By: Greg Speicher
#1 Focus on Annual Reports
How to Spend Your Time
A few years ago, Warren Buffett was on the Fox Business Network discussing the sale of Berkshire’s (BRK.A)(BRK.B) shares of PetroChina (PTR). Fox anchor Liz Claman asked Buffett how he was able to come up with the idea to invest in PetroChina in the first place.
Buffett replied, “Other guys read Playboy, I read annual reports.“
A biography of value investor Peter Cundill was recently published entitled “There’s Always Something to Do.” Truer words have never been spoken. There always is something to do.
The question is are you doing the right things.
Buffett spends his time reading annual reports. Moreover, he isn’t reading willy-nilly. He’s reading with purpose. Buffett focuses on trying to figure out how much a business is worth.
In the case of PetroChina, in 2002 Buffett figured the whole company was worth about $100 billion. The entire business was selling in the market for about $37 billion. Buffett bought $488 million worth of shares which he sold in 2007 for $4 billion. Buffett earned a 700%+ return on a half a billion dollar investment in five years by sitting in his office and reading annual reports.
How do you spend your time? How many annual reports have you read in the past week?
Being a great investor requires brutal honesty. There’s always something to distract you and get you off your game. Being brutally honest about how you spend your time is the first step to spending it on what really matters.
Focus on reading annual reports. You’ll be richer for it.
#2 Learn from the Super Rich
What You Can Learn from Tiger 21, an Investment Club for the Super-Rich
If you have $10 million dollars of investable assets, you may be able to join a super-exclusive investing club called Tiger 21. The group’s 140 members together have investable assets of more than $10 billion.
However, having money isn’t enough. You’ll also need to show that you built your fortune and that you have something to offer the group. Rich seat warmers need not apply.
Members meet once a month to discuss investment ideas and participate in discussions led by world-class experts. The heart of the monthly meeting – and arguably its most valuable component – is the portfolio defense.
During the portfolio defense, a member discloses and defends his portfolio holdings. He is then given candid feedback from other members. The defender also gets a tape recording of the session for further review.
Having to defend your portfolio to a group of highly-capable wealthy investors is characterized as daunting, stimulating and highly valuable.
We could all benefit from such an experience.
Many – if not most – investors continue to hold securities for fuzzy reasons. Perhaps a stock was purchased in a bout of exuberance and you have a nagging feeling there are flaws in your thesis. Perhaps you ventured outside of you circle of competence and made unfounded assumptions. Perhaps the stock was purchased by your last adviser and it’s there because you haven’t gotten around to selling it.
Start by taking Buffett’s simple advice and write down your investment thesis for each security. A couple of paragraphs should suffice if you really know why you’re holding it. This should include why it’s cheap or, if it’s fairly valued, why its intrinsic value will grow at a satisfactory rate.
If you can’t do it, you just flunked your own personal Tiger 21 portfolio defense for that holding, and you should seriously consider exiting the position.
You could also find a way to create your own feedback loop al la Tiger 21. The trick is finding knowledgeable investors or businesspeople who are willing and able to go through the process.
One simple idea is to publish your investing theses on investing web sites such as SeekingAlpha, Value Investors Club or GuruFocus and then defend your idea in the ensuing discussion.
With a little creativity and desire you can find a way to do this.
The bottom line is that we all have blind spots. We all fall victim to human frailty and cognitive biases. We all have gaps in our knowledge. The problem is that your portfolio may contain one or more, at worst, ticking time bombs and, at best, chronic underperformers that can be hazardous to your wealth.
After all, even Buffett needed a Charlie Munger.
#3: Figure It Out or Pass, Don’t Guess
A recent article in The New Yorker profiled hedge fund titan Ray Dalio. Dalio’s fund, Bridgewater Associates, is the largest hedge fund in the world.
The article describes a weekly meeting at the fund where fifty or so partners and analysts discuss important economic trends and look for opportunities. Dalio describes it as a “What’s going on in the world?” meeting.
During the meeting profiled, there was a discussion about the Chinese economy. The question arose how a slowdown in the Chinese economy would effect commodity prices. After the co-chief executive gave his opinion, Dalio asked for additional input. An associate jumped in and expressed his view that a slowdown in China could have a major impact on global supply and demand.
Dalio impatiently replied, “Are you going to answer me knowledgeably or are you going to give me a guess?”
The associate said he would give a educated guess. Dalio cautioned him not to and reminded him of his tendency to offer an opinion without doing the careful painstaking work necessary to back it up.
There is a little of this associate in all of us.
It’s commonplace to throw around opinions in everyday social interactions regarding everything from politics, to sports to business. That’s all well and good, but, when it comes to investing serious money, such sloppy thinking can be costly.
The article states that, “Eventually, the young employee said that he would go away and do some careful calculations.”
If you want to beat the market, don’t satisfy yourself with educated guesses. Do your own work. If you can’t figure it out, move on. Once in awhile you’ll find something and, if you’ve done your own “careful calculations,” you’ll have the conviction to make a meaningful purchase.