Three aptitudes necessary for success in bargain investing would be subjective personality to be able to work alone; facility with numbers to analyze and remember important data; and the ability to defer gratification or see future/distant possibilities. Also, important are the aptitudes that you are LOW in. Very high musical aptitudes would create stress for you if you did not fully use that aptitude. High, high ideaphoria (flow of ideas) would hamper your ability to concentrate. See for yourself…………..
Understanding_Your_Aptitudes 90 page book. Learn more…………..
The above 100-page report on gold will provide a good financial history lesson.
A Reader’s Question
I was thinking about how many people think that the sell-side is just wrong about everything and completely untrustworthy. From what I can tell, they are pretty good with the facts and a really valuable source when you want to learn about a new industry via a primers or initiation reports. This led me to think that most of the sell-side critics think that they have an analytical edge over the sell-siders. Maybe even an informational edge (which I think is very unlikely since these analysts cover one industry full-time.) But certainly an edge in judgment or behavior. This I think is possible if you have a longer-time horizon and no man-with-a-hammer syndrome.
What sort of edge do you think is most achievable over the markets in general for an investor that is dedicated? I’m thinking about full-time investors.
It seems to me that analytic edges are often overstated. What are some cases that the sell-side or entire markets are just completely off on their analysis? Maybe the optimistic analysts during the bubble years? Is this just misaligned incentives?
I would guess that the market usually mis-weighs the probabilities of what may happen in the future, but that would be more of a misjudgment in my opinion. (Maybe this is just semantics.)
I’d love to hear your thoughts.
My reply: I agree that analysts can provide great overviews of companies and industries in their initiation reports. I will read them as a supplement to my own reading of original source documents. I would not read them for valuation or investment recommendations. The idea that analysts can predict next quarter’s earnings is absurd. Finding a reasonable range of normalized earnings three years to five years out is what matters, not the next six months of earnings.
Another reason I might try to read analysts reports is not for new ideas, but to see the extent to which the market is already discounting my own views. Note the universal calls from analysts at Goldman and UBS for gold to trade to $900 or $800 See www.acting-man.com:
“Goldman Sachs lowers gold price target to $1,050” (Bloomberg, Reuters, etc. sometime in January and repeated ad nauseam ever since)
“Moody’s lowers gold price target to $900” (January)
“Morgan Stanley: Gold price won’t see $1,300 again” (April)
Also, analysts may overlook key values in a company because they fixate on the next six months. For example, the most common way of valuing an exploration and production company is an appraisal of net asset value, based on sum-of-the parts approach. But most appraisals tend to ignore exploration assets which are not going to be drilled within some arbitrary time period, say the next 6 to 12 months. For some companies, much of the value is in assets which are not going to be drilled in the next year.
I think most of an investor’s edge is behavioral. (See http://www.amazon.com/Inefficient-Markets-Introduction-Behavioral-Clarendon/)
Take Coach’s (COH) recent plunge.
Coh Comments June 2014 and June 23 VL 2014 The company has to increase its investment to rebuild its brand. Wall Street analysts then act like this:
Therein lies opportunity or maybe not. But if the markets didn’t act that way, then markets would not overreact. Markets tend to over-discount a known risk or uncertainty and under-discount an unknown uncertainty.
A Reader’s Question
Thank you once again sharing the links, access to the value vault, and your blog posts. My experience over the last couple of years has been primarily in private growth investing, and the insights you have shared have helped me significantly reconsider my investment approach.
I have been reading your book recommendations and following CBS lecture notes, but is there anything else you would advise me to do to become a better value investor? I am keen to learn and it appears that there is culture of apprenticeship in the world of public equity value investing. Maybe I could reach out to some practitioners in London (where I am based) – would you be able to highlight any you would consider particularly strong?
Thanks in advance for your help.
My Reply: There are plenty of case studies and examples on this site to learn about valuation. You can visit:http://pages.stern.nyu.edu/~adamodar/ https://www.coursera.org/course/accountingand…Value Investing for Grown ups by Damodaran to learn about valuation and accounting. But the secret to investing and improvement lies within you. That sounds either profound or hokey, but true. I don’t believe MBA courses or apprenticeship (if you can find one) will really help. You don’t want to learn about another person’s style, you want to develop your own. Google and youtube.com Michael Burry for why this is true.
As an example, you can read 5 Keys to Value Investing. The author worked as an analyst for Micheal F. Price. He would submit ideas and get grilled by Price. I didn’t see a whole lot of mentoring going on. Of course, you want to study other investors and the psychology of investment:
- Buffett Klarman and Graham on Mr Market
- Great Investor Behavior
- Investing and Personality Type
But there are no shortcuts to studying yourself. You have to consistently and persistently keep a notebook, log, diary or tape recorder of your trades/investments/decisions. Review them that day and a week, month and year later. Study your proclivities. Can you step outside and see yourself objectively? Impossible? Hire a high school kid on Summer Vacation to film your day at work and see if you notice tendencies. You won’t believe the tape!
Do you have a business plan for your investing career? Goals? Map out the steps.
I highly suggest you see how your countrymen developed their own styles in: http://www.amazon.com/Free-Capital-private-investors-millions/ by Guy Thomas
Review: Conclusion “Free Capital” treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.
It’s not without its flaws, of course. As the author himself states, the book doesn’t cover losing investors, people who took some of the risks investors profiled took, and failed, or who took other risks that didn’t turn out right, and then explores what lessons can be learned from their shortcomings. As an avid deep value (Benjamin Graham) guy myself, I would’ve done without the day trader and some of the other guys who seem like GARPy, momentum-based swing traders with short time horizons and questionable “value” metrics.
As an example, I know that I am an emotional basket-case. I cry during the cartoons if Tweedy Bird gets hurt (http://youtu.be/89FDAYsTgfs). If I buy a stock at $7.05 and the next print is 7.04, I am on the floor wailing. If Jim Cramer on CNBC said buy Tweedle Dumb stock, I would wait for the stock to rally, then buy after the news is priced in only to sell at a loss seconds later.
Also, I have an aversion to paying full price. I went “Dutch” on my honeymoon; my wedding had a cash bar. My guests had to take the subway to the reception; some had to hitch-hike. I am a cheapie.
Ok, I have to deal with serious psychological issues, but how does that help YOU?
Well, even I can develop methods to work around my quirks. See the chart at the top of the page. I have been buying certain gold/silver stocks over the past year because of two reasons: historic/generational low cheapness and lack of the same in other markets, in general. But prices can swing 10% in a day! How would I survive?
My time frame is the next three-to-five years. I study the companies without input from others, I turn off CNBC, and I place my buy and sell orders BEFORE the market and then check at the end of the day. I may go months without doing anything in terms of buying or selling, but I will keep following the companies and their industries closely. I have also held stocks like Enstar (ESGR) for a decade.
My time-frame is longer than most participants. I work around my psychological hurdles because I have faced them. And only YOU can face yours.
I hope that helps.
Posted in YOU
Tagged career, development, Improvement, Investor Psychology, jack schwager, Market Wizards, Munger, reader questions, Reader's Question, tweedy bird, Van Tharp
Jim Rogers, “Well in my new book, http://www.amazon.com/Street-Smarts-Adventures-Road-Markets/, I explain why many schools now are going to go bankrupt—why American education is going to see some starving, some shocking bankruptcies coming out of American tertiary education—and business school is certainly not much use, I was once a full professor in an Ivy League business school (Columbia GBS), and I will tell you, Jeff Macke, most of what goes on is not very useful at all, except to the professors. They charge huge amounts of money. They teach a lot of conventional wisdom, so the kids who come out, come out in the hole financially but also knowledge-wise; their peers who went to work are way ahead of them financially after two years, but secondly knowledge-wise, too, because a lot of what they teach in business school is flat-out wrong.
These poor kids have to unlearn it and start over. In my view, if you do your own work and teach yourself or start with what you know, you will come out way, way, way ahead of going to business school. I consider business school a complete waste of time, money, energy, and everything else. I’ll tell you what, Jeff, you go down and short soybeans one day, you will learn more in the first six weeks than you will learn in 10 years at any business school. The Internet and real life is a fast way to learn, if your are really interests (Source: pages 26-27 in http://www.amazon.com/Clash-Financial-Pundits-Influences-Investment/).
Why You Win or Lose: WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)
A short synopsis of the 1930 contrarian classic.
Another new investing blog: http://glennchan.wordpress.com/2014/06/14/insider-ownership-is-overrated/#comment-1882
One of my favorites:
http://reminiscencesofastockblogger.com/2014/06/15/a-new-bet-on-hercules-offshore/ (Don’t be lazy–do thy own work)
“If you don’t know who you are, this (the stock market or Wall Street) is an expensive place to find out” wrote “Adam Smith” (George Goodman) in his bestselling book, The Money Game (1968).
Take the following personality tests or not. But if you do want to become a better investor YOU must study YOURSELF. What style of investing fits you? Any particular businesses attract you? Where do you struggle or succeed? Patterns? Where or what is your edge, system, plan, and business plan?
Personality Test: http://tharptradertest.com/about.aspx
Investor Personality Test: http://marktier.com/Main/ipp.php
Trading Type Van Tharp
Mark Douglas http://youtu.be/GhKJ9P3agRc
How Michael Burry’s Advice helped (Video link) http://youtu.be/IXAOMZ37Alg
More on your money and your brain by Jason Zweig http://www.jasonzweig.com/
Step aside from trading and investing, ask yourself what YOU would do if you were one of these soldiers?
It’s fascinating how investors come to forget that markets move in cycles and not perpetual diagonal lines. As value investor Howard Marks wrote in The Most Important Thing, “Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.” A normal, run-of-the mill cyclical bear market wipes out more than half of the preceding bull market advance.
Where we are today
All of the above doesn’t mean an imminent reversal of trend only that investors are acting as if risk is low. Remember Buffett’s line, “Be fearful when people are greedy and greedy when people are fearful.”
Skyscraper Index (or curse)
http://library.mises.org//media/Audio/The New 20 Skyscraper Curse.mp3
Central Bank Stimulus Will Not Work
The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit. They will fail due to their ignorance or purposeful blindness to Say’s Law that tells us that money is the agent for exchanging goods that must already exist. New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air. This violation of Say’s Law is reflected in loan losses, which cannot be prevented by any array of regulation or higher capital requirements. In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise. Governments and central bankers should concentrate on restoring economic freedom and sound money respectively.
Read more: http://mises.org/daily/6770/Why-Central-Bank-Stimulus-Cannot-Bring-Economic-Recovery
Now pretend you did not view the above annotated chart and view this:
Psst: NO ONE KNOWS. Better to make your own mistakes rather than following “gurus.”
BO POLNY: GOLD HAS BOTTOMED AT $1321, TO RISE INTO JUNE 5TH TURN DATE
MAY 31, 2013 BY THE DOC 64 COMMENTS
Gold has bottomed at $1321.
I know not one person that has been willing to go on the record and post what I have posted. No individual has yet called the bottom for gold, and I have already gone on the record announcing the bottom only two days after gold hit $1321. The recent drop (just a re-test, in my view) was just four trading days and only $100 off—and folks seem to have forgotten that my Bottom call of April 18 has (so far) held beautifully! I sold my gold at $1900, as you are aware, and the $1321 bottom has not failed me.
For those of you who simply buy and hold Gold and Silver: sleep well, my friends, and know that your decision is a wise one into the year 2020, when they will top!
I have received numerous requests for an Update to the prior dates and charts posted on jsmineset.com. I have waited this week as I have been closely watching the gold market, and I wanted to be certain of the next date I post.
The market continued to plunge another $200. The bottom is in?
Read the fantasy here: http://www.silverdoctors.com/bo-polny-gold-has-bottomed-at-1321-to-rise-into-june-5th-turn-date/
We all want a someone to lead us to the promised land.
Meanwhile….check out an interesting deep value blog: http://www.netnethunter.com/buy-cheap-stocks/
Education is the ability to listen to almost anything without losing your temper or your self-confidence. –Robert Frost
My idea of education is to unsettle the minds of the young and inflame their intellects. –Robert M. Hitchins
My own education operated by a succession of eye-openers each invovling the repudiation of some previously held belief. –George Bernard Shaw
Every act of conscious learning requires the willingness to suffer an injury to one’s self-esteem. That is why young children, before they are aware of their own self-importance, learn so easily; and why older persons, especially if vain or important, cannot learn at all. –Thomas Szasz (www.gloomboomdoom.com)
A Young Reader’s Question
How do I become a great investor?
CSInvesting: Well, it might be too late for you. I started at age eight, and I struggle to keep the pace. However, if you still wish to learn, read widely and experience life. Start a small business. Sell T-shirts or think of a fun business where you can sell products to your classmates.
My grandfather’s advice: “John, that’s your name right?” http://youtu.be/AloNERbBXcc
Buffett’s lecture to Indian business students (MUST SEE): http://youtu.be/4xinbuOPt7c (Value the business BEFORE you see the price.)
A Course in Charlie Munger’s Worldly Wisdom
The journey towards worldly wisdom travels through two equally important territories. Firstly, learning significant concepts from the different disciplines (“the big ideas”). Secondly, learning to recognize patterns of similarities among them.
Course Outline for Worldly Wisdom
Track down more lectures: http://www.safalniveshak.com/fundoo-professor-called-sanjay-bakshi/
HAVE A GREAT WEEKEND!
“Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.” –Charles Mackay
You can’t learn without failure. Listen to this interview on the secrets of failing.
About this week’s guest:
About ideas and people mentioned in this podcast episode:
- Creative Destruction, by W. Michael Cox and Richard Alm. Concise Encyclopedia of Economics.
- Disaster and Recovery, by Jack Hirshleifer. Concise Encyclopedia of Economics.
- Crime, by David D. Friedman. Concise Encyclopedia of Economics.
Web Pages and Resources:
Podcast Episodes, Videos, and Blog Entries:
Obliterated in the stock market (or the Perils of Momentum investing)
Before I sell everything and fire myself from ever managing money again, I’d like to share with you some of the percentage gain losses, from 8 WEEKS AGO to now, of some of 2013′s favorite stocks.
Read more: http://www.businessinsider.com/the-fly-out-2014-4#ixzz30C8MG0bc
A look at a Brazilian Turn-around Value Investor: https://www.santangelsreview.com/2014/04/28/book-review-and-lessons-from-dream-big-a-glimpse-inside-the-strategies-and-tactics-of-3g-capital/
See more: https://www.santangelsreview.com/2013/09/20/transcript-of-a-speech-by-jorge-paulo-lemann/
Businessweek has called him “the world’s most interesting billionaire” and Warren Buffett once said he was an “extraordinary manager.” However, despite purchasing three of the most iconic brands in America–Heinz, Burger King, and Budweiser–and building a tremendous track record as an investor and operator, Jorge Paulo Lemann remains virtually unknown. This is in no small part a function of his reluctance to comment to the press or speak publicly.
However, a few years ago, Lemann gave a speech to prospective Harvard students which was then uploaded to YouTube. The speech, which was delivered entirely in Portuguese, was entitled “What I Learned at Harvard.” In it, Lemann recounts his experience nearly getting thrown out of school at the end of his freshman year, his return the next year determined to succeed, and many of the lessons he learned as an undergraduate that he believes formed the framework for his later business success. Besides a few brief comments in various periodicals over time, as far as I can tell, this has been his only public speaking appearance in recent years. And for the first time it is accessible in English as I’ve had it translated and transcribed. It truly is a great speech from a fascinating investor.
Posted in YOU
Tagged AMZN, Econtalk.org
Part 3:Valuation of WMT,
Wal-Mart Stores, Inc. was incorporated on Oct. 31, 1969. On Oct. 1, 1970, Walmart offered 300,000 shares of its common stock to the public at a price of $16.50 per share. Since that time, we have had 11 two-for-one (2:1) stock splits. On a purchase of 100 shares at $16.50 per share on our first offering, the number of shares has grown as follows:
|2:1 Stock Splits
||Cost per Share
||Market Price on Split Date
|On the Offering
So the price on August 1974 when a 2 for 1 stock split occurred was $23.
What price would I have paid? I would see 38% ROE with little debt ($10.5 mil.) with 40%+ growth. If I paid 4 times the book value of approx. $31 mil. Plus the debt of $10.5 million ( I would not subtract the cash since I assume it is all needed as working capital) or $124 mil. plus $10.5 mil. or $135 million. Divide by $6.542 mil. shares or $20.63 per share or $21 to round up. $23 to $25 was near the highs for 1975 in the fourth quarter but the price was below $20 in the first quarter of 1975. Could I have bought right after the largest decline in stock market history after the Great Depression and with inflation raging? If I knew the value and rarity of an emerging franchise perhaps. But I doubt it.
I would have paid 4 times book value (better is replacement value but this is back of envelope investing) to garner a 9% return but the long term growth of 5% to 6% would give me my required 15% return. Obviously, if I had paid double, that would have been fine.
The key is in recognizing the source of WMT’s competitive advantage and how large the market opportunity to exploit that advantage. The secret is on page 10 of the 1974 WMT annual report 1974-annual-report-for-walmart-stores-inc and on page 11 here: WAL-MART CASE STUDY on Discount Operations 1986 (email firstname.lastname@example.org if that link is taken down) and ask for the case study.
Note that you would have had to hold on through thick and thin without selling on numerous “market” scares, crashes and fears. You have the key to becoming rich in investing but now you know why investing is SIMPLE BUT NOT EASY!
If you have questions post them on this blog do NOT email them to me. Thanks.