Monthly Archives: December 2009

Bruce Greenwald on Lessons Learned from the Financial Crisis

In an interview with Advisor Perspectives, value-investing guru Bruce Greenwald talks about lessons learned from the financial crisis. As a result of the crisis, he has refined his process of risk management.

Here are the takeaways:

1. Never overpay for an investment. Having a margin of safety is critically important.

2. You need to have a reasonable amount of diversification, which Greenwald defines as 20-30 globally diversified positions.

3. Beware of leverage. It’s the fastest way to make a temporary impairment of value into a permanent loss of capital. Many value investors got burned because they invested in financial companies with high amounts of leverage.

4. You must take macro risks into account. The best way to do this is to look at the macro-risk exposure of each of your holdings, for example, how would the position perform in an inflationary environment, what about deflationary?

(Read the entire interview)

Joel Greenblatt Reading List

Here is the reading list from Joel Greenblatt’s Value and Special Situation Investment course at Columbia University.

Greenwald, B., et al., Value Investing –– required
Haugen, R., The New Finance: (4th edition)–– required
Greenblatt, J., You Can Be a Stock Market Genius –– required
Greenblatt, J., The Little Book That Beats the Market –– required
Cunningham, L., The Essays of Warren Buffett –– required
Hooke, J., Security Analysis on Wall Street –– recommended
O’Shaughnessy, J., What Works on Wall Street –– recommended
Dreman, D., Contrarian Investment Strategies: Next Gen. –– recommended
Graham, B., The Intelligent Investor –– recommended
Plus – selections from Graham, B., O’Glove, T., Buffett, M., and more

I suspect the O’Glove selections are from Quality of Earnings.

Could Buffett Earn 50% Returns in Today’s Market?

Warren Buffett is on record as saying he could earn 50% annual returns today if he were working with much smaller sums of money. Here’s a good blog on his statements on the matter from Valuevista.

Warren Buffett — 50% Returns
Much attention has surrounded reports that Warren Buffett said he could generate 50% returns on small sums of money. Typically, three immediate questions arise:

Did he really say that? Did he really mean it? And, how would he (or me or my favorite money manager) do it?

Looking at the record of his comments, it’s pretty clear that he said it (and repeated it) and he really means it.

Buffett seems to have got the set this ball rolling in 1999. At that year’s BRK shareholder meeting, he was asked:

Shareholder: Recently, at Wharton, Mr. Buffett, you talked about the problems of compounding large sums of money. You were quoted in the local paper as saying that you’re confident that if you were working with a small sum closer to $1 million, you could compounded at a 50% rate. For those of us not saddled with a $100 million problem, could you talk about what types of investments you’d be looking at and where in today’s market, you think significant inefficiencies exist?

Buffett: I may have been very slightly misquoted, but I certainly said something to that effect. I talked about how I polled this group of 60 or so people I get together with every couple of years as to what rate they think they can compound money at if they were investing small sums: $100,000, $1million, $100 million, $1 billion, etc. And I pointed out how the return expectations of the members of this group go very rapidly down the slope.

But it’s true. I could name half a dozen people that I think can compound $1 million at 50% per year — at least they’d have that return expectation — if they needed it. They’d have to give that $1 million their full attention. But they couldn’t compound $100 million or $1 billion at anything remotely like that rate.

There are little tiny areas, as I said, in that Adam Smith interview a few years ago, where if you start with A and you go through and look at everything — and look for small securities in your area of competence where you can understand the business and occasionally find little arbitrage situations or little wrinkles here and there in the market — I think working with a very small sum, there is an opportunity to earn very high returns.But that advantage disappears very rapidly as the money compounds. As the money goes from $1 million to $10 million, I’d say it would fall off dramatically in terms of the expected return — because you find very, very small things you’re almost certain to make high returns on. But you don’t find very big things in that category today.

(continue reading)