Monthly Archives: September 2010

Another Reason Why Investing in a Good Business Makes Sense

Value investing does not always work. Put more precisely, there are periods of poor performance and underperformance. As Joel Greenblatt has pointed out, if it wasn’t this way, everyone would do it. The good news is that, in the long-term, value investing consistently delivers satisfactory investing returns.

What is required is the patience to wait until the market recognizes the mispricing that you uncovered and re-prices a stock to reflect its intrinsic value. Sometimes the market recognizes this quickly, but frequently, it takes several years for this to happen.

This is one important reason why investing in good businesses makes sense. With a good business, time is on your side. There is less risk of the business losing value, and over time many good businesses grow in value so you get a double dip: the price increases to intrinsic value and intrinsic value grows. With a lousy business, time is your enemy as you face the risk that the business will deteriorate or burn through its liquid assets and lose value.

Here a useful list of characteristics of a good business from value investor Richard Pzena. The list can be used as a checklist when analyzing and thinking about an investment.

Good Business

High Barriers to Entry

Brand Name

High ROIC

High FCF

Loyal Customers

Growth Opportunity

Responsible Management Team

Pricing Power

Strong Balance Sheet

Low Capex Requirements

High-return Reinvestment Opportunities

Commodity Inputs – suppliers have low power

Bad Business

Obsolete technology – newspapers

Money Loser

No Strategic Vision

Legacy Costs – high cost producer

A Commodity Product

Poor Corporate Governance

Heavy Regulation

Prone to litigation

High Maintenance CapEx Requirements

Knowing a Business Leads to Investing Success

Great investing may be simple, but it is not easy. It requires that you master not only a number of analytical skills, but also your own emotions.

One of the mistakes that investors make is spending too much time studying investment philosophy and process, and not enough time studying businesses. Investment philosophy and methodology will never be a substitute for knowing a business inside out.

When you come across a “millionaire next door”, he or she probably made their money by mastering a small corner of the business world, not spending endless hours studying management theory or entrepreneurship.

Think Rose Blumpkin. She had an advantage over her competitors because of her relentless focus on the furniture business.

There’s a show on the History channel called American Pickers about two guys who travel around Iowa looking for antiques and collectables that they can then restore and resell. The reason they can make a business out of it is that they have an informational advantage. Through years of focus and experience, they know what will sell and what won’t and, most importantly, what things are worth.

Investing is very similar. You must be able to 1) value a business and 2) wait for the right price.

I believe you should spend at least as much time reading annual reports as you do studying books on value investing. I’m not saying you don’t need to master the great books and writings on investing. On the contrary, this is essential and part of the reason this blog exists. Nevertheless, as you master the framework and develop your own investing process, more and more of your time and energy should shift to studying businesses.

Think how much sense it would make for an aspiring golfer to spend all his time reading books and magazines on golf, but only infrequently play golf.

The foundational skill of a great investor is being able to confidently value a business. Only then will you have the confidence to make a meaningful investment when everyone else is afraid or focused on the wrong things.

What annual reports and 10-K’s are queued up for your reading this week?

My Watchlist – September 28, 2010

I have reviewed issue 5 of Value Line and added companies that have exceptional returns on equity or growth in book value. The list is not perfect and some judgment is required in deciding whether to include a particular stock. As always, I welcome your feedback and comments.

The idea here is to have a dashboard of substantially all the high quality businesses in the U.S. in one place that you can review at least weekly to see what Mr. Market is making available to you.

Here is the updated watchlist.

Stocks Added This Week.

Cisco Systems, Inc. (CSCO)

Nokia Corporation (ADR) (NOK)

Express Scripts, Inc. (ESRX)

Avon Products, Inc. (AVP)

The Estee Lauder Companies Inc. (EL)

Nu Skin Enterprises, Inc. (NUS)

Stocks Moving Within 10% of Their 52 Week Low:

Techne Corporation (TECH)

Paychex, Inc. (PAYX)

If you see a stock that looks interesting, here are some questions that may be useful in determining if it is worth pursuing further:

1. Is it within my circle of competence, i.e. do I understand how the business works and where it will be in five to ten years? Be mindful of overconfidence bias.

2. If yes, spend an hour reading the annual report and recent filings. Read these with a purpose. Try to develop a preliminary investment thesis that you are trying to substantiate or disprove.

3. Calculate EBIT (EBITDA – maintenance capex)/Enterprise Value to see how cheap it is.

4. Calculate return on tangible capital employed to see how good a business it is.

5. Ask yourself if it is as good or better than your best holding(s). See Opportunity Cost: Buffett & Munger’s Powerful Investing Filter

6. Ask yourself if it meets your hurdle rate, i.e. 15%, 20%, etc. If you don’t know where you’re going, any road will take you there.

7. Ask yourself if it is better than the other stocks available on the list or that you have found elsewhere. All things considered, buy the cheapest asset available.

8. If it passes all these relatively quick tests, it may warrant your research time.

The author of this blog is NOT an investment, trading, legal, or tax advisor, and none of the information available through this blog is intended to provide tax, legal, investment or trading advice. Nothing provided through these posts constitutes a solicitation of the purchase or sale of securities/futures. The data and information presented in this blog entry is believed to be accurate but should not be relied upon by the user for any purpose. Any and all liability for the content or any omissions, including any inaccuracies, errors or misstatements in such data is expressly disclaimed.

Reflection on a Great Retail Investor

On Friday, I posted notes on an investor’s talk at the Special Situations class at the Columbia Business School. I believe that the class is taught by Joel Greenblatt. The guest speaker specializes in retail store investments. The talk is worth studying and contains many valuable lessons.

Focus Pays Off

So much of investing is trying to get an edge. You want to be like the guy Munger describes who makes a living at the horse track by only betting when the odds line up in his favor. Too many investors are all over map, often veering outside of their circle of competency. One way to get an edge is to pick a few industries you understand and then study them until you really penetrate how they work. You do this by reading the filings of the companies in that industry and following them over a number of years.

The good news is that making money is not so much a function of how many industries you follow but how well you know the ones that you do. The retail investor made annual returns in the high 20’s by focusing on one industry. She has a real edge because she has a knowledge advantage.

By operating in one sector over a long period of time, she understands the patterns of how the stocks in that group trade.

The primary pattern is simple. The market focuses on the short term. Inevitably even the best retailer will stumble on a short term basis. The market – being unduly focused on the short term – then takes the stock down. This volatility creates opportunity.

“The best time to get in is when they missed a season of merchandise because if you look at the fundamentals of the company and it is well-run and the stock gets crushed because they miss a season of merchandise, then it is an opportunity to own for the long term. It is really irrelevant if they pick the hot trends or not.”

Normalized Earnings Power

The key is to figure out what the normalized earnings power is going to be in three to five years after the company moves beyond the current set of problems. You can then set your own price target based on your projection of normalized earnings.

She does her own work. The market may miss a stock because it’s selling at 8.5 Enterprise Value/EBIT as a result of depressed margins because management made some short-term merchandising mistakes. If her own numbers show normalized EV/EBIT of only 6x, she may have a real opportunity. She then does more research.

To value retail stocks, she tries to determine what the company will earn over a five year period and then she uses a very conservative terminal value. She does not simply make a linear projection based on past data, but actually looks at the business at the store and square-foot level. How many stores can they open? How close to saturation are they? Are current margins depressed? Can they improve? Why will they improve? Does this store have a reason to exist? What is it and why will people continue to shop there?

Greenblatt stressed how important it is to actually model the build-out of the store base using conservative assumptions instead of just picking a growth rate and future P/E ratio out of the sky. The bottom line is that you need to understand the business.

How to Research a Retail Stock

Determine how much growth is left in the concept. To determine the saturation of a concept, you need to know who they cater to. There are A malls, B malls and C malls.

“You could see an AEOS (American Eagle Outfitters) in an A or B or C mall. A 1000 to 1200 is max saturation for a retailer to go into all three mall types. An ANF (Abercrombie & Fitch) will max out at 400 malls because they are only in A type malls. You won’t see them in a C mall. That is why they launched the Hollister concept which was for lower quality malls: B and C.”

Do primary research. She approaches research with a thesis. It’s not just an open ended field trip. She wants to know why a stock is cheap and whether it’s a temporary or permanent problem.

Talk with anyone who will talk with you: store managers, senior managers, merchandising managers, people who come out of the store with or without bags, store employees. “Are customers coming in and not buying? What do they think of the merchandise?”

Spend a lot of time in the malls and check out the stores.

Macro Economics

She does not spend time trying to figure out the macro issues. She thinks they are already priced into the market. The primary question is, “Whether this is a cheap stock today and do I think over the next two years there will there be a normal environment.”

Sweating Your Way to Success – Peter Orszag – NYTimes.com

“The most important book I’ve read over the past six months is Matthew Syed’s “Bounce”. Teddy Roosevelt once said that “in this life we get nothing save by effort.” Syed shows how trenchant Roosevelt was.

Syed is a two-time Olympian in table tennis. His book is impressive for two reasons. First, he takes empirical evidence on the science of success seriously (and in the areas where I know the literature to some degree, his depiction is quite accurate). Second, he shows how that evidence shatters widespread myths about what leads to better performance in any complex undertaking (including, for example, chess, tennis and math).

Basically, we’ve bought into several misconceptions about excellence, which are not only wrong but affirmatively counterproductive.

Let me focus today on the core one. Too many of us believe in the “talent” myth — that top performers are born, rather than built. But Syed shows that in almost every arena in which tasks are complex, top performers excel not because of innate ability but because of dedicated practice.”

(continue reading)

Links of Interest – September 24, 2010

Charlie Munger at the University of Michigan (video)

‘We will never see another Warren Buffett’ – Money – DNA – Monish Pabrai on Buffett and investing.

Plan Not to Panic – Joel Greenblatt

Why Some of the Strongest Firms Disappointed Investors

What’s Your CEO Really Worth?

stockPup – fetching data for the intelligent investor – interesting research tool. Worth a look.

A few stock ideas:

Buffett Builds Stake in Needle Maker — Seeking Alpha

A Long-Term Look at Lowe’s — Seeking Alpha

Dr. Pepper Snapple: Getting Sweeter With Rising Dividend, Almost 3% Yield and Stock Buybacks — Seeking Alpha

GameStop To Buy Back $300M in Shares; Retire $200M In Debt – WSJ.com – GameStop has been showing up on the Magic Formula screen.

Here’s a blueprint for how to analyze a retail stock. Looks like Joel Greenblatt’s Special Situations Investing class at the Columbia Business School. The speaker could be Greenblatt’s sister who, I believe, specializes in retail investing. Study this one carefully as it shows how a successful investor values a business.

Class Notes #6 an Investor Specializing in Retail Store Investing

James Montier on Inverting Discounted Cash Flows

James Montier is one of the more insightful investment analysts writing today. Montier is highly skeptical about discounted cash flows (DCF) because they rely on forecasting. He believes that the approach is theoretically correct – an asset is indeed worth the discounted present value of all future cash flows – but that it is fatally flawed in practice because, in his view, no one can make accurate forecasts.

In addition, he points out the problem of the terminal value: minor changes in the terminal growth rate and the discount rate dramatically alter the terminal multiple.

I think Montier raises good points but I think these limitations can be overcome if DCFs are used sparingly and with good judgment. One rational approach is to only use DCFs to value companies that have an established track record of stable earnings and a durable competitive advantage. The terminal multiple should be very modest. For example, you could only project earnings for five to eight years and then use a no-growth terminal multiple.

In general, if you use conservative estimates, you should be able to use DCFs to usefully value any asset if the gap between the present value and current price is large enough. Another approach, which was used by Benjamin Graham, was to show an example where it was only possible to establish a wide range of possible intrinsic values. No matter how wide the range, it was still useful if the current stock price was below that range.

Notwithstanding Montier’s distrust of forecasting, he does think that DCFs can be inverted to make transparent and explicit the growth assumptions that are baked into a stock’s current price. The investor can then use these new insights to assess if he is being overly optimistic and carrying too much risk.

Here’s Montier from the September 9, 2008 issue of Mind Matters:

So, if one can’t use DCF how should one think about valuation? Well, one solution that I have long favoured is the use of reverse engineered DCFs. Instead of trying to estimate the growth ten years into the future, this method takes the current share price and backs out what is currently implied. The resulting implied growth estimate can then be assessed either by an analyst or by comparing the estimate with an empirical distribution of the growth rates that have been achieved over time, such as the one shown below. This allows one to assess how likely or otherwise the implied growth rate actually is.

I thought it would be instructive to do this exercise with two widely held growth stocks: Apple (APPL) and Amazon (AMZN).

Apple

Apple’s current stock price is $287.75 (9/22/2010 close). I used consensus 2010 EPS of $14.48 (see Marketwatch) as the year 1 EPS. I assumed a discount rate of 12% or, said another way, I assumed that investors were looking for a 12% return from Apple’s stock. Assuming a no-growth terminal multiple, the current price assumes that Apple can grow at a rate of 15% per year for the next ten years.

Assuming a constant P/E ratio (and my other assumptions), this would mean Apple would need to have after tax earnings of over $50 billion in year eleven. To put that in perspective, the most profitable company in the Fortune 500 in 2009 was Exxon Mobil which earned $19.3 billion. Microsoft was second with profits of $14.6 billion. Wal-Mart Stores was third with profits of $14.3 billion. Thoughtful investors would want to look carefully at how Apple could grow its earnings to this level.

Amazon

Amazon’s current stock price is $151.83 (9/22/2010 close). I used consensus 2010 EPS of $2.64 (see Marketwatch) as the year 1 EPS. I assumed a discount rate of 15% or, said another way, I assumed that investors were looking for a 15% return from Amazon’s stock. Assuming a no-growth terminal multiple, the current price assumes that Apple can grow at a rate of 37.5% per year for the next ten years.

Assuming a constant P/E ratio, this would mean Amazon would need to have after tax earnings of over $28 billion in year eleven. Based on the consensus estimates, Amazon should earn about $1.2 billion in 2010. Here again, thoughtful investors want to look carefully at how Amazon could grow its earnings to this level.

Here’s the data.

Obviously, there are many ways that these assumptions could have been done. The point is that if an investor buys a given stock at a given price, he should make explicit the assumptions he is making given the current stock price, his expected return (the discount rate), the growth rate, the terminal multiple and the future P/E ratio.

The author of this blog is NOT an investment, trading, legal, or tax advisor, and none of the information available through this blog is intended to provide tax, legal, investment or trading advice. Nothing provided through these posts constitutes a solicitation of the purchase or sale of securities/futures. The data and information presented in this blog entry is believed to be accurate but should not be relied upon by the user for any purpose. Any and all liability for the content or any omissions, including any inaccuracies, errors or misstatements in such data is expressly disclaimed.

Watch List Question: Where’s the Implied Valuation and Margin of Safety?

Yesterday, I received the following comment and question regarding my watch list. I thought I would answer the question in a blog post in case others had the same question and to better explain the methodology of my watch list.

Hi Greg,

Great site, thanks very much for all of your ideas.

I’ve looked at your watch list every time you’ve posted it, but I’m finding it very unintuitive.

I think I understand your concept of Expected Return expressed as a %, but why not have an implied valuation and Margin of Safety columns as well so you can quickly see the variance from current price and best opportunity to research?

If I understand correctly, you could just rank opportunities from greatest yield to least, but the metric feels very unfamiliar.

I’m interested in your thoughts,

thanks,

aron

First, I want to thank Aron for the question. I would start by saying that there is not a perfect way to value a company. All valuations are based on future assumptions that are inherently suspect. There are two basic approaches to this reality: 1) limit future projections to companies with exceptional economics and a long track record (Buffett) or 2) don’t make projections and look for things that are cheap based on current assets and earnings power.

The idea behind the watch list is to focus on those companies that have exceptional economics as evidenced by ten years of exceptional returns on equity without undue leverage. These are the companies where an investor has at least a fighting chance of projecting long-term future earnings and growth.

In order to prioritize the list and highlight areas of opportunity, I wanted to include a valuation metric. I chose to express this as an expected return, which is the sum of the earnings yield and the expected growth rate. This is the approach used by Glenn Greenberg. (Greenberg also seems to suggest that Buffett approaches valuation in a similar way.) The benefit is that it is simple and gets you to focus on two central questions:

  1. Is it cheap today? (earnings yield)
  2. How fast can intrinsic value grow? (growth rate)

It is also easy to calculate.

Aron asks why I don’t rank opportunities from greatest yield to least. The answer is that I wanted to include growth in the valuation since growth is such an important part of a company’s intrinsic value. As Buffett pointed out in his 1991 letter to shareholders, a business with “bob-around” no growth earnings is worth 10 times after tax earnings using a discount rate of 10%. A good business that can grow earnings at 6% is worth a “whopping” 25 times after-tax earnings.

The expected return approach I take is simply another form of a discounted cash flow (DCF). There are three components to a DCF: 1) the discount rate (or expected return), 2) the projected stream of cash, and 3) the present value (PV) of those cash flows.

For a growing stream of cash flows we can use the following calculation:

PV = current earnings x 1/(discount rate) – (growth rate)

Assume I find a stock on the watch list with an earnings yield of 10% ($50 stock price and an EPS of $5) and an expected growth rate of 5%. I would calculate that stock to have an expected return of 15%.

Using the formula above, here’s the math:

$50 = $5 x 1/(15% – 5%)

We can say that the $50 stock price is discounting a 15% future return, assuming a growth rate of 5%.

Often DCF’s are done by first setting the discount rate – or alternatively, the hurdle rate – and calculating the present value of the stock. (I believe this is the approach that Aron is looking for.) If this value is greater than the current stock price, we can look at the difference between the PV and the current stock price and judge whether it provides a sufficient margin of safety, typically expressed as a percentage derived by dividing the discount by the PV of the stock

For example, let’s use a discount rate of 10%. 10% is often used as a proxy for an expected return on an equity investment. (Alternatively, we could follow Buffett and use the yield on long-term government bonds.)

In that case, the present value is far greater because of the reduction in the discount rate from 15% to 10%:

$100 = $5 x 1/(10% – 5%)

We could then say that the stock is selling at a 50% discount to present value.

What I intended to show is that the approach I take in the watch list and the approach of expressing the PV using a fixed discount rate are essentially two sides of the same coin.

Aron also asks about having a margin of safety value so it could be easily compared with that of other stocks on the list. First, I think some caution should be used in expressing the margin of safety as a single percentage in that it can give the impression that the figure is precise. Intrinsic value is better understood, I believe, as a range of values. (Of course, in fairness, the same critique could be made of expressing the expected return as a precise figure, which is why I stress that this is a starting point, nothing more.)

Having said that, the expected return does imply a margin of safety. An asset with a true expected return of 15% is worth far more than an asset with an expected return of 8%. Think of it this way: many things could go wrong with the former asset and it could still outperform or equal the latter asset paying only 8%.

I hope this answers the question. If not, please let me know. Also, I welcome all comments and questions on this most important investing topic of valuation.

My Watch List – September 21, 2010

I have reviewed issue 4 of Value Line and added companies that have exceptional returns on equity or growth in book value. The list is not perfect and some judgment is required in deciding whether to include a particular stock. As always, I welcome your feedback and comments.

The idea here is to have a dashboard of substantially all the high quality businesses in the U.S. in one place that you can review at least weekly to see what Mr. Market is making available to you.

The valuations are very simplistic, although the basic conceptual framework is sound. Over time, an asset should deliver a total return equal to the sum of its current free cash flow yield and its growth rate (assuming that growth rate continues over the long-term).

The valuations attempt to calculate the annualized return that is discounted in a stock’s current price. The first component of the valuation is the company’s earnings yield based on the consensus estimate for this year’s earnings. This may overstate or understate the true free cash flow yield depending on a number of factors, primarily the company’s level of depreciation and amortization and its level of capital expenditures. Ideally, it makes more sense to look at the ratio of EBIT (EBITDA – maintenance capex) to enterprise value in order to compare businesses, so as to normalize earnings and the capital structure. See Greenblatt’s book The Little Book that Beats the Market for more details.

Nevertheless, the earnings yield is easy to calculate and, since we’re looking for stocks that are compellingly (obviously) undervalued, it should serve as a useful screen so we can focus our time on stocks with the greatest potential.

The second component of the valuation is the growth rate. Here I take 60% of the growth rate over the past ten years. The use of 60% is an attempt to be conservative. Caution: even taking 60% of the past growth rate can grossly overstate the future growth prospects of a business. The primary idea here is that you want to determine if the factors that led to the past growth are still in place, and, if so, how much growth potential is left. If you can’t figure it out, you can’t value the stock, at least not its future growth prospects. It still may be worth considering if the stock is so undervalued that it is cheap even if you factor in zero growth going forward.

I’ve added the following stocks this week:

Alliant Techsystems Inc. (ATK)

Rockwell Collins, Inc. (COL)

Lockheed Martin Corporation (LMT)

Markel Corporation (MKL)

Berkshire Hathaway Inc. (BRK.B)

Fairfax Financial Holdings Limited (FRFHF)

U.S. Bancorp (USB)

CIGNA Corporation (CI)

Laboratory Corp. of America Holdings (LH)

Lincare Holdings Inc. (LNCR)

UnitedHealth Group Inc. (UNH)

Computer Programs & Systems, Inc. (CPSI)

Techne Corporation (TECH)

Here’s the updated Watch List for September 21, 2010.

Tip: Don’t forget to utilize the link to GuruFocus in column U. It’s a quick way to see who is buying a stock.

The author of this blog is NOT an investment, trading, legal, or tax advisor, and none of the information available through this blog is intended to provide tax, legal, investment or trading advice. Nothing provided through these posts constitutes a solicitation of the purchase or sale of securities/futures. The data and information presented in this blog entry is believed to be accurate but should not be relied upon by the user for any purpose. Any and all liability for the content or any omissions, including any inaccuracies, errors or misstatements in such data is expressly disclaimed.

A Blueprint for Being a Lousy Investor

In 1986, Charlie Munger gave the commencement speech at the Harvard School, a prep school that five of his sons attended. Munger took his inspiration from a prior commencement speech given by Johnny Carson in which Carson, using inversion, told the students how they could guarantee a miserable life. Here’s Carson’s prescription:

  1. “Ingesting chemicals in an effort to alter mood or perception;
  2. Envy; and
  3. Resentment”

Munger offered his own reflections on Carson’s prescription, and added four more of his own:

  1. Be unreliable;
  2. Ignore the experience of others, both living and dead;
  3. If you get knocked down in life, stay down; and
  4. Ignore the advice of the rustic who said, “I wish I knew where I was going to die, and I’d never go there.”

Inversion allows you to see a problem or situation from a different perspective in order to gain fresh insights that you did not previously notice or that you took for granted. It is in that spirit that I offer the following advice for how to be a poor investor.

1. First, don’t spend much time looking for new investment ideas. Don’t look for ideas off the beaten path, but rather stick with ideas and themes that enjoy a strong consensus. Also, be inconsistent in searching for investment ideas and lose interest when the market is going down and everyone is negative and afraid.

2. Second, be content with superficial analysis of your investment ideas and count on being able to quickly dump your stocks if things go wrong. Don’t do your homework like you would if you were investing substantially all of your net worth in a local business or farm.  Save yourself a lot of time by making your purchase decision based on a write-up in a business magazine, analyst report or blog post.

3. Third, don’t limit yourself to simple, boring investments that are easy to understand. Look for ideas in more exotic, “fast-moving” sectors – biotech, commodities, options, alternative energy, and emerging markets – where you have little experience or competence. Ignore the examples of others – including sophisticated institutions – who have lost their capital by speculating in areas they did not understand.

4. Fourth, invest in businesses with mediocre or poor returns on invested capital that do not enjoy any durable competitive advantages. Reach for more speculative returns by betting on the turnarounds of poorly performing businesses. Count on the fact that, even though you have no expertise in a given industry, you’ll be able to predict if a struggling company will be able to turn around. Ignore the advice of investors like Buffett and Greenblatt who have found that good businesses have a much better chance of delivering satisfactory investment results.

5. Fifth, don’t take the time to investigate the track record of a company’s management. That way you won’t be troubled if management has a poor record of allocating capital, if they will be highly compensated regardless of how the business performs, or if there is evidence that they have been dishonest or unethical in their prior dealings.

6. Sixth, don’t worry about the price you pay for an investment as long as the company’s story is sufficiently exciting, loved by the media or a consensus winner. If you do decide to look at how much you’re paying, don’t spend a lot of time thinking about valuation, normalizing earnings power, and future growth prospects. Instead, rely on simple (simplistic) metrics like price-earnings ratios or price-to-book ratios where you don’t have to think too much or that don’t require as much research. Be content with a superficial valuation and assume that the factors that led to the business’ past success will be firmly in place for the next five to ten years.

7. Seventh, buy a lot of small positions. That way, you’ll never miss out on the excitement of betting on your latest hunch, and you’ll never need to worry too much about a position because it won’t overly matter if the investment works out or not. You’ll always have plenty of action and you can hedge against not really knowing much about any of your investments.

8. Eighth, embrace the newer short-term oriented approach to investing and don’t fall for an out-of-fashion strategy like patiently buying and holding an investment. Who wants to wait three to five years for an investment to work? Focus on investments that will be up big in the next six to twelve months – or sooner. Ignore the fact that there is no rational basis for consistently making short term predictions of prices.

9. Ninth, ignore the lessons of your past mistakes. It’s psychologically painful to go back over your failed investments and it takes time. Ignore developments in behavioral finance and assume that you’re above all that anyway – that you already know what you’re doing. Assume that you’ll get better results in the future without changing any of the methods and behaviors that led to your past results.

10. Finally, take pride in the fact that you already know what you need to know and that learning the lessons of financial history are a waste of time. Also, don’t take the time to study all the great investors who have generously shared their investing methods. Ignore the fact that business is an evolving, complex reality and that investing is a highly competitive endeavor where you go up against the best and the brightest. Ignore the examples of investors like Munger and Buffett – and most successful investors – who are life-long learners.