Hi, Welcome to the 9th Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
Why you shouldn’t talk about your current investments
How Investment Checklist can help you to avoid a bad business
Why you shouldn’t check stock price daily
Should you worry about geo-politics and War? and many other topics as well
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The Education of a Value Investor (Part 3 Final)
It takes Years to build Conviction and it’s fine too
I remember talking with Mohnish at the time and expressing my skepticism about the stock, given that this Chinese company lay outside my circle of competence. In the end, it took me more than a year to get comfortable enough to invest with real confidence that I understood the business.
Don’t follow Heard
In the financial markets, plenty of investors— both amateur and professional— take foolhardy swings for the fences, betting on everything from hot tech stocks to overhyped IPOs. Sometimes these risky long shots pay off spectacularly, tempting other investors to follow their lead in making these duffer moves. But, as in chess, I’ve found that it ultimately works better to maintain my discipline and pursue a careful strategy with better odds of long-term success.
Patiently Waiting is an essential skill for a long term investing
When you drop a stone into a calm pond, you see the ripples. Likewise, in investing, if I want to see the big ideas, I need a peaceful and contented mind. This reminds me of a line that Mohnish often quotes from Blaise Pascal:“ All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
Process of selling stocks (Real Truth)
At a recent annual meeting for my fund, someone in the audience asked me how I handle the process of selling stocks. I replied, “Badly.” To some extent, I was being facetious. But I was also being light-heartedly honest because I don’t believe that anyone handles the selling process particularly well. We can all claim to have clear rules— for example, declaring that a stock must be sold when it reaches 80 percent of its intrinsic value. But the truth is that this is an incredibly inexact science. There are stocks in my portfolio that, on a purely rational basis, I should probably sell. But I often hold onto them anyway. One reason is that I’m trying to manage myself, not just my portfolio. And I believe that my investment returns will be better over several decades if I master the trigger-happy side of my nature.
in confessing publicly that I’m not particularly good at selling, I was no longer trying to dazzle anybody with my brilliance or convince people to invest in my fund. (Honesty)
Stop Checking the Stock Price
Many investors check their stock prices not only on a daily basis but also sometimes minute-by-minute. There’s a peculiar glitch in our brains that somehow makes us think that the stock knows we’re watching it. We may even have a nagging fear that if we stop paying constant attention, something bad will happen. Maybe a big news story will sideswipe us while we’re not watching and the stock will suddenly blow up.
Seeing the stock price on the monitor gives the investor a false measure of reassurance that everything is okay, that the earth is still revolving in its usual orbit.
It’s worth thinking a little more about the effect of all this gratuitous noise on my poor brain. Checking the stock price too frequently uses up my limited willpower since it requires me to expend unnecessary mental energy simply resisting these calls to action.
it shouldn’t really matter if you switch off the monitor, curl up on the sofa, and read a book. After all, Buffett didn’t make billions off companies like American Express and Coca-Cola by focusing on the meaningless daily movements of the stock ticker.
Don’t try to follow everything your investee company doing
In any case, with the type of businesses I invest in, it’s not imperative to know what’s going on from day to day. Virtually all my investments are in companies where the long-term outcome is all but inexorable: the company is heading in that positive direction, and it’s really just a question of how long it takes
If Someone Tries to Sell You Something, Don’t Buy It
Don’t Talk to Management
Senior managers— particularly CEOs— tend to be highly skilled salespeople. No matter how their business is performing, they have a gift for making the listener feel optimistic about the company’s prospects. This ability to win over their audience, including board members and shareholders, maybe the most important talent that got them to the top of the corporate food chain.
For much the same reason, I don’t want to speak with the management of the companies I’m researching. Many smart investors would disagree with me on this. For them, it’s possible that regular contact with senior executives may be fruitful.
The Rule: Beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they seem.
Gather Investment Research in the Right Order
If the idea comes from a salesperson, it immediately puts me in a weak position.
If I have a business relationship with the person, I can tell them, “I’d love to hear about your investment idea. Please could you send it to me in writing?” If they object and say, “Oh, but I really need to talk to you about it first,” I tell them that I just can’t do it. Socially, it might seem awkward to insist on getting an idea in writing first. But it’s important to take as much heat and emotion as possible out of the research process. In my experience, I’m much better at filtering what I read than what I hear.
My routine is to start with the least biased and most objective sources. These are typically the company’s public filings, including the annual report, 10K, 10Q, and proxy statement. These aren’t perfect, but they are prepared with a good deal of care and attention, especially in the United States, and they are reviewed by lawyers. The company doesn’t want to get sued, so there’s an incentive to produce financial statements that investors can rely upon. The accountant’s audit letter is also key. Occasionally, accountants may be under intense pressure to sign off on the accounts, overlooking any irregularities.
Reading financial statements is more of an art than a science. Even if it’s not explicit, you sometimes sense that management is trying to provide less information than investors might find useful. As in poker, unconscious“ tells” can appear even in a footnote, making you wonder if something is amiss.
Investors looking at Berkshire for the first time would do well to read the books that Roger Lowenstein and Alice Schroeder wrote about Buffett. Likewise, in studying Wal-Mart, a good place to start would be Sam Walton’s book Made in America.
Offline Reading > Online Reading
It requires a lot of mental energy to read a web page, with all its links to other information. I don’t want my mind’s chain to be yanked. So I prefer to read the physical editions of things like the Wall Street Journal,
Still, I avoid reading any press coverage until after I’ve studied the corporate filings. There are plenty of good journalists who provide useful context and insight.
The corporate filings are my meat and vegetables— less enjoyable, but usually more nutritious.
As for the equity research published by brokerage firms, I read little of it, and I never rely on it. Once I’m finished with all of my other research, I sometimes pull up these reports so that I know what Wall Street is saying about a company or industry.
(Guy Spier is doing reverse than us. We often look at Brokerage reports first and later research about stock)
Discuss Your Investment Ideas Only with People Who Have No Axe to Grind
The conversation must be strictly confidential. Second, neither person can tell the other what to do as this tends to make people feel judged, so they become defensive. In fact, it helps if you don’t even know whether the other person is thinking of buying or selling the stock since that knowledge muddies the waters. Third, we can’t have any business relationship because this could skew the conversation by adding a subtle or not-so-subtle financial agenda. Of course, what matters most in these conversations is mutual trust. So no action should be taken unless the other person gives clear permission.
For example, instead of asking what a company will earn next year, it’s more useful to ask something like, “What needs to happen for them to generate a lot of cash next year?”
Pool your knowledge with other investors, but stick with people who can keep their ego in check. If the other person happens to be Buffett, Munger, or Pabrai, so much the better.
Never Buy or Sell Stocks When the Market Is Open
Wall Street is perfectly designed to take advantage of weaknesses in the human brain.
When it comes to buying and selling stocks, I need to detach myself from the price action of the market, which can stir up my emotions, stimulate my desire to act, and cloud my judgment. So I have a rule, inspired by Mohnish, that I don’t trade stocks while the market is open. Instead, I prefer to wait until trading hours have ended. I then email one of my two brokers—preferring not to speak with them directly—and ask to trade the stock at the average price for the upcoming day. I’m not trying to get an edge on the market because I don’t want to get swept up in its constant mood swings.
Wall Street is rewarded for activity. My shareholders and I are rewarded for inactivity.
As Ben Graham explained, we have to try to make the market our servant, not our master.
Keep the market at a safe distance. Don’t let it invade your office or your brain.
If a Stock Tumbles after You Buy It, Don’t Sell It for Two Years
When a stock has tumbled, selling it is even more emotionally fraught. After all, it’s hard to make rational decisions about an investment that has already lost you a lot of money since negative emotions such as remorse, self-loathing, and fear can short-circuit the ability to think clearly. Mohnish developed a rule to deal with the psychological forces aroused in these situations: if he
He explained this to me around the time of our lunch with Warren Buffett, and it made so much sense that I instantly adopted this rule. Once again, it acts as a circuit breaker, a way to slow me down and improve my odds of making rational decisions. Even more important, it forces me to be more careful before buying a stock since I know that I’ll have to live with my mistakes for at least two years. That knowledge helps me to avoid a lot of bad investments.
As Warren once put it, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches— representing investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do much better.”
Don’t Talk about Your Current Investments
was a bad idea to speak publicly about stocks that I own. The issue isn’t that other investors might steal my best ideas. The real problem is that it messes with my head. Once we’ve made a public statement, it’s psychologically difficult to back away from what we’ve said— even if we’ve come to regret that opinion. So the last thing I want to do is walk into the trap of making a public statement about a stock, given that the situation might later change or that I might subsequently discover that I was wrong.
I experienced this firsthand with a stock called EVCI, which I bought around 2003. Within 18 months, it surged seven-fold, making it the most successful investment I had made up to that point. As we’ll discuss later, I should have sold all of my shares. But I had given an interview to Value Investor Insight, extolling EVCI as an example of my investing prowess. As a result, I was publicly invested in the stock and couldn’t part with it even though it was no longer cheap. For various reasons, the stock was subsequently halved. In retrospect, I could see that I would have been much better off if I’d never spoken about it since this would have given me more latitude to sell once the circumstances changed.
Make a Checklist to avoid mistakes (survival tool)
I’ve seen investment checklists that ask questions like: “Is this company cheap?” Or: “Does it have a high return on equity?” In my opinion, this is a misguided way to use checklists. I prefer to use them in much the same way that pilots use them. They don’t ask: “Does this plane fly fast?” Or:“ Am I flying to a sunny destination?” Rather, the items on their checklists are designed to help them avoid mistakes that have previously led to plane crashes.
In investing too, the real purpose of a checklist is to serve as a survival tool, based on the haunting remembrance of things past.
Investing Mistake Case-study (The Man Who Lost His Cool)
I came across an obscure college called Interboro Institute, which was owned by EVCI Career Holdings Corp. This company’s enterprising management team had come up with an innovative way of providing a college education to students with limited resources, many of whom had failed to graduate from high school. The students typically received financial aid grants that exceeded the cost of Interboro’s bare-bones education. So they were educated for free while EVCI made money in the process.
With EVCI’s operating income and stock both up seven-fold, the board agreed to grant huge pay rises to the company’s two top executives. The chairman/CEO would see his base salary leap from $326,000 a year to $621,000, and the president’s base salary would jump from $267,000 to $483,000.
I was grateful for their astute management of the company up to that point, and I wanted them to get rich alongside their investors. But this was a minuscule company that had generated less than $3.5 million in operating profits the previous year. Their pay hike meant that these two executives would now take roughly a quarter of the operating profits in cash for themselves. To me and to other investors, that was an outrageous amount for a company of this size. After all, who owns the company? The management or the shareholders? In retrospect, I should have sold my shares right then.
I arranged to meet EVCI’s chairman/CEO for lunch at a restaurant near his office in Yonkers. Our conversation seemed cordial until suddenly all hell broke loose. He began shouting at me at the top of his voice, and the whole restaurant fell into stunned silence. It felt like a scene from a movie. I don’t remember his exact words, but I think he yelled, “Are you accusing me of lying?” He also said something to the effect of, “Who the hell do you think you are?”
I froze and had no idea how to react. I thought I was offering him an opportunity to make enormous sums. In return, he seemed determined to humiliate me publicly. This was an astounding turn of events. What I discovered much later was that he was going through a bitter divorce. According to a 2009 decision from the New York Court of Appeals, he and his wife were fighting over their marital assets, including his stock in EVCI. His wife commenced divorce proceedings in 2003, a trial ensued, and she was later granted a divorce on the grounds of abandonment. In 2006, the trial court “rejected” his “claims that the appreciation in the value of the EVCI stock was due solely to his efforts,” and it used the trial date “for valuation purposes” of his stock and options.
Later, when I performed a postmortem on my various investing mistakes, I reexamined what had happened at EVCI and tried to draw some practical lessons from the experience. For me, one of the most important was that I needed to be more conscious of the extent to which the life circumstances of top executives can affect their decision-making and their ability to manage the business. If I have even a mild argument with my wife, it can put me out of sorts for the day, affecting both my mood and my ability to make intelligent decisions. So I can only imagine how hard it would be to go through a contentious divorce. Indeed, this is just one example of the many life events that can knock an executive off-track: it might also be a family bereavement, a major dispute with a business partner, or even extreme levels of personal debt.
So I added a couple of items to my checklist as a formal reminder of some hard-earned lessons, courtesy of this education company.
Checklist Items: Are any of the key members of the company’s management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders? Also, has this management team previously done anything self-serving that appears dumb?
When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
- Warren Buffett
OverDependent Business
The point is that I want to invest in companies that control their own destiny, not in companies that have their destiny determined by forces beyond their control.
“How does this company sit within the value chain, and what parts of this business could be impacted by changes in other parts of the value chain that this company has very little influence over?”
Short term Headwinds (RM Price Inflation)
In 2007 this thought process led me to invest in Alaska Milk, the dominant producer of condensed milk in the Philippines. The company’s key ingredient was powdered milk that had to be imported from abroad. When the global price of powdered milk shot up, the company’s profit margins were squeezed and its stock plunged. I was convinced that the price of powdered milk would eventually return to normal as supply rose to match increased demand from China. As a result, Alaska Milk’s profits would rebound. This proved correct, and I made about five times my money in five years.
Undervaluation and Overvaluation (Margin Of Safety)
A key lesson for me is that, in the long run, I will save an awful lot of money if I succeed in countering this tendency to overpay. This should also save a lot of my brain cells. After all, if I pay too much upfront, I’d better understand everything there is to know about the company since there is no margin of safety. If I invest when it’s undervalued, I can be wrong about a whole host of issues and still make a good return.
Checklist Items: Is this stock cheap enough (not just in relative terms)? Am I sure that I’m paying for the business as it is today— not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal needs? For example, am I keen to buy it because it makes me feel smart?
Warren Buffett As Human Being
Anybody who sees Buffett merely as a great stock picker is clearly missing the point. At our charity lunch, his kindness and generosity of spirit were unmistakable. He was evidently determined to deliver much more value to us than we could possibly have hoped for or expected. He was there to give, both to the GLIDE Foundation and to us, not to receive.
I’ve repeatedly seen his desire to serve others and not to put his needs above theirs. His example has helped me to understand that it’s possible to be a servant without losing your autonomy, self-respect, or ambition.
At our charity lunch, Warren was also a servant of sorts despite being the world’s most famous investor.
Books are great but shouldn’t be your only way to get knowledge
Books are a priceless source of wisdom. But people are the ultimate teachers, and there may be lessons that we can only learn from observing them or being in their presence.
For me, the greatest benefit to hanging out in these positive environments was a more subtle one: the opportunity to observe people who were far better at business and life than I was. This is one of the many reasons why attending Berkshire’s annual meeting is such a rich learning experience.
The most important point to make here is that this is how we learn—by watching people who are better than us, modeling their behavior, then experiencing for ourselves why their approach is wise and works.
The key, in my experience, is to value people as an end in themselves, not as a means to our own ends.
When you’re surrounded by people like this, all of them trying to help one another, it sometimes feels like heaven on earth.
One thing is for sure: I receive way more by giving than I ever did by taking. So, paradoxically, my attempts at selflessness may actually be pretty selfish.
Money shouldn’t be everything beyond a point
Munger has said that once you’ve made a certain amount (I think it was $ 100 million), there would have to be something wrong in your head for you to continue dedicating yourself to the accumulation of wealth.
stopped worrying about trying to get the best returns.
In the end, I handled the financial crisis well, partly because I confronted my fears of loss and found ways to work around them. If I hadn’t been aware of this aspect of my inner life, I might have panicked when a stock like Discover Financial Services fell 80 percent. Instead, I held steady as it rebounded. Having gained a deeper sense of who I am, I’ve also stopped worrying about trying to get the best returns.
Books Recommendations from Guy Spier
The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham is where it all started for me. Four other books that deserve to be read and reread many times are Seth Klarman’s Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor; Joel Greenblatt’s You Can be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits; The Aggressive Conservative Investor by Martin J. Whitman, Martin Shubik, and Gene Isenberg; and John Mihaljevic’s The Manual of Ideas: The Proven Framework for Finding the Best Value Investments. Before I discovered value investing, I was also captivated by two other investment classics: EdwinLefèvre’s Reminiscences of a Stock Operator and The Alchemy of Finance by George Soros.
Roger Lowenstein’s biography Buffett: The Making of an American Capitalist was the first book that I consciously used to help me “model” Warren Buffett. Other seminal works on Buffett include Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life and Tap Dancing to Work: Warren Buffett on Practically Everything, 1966– 2013 by his friend Carol Loomis, a renowned writer who worked at Fortune for 60 years. There is also a deep well of wisdom from Buffett in Berkshire Hathaway Letters to Shareholders, 1965– 2013. Another marvelous glimpse inside the mind of a master is Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, which includes his eye-opening analysis of the causes of human misjudgment
Excerpts and Learning from Articles/Blogs
Walter Schloss: One of the most underappreciated investors of all time.
Success Hides A lot of Problems (Superb Article on Netflix Saga)
Success hides many flaws, but eventually, they’ll get exposed because nothing grows forever.
I want to talk about the idea that growth hides many flaws. This is a powerful concept that applies to life and obviously businesses.
There are only so many hours in a day. Only so much money on the balance sheet. Only so many ideas you can focus on. I don’t have any great insights, but Hastings got me thinking about some of the flaws that will be exposed if and when the economy finally does slow down. What happens when a sailboat’s in the middle of the ocean and the wind completely disappears?*
Don't let the Lindy Effect fool you while picking stocks
1) Don't listen to pundits giving lectures on durable competitive advantage. Nothing lasts forever. People die. Trends change. Preferences change. If you don't want to lose money, start with the premise that all businesses are fragile and will die sooner rather than later.
2) No one knows much about what is going to happen in the long-term future. We are all deterministic beings in a probabilistic world.
3) Have a risk management plan for your investments, which is preferably a quantitative one. Because when things get rough, trust yourself to self-sabotage unless you have a well-defined system.
4) When you are losing money in an investment, don't average down. You may think you know everything about the business. But you don't. You are just kidding yourself. (The only time to average down is when the overall market has corrected and your stock is down along with everything else.)
Things I'm Pretty Sure About
We all see the same market price and read the same commentary, the latter of which is like gasoline on the flames of herd behavior. So investing misbehaviors can snowball. The consequence is that markets rarely sit at “average” valuations; they spend far more time in areas that look historically cheap or historically crazy.
The advice that sounds the best in the short run is always the most dangerous in the long run.
- Jason Zweig
What if we’re currently in a recession? I don’t know if we are. No one does. But recessions are often only known in hindsight after economic data is revised to show that a period of slow growth was actually negative growth
I’m more impressed with someone who has outperformed by a little bit over multiple cycles than someone who has outperformed by a lot over one
Repository to Learning about IT Sector (Thread)
Cashflow Statment Simplified
Small Video Clips
Interest rates increasing impact (PE D-Rating) (53:01 to 55:42)
Investing in China (Edelweiss Greater china fund) (01:04:58 To 01:28:59)
Inflation impact on Nifty 50 Companies (Which Sector will be impacted and which will not?) {17:17 to 19:20}
Luxury Consumer Spending Company (Jewellery, Liquor, Agri Inputs ) Brilliant view shared on Financials and IT and some good advice to Ponder upon. (25:59 to till the end )
Why you shouldn't check your portfolio every day (28:12 to 31:50)
Why you should use an investment checklist (Benefits) (34:58 To 39:25)
Should you worry about geo-politics and War? (Vijay Kedia) (10:50 to 12:40)
For me still getting a page, 'Subscribe Now' even after subscribing it... Seems still i do not have access to premium posts.. Please help me here