A good video to share on Value Investing (Richard H Lawrence)

The speaker has shared a lot of his experience and knowledge, and has been very generous in answering many questions in this video.



-------

1.  Invest in superior company.
2.  Good management.
3.  Buy when stocks are down.  Be a contrarian.
4.  Invest for long term capital gains.

-------

Surround yourself with the right people who share your philosophy.  (The DNA of the firm).

Discipline, procedure and process.   Set up the tools.  (e.g. monitor the 52 week low levels.  Pricing power.  Score risk.  What would you do when you meet a big bear market?)

-------

Deliver the results to the investors.

Time weighted returns (NAV return in the fund).  Capital weighted returns (Investor's return).

Must learn to manage your partnership in the bear market.  The best opportunity in bear market gives you excess return over the next 7 years.  Control the level of your asset under management to ensure his stocks have the muscle to get through a severe bear market.

Control greed.  Don't allow greed to get into your way.

-------

6 Tenets of his model:

1.   Pricing power:  

How do you calculate this?  Able to price your profit to ensure no erosion of margin irrespective of input cost rising or falling despite facing a lot of competition.   .

Look at Margins -  Gross profit margin.  Cash gross profit margin (EBITDA margin).  Low variability of cash gross profit margin.


2.   Cash flow:

Cash flow from operation:  Net Income + D&A + other non cash items.

Free cash flow = CFO - maintenance Capex  (business in steady state)

Cash flow of the corporate structure.  (e.g. Apple has all its cash in overseas countries and has to borrow in US to pay off dividends and buy backs.domestically)

Working capital cash flow:  Negative working capital cash flows.

Company must know how to manage the FCF.   Give dividends.  Reinvest for growth.


3.   Invest in High profitability company.  

600 out of 1000 companies are probably mediocre profitability companies.  Eliminate them.

Focus on the ones with the highest profitability in the 400s.

Stay with the best of the best, and you should be able to outperform.

(I don't believe in the WACC.  DCF can be difficult to use and garbage in and garbage out.)

What is an acceptable level of profitability?

Above industry average (NOT THE BEST ANSWER).

Better to look at this through the DUPONT MODEL.   Asset turnover.  Net profit margin. Financial leverage.   Can check the reasons why these factors are not high.  Very good model.

Margin gone up.  Asset turnover gone up.  Financial leverage gone down.  VERY GOOD.
Those where ROE is high due to high finanical leverage.  NOT SO GOOD.

EBIT / NET OPERATING ASSET transfer into high ROE,  allows you to look at the quality of the management.


4.   Need to be prepared for a bear market.

Don't like cyclical companies.  Volatility of margins.  Sales slow, interest cost goes up and profit margin drops.  A whole waste of time and pain to get into these stocks.

Better stay with companies with stable earnings that can get through bear markets.  Even when you invested on a wrong day, you will still be alright.

5.  Sustainability of EPS growth.  Don't invest for change of PE.  INVEST FOR EARNINGS GROWTH.

SUSTAINABILITY EPS GROWTH and DIVIDENDS - CONTRIBUTE TO 80% OF RETURNS.

Companies with EPS growth -  look for low cyclicality of business, ability to increase market share, good companies usually grow market share during a bear market or recession, low cost, large number of customers and suppliers.  All these are low risks to your investing.


6.   Valuation (Benchmarking)

His Formula:

(ROE + normalised Earnings growth over next 3 to 4 years) /4 = target PE
e.g. (30 + 14 /4) = target PE of 11. 

Comparing a group of 15 companies and score them 1 to 15, ranking them.


John Neff: (Earnings growth + Dividend yield) / PE.  Discards the stocks with the worse number.

De-emotionalise the process which is incredibly emotional.

These are powerful instruments for rebalancing your portfolio.



Track the key numbers in your portfolio.

Benjamin Graham's Classic Deep Value Investing versus Warren Buffett's Moat-Type GARP Investing.

Why Guy Spier Rejected Warren Buffett’s Investment Strategy

in warren buffett

Here's a question: Give the fact that Warren Buffett is the most successful, respected, and wealthy investor of all time, why would any professional value manager reject Warren Buffett's contemporary investment strategy? It's seems odd, but Guy Spier has his reasons.

Who Is Guy Spier?

If the name Guy Spier seems familiar, it may be because of his growing reputation among the value investing community. Spier is famous for paying $650 000USD, along with Monish Pabrai, to have lunch with Warren Buffett. His 2014 book, "The Education of a Value Investor," has also made the rounds and is becoming a very popular book. It's currently rated a 4.5 star read by 295 people on Amazon.

Spier was born in South Africa and educated at the City of London's Freeman School, later receiving his MBA from Harvard. He started out as a professional money manager in 1997 with $15 Million mostly from family and friends. Since then he's managed to wrack up outstanding returns versus the S&P 500. In 2011, his gains totalled 221.6% versus the S&P 500's 36.7%. That's an impressive record especially when most managers fail to beat the market over even a moderate period of time.

Guy Spier's investment vehicle is his Aquamarine Capital, an investment partnership inspired by Warren Buffett's early partnership. Aquamarine is fairly restrictive with regards to who it manages money for, and fund information is only distributed by request.

Citing Buffett, Munger, and Pabrai as major investment influences, you'd be forgiven for thinking that Guy Spier sticks to Warren Buffett's moat-type businesses. While Spier was once a card-carrying Buffetteer, his true preference is for classic Graham deep value investments.

What's Guy Spier's Problem With Warren Buffett?

In 2011, Jacob Wolinsky of Value Walk fame conducted a masterful interview with the man himself, which was published by The Manual of Ideas. Jacob's conversation with Spier revealed some valuable insights into how a small investor should manage his portfolio.

"Pretty soon after I started I fell in love with this whole GARP idea. I spent a lot of time around Ruane Cunniff by researching their ideas and attending their annual meetings, where I had the chance to listen to and meet some of their brilliant investors and analysts, including Bob Goldfarb, Greg Alexander, Jonathan Brandt, and Girish Bhakoo. I learned about why Warren had moved into the business of buying, and paying up for better businesses."

GARP, or "growth at reasonable prices," is a strategy that boils down to selecting companies that are expected to grow at high rates relative to their industry, or businesses in general, and then to buy those firms when their stocks are trading at reasonable valuations. What counts as reasonable is a matter of perspective, though, and many investors are split between using Discounted Cash Flow or classic Ben Graham measure of value.

Just like many other investors who are just starting out in value investing, Spier only focused on Warren Buffett's modern investment strategy, buying growing companies with strong moats at decent prices. He dug deep into Buffett's strategy, dissecting exactly what he looked for when he hunted large, well run, businesses with durable competitive advantages, and then formed his investment partnership around that.

As Guy Spier explains, this sort of strategy has a few major pitfalls.

"Something I learned during the financial crisis was that when you pay up for a better business, you can suffer greatly when the price people are willing to pay for that business goes down dramatically, as it did in 2008. Many “better” businesses fell in price more rapidly than other businesses because, as the crisis came about, many investors were not willing to pay up for growth or quality. ...I lost more money owning those businesses than I would have if I had owned the right cigar butts..."

But large drops in price during bear markets wasn't the only investment trap that Spier spotted. As it turned out, GARP firms also pushed investors into making major behavioural mistakes when investing.

"If you talk about your stocks, it will affect how you think about them as well as the portfolio decisions you make. At the time, I did not believe it would skew my decision making. But if I go back over the life of Aquamarine Fund and examine my letters to investors, I can see clearly how this created a bias for better businesses, simply because it was more fun to talk about them. (Or perhaps a better way to put this is that I developed a bias for businesses that are fun to talk about.)"

If Buffett was right in calling inflation a corporate tapeworm, psychological biases are definitely an investor's tapeworm. They cause us to overestimate the returns we can expect from a particular stock, how fast the company will grow, the profit the company will produce, or even how durable the competitive advantage of the company is itself. This trap is often due to the Halo Effect, the tendency to attribute or overestimate a range of good traits that a company may not actually have based on the existence of a single good trait that actually exists. In dating, for example, a beautiful woman may be seen as more sociable, better adjusted, or more popular, by virtue of her looks when she may not actually possess any of those attributes.

By contrast, Cigar Butts tend to sidestep this issue much of the time. They don't readily lend themselves to producing the halo effect and you're much less likely to talk about them at a party, keeping those psychological and social chains off so you can easily change your opinion when the facts change. They're also known to trigger an investor's gag reflex, so investors systematically underestimate a Cigar Butt's future growth rate and stock return.

Ironically, despite providing investors with better returns, small retail investors prefer great companies to Cigar Butts because they cause less psychological or emotional strain.

"Owning things that Mike Burry says have an “ick” factor or cigar butt investment ideas that have a lot of hair on them is not something your investors want to hear about unless you have a very sophisticated group of investors. In my case, many of my investors had never owned stocks before so they were not going to feel too comfortable about me owning companies with a high “ick” factor. So I was immediately biased toward buying better businesses at a reasonable price. With most audiences, it is much easier, for example, to talk about Heineken and their phenomenal sales growth in Russia and other BRIC countries, or about Nestle and their Nespresso brand, than to talk about businesses that are either “hated, or unloved,” as Whitney Tilson would put it."

Part of the reason why these "dirty" stocks work out so well is due to a phenomenon called "reversion to the mean." Reversion to the mean is a basic law in both life and investing. The principle is that abnormal results, either positive or negative, tend to not last.

Take height for example. A freakishly tall father and mother will have tall children, but those children will usually be shorter than their parents. The height of future offspring reverts to the average height of people in general.

Guy Spier's Aquamarine Fund Vs. The S&P 500

The same principle is at work in investing. It's why Cigar Butts tend to work out well in the end. Inevitably, the company's business improves or some piece of good news comes out to send significantly undervalued shares skywards. Conversely, great returns don't last and firms with higher levels of profitability tend to get beaten back to more average levels of profitability. This is why Buffett loves moats, but even moats can't fend off natural forces indefinitely.

"When I started investing I used screening software to find companies with the metrics you mention — high ROE, low price to book, and high return on invested capital. I was looking for all of those types of things.

I think all of those metrics have a potential downfall, and I will give you an example: In general, you want to invest in high ROE businesses, and you can run various types of a screen to find high ROE businesses, but to the extent that in the vast majority of businesses, ROE is going to revert to the mean, you may have paid up for something that might not be there in five years. The ROE five years forward might be a lot lower than the ROE you are paying up for today."

As Guy Spier explains, you end up paying a large price up front for a business that is facing an immutable law of nature. Eventually, that return on equity will shrink and the business will be far less profitable than when you spotted it. While the risk-reward relationship may still be in an investor's favour, the company's margins face a tremendous amount of pressure.

".........you want to own something that makes the situation unusual and gives you an unusual risk/reward. That is not necessarily a cigar butt, but you have to identify what it is that will result in a return of 3x in two years. I am trying very hard to own things that will give me a return of 3x in two years rather than settle for something that will appreciate at a few percentage points better than the market."

One of the huge advantages of net net stocks, the classic Cigar Butt, is that the risk-reward profile is heavily skewed in the investor's favour. Roughly 75% of net nets produce large positive return over a two year period, and the average results of a net net stock portfolio over time is 15% over and above the market. That makes for a 25%+ annual average return.

Often investors new to net nets make the mistake of only buying a few stocks and assuming that they'll all see massive advances in price. This is just not the case. While net nets work out well, some stocks are bound to disappoint which means that a proper net net strategy requires a decent amount of diversification. Still, net nets are probably safer than you assume. James Montier found that these stocks only see major (90%+) losses in 5% of cases. That compares to 2% for stocks in general, showing just how safe a well diversified net net stock portfolio is versus the market.

Keeping in mind basic requirements of good net net stock picking (no Chinese firms, resource explorations firms, etc) the highest returning net nets are often the stocks that are selling for the cheapest prices relative to net current asset value (NCAV). Buy cheap enough and you can bag the 3x advance in 2 years that Guy Spier favours.

But, as he explains, price to value often isn't enough.

"Tom Russo has said, “flying an airplane requires you to focus on five or more instruments,” and you can’t favor the altimeter over the speed indicator, or the vertical speed indicator over the pitch indicator, for example. You have to look at all the instruments together and fly the plane integrated. Tom has used this plane analogy to discuss investments. There is no single metric you should look at but rather keep an eye on all of them."

This is why investors should be using a high quality scorecard when assessing their stocks. For my own investing, I use our Core7 Scorecard to help dissect the net net stocks that I buy to see if they're the sort of stocks that are bound to avoid losses and produce meaningful returns. I've compiled most of the thinking that's gone into this checklist into my net net stock guide, Retire Young & Rich. Ultimately, it takes more than blindly following Buffett's current strategy to produce the best possible investment results. As Guy Spier said,

"Thus, you could say that my approach to investing, in contrast to Buffett, has gone in the reverse direction. My approach today has become more similar to the way Warren Buffett invested when he got started. The important thing to realize is that if Buffett today was running a fund the size of Aquamarine, he would be investing differently than the way he does today."

Start putting together your high quality, high potential, net net stock strategy. 

http://www.netnethunter.com/why-guy-spier-rejected-buffetts-contemporary-investment-strategy/?utm_source=facebook&utm_medium=value-investing&utm_campaign=cp1

THE 10 BEST INVESTORS IN THE WORLD

Warren Buffett
Charlie Munger
Joel Greenblatt
John Templeton
Benjamin Graham
Philip Fisher
Mohnish Pabrai
Walter Schloss
Peter Lynch
Seth Klarman



Warren Buffett (1930)

"Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."

Warren Buffett, born on August 30, 1930 in Omaha, Nebraska, is known as the world's best investor of all time. He is among the top three richest people in the world for several years in a row now, thanks to the consistent, mind-boggling returns he managed to earn with his investment vehicle Berkshire Hathaway. The funny thing is that Buffett does not even care that much about money. Investing is simply something he enjoys doing. Buffett still owns the same house he bought back in 1958, hates expensive suits, and still drives his secondhand car.

Investment philosophy:
 Focuses on individual companies, rather than macro-economic factors
 Invests in companies with sustainable competitive advantages
 Prefers becoming an expert on a few companies over major diversification
 Does not believe in technical analysis
 Bases his investment decisions on the operational performance of the underlying businesses
 Holds on to stocks for an extremely long period, some stocks he never sells
 Uses price fluctuations to its advantage by buying when undervalued and selling when overvalued with respect to intrinsic value
 Puts much emphasis on the importance of shareholder friendly, capable management
 Beliefs margin of safety are the three most important words in investing


Charlie Munger (1924)

"All intelligent investing is value investing — acquiring more than you are paying for."

Charlie Munger is vice-chairman of Berkshire Hathaway, Warren Buffett's investment vehicle. Even though Buffett and Munger were born in Omaha, Nebraska, they did not meet until 1959. After graduating from Harvard Law School, Munger started a successful law firm which still exists today. In 1965 he started his own investment partnership, which returned 24.3% annually between 1965 and 1975, while the Dow Jones only returned 6.4% during the same period. In 1975 he joined forces with Warren Buffett, and ever since that moment Charlie Munger has played a massive role in the success of Berkshire Hathaway. While Buffett is extrovert and a pure investor, Munger is more introvert and a generalist with a broad range of interests. The fact that they differ so much from each other is probably why they complement each other so well.

Investment philosophy:
 Convinced Buffett that stocks trading at prices above their book value can still be interesting, as long as they trade below their intrinsic value
 Has a multidisciplinary approach to investing which he also applies to other parts of his life ("Know a little about a lot")
 Reads books continuously about varied topics like math, history, biology, physics, economy, psychology, you name it!
 Focuses on the strength and sustainability of competitive advantages
 Sticks to what he knows, in other words, companies within his "circle of competence"
 Beliefs it is better to hold on to cash than to invest it in mediocre opportunities
 Says it is better to be roughly right than precisely wrong with your predictions


Joel Greenblatt (1957)

“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

Joel Greenblatt definitely knows how to invest. In 1985 he started his investment fund Gotham Capital, ten years later, in 1995, he had earned an incredible average return of 50% per year for its investors. He decided to pay his investors their money back and continued investing purely with his own capital. Many people know Joel Greenblatt for his investment classic The Little Book That Beats The Market* and his website magicformulainvesting.com. Greenblatt is also an adjunct-professor at the Columbia Business School.

Investment philosophy:
 Buys good stocks when they are on sale
 Prefers highly profitable companies
 Uses the Normalized Earnings Yield to assess whether a company is cheap
 Beliefs thorough research does more to reduce risk than excessive diversification (he often has no more than 8 companies in his portfolio)
 Largely ignores macro-economical developments and short term price movements


John Templeton (1912 -2008) 

"If you want to have a better performance than the crowd, you must do things differently from the crowd."

The late billionaire and legendary investor, John Templeton, was born in 1912 as a member of a poor family in a small village in Tennessee. He was the first of his village to attend University, and he made them proud by finishing economics at Yale and later a law degree at Oxford. Just before WWII, Templeton was working at the predecessor of the now infamous Merrill Lynch investment bank. While everyone was highly pessimistic during these times, Templeton was one of the few who foresaw that the war would give an impulse to the economy, rather than grind it to a halt. He borrowed $10.000 from his boss and invested this money in each of the 104 companies on the US stock market which traded at a price below $1. Four years later he had an average return of 400%! In 1937, in times of the Great Depression, Templeton started his own investment fund and several decennia later he managed the funds of over a million people. In 2000 he shorted 84 technology companies for $200.000, he called it his "easiest profit ever". The beauty is that despite all his wealth, John Templeton had an extremely modest lifestyle and gave much of it away to charitable causes.

Investment philosophy:
 Contrarian, always going against the crowd and buying at the point of maximum pessimism
 Has a global investment approach and looks for interesting stocks in every country, but preferably countries with limited inflation, high economical growth, and a movement toward liberalization and privatization
 Has a long term approach, he holds on to stocks for 6 to 7 years on average
 Focuses on extremely cheap stocks, not necessarily on "good" stocks with a sustainable competitive advantage, like Warren Buffett
 Beliefs in patience, an open-mind, and a skeptical attitude against conventional wisdom
 Warns investors for popular stocks everyone is buying
 Focuses on absolute performance rather than relative performance
 A strong believer in the wealth creating power of the free market economy



Benjamin Graham (1894 - 1976) 

"Price is what you pay, value is what you get."

Columbia Business School professor Benjamin Graham is often called "The Father of Value Investing". He was also Warren Buffett's mentor and wrote the highly influential book The Intelligent Investor, which Buffett once described as the best book on investing ever written. Graham was born in England in 1894, but he and his family moved to the United States just one year later. His official name was Grossbaum, but the family decided to change this German sounding name to Graham during the time of the First World War. Graham was a brilliant student and got offered several teaching jobs on the University, but instead he decided to work for a trading firm and would later start his own investment fund. Due to the use of leverage, his fund lost a whopping 75% of its value between 1929 and 1932, but Graham managed to turn things around and managed to earn a 17% annualized return for the next 30 years. This was way higher than the average stock market return during that same period. In total, Graham taught economics for 28 years on Columbia Business School.

Investment philosophy:
 Focuses more on quantitative, rather than qualitative data
 First step is to look for stocks trading below 2/3rd of net current asset value (NCAV)*
 Prefers companies which pay dividends
 Looks for companies with a consistently profitable history
 Companies should not have too much long term debt
 Earnings should be growing
 Is willing to pay no more than 15 times the average earnings over the past three years
 Diversifies to spread the risk of individual positions
 Emphasizes the importance of a significant Margin of Safety
 Profits from irrational behavior caused by the manic-depressive "Mr. Market"
 Warns that emotions like fear and greed should play no role in your investment decisions

*NCAV = current assets - total liabilities



Philip Fisher (1907 - 2004) 

"I don't want a lot of good investments; I want a few outstanding ones."

Philip Fisher became famous for successfully investing in growth stocks. After studying economics degree at Stanford University, Fisher worked as an investment analyst before starting his own firm, Fisher & Co. This was in 1931, during the times of the Great Depression. Fisher's insights have had a significant influence on both Warren Buffett and Charlie Munger. Philip Fisher is also author of the powerful investment book Common Stocks and Uncommon Profits, which has a quote from Buffett on its cover which reads: "I am an eager reader of whatever Phil has to say, and I recommend him to you."

Investment philosophy:
 Dislikes technical analysis
 Does not belief in "market timing"
 Prefers a concentrated portfolio with around 10 to 12 stocks
 Emphasizes the importance of honest and able management
 Beliefs you should only invest in companies which you can understand
 Warns that you should not follow the masses, but instead have patience and think for yourself
 Companies should have a strong business model, be innovative, highly profitable, and preferably a market leader
 Has a focus on growth potential of both companies and industries
 Buys companies at "reasonable prices" but does not specify what "reasonable" is to him
 A true "buy & hold" investor who often holds on to stocks for decades
 Beliefs great companies purchased at reasonable prices and held for a long time are better investments than reasonable companies bought at great prices
 Has a "scuttlebutt" approach to doing research by asking questions to customers, employees, competitors, analysts, suppliers, and management to find out more about the competitive position of a company and its management
 Only sells when a company starts experiencing issues with its business model, competitive positioning, or management



Mohnish Pabrai (1964)

“Heads, I win; tails, I don’t lose much. “

Mohnish Pabrai has once been heralded as "the new Warren Buffett" by the prestigious American business magazine Forbes. While this seems like big words, you might start to understand why Forbes wrote this when you look at the performance of Pabrai's hedge funds, Pabrai Investment Funds, which have outperformed all of the major indices and 99% of managed funds. At least, that was before his funds suffered significant losses during the recent financial crisis because of their exposure to financial institutions and construction companies. Still, there is much we can learn from his low-risk, high-reward approach to investing, which he describes in his brilliant book The Dhandho Investor: The Low-Risk Value Method to High Returns.

Investment philosophy:
 Points out that there is a big difference between risk and uncertainty
 Looks for low-risk, high-uncertainty opportunities with a significant upside potential
 Only practices minor diversification and usually has around 10 stocks in his portfolio
 Beliefs stock prices are merely "noise"
 Used to buy reasonable companies at great prices, but now wants to focus more on quality companies with a sustainable competitive advantage and shareholder friendly management



Walter Schloss (1916 - 2012) 

"If a stock is cheap, I start buying." While Walter Schloss might not be the most well-known investor of all time, he was definitely one of the best investors of all time. Just like Buffett, Walter Schloss was a student of Benjamin Graham. Schloss is also mentioned as one of the "Super Investors" by Buffett in his must-read essay The Super Investors of Graham-And-Doddsville. An interesting fact about Walter Schloss is that he never went to college. Instead, he took classes taught by Benjamin Graham after which he started working for the Graham-Newton Partnership. In 1955 Schloss started his own value investing fund, which he ran until 2000. During his 45 years managing the fund, Schloss earned an impressive 15.3% return versus a return of 10% for the S&P500 during that same period. Just like Warren Buffett and John Templeton, Walter Schloss was known to be frugal. Schloss died of leukemia in 2012 at age 95.

Investment philosophy:
 Practiced the pure Benjamin Graham style of value investing based on purchasing companies below NCAV
 Generally buys "cigar-butt" companies, or in other words companies in distress which are therefore trading at bargain prices
 Regularly used the Value Line Investment Survey to find attractive stocks
 Minimizes risk by requiring a significant Margin of Safety before investing
 Focuses on cheap stocks, rather than on the performance of the underlying business
 Diversified significantly and has owned around 100 stocks at a time
 Keeps an open mind and even sometimes shorts stocks, like he did with Yahoo and Amazon just before the Dot-Com crash
 Likes stocks which have a high percentage of insider ownership and which pay a dividend
 Is not afraid to hold cash
 Prefers companies which have tangible assets and little or no long-term debt 10



Peter Lynch (1944)

"Everyone has the brain power to make money in stocks. Not everyone has the stomach."

Peter Lynch holds a degree in Finance as well as in Business Administration. After University, Lynch started working for Fidelity Investments as an investment analyst, where he eventually got promoted to director of research. In 1977, Peter Lynch was appointed as manager of the Magellan Fund, where he earned fabled returns until his retirement in 1990. Just before his retirement he published the bestseller One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Just as many of the other great investors mentioned in this document, Lynch took up philanthropy after he amassed his fortune.

Investment philosophy:
 You need to keep an open mind at all times, be willing to adapt, and learn from mistakes
 Leaves no stone unturned when it comes to doing due diligence and stock research
 Only invests in companies he understands
 Focuses on a company's fundamentals and pays little attention to market noise
 Has a long-term orientation
 Beliefs it is futile to predict interest rates and where the economy is heading
 Warns that you should avoid long shots
 Sees patience as a virtue when it comes to investing
 Emphasizes the importance of first-grade management
 Always formulates exactly why he wants to buy something before he actually buys something



Seth Klarman (1957) 

“Once you adopt a value-investment strategy, any other investment behavior starts to seem like gambling.“

Billionaire investor and founder of the Baupost Group partnership, Seth Klarman, grew up in Baltimore and graduated from both Cornell University (economics) and the Harvard Business School (MBA). In 2014 Forbes mentioned Seth Klarman as one of the 25 Highest-Earning hedge funds managers of 2013, a year in which he generated a whopping $350 million return. Klarman generally keeps a low profile, but in 1991 he wrote the wrote a book Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor, which became an instant value investing classic. This book is now out of print, which has pushed the price up to over $1500 for a copy!

Investment philosophy:
 Is extremely risk-averse and focuses primarily on minimizing downside risk
 Does not just look for cheap stocks, but looks for the cheapest stocks of great companies
 Writes that conservative estimates, a significant margin of safety, and minor diversification allow investors to minimize risk despite imperfect information
 Warns that Wall Street, brokers, analysts, advisors, and even investment funds are not necessarily there to make you rich, but first and foremost to make themselves rich
 Often invests in "special situations", like stocks who filed for bankruptcy or risk-arbitrage situations
 Suggests to use several valuation methods simultaneously, since no method is perfect and since it is impossible to precisely calculate the intrinsic value of a company
 Is known for holding a big part of its portfolio in cash when no opportunities exist
 Beliefs investors should focus on absolute performance, rather than relative performance
 Emphasizes that you should find out not only if an asset is undervalued, but also why it is undervalued
 Is not afraid to bet against the crowd and oppose the prevailing investment winds
 Discourages investors to use stop-loss orders, because that way they can't buy more of a great thing when the price declines


Final words 

I hope you enjoyed reading how some the best investors in the world think about investing. You might have noticed some common themes, like buying companies for less than they are worth. And while they all practice this value investing approach, there are also notable differences between the strategies of these masters of investing. Where Warren Buffett runs a concentrated portfolio and focuses on "good" companies with a sustainable competitive advantage, Walter Schloss managed to earn impressive returns by simply buying a diverse set of extremely cheap companies. As Bruce Lee once said: "Adapt what is useful, reject what is useless, and add what is specifically your own.”


https://www.valuespreadsheet.com/best.pdf

Benjamin Graham, the Father of Value Investing

Is the Graham and Dodd "look for values with significant margin of safety relative to prices" approach to security analysis out of date?

The Super-investors of Graham-and-Doddsville by Warren Buffett
https://drive.google.com/file/d/0BxxZpH0rWpYHQkZDc2RKQlM3cFE/view


Are short-term performance and value investing mutually exclusive?

The Hare and Tortoise Revisited.

8 Rules for Picking Perfect Value Stocks

Tim Melvin's 8 Rules

1.  Book value matters
2.  Buy maximum pessimism
3.  Do not do what everyone else is doing
4.  Margin of safety is critical
5.  Scale into stocks (Double down at liquidation value)
6.  React; don't predict
7.  Patience is Profitable
8.  Do not play just because the casino is open

Warren Buffett’s Greatest Competition

There’s no disputing that Warren Buffett is the best investor of all time. His net worth speaks for itself. In fact, there is only one person in history worthy of comparison.

That person is young Warren Buffett.

Let’s take a look at the numbers Buffett achieved in the 1950s and 1960s compared to his performance thereafter.

From 1957 to 1969, Buffett achieved an average return of 29.5% and a cumulative return of 2794.9%!

In this timeframe, the Dow had a negative return in 5 out 12 years. Buffett had a positive return in all 12 years, with his most successful year, 1968, reaching a remarkable 58.8%. That beat the Dow by more than 50 percentage points.

This was the pinnacle of Buffett utilizing the strategies of Benjamin Graham and investing in net net stocks. He focused on the best possible NCAV investments, such as Western Insurance Securities Company, and often chose fairly concentrated portfolios. Once he found the stocks, he simply puffed the cigar and celebrated his victories.

Back then, finding these valuable, cheap companies was difficult. Young Warren Buffett had to do his own research and put in relentless man-hours. He spent months combing through Moody's stock manuals to find a handful of available net nets. Today, you can find a good selection of high-quality international net net stocks by signing up for free net net stock picks or, even better, opting for full access to Net Net Hunter.

For comparison, between the years of 1965 and 2014 when Warren Buffett became a behemoth, Berkshire achieved a compounded annual return of 19.4%, over 10% less than the best years of his investment life. And, these numbers were heavily boosted by the returns young Warren Buffett achieved in the late 1960s. During this timespan, he also had a few negative years and a few more in which the S&P 500 outperformed his portfolio.

A return of 19.4% annually is nothing to sneeze at. Most investors do worse. Still, 84-year-old billionaire Warren Buffett wouldn’t last a round in the ring with his agile, quick-footed 30-year-old self. At a Berkshire Hathaway annual meeting, he admitted it:

"Yeah, if I were working with small sums, I certainly would be much more inclined to look among what you might call classic Graham stocks, very low PEs and maybe below working capital and all that. Although -- and incidentally I would do far better percentage wise if I were working with small sums -- there are just way more opportunities. If you're working with a small sum you have thousands and thousands of potential opportunities and when we work with large sums, we just -- we have relatively few possibilities in the investment world which can make a real difference in our net worth. So, you have a huge advantage over me if you're working with very little money." – Warren Buffett

You have thousands and thousands of potential opportunities that Buffett does not! By being able to invest in net net stocks, classic Graham stocks, you have a huge advantage over the Oracle of Omaha.

Following Benjamin Graham and a Young Warren Buffett

So, this brings us back to the beginning. A young Warren Buffett risked everything and hopped on a train to Washington D.C. to work for Benjamin Graham, the father of value investing.

In 1954, he accepted a job at Graham’s partnership for a starting salary of $12,000 a year. Under Graham’s tutelage, he fine-tuned his ability to spot promising net net stocks, as opposed to merely cheap stocks.

Both are obviously value stocks, but cheap stocks can be any stock where the current price is lower than the underlying intrinsic value. Net net stocks are valued purely on their net current assets. That’s cash, accounts receivable, and inventory minus total liabilities, preferred shares, and various off-balance sheet liabilities. Working capital. This is better known as the NCAV, or Net Current Asset Value.

If the stock price was 2/3 of the NCAV, Graham would buy. When the stock price returned to the full NCAV, Graham would sell. Assuming he found a good net net stock, his downside is protected by the discount to net liquid assets, providing a huge margin of safety. It’s such a solid strategy that you, as a small investor, don’t really have to know a thing about the industry. By comparison, Buffett went into textiles in a major way and lost his shirt.

There have been multiple studies that show Graham’s strategy consistently shows returns of a basket of net net stocks in the 20-35% range. From 1970 to 1983, an investor could have earned an average return of 29.4% by purchasing stocks that fulfilled Graham’s requirements and holding them for at least a year.

Buffett himself, using Graham’s strategy, stated that he would see returns within a 2-year timeframe 70 to 80% of the time. He would take a puff and sell instead of collecting boxes of cigars and waiting for them to appreciate in value.

Despite the simplicity of his approach, it seems most investors ignore the stocks that Graham would have most coveted. Investors nowadays want to invest as if they’re billionaires, choosing a wide range of large cap stocks and holding on to them until retirement, death, or the next big market crash.

Going against the market takes conviction and faith in your approach, something both Graham and Buffett had in spades. Smart value investors don’t brag about owning Apple or Google. They talk about small wholesale electronics factories and unknown retail companies. They are excited about international microcap stocks in Japan or Australia.

If you’ve read this far, you’re not Warren Buffett, the immobile billionaire. You’re young Warren Buffett, the wide-eyed investor hopping on a train heading toward immeasurable wealth.

Read more here:

http://www.netnethunter.com/how-young-warren-buffett-started-his-fortune/

Is Benjamin Graham Still Relevant in 2015?

 Benjamin Graham in the Shadow of Buffettology?

Part of the question of whether Benjamin Graham is still relevant today arises from the popularity and success of Warren Buffett. During the course of his career, Buffett has essential blazed a trail away from the core strategies of Benjamin Graham. He's been quite successful, too, recording returns much higher than Benjamin Graham ever did.

Buffett's most recent plain vanilla approach to investing involves buying good companies at good prices and not looking for the statistical bargains that Graham advocated. Instead of buying bargains and selling them when they rise back to fair value, Buffett mostly holds onto his stocks forever.

Buffett has also spent a lot of time talking to the press and students about investing and business, which has lead many people to adopt the contemporary Buffett approach to investing.

Investors should definitely keep two things in mind when it comes to Buffettology, however. First, Buffett's investment philosophy is still rooted in the philosophy of Benjamin Graham and, second, Buffett racked up his biggest returns in the 1950s and 1960s when he was still using Benjamin Graham's investment philosophy.

Buffett still uses significant aspects of Graham's approach -- specifically the focus on valuation. All of his investment decisions involve judging the value of the business and then using that value as the bedrock from which he assesses the investment's merit. Bad things can happen to your net worth when you buy great companies at expensive prices. He also recognizes that reversion to the mean is nearly a fundamental law in business so looks to ways to protect himself by buying firms with strong competitive advantages.

Despite Buffett's great long term track record, his Buffett Partnership letters reveal that he was achieving his highest returns while he was using Benjamin Graham's classic value investing approach -- the cornerstone of which was Graham's net net stock strategy. During the 1950s and 1960s he earned returns of roughly 30%, and only changed his strategy when his portfolio became to large to continue buying net net stocks.

Warren Buffett had the best results of his career during his partnership days. His later returns had to be much lower to drag down his average returns to 20%.

After the change, while Buffett still earned outstanding results, they were not nearly as good as they were before the change in investment strategy. It's worth noting that even now Buffett would chose to use a classic Benjamin Graham approach to value investing if he was managing a portfolio under $10 million.

Read more here:

http://www.netnethunter.com/benjamin-graham-still-relevant-or-a-complete-waste-of-time/

The Intelligent Investor Benjamin Graham Audiobook

https://www.youtube.com/watch?v=SOZL99qriLE

Buffett - The making of an American Capitalist (Roger Lowenstein)***

https://www.youtube.com/watch?v=7nXDyOfmj34

### Attractive Buying Opportunities arise through a Variety of Causes

Attractive buying opportunities for the enterprising investor arise through a variety of causes.

The standard or recurrent reasons are
(a) a low level of the general market and
(b) the carrying to an extreme of popular disfavor toward individual issues. 

Sometimes, but much more rarely, we have the failure of the market to respond to an important improvement in the company's affairs and in the value of its stock.

Frequently, we find a discrepancy between price and value which arises from the public's failure to realise the true situation of a company - this in turn being due to some complicated aspects of accounting or corporate relationships.

It is the function of competent security analysis to unravel such complexities and to bring the true facts and values to light.


Benjamin Graham
Intelligent Investor


Summary:

Attractive buying opportunities (discrepancy between price and value) occur due to various causes:
1.  low level of the general market
2.  extreme of popular disfavour towards individual stocks
3.  failure of market to respond to improvement in the company
4.  failure to realise hidden value in the company due to some complicated aspects of accounting or corporate relationships

Portfolio Policy for the Enterprising Investor (Benjamin Graham)

The activities characteristics of the enterprising investor may be classified under four heads:

1.  Buying in low market and selling in high markets
2.  Buying carefully chosen "growth stocks"
3.  Buying bargain issues of various types
4.  Buying into "special situations"

Benjamin Graham
The Intelligent Investor

Quote 

"The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption of an investment policy.  Comparatively little will be said here about the technique of analysing securities; attention will be paid chiefly to investment principles and investors' attitudes."

"That risk cannot be avoided.  But by bearing it clearly in mind we may succeed in reducing it." 

 Related:

### Attractive Buying Opportunities arise through a Variety of Causes

Approach to Convertible Issues

An illustration on convertible issue

The fine balance between what is given and what is withheld in a standard-type convertible issue is well illustrated by the extensive use of this type of security in the financing of American Telephone & Telegraph Company.

Since 1913 the company has sold at least seven separate issues of convertible bonds, most of them through subscription rights to stockholders.

The convertible bonds had the important advantage to the company of bringing in a much wider class of buyers than would have been available for a stock offering, since the bonds are popular with many financial institutions which possess huge resources but some of which are not permitted to buy stocks.

The interest return on the bonds has generally been less than half the corresponding dividend yield on the stock - a factor which was calculated to offset the prior claim of the bondholders.

Since the company has been able to maintain its dividend without change for many years, the result has been the eventual conversion of all the older convertible issues into stock.  

Thus the buyers of these convertibles have fared well through the years - but not quite so well as if they had bought the capital stock in the first place.

This example establishes the soundness of American Telephone & Telegraph, but not the intrinsic attractiveness of convertible bonds.

To prove them sound in practice we should need to have a number of instances in which the convertible worked out well even though the common stock proved disappointing.  

Such instances are not easy to find.


$$$$$


Advice by Benjamin Graham on convertibles

Our general attitude toward new convertible issues is thus a mistrustful one.

We mean here, as in other similar observations, that the investor should look more than twice before he buys them.

After such hostile scrutiny he may find some exceptional offerings that are too good to refuse.

The ideal combination, of course, is a strongly secured convertible, exchangeable for a common stock which itself is attractive, and at a price only slightly higher than the current market.  

Every now and then a new offering appears that meets these requirements.

By the nature of the securities markets, however, you are more likely to find such an opportunity in some older issue which has developed into a favorable position rather than in a new flotation.

(If a new issue is a really strong one, it is not likely to have a good conversion privilege.)


Benjamin Graham
The Intelligent Investor

Formula Timing - Buying in low markets and selling in high markets. No simple and fool-proof formula. Select a ins and outs formula timing plan that is simple and convenient .

Let's look at the possibilities and limitations of a policy of entering the market when it is depressed and selling out in the advanced stages of a boom.

This bright idea appeared feasible from a first inspection of the market chart covering the gyrations of the past fifty years.

But closer study indicated that no simple and fool-proof formula could be counted upon to work out in the future.  

For example, the history of the Dow-Jones Industrial Average suggests that it should be possible to buy at 140 during the next few years and sell out at 280 later.

But this is only an indication and not a true prediction.

Nor can we tell whether the probability of its working out is good enough to justify the basing of an investment policy upon it.

$$$$$

The various formula timing plans, which have come into prominence in recent years, all represent a compromise attempt to deal with this probability.

Instead of planning to do all the buying at 140 - or some similar price - and all the selling at 280, the formula user buys at various stages on the downside and sells in installments on the upside.

By this means he can obtain some benefit from market fluctuations, even if they do not fall precisely within the range suggested by the chart.

Thus his formula assures him at least some profit if the future performance of the market is only reasonably close to that of the past.

$$$$$

A simple application of this idea would be to sell 10 percent of your holdings when the market advances 10 per cent above a chosen base or central level; then to sell 20 per cent of the remainder when it advances another 10 per cent and so on.

Repurchases would be made after the market had declined to the central level, and on some similar schedule.
Following this plan, you would have sold all your stocks if and when the market level reached double the base figure, and you would then have realized a profit of 37 per cent above the base.

You can apply these ins and outs of formula timing plans, using various types of plans, to calculate their possible results, using the record of your own actual operations and also applied to hypothetical or imaginary funds.

$$$$$

There is some danger here for both writers and investors to lose themselves in a maze of alternative procedures.  

It is well to bear certain basic facts in mind.  No one plan has a priori or guaranteed advantage over any other.

The relative results of various plans will depend on how well each happens to fit the market fluctuations of the future.

$$$$$

1.  The more certain the investor is that the range of future fluctuations will duplicate the past, the more justified he is in concentrating his buying close to the bottom line of the Dow-Jones performance chart and his selling not much below the top line.  

2.  But since we lack any proof that the past range must determine that of the future, most of us will prefer a compromise formula by which buying and selling is done in various stages below and above the indicated median level.

3.  So too, there is no assured advantage as between a plan to sell 100 per cent of our stock holdings by the time a designated high point is reached and a plan that assures retention of some stocks under all circumstances.  The latter in some measure protects against an inflationary breakout of a permanent character into a much higher band of fluctuation than we have experienced hitherto.

But like all the other choices in formula timing plans the wisdom of this one depends not on reasoning but on results.

$$$$$

The sovereign virtue of all formula plans lies in the compulsion they bring upon the investor to sell when the crowd is buying and to buy when the crowd lacks confidence.  

If the reader adopts a formula plan today and it happens to turn out badly - because the market chances to soar upwards to unexpected heights and does not return - it will still prove to have been worth while.

For the principle and the psychology will remain sound and applicable to the markets of the future, however far removed their middle range may be from the line of the past.

$$$$$

Since all the rest is a matter of detail or of guesswork, we strongly advice to "formula investors" that they select a plan that is simple and convenient in their circumstance.



Benjamin Graham
Intelligent Investor

Timing is of no value, unless it coincides with pricing, enabling repurchase at substantially under previous selling price.

The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking.

Yet in many cases he pays attention to them and even acts on them.  Why?

Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than his own.

This attitude will bring the typical investor nothing but regrets.

Without realizing it, he is likely to find himself transformed into a market trader.  

During a sustained bull movement, when it is easy to make money by simply swimming with the speculative tide, he will gradually lose interest in the quality and the value of the securities he is buying and become more and more engrossed in the fascinating game of beating the market.

But "beating the market" really means beating himself - for he and his fellows constitute the market.

Thus he begins by studying market movements as a "commonsense investment precaution" or a "desirable supplement to his study of security values"; he ends as a stock-market speculator, indistinguishable from all the rest.

A great deal of brain power goes into this field, and undoubtedly, some people can make money by being good stock-market analysts.

But it is absurd to think that the general public can ever make money out of market forecasts.

For who will buy when the general public, at a given signal, rushes to sell out at a profit?

If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting:

(a) to try to do what countless others are aiming at and
(b) to be able to do it better than your numerous competitors in the market.

There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully that the general public, of which he is himself a part.


$$$$$$$$$$


Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry.

The idea of waiting a year before his stock moves up is repugnant to him.  

But a waiting period, as such, is of no consequence to the investor.

What advantage is there to him in having his money un-invested until he receives some (presumably) trustworthy signal that the time has come to buy?

He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income.

What this means is that timing is of no real value to the investor unless it coincides with pricing - that is, unless it enables him to repurchase his shares at substantially under his previous selling price.


Benjamin Graham
Intelligent Investor