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Friday, 27 March 2015 00:00

Daily Journal 2015 Meeting Notes

Daily Journal Annual Meeting Notes                                                                                        March 25, 2015


**Please note that I have tried to make these quotes as accurate as possible but they may not be verbatim


DJCO software business

Prospects look about as good as they have in a long time.  If successful much bigger maker - over the whole country.

Hard business but if we succeed this might it harder for people to come in and compete with us.

Darwinian Wisdom -  One business dying and so they try something new,  Must companies doing this will fail.  It's normal for companies to fail due to technological change.

He said while discussing activist investors that it can't be good for civilization. 

I know no wise (or successful) person who doesn't read a lot.  People who multitask are paying a huge price.  Concentration of thought is hard but it's a critical to possess.  I succeeded because I have a long attention span and can tune everything out.  Any success was due to thinking hard and following through.

World will be harder over next 50 years

Japan's position has changed because their competition (S. Korea, China) got better which is why they economy has declined.

MidAmerican is trying to do the right thing for everyone.  Think it's almost a no brainer as far as its likelihood of success.

Buying WFC at $8 was shooting fish in an empty barrel (Charlie had earlier used an analogy that he liked to find situations where the decisions were easy, like shooting fish in a barrel drained of water.)

Lee Kuan Yew most important nation builder in history of the world.  He was very rational and turned a swamp into a country while eliminating bribes, a most admirable man (Charlie also mentioned a plan to commission a bronze statue of him).

Damn near impossible to get wealthy in large cap stocks.  People who invest will be looking in more restricted/lower followed areas.  Not enough to buy quality companies because quality is priced in.

Elon Musk is a genius.

Others try to be smart I just try not to do anything idiotic.

3G using zero cost based budget system.

Casinos and lotteries are not beneficial to society.

 The desire to get rich quickly is dangerous.

While in a general discuss about ITT and its accounting issues he mentioned that Valeant's is doing much the same.

Tuesday, 25 November 2014 00:00

Zero to One

Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel with Blake Masters

I had reservations about this book because, while it was highly recommended, my primary reason for reading the book was the hope that it might contain some useful perspective on common stock investing.  The book is primarily focused on venture capital, not an area that holds a high level of interest to me so I was pleasantly surprised when the first paragraph of the book contained a question that hooked me.    The question was one of the author’s favorite interview questions:  “What important truth do very few people agree with you on?”
The question  was an easy one for me to answer as most people believe in diversification, but the truth is the opposite, i.e. portfolio concentration.  Too many funds practice a high level of diversification that essentially makes them index funds with much higher fees.
This will be an unconventional blog post as most of the items I quote from the book speak for themselves.
p. 13: “The first step to thinking clearly is to question what we know about the past.”

I'm always surprised that most investing books don't discuss investing history.   If you don't take the time to understand  historical markets movements you put yourself in a bad position because you will have a much harder time understanding market cycles.  The low point of cycles when everyone else is afraid to invest is the ideal time to make outstanding investments.

p. 21: What does the author say the lessons of the internet bubble were?

1.    It is better to risk boldness than triviality.
2.    A bad plan is better than no plan.
3.    Competitive markets destroy profits.
4.    Sales matters just as much as product.

p.23: “The most contrarian thing of all is not to oppose the crowd but to think for yourself.”

p.24: “Under perfect competition, in the long run no company makes an economic profit.  The opposite of perfect competition is monopoly.

p.25-35: He defines a monopoly as”…the kind of company that’s so good at what it does that no other firm can offer a close substitute.”
“If you want to create and capture lasting value, don’t build an undifferentiated commodity business.”

p.25:  This in investing terms would change only slightly to don’t buy an undifferentiated commodity business.

Decline of Monopolies

p.33: "...old monopolies don't strangle innovation.  With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decades-long operating system dominance."  He talks about IBM, AT&T also eventually declined.  Even the best monopolies have finite lives.

p.34: "All happy companies are different: each one earns a monopoly by solving a unique problem.  All failed companies are the same: they failed to escape competition."

p.47: "If you focus on near-term growth above all else, you miss the most important question you should be asking:  will this business still be around a decade from now?  Numbers alone won't tell you the answer; instead you must think critically about the qualitative characteristics of your business."

p. 48:  Monopoly Traits:

1. Proprietary technology:  "...most substantive advantage a company can have because it makes your product difficult or impossible to replicate.  Mentions Google's algorithms and that your product needs to be 10X better.  Amazon had 10x inventory.

2. Network Effects
Product is more useful as more people use it.  He believes that to be successful with this strategy you must start in a small market.

3. Economies of Scale.
Monopoly business gets stronger as they get bigger.  Can spread costs out.

4. Branding
Used Apple as an example - "paid advertising, branded stores, luxurious materials, playful keynote speeches.    Reinforces other monopoly traits.

Power Law p.87: "At Founders Fund, we focus on five to seven companies in a fund, each of which we think could become a multibillion-dollar business based on its unique framework  Whenever you shift from the substance of a business to the financial question of whether or not it fits into a diversified hedging strategy, venture investing starts to look a lot like buying lottery tickets.  And once you think that you're playing the lottery, you've already psychologically prepared yourself to lose."
What an excellent quote and advice that I wish more people will follow.  Investors should approach investing in a rational serious manner which in a perfect world would allow them to make the optimal investment decisions based on the companies available that they can understand and value.

p. 90: "The most common answer to the question of future value is a diversified portfolio: "Don't put all your eggs in one basket...  investors who understand the power law make as few investments as possible."
The author is involved with venture capital an area where the accepted wisdom is to diversify your portfolio, much like what you hear as an accepted truth in the equity investing world.  In his fun he tries to purchase companies that "..have the potential to be succeed at vast scale."  The only thing I would add from an equity investing standpoint is that valuation must also play a role in your decision making process.

To wrap this blog post up I have to say that I really enjoyed the book and would have no problem recommending it to followers of the blog.

Thursday, 25 September 2014 00:00

Book Update, WEB, & Adam Smith

Book Update, WEB, & Adam Smith


Book Update

The 2nd edition of The Focus Investor will be published on or about December 10th.  I had delayed publishing the book hoping that the investing book market would recover but a recent health issue convinced me to move forward.  The cover has been designed and I'm working on the final drafts of the book now with my editor so that we can then forward on the material to my book designer.

Here is the Amazon link to the pre-order:

Amazon Book Link


Lessons From WEB and Gladwell

Once again Warren has allowed Fortune magazine to print an excerpt from his next annual letter to shareholders.  (Link:  This blog post  is inspired by that letter and the most recent book by Malcolm Gladwell, David and Goliath: Underdogs, Misfits, and The Art of Battling Giants.

Let's first look at the excerpt from  Mr. Buffett's annual letter.  In the excerpt he describes two investments in fields outside common stocks.  The common theme of both investments was that he was able to take advantage of low prices because the real estate environment was depressed after bubbles had burst.  This is a simple lesson, but one that I'm always surprised that isn't acted upon by most investors, i.e., when the situation is dark and stormy in the markets is when investors will have above average chances of finding investment opportunities to take advantage of.  Understanding the history of financial bubbles so that you can take advantage of similar situations that will occur in the future is a major focus of my book, The Focus Investor.

Another piece of  investment advice he mentioned in the article connected with the Gladwell book I'm currently reading.  The quote was:

"Forming macro opinions or listening to the macro or market predictions of others is a waste of time.  Indeed it is dangerous because it may blur your vision of the facts that are truly important."

In one chapter of Mr. Gladwell's book, he examines the basketball coaching career of Vivek Ranadive's.  Ranadive decided to coach his daughters seventh-and-eighth grade basketball team despite never having played basketball .  In fact during the few times he had watched a basketball game he couldn't understand why both teams let players get to the half court line unimpeded each time.  His team  was average, at best, so he developed a plan that would provide his team with a needed advantage, they would  " a real full-court press - every game, all the time".  This strategy caused so much havoc that the team was able to compile a winning record that lead them  into the final game in their league national championship series.  Along the way Ranadive noticed that opposing coaches began to get angry because he wasn't playing the game in the correct manner and one person tried to initiate a fight with him in a parking lot.

This is the same lesson Warren talks about in his letters, just because diversification is preached as main-stream gospel, doesn't mean it's the right strategy for investors to follow.  Just because someone appears on television doesn't make them an expert in investing and that you should act upon their suggestions.  In fact I think most of the topics of conversation on CNBC are pure drivel and are actually dangerous for an investor to focus on because so much of it is short-term orientated.

Another example from Gladwell's site highlights why I built this site in the first place.  Focus, or concentrated investing, is looked at with suspicion in the mainstream investment community and in academia as well.  Gladwell highlights how Manet, Degas, Cezanne, Monet, Pissarro, and Renior - all names that are immediately recognizable today even if you're not an art collector, at the beginning stages of their careers where shunned by the established art intuitions of the day.  The institutions treated their work with contempt and even when they happened to pick one of their pieces to display they would display them in the least visible areas.

The painters (known as the Impressionists) had a completely different interpretation of what art should be that didn't match with what the establishment thought was fine art.  They decided to hold their own show where they didn't have to abide by the conventional painting rules with an additional benefit being that their art wouldn't get lost in the hundreds of painting in the main show,    "We are beginning to make ourselves a niche, " a hopeful Pissarro wrote to a friend. "We have succeeded as intruders in setting up our little banner in the midst of the crowd."   As history has shown their approach certainly was successful.

One of the key lessons to learn from both Buffett and Gladwell  (and expressed so well in the following quote by Gladwell) is that sometimes the "...apparent disadvantage of being an outsider in a marginal world turns out not to be a disadvantage at all."  I certainly have seen that over and over in my professional career.

 Adam Smith


George Goodman, who wrote under the pseudonym  Adam Smith, passed away this year.  In this short remembrance on Mr. Smith Jason Zweig wrote that  Mr. Buffett considered him to be "...the second-best writer ever to explain how the investment business works, after the brilliant Fred Schwed, whose Where Are the Customers' Yachts? remains the finest - and funniest - book on Wall Street ever written."

Buffett went on to say that he thought his first book, The Money Game, was "incredibly insightful."

Here is a quote from the 1968 version of The Money Game (p. 81) that I think fits in with the overall discussion in this blog post:

"If you are automatically applying a mechanical formula, then you are operating in this area of intuition, and if you are going to operate with intuition - or judgment - then it follows that the first thing you have to know is yourself.  You are - face it - a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it....  A series of market decisions does add up, believe it or not, to a kind of personality portrait.  It is, in one small way, a method of finding out who you are, but it can be very expensive.  That is one of the cryptograms which are my own, and this is the first Irregular Rule:  If you don't know who you are, this is an expensive place to find out."

Stay focused!

Saturday, 05 October 2013 00:00

Lou Simpson 2013 Speech Notes

Lou Simpson Speech at Ohio Wesleyan 10/3/2013

Speech Title: Corporate America: To Rent or Own?

Please note that I’ve tried my best to come as close as possible to what Mr. Simpson said during his speech but I only took notes and did not conduct a word for word transcription.
When looking for companies to buy determine if they care about long-term profits as a lot of forces make CEOs focus on short-term.
1. Most CEOs are focused on empire building. Bigger is more important. M&A record is mediocre at best with a good percentage of them result in value destruction. They get paid more as business gets bigger. Some CEOs are just deal jockeys.

2. CEOs are focused on short-term EPS and revenue growth. When CEOs say to him that an action they wish to take will create value he tells them that they need to create value on a per-share basis.

3. Lots of noise and self promotion in terms of executives on CNBC and attending conferences where they try to sell stock like selling pizza. “If you do a good job running the company the investors will find you.” He thinks you will only find people who want to rent your stock by attending conferences and that you will get a better class of shareholders by running the business in the right manner.

4. Accounting issues. Lots of noise in earnings, GAAP is meaningless as a result of continuous one time charges. He prefers to focus on the cash flow statement.
Good businesses, those earning a good return on capital, low capex, and can invest cash flow or give it to shareholders in efficient manner.
What are good uses of cash?

1. Increase Dividends
2. Buy stock below intrinsic value
3. Pile up cash (generally not smart)
4. Reivest in current business which should be first priority.

Focus on companies looking to buy back stock.

What really bothers him is when CEO and senior management own no stock. Options and restricted stock do not count. He feels they shouldn’t receive stock if all they do is sell it and not become owners.
He told a story about a company that recently did a bond offering. Buying back stock like crazy. Lou and CEO are the only ones who own lots of stock. He is chairman of the compensation committee (I’m fairly certain this is Verisign which is a company I own).

Other Management Issues
1. Lots of turnover. Pressure on CEOs to hit home run right away. HP is example of a company that gone to outsiders for management and it has been a disaster. He said it was once a great company and who know maybe Meg Whitman can turn it around.
2. Wall street focuses on company earning numbers and exceeding guidance expectations. He stated he is not a fan of guidance. He didn’t say this but my impression was that CEOs pay too much attention to Wall Street and this is one reason for their short-term focus.

Root of the problem is instant gratification. An example is mutual funds in that they advertise short-term performance. People who buy mutual funds are even worse as they focus on hot funds. At this point he spoke highly of Peter Lynch’s track record as a fund manager and commented even so most of the investors in the fund lost money by buying high and selling low.

Most investors are greedy when they should be fearful and vice versa.

He recommended the book The Outsiders by William Thorndike. The book should people who thought like owners and were able to create a lot of value. The place he is still on the board sent the book to everyone (board and senior management). As I mentioned before I believe he is referring to Verisign.

How to invest:

1. Try to find fine businesses
2. Try to find businesses that could be run by idiots
3. Find people running company that think like long-term owners
4. Find businesses that reinvest back in the business when necessary
5. Willing to send excess cash to shareholders in most efficient manner
6. Find people who are tying to grow long-term value on a per-share basis.
7. Managers who own stock (said he looks very carefully at the proxy statement)
8. Look carefully at compensation structure
9. Culture is very important but management must not just talk it, they must live it.

Q&A Session

(The microphone was not working properly so I was unable to write down the questions asked)

He replied that options have a place but need a longer time horizon. Spoke against option repricing.

He replied in response to a question that corporate America is over-regulated and its hurting America even though we still overcome this issue.

Moneyball, the book and the movie, contain all sorts of important lessons and both have struck a chord with its audience and have both been positively received but outside of the investment world I would imagine most watchers of the movie have no idea how well it represents what money managers like myself try to accomplish in our search for investment opportunities.

The focus of the story is how the Oakland A's managed to win 91 games in 2000 and 102 games in 2001 while only spending $26 million for 27 players in 2000 and $34 million for 28 players in 2001. The Yankees in comparison won 87 games in 2000 and 95 in 2001 while paying $85.1 million on 26 player salaries 2000 and $116.3 million for 29 players in 2001 (Information sourced by Another way to look at this data is that Oakland paid $285, 714 per win in 2000 while the Yankees spent $978,160. It wouldn't take a value investor much longer than a few seconds to determine who created more value. Mr. Lewis echoed this on p. 288 "...some baseball executives seemed to be much better than others at getting wins out of dollars."

Value investors also look for opportunities in the market where value and price have diverged. This was just what Billy Beane and the A's where doing as explained by Mr. Lewis in the book preface:
"...set about looking for inefficiencies in the game. In what amounted to a systematic scientific investigation of their sport, the Oakland front office has reexamined everything from the market price of foot speed to the inherent difference between the average major league player and the superior Triple-A one. That's how they found their bargains."

While we conduct the same process in investing luckily there are many more companies than teams in MLB so in most periods, if you dig long enough, you will find a company that is misunderstood in the market. This one element, the misunderstanding or misjudgment of talent and companies, is vitally important to any successful baseball general manager and investor.

Another lesson gleaned from Moneyball is that it takes a combination of looking at the raw numbers (stats in baseball, quantitative analysis in investing) and evaluating the rest of the picture. The perfect illustration of this in the book is when Paul DePodesta is examining player stats and discovered a player, David Beck, while looking over a pitcher who was a consensus first round draft pick. Paul looked over the others pitchers on that team and discovered that Beck actually had better stats then the consensus first round pick. Paul asked the scouts to look at him and the scouts eventually told him that the pitcher was a "soft tosser", scout code for someone not worth looking at. Later the situation changed and the head of scouting decided to draft the player without ever having seen him throw a pitch.

The reason Beck had been undrafted soon became apparent when they saw him pitch. They saw " of the most bizarre sights any of them had ever seen on a pitcher's mound. When the kid drew back his left arm to throw, his left hand flopped and twirled maniacally..." All the other scouts had ignored Beck because he didn't pitch the way everyone else did, he was different. A parallel in the investing world was when investors bailed out of Warren Buffett's company, Berkshire Hathaway, during the internet bubble because he wouldn't invest when everyone one was investing in overpriced technology stocks and making "easy money".

What's interesting is that David Beck ended up not making it to the big leagues. In this case it seems the numbers alone didn't tell the whole story. It's like finding a company with great fundamental numbers lead by a management team that has horrible capital allocation skills. To be really successful you have to find a player or company that has the complete package.

In the following section I highlight several sections that contain important lessons and talk about how they are also relevant to the investing world.

Quote 1: "..the point is not to have the highest on-base percentage, but to win games as cheaply as possible. And the way to win games cheaply is to buy the qualities in a baseball player that the market undervalues, and sell the ones that the market overvalues."

Investing Lesson: One of the most basic lessons in investing. You must buy when others are selling. This sounds obvious and easy but when these opportunities become available the company will likely be facing a difficult short-term situation. You will also be hard pressed to find anyone positive about the company (or the market in certain situations) and most people find it had to align themselves against the consensus view of any given particular situation.

Quote 2: "For Billy and Paul, and, to a slightly lesser extent, Erik and Chris, a young player is not what he looks like, or what he might become, but what he has done." (p. 38)

Investing Lesson: An investor should examine a company's past performance and use it as a guide to the quality of the business first and then form their own impressions of the quality of the company's future franchise. This is not a hard and fast rule for companies as occasionally one that hasn't performed well historically can turn the corner under a new management team or one that discovered the flaws in their business model. One such company is Verisign. The company came to understand its acquisition strategy had failed to create long-term value and changed course by selling them off, reinvesting back in their core business, paying special dividends, and buying back stock.

Quote 3: The book is talking about the oldest scout in the room named Boogie. He had been sent to scout Billy Beane and said "Billy was a guy you could dream on." (p.42)

Investing Lesson: You shouldn't make a stock purchase based solely on high expectations or because the company, while currently not profitable, is projected to have incredible growth, margins and future prospects. You have to form reasonable expectations and only make an investment when the price of the security and your expectations meet. You conclusions may not be the same view that is held by the "street" but don't let that deter you.

Quote 4: Paul DePodesta, "You know what gets me excited about a guy? I get excited about a guy when he has something about him that causes everyone else to overlook him and I know that it is something that does not matter." (p. 116)

Investing Lesson: The best investments usually are found in areas where others don't understand the value equation or are overweighting an negative issue the company is dealing with. Reis is one company that comes to mind that found itself mired in just such a situation. The company had two divisions, one had been performing very well and the other was in run-off mode but had an outstanding liability present in the form of a lawsuit. Even after the lawsuit was settled there was a period of time where the situation still was not widely understood and thus the stock remained undervalued.

Quote 5: Paul DePodesta. He and Michael Lewis are in the film room watching the New York Yankees take it to the A's. Michael is getting fired up because the A's are not playing well and the Yankees have been taking advantage of that with a good deal of success and nobody else in the film room is showing any reaction. Paul says "It's looking at process rather than outcomes. Too many people make decisions based on outcomes rather than process. It's not what happened it's how our guy approached it." (p. 146)

Investing Lesson: You will not be right about every investment you make. The key is to do the develop a process that includes conducting a thorough review of the company, purchase it an price far enough below your estimate of its intrinsic value that you have a margin of safety and have the discipline and patience to wait until others also recognize the value. If you finally conclude your have made a mistake don't stall on making the sale, do it and figure out what went wrong in your decision process.

Quote 6: Scott Hatteberg is in the film room reviewing tape of a pitcher he has not had much luck hitting against. "...Hatteberg considers why everyone doesn't prepare for Jamie Moyer as he does - by watching tape, imagining what will happen, deciding what to look for, deciding what he will never swing at." (page 184)

Investing Lesson: This is another example of the disciplined process and persistence it takes to succeed in any realm of study. Scott had developed a process that helped him prepare for possible situations that he could excel at and also to see what situations he should avoid. The search discipline is the same for investing. You must understand what companies fit into your circle of competence and avoid those that are not understandable or are currently overpriced. As an investor you should always be looking for companies that fall into your circle of competence, even if they are currently overvalued, so you can watch them in case the situation changes. You should also develop an understanding of situations to avoid. Investing in IPOs is one such situation that in the vast majority of cases should be avoided. IPOs tend to be of companies that are hot in the market right now and in most cases will be sold at a premium valuation.

Quote 7: Mr. Lewis listed 5 rules used by Billy Beane when he is shopping for players. The first doesn't apply to investors but the last 4 are good rules to follow (p. 193-194):

"The day you say you have to do something, you're screwed. Because you are going to make a bad deal. You can always recover from the player you don't sign. You may never recover from the player you signed at the wrong price."

"Know exactly what every player in baseball is worth to you. You can put a dollar figure on it."

"Know exactly who you want and go after him."

" Every deal you do will be publicly scrutinized by subjective opinion. To do this well, you have to ignore the newspapers."

Investing Lesson: I think these five rules sum up the lessons from the book quite well. Price, i.e. valuation, is all important in investing just as in baseball. When you find the right company selling at the right price you need to invest a meaningful portion of your portfolio in that company. You must be able to stay investing based on your own reasoning and be able to ignore the opinions of the crowd.

Tuesday, 16 April 2013 14:43

Books and More

Books and More...

Hello everyone! We have several topics to cover in this Blog entry so let's dive right in.

1. So far I have had three rejections while conducting my agent search for the new edition of The Focus Investor.

2. Lawrence Cunningham has published an updated version of his great reference, The Essays of Warren Buffett: Lessons for Corporate America (Third Edition). The unique feature of this book is that it presents the material contained in Warren Buffett's shareholder letters by topic which makes it much easier to find what Warren has said concerning a specific topic. This book has been a valuable time saving resource for me and I would certainly recommend it to everyone.

Amazon Link

Kindle Link

3. What's Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio by John Del Vecchio and Tom Jacobs (Disclosure: I was provided a review copy by Mr. Jacobs.)

Amazon Link

Kindle Link

Summary Review:
The first thing I want to tell readers is that I really enjoyed the material in this book. It's well written and it's a book that both "professional" investors and those who do their own investment work will find insightful.

I'm always interested in learning more about forensic accounting techniques and when I saw this book on Amazon I was immediately interested. I recognized one of authors of the book right away as I had followed Mr. Jacobs career for many years dating back to his Motley Fool days. I was also intrigued when I read that Mr. Vecchio had worked for David Tice AND Dr. Howard Schilit, both legends in the forensic accounting field.

For those that haven't read the book yet it certainly covers forensic accounting, and does so using real examples in an easy to understand format, but it also contains much more. So just what is the thesis of the book? They explain it on page 19:

"With the tools in this book, investors will increase their chances of achieving high real returns by weeding out or avoiding the stocks that perform so poorly that they will ruin overall returns and possibly destroy capital permanently."

To reach this goal they advocate using an investment approach that combines a small-cap value strategy (while also participating in select special situations) with a short component.

I found their short thinking quite interesting as they state not to short companies "...based on overvaluation, fads, frauds, or poor business models" which is what I would have considered to be perfect short candidates. They instead advocate waiting until the aggressive accounting methods discussed in the book are used by companies, i.e. "wait until there are negative catalysts for profits in the near future - a year or two at most, the rough time period that the value-with-catalyst investor seeks."
The material is presently effectively with looks of real world examples that highlight the strategies that have successfully employed and investors will surely find it useful.

Detailed Review (For those blog readers who really want to get into the details):
The first chapter lays out the base case on why it's important to know what's behind the numbers and discusses a variety of topics that touch upon the psychology of investing and what pitfalls the individual investor typically make in their investing process. It highlights the importance of real returns, why it's hard for most people to follow a dollar cost averaging program and lays the foundation for their investment thesis.

I found Chapters 2-5 to be exactly what I was looking for in this book: forensic accounting techniques. Chapter 2 covered the income statement and examined such topics as aggressive revenue recognition, channel stuffing, and accounts receivables. The chapter teaches you how to spot problems and provides examples of problems they discovered and how they discovered the examples using the company's SEC filings. The remaining Chapters 3-5 also use the same format to cover other areas in the financial statements that investors can use to try and spot potential problem areas. This was the part of the book I thoroughly enjoyed and has material that every focus investor needs to be aware of to be an effective investor.

In Chapter 6 Tom develops his thesis for the long portion of the investment program the book advocates. I think focus investors will find most of his ideas to be quite consistent with the focus investing style and he is obviously heavily influenced by an excellent research paper written by Tweedy Browne: "What has Worked in Investing." My main reservation about this chapter will come as no surprise, no mention is made of portfolio concentration. Tom's approach is obviously very heavily influenced by Ben Graham who certainly did not follow a concentrated investing style. While I favor a more concentrated investing approach I can find no fault with anyone that follows the example of Mr. Graham.

The next section of the book is where the trouble begins. If you have read this blog, this site, or my book you know that I am no fan of using charts to aid in the investment decision process and since this Chapter 7 covers that topic I would recommend skipping Chapter 7.

I have the hardest time with Chapter 8 as it deals with suggestion on how to avoid "massive bear market losses." I would suggest focus investor read it as it does present several interesting indicators that investors might want to be aware of but I also want to caution focus investor practitioners to not become so focused on the subject that you get completely out of the market as people have proven time and time again that they get out when they should be buying stocks. Market timing has no place in the focus investing strategy. In fact focus investors should structure their financial situation so that they possess the ability to not only ride out bear markets but also be able to take advantage of them. This requires a different mentality and temperament and is not for everyone.

Parting Thoughts

The best part of the book dealt with forensic accounting which sections contained plenty of information that their readers can put to good use immediately. I thought they covered shorting in an interesting and compelling manner though they didn't convince me to participate. Not that I think shorting is wrong, I just don't find it appealing personally. As they mention in the book even if you don't short stocks yourself "...the short-selling expert's tools - and the shorting mindset - can lead to successful investing, simply by avoiding the statistical basement revealed by the data."
I didn't find Chapters 7 and 8 to my liking and would have to recommend skipping those sections. In my experience technical analysis and market timing are not rewarding areas for focus investors to be spending time on.
Overall I found the book to be quite interesting and think that it's certainly worth including in your investing library.

4. I found this article in the New York Times on April 12, 2013 by James Stewart, When Shareholder Democracy is Sham Democracy to be quite disturbing even though it matches the experiences I have had in the decade or so I have been involved in the investment industry. In the opening paragraph the author discusses how he thought that it was "..hard to imagine a more compelling case for ousting directors than the posed by Hewlett-Packard" and I certainly would have no argument with that as they presided over a significant level of shareholder value destruction.

Now I have seen how high the levels of shareholder atrophy is for years and Ben Graham talked about how shareholders acted like sheep back in his book, Security Analysis, written in the 30s, so this shouldn't come as a surprise that Hewlett-Packard's board members mainly survived the period of bad decision making. What the author goes on to state next did surprise me, he found 41 cases in which "...the director actually lost their elections last year, meaning that more than 50 percent of the shareholders withheld their votes of approval. Yet despite these resounding votes of no confidence, they remained at their posts."
He gives several examples of how companies are blatantly disregarding their shareholders with one example being particular egregious. Iris International had all nine of their directors nominees rejected by shareholders. They resigned as required be Delaware corporate law but they then voted to reject THEIR OWN RESIGNATIONS.

In my experience many companies, especially under performing ones, have no desire to speak with their shareholders and only do so grudgingly. Management and directors both in most cases seem to think of their shareholders as adversaries and not someone that owns part of the company. The incorporation laws in Delaware have caused the tipping point to favor management to such a large extent that shareholders are left without a voice that carries any weight. It's sad to see shareholders have such an unimportant voice in a country founded on democratic principles.

Link to article:

Friday, 15 March 2013 00:00

GEICO: An Investment Lesson

I wrote the following article thinking that it would be part one of a larger piece on examining Mr. Buffett's early investments by paying particular attention to what was known at the time and also to see what lessons focus investors could learn from them. With the sad passing of Mr. Bynre I thought readers might enjoy this article since it deals with GEICO, which he was instrumental in saving.

GEICO: An Investment Lesson

Mr. Buffett discovered GEICO while researching his teacher at Columbia, Benjamin Graham. After learning Graham was on the board of the company he went to its office, on a weekend, and was lucky enough to find a key executive willing to educate him on the company and the insurance industry. After this education and his own further research it became clear to him that the company enjoyed a unique distribution method, direct sales to its customers, which allowed them to enjoy a cost advantage by having lower expenses than the typical agent method of distribution. He became so enamored with the company and its business model that he recommend the company to his clients while working as a broker in Omaha.

He continued to watch the company during the following decades despite having sold his stake in the 1950s. He was finally able to make a major investment in the company when the company almost derailed into bankruptcy as a result of poor underwriting and other factors in the mid 70s. This brings up a principle that I have mentioned before in my book, a key principle of focus investing: take the time to understand exceptional companies because when they hit a rough patch and the market sends the stock price into a tail spin you can quickly examine the issues and see if they are long-term or short-term in nature and act accordingly. Let's now look an overview of the history of the company and then look at Mr. Buffett's GEICO investment history to see what lessons we can take away from it to apply in our own investment operations.

The history of the company is briefly described here from the company's internet site:

"The 1960s proved to be similarly successful. GEICO experienced virtually unbroken growth, passing the 1 million policyholder mark in 1964. Insurance premiums reached $150 million in 1965. Net earnings doubled to $13 million in 1966. GEICO opened a number of sales and service offices for walk-in customers and its first drive-in claims office in 1965.

The 1970s, however, were not nearly as good to the company. At the beginning of the decade, both Leo and Lillian Goodwin passed away, and the loss of the company's founders (I would also include the passing of the leadership reins by Mr. Lorimer Davidson in 1970 when he retired as Chairman), seemed to usher in difficult times for GEICO. By the mid-70s, the years of aggressive expansion were starting to show some weaknesses in the company's loss reserves (NOTE: Unspoken here is that poor policy pricing and a declining stock market really hurt the company. In Snowball, the book by Alice Schroeder (page 889), she writes that "...the devastating stock market of 1973-74 had wiped out so much value from GEICO's stock portfolio that for every share of stock, investments that had once been worth $3.90 were now worth a dime a share". This on top of a increase in auto accident claim costs and high inflation levels pressuring their bond portfolio are just several of the challenges that combined to make it a difficult period for the company.)"

The investment story starts in 1975 when Mr. Buffett (p. 430, Snowball) stated that "I looked again at GEICO and was startled by what I saw after a few rule-of-thumb calculations about loss reserves." This was important for a simple reason, GEICO was in growth mode and had expanded from its original mandate to only insure government workers because the founders discovered that they had a lower loss rate than the general population. When in growth mode you take on lots of new customers and to get these new customers you may have to price more aggressively. Another factor to consider is that GEICO likely had no cost/lose history on these new customer lines so a natural consequence was that they would experience more losses and hence would need to keep a close eye on their reserves going forward.

Mr. Buffett continued "It was clear in a sixty-second examination that the company was far underreserved and the situation as getting worse. I went in to see [the CEO] Norm Gidden on one of my Washington Post trips. He was friendly, but he had no interest at all in listening to my comments. They were in deep denial. He really sort of hustled me out of the office and would not respond on the subject."

It didn't take long before the company had to face reality though as in early 1976 they announced a $190 million loss and to make matters worse from the viewpoint of the investment community they also announced a suspension to their dividend payments. GEICO was soon forced to seek new management and chose Jack Byrne, an insurance executive that had recently left Travelers when wasn't picked to be their next CEO.

The situation was so serious that Jack knew he would need the help of regulators so he had a meeting with Max Wallach, the District of Columbia Insurance Superintendent. After many additional meetings Mr. Wallach decided not to shut down the company but insisted that conduct a reinsurance agreement with other companies in the business and also required them to raise a slug of capital so that they could pay their claims as they came due. This was a actually a favorable result as Mr. Wallach could have chosen to shut down the company completely! Jack wasted no time in implementing his rescue plan, Operation Bootstrap, which included closing offices, slimming down the size of the work force, and exiting unprofitable markets.
Warren watched all these events transpiring and saw the stock price go into free fall. He know the company so well and for so long he thought GEICO possessed a cost advantage rarely found in an insurance company and thought that advantage would continue if the company survived. After thinking on the situation he knew that Jack Bryne had to possess a combination of gifts if he was going to succeed in his quest to right the ship. If he was going to invest in GEICO now he had to meet with him and determine if he possessed those characteristics. Warren was looking for someone who was (page 433, Snowball) ", unflappable, and professional." and who knew the insurance business inside and out. After meeting with Bryne he decided that he was the right person and started buying large amounts of GEICO common stock.

All these actions sound perfectly natural looking back on them with the advantage of time having passed and the eventual outcome being known but let's examine at what was being reported on in the news and see if you think you could have had the courage to invest then. Here is one article dated July 16, 1976 which was titled, Insurance: GEICO at the Brink[1][1]:

"Once upon a quite recent time, the staid insurance industry had a Cinderella firm called Government Employees Insurance Co. (GEICO). By charging low premium rates, GEICO skipped past older firms to become the fifth largest auto insurer in the land. Investors from far and wide flocked to buy a piece of GEICO, bidding its stock up to more than $60 a share. Then Cinderella turned into a pumpkin.

Today GEICO stock is selling at about $2.50 and the company is on the brink of bankruptcy. A GEICO crash would be costly to the company's 2.8 million policyholders in 25 states, who would lose some of the $660 million a year they have been paying GEICO in premiums, and to other insurers, who would have to take over payment of claims against GEICO. The company has lost $150 million since the start of 1975. Worse, Maximilian Wallach, Superintendent of Insurance in Washington, D.C., where GEICO is headquartered, seems to be failing in a rescue attempt.

Costly Pullout. For weeks Wallach has been phoning executives of other insurance companies to persuade them to reinsure 40% of GEICO'S policies and pay GEICO $26 million in cash commissions in return for a share of future premium income. He also sought their agreement to buy whatever part of a planned $75 million offering of GEICO convertible preferred stock the company's present shareholders do not purchase (shareholders must approve the offering at a meeting next week). By late June, Wallach had rounded up enough pledges to put off a deadline he had once set for moving to have GEICO declared bankrupt.

But last week State Farm Mutual Automobile Insurance Co., the nation's largest auto insurer, withdrew its offer to reinsure 6% of GEICO's policies. State Farm had warned Wallach that it would carry out the agreement only if other insurers agreed to reinsure 34% of GEICO's policies by June 30. With State Farm out, it is now doubtful that other insurers can be persuaded to pump enough cash into GEICO to keep the company alive. GEICO directors are planning to offer 300,000 shares of senior preferred stock (which would have first priority on any future dividends) in case the $75 million convertible preferred issue does not sell, but who might want to buy the senior preferred—and why—is open to question."

So when did Mr. Buffett make his first investment? According to Roger Lowenstein in his book, Buffett The Making of an American Capitalist, he first bought "...500,000 shares at 2 1/8 (which only a few years earlier was trading in the low 40s) and left a standing order in the multimillions" after an extensive meeting with Jack Byrne in July 1976. So at this point he thought the company had the right CEO but the insurance commissioner still needed to be convinced not to take over the company and the reinsurance program and equity raise mentioned earlier needed to be worked out.

I think he made the investment, and was comfortable with his decision, because he knew that Max Wallach, by insisting that the company coordinate a reinsurance program with other insurance companies, didn't seem to want to kill the company. He also knew that he would be willing to contribute to the reinsurance program required by the insurance commissioner (Later he did participate in the reinsurance program and during an subsequent equity raise, he advised the investment banker he would be willing to serve as the sole provider of the capital if he was forced to). In short he had a unique perspective and an in-depth knowledge of the insurance industry that many investors would not have had the benefit of when they tried to determine if the company would make a good investment. Investing during these periods is not easy as is evident in a comment Mr. Buffett made a comment at a Washington Post board meeting: "I've just invested in something that might go under. I could lose the entire investment next week". (page 198, Buffett: The Making of an American Capitalist)

How did the investment situation work out? No more than two months after Mr. Buffett made his initial investment the company completed its preferred stock offering with Mr. Buffett purchasing a large chunk of it. This offering essentially meant that the company was certain to survive its troubles. The common stock responded to the change in the situation by jumping to 8 1/8. Mr. Buffett kept investing and over the next couple of years he doubled his stake in the company.

I think focus investors, though unlikely to have been able to invest as early as Mr. Buffett due to his unique understanding and access to the company, would have been able make a profitable investment even after the clouds had cleared over the company. Learn to take the long-term view, avoid rear-view mirror investing, and if the underlying business are intact you can make very profitable investments even after the clouds have cleared because the investment community at large will take time to believe the company turnaround is real.

[1] Link:,9171,914339,00.html

Tuesday, 11 December 2012 00:00

The Outsiders

The Focus Investor Book 2nd Edition

The book revamp/rewrite/improvements are done. The next step is trying to find an agent or someone to publish it. Keep your fingers crossed! If the book doesn't find a publisher I'm looking at electronic publishing options.

Book Review: The Outsiders by William Thorndike

Amazon Link

Amazon Kindle Link

Focus investors are always searching for those companies that have exceptional competitive advantages but the investment research process doesn't end when they are found. To earn outsized investment returns two other necessary components need to be present:

1. The company needs to be selling below its intrinsic value
2. The company must also possess management that understands how to properly allocate capital.

Management capital allocation skills can then become the determining factor on what kinds of investment returns the shareholders will receive. Management can sink investment returns by squandering excess cash by making bad acquisitions, failing to buy back stock at appropriate prices, and not taking advantage of tax efficiencies.

The Outsiders is of my favorite investment books of the year because it examines how excess returns can be created by a management team that approaches their job differently than most CEOs. It's well written, it has clear historical examples, in short there is a lot of lessons to learn, and apply, to a focused investment program.

What's the key insight to the book? Warren Buffett once related that the institutional imperative was a force in business that he never learned at business school. Well I've been in the investment industry now over ten years and I can say with confidence that the institutional imperative is alive in well both in the investment business and at the companies I follow. This book shows you how talented management team can break free of the institutional mindset and create real shareholder value!

It's rare to find a manager willing to differentiate themselves from Wall Street and not follow the normal Wall Street line. For instance many CEOs have to devote a large portion of their time meeting with money managers simply because most money managers won't even invest in their company if they don't speak with them. I'm sure the vast majority of this time could be better used by the CEOS instead of them having to deal with money managers trying to get a direction of next quarter's earnings or "advising" the management team of short-term behavior that might boost the stock price.

In a recent Wall Street Journal article (Investors Demand CEO Face Time, Nov. 29, 2012)the CEO of Gamestop said that "... investors and analysts take up an ever-larger chunk of his schedule. He estimates he now spends 25% to 30% of his time preparing for or attending meetings at the company's Grapevine, Texas, headquarters or investor hubs like New York, Boston, Chicago and San Francisco."

So finding a management team that can resist this institutional imperative is quite rare. To find one that takes the next step into the type of superior capital allocation as Mr. Thorndike discusses in his book is even rare but if they can be identified they can add lots of value to your investment portfolio over time.

Everyone reading this blog is familiar with Warren Buffett and he is featured in the book (along with other luminaries as Tom Murphy, Henry Singleton and Kay Graham , to just name a few) ins lauded for having created an incredible capital compounding machine at Berkshire but how many managers follow his example? Not many.

Do I know of any management teams that are following the formula described in the book? Well I would say Verisign since 2007 has followed quite a few aspects displayed by managers in the book.

The Verisign management team embarked on a new business vision in November 2007 and from that time to late 2011 the company decreased headcount from 5,000 to 1,000, went from 88 worldwide offices to approximately 10, and sold 13 business combinations. The team took the capital generated from this process and rewarded shareholders with attractive share buybacks and dividends. They bought back $1.3 billion in stock in 2008, $260 million in 2009, $449 million in 2010 and $550 million in 2011.

I would like to see the capital allocation done with a more opportunistic methodology but the company certainly has done better on this front then I have seen the vast majority of companies I have observed over the years.


Mr. Thorndike book provides many clear cut examples of managers that blazed their own trails, often in conflict with accepted financial practices of the times. He walks us through these examples and explains how they were able to earn outsized returns for their shareholders. These lessons can be used in your own investing process and will help you when you search for management teams of current companies that have the characteristics detailed in the book. The traits include a willingness to go against conventional wisdom, the ability to be flexible enough to buy stock when it's cheap and do acquisitions only when their return expectations can be attained.

This quote (page ix) contains the main theme of the book and it's something that most investors miss:

"The metrics that the press usually focuses on is growth in revenues and profits. It's the increase in a company's per share value (author italics), however, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO's greatness."

Thursday, 12 April 2012 00:00

Howard Marks: Speech Notes & Book Review

Brief Notes From Howard Marks' Speech at 2012 Indy CFA Investment Forum (March 2012)

I was able to attend a conference just recently in my home city of Indianapolis at which Mr. Marks was a speaker. Not only is he an accomplished writer but he is a gifted public speaker (and somewhat of a jokester as I will reveal a little later in the blog).

Key Takeaways (the following is from my notes and is not a transcript):

Fundamentals, psychology, and technicals influence asset prices. Since 2009 fundamentals remained iffy, psychology has rebounded significantly, macro picture as scary as he has ever seen it.

Everyone was dependant on capital markets and as a result we won't see the same growth as credit won't be as available as in the past.

Europe: very cloudy, quite scary, Needs (or is working from) a new instruction manual

Risk: Alternative history concept learned from Taleb. Look at what could have happened. Think about possibility that things other than what you expect will happen.

Investing is when events collide with an investment portfolio. Offense vs. Defense decisions are the most important.

What were keys to success in great recession?

  • · You needed the nerve to invest
  • · You didn't need patience. Discernment, risk control, and selectivity did work in that particular period

Current stance:

  • · Move forward but with caution
  • · Lots of things wrong with the world but have recovery with modest expectations

It's not quality that's important it's the price. (My comment - but when quality can be purchased at the right price it can lead to great results)

What will make sure you do okay if world doesn't go your way? Margin of Safety.




On a more personal level I did miss a conversation Mr. Marks was having in the hallway before his presentation but I was able to talk to him briefly before lunch (no earth shattering revelations) and I walked away very impressed. In fact I wish I had heard his IPO road show presentation before this encounter because I would have told him how impressed I was with his firms accounting standards. I don't know Mr. Marks personally but using that conservative standard really makes him, and his firm, a class act in my book.

He also has a sense of humor. Here is the first sentence he wrote when he signed my copy of his book, Memo to Oaktree Clients: "Don't sell this book on eBay. You'll never get another one. "Don't worry Mr. Marks I would never sell it (well maybe if a high quality company with a fifty foot moat stocked with crocodiles was selling at ones times earnings).

Book Review: The Most Important Thing Illuminated Edition

Amazon Kindle Link:

It's my pleasure to announce that Howard Marks will be releasing a new copy of his book! The new edition is titled: The Most Important Thing Illuminated. This new version, (my understanding is that it will be available in a digital version only), is annotated by Chris Davis, Joel Greenblatt, Paul Johnson, and Seth Klarman. It also includes a new chapter: Reasonable Expectations.

I have to say I was very excited to learn that this new edition was going to be released. As I mentioned in a previous entry on this blog I found the first edition of his book to be a seminal investing work, one that deserves to be on the same shelf as The Intelligent Investor, Security Analysis, Common Stocks and Uncommon Profits, and the Berkshire Hathaway shareholder letters.

I was not disappointed when I read my review copy. I found that the annotated comments highlighted important sections in the text while also providing additional compelling perspectives but yet didn't get in the way of the flow of the book.

Don't just take my word on this, here are a few examples:

p. 58: Howard Marks: Understanding uncertainly: Dimson's formulation reminds us of a very simple concept: that many things are possible in the future. We can't know which of the possibilities will occur, and this uncertainty contributes to the challenge of investing. "Single scenario" investors ignore this fact, oversimplify the task, and need fortuitous outcomes to produce good results.

p. 104:Seth Klarman: Even the best investors judge themselves on the basis of return. It would be hard to evaluate yourself on risk, since risk cannot be measured. Apparently, the risk-averse managers of this endowment were disappointed with their relative returns even though their risk adjusted performance was likely excellent, as borne out by their performance over the following three years. This highlights just how hard it is to maintain conviction over the long run when short-term performance is considered poor.

Please allow me to make one additional comment on the annotations before I discuss the new chapter. I was not familiar with Mr. Johnson before reading his collection of annotations in the book but I found them insightful and thought provoking. I wish my college career had included being a student in his classes. You can find more information on him at this site:

The new chapter is Reasonable Expectations. This chapter develops the theme that investors need to keep their expectations grounded in reality to guard themselves from overreaching and thus taking on far more risk than is reasonable. Mr. Marks cautions his readers that one can never know when the exact right time to make a purchase is. Focus on buying it when its trading at below your estimate of value with the understanding that if its gets cheaper you will buy more as the price declines. The point is not to become despondent if the stock continues to decline after your purchase as it's almost impossible, and not reasonable, to expect to be able to catch the absolute button.

Here is a quote from this chapter in which Mr. Marks is telling his readers how an investor should have been thinking in the dark period of 2007-2009

"I need 8 percent. I'd be glad to earn 10 percent instead. Twelve percent would be even better. But I won't try for more than that, because doing so would entail risks I'm just not willing to bear. I don't need 20 percent."

I find that comment particularly interesting when you consider that Mr. Buffett has spoken on the record many times that he looks for investments that can earn him 15%.

In conclusion I certainly think the chapter is a valuable addition to the book. This new material, along with the added annotations, make the new edition a worthwhile purchase. All in all this new edition does the nearly impossible, it takes an already classic text and makes it an even more indispensable tool for investors!

Templeton's Way with Money: Strategies and Philosophy of a Legendary Investor Book Review

Amazon Kindle: Link

Amazon: Link

John Templeton is a legend in the investment business though I think to the current generation his investment insight is not nearly as well studied as are Benjamin Graham and Warren Buffett.

In my studies of successful investors and their investment approaches one common theme shines through. The theme is that they follow their own path and it's evident from the book that Mr. Templeton also refused to follow conventional investment wisdom. He preached against excess diversification, he went in search of bargain securities around the world (an approach not common at the time) and he refused to categorize himself as a growth or a value investor. He believed that growth is just a component that needs to accounted for in the valuation equation.

Why should you buy this book? It contains valuable information such as his investment principles, extracts from his letters to shareholders. The authors, one of whom worked for Mr. Templeton, help the reader develop a deeper understanding of the material by providing comments and insights as appropriate.

Besides his refusing to blindly accept conventional investment wisdom one of the other most valuable insights that an individual investor can learn from this book, in my opinion, is his policy concerning investment allocation. He understood that one of the great difficulties in investing is being able to buy when the market is declining so he developed a system that automatically invested more in stocks as they declined in market downturns (and did reverse when the market was rising) which helped make sure his clients were able to take advantage of stocks when they were cheap.

A worthy edition to read, study, and include in your investment library.

Thursday, 09 February 2012 00:00

Buy High and Sell Higher?

Blog Ideas

I thought I'd say a few things that have caught my attention over the past few months. I have a new academic study to share, a few books to mention and some news on my own upcoming new edition of The Focus Investor. I just received the annotated copy of it back from the editor the other day. Though we are one step closer to getting in everyone's hands it still needs to be revised, again. On to the rest of the blog!

Thinking, Fast and Slow: A Fascinating Book

Amazon Link:
Thinking, Fast and Slow

Amazon Kindle Link:
Thinking, Fast and Slow

This probably won't surprise many regular readers of this blog (yes I know that I should be posting more regularly in order to actually have regular readers!) but I have a new book to recommend:Thinking, Fast and Slow by Daniel Kahneman, a recipient of the Noble Prize in Economic Sciences.

The marketing blurb from the book:

"In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilitiesand also the faults and biasesof fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacationeach of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.

Engaging the reader in a lively conversation about how we think, Kahneman reveals where we can and cannot trust our intuitions and how we can tap into the benefits of slow thinking. He offers practical and enlightening insights into how choices are made in both our business and our personal livesand how we can use different techniques to guard against the mental glitches that often get us into trouble. Thinking, Fast and Slow will transform the way you think about thinking."

Dr. Kahneman covers all the bases that an investor should think about when studying how their our actions and though processes can influence their decision making in life and investing. Here is one quote that I found very informative for focus investors:

pages 339-340

"Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. ...the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are less prone to useless churning of your portfolio if you don't know how every stock in it is doing every day..."

We all understand one of the enemies of the focus investor is the inability to sit on our rumps for long periods of time while we wait for opportunity to come to us and this is just further confirmation.

This is just a tiny portion of the wisdom in the book and I heartily recommend it to all of my readers even if you have read many books about investment psychology.


Cramer Study

In case you didn't know I'm not the only person who has issues with Jim Cramer and his television show. C<span">ramer and Jason Zweig, a writer for the WSJ, also have quite a history of bantering back and forth. One episode between them dates back to 2008 and here is how the Mad Money site frames the dispute:

"Cramer criticized Wall Street Journal columnist Jason Zweig after he wrote an article this weekend that said buy and hold is solid investment strategy and took a shot at TV pundits who recommend trading in and out of stocks. Cramer explained that his strategy is to buy and do homework, not buy and hold. He reminded investors that buy and holders got slaughtered during the dot-com bust. Cramer took even more issue with Zweig's statement that buying stocks down 50% is a good investment. He pointed out that investors who bought into National City (NCC), Washington Mutual (WM), General Motors (GM) Fannie Mae (FNM) and Freddie Mac (FRE) after they dropped 50% are now down even more. Cramer said that savvy investor should do one hour per week of homework on any stock they invest in - if they don't have time than they should hand it off to a professional, and do their homework on the guy in running the fund. He told investors to remain involved in their portfolios. "The results are completely worth the effort," he said."

(Link to full article:

The idea that Buy and Hold is dead as an investment stratedgy seems to be a theme for this blog post as it is discussed here and in a later part of this blog. Trust me Buy and Hold is alive and well if its properly conducted. Jason Zweig seems to have the last laugh in this argument with Cramer though as this new research article points out in his January 28, 2012 tweet:

says new study: to make money, short jim cramer's "buys," ignore his "sells"

I think its worth a read.


A New Templeton Book

Amazon Link:

Templeton's Way with Money: Strategies and Philosophy of a Legendary Investor by Jonathan Davis and AlasdairNairn

This book looks quite interesting as it is written by two investment professionals with one, Sandy Nairn, having worked with Mr. Templeton for ten years. They believe that their prospective will offer fresh insights into his investment approach. The authors also advise that they have the benefit of having new material to draw from which includes letters to clients and investment holding data that has not been previously published.

James Montier, an author and investment manager that I respect, wrote this blurb:

"Anyone calling themselves an investor should read this book. It is a treasure trove packed with a wonderful combination of Sir John's collected wisdom on the enduring power of the value-based contrarian approach and the authors' fresh insights into both Sir John's methods and their application in today's investment opportunity set."

I think the book looks quite interesting and have preordered it. I also intend to follow up with a full review when the book is released.


Book to Avoid: Buy High, Sell Higher?

Buy High Sell Higher by Joe Terranova

I was recently in my local library ordering articles for background research on a new chapter of The Focus Investor book when I stopped by the investment section and one title jumped out at me: "Buy High and Sell Higher" with a further blurb on its cover that stated "Why buy-and-hold is dead..." Which are both sentiments that I disagree with but thinking that its worthwhile on occasion to see the counter arguments to ideas that you believe in I checked out the book.

In the prologue he gives one good piece of advice when he states that one principle of investing is that you should never put yourself in a position that you have to sell at an inappropriate time. He follows up with a piece of horrible investment advice. On page 12: "The new normal is characterized by fear and uncertainty, and not just for retail investors. New times demand new tactics: welcome to buying high and seller higher."

He goes on to talk about how this strategy would have failed if they would have invested in the S&P 500 in 2000 and held onto those shares until 2010. He also uses Microsoft as an example by saying if you had purchased the stock in 2000 and held onto it until 2010 would have been a "losing proposition in the New Normal". The problem is that he never takes into consideration the valuation of Microsoft in 2000 and how the high price paid versus earnings would be a large of the reason why the company stock (versus its actual business performance) had under performed over this period. The company in this case performed well but the stock didn't in large part because of the unrealistic expectations of those who initially overpaid.

He goes on to discourage day trading but then goes onto to say that you should be "trading around positions and shifting allocations six to eight times a year". His advice is to invest with confidence, on other words investing in "...stocks that the market likes: stocks with momentum, stocks that are outperforming the average benchmark indexes like the S&amp;P 500, and more specifically, stocks that are outperforming other stocks in the same sector". (page 15) Notice how he never once mentions valuations, never once talks about them as businesses.

He further advises investors not to buy when the stock price is low (he calls this the falling knife method of investing) because "when you buy a stock that is consistently making new lows or has just made a 52-week low, you have no point of reference to tell you what to do with that stock". He goes on to state his belief that no investor has any idea of how far the security could fall so they can have no idea when they should sell. Once again his mistake is not taking into account the value of the business and trying to determine the reason for the drop versus the long-term picture of the business. If there is a disconnect, i.e. the company is facing short-term headwinds but with a favorable long-term horizon, this can present a compelling investment opportunity.

He reserves his thoughts on buy on hold on page 48... " became a classic buy-and-hold asset from 2000 to 2010... Just because buy-and-hold has been revealed to be a flawed investment strategy in general during the last decade does not mean that there were not a few assets that could be bought and kept without experiencing significant pullbacks, and gold was one of them." So he appears to be saying that buy-and-hold can work but I doubt he was recommending gold to his client between 2000-2006. So it seems he is telling us buy-and-hold is dead except for those assets/investments that held their value over the last decade and which are now quite obvious to spot with the aid of hindsight.

In the conclusion of his book (page 233-234) he advises investors not to invest like Buffett mainly because he thinks holding stocks forever is something that many investors "can't afford to invest the way he does... no one should invest like Buffett." He continues this discussion by mentioning that in 2008 Buffett purchased a big slug of GoldmanSachs preferred stocks and used it as an example of how investors simple can't invest like Buffett. What he neglects is what Buffett has spent years teaching about investing via his annual report, interviews, and his annual meeting. You must look for companies that you can understand , companies that possess competitive advantages, and that are selling for below you estimate of intrinsic value. Individual investors are certainly able to make these kinds of investments if they spend time learning the investment process, a process that has been followed successfully by value investors for generations. In fact the book provides us with some measure of hope as people who follow the ideas advocated in this book help to generate investment possibilities that we can take advantage of.

In the final analysis the book advocates an investment approach dependent on gut feelings and frequent trading with a fatal full in that no thought is given concerning the companies long-term fundamentals and valuation. My suggestion would be to forget his motto: Buy High, Sell Higher and instead remember this motto: Buy Below Intrinsic Value, Sell Above Intrinsic Value. Although the book does contains a few nuggets of investment wisdom the overall message is one to that I think all investors would do well to avoid. leave the speculative investing to the speculators.

Tuesday, 27 September 2011 00:00

Ted Williams & Investing

Having a Dad from the Boston area who was a big baseball nut resulted in my hearing Ted Williams name mentioned as one of the greatest hitters ever to play baseball quite often.

Warren Buffett has mentioned that he feels Ted's discussion of which pitches he choose to swing at is very relevant to the investment arena because we can wait until we see the perfect investment pitch before we take a swing.

I have several paragraphs about Mr. Williams in the new edition of The Focus Investor that I'm working on but a recent New York Times article, Ted Williams's .406 is More Than a Number had several points that I think are worth quoting here.

"Williams spent the rest of his life — he died in 2002 — explaining that the .406 season was a result of his tireless dedication to what he labeled the science of hitting, and refining it consumed him. He did not, for instance, usually talk about fielding, base running or bunt strategy...

According to "Ted Williams: The Biography of an American Hero" by Leigh Montville, Williams would rise at 6 a.m. and, with his teammate Charlie Wagner, drive 20 minutes west of Boston to Sunset Lake, where they fished undisturbed for a couple of hours. With the games starting at 3 p.m., Williams arrived before noon and started swinging a bat or a broomstick in the clubhouse. Waving an object to mimic his baseball swing, even if it was a hair brush in front of a mirror, took up hours of Williams's days.

After many games, he took extra batting practice.

Adding to his comfort, he was familiar with most of the pitchers in the American League and had memorized their tendencies and pitching repertories. He mined the daily box scores for clues about each pitcher to update his mental databank. And because he was popular with umpires — he never argued balls and strikes — he could glean useful information about pitchers they had recently seen. Reaching base, Williams would converse with the nearest umpire, hoping to learn if someone had a new pitch or seemed overly reliant on his fastball. No insight was too small to Williams. (Such fraternization between umpires and players is now prohibited."

That kind of focus and determination is a great example of the type of ethic a good investor needs to be successful over the long-term. Hard work, focus, finding ways to develop slight advantages are all are necessary traits.

Friday, 16 September 2011 00:00

Munger Models and Trying Times

Munger Models

I'm just finishing reading the book, The Invisible Gorilla: How Our Intuitions Deceive Us, by Christopher Chabris and Daniel Simons and wanted to make sure I mention it to readers of the blog because it contains another model that we can plug into our "Munger Mental Model" approach.

The authors discuss how people can miss gorillas in videos, what convicts can have in common with chess masters, how a company like Motorola lose billions developing its Iridium service, what causes people to link two unrelated events together, and much more.

Some new concepts to add to your mental models would be: the illusion of attention, the illusion of confidence and the illusion of cause.

A juicy quote from the book sure to make you want to read a copy (I hope at least!):

"...Be wary of your intuitions, especially intuitions about how your mind works. Our mental systems for rapid cognition excel at solving the problems they evolved to solve, but our cultures, societies, and technologies today are much more complex than those of our ancestors. In many cases intuition is poorly adapted to solving problems in the modern world. Think twice before you decide to trust intuition over rational analysis, especially in important matters, and watch out for people who tell you intuition can be a panacea for decision-making ills. And if anyone ever asks you to watch a video and count the passes of a basketball..."

Amazon Book Link:
The Invisible Gorilla

Amazon Kindle Link:
The Invisible Gorilla

Trying Times

I also thought I'd share some quotes from a book whose content helped me transform a section of the revised edition of my book, The Focus Investor, that I'm working hard to complete. The book is titled: The Great Depression: A Diary by Benjamin Roth and the following quotes from it really detail just trying it must have been to be an investor during that time period (you think we have it bad now?)

One reason that I think this book is so interesting is that its written by an individual who understands what investing is really all about as is evident from this quote:

(page 29) "...the conservative longtime investor who follows the general rule of buying stocks when they are selling far below their intrinsic value and nobody wants them, and of selling his stocks when people are bidding frantically for them at prices far above their intrinsic value - such an investor will pretty nearly hit the bull's-eye.... Their secret to a large extent lies in having liquid capital available and the courage to invest when things look the blackest."

Here are a few other quotes I found interesting. Just imagine trying to keep investing during these times. Would you have the courage and the belief in your approach to be able to do so?

( page 9) June 15, 1931 "Stocks continue to go lower and dividends are being slashed right and left.For over a year now people have been buying stocks at what they think are bargain prices."

(page 47) January 11, 1932 "The stock market continues downward and there seems no end of it.The contrast between 1929 prices and today is unbelievable.A few samples of some of the drops are Truscon 63 to 5; Sheet & Tube 175 to 12; U.S. Steel 250 to 35; Republic Steel 140 to 4... Even now there is no way of telling if the bottom has been reached."

(page 29) March 3, 1933 "People who bought "bargains" in stocks in 1931 now find they were too quick and these same stocks are now selling at 1/3 of 1931 prices.If they can hold on long enough they will come out alright but it is a soul-trying period of waiting."

What did he conclude about investing as a result of this time period? Buy a copy of Mr. Roth's book or wait for me to finish my own book!

Amazon Book Link:
The Great Depression: A Diary

Amazon Kindle Link:
The Great Depression: A Diary

Wednesday, 20 April 2011 00:00

Howard Marks Book Review

The Most Important Thing: Uncommon Sense for the Thoughtful Investor, by Howard Marks, Publication Date: May 1, 2011

Columbia Business School Publishing

Amazon Book Link:

The Most Important Thing

Amazon Kindle Link:

The Most Important Thing

I first discovered Mr. Marks several years ago when an investment analyst published a reading list that highly recommended a book that I hadn't heard of: Memos to Oaktree Clients by Howard Marks. I didn't place the name but a quick search on the internet revealed that Mr. Marks has had a long, and distinguished, investing career and was one of the founders of Oaktree Capital Management, a firm that invests in distressed assets and now manages approximately $80 billion. I recognized all of the other books that the analyst mentioned and thought they were all top tier quality books so I decided to obtain a copy of Mr. Mark's book immediately.

As the title indicates it was a selection of memos about his general investing philosophies that Mr. Marks had written to his clients over the years. It wasn't long after I opened the book before the rest of the world faded to black as I read, totally captivated. Mr. Marks has a clear writing style that reminds me a great deal of Mr. Buffett's writing. The ideas are powerful but they came across so clearly that you will have no difficulties grasping the concepts he is discussing just as Mr. Buffett has the knack of distilling complicated matters into easily discernable bits.

So, as you can imagine, when I discovered that he was publishing another book I was terribly excited and applied right away to obtain a review copy. Having had it in my possession for a few days now , and as promised in an earlier blog post, here is my review of the book.

I must say before I start the actual review that Mr. Marks and I have reached many of the same conclusions about investing so I may be a bit colored in my judgment. It is certainly hard not to praise his core investing beliefs when then coincide so closely with my own.

Okay, enough of the preliminaries. Mr. Marks states that when he was attending client meetings over the years he noticed a pattern. He would say in one meeting that that such and such was the most important thing about investing and in later meetings he found himself referencing other items that he titled the most important thing to understand. Upon reflection about this pattern he decided to write a memo in July of 2003 that covered all these critical areas in his investing philosophy.

This new book expands upon the ideas he covered in that original memo. Topics that are covered include: market efficiency, value, risk, investment cycles, contrarianism, finding bargains, patient opportunism, circle of competence, luck, avoiding pitfalls, etc... In short all the topics that a focus investor needs to understand and be able to place, and use, in their own mental models.

What does Mr. Marks want his readers to gain from his book? Here are his own words from the introduction of the book:

"I didn't set out to write a manual for investing. Rather, this book is a statement of my own investment philosophy. I consider it my creed, and in the course of my investment career it has served like a religion. These are the things I believe in, the guideposts that keep me on track. The messages I deliver are the ones I consider the most lasting. I'm confident their relevance will extend beyond today.

You won't find a how-to book here. There's no surefire recipe for investment success. No step-by-step instructions. No valuation formulas containing mathematical constants or fixed ratios - in fact, very few numbers. Just a way to think that might help you make good decisions and, perhaps more important, avoid the pitfalls that ensnare so many.

It's not my goal to simplify investing. In fact, the thing I most want to make clear is just how complex it is. Those who try to simplify investing do their audience a great disservice. I'm going to stick to general thoughts on return, risk and process..."

Mr. Marks has succeeded in his goals in a brilliant manner. There is, quite simply, an incredible amount of wisdom between the covers of his book and an investor is doing them a disservice if they don't read, and re-read, this book. I will be placing it on my shelf right next to the great investments classics of Security Analysis, The Intelligent Investor, the Berkshire Hathaway annual reports, and Margin of Safety. Quite simply I can't recommend it highly enough.

Additional praise for the book:

"The Most Important Thing, Mark's insightful investment philosophy and time-tested approach, is a must read for every investor." Seth Klarman, President, The Baupost Group

"When I see memos from Howard Marks in my mail1318, they're the first thing I open and read. I always learn something, and that goes double for his book." Warren Buffett

Tuesday, 19 April 2011 00:00

Berkshire Meeting Comic

I have been attending the Berkshire Hathaway meeting for many years now and I thought it would be fun to hire Nate to create a comic strip type picture that detailed a small sample of the great wisdom that Mr. Buffett and Mr. Munger have shared with us over the years. With the 2011 Berkshire Hathaway Annual Meeting coming soon I thought I'd post the finished product for your viewing pleasure!

Bigger Version

Wednesday, 30 March 2011 00:00

Mad Money or Bad Advice?

I think every "value" investor has their what did Cramer just say moments. I certainly fall in that club. I occasionally watch the show to catch interviews with the CEOs that he interviews while I do my daily exercise routine. One rare occasions I will continue watching past that point (I know, I know, what was I thinking?) and one two occasions I listened to what is, in my opinion, really poor advice. The instances and my comments are detailed in the following post..

Before we begin I have to mention that Andy Kilpatrick is coming out with another edition of his classic work on Warren Buffett. Be sure to contact Andy or head to Amazon to order a copy.

Jim Cramer Mad Money Show, 03/10/2011

"Hey listen, I get it... I've been there... caught owning too much stock into a hideous sell-off... a nasty sell-off... like the one we had today with the Dow plummeting 228 points. I've been there, not knowing what to do. The propensity... the desire... to take sweeping, drastic action. And get out now, so to speak. I get it. Why not?

Think about it. It's everything gone wrong... What's gone right? I mean everything. Employment claims at 8:30am today. Reversal of the positive trend. Right back down. China? Clearly slowing. We know that from the deficit number. Tech, hitting the wall. Best themes out there... mobile internet tsunami, tablet... stalled out. Oil. Going down. But because of demand destruction, not the destruction of Colonel Ghadaffi. Spain is collapsing. Oh thanks! Can Italy be far behind? I mean, that's all tied to Libya anyway. Agricultural trade seems dead as a doornail. QE2? On the verge of ending. Taxes going up all over the place.

So how do you resist? How do you resist selling everything?...

Well tonight I'm going to give you your crisis playbook for dealing with this particularly awful, unrelenting moment.

First... this may surprise you... but you do have to sell something. You have to sell something. Too many things are going wrong right now. Way too many. Not a lot of silver linings. And look, I'm a silver lining kind of guy. And not everything you own is equally good. Some of it is probably pretty bad... pretty darn bad.

So I want you to sell something. Hey listen, take a loss. It's okay. First loss is your best loss. Got some big profits in a stock? Don't give them back. Ring the darn register. That's fine. You can always buy it back lower if you really like it, when the risk/reward is more in your favor, and it is not in your favor right now. But... and a big "but"... do not blow out of all of your stocks. Do not panic. That's stupid. Don't blow out of everything. Don't give up on stocks entirely. Don't hide in Treasuries. Do not hide in Certificates of Deposit with those puny yields. Instead, get ready to redeploy your capital into stocks that are selling off, because not all of them deserve to go down. Get ready... get ready in this sea of red to add to something you really like."


Comments like this reinforce my view that watching Mad Money is dangerous to your financial health. I mean seriously if you can't handle a 1.87% one day decline in your portfolio you shouldn't be investing in equities PERIOD.

What Cramer is trying to tell you is that you should always have money on the side to take advantage of market down cycles. That is absolutely something we can agree with him on. We like the motto of the boy scouts: Be prepared. Why pick a down day though to send this message? It's not like any of the issues he speaks about are new issues. Why didn't he pick a day when the market was up a HUGE 1.87% to tell investors it might be a good time to take money out of equities?

He is right in that it's not a time to panic but telling people to sell something and take a loss because of a one day drop is frankly poor advice at best. As I said earlier if you aren't comfortable holding the stocks in your portfolio during a 1.87% drop in the market you shouldn't be investing in equities, it's just that simple.

You should only sell your investments when they are selling above a price that you think is in excess of what your estimates of its current intrinsic value is (and its future intrinsic value growth rate) or when you find a company that you understand that is selling for a significant discount to its intrinsic value. The fact that the market is down 1.87% should not make you want to sell anything.

As concentrated investors we suggest that they only prudent course of action when markets are priced such as they are now is to keep a comfortable margin of cash on hand to take advantage of opportunities that present themselves. If your using margin, stop. You should be able to sustain a nice return over time without it and avoid the downsides of having levered up in an up market.

Further Jim Cramer Shenanigans on Mad Money Show, 03/29/2011

Well once again Mr. Cramer comes out with more shocking financial advice on his television show. I'm sure regular readers of this blog will not fall for his comments but his efforts to "teach" investors is likely to do more harm. Essentially he tells his readers that by listening to him they will profit on the next group of likely momentum stocks. Ignore the valuation he says, we all know they are overpriced, but some suckers are sure to drive the price up. What will likely happen is that he will encourage people to get in they will make some money (maybe) and then the stocks will run up some more and they will get back in and become the suckers that hold on too long.


"Here's what's going to happen. Within the next year, we're going to see IPOs... Twitter, Groupon, Zenga... that's gaming... as well as LinkedIn probably, maybe Facebook... They will be huge deals. I would bet that the smallest one might be Zenga... Zenga at $10 billion. The others will be worth more than that. Maybe much more. Those who get in as venture capitalists will make fortunes here. Those who get in on the IPOs will also make fortunes. But those who buy in the aftermarket? Uh... initially maybe. Later on, hard to say.

As fortunes are being made in these stocks, the critics will come out of the woodwork. And you know who they will be criticizing? Me! Why? Because I will be trying to get you in. I'm going to be trying to make you as much money as possible. And you will make money until it all blows up. And hopefully when it does, you'll have taken so much off the table, that you'll still have a massive win... a net win.

If you go read Confessions Of A Street Addict, I knew the valuations were all wrong during the dot-com bubble. I knew it was absurd. I recognize that it was a repulsive era, and agreed with those who said it was all nuts! That said, there was one big difference... the same difference this time around... I want you to make hay with the bubble, while the sun shines. I don't want you taking counsel with the bears initially. Once we've made a lot of money, that's a horse of a different color.

In other words, I am telling you that I have seen this picture before, and it ends really badly. But... and this is what the naysayers don't understand... you don't have to stay until the end of the movie!

By the way, I don't care that this new crop of IPOs is better than 1999 era batch, because they'll be colossally overvalued anyway. So they're not based on eyeballs or revenues, but so what. It's going to be overvalued. In fact, I'll even stipulate that they're even more overvalued than the bears think. Yet that fact is totally irrelevant. It's an abstraction, at least in the beginning. And I'm willing once again to risk my reputation, both telling you when to get in, and more importantly when to get out. The easiest thing to do is say it's all overvalued and I don't want to play and it will make you nothing!

It's my job to try to make you something. So I will fight to get you in. And then before the movie ends, I will do my best to try to get you out, because that's how real money is played..."

To conclude any fan of Cramer should take heed of this quote by Mr. Buffett:

"I mean, when times are good, it is kind of like Cinderella at the ball. She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall.

"And that's what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall."

In the quote he is referring to how incentives can influence behavior but the quote is just as relevant for this article. There is no place for momentum plays in a proper investment strategy and Mr. Cramer should be ashamed of himself for using base psychology plays to get people to follow his dangerous investment thesis.

Monday, 14 February 2011 00:00

Glenn Greenberg's Speech Highlights

Selected Highlights from the Glenn Greenberg's Columbia Speech (Spring 2010)

Mr. Greenberg is the managing director of Brave Warrior Capital (formerly he was one of the founders of Chieftain Capital). He is a concentrated investor with a superb long-term track record.His comments on investing are rare so when I happen to find a new source of information on or about him I devour it. This blog covers comments from a presentation he gave at the Columbia business school.

In this blog I have attempted to transcribe comments that I thought were especially interesting.In the interest of keeping the length (cough) reasonable I was forced to leave out quite a bit of material and so I would recommend anyone who has the interest to listen to the speech via the Columbia internet site (see links at the end of the document.)

I have tried to transcribe his comments verbatim with a minimum of adjustments to provide better flow of his ideas.As such any mistakes found are entirely my own.In certain areas of the document I paraphrased portions of his comments and I have annotated theareas as such in the write-up.

I hope you can accept the limitations of the document as I feel there is a lot to learn by a careful study of his comments. Feel free to email me if you would like a copy of this blog in PDF format.


[13:16] I have a new company and I've learned a lot of things that I had forgotten over 26 years (at Chieftain). Number one I learned that when I don't read 10ks and study the numbers myself I don't really have the tools to make good investment decisions and I didn't really realize it because the young guys that came out of [intelligible} Hall were computer literate and started building models.Wow this is pretty cool, you can project out, put in more variables so it became a very model driven place.It used to be a yellow pad, studying the 10K and putting down key numbers, looking at the historicals, asking questions of management and getting a good sense of where business might be heading in the next couple of years.Trying to decide is this a good business, is this a business I want to own if we go through another 1987 or 2008 or is this something the wheels could fall off.

First you decide that the business is a good business then you decide is it cheap, what is the outlook [intelligible] but I've rediscovered without reading the source material you really don't have the information.Another thing that I found since we have now brought on two younger people to work with us is that they come in and they use Capital IQ which I'm sure some of you are familiar with and I have now after a few months of working with them decided that we should ban Capital IQ because it's so riddled with errors that whatever time you think your saving, the numbers just aren't useful.They're wrong and if they're wrong you're going to be totally misguided and you're not going to get anywhere.

I urge you to lay off the numbers that are prepared by others and take the extra few hours, at first it will be slower and more cumbersome to do them yourself and scrub the numbers but soon you will be get super quick at it.It will tell you what numbers you really need to focus on.I have memos that have 761 lines of stuff, masses of numbers,but really any company that you're looking at you want to boil it down to a much smaller number.They're certain major issues at any company you look at.

An example, we own Google.You can say how there is so much you don't know?One thing I do know is that people now spend about 30% of their time on the internet.Thirty percent of the time and its only 10% of where all advertising is done.I'm willing to make the bet that over the next five to ten years the amount of advertising is going to catch up with the amount of time people are spending on the internet.I don't know what shape it will be and I don't know if Facebook will be able to do it better but I'm convinced that Google with 50% share on online advertising will get its fair share.There is also a lot of optionality in all the things that have poured money intothat aren't on anyone's radar screens yet. Obviously the nature of their business generates a staggering amount of cash.I can do a little model of that obviously but in a sense it's really a bet that people spending thirty percent on their time on the internet that advertisers are going to find a way to get in front of those people when their on the internet.

You can model a lots of different things and they are a lot of numbers but in the end investing is making a bet.Being a good investor is going through all the numbers and picking out those that really say something, that are very meaningful, and those are of you that want to be investors are going to have to learn about what's key in driving an investment.

When you are going to talk with management start by saying to yourself if there were three questions I could ask that I could give truth sermon to the CEO what three questions would I ask that the answers to would tell me whether I should be an investor.And I'm not talking about whether their earning are going to be $4 a share.Ask more strategic questions, don't get lost listing 35 questions that you have pulled out that are in no particular order and then you start working your way through the list.Go for the questions that are really going to make your mind up pretty quickly about whether this is something you want to explore further or something to forget about.

[20:15] I can give an example.I'm very interested in Abbott.Abbott trades at 52 and this year it's free cash flow will be about $5.20.It's trading at 10 times free cash flow.It's a hell of a company, it's had a great record, it has a very astute management that has made great acquisitions, it's not overspent on R&D.It's orientated towards prime illness which will be a long, long runway [intelligible].The problem is that it has onedrug which is a treatment for rheumatoid arthritis, called HUMIRA, that is about 45% of their earnings and growing fast and will eventually go off patient.A very complicated, there is only one example of this kind of a large molecule drug being made generically.This could make the end more gradual but eventually all things come to an end.

So if I'm going to meet with the CEO the question I would ask is how he thinks about the maturation, how he thinks about a company that has about 45% of its earnings coming from one drug and will probably have 55 plus percent of its earnings coming from that drug when it has its first competitor come off patent and then we it comes off patent.How is he thinking about it, what steps is he taking to prepare because that is really the key investment issue.Press him on his answers.

[22:20] Another example, Ryanair in which we have a big position. Ryanair is a low cost European carrier which was designed from scratch to be (modeled after Southwest Airlines)...

The big question is that they are running out of ordersso in 2012 they will go into a very different mode.Instead of growing 15-20% per year in new capacity they will essentially have no new capacity.

The number one question would be do you want to stop growing or do you want to make another order?If you can make another order with Boeing what rate of growth do you want to go for?(Paraprhased)He is looking to see how their growth would affect yield (i.e. how many people in seats versus total plane capacity) and how they themselves think about the issue.He thinks that if the company never ordered another plane(they have a very young fleet) that conservatively projecting the cash flow of the company (taking into account higher maintenance expense as the fleet ages) and discounting it back to the present would yield about a 13.5% return (not certain what stock price he was considering).He would ask management if they had thought about that and base their plans against that bogey.

[38:15]Find managers that are ruthless in the way they run their business.

[39.07]I completely believe in investing in good businesses.One of the time that it was driven home to me was in 1987 when the market fell 18% in one day, 40% in one month,I made 23% in one day.I made up my mind at that point that could happen again and I was just going to own only businesses that if that happened again I'm fine with.I'm fine with the stock being down, I believe in the business, the value will recover.Not get into short-term plays, buying some junk because you hear stories.That is when you would no doubt sell for huge losses.

[52.09] I can't say enough about doing your own homework and then thinking about it.

[1:12:34] Question: I wanted to as you about DCF model and what hurdle rate you using now and how did you get it.Also do you use the same hurdle rate for different companies and different sectors?Do you also use it to decide the selling price as well?

When I first started in the business every company that I ever analyzed I did on a yellow pad which wasn't exactly conducive to a DCF model. The young people who came into my firm all were computer literate and developed the DCF model which became the model around the office.The model was utterly useless in the last few [intelligible], utterly useless.So I am now, in my new firm, going back to the way I used to do things which is basically have a very clear view on why I think it is a good business, a business that can grow, the quality of the business and a very clear view of where I think the business will be in the next few years.

(My comment:In the book, Value Investing from Graham to Buffett and Beyond, p. 219 discusses his early years and provides additional background information:

"Greenberg likes companies that produce a stream of free cash flow, so it makes sense that he uses an estimate of cash flow to tell him the value of those firms.Before the arrival of the personal computer and the electronic spreadsheet, he and his partner would analyze a company by isolating its business segments and projecting revenues and expenses no more than two or three years into the future.By assuming that it would grow steadily from then on, they could calculate its current value by discounting that cash flow back to the present, using only a hand calculator.")

The way I would probably think about the DCF I would start out with the FCF yield today and think about what I think the business is capable of growing say over the next five years and if that comes up to something like 15%, the combination of the free cash yield today plus the grow rate that I think is reasonable then I think I've got a pretty good investment.The reason I think that is because I think the market probably, over time,you tell me, you pick a rate, 7, 8, or 9 percent if I have something that is going to get me 14 or 15 percent that is clearly undervalued relative to the market that is priced to give me 7, 8 or 9 pick a number.I think that I'm very down on computers, I think they are a complete waste of time.I don't know how Warren Buffett feels about them, you should ask him about them.

(My comment:It's interesting that his son Spencer, has developed an computer AI based approach to investing at Rebellion Research, a small NYC based hedge fund.As of July 2010 the firm was doing quite well.)

Bruce Greenwald:You did.He feels the exact same way expect for instead of using the hurdle rate of fifteen percent use thirteen (My comments:Is this because of his smaller investment universe?I think so and so don't believe that comment is as relevant to smaller investors).

Greenberg:That was a time when stocks were really high.Believe it or not, when the business was easier, I used to ask myself couldI see how the stock would be up at least 50% on the next two years based on where I saw the earnings develop over the next two years.That was sort of the hurdle rate.{Paraphrased) Over time as market when higher this got to tough to do without projecting extremely aggressively and in the 2008 area interest rates were low.

I asked Warren how low (hurdle rate) do you go and his answer was 13%.

So that is my new way of thinking about things:free cash flow yield plus reasonable rate of growth, business that I have confidence in and I'm not going to wake up one day and the thing has fallen apart and I try and get the best group of those in my portfolio.

(My comment:Interesting that he is willing to adjust his approach because at one time the DCF spreadsheet model seemed to be a key part of his investment process.)



The Spring 2010 speech:


Tuesday, 08 February 2011 00:00

Howard Marks - Memos and Book

If you have visited this site before you certainly know which investors that I respect. The list of living investors would include Warren Buffett, Charlie Munger, Seth Klarman, and James Montier. I added another investors to that list several years ago but I think this is the first time I have mentioned him here on the site. Now is the time to bring him to your attention as I recently discovered he will have his first widely available book published in May of this year.

He is well known to institutional managers and distressed debt investors for his investing memos that he publishes when he feels he has something relevant to say. As an individual investor you may not have heard of him as his firm doesn't market itself to retail investor (they don't invest in public equity markets) and he does seem to stay out of the limelight.

His writing strike a cord with me for several reasons. He is a big believer in behavioral investing and his firm is one of the few on wall street (Seth Klarman coming immediately in mind as another) that has a sharp focus on only investing in areas of the market that are currently experiencing inefficient pricing. Many firms say they follow this manta but few practice it religiously. The firm does not have funds for every investment category that one could possibly dream up which again confirms that they practice what they preach.

After reading his memos available on the Oaktree Capital internet site (there is also a hard cover book titled Memo to Oaktree Clients from Howard Marks printed by Wave Publishing but it is hard to locate) it was immediately apparent that he deserved to be compared to the best writers in the industry and someone it would pay dividends to follow closely in the future.

A reading of the memos provides a wealth of valuable investment knowledge and they're comparable to Warren Buffett's Berkshire Hathaway letter to shareholders in terms of quality and wisdom shared.. I can safely predict that this book will be a must read for investors. Don't just take my word for it as Warren Buffett and Seth Klarman both provided blurbs for it. I have asked the publisher for a review copy of the book and if I do obtain one I will provide a detailed review as soon as possible.

Amazon Link (We earn a small commission if you order the book via this link):
The Most Important Thing

The Most Important Thing

Here is his background from the Oaktree Capital internet site:

"Since the formation of Oaktree in 1995, Mr. Marks has been responsible for ensuring the firm's adherence to its core investment philosophy, communicating closely with clients concerning products and strategies, and managing the firm. From 1985 until 1995, Mr. Marks led the groups at The TCW Group, Inc. that were responsible for investments in distressed debt, high yield bonds, and convertible securities. He was also Chief Investment Officer for Domestic Fixed Income at TCW. Previously, Mr. Marks was with Citicorp Investment Management for 16 years, where from 1978 to 1985 he was Vice President and senior portfolio manager in charge of convertible and high yield securities. Between 1969 and 1978, he was an equity research analyst and, subsequently, Citicorp's Director of Research. Mr. Marks holds a B.S.Ec. degree cum laude from the Wharton School of the University of Pennsylvania with a major in Finance and an M.B.A. in Accounting and Marketing from the Graduate School of Business of the University of Chicago, where he received the George Hay Brown Prize."

Howard Mark's Links:
Past and Current Memo from our Chairmen issues:

Financial Times Video Interview:

Interviews & Articles:

Tuesday, 18 January 2011 00:00

New Year Musings

Random Musings

1. Montier Words of Wisdom

(James Montier (In Defense of the "Old Always" December 2010)

"...attempting to invest on the back of economic forecasts is an exercise in extreme folly, even in normal times. Economists are probably the one group who make astrologers look like professionals when it comes to telling the future."

I just love that quote as I believe it states, quite elegantly, the folly of paying closer attention to the macroeconomic picture when it would be an infinitely more productive use of time to concentrate on company specific issues and making a purchase when their is a big disconnect between your estimate of intrinsic value and its valuation by the market.

This brings me to another quote from the same article that I feel is especially important to focus investors:

"From the perspective of mean reversion, fat tails help to create some of the best opportunities. That is to say, fat tails often create fat pitches."



2. The Rest of the Story

(Why You Shouldn't Trust Wall Street's Top Stocks for 2011, WSJ, 01/05/2011)

The author came up with a great premise for this story with the type of inverse thinking that would make Charlie Munger proud. He decided to examine not just how the stocks that analyst recommended as their top picks performed but he went one step further and decided to look at how their sell recommendations performed. I doubt any regular reader of this site will be surprised by the outcome.

"I asked them (Thomson Reuters) for the 10 stocks that analysts rated most highly a year ago. These stocks were the cool kids on the Street. The ones everyone wanted to hang out with. How did they do? Not bad. If you'd invested $1,000 in each one a year ago, your $10,000 stake would have grown to nearly $12,400 today - an impressive 24% return. By contrast, the S&P 500 overall gained just 13%."

As you suspect the losers that nobody wanted to own earned 32%. It's a great article and I recommend you head over to the WSJ and read the whole thing.


3. Portfolio Differentiation?

(Pack Mentality Grips Hedge Funds, WSJ, 01/14/2011)

The last musing to start the new year highlights another area in investing that focus investors can potentially take advantage of to outperform professional investors.

The article discusses how hedge fund managers seem to have very similar holdings in their portfolios. This example, one of several in the article, highlights the issue:

"Sometimes groups of like-minded funds pour money into the same securities. That what happened with funds connected to veteran manager Julian Robertson of Tiger Management... In 2008 and 2009, as many as 10 of those funds held large positions in MasterCard, according to filings by AlphaClone.

The Visa trade was even more popular, holding the top spot by the first quarter of 2010.

In May, the Senate voted to restrict debit-card fees... Within days, Visa and MasterCard plunged 22% and 18% respectively. The stock (Visa), which had been among the top 10 holdings of 177 hedge funds AlphaClone tracks, dropped from the top 20."

So what lesson can be taught from this article? Look for opportunity when a company goes from adored to hated. This Visa opportunity may not have been the right one but when a stock hits a bump in the road and its fall is compounded by extensive selling pressure it certainly increases the chance that a long-term investor might find a golden opportunity to take the other side of the trade.

Wednesday, 03 November 2010 00:00

Pension Funds: Broken Model

Pension funds should be dream clients for focused value investment managers. They have a long-term time horizon which should allow them a major competitive edge; the ability to take advantage of the market when its participants fall into despair. In my view, they have completely failed use their built in advantages because of significant structural problems, i.e. they hire money managers who commit a major investment faux pas, they perceive that volatility equals risk, which is a completely false truth foisted on us largely by academics. Volatility has no connection to risk when risk is defined, appropriately, as the chance of permanent capital loss.

Using consultants and placement agents can lead to additional problems. For instance CalPERS has experienced problems related to kickbacks. According to a recent story in The Deal ".. a former CalPERS president resigned from the board of the Los Angeles Fire and Police Pensions after the SEC sent a letter inquiring into his financial disclosures and dealings with Weatherby (where a former employee pleaded guilty to a securities fraud charge) and other consultants. Several other former board members have been served subpoenas or are ensnarled in civil litigation. All have denied these charges and in several cases in the end no charges were brought against them. CalPERS has since strengthened its policy on the use placement agents and the payment of fees.

They have been so focused on boosting returns as much as possible, mainly because they use excessively optimistic growth assumptions which has led to a historical underfunding of the plans. This causes them to chase hot sectors such as in the 1990s when they, according to a October 16, 2010 WSJ article, "...loaded up on stocks in the booming 1990s and had almost 70% of their money in them by the mid 2000s." The article continues but letting us know that, as of July, the pension funds have changed their views and have decreased their allocations to stocks to 45%.

Not only did pension funds wade into the stock bubble, they also went knee deep into the private equity bubble. For instance, as related the recent New Deal article:

"Between 2006 and 2008 CalPERS poured about $8.4 billion into 15 of the 20 largest buyout funds raised during that period."

Leaving aside what they should have done in those periods and how they should be positioning themselves going forward, for the moment , let's take a look at the same WSJ article mentioned above to learn what they are doing. In the article Towers Watson conducted a survey that revealed "..on average, they were planning this year to move 10% of their assets out of stocks and into bonds and alternative investments."

So as you can see they overloaded on stocks when stocks in general were highly priced and now they are moving into bonds during what is sure to develop to be a massive bubble in bonds during a period of historically low interest rates. The comedy team at Saturday Night Live would be hard pressed to write a better script.

Lest you think this tale of missteps is a one off occurrence let's examine what Mr. Buffett had to say in a New York Times article dated August 31, 1979 (which essentially quoted his Berkshire Hathaway letters to shareholders):

"In 1971, pension fund managers invested a record 122 percent of net funds available in equities [buying some with borrowed money at full prices]. In 1974, after the bottom had fallen out, they committed a then-record low of 21 percent to stocks."

"In 1978 pension managers, a group that logically should maintain the longest investment perspectives, put only 9 percent of net available funds into equities - breaking the record low figure set in 1974 and tied in 1977."

The situation is a tragic romantic comedy in which they constantly make the wrong choices in love. So how does all this relate to focus investors? This is yet another example of irrational behavior that we, who do have long term horizons, and don't equate volatility as risk, can take advantage of.


For more information I would recommend these two articles:

WSJ, October 16, 2010: Pension Funds Flee Stocks in Search of Less-Risky Bets

The Deal, Too Big to Sail?

Tuesday, 19 October 2010 00:00

Warren: Cheap or Quality?

From an interview Warren gave with Beck Quick on CNBC about his biggest investment mistake. I thought his comments on investment purchases would hit home with focus investors.

BECKY: So that is a lesson you carried with you? And yet, it's one that is—you're reminded of every single day. It's Berkshire Hathaway.

BUFFETT: Yeah. And every now and then, I get tempted. Because I started out with Ben Graham in 1950 or so. And his whole idea was buying things that were cheap. You don't want to buy things that are cheap.You want to buy things that are good. It's much better to buy something that's good at a fair price, than something that is cheap at a bargain price. [Italics added] And I wasn't—I didn't start out that way. I was taught a different system. But—but if I didn't learn from Berkshire Hathaway, I'll never learn.)

Tuesday, 28 September 2010 00:00

Wisdom from Graham

I just read this section of a speech by Mr. Graham and I enjoyed it so much I feel compelled to share it with you all:

"...the second episode (first referred to the publication of Common Stocks as Long-term Investments which Mr. Graham believed help provide the foundation for the bull market in the 1920s) - historical in my thinking - occurred toward the end of the market's long recovery from the 1929 to 1932 debacle. It was the report of the Federal Reserve in 1948 on the public's attitude toward common stocks. In that year the Dow sold as low as 165 or 7 times earnings, while AAA bonds returned only 2.82%. Nevertheless, over 90% of those canvassed were opposed to buying equities - about half because they thought them too risky and half because of familiarity. Of course this was just the moment before common stocks were to begin the greatest upward movement in market history... What better illustration can one wish of the age-old truth that the public's attitudes in matters of finance are completely untrustworthy as guides to investment policy.

I think the future of equities will the roughly the same as their past; in particular, common-stock purchases will prove satisfactory when made at appropriate price levels."

p. 248 of Benjamin Graham, Building a Profession edited by Jason Zweig and Rodney Sullivan

I would add that you should take this wisdom and, as Mr. Munger likes to say, invert it in order to stay away from the areas of current rampant speculation. I would, at present, define those areas as gold and bonds.

Monday, 23 August 2010 00:00

Marathon's GIR

I recently finished reading the book Capital Account: A Money Manager's Report on a Turbulent Decade 1993-2002. The book is full of investment wisdom and I would recommend purcashing a copy if you can find one.

Basically the book contains experts from their newsletter the Global Investment Review. As their site says its "...published eight times a year and contains approximately six articles. Its aim is to provide clients with Marathon's latest investment thinking and (at times irreverent) commentary on events in the business and financial world. The first GIR appeared in January 1987, shortly after the establishment of Marathon."

If you can't (or don't want to purchase the book) I would recommend at least reading the PDF copies of several of their past GIRs that are available on their internet site at:

I especially enjoyed reading these:
August 2001 MacGuffins
May 2001 Two Handled Pump

Friday, 13 August 2010 00:00

Mr. Munger and Mr. Li Lu

Mr. Munger recently made a somewhat surprising announcement to the effect that Li Lu is basically one of the projected capital allocators for Berkshire Hathaway when he was quoted in a recent WSJ article stating ""In my mind, it's a foregone conclusion". There has been a mixed reaction to this article I and thought it would be interesting to blog about what Charlie sees in him and to see how Li Lu approaches investing.

The article relates the only solid return data that I have seen to date about his investment returns which, according to the WSJ article, his "...hedge funds have garnered an annualized compound return of 26.4% since 1998, compared to 2.25% for the Standard & Poor's 500 stock index during the same period."

I have no personal knowledge, other than what I have read (his biography about his time in China) and two videos of lectures he gave at Columbia University that I watched. I have no idea what investments he made that comprise his track records, other than an investment in Timberland and BYD. Despite this I will try and explain the reason why I think Charlie is enamored with him.

So first let's start the discussion by drawing on comments Charlie made at the 2007 Wesco annual meeting when he spoke about what characteristics had made Br. Buffett so successful.

Here is the list:

1. Mental aptitude

2. Warren has a strong interest in what he is doing

3. Warren is a learning machine. In fact Charlie said that "Warren's investing skills have markedly increased since he turned 65."

4. He is able to make his own decisions and he is very objective in making those decisions

5. He reinforces those people that are close to him

Just looking at the publically available history of Mr. Li obviously has triumphed over a number of adversities over his life which shows us that he develops firm convictions and is not deterred when his convictions conflict with others. He fought for what he believed in when he was in China, under a repressive government, he came to the United States only able to speak a minimal amount of English and ended up graduating from Columbia University. While there he developed an interest in investing that was reinforced when he listened to a lecture from Mr. Buffett.

As the article mentioned he used a portion of his book advance money to start investing. He did well and eventually stated his own hedge fund company in 1998 called Himalaya Capital (the internet site is still up and is updated. The link is:

Since that time he has focused on the investing field and I'm sure he has developed a process that has been refined over time into a form that Charlie obviously thinks highly of since he gave Mr. Li personal funds to invest.

I'm sure all those factors, i.e. his strength of character, obvious mental aptitude and his strong interest in investing made him interesting to Charlie. As Charlie also said at the 2007 Wesco annual meeting, "We like a peculiar mindset. People chosen won't look like standard people. Obviously we'd like to try to get somebody that reminds us of Warren."

I also thought this quote from Li Lu's foreword to the Chinese edition of Poor Charlie's Almanac is instructive of how Charlie did he due diligence on Mr. Li:

"Seven years after we've known each other, at a Thanksgiving gathering in 2003, we had a long heart-to-heart conversation. I introduced every single company I have invested in, or researched, or am interested in to Charlie and he commented on each one of them. I also asked for his advice on the problems I've encountered. Towards the end, he told me that the problems I've encountered were practically all the problems of Wall Street. The problem is with the way the Wall Street thinks. Even though Berkshire Hathaway has been such a success, there isn't any company on Wall Street that truly imitates it. If I continue on this path, my worries will never be eliminated. But if I was willing to give up this path right then, to take a path different from Wall Street, he was willing to invest. This really flattered me.

With Charlie's help, I completely reorganized the company I founded. The structure was changed into that of the early investment partnerships of Buffett and Munger (note: Buffett and Munger each had partnerships to manage their own investment portfolios) and all the shortcomings of the typical hedge funds were eliminated. Investors who stayed made long-term investment guarantees and we no longer accepted new investors.

Thus I entered another golden period in my investment career. I was no longer restricted by the various limitations of Wall Street. The numbers still fluctuate as before, but eventual result is substantial growth. From the fourth quarter of 2004 to the end of 2009, the new fund returned an annual compound growth rate of 36% after deducting operating costs. From the inception of the fund in January 1998, the fund returned an annual compound growth rate in excess of 29%. In 12 years, the capital grew more than 20 folds."

So what does Mr. Li say about his investing philosophy. His quotes are few and far between but I was able to locate a few. This first quote is from a May 1998 article in the New York Observer by Carrie Cunningham (

"Mr. Li said he likes to buy stocks that are undervalued, in his estimation. That goes against the currently fashionable "momentum" theory used by investors who believe they can ride an overvalued stock that is still soaring in price, and then jump out before the stock comes crashing back down.

"If you're right, ultimately it will prove you're right, but you look stupid for a long time," he said of his own gambits. "It is what I'm all about. It's revolutionary. It is about trusting yourself. It's about challenging the conventional wisdom. That's what we did in Tiananmen."

This additional quote from the recent WSJ article clearly highlights the similarity between Charlie's approach to investing and Mr. Li's:

"Mr. Li told investors he took a lesson from watching the World Cup, comparing his investment style to soccer. "You may very well work extremely hard and seldom score," he says. "But occasionally—very occasionally—you get one or two great chances and you make decisive strikes that really matter."

Compare that to this quote from Charlie from the book Damn Right!:

"Playing poker in the Army and as a young lawyer honed my business skills. What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don't get a big edge often. Opportunity comes, but it doesn't come often, so seize it when it does come."

So as you can see I think it's pretty clear why Mr. Munger concluded that Mr. Li is the right candidate. He has the right intellectual background, he is an independent thinker, he sticks to his convictions and he is not afraid of volatility. For more insight into his investment philosophy I would recommend a careful study of notes on his lectures at Columbia University which are available at:

Thursday, 05 August 2010 00:00

Passion and the Successful Investor

"Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character." Benjamin Graham, The Intelligent Investor.

One change in my thinking from the first edition of my book is that in it I advanced the idea that anyone could become a successful focused investor. I now believe that anyone can become a focused investor but in order to do so they must devote a serious portion of their time to learning the process of investing.

What changed my thinking? I had been developing this thought for some time but it really coalesced when I read Chapter 2 of Outliers: The Story of Success by Malcolm Gladwell. The whole book is very well done but when reading the section in which he writes about the Beatles, Bill Joy, and Bill Gates and how they all become quite successful really made me think about the issue in more depth. He develops a theory about how they became so successful. In essence they are achieved a high degree of success because they wholeheartedly put many hours of work into developing insight and skill at their chosen passions.

For instance, Bill Gates had access to a computer during a time when being able to spend large chunks of time on one was quite rare and he was able to become quite skilled in a field that was in its infancy before most people even realized the field existed.

The Beatles went to Hamburg, Germany five times over a two year period where they employed to play gigs, night after night. Mr. Gladwell estimates that over this time frame the Beatles played 270 nights. This experience was an extraordinary gift as it provided them with the ability to work together, develop a stage persona, try out ideas, and in short develop and refine the processes that help make them a success later. As we shall see a little latter in this narrative though just spending 10,000 hours practicing something is not a guaranteed path to success.

I however found myself wondering if passion and repletion were the only reason they were successful? I wondered if some sort of natural ability might also play a factor. Thankfully I happened to read a book that addressed this question: The Genius in All of Us by David Shenk.

In the introduction to the book he discusses the baseball hitting skills of Ted Williams. The author tries to dispel various myths as to why Mr. Williams was such a good hitter. He stated that baseball fans thought of him as having "...a collection of innate physical gifts, including spectacular eye-hand coordination, exquisite muscular grace, and uncanny instincts."

What did Mr. Williams think of this as an explanation of his ability? Not much as is clearly evident in his reply: "Nothing except practice, practice, practice will bring out that ability... the reason I saw things was that was so intense... It was discipline, not super eyesight."

This discipline was apparent from an early age. When interviewed friends from his youth recall him constantly hitting baseballs. In fact they related that he would hit the balls so many times to practice his swing and stance that the outer shells of the balls would be worn completely off when he was finished with them.

When he achieved his dream of reaching the big leagues his search for hitting knowledge didn't slow down at all. This drive was evident to his biography writers Jim Prime and Bill Nowlin, "He discussed the science of hitting ad nauseam with teammates and opposing players. He sought out the great hitters of the game - Hornsby, Cobb, and others - and grilled them about their techniques."

Mr. Shenk also wanted to highlight that child prodigy's where not born with natural gifts. For example he examined Mozart, who is often referenced as an example of a child prodigy. The real story behind his amazing skills starts with his father Leopold Mozart, whose passion was music, and just happened to be a music teacher and composer. His father might not have been a master composer but he had a gift for teaching music and had developed methods that were quite advanced for his time.

His father had already taught Mozart's sister, Nannerl, how to play and Mozart naturally developed an interest in the music that enveloped his family's world. Under this environment and with continuous instruction from his father he went on to achieve world acclaim when he was older but during his youth his level of performance is often matched today by children who are taught today under the same type of rigorous instruction regime.

Anders Ericsson, a Swedish psychologist, has studied the issue of talent and several themes seem to equate to achieving that goal. Among those that are relevant to developing skills in investing include:

1. Practice style is all important. His studies have shown that you need to use what Ericsson calls "deliberate practice" which he explains as "... [involves] repeated attempts to reach beyond one's current level which is associated with frequent failures." (page 55, The Genius in All of Us)

2. Short-term intensity cannot replace long-term commitment.

Ericsson studies revealed no genetic components that accounted for elite athletic achievement (with the exception being body size). Given this evidence the author of The Genius in All of Us concluded that "Becoming great at something requires the right combination of resources, mentality, strategies, persistence, and time; these are tools available to any functioning human being."

A final point that I want to make that reinforces the point I am making in this section is summed up on page 20 of the book Complications: A Surgeon's Notes on the Imperfect Science by Atul Gawande. He relates that K. Anders Ericsson, a "cognitive psychologist and expert on performance, notes that the most important way in which innate factors play a role may be in one's willingness to engage in sustained training" (italics by original author).

Friday, 02 July 2010 00:00

Nordion: An Interesting Situation

I originally sent this as an email1318 to a friend in February of this year and I thought I would post it here as I still find the situation interesting.

The company is called MDS INC (Ticker: MDZ) (soon to be renamed to Nordion). The background history of the company is one filled with a legacy of value destruction but it has now sold all but its core business (more later) with the biggest legacy business being sold to Danaher recently for which the company received $650 million. At this point all the old business divisions besides Nordion have been sold but there are still some legacy obligations remaining.

The prior management team has been replaced, with the exception of the CEO of the Nordion business who is now the CEO. The company is now refocusing on its Nordion business, a medical isotope supplier.

So what is the deal here? Well medical isotopes are only produced, currently, in 5 nuclear research reactors, the newest one coming into service in 1965. Out of those five there are two that produce about 65% of the world's supply of medical isotopes. The HFR (Netherlands) and NRU (Canada) reactors are those 2. Nordion gets 100% of the Mo-99 produced from the NRU reactor and then processes it into Tc-99m and exports it to Lantheus who distributes it.

Tc-99m is used in 30 million patients yearly to treat a range of issues including Myocardial perfusion, bone scans, etc. Its advantages include low dose, a six hour half-life and a historically low cost. All these are also important competitive advantages that have kept away competition for 30+ years.

The business, under normal operating circumstances is solidly profitable.

So what is the problem? The first is that the NRU reactor is old and has been offline since late 2009 due to a small heavy water leak. That presents supply problems to Nordion which in turn has lead to unprofitable operations. The company had been working with a division of the Canadian government, AECL, to design and constructing two new nuclear research reactors, the now infamous (in these circles) Maple project which has now been completely stopped by the current Canadian government.

So with NRU down and Maple cancelled the stock is in the doldrums, for good reason.

Why even bother with this? Well when NRU gets back online (scheduled for late April but I have my doubts*) they should be up for a healthy time period because during the repair the reactor was completely shutdown. This allowed the AECL to do a bunch of additional work inside the reactor that it normally can't do (because the reactor was almost continually in service) which to date has included new wiring, critical values and chiller units. The AECL is going to put patches over the problem areas and so far is 48% completed*.

Weekly updates (as well as a bunch of informative videos talking about the process (can be seen at The AECL is going to apply for a life extension with the Canadian nuclear regulatory agency to keep it running until 2016 which I think is highly likely to pass based on comments from the government, etc. So if they can get it back online and if they get the license extension Nordion should have a good period of profitability.

Value added action being taken:

The company is doing a buyback and will be purchasing between 40-46% of the outstanding common shares (This has since been completed. Their press release stated that "On March 29, 2010, MDS repurchased and cancelled 52,941,176 Common shares at a purchase price of $8.50 per Common share for a total cost of $450 million under the substantial issuer bid.")

Why might you want to look it more closely?

- Even after this the company with have a clean balance sheet with between $85-110 million in cash and no debt. (On Jun 14, they reported a cash balance of $134 million)

- The company could potentially receive a settlement from AECL (i.e. Canadian government) for a portion of the $350 million they spent on helping to develop Maple

- Will be quite profitable when they get supplies from NRU again and return to normal operations although it may take some time to return to earlier margins levels as customers come back on line

- Due to issues with the way product is developed (with Highly Enriched Uranium) there is no way this is going to be a program that doesn't involve cooperation with governments and there are unlikely to be any major sources on new supplies on the near to medium term horizon


- With global supply issues causing the price of Tc-99m to increase users are looking for replacements that, so far, have meet resistance due to low price point. One such is PET technology may be more attractive

- New research is being done into the production of Tc-99m which could mean at some point could mean more competition

- Outlook is cloudy for when NRU will come back online and if it can get license extended to 2016.

*I was correct as the project was delayed with a new tentative date of late July. On June 30 the AECL posted in their regular updates that they believe the repairs have been completed and think the NRU can be returned to service. They further advised that they will be appearing before the Canadian Nuclear Safety Commission (CNSC) in a public hearing to consider AECL's application for the restart of NRU on July 05, 2010, at 2:30 p.m.

Tuesday, 29 June 2010 00:00

What it Takes!

I receive quite a bit of questions about what it takes to find a job in this field. When I was reading the WSJ article published today called, Intern to Civilization Leader, I thought it was a perfect illustration of what I tell all of them. Do something useful to make yourself noticed and seperate yourself from the crowd. Also be persisent, if you're product is high it will get noticed. Just sending a resume and making a phone call expressing interest will seldom recieve any interest in such competitive fields as investing and gaming.

Here are some relevent quotes from the article:

Q: Internships at game companies are pretty hard to get. How did you land one?

A: I started out as a beta tester, playing new games for the company and asking if I could help out in any way. I kept pestering them until they finally acquiesced. They said they didn't have any full-time positions, but they could make a programming internship for me. That was in February 2005.

Q: Did you have much programming experience when you applied?

A: My father is a computer programmer for United Airlines. He would program me little games for fun, just on his own, really primitive stuff. I kind of picked up on that and started doing it myself. At 9 or 10 years old I was programming simple games. I [started out] majoring in computer science at Colorado State University. But most of what I know now about making games was learned at Firaxis while I was an intern.
How You Can Get There

A: Early on, I did very basic programming tasks that the lead programmer needed done. But I was also making scenarios and maps [for the Civilization game] while in the internship. It wasn't related to what I was doing but it was stuff I found interesting—and so did they. Eventually, they told me they were making expansions [add-on game scenarios] for Civilization IV, and they needed designers to make stuff. That's when I got the job. I was hired on as a full-time designer after getting my degree.

Q: After double majoring in computer science and history, you dropped computer science in favor of a history degree. Has that affected your career?

A: From a very young age I've always had an interest in history, World War II in particular. When other people were reading "Goosebumps," I was reading [the book] "Panzer Battles." It ended up playing a major role in what I've been doing because Civilization uses history as a foundation for everything that takes place. It's important to know the flow of history and the different major events that people will recognize. When I moved to take the [intern] job at Firaxis [in Maryland], I finished my degree at Towson University. Even as an intern, I was working full-time and dropped the double major to work just on history

Best advice: "It's a very competitive field and it's more than just playing a lot of games," says Mr. Shafer. "You have to separate yourself somehow."

Skills you need: "Being well-rounded and having perseverance," he says. "Knowing programming is third."

Where you should start: "Be proactive. Make your own opportunities," he says."

Monday, 30 November 2009 00:00

Welcome to the updated site!

Hello everyone and welcome to the new site! I created this site over 10 years ago as a place that I could discuss concentrated investing and provide more in depth articles than I was finding in the magazine and internet articles of the time.

After finding a position in the investment industry in 2004 I put the site on hiatus while I concentrated on settling into my new job. After the Great Recession of 2009 occurred I decided to think about how to bring the site back. Why? Because I was distressed about the resulting conversation about investing principles that it spawned.

Stay tuned as I will be posting comments on current investing topics on the blog. I will also be posting more in depth discussion of companies that I think they might be worth investigating more on your own.

Focus Admin

PS: If you enjoyed my book, The Focus Investor, I thought I'd announce publicly for the first time that I'm hard at work on a significantly revised edition of it.

Monday, 30 November 2009 00:00

Brevity Award

The Park-Ohio Holdings Corp. gets the award this year for the shortest annual letter:

"ParkOhio was well positioned during 2009 to take advantage of growth opportunities that are currently developing in our core business. Hard decisions were made last year to ensure 2010 and subsequent years will be rewarding to our shareholders."

Contrast that letter with any annual letter written by the CEO of Techne at the link below:

I received this in my email1318 earlier today and thought I'd share it with my readers here and make a few comments after it.

U.S. Bonds Resemble Internet Bubble, Citi Says: Chart of Day


By David Wilson

Aug. 17 (Bloomberg) -- U.S. bonds may be just as vulnerable to a plunge as stocks were a decade ago, when the Internet bubble burst, according to Tobias Levkovich, Citigroup Inc.s chief U.S. equity strategist.

The CHART OF THE DAY depicts how an index of monthly returns on 10-year Treasury notes since 2000, as compiled by Ryan Labs, compares with a total-return version of the Standard & Poors 500 Index from 1990 through 2005. The latter gauge peaked in August 2000 and tumbled 38 percent in the next two years.

The similarities should cause anxiety, Levkovich wrote yesterday in a report with a comparable chart. He calculated that the 10-year note had a 0.87 correlation with the S&P 500 of a decade earlier, which meant its performance followed much the same pattern.

Another parallel, he wrote, is that investors are moving into bond mutual funds in the same way that they poured cash excessively into stock funds back in 2000.

About $561 billion has flowed into bond funds since the beginning of last year, according to data from the Investment Company Institute. Stock funds, by contrast, had a $42 billion outflow during the period.


A theme that also strikes home with me in investing is that people always seem to extrapolate recent events into the future. Just like in the late 1990s when money recklessly flooded into equities to chase recent good performance investors are now rushing into bonds looking for extreme levels of perceived safety and disregarding high quality equities which are now sporting the most attractive valuations in years (some of which also have dividend yields in excess of 10 year U.S. treasury notes).

On Monday I happened to come across a 1979 New York Times article that referenced Warren Buffett's 1978 Berkshire Hathaway Letters to Shareholders and highlighted his comments on institutional asset allocation. I believe it would be instructive to quote it here with the Bloomberg comments in mind:

"An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities - at full prices they couldn't buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.

A second footnote: in 1978 pension managers, a group that logically should maintain the
longest of investment perspectives, put only 9% of net available funds into equities - breaking the record low figure set in 1974 and tied in 1977."

So what is the situation today concerning the allocations of pension funds and other institutional investors? Let's examine a few relevant quotes from around the world to see if the same behavior that Warren mentioned is happening again.

The first quote is from an April 17, 2009 Bloomberg article:

"Funds overseeing money for California teachers and public workers, Dutch government retirees and South Korean private- sector employees reduced their target weightings for equities this year, data compiled by Bloomberg show. The rest of the 10 largest kept them the same. U.K. pensions have cut stock allocations to the lowest since 1974, according to Citigroup Inc. Managers handling Oxford and Cambridge University professors assets have been selling shares as the MSCI World Index posted a five-month, 51 percent rally."

Here are several more recent quotes from a June 11, 2010 article in Investments & Pension Asia

"Research for the survey was conducted in May 2010. Questions were sent to a wide cross-section of pension funds, almost half (46%) of which are corporate followed by public pension funds (30%) and endowments (8%). They have a total of $110bn under management. The pension funds have, on average, a 44% target allocation to equity, 37% to bonds, 16% to alternatives and 3% to cash.

Given the difficult environment in the lower-quality sovereign bond segment, investors six-month tactical views reflect a more moderate appetite for bonds (though it is far from negative). Indeed, most of the respondents do not anticipate any change in their bond target asset allocation in the next six-months while 13% anticipate an increase and 11% a decrease"

How are the Europeans looking at this issue? Here is a quote from a Finfacts Ireland April 2010 article:

"Mercer, the international pensions consultants, said on Thursday that the move away from shares is particularly evident in the more mature defined benefit markets such as the UK where the allocation has fallen from 54% in 2009 to 50% in 2010. In Ireland it has reduced from 60% to 59% and in the Netherlands from 28% to 23%. This trend is likely to continue, with 29% of UK schemes and 35% of European schemes (ex-UK) planning further reductions in domestic equity. A further 20% of UK schemes and 33% of European schemes (ex-UK) are planning a reduction in non-domestic equity.

Bonds continue to form the largest part of most European pension funds investment portfolios, and this looks set to continue. For example, following the significant rally in equity markets, a net 27% of European (ex UK) schemes plan to increase their exposure to government bonds."

So it would seem that institutional investors have no learned the lesson from their experiences in 1974. They are once again not taking a long term viewpoint and are extrapolating recent trends into the future. They ran out of stocks when they should have been buying them in the downdraft of 2008/2009 and are now increasing bond allocations when they should be increasing their large exposure to high quality equities. After all would you prefer owning a 10 year US Treasury Note yielding 2.69% (as of 08/17/1010) or high quality equities which in some cases can be purchased with yields exceeding 10 year bonds? For example JNJ just sold $550 million of 2.95% 10 year notes, has a P/E of just over 12 and sports a dividend yield of 3.7%. The choice, for me, would be easy.