- businesses that are fun for the shareholders.
- Pay only a reasonable price, even for an excellent business.
- Invest for the long term
- Do not diversify excessively.
1. “Think independently. We try to be skeptical of conventional wisdom, he says, and try to avoid the waves of irrational behavior and emotion that periodically engulf Wall Street. We don’t ignore unpopular companies. On the contrary, such situations often present the greatest opportunities.
2. “Invest in high-return businesses that are fun for the shareholders. Over the long run, he explains, appreciation in share prices is most directly related to the return the company earns on its shareholders’ investment. Cash flow, which is more difficult to manipulate than reported earnings, is a useful additional yardstick. We ask the following questions in evaluating management: Does management have a substantial stake in the stock of the company? Is management straightforward in dealings with the owners? Is management willing to divest unprofitable operations? Does management use excess cash to repurchase shares? The last may be the most important. Managers who run a profitable business often use excess cash to expand into less profitable endeavors. Repurchase of shares is in many cases a much more advantageous use of surplus resources.
3. “Pay only a reasonable price, even for an excellent business. We try to be disciplined in the price we pay for ownership even in a demonstrably superior business. Even the world’s greatest business is not a good investment, he concludes, if the price is too high. The ratio of price to earnings and its inverse, the earnings yield, are useful gauges in valuing a company, as is the ratio of price to free cash flow. A helpful comparison is the earnings yield of a company versus the return on a risk-free long-term United States Government obligation.
4. “Invest for the long term. Attempting to guess short-term swings in individual stocks, the stock market, or the economy, he argues, is not likely to produce consistently good results. Short-term developments are too unpredictable. On the other hand, shares of quality companies run for the shareholders stand an excellent chance of providing above-average returns to investors over the long term. Furthermore, moving in and out of stocks frequently has two major disadvantages that will substantially diminish results: transaction costs and taxes. Capital will grow more rapidly if earnings compound with as few interruptions for commissions and tax bites as possible.
5. “Do not diversify excessively. An investor is not likely to obtain superior results by buying a broad cross-section of the market, he believes. The more diversification, the more performance is likely to be average, at best. We concentrate our holdings in a few companies that meet our investment criteria. Good investment ideas–that is, companies that meet our criteria–are difficult to find. When we think we have found one, we make a large commitment. The five largest holdings at GEICO account for more than 50 percent of the stock portfolio.
On talking to companies: “That’s a good discipline – you should spend your day talking to operators, not to Wall Street.” – Jeffrey Ubben
“Most of our investments are a product of what we’ve learned from working with and investing behind really great management teams. We’re very isolated. We’d rather spend our time learning from successful operators and investors. CEO’s making strategic decisions every day — they are essentially investors themselves — allocating capital in the most shareholder-friendly way. This approach keeps us independent and it keeps our portfolio unique.” – Cara Goldenberg
“We have a network and investor base that is totally different from most hedge funds. Our reference list is our management teams. People say, ‘can you give me your list of references?’ And we send a list of CEO’s. And they say, ‘No, we’d like to speak with your investors.’ We say, ‘Those are our investors.’” – Cara Goldenberg
“My job is not to ignore the current and potential macroeconomic environment nor is it to forecast it. It is to choose a select number of companies that have the right combination of characteristics that will allow it to survive and thrive in nearly any scenario.” – Peter Kinney
“The only way to test a hypothesis is to look for all the information that disagrees with it.” – Karl Popper
“Having spent 15 years…doing nothing but short selling, I can argue with some authority that, as an investment strategy, shorting suffers from each one of these characteristics of a bad business.” – Joe Feshbach
“Costs and liabilities are rarely overstated.” – Seth Klarman
“Crooks are exposed when they run out of money.” – Chris Browne
“We are in a zero-sum game, so by definition you can’t be with the consensus and add value because the consensus is reflected in the price. You have to be able to think independently. And independent thinking is something I worry about in terms of the industry. There are some fantastic people in the industry. I don’t actually know what a hedge fund is. A hedge fund is a bouillabaisse of all different people doing all different things. But hedge funds on average (this is a great concern) are not doing enough independent thinking. The beauty of being in the hedge fund business is that it’s the only business in the world that I know of that is really not cyclically dependent. Your environment is not your determinant. You’re free to do whatever you want. There’s no such thing as a bad environment. You can go short. You can go long. You can take spreads. You can do anything you want, just as long as you do it prudently. You have that sort of freedom. So there’s no reason for us, for the industry as a whole, to perform this way.
“The average correlation between the hedge fund index and the average portfolio of stocks and bonds is 76 percent. Why is that? There’s no good reason anybody lost money last year (2009). You can go short, you can go long, you can take spreads. If we as an industry are going to be able to make a contribution to the rest of the world in terms of the investment community, we have to do independent thinking to be able to take uncorrelated positions. That’s our responsibility. Too many people in the hedge fund industry in my opinion are just basically carrying their beta through, replicating certain return patterns.
“What we do is we’ve replicated almost every style–we’ve taken 14 different styles of hedge funds–and we’ve taken their return series. The average correlation is between 50 and 60 percent of a manager with that return style. And we’ve been able to replicate that return style by just creating a passive mix. For example, emerging market managers… you could just be long the emerging markets and whether you are up or down would drive their returns. Trend following strategies in terms of commodities are strategies that could be replicated by simply trading off moving averages. So you need to have more of an independent point of view in order to create uncorrelated alphas.” — Ray Dalio
“It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges.” – John Maynard Keynes
“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one knows something about… It is a mistake to think that one limits risk by spreading too much between enterprises about which one knows little and has no reason for special confidence…” – John Maynard Keynes
“An investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money.” – J.M. Keynes
“It’s not bringing in the new ideas that’s so hard; it’s getting rid of the old ones.” – John Maynard Keynes
“In the long run, we are all dead.” – John Maynard Keynes
“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” – John Maynard Keynes
“I believe in market economics. But to paraphrase Churchill – who said this about democracy and political regimes – a market economy might be the worst economic regime available, apart from the alternatives. I believe that people react to incentives, that incentives matter, and that prices reflect the way things should be allocated. But I also believe that market economies sometimes have market failures, and when these occur, there’s a role for prudential – not excessive – regulation of the financial system.” – Nouriel Roubini
“But in the financial markets, without proper institutional rules, there’s the law of the jungle – because there’s greed! There’s nothing wrong with greed, per se. It’s not that people are more greedy now than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there’s less fear. And second, b prudential regulation and supervision to avoid certain excesses.” – Nouriel Roubini
“THERE ARE IDIOTS. Look around.” – Larry Summers
“We don’t go in much for titles at our firm, [but] if we did, my business card would read ‘Bill