at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit.” Homer Hoyt, in One Hundred Years of Land Values in Chicago, quoted in a Chicago Tribune editorial of April 1890
“Between 1982 and 1999U.S.stock prices increased by a factor of thirteen — the most remarkable run of annual increases in stock prices in the two hundred years of the American republic. In the very long run, U.S. stock prices have declined every third year; in the last two decades of the last century, stock prices fell in only one year, and then only by 5 percent. The market value ofU.S.stocks increased from 60 percent of U.S. GDP in 1982 to 300 percent of GDP in 1999.”
“the ultimate result of shielding man from the effects of folly is to people the world with fools.” — Herbert Spencer
Pascal’s Wager — an argument that belief in God is rational; if God does not exist, one will lose little by believing in the supreme being, while if God does exist, one will lose everything by not believing.
“Markets look a lot less efficient from the banks of the Hudsonthan the banks of the Charles.” — Fischer Black, quoted in Bernstein’s Against the Gods
Offer to play a game in which a fair game is tossed; for every tails, you are paid $2, but a heads ends the game. For each tails, your payout doubles. How much would someone have to offer you to take your place in the game? [The expectation is infinite, but obviously most people will accept a finite payout to give up their spot in the game.]
Peter Cundill[173]
- The essential concept is to buy under-valued, unrecognized, neglected, out of fashion, or misunderstood situations where inherent value, a margin of safety, and the possibility of sharply changing conditions created new and favourable investment opportunities. Although a large number of holdings might be held, performance was invariably established by concentrating in a few holdings. In essence, the fund invested in companies that, as a result of detailed fundamental analysis, were trading below their “intrinsic value.” The intrinsic value was defined as the price that a private investor would be prepared to pay for the security if it were not listed on a public stock exchange. The analysis was based as much on the balance sheet as it was on the statement of profit and loss.
- Investments should only be made if most of the following criteria are met:
- The share price must be less than book value. Preferably it will be less than net working capital less long term debt.
- The price must be less than one half of the former high and preferably at or near its all time low.
- The price earning multiple must be less than ten or the inverse of the long term corporate bond rate, whichever is the less.
- The company must be profitable. Preferably it will have increased its earnings for the past five years and there will have been no deficits over that period.
- The company must be paying dividends. Preferably the dividend will have been increasing and have been paid for some time.
- Long term debt and bank debt (including off-balance sheet financing must be judiciously employed. There must be room to expand the debt position if required.
- In every analysis you need to isolate what the real assets are and you must not forget to examine the franchise to do business, to review the character and competence of the management and to estimate the outcome if the whole business had to be turned into cash.
- I try to keep in mind Oscar Wilde’s comment that “saints always have a past and sinners always have a future,” so no investment should be ruled out simply on the basis of past history. We focus on liquidation analysis and liquidation analysis alone.
- Characteristics that appear with greater frequency than all the rest (regarding the traits of great investors):
- Insatiable curiosity: “Curiosity is the engine of civilization. If I were to elaborate it would be to read, read, read, and don’t forget to talk to people, really talk, listening with attention and having conversations, on whatever topic, that are an exchange of thoughts. Keep the reading broad, beyond jus the professional. This helps to develop one’s sense of perspective in all matters.”
- Patience: “Patience, patience, and more patience. Ben Graham said it, but it is true of all investment disciplines, not only value investing, although it is indispensable to that.”
- Concentration: “You must have the ability to focus and to block out distractions. I am talking about not getting carried away by events or outside influences – you can take them into account, but you must stick to your framework.”
- Attention to detail: “Never make the mistake of not reading the small print, no matter how rushed you are. Always read the notes to a set of accounts very carefully – they are your barometer. You need sound simple arithmetic skills, not differential calculus. They will give you the ability to spot patterns without a calculator or a spread sheet. Seeing the patterns will develop your investment insights, your instincts – your sense of smell. Eventually it will give you the agility to stay ahead of the game, making quick, reasoned decisions, especially in a crisis.”
- Calculated risk: “Be prepared to take risks but never gambles. Value investors are often perceived as taking the safe investment route and that it true. But the time scales required for value investor can be contradictory. Holding on to heavily discounted stock that the market dislikes for a period of five or ten years is not risk free. As yeach year passes the required end reward to justify the investment becomes higher, irrespective of the original margins of safety. Equally for the growth specialist, speculating that a company in a favoured market, with negligible current earnings, will in due course enjoy exponential growth is not risk free. On top of which there is no margin of safety. Either could be regarded as gambling, or calculated risk. Which side of that scale they fall on is a function of whether the homework has been good enough and has not neglected the fieldwork.”
- Independenceof mind: “I think it is very useful to develop a contrarian cast of mind combined with a keen sense of what I would call ‘the natural order of things.’ If you can cultivate these two attributes you are unlikely to become infected by dogma and you will begin to have a predisposition towards lateral thinking – making important connections intuitively.”
- Humility: “I have no doubt that a strong sense of self belief is important – even a sense of mission – and this is fine as long as it is tempered by a sense of humour, especially an ability to laugh at oneself. One of the greatest dangers that confront those who have been through a period of successful investment is hubris – the conviction that one can never be wrong again. An ability to see the funny side of oneself as it is seen by others is a strong antidote to hubris.”
- Routines: “Routines and discipline go hand and hand. They are the roadmap that guidaes the pursuit of excellence for its own sake. They support proper professional ambition and the commercial integrity that goes with it.”
- Menssanain corporate sano: “I now that there are successful investors who are supremely unfit and don’t give a fig. for myself I have found that my exercise routines have contributed immensely towards giving me the mental resilience to get through the tough times – ad there are always tough times. I also believe that engaging in competitive sport has taught me to temper my competitive instincts with common sense and only to attempt what I sincerely think is possible – that works professionally too. About fifty percent of my time is spent reading and running is useful for digesting it all. I run almost every day, but I hope not to point of obsession. I have been known to have the odd dry martini now and then! But I am convinced that there is a strong link in temperament between elite athletes and elite investors. Watching the best sportsmen in action prompts the question as to why the best are so much better than everyone else. Perhaps it is because they practice ‘adaptive perfectionism.’ This is something that is readily applicable to investment and I have tried to follow it by remaining faithful to the Ben Graham principles that I believe are the soundest route to investment success, while retaining an eye for adapting them and moving them forward to fit today’s investment world more perfectly.”
- Scepticism: “Scepticism is good, but be a sceptic, not an iconoclast. Have rigour and flexibility, which might be considered an oxymoron but is exactly what I meant when I quoted Peter Robertson’s dictum ‘always change a winning game.” An investment framework ought to include a liberal dose of scepticism both in terms of markets and of company accounts. Taking this a step further, a lot of MBA programs, particularly these days, teach you about market efficiency and accounting rules, but this is not a perfect world and there will always be anomalies and there is always ‘wriggle room’ within company accounts so you have to stick to your guns and forget the hype.”
- Reading again:
