Tag Archives: A Journey

Who Are You and What is Your Background?

Who Am I?

Excuse this egocentric post. Several readers have asked, “Who are you and what is your experience in investing.”  I don’t believe the who is important. You have to take what is useful and prove everything asserted here to yourself.  I purposely have taken out the names of some great investors for two reasons:

  1. To protect their privacy
  2. To have you focus on the concepts and principles rather than the notoriety of the speaker.  Never cease to do your own thinking.

I wrote a parody of my investment career and how I fell into value investing when I submitted this article to www.fool.com a few years ago.

How I Became a Value Investor

In my peripatetic life I have been a ruby smuggler, commodity trader, securities analyst, investment banker, and entrepreneur. Each role taught me more about value investing.

As a ruby smuggler, I moved product to where demand was greatest. I operated in the world of supply and demand which translates into reversion to the mean for an investor. For example, I would buy rubies for x and sell them for 2x. The
market naturally brings in capital until the opportunity vanishes. I learned
not to mindlessly extrapolate current results into the future.

Commodity trading taught me that the role of the marginal buyer and seller sets
the price: “Mr. Market” at work. When bond traders at the CBOT wade into the
soybean pit because that is where the “action” is (high prices and volume),
then I saw the most anxious buyer set the highest prices. Prices often diverge
widely from value because people just can’t help themselves; they go crazy
sometimes.

Later, I found myself at an obscure securities firm writing reports and raising
money for companies. Brokers were desperate to sell stories to gullible
investors. Action and excitement ruled and incessant activity was the lifeblood
of the firm, but where were the customers’ yachts?

I was a pimp with tasseled-loafers when I sold the firm’s over-hyped
merchandise to institutional investors who rarely did their own work. In my
reports I predicted next quarters’ earnings. A fool’s game. Even if by some
miracle my guess was close to actual results, it didn’t matter if the expectations
were even higher. Ah, the danger of momentum investing.

If I ran naked onto Cramer’s Mad Money show while waving a shrunken head,
ripped the mike from his clenched fist and predicted the direction of the
market, my predictions would be just as prescient as his. Predictions are the
sound and fury of Wall Street predicting nothing. Experience taught me to focus
on business value.

There had to be a better way. I had been reading about this guy in Omaha, but
the lessons didn’t really sink in until I left Wall Street in disgust to start
several businesses. As a businessman I had to worry about hiring, firing,
generating sales and strategy. Buffett’s focus on business, competitive
analysis and management started to resonate: the right people are everything,
operational efficiency is a constant task, capital allocation is tied into
strategy and management incentives matter a lot. Businesses usually don’t fit
neatly into spread sheets or our assumptions. Becoming a rational businessman
is quite different than gazing at flashing stock prices.

Rationality and knowledge will eventually triumph over fear, euphoria and
emotionalism. Try going into your local store and offering the owner half the
cash in his till, then tell him to get out because you own the business now.
Crazy? Mr. Market offered some Internet companies at half their cash value in
2002/2003. That is what I call a margin of safety!

Once a value investor, you never go back.