Category Archives: Search Strategies

Value Investing Seminar; Hating Finance; Doing Research

Value Investing Seminar in Cyprus

I know nothing about this but to let you know: https://cyprusvalueinvestor.com/

Hating Finance

Why Everyone Hates Finance and What to Do about It
By Paul McCaffrey

Finance can be a noble profession, yet too many people don’t see it that way.
Mihir A. Desai, the Mizuho Financial Group Professor of Finance at Harvard Business School and professor of law at Harvard Law School, explained why finance has a trust problem and offered a simple strategy to address it at the 71st CFA Institute Annual Conference.

“Finance is being demonized, and it’s being demonized because people don’t understand it,” he said. “If we want to stop demonization, we have to make it accessible . . . And it turns out stories and the humanities are a really powerful way to do that.”

Though he says much of the criticism of finance is unfair, Desai, the author of The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, acknowledged that some of the industry’s reputational wounds are self inflicted.
“Why do we have more than our share of Martin Shkrelis?” he asked. Largely because of attribution error. What sets finance apart from most other disciplines is that performance feedback is clear and constant. And that can breed arrogance.

“If you’re an investor,” Desai explained, “you get feedback all the time about how you’re doing every day. And it’s super precise and inflated by leverage. What happens in those settings? Human beings do what human beings do everywhere. Every good outcome is because of me. Every bad outcome is because of the world.”

As that process continues through the years and the outcomes are mostly good, people come to believe in their skill, that they earned and deserve their returns.
But in finance and investing, skill is difficult to assess and practically impossible to prove.

“The greatest lesson in finance, of course, is it’s very hard to tell the difference between luck and skill,” Desai said. “It’s better to operate as if it’s luck.” He also pointed to the emphasis on value extraction over value creation in recent decades as another culprit behind finance’s lackluster standing among the public.

These criticisms aside, Desai believes that finance does much more good than harm and that finance professionals need to highlight the benefits that it creates.

Rehabilitating Finance

“If we re-aim the practice of finance and the underlying ideas that are incredibly noble, we can make finance into something aspirational, which is what it should be,” he explained. That requires thinking about the big ideas, the first principles of finance, and explaining them to people in ways that resonate.

“And frankly equations and graphs don’t work for many people,” he said. “It turns out there’s a whole section of the population that just doesn’t get that.”
That’s where literature and the humanities come into play.

Inspired by the structure of The Wisdom of Finance, Desai broke finance down into seven concepts during his presentation, what he calls “the biggest ideas in finance,” which are

  1. risk and insurance;
  2. risk management —
  3. options/diversification;
  4. value creation and valuation;
  5. corporate governance;
  6. mergers;
  7. leverage/bankruptcy.

As Desai explains it, when reduced to its essence, finance comes down to insurance. “Insurance is underneath all of finance in a remarkable way,” he said. “Once we think about risk and insurance, we have to think about risk management. That’s going to be about options and diversification. Instead of doing it with fancy calculus, we’re going to do it with stories.”

Risk and The Maltese Falcon
To explain risk, Desai recommends the Dashiell Hammett novel, The Maltese Falcon, which was made into a motion picture starring Humphrey Bogart as the hard-bitten San Francisco private detective Sam Spade. In the novel, Spade recounts a story about a man named Flitcraft, who disappears one day, leaving a wife, family, and career behind. Some years later, the wife receives word from an acquaintance that Flitcraft has been spotted in Spokane, Washington. She calls Spade to investigate.

Spade learns after traveling to Spokane, that the man is Flitcraft, as it turns out, only he’s changed his name to Charles Pierce. Spade confronts him and Flitcraft admits his ruse and explains why he abandoned his family.

“‘I was walking along, and a huge iron beam fell right next to me, and a piece of sidewalk jumped up and hit me in the face,’” Desai said, quoting Flitcraft’s words. “‘And at that moment, I realized that life was totally random. And I’d been living my life as if the universe was well ordered so my life had to be well ordered. But, in fact, the universe is random. So I’m going to change my life at random.”

So Flitcraft left to build an entirely new identity. “But then,” Desai continued, “Sam says, ‘The best part of the story is, when I found him in Spokane, he had recreated the same life he had . . . He had the same kind of wife and house and job and kids and everything was exactly the same.’” The names Flitcraft and Charles Pierce were not chosen by chance. Allen J. Flitcraft was a leading actuary and author of a life insurance manual. Charles Sanders Peirce was a philosopher dubbed the “father of pragmatism.”

What Hammett and Spade were getting at was that what looked chaotic and haphazard was not entirely unpredictable. There was an underlying order to it.
“The fundamental thing in life is randomness,” Desai explained. “And what do finance and insurance understand? They understand that we can navigate it by looking for patterns. Things that look totally random are not. . . That’s what the foundation of finance is: Seemingly random outcomes actually behave along patterns.”

Pride, Prejudice, and Risk Management

So how does Desai explain the concept of risk management?
“We could talk about options and diversification with modern portfolio theory and stochastic calculus,” he said. “Or we could use Jane Austen.”
It turns out her 19th-century English romantic novel Pride and Prejudice, describing the courtship rituals of the day and how the heroine, Elizabeth Bennet, and other young women respond to their various suitors, has a lot to teach on the subject.

“So what’s the risk management problem?” Desai said. “Potential suitors come by and you don’t know which one to take. And there’s always a problem. Some of them are rich, some are drunk, some of them are nice, some of them are ugly.”
Indeed, the novel features one of the worst marriage proposals ever. A Mr. Collins asks Bennet for her hand rather bluntly: “You’re not that pretty. You’re not that rich. Here’s an offer. I suggest you take it,” Desai recalled. “And of course, what’s he doing? He’s playing off her risk aversion.”

Bennet rejects the offer, but soon after, Collins shifts his attention to her friend Charlotte, to whom he makes a similarly mercenary proposal, one that that she excitedly accepts.

“The neat part about that story is the risk management problem is solved with options and diversification,” Desai said. “These characters give voice to what we think of as modern financial institutions.” “Finance needs some humanization.”

Desai’s message was simple: The best way to reclaim finance’s reputation is to demystify it and to do it through literature and the humanities, through storytelling.

“If it becomes all about spreadsheets and screens, then we detach ourselves from humanity,” he said. “We should think about the human consequences of what we do. And these stories are a wonderful way to get reattached to what the moral content of our ideas are.”

https://blogs.cfainstitute.org/investor/2018/05/22/why-everyone-hates-finance-and-what-to-do-about-it/

Doing Research

https://youtu.be/c34vmUxXZ1A

The Art of Contrary Thinking

The above video is a decent book review of the book, The Art of Contrary Thinking found in this link: http://csinvesting.org/2017/12/01/the-art-of-contrary-thinking/

and http://csinvesting.org/2015/12/16/contrarian-investing-part-ii/

You are neither right nor wrong because people agree or disagree with you but because you have your facts and reasoning correct.

Emotionally, going against the crowd will subject you to ridicule.

Focus on Management Excellence; My Interview Did NOT Go Well!

Identifying-Managers-with-Talent-and-Integrity-May-2017

Perhaps you should differentiate yourself by focusing on management’s character and skill.  However, you will need to focus and work hard to make a difference in understanding who is unique.

Find founder-led companies who are mission driven–one place to start your search.

Imagine putting the numbers of Berkshire Hathaway during the early days of Buffett’s takeover into a spreadsheet–would ANYONE have bought Berkshire.   Who would have focused on Buffett’s integrity and skills?

Also: https://microcapclub.com/2018/05/invest-in-owner-management/

My Interview at Goldman Sachs

 

Interviewer: Are you unbiased?
John Chew: What a dumb question! Next.

Interviewer: No matter how you answered that question, how could you have an edge in researching companies?
John Chew: Well, I ……………..

and

Any suggestions? Is it possible to be unbiased? And based on your answer, how can you have an edge researching companies? Prize.

Arbitrage! Primero Mining and First Majestic

Mark Twain once said: “A gold mine is a hole in the ground with a liar standing on top of it.”  I think mining is more like a rusty, leaky bucket that you need to pour capital so as to keep the bucket filled.

A better description: mining is a capital intensive business that must be constantly replenishing its depleting reserves which are hard to find much less extract economically.

However, if you buy Primero Mining (PPPMF) say this morning 9:40 AM at 18 cents you will receive 0.03325 shares of First Majestic Silver (AG) that you short at $6.00, for example.   For each share of Primero bought at 18 cents allows you to own ($0.18/.03325) a proportional share of First Majestic at $5.41.  The difference between your short sale of First Majestic at $6 and 5.41 is ($6 – 5.41)/5.41 is about 10.9%.

Or the short sale of $6 of First Majestic converts at 0.0335 into a share price of Primero Mining of ($6 x 0.03325) or $0.1995.   The difference between the 18 cents that you paid for Primero and 19.95 cents received upon the closing of the transaction is (1.95 cents/ 18 cents) or 10.8%. The deal should close within the next twenty days.   The annual return if the deal closes in the next 10 to 20 days is over 100%.  March 13th is Primero’s shareholder meeting to approve the deal.

I believe there is a 98% chance of the deal going through thanks to all three parties benefiting. Wheaton precious metals’ (WPM) stream was restructured so there is now an economic mine and opportunity for WPM to receive cash flow. Primero shareholders are no longer faced with bankruptcy, and First Majestic has the money and the expertise to handle underground mining to expand their reserves and cash flows.  https://www.gurufocus.com/forum/read.php?10,622803,622803,report=1

Also, the proxy advisor has given the go ahead for the MARCH 13th meeting.  http://www.primeromining.com/English/investors/news/press-release-details/2018/Leading-Independent-Proxy-Advisory-Firms-Recommend-Primero-Shareholders-Vote-in-Favour-of-Proposed-Arrangement/default.aspx

If the deal would fall through, then let’s imagine your 18 cents is now worth $0 (PPPMF probably drops to 5 cents, but let’s be cruel) and AG spikes up 50 cents. On the deal announcement, AG fell 30 cents. Every dollar in PPPMF goes to $0 and every short dollar in AG loses about 10%.  A 2% chance of the deal not closing causes a loss of $1.10 for every dollar invested–which means an expected loss of 2.2 cents vs. making about 10 cents to 11 cents on each dollar invested in the arbitrage.  I have an expected value of about 8 to 9 cents on each dollar invested in this arbitrage within the next month.  Not bad considering my alternatives today.

See below 

Mexico-focused company First Majestic Silver has signed a definitive arrangement agreement to acquire all of the issued and outstanding common shares of Primero Mining for $320m.

Under the agreement, every Primero shareholder will receive 0.03325 First Majestic common shares in exchange for one Primero common unit.

Primero owns the San Dimas silver-gold mine in the Mexican state of Durango.
Primero has identified more than 120 epithermal veins with exploration potentiality throughout its production history.

In parallel with the deal, First Majestic has entered separate agreements with Wheaton Precious Metals International (WPM) to terminate the existing silver streaming interest at the San Dimas mine.

You can use Google Alerts to send to your email notices of buyouts, mergers, etc. Then do your homework.  These tiny, obscure deals are out there.

This is NOT a recommendation for you to do this arbitrage, but follow the logic or the lack thereof.   

Forced Selling-Golden Queen Mining

Here is an example of uneconomic selling–the price decline has nothing to do with the underlying operations or the price of the product the firm is selling (precious metals and aggregates).  The marginal seller sets the price no matter how unintelligent.  Seth Klarman always sought out these types of situations.

If you have an understanding of the company’s fair value, then you perhaps get a gift.  I heard from the grapevine that John Doody of The Gold Stock Analyst put out a sell recommendation because Golden Queen would defer paying dividends once the company reached full production so as to explore and expand the existing mine. His newsletter does NOT cover explorers, so he recommended selling.  The decision was correct for him, but his subscribers all tried to leave the room through the same exit.  GQMNF traded over 6 million shares or about 100 times the normal daily volume of 60,000 shares.  There is more selling likely over this week and next.

10/5/17

Correcting on Golden Queen (GQM.to)

http://incakolanews.blogspot.ca/2017/10/correcting-on-gold-queen-gqmto.html
When IKN gets one wrong, your humble scribe has no problem in eating a slice of humble pie. That happened last night when in this short post I wrote that the big share price drop in Golden Queen (GQM.to) was due to selling from the partner Clay family. That’s not right. In fact, the drop was due to John Doody issuing a sell call to his newsletter subscribers. Therefore, IKN corrects.
Widening the subject slightly, As for the real reason behind the GQM drop, the dumbass Doody has a really nasty track record of screwing his own subscribers this way. In fact the comment on the promising Alphamining blog here yesterday said it well:
“If the massive sell-off today was due to a newsletter writer’s recommendation and you are a subscriber, ask yourself if you really should follow his or her advice on small cap stocks with limited liquidity.  You’ll overpay to establish the position and you’ll get crushed when the herd heads for the exit, which may explain the action today.”
Or as one of the people kind enough to wrote into IKN this morning noted, “They did the same thing to Minefinders, Eldorado and most recently, as you are aware, Sandstorm. Each time was a great buying opportunity”. True that.
A good blog to help understand the junior resource sector: http://www.alphaminingblog.com/2017/10/wtf-why-fall-golden-queen-mining.html

Book Review: Pitch the Perfect Investment

Pitch the Perfect Investment, by two money managers who have also taught for many years at Columbia University’s Graduate Business School, can stop small caliber bullets or deflect a vicious sword blow with its heavy-gloss 496 color pages.  Bad jokes aside, is the book worth the $30+ for its intended audience, young professionals seeking an investment career or can other readers gain investing insights?

FYI: I previously mentioned here Sept. 6th 2016, Pitch the Perfect Investment and Sept. 21, 2017 Pitch the Perfect Investment

Slide presentation:170926_Fordham_LC_final

The authors synthesized many academic publications for the reader to understand the subtleties behind concepts like the Wisdom of Crowds, market efficiency, behavioral finance, and risk into clearer language.  This book with its colorful diagrams can help you grasp the theory of a discounted cash flow model or “DCF”; DCFs are used throughout the book because as the authors say, “all valuation is at the core a DCF, either explicitly or implicitly, whether they (analysts and portfolio managers) admit it or not.”   Of course, it is a given that the young analyst can gain his or her own company and industry expertise so as to insert reasonable assumptions into the DCF model.

Investing is simple but not easy some say. This book provides the simple concepts in a colorful, insightful way, but you have to do the hard part—scratch out a variant perception while competing with many other professionals. Sobering.

The reader is taken through the basics of valuing an asset, a business, how to evaluate competitive advantage and value growth with simple examples (The Lemonade Stand).   The authors drive home the importance of differentiating between nominal growth and profitable growth.  Growth without competitive advantage earning a return above its cost of capital is useless or worse. Certainly, all investors must grasp those concepts.  Every page is festooned with color cartoons, diagrams, tables and graphs.  This is a visual text.

The most interesting part of the book for me was the Chapter 6, The Wisdom of Crowds.  As Buffett says, “You must know two things as an investor: how to value a business, and how to think about prices.”  If I can paraphrase correctly, the Wisdom of Crowds with an adequate amount of domain-specific knowledge and diverse views acting independently from each other on disseminated information will be a force to push price towards efficiency or intrinsic value.  My respect for market efficiency and the person on the other side of the trade from me was reinforced.  If you gain anything from this book, understand that earning an investment edge or variant perception is EXTREMELY difficult and rare.   The authors may have intentionally driven home their point with their example of Cloverland Timber Company.

In their example, the analyst had the domain expertise to notice a line in the financial statement that the Cloverland was undercutting its forests, then satellite imagery was used to assess the quality of the asset and arrive at a more accurate valuation than the market’s current estimate.  The information is available but not publicly disseminated.   I wonder how many analysts/portfolio managers have the time, energy, money, or inclination to go this extra mile?  If you are this able, then you deserve alpha.   What are the implications?

If diverse individuals with independent thoughts are required to have the “Wisdom of Crowds” operate effectively, how will investment firms with their hordes of MBAs and CFAs all taught the same concepts, reading the same newspapers, magazine, research reports, and attending the same investment conferences arrive at non-consensus conclusions often–or ever?

The Wisdom of Crowds gives you an understanding of how prices are set under normal conditions when the forces of darkness and “Mr. Mayhem” (cartoon figure in the book using a magnet to pull prices away from market efficiency; he is the guy you need to spot quickly) are not strong enough to pull prices sufficiently away from intrinsic values.  In other words, behavioral finance is complementary to efficient markets.  One can then recognize when the Wisdom of Crowds becomes the Madness of Crowds.  For an understanding of how prices are set by individuals in a free market, go to pages 79-185 in Man, Economy, and State by Murray Rothbard (Google: Man, Economy, and State.pdf) which has an analysis of how individuals set prices through direct exchange.

Another valuable chapter in the book is Chapter 9, How to Assess Risk.  When investors confuse uncertainty (unknowns) with risk (losing money), then opportunity may appear.

Paul Sonkin, one of the authors, gives sobering advice to students who dream of becoming money managers.  Page 151: “I’m not trying to discourage you from pursuing your dreams, but you should do it with your eyes open.  Do it because you love analyzing companies, not to make a quick buck. And, if your goal is to outperform the market, keep in mind how difficult it has been in the past and the fact that it will only be more challenging in the future.” Those are true words.  The investing profession may end up like acting.  Only the crazy brave will pursue.

Once you have finished Section 1, The Perfect Investment, you then learn how to “Pitch” the Perfect Investment.   Assuming you are diligent enough to acquire the information, assess risk, identify an actual mispricing, and know the catalyst, then convincing another of the merits of your investment should be the easy part.  Unfortunately, too many do not provide a convincing case for the merits of their investment.   An example, of a devastatingly compelling case: The truth shall set you free (liar, liar)

The authors lay out a framework below in this example:

Value or What Can I Make:  Market price is $90 but the stock is worth $140—time horizon is less than 18 months.

Catalyst: Or Who else will figure this out:  Activist with a good track record is pushing for a sale.

Mispricing: The activist did an independent appraisal which the market is unaware of showing a substantially higher value than the company appraisal.  Also, the presence of the activist does not appear to be priced into the stock.  The market is unaware of the activist or does not think he will be successful.

Downside:  Limited. Timberland is a hard asset.

For another example of a forceful investment case with an implied catalyst: Other People’s Money Does Danny Devito provide a strong case? Does he show how much one can make, lose, what is the market missing, and the catalyst?

If you truly have a variant perception, then this is usually your reception: Michael Burry’s Variant Perception

And, only if you are right, and you make the decisions can you present this way: Michael Burry’s Investors  If you read the book, The Big Short, ironically you know that Michael Burry was not making a macro bet, but on the impossibility of individual mortgage holders to make their mortgage payment when asset prices decline and/or interest rates reset higher.

An investment edgeThere are only three ways to gain an edge

In summary, while I do not agree with the book-jacket blurb:

Mr. Nicholas Gallucio, CEO of Teton Advisors, who said, “In this era of hyper-competition on Wall Street ……even the smallest edge can make the difference between success and failure. Pitch the Perfect Investment will give the professional investor that edge.”  I do believe the book is worth $30 for a beginning and intermediate investor who wants to refine their understanding of key investment concepts and to review how to make clear and convincing investment pitches.   Even if an investor does not have a boss to pitch to, the investor should always write down a succinct investment case for each investment.

Remember, I’m biased. I’m a cheapie who went Dutch on his honeymoon, charged an entrance fee, and had a cash bar.  Sure, I made a profit, but the divorce cost a fortune.  Perhaps, I confused price with value.

PS: Graham and Dodd Oct 2017

Hedge Fund Analyst Quiz–NG $3 The New Normal

Your boss runs into your office and slaps this report onto your desk: Don‘t Bet Against Innovation_Sub-$3 Is the New Normal

After reading the report and using your knowledge of how capital cycles work, what would you say to your boss about using the information in that report for investing?  IF you wanted to make an outstanding investment, then how might the report help you?   The video below might give you a hint.  Remember that the JP Morgan report goes to thousands of portfolio managers and analysts, so how can YOU use the information to have an edge? Or can you? Comments needed in order to keep your hedge fnd job.

Good luck!

 

Does Momentum Work with Value Investing?

Does “Momentum” Investing work with “Value” Investing?

See the research paper by Nicholas Barberis below. Barberis concludes that value and momentum are driven by biases that mirror one another. Value is driven by an overreaction problem in which humans are too quick to draw conclusions from a small amount of recent data. In contrast, momentum is driven by an underreaction issue, which is the opposite of verreaction. With underreaction, humans are slow to update their views based on new evidence, which could be due to a systematic behavior bias and/or due to the fact human beings simply have limited cognitive power.

A lot to ponder.  I recommend Quantitative Investing by Wesley Gray. Momentum investing is NOT growth investing (buying price at high multiples to underlying fundamentals), because momenum investing is strictly based on recent price movements not fundamentals.

a model of investor sentiment or under and over reaction

Value and momentum everywhere

http://blog.alphaarchitect.com/2016/03/22/why-investors-should-combine-value-and-momentum/#gs.FlrDk6A

and http://blog.alphaarchitect.com/2017/06/06/the-value-momentum-trend-philosophy/#gs.7NtEcq4

Can we control our emotions and emotional responses?

http://bigthink.com/stephen-johnson/everyones-thinking-about-emotions-wrong-says-psychologist-lisa-feldman-barrett

Finding Good Capital Allocators; The Problems with Using Sentiment

Finding good capital allocators

Strategic Presentation May 2017b    What would show you that this management team allocates capital well in their resource sector?   Are their actions EXTREMELY rare in the Junior Resource Mining industry?

The Perils of Using Sentiment As a Timing Tool

The limitations of sentiment, revisited

June 12, 2017

In a blog post in March of this year I discussed the limitations of sentiment as a market timing tool. I wrote that while it can be helpful to track the public’s sentiment and use it as a contrary indicator, there are three potential pitfalls associated with using sentiment to guide buying/selling decisions. Here are the pitfalls again:

The first is linked to the reality that sentiment generally follows price, which makes it a near certainty that the overall mood will be at an optimistic extreme near an important price top and a pessimistic extreme near an important price bottom. The problem is that while an important price extreme will always be associated with a sentiment extreme, a sentiment extreme doesn’t necessarily imply an important price extreme.

The second potential pitfall is that what constitutes a sentiment extreme will vary over time, meaning that there are no absolute benchmarks. Of particular relevance, what constitutes dangerous optimism in a bear market will often not be a problem in a bull market and what constitutes extreme fear/pessimism in a bull market will often not signal a good buying opportunity in a bear market.

The third relates to the fact that regardless of what sentiment surveys say, there will always be a lot of bears and a lot of bulls in any financial market. It must be this way otherwise there would be no trading and the market would cease to function. As a consequence, if a survey shows that almost all traders are bullish or that almost all traders are bearish then the survey must be dealing with only a small — and possibly not representative — segment of the overall market.

I went on to write that there was no better example of sentiment’s limitations as a market timing indicator than the US stock market’s performance over the past few years. To illustrate I included a chart from Yardeni.com showing the performance of the S&P500 Index (SPX) over the past 30 years with vertical red lines to indicate the weeks when the Investors Intelligence (II) Bull/Bear ratio was at least 3.0 (a bull/bear ratio of 3 or more suggests extreme optimism within the surveyed group). An updated version of the same chart is displayed below.

The chart shows that while vertical red lines (indicating extreme optimism) coincided with most of the important price tops (the 2000 top being a big exception), there were plenty of times when a vertical red line did not coincide with an important price top. It also shows that optimism was extreme almost continuously from Q4-2013 to mid-2015 and that following a correction the optimistic extreme had returned by late-2016.

Sentiment was at an optimistic extreme late last year, at an optimistic extreme when I presented the earlier version of the following chart in March and is still at an optimistic extreme. In effect, sentiment has been consistent with a bull market top for the bulk of the past four years, but there is still no evidence in the price action that the bull market has ended.

Regardless of what happens from here, four years is a long time for a contrarian to be wrong.   See more at http://www.tsi-blog.com

Lesson? Always place data into context and do not rely on any one piece of information.   Sentiment can be useful as part of an over-all picture of a market or company.

Here is an example of an investor who applies that principle in his OWN method of investing. https://www.thefelderreport.com/2017/05/31/how-a-funny-mentalist-learned-to-avoid-annihilation/

He gained INSPIRATION from his investing heroes but did not try to mimic them.

This analyst of gold doesn’t just use news and sentiment but also fundamentals: https://monetary-metals.com/the-anatomy-of-browns-gold-bottom-report-4-june-2017/

And finally, consider the slow crash: https://mishtalk.com/2017/06/12/buy-the-faangs-baby-slow-torture/#more-46281

The Qualities of a Good Analyst; 100-to-1 Master Class

Confidence vs. Humility

1Q17 | Bill Nygren Market Commentary (Abridged)

see: http://1Q17-Bill-Nygren-Market-Commentary

March 31, 2017

At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.

Oh Lord, it’s hard to be humble, when you’re perfect in every way.  It’s Hard To Be Humble by Mac Davis, 1974

What Makes a Good Oakmark Analyst?

I also like March because it is the month I get to speak to investment students at my alma mater’s Applied Securities Analysis Program and Bruce Greenwald’s value investing program at Columbia.  Typical topics include how I got interested in investing, my education and career path, and what makes Oakmark unique. Without fail, the aspiring investment professionals will eventually ask about the characteristics we look for when we hire analysts at Oakmark or, more generally, What do you think makes a good investment analyst?  Perhaps the answer might give some insight into how we think at Oakmark.

When I served as director of research, I used to joke that every analyst search we conducted started with the same list of requirements: A high GPA from a good university, a major in finance or accounting, intuitive math skills, strong oral and written communication ability, three to five years’ related work experience, intense competitive drive, and activities demonstrating leadership. MBA or CFA required.  Yet almost every hire was somewhat outside that box. We hired some analysts with low GPAs, some with different degrees and some from second-tier colleges. We hired some with over 10 years’ experience, and others with no experience at all. Some had neither an MBA nor a CFA. What we realized was that our search criteria, though representative of our typical hires, was not really defining the candidates we were looking for. Those criteria defined the candidates most investment firms are looking for, but didn’t at all get to what makes Oakmark unique.

Team Player
There are three additional characteristics that we believe are necessary to succeed at Oakmark that we either don’t think we can teach or don’t want to teach, so we require them to be present before we hire an analyst.  First is being a team player.   At many investment firms, analysts have a one-on-one relationship with portfolio managers.  They develop their stock recommendations and present them to a portfolio manager who decides whether or not the stocks will be purchased. If analysts pick good stocks, they will be paid well and their careers will progress. In that setup, it doesn’t really matter whether the analyst is a team player or not.  Oakmark is different.

Oakmark analysts succeed by helping the team succeed. Yes, we expect them to find good stocks to purchase, but that effort is collaborative. An analyst who begins working on a new buy idea seeks input from the rest of the investment team before the idea is finalized. When the work is presented, it is the job of every investment professional at our company to attempt to find flaws that would prevent us from investing. Throughout the time we hold a stock, the analysts will challenge each other as to whether or not our sell target correctly incorporates all the new information we’ve seen subsequent to our purchase. When the stock is sold, it is treated as a victory for the team if it went up, and a team defeat if it did not. We all understand that we do well financially when our shareholders do well financially. That’s in part because a major factor in our compensation review is how well an analyst helps improve the team’s stock selection.

We know that anyone who puts their personal success over Oakmark’s success will not last long at our company. So, we look for clues in resumes such as a history of playing team sports or other activities where accomplishments by a group are more important than by an individual. We know that we can’t teach someone how to be a team player.

Value Investor
More than 30 years ago, Warren Buffett wrote an article that has become a value investing classic: The Superinvestors of Graham and Doddsville (Fall 1984, Hermes’ the Columbia Business School Magazine). If you haven’t read it, or haven’t read it recently, it is well worth the time. In that article, Buffett explained the futility of trying to convert investors to a value investing philosophy:

It is extraordinary to me that the idea of buying dollar bills for 40c takes immediately with people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find you can talk to him for years, and show him records, and it just doesn’t make any difference. They just don’t seem able to grasp the concept, simple as it is.  I’ve never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn’t seem to be a matter of I.Q. or academic training. It is instant recognition or it is nothing.

We 100% agree with Buffett. Everything we do at Oakmark is based on value investing. We don’t know how to teach someone how to think like a value investor. You can’t succeed at Oakmark without practicing value investing. Therefore, we will only hire analysts who have developed a value philosophy prior to joining our team.

Humility
There are some characteristics for successful analysts that are simple more is better traits. Intelligence, curiosity, communication skills all are more is better.  Then you have the continuums where, like NCAA basketball teams, a strength carried to the extreme becomes a weakness. We want discipline, but we also want creativity. We demand patience, but don’t want stubbornness. We want thoroughness, but require decisions based on incomplete information. Success requires striking an appropriate balance between these traits that sound like opposites. Being at one extreme or the other is a recipe for failure.

(CSInvesting: reading the Nicomachaen Ethics by Aristotle would teach you to seek moderation.) http://classics.mit.edu/Aristotle/nicomachaen.html

One of the most important continuums for us is confidence versus humility. It is especially important for a value investor to have the confidence to take a position when the vast majority of investors are on the opposing side. But without humility, one loses the ability to admit a mistake. I’m reminded of the early 1980’s TV show Happy Days with the super-cool Fonzie who could never say the words I was wrong. Fonzie would have been an awful investor.

In a book many in our research department have enjoyed, Superforecasting: The Art and Science of Prediction, Philip Tetlock and Dan Gardner state:

The humility required for good judgment is not self-doubt, the sense that you are untalented, unintelligent, or unworthy. It is intellectual humility. It is a recognition that reality is profoundly complex, that seeing things clearly is a constant struggle, when it can be done at all, and that human judgment must therefore be riddled with mistakes.

What we are looking for in Oakmark analysts is confidence paired with the humility to remain open to evidence that shows they are wrong.

One of my investing heroes, former hedge fund pioneer Michael Steinhardt, said, “The balance between confidence and humility is best learned through extensive experience and mistakes.” Unlike being a team player or a value investor, with time, almost every investor develops humility. But it is an expensive lesson to learn. We want analysts who developed their humility by losing money somewhere else.

I can’t count the number of resumes I’ve seen or conversations I’ve had with students where they excitedly state that their personal portfolio returned X percent last year. And of course, X is always some number that is astoundingly high relative to the market or to Oakmark returns. That record is almost always accompanied by scorn for incompetent professional investors and the offer to teach us the secrets of their success. I smile as I mentally mark off the box needs to be humbled by losing money.  Then I wish them great success in their job search and suggest they check back with us in a few years.

Master Class in 100 to 1 Investing (Chris Mayer).

Sure a marketing tool, but perhaps some can learn more about patience.   I am not affiliated, but thought I would share the link.  All Mayer is doing is talking about the Phelp's book, 100 to 1 Investing.

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