Just finished skimming through "John Neff on Investing". Enjoyed the book. Apparently was given a cold shoulder on Wall Street, before going on to manager the Windsor fund. Also no MBA just some courses on finance and investing.
Also espouses low p/e strategy like Dreman. Amazing to me in some ways, if so easy why not more millionaires around ? Anyway, maybe this will lean me more toward value investing in the future.
From the book:
Windsor was never fancy. These were its principal elements:
1) a low P/E ratio.
2) Fundamental growth in excess of 7%
3) Yield protection, enhancement in most cases
4)Superior relation of total return to P/E paid.
5)No cyclical exposure without compensating p/e multiple.
6) Solid companies in growing fields.
7) Strong fundamental case.
"total return" described our growth expectations.
total return = earnings growth + yield.
Without these growth expectations, rational investors do not buy equities.
As a way to measure the bang for our investment buck, total return divided by initial p/e could not have been more succinct.
total return ratio = (total return) / (p/e)
We preferred stocks whose total return ratio exceeded the market average by 2 to 1.
e.g
company earnings growth yield total return p/e total return ratio
--------- ----------------- ----- ----------- ---- -----------------
yellow freight 12% 3.5% 15.5% 6X 2.6
1999 market 8% 1.5% 9.5% 27X 0.35
Inflection points abound!!
However most of these take investors by surprise. The market place always becomes momentum-laden as inflection points draw near. In my experience, markets are continuously foolish thanks to investors who forget the past.
So long as fundamentals remain intact, we were not averse to holding stocks for 3-4 years, but that has not prevented us from taking profits right away. There have been times we have owned shares for a month or less.
When you feel like bragging about a stock, its probably time to sell.
In overpriced markets, we periodically went to as much as 20% cash. (A higher percentage wasn't prudent for an equity fund, in my judgement)
Our maximum progress usually occurred after an inflection point.
Conventional wisdom suggests that more information is a blessing and more competition a curse. I'd say the opposite is true. Coping with so much information runs the risk of distracting attention from the few variables that really matter.
If a stock is as terrific as you believe, catching it a quarter point higher is less hazardous than firing before you aim properly. Do homework! Time spent nosing around usually comes handy.
Sunday, May 21, 2006
Sunday, May 14, 2006
From David Dreman's book
- First goal should be a strong defense : preserve capital ! Never lose money.
-Fundamental research has been no more successful than technical analysis. This is because forecasting is the most important factor in security analysis. However, research analysts forecast poorly. This will mean some earnings misses for some stocks in some quarter on another. Higher p/es are punished more and one miss can devstate the price.
- Just how much information a person can handle effectively has come under intense scrutiny in recent years, with striking results. One is that investor's comprehension of large amounts of data about companies, industries or teh economy may not always give him or her that extra "edge". In fact ingesting large amounts of investment information can lead to worse rather than better decisions. People, when swamped by information, may select ony a small portion of the total, and reach a dramatically different conclusion than what the entire data would suggest. Not unlike juggling, each factor is another ball in the air, increasing the difficulty.
- Rule 2 : Respect the difficulty of working with a mass of information. In-depth information does not translate into in-depth profits.
-Under conditions of anxiety, uncertainty and too much information, the market becomes a giant Rorschach test. The investor sees any pattern he wishes.
-In extensive studies, was found that analysts estimates were way off mark, even though they were made less than three months before the end of the quarter for which earnings were reported. The average error was 44%
- Earnings surprises of even a few percentage points can trigger major price reactions. (especially for high p/es)
-Rule 6 : Analsyts forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimate.
-Rule 8 : It is impossible, in a dynamic economy to use the past to estimate the future.
-The more data you get, the less information you have.
-Surprise helps unpopular stocks (with low P/Es) and hurts popular ones (with high P/Es)
- Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.
-Rule 13 : Favored stocks underperform the market, while out of favor companies outperform the market, but the reappraisal often happens slowly, even glacially.
-Avoid stocks that experts or crowds are recommending.
-Sonjoy Basu published a study that found that annual returns decline as one moves from low p/e to high p/e.
-Rule 18 : Invest equally in 20-30 stocks, diversified among 15 or more industries.
-Rule 19 : Buy medium or large sized stocks.
-After picking low P/E, P/B, P/CF or P/Div, don't abandon Security analysis entirely.
1) Check that strong financial position.
2) As many favorable operating and financial ratios as possible
3) A higher rate of earninsg growth than the S&P and the likelihood this will not plummet in the near future.
4) Earnings estimates should always lean to the conservative side.
5) An above average dividend yield which the company can sustain and increase.
Dreman dound indicator 5 above improved performance when used with low P/Es.
-Rule 20: Diversify across industries. Buy the least expensive stocks within an industry regardless of how high or low the general price of the industry group.
-P/E of S&P in 97 was 24.2, P/CF 18.1, P/B 5.4 and yield 1.6%. As a rule of thumb try to use a 20% discount for the first three measures and a yield of atleast 1%. P/CF, P/E and P/B should be available in Value Line.
-Rule 21 : Safest approach is to rely on mechanical guidelines, which filter out much of emotional content. Sell a stock when its P/E approaches that of the overall market, regardless how favorable the prospects may appear. If it reaches that point, grit your teeth and get rid of it. It will probably go higher but why be greedy? Youve made a good gain and that's the whole point.
-How long to wait for a stock to work out? I would say 2.5-3 years or 3.5 years for cyclicals. If after this time the stock still disappoints, sell it. Another important ruke is to sell a stock immediately of the long term fundamentals deteriorate. No matter how much research, things can go wrong. Iam not talking of a temporary surprise or a poor quarter from which a stock will snap back from, but major changes that weaken a companies prospects. Under these conditions, I have found that taking your lumps immediately and moving on results in the smallest loss.
-
-Fundamental research has been no more successful than technical analysis. This is because forecasting is the most important factor in security analysis. However, research analysts forecast poorly. This will mean some earnings misses for some stocks in some quarter on another. Higher p/es are punished more and one miss can devstate the price.
- Just how much information a person can handle effectively has come under intense scrutiny in recent years, with striking results. One is that investor's comprehension of large amounts of data about companies, industries or teh economy may not always give him or her that extra "edge". In fact ingesting large amounts of investment information can lead to worse rather than better decisions. People, when swamped by information, may select ony a small portion of the total, and reach a dramatically different conclusion than what the entire data would suggest. Not unlike juggling, each factor is another ball in the air, increasing the difficulty.
- Rule 2 : Respect the difficulty of working with a mass of information. In-depth information does not translate into in-depth profits.
-Under conditions of anxiety, uncertainty and too much information, the market becomes a giant Rorschach test. The investor sees any pattern he wishes.
-In extensive studies, was found that analysts estimates were way off mark, even though they were made less than three months before the end of the quarter for which earnings were reported. The average error was 44%
- Earnings surprises of even a few percentage points can trigger major price reactions. (especially for high p/es)
-Rule 6 : Analsyts forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimate.
-Rule 8 : It is impossible, in a dynamic economy to use the past to estimate the future.
-The more data you get, the less information you have.
-Surprise helps unpopular stocks (with low P/Es) and hurts popular ones (with high P/Es)
- Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.
-Rule 13 : Favored stocks underperform the market, while out of favor companies outperform the market, but the reappraisal often happens slowly, even glacially.
-Avoid stocks that experts or crowds are recommending.
-Sonjoy Basu published a study that found that annual returns decline as one moves from low p/e to high p/e.
-Rule 18 : Invest equally in 20-30 stocks, diversified among 15 or more industries.
-Rule 19 : Buy medium or large sized stocks.
-After picking low P/E, P/B, P/CF or P/Div, don't abandon Security analysis entirely.
1) Check that strong financial position.
2) As many favorable operating and financial ratios as possible
3) A higher rate of earninsg growth than the S&P and the likelihood this will not plummet in the near future.
4) Earnings estimates should always lean to the conservative side.
5) An above average dividend yield which the company can sustain and increase.
Dreman dound indicator 5 above improved performance when used with low P/Es.
-Rule 20: Diversify across industries. Buy the least expensive stocks within an industry regardless of how high or low the general price of the industry group.
-P/E of S&P in 97 was 24.2, P/CF 18.1, P/B 5.4 and yield 1.6%. As a rule of thumb try to use a 20% discount for the first three measures and a yield of atleast 1%. P/CF, P/E and P/B should be available in Value Line.
-Rule 21 : Safest approach is to rely on mechanical guidelines, which filter out much of emotional content. Sell a stock when its P/E approaches that of the overall market, regardless how favorable the prospects may appear. If it reaches that point, grit your teeth and get rid of it. It will probably go higher but why be greedy? Youve made a good gain and that's the whole point.
-How long to wait for a stock to work out? I would say 2.5-3 years or 3.5 years for cyclicals. If after this time the stock still disappoints, sell it. Another important ruke is to sell a stock immediately of the long term fundamentals deteriorate. No matter how much research, things can go wrong. Iam not talking of a temporary surprise or a poor quarter from which a stock will snap back from, but major changes that weaken a companies prospects. Under these conditions, I have found that taking your lumps immediately and moving on results in the smallest loss.
-
Tuesday, May 09, 2006
Lynch from Investment Guru interview :
You could have bought Wal-mart 10 years after it went public. Let's say you're very cautious. You wait another 10 years. This was not a startup any more, even then you would have made 30 times your money. The reason is that after 10 years it had reached only 15% of te country.
You could say, this company has minimal costs, they're efficient, all competition says they're great, the balance sheet is great, products are terrific and they're self-funding. Why can't they go to 25%? Think of that and buy and hold. You have to ask: why can't this company go from 20 stores to 400 stores?
Q Some people say there is no point in trying to beat the market. Academics say that Lynch and Buffett are the outliers on the right tail of the distribution curve, the lucky orangutans that do things by luck. How do you answer this ?
Lynch : Well you could say that there are going to be a million tennis matches this weekend. And 500,000 people will lose and 500,000 people will win. Therefore should people not practice their backhand or serve? The question is : why not be a winner rather than a loser? You could be a better investor if you look at the balance sheet, if you knew what the company did, if you use the information you have. You would simply do a better job . Just like you would be a better tennis player if you worked on your weakness and improved strengths. The concept is maybe we should ban tennis, since half the people are going to lose so the other half can win.
Q What do you think of technical analysis?
Lynch : I like only one formation. The stock goes from 50 to 8. Then sideways for a few years between 8 and 11. Such stocks may make a nice research list. Now see what the situation is, if you're right it'll go up, if not it'll go sideways and you won't lose money.
PB Remember : The key is to increase your odds. Get more favorable odds. I'd like to believe that my odds are getting better with education. You can't be perfect but can increase odds only.
The fact that you're working with just a small part of the market and avoiding the whole (which includes bad ones) can translate in bettering the market if due diligence is done.
e.g. if I had read a bit about market P/Es etc, would maybe not have purchased tech stocks in 1998-99.
You could have bought Wal-mart 10 years after it went public. Let's say you're very cautious. You wait another 10 years. This was not a startup any more, even then you would have made 30 times your money. The reason is that after 10 years it had reached only 15% of te country.
You could say, this company has minimal costs, they're efficient, all competition says they're great, the balance sheet is great, products are terrific and they're self-funding. Why can't they go to 25%? Think of that and buy and hold. You have to ask: why can't this company go from 20 stores to 400 stores?
Q Some people say there is no point in trying to beat the market. Academics say that Lynch and Buffett are the outliers on the right tail of the distribution curve, the lucky orangutans that do things by luck. How do you answer this ?
Lynch : Well you could say that there are going to be a million tennis matches this weekend. And 500,000 people will lose and 500,000 people will win. Therefore should people not practice their backhand or serve? The question is : why not be a winner rather than a loser? You could be a better investor if you look at the balance sheet, if you knew what the company did, if you use the information you have. You would simply do a better job . Just like you would be a better tennis player if you worked on your weakness and improved strengths. The concept is maybe we should ban tennis, since half the people are going to lose so the other half can win.
Q What do you think of technical analysis?
Lynch : I like only one formation. The stock goes from 50 to 8. Then sideways for a few years between 8 and 11. Such stocks may make a nice research list. Now see what the situation is, if you're right it'll go up, if not it'll go sideways and you won't lose money.
PB Remember : The key is to increase your odds. Get more favorable odds. I'd like to believe that my odds are getting better with education. You can't be perfect but can increase odds only.
The fact that you're working with just a small part of the market and avoiding the whole (which includes bad ones) can translate in bettering the market if due diligence is done.
e.g. if I had read a bit about market P/Es etc, would maybe not have purchased tech stocks in 1998-99.
From Benjamin Franklin's autobiography:
-Be encouraged to due diligence in thy calling, and distrust not Providence (and yourself).
-I wish to acknowledge luck and God for setting me down the right path and giving me success. My belief in such guidance leads me to hope that this same goodness will continue to bless me.
-Be encouraged to due diligence in thy calling, and distrust not Providence (and yourself).
-I wish to acknowledge luck and God for setting me down the right path and giving me success. My belief in such guidance leads me to hope that this same goodness will continue to bless me.
Sunday, May 07, 2006
The easiest way invariably is the best way. I don't think you can get to be a really good investor without doing a massive amount of reading. Each year at the annual meeting Munger recommends a wide range of reading material. These include Value Line charts, Cialdini's "Influence", Hagstrom's the WB portfolio: Mastering the Power of Focus Investing.
Frequently you look at a business having fabulous results. And the question is "How long can this continue? Think about why the results are occurring now and about what will make these results to stop occurring."
This helps spot a company that has a franchise on a certain product, a so called "moat" around its business.
Observing business over time gives an investor greater perspective on investing. Some simple changes in the way we live can alter the long term value of a business.
"Modern Portfolio Theory? Its demented!" proclaims Munger. "I also ignore Beta since we think it is nonsense. We just want favorable odds, as long as these are in our favor and we're not risking evrything on one throw of the dice, we don't mind volatility"
I have never taken a course in chemistry, economis, psychology or business. Early elemntary physics and math helped me assimilate the fundamental ethos of hard science, which I therafter pushed further and further into softer and softer subjects. Early exposure to hard skills is essential. Mastery of psychology and accounting should be required.
Frequently you look at a business having fabulous results. And the question is "How long can this continue? Think about why the results are occurring now and about what will make these results to stop occurring."
This helps spot a company that has a franchise on a certain product, a so called "moat" around its business.
Observing business over time gives an investor greater perspective on investing. Some simple changes in the way we live can alter the long term value of a business.
"Modern Portfolio Theory? Its demented!" proclaims Munger. "I also ignore Beta since we think it is nonsense. We just want favorable odds, as long as these are in our favor and we're not risking evrything on one throw of the dice, we don't mind volatility"
I have never taken a course in chemistry, economis, psychology or business. Early elemntary physics and math helped me assimilate the fundamental ethos of hard science, which I therafter pushed further and further into softer and softer subjects. Early exposure to hard skills is essential. Mastery of psychology and accounting should be required.
Saturday, May 06, 2006
I have been reading "Damn Right!" by Janet Lowe. Some interesting tidbits from the book :
Charlie did not share the special admiration ?Buffett felt for Graham. Munger said "Graham had blind spots.He had too low an appreciation of the fact that some businesses were worth paying big premiums for".
Yet Charlie agreed with his most fundamental teachings and they have been part of the Buffett-Munger success formula from the start. "The basic concept of value to a private owner and beig motivated when you're buying and selling securities by reference to intrinsic value instead of price momentum-I don't think that will ever be outdated", said Munger.
I never want to overpay for an asset i.e pay more than its intrinsic value. Howeverthere are very rare exceptions for whom it is worth paying up a bit to get in with for the long term advantage.
Buffett : Charlie shoved me in the direction of not just buying bargains, as Graham had taught me. It took a powerful force to move me on from Graham's limiting view. It was the power of Charlie's mind. He expanded my horizons. Boy, if I had listened only to Ben, would I have been a lot poorer. Now I became interested in buying a wonderful business at a moderate price".
Charlie to his daughter when she was rebellious "I see you've decided to raise yourself, I hope you'll do a good job".
It was a relief to Munger to quit the law. I preferred making my own decisions and gambling my own money. I usually thought I knew better than the client anyway, so why should I have to do it his way? So partly, it was having an opinionated personality and partly it was a desire to get resources permitting independence". Munger came to understand that to be truly wealthy, a person needed to build up an ownership in a business.
By the time he quit law in 1965, " I had more confidence that Wheeler, Munger would work out, and I had much greater wealth" - Munger. I was not very surprised when he gave up the law said Munger's sister Carol, "That'swhat happens when someone finds something that is his real love".
What Charlie finds interesting is how few big decisions were involved in creating billions of dollars, fewer than one every three years. "I think the record shows the advantage of a particular mind-set-not seeking action for its ow sake, but instead combining extreme patience with extreme decisiveness".
The lesson of his business life is that you don't want to do business with people you can't trust. The economis are irrelevant if yoo don't have trust.
When See's turned out to be an excellent ongoing business, M & B realized how much easier and pleasanter it was t obuy a good business and just let it roll along, than to buy a deeply discounted but struggling business and spend time, energy and more money to set it straight.
Munger says he and Buffett should have seen the advantages of paying for quality much earlier.
"IF we hadn't bought See's, we wouldn't have bought Coke", says Buffett, "I've had windmills and second rate department stores, pumps and textile mills and all these were as problematic as windmills".
Munger told Berkshire that there are a lot of companies in America that throw off a lot of cash but which can't be expanded very much. To try and expand would be to throw money down a rat hole. Such businesses don't stir acquisition desires but they are welcome at Berkshire because he and Buffett can take the capital and invest it elsewhere.
Charlie did not share the special admiration ?Buffett felt for Graham. Munger said "Graham had blind spots.He had too low an appreciation of the fact that some businesses were worth paying big premiums for".
Yet Charlie agreed with his most fundamental teachings and they have been part of the Buffett-Munger success formula from the start. "The basic concept of value to a private owner and beig motivated when you're buying and selling securities by reference to intrinsic value instead of price momentum-I don't think that will ever be outdated", said Munger.
I never want to overpay for an asset i.e pay more than its intrinsic value. Howeverthere are very rare exceptions for whom it is worth paying up a bit to get in with for the long term advantage.
Buffett : Charlie shoved me in the direction of not just buying bargains, as Graham had taught me. It took a powerful force to move me on from Graham's limiting view. It was the power of Charlie's mind. He expanded my horizons. Boy, if I had listened only to Ben, would I have been a lot poorer. Now I became interested in buying a wonderful business at a moderate price".
Charlie to his daughter when she was rebellious "I see you've decided to raise yourself, I hope you'll do a good job".
It was a relief to Munger to quit the law. I preferred making my own decisions and gambling my own money. I usually thought I knew better than the client anyway, so why should I have to do it his way? So partly, it was having an opinionated personality and partly it was a desire to get resources permitting independence". Munger came to understand that to be truly wealthy, a person needed to build up an ownership in a business.
By the time he quit law in 1965, " I had more confidence that Wheeler, Munger would work out, and I had much greater wealth" - Munger. I was not very surprised when he gave up the law said Munger's sister Carol, "That'swhat happens when someone finds something that is his real love".
What Charlie finds interesting is how few big decisions were involved in creating billions of dollars, fewer than one every three years. "I think the record shows the advantage of a particular mind-set-not seeking action for its ow sake, but instead combining extreme patience with extreme decisiveness".
The lesson of his business life is that you don't want to do business with people you can't trust. The economis are irrelevant if yoo don't have trust.
When See's turned out to be an excellent ongoing business, M & B realized how much easier and pleasanter it was t obuy a good business and just let it roll along, than to buy a deeply discounted but struggling business and spend time, energy and more money to set it straight.
Munger says he and Buffett should have seen the advantages of paying for quality much earlier.
"IF we hadn't bought See's, we wouldn't have bought Coke", says Buffett, "I've had windmills and second rate department stores, pumps and textile mills and all these were as problematic as windmills".
Munger told Berkshire that there are a lot of companies in America that throw off a lot of cash but which can't be expanded very much. To try and expand would be to throw money down a rat hole. Such businesses don't stir acquisition desires but they are welcome at Berkshire because he and Buffett can take the capital and invest it elsewhere.