Monthly Archives: February 2012

Links of Interest – February 24, 2012

Sardar Biglari Takes a Page From Warren Buffett for His Own Path – NYTimes.com

Yum’s CEO Serves Up New Taco, Growth Plans – WSJ.com

Assessing Performance Records – A Case Study – Howard Marks

Caution: Danger Ahead – First Pacific Advisors – February 18, 2012

The Value Trap of Deeply Cyclical Stocks | Institutional Investor

Vistaprint (VPRT): The Makings of a Moat?

The Biggest I.P. War Chests – Businessweek

Aquamarine Fund Letter

Leon Cooperman on Where to Invest
David Winters of Wintergreen Advisors and Michael Harkins of Levy Harkins & Co.

100 Ways to Beat the Market: #30: Respect the efficiency of markets.

Value investing is seemingly more popular than ever. Books on value investing continue to multiply. Several universities offer programs based on the principles of value investing, and a number of MBA programs send their students on pilgrimages to Omaha to meet with Warren Buffett. These schools produce many trained specialists who find work in various value-oriented hedge funds and money management firms. The web is full of various sites and blogs – like this one – that follow a value investing philosophy.

It is impossible to assess the collective fruit of all these efforts. It is, unfortunately, very possible to be well versed in value-investing methodologies and still fail to produce above-average results.

One thing that can lead to sub-optimal results is under appreciating how efficient the market is most of the time. Wall Street is full of a lot of smart people who dedicate tremendous energy to following the market. The Internet has only made it easier to stay on top of the latest news and information. It is wise to recognize this reality and remain very humble about being able to gain an edge on the basis of better research alone.

In spite of these highly transparent markets and trained professionals, the short comings of human nature are still occasionally on full display, in the form of multitudinous frailties, overreactions and misjudgments. You absolutely want to look for these periodic occasions when the person on the other side of the trade is acting in a way that is irrational.

This is precisely why the Mr. Market parable is so central to value investing. As Bruce Greenwald put it in an interview with The Motley Fool, “Graham saw was that the best indicator of irrationality – sort of a systematic, statistical indicator of irrationality on the other side – is when things get oversold.”

Exploiting this is not so much about having an information edge over the other guy – although you must thoroughly do your homework – as much as it is having an edge in temperament. That is why your search strategy should focus on spotting situations where securities are clearly oversold and sellers are acting irrationally.

Most of the time these are unavailable, but, when they are, you must pounce. These are where the big money is made and where the true, professional value investors, who consistently beat the market, operate.

Links of Interest – February 17, 2012

Warren Buffett’s (Modern Day) Margin of Safety

Glenn Greenberg’s New Buys: Growth Stocks for Value Investors

Watsa sticks to his guns as pessimism proves costly – The Globe and Mail

Oracle Is Too Cheap to Ignore Any Longer

Loews Chief Tisch Says He Favors Cash, Stock Repurchases Over Acquisitions – Bloomberg

Bruce Berkowitz Says Focus on `Survivors’ – Video – Bloomberg

MFP’s Price Interview – Video – Bloomberg

10 Worrying Signs that Your Stock May be a Value Trap

Jim Chanos: Beware the Global Value-Trap (Presentation From Value Investing Congress) ~ market folly

Links of Interest – February 10, 2012

Bill Ackman: RIM Too Tisky to Invest In

Greenlight Capital 2011 Letter to Investors

T2 Partners January Letter to Investors – Big Bounce Back Month

Portfolio holdings of legendary investors – DATAROMA – Value investing – Tom Russo update

Fink: Investors Should Be 100% in Equities – Bloomberg

Coca-Cola: it’s the real thing – FT.com

Shares: reaping the dividends

Schloss Sixty Five Years

Walter Schloss’ 16 Golden Rules For Making Money In The Stock Market

CBS interview with Warren Buffett with tour of Omaha offices

Donald Yacktman is bullish on PepsiCo’s long-term prospects.

Buffett on why Stocks beat Gold and Bonds

Hedge Fund manager Guy Spier on Corporate Earnings.

Warren Buffett: Why stocks beat gold and bonds

(CNN Money) In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives over time.

At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in (continue reading)

100 Ways to Beat the Market: #29: Double down on process.

One of human beings’ quirks is that we are attracted to action. We want something to always be going on. My kids will come to me and say, “I’m bored.” It is not a state they like, and they want me to fix it by conjuring up some exciting activity on the spot.

Thinking about your investing process is not all that attractive to most investors. It seems boring. “Forget process. Just point me in the direction of the next ten-bagger and I’ll be happy.”

Regardless of how we see the world, truth has a way of imposing itself. And the truth is that process is boring, but it is where you can arguably make the most progress as an investor, if you relentlessly focus on it. Over time you will get better, and your results will improve.

Buffett has rightly said that what an investor needs to be successful is a rational framework and the right temperament. He’s correct, of course. But too many stop there and spend, perhaps, too much time thinking about their investment philosophy and not enough time on their process.

Here are some questions that can help you improve your process:

1. How do you search for new ideas?

2. Is your search strategy robust, i.e. does it reasonably insure that you will not miss attractive investments within your circle of competence?

3. How often do you run your screens? Are you consistent?

4. Do you have preliminary filters in place – required hurdle rate, risk profile, complexity, un-knowability, etc. – to quickly weed out ideas and not waste precious research time?

5. When you do find an idea, do you have a well-defined research process or checklist that you go through, without exceptions?

6. Have you carefully defined your valuation methodology? How could you improve it? Do you have a required hurdle rate, and is it appropriate?

7. Do you have investment checklists to help determine if a business is good and if management is a worthy steward of your capital?

8. Do you have a cognitive bias checklist in place to minimize the risk of biased or faulty thinking when evaluating an investment?

9. Do you have a watchlist? Is it up to date? Is it a hodgepodge, or does it contain actionable stocks with pre-determined buy prices?

10. Do you write down your investment thesis, prior to pulling the trigger on a new investment?

11. How do you size a new positions? How many stocks do you hold? Are you a focused investor (Glenn Greenberg) or widely diversified (Walter Schloss)? Why?

12. Do you scale into new positions? Do you buy more when a stock goes down? Do you do this haphazardly or have you thought it through?

13. Do you hold cash and, if so, how much? How did you determine the amount? Does your hurdle rate go up as you cash holdings go down, i.e. do you become increasingly selective as your cash goes, for example, under 20%?

14. How do you monitor your existing holdings? How are you organized to stay on top of your investments? How could you improve?

15. Do you listen to conference calls and read the Q’s? Do you look for disconfirming evidence that challenges your thesis?

16. Have you defined your sell criteria? If you are a long-term investor, is there an over-valuation level at which you would sell? Do you figure it out ahead of time and mark it down?

17. Do you trade around positions – making partial sells and buys as your stocks become over or undersold? Why or why not?

18. Do you review your past mistakes? Do you record your lessons in a form that you can review and learn from?

19. Do you have a time when you regularly review your investment process – all of the above – and make a plan to improve it?

These questions are not exhaustive, nor are they meant to be. They are, however, more than sufficient to get you thinking about your own process and how to make it better. This is the path to beating the market.

Re-issue!

A good deal of what I write about deals with investing principles, which by their nature are not dated. Here’s a couple past blogs on Glenn Greenberg –  one of the best investors out there – that are worth reading, if you missed them, and worth a second look, if you’ve already read them.

Glenn Greenberg at Columbia: How a Great Investor Thinks
Glenn Greenberg at Columbia: How a Great Investor Thinks (Part 2)

Links of Interest – February 3, 2012

David Dreman: Cheapest Stock Market in 30 Years | ValueWalk.com

Wells Fargo: The Bank That Works – Forbes

13 Cheap US Stocks Insiders Bought Recently

Mason Hawkins on His Favorite Investments for the Next Few Years

RISE IN MULTI-FAMILY HOUSEHOLDS A REMINDER THAT YOUNGSTERS CAN’T WAIT TO MOVE OUT–AND EVENTUALLY WILL

Why Facebook Clearly Belongs in the 10X Revenue Club « abovethecrowd.com

Marc Langefeld’s Investment Ideas: Tesco: Consistent Earnings Growth at Attractive Price

Distressed Debt Investing: Understanding Incentives: An Often Overlooked Part of the Investment Decision Making Process

The 10-Word Investing Philosophy – Total Return – WSJ

Chuck Akre on the Search for Compounding Machines