Sunday, May 24, 2015

10 Non-Investing Quotes With Great Investing Lessons

As much as I enjoy reading investing books, some of the most valuable investing lessons I've learned have come from non-investing sources. Here are a few that I've written down over the years.
  • What has been will be again, what has been done will be done again; there is nothing new under the sun. - Ecclesiastes 1:9
    • The specific circumstances change (tulips, dotcom stocks, Nifty Fifty) but investor behavior repeats itself. By studying market history, and history in general, you can get a sense of when investors are acting irrationally and invest accordingly. 
  • Of all losses, time is the most irrecuperable for it can never be redeemed. - The Tudors
    • Time is a precious commodity in many parts of life, including investing. If we're lucky, our investing time horizon stretches a few decades. The longer you delay investing, the less time your money has to compound. Start saving and investing now. 
  • Whenever you find yourself on the side of the majority, it is time to pause and reflect. - Mark Twain
    • If you find that your investment thesis is shared by many investors, it's probably reflected in the stock price. It always pays to ask yourself, "And who doesn't know that?" when considering the key points of your thesis. (h/t Howard Marks)
  • If you can't explain it to a six year old, you don't understand it yourself. - Albert Einstein
    • Stay within your circle of competence. If you can't break down the company's business into simple terms, you shouldn't buy the stock.  
  • When jarred unavoidably by circumstances, revert at once to yourself, and don’t lose the rhythm more than you can help. - Marcus Aurelius
    • When we're stressed or anxious, we tend to act in ways that we normally wouldn't. The markets will rattle you from time to time, but it's important not to act until you're calm and collected. 
  • Patience is bitter, but its fruit is sweet. - Various
    • Remaining patient in periods of market turbulence isn't easy, but if we're able to keep calm and make rational decisions in irrational times, we have the opportunity to realize superior returns.
  • It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts. - Arthur Conan Doyle, Sherlock Holmes
    • Buying a stock without first collecting and considering the facts and figures is pure folly. Don't buy something on story alone and always be aware of any biases you have before you start researching the company. 
  • Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. - Luke 16:10
    • A good one to keep in mind when evaluating management's track record and integrity. 
  • The only thing worse than not getting what you want is someone else getting it. - Roger Sterling, Mad Men
    • It's one thing to miss out on a stock, but it's made a whole lot worse when others around you have capitalized on it (Apple comes to mind for me). Tip your cap to those who were successful and move onto the next idea. 
  • Man is not a rational animal, he is a rationalizing animal. - Robert A. Heinlein
    • One of the key assumptions of the Efficient Market Hypothesis is that all market participants are rational, but investors' decisions are full of behavioral and cognitive biases that cloud or sway their otherwise rational judgement. If we're aware of these biases and can recognize them in ourselves and in others we can improve our results.
What non-investing quotes have influenced your investing? Let me know in the comments section or on Twitter @toddwenning.

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Stay patient, stay focused.



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Tuesday, May 12, 2015

Considering Management's "Capacity to Suffer"

Earlier this week, Brattle St. Capital shared an interview transcript (originally posted on ValueWalk) with noted investor Tom Russo in which Russo discussed the importance of investing in companies with management teams that have the "capacity to suffer":
When management makes those investments, they must have the capacity to suffer. They have to suffer during the start-up period of those investments because they are not necessarily linked to at the hip with the Wall Street expectations of smooth and steady quarters, but they are able to withstand the burden of the investment cycle. It is inevitably certain that profits are low or non-existent during these early years. And if you do not have the capacity to suffer through that period, you will shy away from making the accurate amount of investment. Your management will under-invest at a time when they have set an advantage and will allow competitors to come into the market. 
This is an important point to consider. Can management make the necessary, long-term investments in its business that support or widen its moat without taking on significant career risk in the process?

Even if we're talking about an otherwise-strong business, it's not a recipe for long-term success if the CEO is overly-concerned about how a value-accretive investment will impact earnings per share in the current quarter or calendar year and how Wall Street may react to temporary weakness.

Put another way, if you're a patient investor in a company that's led by an impatient management team, be prepared for an unpleasant outcome.

To remedy this, Russo recommends looking for family-owned businesses that can afford to ignore the short-term obsession of the street and activist investors.

When researching a new idea that isn't family-owned, I also look through the list of the company's major shareholders - these are usually mutual funds and institutions.

Once you have the list of major owners, take a look at each fund's website to learn more about their philosophy and approach. Are they also long-term focused or do they have high portfolio turnover? How long have they held the stock in question?

The more the company is owned by investors who "get it," the less pressure management will likely feel to deliver short-term results at the expense of long-term value creation.

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Stay patient, stay focused.



Sunday, May 10, 2015

Weekly Reading List 5/10/2015

What I've been reading and listening to - May 10, 2015
What have you been reading? Let me know in the comments section below or on Twitter @toddwenning.

Stay patient, stay focused.



Saturday, May 9, 2015

Should Long-Term Investors Mind the Macro?

One of my key takeaways from the Berkshire Hathaway conference last weekend was that Buffett and Munger don't spend a lot of time, if any, thinking about the direction of the broader economy when they make investment decisions.

At one point, Buffett and Munger joked (half-joked?) that they thought any company that employs an economist has one employee too many. Munger said it was best to declare yourself ignorant about macro forecasts and, when it comes to investing amid uncertain economic times, said that he and Buffett "keep swimming and let the tide take care of itself."

Other investors I admire had similar feelings about incorporating macroeconomic forecasts into their investment process.

As Philip Fisher wrote in Common Stocks and Uncommon Profits:
The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probably incomplete series of facts make one wonder what might have been accomplished if only a fraction of such mental effort had been applied to something with a better chance of proving useful.  
Here's Peter Lynch on the subject:
It's lovely to know when there's recession. I don't remember anybody predicting (that in) 1982 we're going to have 14 percent inflation, 12 percent unemployment, a 20 percent prime rate, you know, the worst recession since the Depression. I don't remember any of that being predicted. It just happened. It was there. It was ugly. And I don't remember anybody telling me about it. So I don't worry about any of that stuff. I've always said if you spend 13 minutes a year on economics, you've wasted 10 minutes. 
I recall during the financial crisis spending a disproportionate amount of time thinking about macroeconomic matters - worrying about hyper-inflation, interest rates, etc. - that would have been much better spent searching for great businesses that had been beaten down.

In February 2009, for example, I started a small position in a Treasury Inflation-Protected Securities (TIPS) ETF in an effort to "play" inflation. The 7% or so gain I made on that investment pales in comparison to the money I would have made simply putting that sum into a S&P 500 ETF or into one of the other stocks I bought during the market downturn. (I mourn such errors of omission more than those in which I invested but ended up losing money.)

Still, it's important to keep tabs on the macroeconomy, even if we're not actively forecasting it.

As Howard Marks put it:
In my opinion, the key to dealing with the future lies in knowing where you are, even if you can't know precisely where you're going. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move. (his emphasis)
I would think that Buffett, Munger, Fisher, and Lynch would agree with this statement. Then again, maybe not, but I'm not sure how you invest in any company - especially a commodity-linked business - without having an opinion on where that business might be in its cycle.

Truly great businesses run by able management teams should be able to adapt to various economic scenarios and deliver solid results across a full business cycle and beyond. However, it's much more difficult to predict when the cycle will turn, how much it will turn, and for how long it will turn. As such, our research time is much better spent analyzing things like competitive dynamics, strength of the management team, and the company's financial health. We have greater odds of being right on this than we do on forecasting macro trends.

How do you use economic forecasts, if at all, in your research process? Please let me know in the comments below or on Twitter @toddwenning.

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Stay patient, stay focused.



Sunday, May 3, 2015

6 Key Takeaways from the 2015 Berkshire Conference

Greetings from Omaha!

Yesterday, I attended the Berkshire Hathaway Annual Meeting and finally got to see Buffett and Munger answer questions in person. For years I've followed the conference online, but it was definitely worth the seven-hour drive from Chicago to experience it live. If you ever get the chance to make it out here for the conference, I highly recommend it. I've posted some of my pictures below.

As always, there were a ton of great quotes and lessons from the Q&A session, but here are my six key takeaways.

1. When evaluating a company, look for reasons not to buy the stock.

One of the questions from the audience asked Buffett and Munger to list five positive characteristics to look for in an investment. They declined to list five characteristics, saying the scenarios can change with each opportunity, but that they would focus on finding reasons not to keep researching a stock. To me, that means looking for holes in management's capital allocation process, a declining competitive advantage, and negative aspects of a corporate culture.

2. Focus on buying good companies at good prices and let the economy take care of itself.

Charlie had a great quote on investing in uncertain macroeconomic times: "We're swimming all the time and let the tide take care of itself." He also said he couldn't recall turning down an acquisition or deal due to macroeconomic factors. At times, they end up being wrong of course, but they're okay with that since they might have otherwise missed out on good opportunities as well.

3. The key is controlling your emotions.

Another great quote from Charlie was, "Warren, if people weren't so often wrong, we wouldn't be so rich." A number of times, they reinforced the importance of controlling your emotions and being rational so that you can capitalize on other investors' mistakes. Warren commented that business school training was a handicap 20 years ago when all they did was teach efficient market theory. The market will be irrational and it's your job to know when to pounce on the opportunities.

4. Corporate culture matters.

A number of audience members praised Buffett and Munger for creating a company with a sterling reputation. Buffett said that a company's culture and values come from the top (CEO, CFO, etc.), that they need to be written down, be consistently practiced, and that, with time, you'll have created a business with a great reputation. People will always follow what you do and not what you say.

5. Understand the power of incentives. 

Buffett said, "Charlie and I really believe in the power of incentives." That is, understanding not just how executives are compensated and incentivized, but also how management's expectations might affect employee behavior. For example, if a CEO has set unrealistically high margin or growth targets, employees may take liberties they wouldn't otherwise to make sure the CEO looks good. These are situations you want to avoid.

6. Think long-term

Buffett commented that no one buys a farm or apartment complex based on how they think it will perform over the next month or so. They think about how it will do over the long-term. It's important that we think of our equity investments in the same way. Be a buyer of businesses, not a trader of tickers.

The six hours of back and forth with Buffett and Munger left a lot for me to think about on the drive back to Chicago today. I'm sure I'll think of something else I wanted to mention somewhere near Des Moines. :)

What did you think of the conference? Let me know in the comments section below or on Twitter @toddwenning.

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Stay patient, stay focused.