Monthly Archives: July 2011

Links of Interest – July 29, 2011

Tilson Article Archive – Lots of great articles on and by Buffett and Munger

Bruce Berkowitz’s AAII Presentation – Overview of Berkowitz’s investing process and his thesis on Bank of America

Best Buy Marketing Chief explains advertising flight from print to digital | Poynter. – Good perspective on the secular shift to on-line advertising

Levy Harkins quarterly letter

Horizon Asset Management – Current Commentary

Notes from Jim Roger’s presentation on July 21, 2011

Understanding the Correlation between Oil Prices and the Falling Dollar – Council on Foreign Relations

Is Better Task Management on Your To-Do List? –

100 Ways to Beat the Market #4: Go Back to Buffett

In his classic book Mastery (which I highly recommend), George Leonard provides a road map to long-term success and mastery of your craft. It’s relevant to our subject because, if you want to consistently beat the market, you must pursue investment mastery.

The first of Leonard’s five keys to mastery is instruction. Leonard states, “For mastering most skills, there’s nothing better than being in the hands of a master teacher.”

There is none better than Buffett: not only is he the best investor of our era but also he has shared an enormous amount of his thinking.

My advice is to carefully go back and read or re-read all Buffett’s output. Study it like a chemistry textbook. Study it like Eddie Lampert did. Take careful notes. Let it deeply inform your investment process.

Start with the partnership letters and then work through all the Berkshire shareholder letters. Get a hold of the meeting notes from Outstanding Investor Digest going back to the 80’s. (They may be available through some good libraries. Order back copies if you have to.) They are pure gold. Move on to the speeches and videos. The 1991 speech at Notre Dame is a gem.

Then move on and go through the best of the secondary literature. Don’t miss Seeking Wisdom and Of Permanent Value.

Of course, no study of Buffett would be complete without also going back through Munger’s body of work, starting with the excellent Poor Charlie’s Almanac.

This will take some time. Enjoy the process. Consider it your own post-graduate program in successful investing. Turn down the noise and turn up the wisdom.

Finally, I’ve heard people say that you don’t want to slavishly follow Buffett. They say to seek your own voice. That’s true to a point. Those who master a subject must first master the fundamentals and trace the path forged by the great ones. This takes time and dedication. Only then are you really ready to cut your own path.

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10 Ways to Improve Your Investment Process – #2. Define Your Process

The second idea to improve your investment process – if you have not already done so – is to carefully define it in writing. As investors, by default we all have some type of investment process. Some are good and some are not so good. Some are thoughtfully constructed, some are not.

All of them can be improved through focused effort.

If you haven’t done so already, you should commit your process to writing – not just your general philosophy – but all aspects of your process: your search strategy, research and valuation methods, portfolio management, sell strategy, everything – and then work like crazy to improve it. If you don’t write it down, you can’t study it, tweak it, improve it, and develop it.


To have a good investment process, you need to answer the question, “What’s my edge?” Investing is highly competitive, and you have to assume that the person on the other side of the trade is intelligent and well-informed.

Michael Mauboussin talks about three types of edge: analytical, psychological and institutional.


First, let’s consider an analytical edge. Mauboussin explains that you can think of it as the ability to recognize a gap between the fundamentals and expectations. For example, consider horse track betting. The fundamentals are the speed of the horses or the records of the jockeys. The expectations are the odds and the payouts. Having an analytical edge means being able to skillfully handicap the race and see valuation gaps between the fundamentals and expectations.

How do you get an analytical edge? You could focus on one industry or sector, perhaps where you have specialized knowledge or experience. Or, you could focus on complex situations that are hard to understand. Perhaps you could gain an edge by focusing on micro or nano-cap stocks with little or no analyst coverage.

You might want to focus on securities that have shown persistent outperformance, such as special situations. You could look for time arbitrage opportunities where the market is overreacting to recent events and undervaluing a business’s long term prospects.

Don’t underestimate the knowledge and expertise it takes to gain an analytical edge in today’s highly competitive market. The required skill is similar to that of a medical specialist or skilled attorney.

Charlie Munger tells the story of Max Plank traveling around Europe lecturing after he won the Nobel Prize. Apparently he gave the same speech so many times that his chauffer memorized it. To amuse themselves, so the story goes, Plank would have the chauffer occasionally give the speech. During the Q&A that followed, if someone asked a question that the chauffer couldn’t answer, he would retort, “My good man, I’m surprised you would ask such a simple question in a sophisticated European city. I’m going to have my chauffer answer that one.”

We need to avoid chauffer knowledge like the plague when pursuing an analytical edge. Simply regurgitating someone else’s thesis is to have no edge at all.


Another type of edge is a psychological edge. One form of having a psychological edge is having the emotional discipline to exploit fear – to step up when others are in a state of panic. Another form of psychological edge is having the patience to wait for obviously attractive opportunities. Also, you might seek an edge in how you run your portfolio by placing large bets on your high-conviction ideas. This is how some of the most successful investors run their portfolios.

Professional poker players only bet in size when the odds are favorable. If you don’t know your edge, you can’t assess when the odds are in your favor. If you invest anyway, you’ll make yourself the patsy and the outcome is much less likely to be positive.


Finally, a word about having an institutional edge.

If your money is managed by a professional money management firm, you will have an edge if they truly put your interests first. How do you know? Do they eat their own cooking? That is, is a substantial part of their net worth in the fund? Are their fees fair? Will they close the fund if it gets too large or are they more interested in harvesting assets? Do they look like a closet index fund or do they have a process that adds real value? Pay close attention and focus your investments with managers who adhere to these principles.

10 Ways to Improve Your Investment Process – #1. Define Your Outcome

The first idea to improve your investment process is define your outcome. You must have a crystal clear idea of what you’re trying to accomplish.

If your target is clear, it helps you define a good process. For example, whether your goal is to beat the S&P500 or achieve an absolute return of 15%, it forces you to think carefully about the type of strategy you’ll need to actually do it. What type of securities will you need to buy?  What are their characteristics?  How will you find them?  What about taxes and transaction costs?

Equally important, it will give you a yardstick to say no to the majority of securities that won’t help you meet your goal.

If you’re target isn’t clear, you may be tempted to rationalize poor results.  Buffett warns about shooting an arrow into a blank canvas and then drawing the bull’s-eye around the implanted arrow.

If don’t have a yardstick, you can’t measure your performance and see if you’re making progress.  Without a yardstick, you can’t see if you’re actually adding value.

Isn’t the purpose of an actively managed fund – to add value?

Finally, I offer a word of caution. You can’t define success as achieving your outcome each and every year. External factors and chance have too much impact on short-term performance.

However, if you can’t reach your outcome over a five-year period, you may be kidding yourself. Your investment process may not be adding any value.

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100 Ways to Beat the Market #3: Figure It Out or Pass, Don’t Guess

A recent article in The New Yorker profiled hedge fund titan Ray Dalio. Dalio’s fund, Bridgewater Associates, is the largest hedge fund in the world.

The article describes a weekly meeting at the fund where fifty or so partners and analysts discuss important economic trends and look for opportunities. Dalio describes it as a “What’s going on in the world?” meeting.

During the meeting profiled, there was a discussion about the Chinese economy. The question arose how a slowdown in the Chinese economy would affect commodity prices. After the co-chief executive gave his opinion, Dalio asked for additional input. An associate jumped in and expressed his view that a slowdown in China could have a major impact on global supply and demand.

Dalio impatiently replied, “Are you going to answer me knowledgeably or are you going to give me a guess?”

The associate said he would give a educated guess. Dalio cautioned him not to and reminded him of his tendency to offer an opinion without doing the careful painstaking work necessary to back it up.

There is a little of this associate in all of us.

It’s commonplace to throw around opinions in everyday social interactions regarding everything from politics, to sports to business. That’s all well and good, but, when it comes to investing serious money, such sloppy thinking can be costly.

The article states that, “Eventually, the young employee said that he would go away and do some careful calculations.”

If you want to beat the market, don’t satisfy yourself with educated guesses. Do your own work. If you can’t figure it out, move on. Once in awhile you’ll find something and, if you’ve done your own “careful calculations”, you’ll have the conviction to make a meaningful purchase.

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100 Ways to Beat the Market #2: Learn from the Super Rich


If you have $10 million dollars of investable assets, you may be able to join a super-exclusive investing club called Tiger 21. The group’s 140 members together have investable assets of more than $10 billion.

However, having money isn’t enough. You’ll also need to show that you built your fortune and that you have something to offer the group. Rich seat warmers need not apply.

Members meet once a month to discuss investment ideas and participate in discussions led by world-class experts. The heart of the monthly meeting – and arguably its most valuable component – is the portfolio defense.

During the portfolio defense, a member discloses and defends his portfolio holdings. He is then given candid feedback from other members. The defender also gets a tape recording of the session for further review.

Having to defend your portfolio to a group of highly-capable wealthy investors is characterized as daunting, stimulating and highly valuable.

We could all benefit from such an experience.

Many – if not most – investors continue to hold securities for fuzzy reasons. Perhaps a stock was purchased in a bout of exuberance and you have a nagging feeling there are flaws in your thesis. Perhaps you ventured outside of you circle of competence and made unfounded assumptions. Perhaps the stock was purchased by your last advisor and it’s there because you haven’t gotten around to selling it.

Start by taking Buffett’s simple advise and write down your investment thesis for each security. A couple of paragraphs should suffice if you really know why your holding it. This should include why its cheap or, if it’s fairly valued, why its intrinsic value will grow at a satisfactory rate.

If you can’t do it, you just flunked your own personal Tiger 21 portfolio defense for that holding, and you should seriously consider exiting the position.

You could also find a way to create your own feedback loop alla Tiger 21. The trick is finding knowledgeable investors or businesspeople who are willing and able to go through the process.

One simple idea is to publish your investing theses on investing web sites such as SeekingAlpha, Value Investors Club or GuruFocus and then defend your idea in the ensuing discussion.

With a little creativity and desire you can find a way to do this.

The bottom line is that we all have blind spots. We all fall victim to human frailty and cognitive biases. We all have gaps in our knowledge. The problem is that your portfolio may contain one or more, at worst, ticking time bombs and, at best, chronic underperformers that can be hazardous to your wealth.

After all, even Buffett needed a Charlie Munger.

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7 timeless lessons from Peter Cundill’s biography

I just finished reading Peter Cundills biography There’s Always Something to Do: The Peter Cundill Investment Approach. It’s the story of a great investor who lived life on his own terms and who had a great joie de vivre.

The book contains several timeless investing lessons.

1. Follow your passion with conviction and success will follow. Cundill discovered Ben Graham after knocking around in the dark for several years and that was it. He followed the path laid out by Graham with unwavering gusto and built one of the great long-term track records in the process – a compound annual rate of return of 15%+ for over thirty years.

2. Operate from a value-oriented framework and you will make money. This is a time-tested approach that has proven to make big money slowly but surely. The track records of many great investors attest to this fact.

3. Search widely for value. The more rocks you turnover, the greater your chances of finding something worthwhile. Cundill became a global investor and scoured the globe looking for deep value.

4. Get good at scuttlebut. Information is the lifeblood of sound investment decisions. Read broadly. Develop your network. Focus. Cundill was a master of the power of scuttlebut which he used to insure he understood a situation thoroughly before committing precious capital.

5. Be patient. Cundill wrote, “The most important attribute for success in value investing is patience, patience, and more patience. The majority of investors do not posses this characteristic.” Coming from a man like Cundill, this speaks for itself.

6. Keep a journal. Cundill kept a detailed investing journal throughout his career that provides the basis for the book. The process of writing worked to clarify his thoughts and allowed him to look back and grow from his experience and mistakes.

7. Do a yearly post-mortem. Each year, Cundill did a critical analysis of his decisions and performance during the prior year. This was conducted with honesty and humility in an effort to continue to raise the level of his game.

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100 Ways to Beat the Market #1: Focus on Annual Reports


A few years ago, Warren Buffett was on the Fox Business Network discussing the sale of Berkshire’s shares of PetroChina. Fox anchor Liz Claman asked Buffett how he was able to come up with the idea to invest in PetroChina in the first place.

Buffett replied, “Other guys read Playboy, I read annual reports.“

A biography of value investor Peter Cundill was recently published entitled There’s Always Something to Do. Truer words have never been spoken. There always is something to do.

The question is are you doing the right things.

Buffett spends his time reading annual reports.  Moreover, he isn’t reading willy-nilly. He’s reading with purpose. Buffett focuses on trying to figure out how much a business is worth.

In the case of PetroChina, in 2002 Buffett figured the whole company was worth about $100 billion. The entire business was selling in the market for about $37 billion. Buffett bought $488 million worth of shares which he sold in 2007 for $4 billion. Buffett earned a 700%+ return on a half a billion dollar investment in five years by sitting in his office and reading annual reports.

How do you spend your time? How many annual reports have you read in the past week?

Being a great investor requires brutal honesty. There’s always something to distract you and get you off your game. Being brutally honest about how you spend your time is the first step to spending it on what really matters.

Focus on reading annual reports. You’ll be richer for it.