From Seth Klarman's book.
- "Being a value investor can be a lonely undertaking. A value investor may experience poor, even horrendous, performance compared with that of other investors during prolonged periods of market overvaluation. "
- "For a value investor a pitch must not only be in the strike zone, it must be in his sweet spot. Above all, investors must always avoid swinging at bad pitches"
- Remember the reason you bought the investment, and if that no longer holds true, then sell the investment.
- "The trick of successful investors is to sell when they want to, not when they have to."
- "Maintaining moderate cash balances or owning securities that periodically throw off appreciable cash is likely to reduce the number of foregone opportunities."
- a. A bottoms up approach, searching via fundamental analysis.
- NPV and IRR are great tools for summarizing data. NPV is the discounted value of all future cash flows that the business is expected to generate. Use this when earnings are predictable and a discount rate can be chosen. When interest rates are unusually low, could cause inflated share prices.
- Analyze liquidation value. Understand what would be an orderly liquidation versus fire sale liquidation. Net working capital = Current Assets – Current Liabilities. Net working capital = Net Working Capital – all long-term liabilities. Operating losses deplete working capital. Look at off balance sheet liabilities, such as under-funded pension plans.
- "working capital / sales ratio" is worthwhile. Discount rates of 12% for first 5 years followed by 15%. These higher rates indicate "uncertainty". Also see insider purchasing.
- Book value is not very useful as a valuation yardstick.
- If you see a company selling inexpensively, ask , "What is wrong with this company?" Like Charles Munger, who advises investors to "invert, always invert. Bargains should be inspected and re-inspected for possible flaws."
- He cited that institutions frowned upon arbitrage plays, and certain companies within an industry were punished without merit. Many institutions cannot hold low-priced securities, and that in itself can create opportunity. He also cites year-end tax selling, which creates opportunities for value investors.
- "Some information is always elusive," hence need to live with incomplete information. Knowing all facts does not always lead to profit. The first 80% of the research is gathered in the first 20% of the time spent finding that research."
- "High uncertainty accompanied by low prices. By the time uncertainty resolved, prices rise." Make decisions quicker, without all of the information, and take advantage of the time others are delving into the same information. The extra time can cause the late and thorough investor to lose their margin of safety.
- "Investment research reducing large piles of information to manageable ones, distilling the investment wheat from the chaff. A lot of chaff and very little wheat.
- Bankrupt Companies Look for Net Operating Losses as a potential benefit. Beauty of investing in bankrupt companies is the complexity of the analysis. This complexity leads to potential opportunity, as many investors shy away from the complex analysis. He cites the example of expensing rather than capitalizing certain expenses.
- Look at off-balance sheet arrangements. (e.g. real estate and over-funded pension plans)
- "As a rule investors should avoid the common stock of bankrupt entities at virtually any price; the risks are great and the returns are very uncertain."
- "All investors must come to terms with relentless continuity of the investment process."
