Lou Simpson – Investors That Use Hot Tips Or Listen To CNBC Are Playing A Losers Game

Last week investing great Lou Simpson, former chief investment officer for Geico—a Berkshire Hathaway subsidiary, did a Q&A with Robert Korajczyk, a professor of finance at the Kellogg School to discuss his successful investment strategy. Simpson provides a warning to investors saying, “If somebody’s going to invest using hot tips, or listening to CNBC, or investing with so-called wealth managers at brokerage firms, I think it’s a loser’s game for them.”

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Lou Simpson
TheDigitalWay / Pixabay

Here’s an excerpt from that interview:

Bob Korajczyk: What would you say is the essence of your investment philosophy?

This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery

D1 CapitalThe first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More


Lou Simpson: The essence is simplicity. The base case for investing in any area of the market is a passive product, such as an index fund. That’s something any investor can access.

If you’re a professional investor, the question is: How can you add value? The more you trade, the harder it is to add value because you’re absorbing a lot of transaction costs, not to mention taxes.

What we do is run a long-time-horizon portfolio comprised of ten to fifteen stocks. Most of them are U.S.-based, and they all have similar characteristics. Basically, they’re good businesses. They have a high return on capital, consistently good returns, and they’re run by leaders who want to create long-term value for shareholders while also treating their stakeholders right.

Korajczyk: So you concentrate your investments in your very best ideas.

Simpson: You can only know so many companies. If you’re managing 50 or 100 positions, the chances that you can add value are much, much lower.

So far, this year we bought one new position, and we’re looking pretty seriously at one more. I don’t know what we’ll decide to do. Our turnover is 15, 20 percent. Usually we add one or two things and get rid of one or two things.

Warren [Buffett] used to say you should think of investing as somebody giving you a fare card with 20 punches. Each time you make a change, punch a hole in the card. Once you have made your twentieth change, you have to stick with what you own. The point is just to be very careful with each decision you make. The more decisions you make, the higher the chances are that you will make a poor decision.

One thing a lot of investors do is they cut their flowers and water their weeds. They sell their winners and keep their losers, hoping the losers will come back even. Generally, it’s more effective to cut your weeds and water your flowers. Sell the things that didn’t work out, and let the things that are working out run.

..................

Korajczyk: Is there a way for somebody to be an active investor, but only spend a few hours over the weekend doing research?

Simpson: You probably could. But even among professionals who trade full time, the majority do not add value. Because, again, you have fees, you have transaction costs.

Yes, I think there are people who have the right mindset and maybe contacts, and certainly luck, who could outperform the market. But if somebody’s going to invest using hot tips, or listening to CNBC, or investing with so-called wealth managers at brokerage firms, I think it’s a loser’s game for them.

You can read the full interview at KelloggInsight here.

Article by Johnny Hopkins, The Acquirer's Multiple

Previous articleWolf-Sized Otter Lived Six Million Years Ago And Had A Deadly Bite
Next articleThe 10 Cash Flow Ratios Every Investor Should Know
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”