Berkshire Hathaway!)

Next, I will post some questions and supplementary readings for Chapter Two in DEEP VALUE (the book) over the weekend.

Enjoy your Weekend!

DEEP VALUE Videos on Net/Nets and Investing

Closing Arg

How is it possible that an issue with the splendid records of Tonopah Mining should sell at less than the company’s cash assets alone? Three explanations of this strange situation may be given. The company’s rich mines at Tonopah are known to be virtually exhausted. At the same time the strenuous efforts of the Exploration Department to develop new properties have met with but indifferent success. Finally, the drop in the price of silver last year has provided another bearish argument. It is this combination of unfavorable factors which has carried the price down from $7  1/8 in 1917 to its present low of $1  3/8 in 1923.

Granting that the operating outlook is uncertain, one must still marvel at the triumph of pessimism which refused to value the issue at even the amount of its cash and marketable investments; particularly since there is every reason to believe that the company’s holdings in the Tonopah and Goldfield railroad, are themselves intrinsically worth the present selling price. (Ben Graham on Investing)


Marty Whitman criticizes Graham and Net Nets (3 minutes Must see!)

Marty Whitman: They Just Don’t Get it.  (23 minutes) Marty says many analysts on Wall Street do not understand credit analysis.   We will explore later in this course whether the quality of credit provides a better assessment of the true cost of capital for a firm rather than “beta.”

One investor’s experience investing in Net/Nets (3 minutes)

Net/nets as value traps (5 minutes)

Good advice on behavioral investing (3.5 minutes)

Prof. Greenwald on UGLY and Cheap or Graham’s Search Strategy (8 minutes)

Greenwald on the Balance Sheet (risk of financials) (10 minutes)

Reading Assignments; The Institutional Imperative


All Enrollees in the DEEP VALUE COURSE should have been emailed Security Analysis and The Intelligent Investor.

Please read Chapters 42 – 45 (on the Balance Sheet). Especially focus on Chapter 43, Significance of Current Asset Value in Security Analysis, (pages: 548-613)

Read Chapter 15 in the Intelligent Investor (pages 376-402)

Chapter 22, Graham’s Net-Nets: Outdated or Outstanding in Montier’s Value Investing,  (Pages 229-235)

Chapter 2, Contrarians at the Gate in Deep Value, (pages 19 -34)

Chapters 1 & 2 in Quantitative Value (pages 3 – 59)

A total of about 168 pages.   This is to give you an early start for next week.  If you are short on time, then just read Ch. 2 in DEEP VALUE. 

If you didn’t receive any of those books, then 1) check your spam folder, 2. email me at with the title BOOKS and what you are missing.  3. if you receive an email with material that you have already received, then ignore/delete.

The Institutional Imperative
Sometimes institutions get caught up in the moment as well.  A company I used to work for held the Fairholme fund in two separate strategies in 2010.  At the end of 2010 I was able to convince the group to completely sell out of the fund in the smaller strategy, but it remained in the larger strategy.  In 2011, the Fairholme fund lost about 32% when the S&P 500 was up 2%.


At the end of 2011 I (the author of this article, link below) was able to convince the group to add the Fairholme fund back to the smaller strategy, but was unable to convince them to even maintain its weighting in the larger one.  Instead the group decided to cut the allocation in the larger strategy in half, despite my objections.  The argument was that the volatility and amount of underperformance (What about Regression to the Mean?) was too great.  The amount of underperformance was one of the reasons to add it back to the smaller strategy and in my experience returns trump volatility as volatility can actually be your friend.  In 2012, Fairholme was up about 35% which almost beat the S&P 500 by 20%.  In the end it was the clients that were hurt as the investment group followed the herd, on the larger strategy at least, keeping a manager after great performance and selling them after poor performance.  Read more….

The institutional-imperative

Institutional Investors and Analysts tend to herd-like behavior by acting late after trends are established.

Goldman cuts oil outlook, so NOW you tell us! (Perhaps, a tad late on the ADVICE!)

Working at Goldman Sachs



Repetitio est mater studiorum,” says the Latin proverb – repetition is the mother of all learning.

Lessons for this post:

  1. Know what you are doing.
  2. Avoid paying massive premiums over net asset values.

Below is CUBA, a closed-end fund investing in companies that invest in Cuba or will benefit by an increase in business with Cuba. Note the spike upward on the announcement that Obama would allow a prisoner exchange and take Cuba off the US’s terror list opening up the possibility of the end of the US embargo.

large CUBA

Now go: CUBA NAV Summary  (Click on the button, since exception on the right side of the page, to see the history of price vs. Net Asset Value (“NAV”). Note the results last time “investors”/speculators or the confused paid in excess of 50% to the underlying stocks. We can argue about the intrinsic values of the underlying stocks but not the prices–because price is what it is. Mr. Market has spoken.

Here we are todaysmall cuba

Go back and click on CUBA NAV Summary and view the one year summary. Note that the price reached a 70% premium to the NAV AFTER the news event of “improving” US/Cuba relations.   Upon hearing the news:

My first post on CUBA (CEF) SELL!  Can I predict? No, just common-sense.

Where is the efficient market? Perhaps the unavailability of shares to borrow hindered arbitrageurs who could buy the underlying stocks and short the closed-end fund (“CEF”), CUBA.  But to pay such a premium is almost a guaranteed loss unless sold to a greater fool who will pay an even more absurd premium. That is speculating not investing. What is business-like about paying a 70% premium after a news event?

A closed-end fund sells a fixed number of shares to investors. For example, let’s pretend we start a closed-end fund to buy stocks, called the BS Fund. We sell 10 shares at $10 each for $100 in capital, then we buy 1 share of Company X at $50 and 2 shares of Company Y for $25 (ignoring commissions and fees). The net asset value (NAV) is ($50 times 1 share) + ($25 times 2 shares) = $100.   The net asset value per share is also $10.  So the price per share of the CEF ($10) trades at no premium (0) to the NAV per share $100/10 shares.  Now an investor wants to sell 3 of his BS (CEF shares) to an investor who bids for them at $9.00 per share.  Unless, the underlying share prices of Company X and Y change, then the discount is now 10%.  We, as the management, must institute a decision to buy back shares of the BS fund to close the discount or investors increase their demand for the shares.

Carl Icahn got his start as a closed end fund arbitrageur, who would force the managements of the closed-ends funds that traded at large discounts to NAV, to buy-back their shares.

Setting aside the emotional impact of the news announcement, the prisoner exchange and Obama’s reducing of sanctions doesn’t change much.  By the way, if sanctions and embargos don’t work (I agree) as Obama claims then why the sanctions on Russia? If the Russians didn’t surrender during Stalingrad, what are the odds now? Color me cynical.

The US is ALREADY one of the top ten trading partners with Cuba. Of course, the embargo is a farce, kept in place for political purposes. Congress still has to vote to remove the embargo, but even without the embargo Cuba lacks the production of goods and services to trade. Why? Cubans lack the capital to produce because they lack the security of property rights and the rule of law to acquire capital. No Habeas Corpus, no freedom of speech, and no rights. No tyranny generates LONG-TERM economic growth.

What returns will foreign investors require to invest in Cuba?  Say you whip out your spread-sheet and suggest 25% annual returns to build a new hotel in Cuba based on your projection of American tourists hitting the shores of Cuba like locusts.  Two years after the hotel is built, Raul Castro and his military cronies tears up your contract. Investment lost.  Without the rule of law and sanctity of contract, the rest means little. The first lesson is to know what you are doing.

Life in Cuba:

  1. Tengo Hambre A Cuban Says I AM HUNGRY!
  2. Life for Cuban Youth (Cuba with highest suicide rates in the Western Hemisphere.

The investor who buys CUBA would have to understand what the current changes mean for the companies in the fund. Anyone who spends time understanding the current economic conditions there would grasp how little the current announcement means for investment there.  Ask the Canadian investor rotting in a Cuban jail today Canadian investor rots in Cuban jail.

Speculators were willing to pay at 70% premium AFTER the price of the underlying companies had moved higher by 10% to 15% on the news.  A premium on top of a premium–a lesson of what NOT to do.   Questions?

If anyone in this class does that, then this awaits: No Excuse

Emergency and DEEP VALUE Investing (Lesson 1)

planeEmergency Inbound   Please JUST LISTEN (not watch) to the audio. Ignore the skill of the pilot.  What do you notice AS UNUSUAL?   How does this relate (if at all) to Deep Value Investing?

Emergency Inbound Simulation with Audio The two-minute video—please WATCH along with listening carefully to the Captain.

Full Simulation If you don’t grasp the situation (you are in a 50-ton aircraft that flies like a tank with wings once power is lost-the aircraft holds 155 passengers and several tons of fuel, you are over a DENSELY populated area.), watch that seven-minute video.  Thoughts about the Captain?  What was he thinking and doing? Any lessons here for us as investors?

Was he thinking about this? FEARLESS

Was his reaction similar to this? Here’s JOHNNY!

I used to be a pilot of small aircraft so I am biased. Is there any connection between how the pilot acted and investing? The situation and investing?   Was the pilot lucky?   Was the pilot a hero?  Would the pilot consider himself to be a hero?   Why don’t we give parades to mothers who don’t kill their children?

Take a break and go back to the first link.  Before listening again, think about what you would do as the pilot. How many decisions do you have to make and how much time do you have to decide?   What would you be fearful of? Why?   How should we handle fear?  Why are we the enemy?

Don’t hesitate to disagree, contradict or point out other questions.  Do you think that personality has a lot to do with how the person responds–the nature vs. nurture argument?   Buffett said that once you have over a 125 IQ then success is a function of temperament and character. Do you agree? What about this guy: Do You Love the Virgin Mary?.  Can you work around temperament? By the way, have you ever noticed any similar traits among Seth Klarman, Warren Buffett, Ben Graham, Walter Schloss?

One goal of this post is to reinforce the power of emotions in terms of your readings from lesson 1.

Questions on the Readings (Lesson 1, Deep Value)

Contrariwise, if it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.
~ Lewis Carroll

When dealing with people, remember you are not dealing with creatures of logic, but creatures of emotion.
~ Dale Carnegie

Mastering others is strength. Mastering yourself is true power.
~ Lao Tzu

Your goal should be to find an investment approach that works for you.  You will need to determine your investment edge.

You should read:

the Preface from Deep Value (Toby Carlisle)

Chapter 20_Margin of Safety Concept

Buffett Klarman and Graham on Mr Market

Behavioral Portfolio Management

Questions from the readings:

  • Do you agree that deep value investing is an investment triumph disguised as business disaster?
  • What do you see as the biggest investment risk(s) in “deep value investing?”
  • When do stocks appear most attractive and when is the risk highest?
  • What is considered the main margin of safety metric?
  • What are investors rewarded for?
  • What concept must you truly grasp to be a successful deep value investor?
  • Why do prices move more than intrinsic value?
  • True or False: A good value investor understands and takes advantage of the behavioral biases of others because he has already eliminated them in him/herself?
  • Deep value investing often means buying distressed assets but can you buy a franchise (see attachment of Wal-Mart or a company able to grow with profits above its cost of capital due to barriers to entry) at deep value prices? Name two investments by Buffett that might fit that criteria? WMT_50 Year SRC Chart
  • How can we think of activist investing?
  • What are your goals for this course?
  • How do Mr. Graham and Mr. Buffett view buying a share of stock?
  •  What do you do if you can’t find an attractive investment?
  • What is Mr. Market’s purpose?
  • How are prices set? in Philadelphia it’s worth fifty Bucks (video)
  • Are prices based on subjective or objective valuation?
  • If you are playing poker and you don’t know who the sucker is—why is that a problem?  Who’s the sucker? Playing the sucker  (video) What EMOTIONAL error did the SUCKER display? When did the sucker CEASE to be a sucker?   What is the main error–man, especially male, beginning investors—exhibit?
  • What is the key to investment success?
  • What TYPE of market participant seeks Mr. Market for investment guidance?  Do you notice any conflicts, ironies or problems?   Or can it be a way to improve your investment results?
  • How do many investors react to huge market volatility?
  • Did Mr. Graham give you a way to access the valuation of a common stock? Explain.
  • Extra credit: Did Graham ever give a FORMULA for determining intrinsic value?  Be careful and read the footnotes to the formula he presents and why he offers it to readers. See Intelligent Investor.
  • What is the biggest mistake investors make when buying securities? How would you prevent that? What does Graham do?
  • What is the danger in growth stock investing?
  • What is a good or bad stock/investment?
  • When during the past fifty years were the greatest American companies (Franchises mostly) bad investments. Why?
  •  What is the best approach to take in investing.
  •  What is risk?
  • Why do so many “smart” people fail at investing or at least do less well than simple stock indexes over time?

You can email me at with LESSON 1 in the title with questions and answers or post here in the comments section. If you don’t have time or wish to pass then come back to this lesson later.

  • What are the five investment criteria in the Behavioral Portfolio Management? 
  • What is the cult of emotion?
  • Is it possible for emotion to help you as an investor?

I will be asking for one or two volunteers who wish to research the article BEHAVIORAL PORTFOLIO MANAGEMENT.   You will need to read the articles below and then determine if the author’s five criteria will work.   Over this course, I will probably assign twenty or so special projects. Then we will share your work/efforts.

SSRN_Behavioral Measures of Expected Market Return

SSRN The Importance of Investment Strategy_Howard

SSRN Behavioral Portfolio Management_Thomas


Making Money Out of Emotions   How investors fail because of their own brain.  Solution: Pre-program your portfolio.

I will post the review of the lesson/readings by the end of the week. There will be supplementary material posted throughout the week.   You will also be emailed any postings.

Evolutionary Development of Contrarians; Letter to An Analyst

What does it mean to be a true contrarian? ( Steve explains the fundamentals of his investment philosophy and how to apply it to real-world situations. He details how human herding, group following, and projection of the recent past into the indefinite future enabled our ancestors to survive thousands of years ago, while weeding out those who were contrarians. This has caused contrarian behavior to be quite rare in modern times because it goes against our hard-wired emotions. Steve analyzes why the financial markets often act most irrationally during the first hour of each trading week. He also describes the reasons that financial analysts at major corporations are unable to invest in a contrarian fashion even if they know intellectually why they should be doing so.

Letters to an Analyst

Value Traps; The Dollar Crisis; Depression of 1929


I owe my early success as an investor not to brains or knowledge, because my mind was untrained and my ignorance was colossal, The game taught me the game, And didn’t spare the rod while teaching.  

Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee.  –Jessie Livermore

Mark Sellers and PRXI Value Trap

He put over 50% of his fund into MCF:


I added an update to yesterday’s micro-cap post.  The point is to try and understand prior investment successes or failures. Any lessons there?

An excellent book on the inflationary 1970s The-Dollar-Crisis by Percy Greaves

I just like the old photos to capture the spirit of the times: The-Stock-Market-Crash-of-1929

628x471 (1)

I am still in shock over Brazil’s World Cup blow-out.


A fat tail event?

Sentiment vs. Money Supply Growth; Find Cheap Options



Market Sentiment and Money Supply update:

James Grant’s Investment Approach (Video) June 12, 2014

Jim Grant: Buy Gold

Editor: Focus on how Mr. Grant approaches investing not necessarily the current object of his affections.

James Grant: “The Fed’s policy will inevitably fail because hyper-aggressive leveraged finance always seems to step in front of a bus.”

“Macro-economic forecasting is not a useful endeavor. It seems a better way is to consider the panoply of risks and then after having pondered them, look for mis-priced and cheap options on likely but uncertain outcomes.”

[Note: Grant’s comments on gold begin at the 7:12 minute mark.]

“Gold is an example to me of an opportunity,” James Grant, editor of Grant’s Interest Rate Observer said in an interview this week. “[It] exhibits so many of the characteristics of a corpse, although it does occasionally toss and turn.”

“Gold stocks certainly look as if they were dead—but nobody even bothers to poke them with a stick.”

Gold is a cheap option on the failure of price control. Observe how the future is handicapped. We now have low levels of volatility and terrific embedded complacency. You will be paid well if the consensus makes a mistake. Invest in the monetary failure of an improvised monetary system run by tenured professors (Yellen).

Investing is when you want people to agree with you not now but in the future.

“Gold and gold mining shares are very, very cheap-and certainly widely detested options on the failure of this massive world-wide experiment, or the demonstration of the hopelessness of the technique of price control.”


Compare and Contrast




The above represents my understanding of INFLATION, not prices rising. Prices may or not rise depending upon supply/demand for goods and currency. Usually, as the supply of currency increases much faster than the production of goods and services, then prices rise or the value of the currency declines.



Thanks to and