From Janet Lowe's Ben Graham on Value Investing

My fave excerpts:

A true investor seldom is forced to sell his shares

If you aren't certain that you understand and can value your business far better than Mr. market, you don't belong in the game

Price will tend to fluctuate around value. The price of the security is like a stopped clock it will be right twice a day, and will be wrong all the rest of the time. The main principle in what we are saying is that securities are chronically mispriced in relation to the intrinsic value.

I have found it useful to estimate the central value of the Dow Jones industrial average by the simple method of capitalizing 10 year average earnings at twice the interest rate for high-grade bonds.

Odlum decided the way to make money was to buy companies in trouble and revamp them. Graham debated with him, saying that it was safer to buy a variety of stocks. Odlum later invested all of his money in uranium companies. they went down and he had all his eggs in one basket.

Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.” — Warren Buffett

From :
For most of us, it’s easier to understand a business or product we encounter on a regular basis. Investing in what you know allows you to more easily place value on the stock and stay informed on industry trends. If you don’t understand what the company does or how it makes money, how will you be able to manage your investment? (When it dips 50%, would you hold on?)

Finding companies you know is only the beginning; the circle of competence is only meant to help you stay within your arena of expertise. Once you have generated a list of the companies you understand, the next step should be conducting an analysis of the financials. Don’t worry — you don’t have to be a finance whiz to understand the basics of the stock market. Berkshire Hathaway’s investment philosophy is surprisingly simple: The company should have consistent earning power, good return on equity, capable management and be sensibly priced. Investing is less about the stock price and more about the value of the business — is it a good one?

Successful investing is more about learning over time and slowly expanding your circle of competence. For now, stick with what you know and focus on the long term.. 

From an old Economist article : 

Mr Buffett has consistently beaten the market by buying good-quality firms that he is confident he understands, typically outfits operating in a relatively stable industry. His preferred acquisitions have a hard-to-replicate advantage over their competitors—a popular brand, say, or a degree of monopoly power—that he likes to describe as a protective “moat”. He also favours firms with a strong ethical culture, and management that is interested in doing a good job, not just making money. If he gets the shares when they are cheap (just after Coca-Cola’s “new Coke” debacle, for example), all the better: but “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he says.

Warren Buffet quotes from Janet Lowe's book

Warren Buffet quotes from the Janet Lowe book

- I would take one industry at the time and develop some expertise in half a dozen. I would not take the conventional wisdom now about any industries as meaning a damn thing. I will try to think it through.

If I was looking at an insurance company or a paper company, I would put myself in the frame of mind that I had just inherited the company and it was the only asset my family was ever going to own.

 What would I do with it? What am I thinking about? What am I worried about? who are my competitors? Who are my customers? Go out and talk to them. Find out the strengths and weaknesses of this particular company versus other ones.



-Investing is reporting. I told him to imagine he had been assigned an in-depth article about his own paper. Hed ask a lot of questions And dig up a lot of facts. Hed know the Washington Post. And that's all there is to it.


-Warren talks about these discounted cash flows....I've never seen him do one Munger huffed.. It's true replied buffet if the value of the company doesn't just scream out at you, it's too close.

-You need a moat in business to protect you from the guy who is going to come along and offer your product for a penny cheaper.

-The definition of a great company is one that will be great  for 25-30 years.

-Purchasing junk bonds, we are dealing with enterprises that are far more marginal. These businesses are usually overloaded with debt and often operating in industries characterized by low returns on capital. Additionally the quality of management is sometimes questionable. Management may even have interests that Are directly counter  to does of shareholders. Therefore we expect that we will have occasional large losses in junk issues. So far however we have done reasonably well in this field.

-More than once buffet has acquired an interest in companies that face serious financial difficulties, a condition that did not alter their franchise value. "it was similar to American Express in the late 1963 when the salad oil scandal hit it. It did not put the franchise of the travelers check or the credit card. It could have ruined the balance sheet of American Express, but the answer of course was that American Express with no net worth was worth a tremendous amount of money.
And geico with no net worth was worth a tremendous amount of money, too, except it might get closed up the next day because it had no net worth ; but I was satisfied that the net worth would be there. The truth is a lot of insurance companies for the ownership of it would have put up the net worth. We would have put it up.

Excerpts from Valuewalk Article- Li Lu on Charlie Munger :

- Till this day, the vast majority of individual investors and institutional investors still follow investment philosophies that are based on “bad theories.” For example, they believe in the efficient market hypothesis, and therefore believe that the volatility of stock prices is equivalent to real risk, and they place a strong emphasis on volatility when they judge your performance. In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital...They still accept the theories that say “volatility is risk” and “the market is always right.”

-But this old man spoke succinctly

-The numbers still fluctuate as before, but eventual result is substantial growth. From the fourth quarter of 2004 to the end of 2009, the new fund returned an annual compound growth rate of 36% after deducting operating costs. From the inception of the fund in January 1998, the fund returned an annual compound growth rate in excess of 29%. In 12 years, the capital grew more than 20 folds

-When Charlie thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable; to examine how business become big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market.

-Charlie constantly collects and researches the notable failures in each and every type of people, business, government, and academia, and arranges the causes of failures into a decision-making checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision making in his life and in his career.

-Charlie’s mind is original and creative, never subject to any restrictions, shackles, or dogmas. He has the curiosity of children and possesses the qualities of a top-notch scientists and their scientific research methods. He has a strong thirst for knowledge throughout his life and is interested in practically all areas. To him, with the right approach, any problem can be understood through self-study, building innovations on the foundation laid by those who came earlier.

-Circle of Competence: Charlie said, if I want to hold a view, if I cannot refute or disprove this view better than the smartest, most capable, most qualified person on Earth, then I’m not worthy of holding that view. So when Charlie truly holds a certain point of view, his thinking is not only original and unique, but also almost never wrong.

-A beautiful lady once insisted that Charlie use one word to sum up the source of his success, Charlie said it was being “rational.”. Even in a completely unfamiliar territory, with just one look he could see through to the essence of things. Buffett calls this characteristic of Charlie the “two-minute effect” — he said Charlie can, in the shortest time possible, unravel the nature of a complex business and understand it better than anyone else can.

-I asked Charlie: “You have your own private jet and so does Berkshire, why do you bother going through the trouble of flying commercial?”

Charlie replied:”Firstly, it is a waste of fuel for me to fly in my private jet. Secondly, I feel safer flying in a commercial aircraft.” However, the real reason is Charlie’s third reason, “I want to live an engaged life. I don’t want to be isolated.”

-Once he went to Seattle to attend a board meeting, taking the economy class as usual, he sat beside a Chinese girl who was doing her calculus homework throughout the flight. He was impressed with this Chinese girl because he has difficulty imagining American girls of the same age having such power of concentration to ignore noise on the aircraft and concentrate on studying.

-Because of this, he believes people must be strict and demanding on themselves, continuously improving their discipline in life in order to overcome the innate weaknesses of human nature. This way of life is, to Charlie, a moral requirement. To an outsider, Charlie might seem like a monk; but to Charlie, this process is both rational and pleasant and it allows people to having a successful and happy life.

-If Confucius returned 2000 years later to the commercialized China, his teaching will probably be: have your heart in the right place, cultivate your moral character, fortify your family, acquire wealth, and help the world!

From :

The career advice taht really helped me the most to decide what to focus on

My favorite career advice excerpts from The 20 Uncommon Career & Life Lessons from My Weekend with Warren Buffett:

2. Don’t expect people to change. They’ve realized how futile is to try to changes others’ behavior. We love to paint a rosy picture that things will be better after some special event happens (an acquisition, a marriage, kids, a move, a new job, whatever), but for the most part, how people act is out of our control. Make sure the people you surround yourself with are the right fit from the beginning.

“If we thought the success of our investment depended on them taking our advice, we’d move on.” – Charlie Munger

6. Don’t expose yourself to steps that can keep you from tomorrow. It can take a lifetime to build a masterpiece, but only an instant to destroy it. No matter what the possible benefit, these two guys refuse to do anything that opens them to the chance of going back to zero. That’s why they don’t use debt, and in their last 50 years have never faced a truly dire situation.

7. Tell the truth to a group of people who believe what you do, and things will work out. I do everything I can to run Live Your Legend the same way. Align with the right people and do it in an honest way. Pretty simple. 

8. Great things are built as a result of the combination of time and consistency towards a cause you deeply believe in. Find what you’re good at – what you want to build. Then put your head down and allow a lifetime to build it. 40 years ago Buffet wrote out 13 principles of what he wanted to create and how he wanted it run. He then built a culture that executed on that every day. Just about anything can be done with the right focus, time and consistency. As long as you care enough and aren’t in too much of a hurry.

10. There’s little progress without failure. These guys quickly admit not only that they’ve had plenty of failures, but that they wouldn’t have what they do if it wasn’t for the screw ups. Unsuccessful people avoid failure at all cost. The successful ones embrace it, learn from it and keep building. If you’re not screwing up every once in a while, you’re not trying hard enough. 

11. You don’t need to be able to do that many things right to succeed. In fact, success is inversely proportional to how many things you try to do. Do a few things really well. Focus on that. Hire others to do the rest or don’t do it at all. The most successful businesses and people have a much longer list of what they aren’t willing to do, than what they actually spend time on. Warren is notorious for how many things he’s says no to. Stay within your circle of competence. When in doubt, do less.

14. Purpose is the ultimate compensation. Job satisfaction and loyalty come from the autonomy to do the work that matters to you, not from a lofty salary or bonus. Give people autonomy and trust to do things they are good at. Avoid micro-managing. Don’t think you can do their skill better than they can.

Buffett recently mentioned how he’d give up his private jet long before giving up his Internet access. And who wouldn’t? But think what that means. A billionaire has access to every tool in the world, yet the most important is the one that all of us have equal (and free) access to.

From http://www.businessinsider.com/munger-explains-buffetts-success-2014-9 :

So what exactly did Munger identify as some of the unique keys to Buffett being "so unusually successful"? He began by noting:

The first factor is the mental aptitude. Warren is seriously smart.

Munger continued by noting Buffett "out-achieved his mental aptitude." Then there's the good effect caused by his doing this since he was 10 years old. It's very hard to succeed until you take the first step in what you're strongly interested in. There's no substitute for strong interest and he got a very early start.

Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age. Warren's investing skills have markedly increased since he turned 65.

Munger notes this reality is "really crucial," because he suggests, "having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is."

And Buffett hasn't just continued his learning, but he's also seen all of the steps laid out on the path set before him as a chance to gain better understanding. Munger compares Buffett to the Roman emperor Marcus Aurelius who "had the notion that every tough stretch was an opportunity — to learn, to display manhood, you name it. To him, it was as natural as breathing to have tough stretches."

As a result, Munger suggested, "Warren doesn't spend any time on self-pity, envy, etc."

Put simply, Buffett has continually dedicated himself to refining and expanding his understanding of investing.

The key to remember

Warren Buffett once said:

I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life.

Very nice interview at  Q&A With Guy Spier Of Aquamarine Capital :

My excerpts:

1. What company have you owned the past that was the most surprising to you? (In prospect or in retrospect)

I think that many have surprised me in one direction or another, but one of the more memorable was Duff and Phelps Credit rating - which I purchased in the mid-1990's at a 7 Price to Earnings ratio. The company proceeded to increase in value by seven times over 2-3 years before being purchased by Fimalac, the owner of Fitch. I had expected the stock to double, but I did not understand that I had purchased a super high quality business with a manager who was committed to devoting every cent of free cash, which was in excess of reported earnings, to repurchasing shares.

2. Which rule(s) of your checklist would surprise average investors the most, if any?

I actually think that none of them would. They are common sense items that anyone would look over and say, "yes - that makes obvious sense". What is key is not that they are surprising, but that in the wrong state of mind, I might easily skip over a particular factor in evaluating an investment.

3. Would you advise young people to get a CFA charter or an MBA or is there a better way to become an investor?

I don't think that either is necessary in order to become a good investor. Attending the Berkshire Hathaway meetings, studying Warren Buffett and reading the Berkshire Annual Reports, along with Poor Charlie's Almanack are an absolute necessity, in my view.

5. What would you say is the most common mistake that value investors make? Does this matter if the value investor is amateur or professional?

I think that all-too-often, we feel like we are forced to take a decision. Amateur investors, investing their own money, have a huge advantage in this over the professionals. When you are a professional, there is a whole system of oversight that is constantly saying, "What have you done for me lately!" or in baseball terminology, "Swing you fool!"

Amateur investors who are investing unlevered funds that they don't need any time soon have no such pressures.

6. Financial companies are usually a big part of the portfolio of value investors, because they seem cheap to industrials and utilities. But every now and then financials wipe out in a credit crisis. Why don't many value investors pay attention to credit conditions?

Yes, that's absolutely true. And yes, value investors probably pay far too little attention to the credit cycle. In my case, I think that I was utterly convinced that my stocks were sufficiently cheap, such that I could invest without regard to financial cycles. But I learned my lesson big time in 2008 when I was down a lot. I now subscribe to Grant's Interest Rate Observer so as to help me track the credit cycle.

9. How do you balance keeping an independent view versus interacting with respected professional friends who have their views?

I try to switch off, or distance myself from people who I think communicate in a way that is not productive for me. The key is to have the kind of discourse that allows other people to come to their own conclusion. Asking open ended questions and not telling someone what to do are important aspects of that. When I come across people who do that, I try to build closer relationships with them. If they don't I might still keep them in my circle, but I would not allow myself to interact with them too often - because I don't want to be swayed.

11. How do you feel about quantitative value investors?

If you mean to use statistical methods to uncover value, Ben Graham style, then I'm all for it. That is what I did when I created my Japan basket. That said, I found it hard and monotonous work. Monotonous because, in the case of Japan it did not lead to greater knowledge or wisdom about the world, because there was a limit on the degree to which I could drill down.

From : Peculiar Habits of Incredibly Successful People

Adams writes in his book How to Fail at Almost Everything:

A system is something you do on a regular basis that increases your odds of happiness in the long run. If you do something every day, it's a system. If you're waiting to achieve it someday in the future, it's a goal.

The system-versus-goals model can be applied to most human endeavors. In the world of dieting, losing twenty pounds is a goal, but eating right is a system. In the exercise realm, running a marathon in under four hours is a goal, but exercising daily is a system. In business, making a million dollars is a goal, but being a serial entrepreneur is a system.

President Obama wears the same style suits to reduce low-level decision-making

He explained in 2012:

You'll see I wear only gray or blue suits. I'm trying to pare down decisions. I don't want to make decisions about what I'm eating or wearing. Because I have too many other decisions to make. You need to focus your decision-making energy. You need to routinize yourself. You can't be going through the day distracted by trivia.

Charles Darwin tried his whole life to prove his own theories wrong

Charlie Munger once explained Darwin's philosophy:

One of the great things to learn from Darwin is the value of the extreme objectivity. He tried to disconfirm his ideas as soon as he got 'em. He quickly put down in his notebook anything that disconfirmed a much-loved idea. He especially sought out such things. Well, if you keep doing that over time, you get to be a perfectly marvelous thinker instead of one more klutz repeatedly demonstrating first-conclusion bias.

Munger quotes

My favorite quotes from http://www.valuewalk.com/charlie-munger-page/

CHARLIE MUNGER QUOTES

1. You must value the business in order to value the stock.
2. The best thing a human being can do is to help another human being know more.
3. Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. Then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available because of prudence and patience in the past.
4.  Just as animals flourish in niches, people who specialize in some narrow niche can do very well.
5. The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you are paying for. Move only when you have an advantage.
6. Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.
7. It is not given to human beings to have such talent that they can just know everything about everything all the time. However, it is given to human beings who work hard at it. Who look and sift the world for a mispriced bet – that they can occasionally find one.
8. In addition, the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time they don’t. It is just that simple.
9. Acknowledging what you do not know is the dawning of wisdom.
10. Determine value apart from price; progress apart from activity; wealth apart from size.
11. Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.
12. I think records of accomplishment are very important. If you start early trying to have a perfect one in some simple thing like honesty, you are well on your way to success in this world.
13. We try more to profit from always remembering the obvious than from grasping the esoteric.
14. Someone will always be getting richer faster than you. This is not a tragedy.
15. Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.
16. Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you are not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you will end up with one hell of a result.
17. You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. Nevertheless, there are also cases where you have to recognize that you have no wisdom to add – and that your best course is to trust some expert.
18. The safest way to try to get what you want is to try to deserve what you want. It is such a simple idea. It is the golden rule. You want to deliver to the world what you would buy if you were on the other end.
19. I am not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I have reached that state.
20. Avoid working directly under somebody you do not admire and don’t want to be like.
21. Intense interest in any subject is indispensable if you are really going to excel in it.
22. Never, ever, think about something else when you should be thinking about the power of incentives.
23. Everybody engaged in complex work needs colleagues. Just the discipline of having to put your thoughts in
24. Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail.

Sequoia Fund letter excerpts

Excerpts from Sequoia Fund Second Quarter Commentary

Sequoia Fund’s investment objective is long-term growth of capital. In pursuing this objective the Fund focuses on investing in equity securities that it believes are undervalued at the time of purchase and have the potential for growth. A guiding principle is the consideration of equity securities, such as common stock, as units of ownership of a business and the purchase of them when the price appears low in relation to the value of the total enterprise. The balance sheet and earnings history and prospects of each company are extensively studied to appraise fundamental value. Sequoia Fund typically sells the equity security of a company when the company shows deteriorating fundamentals, its earnings progress falls short of the investment adviser’s expectations or its valuation appears excessive relative to its expected future earnings.

We believe it is futile to try to predict the direction of the stock market from year to year. Rather than try to guess what might happen next, we think it more prudent to own a portfolio of market-leading companies that earn high returns on capital, boast strong balance sheets and self-fund their growth. We try to invest alongside motivated and ethical management teams and to identify businesses with many years of growth ahead of them. We try to buy these businesses carefully, taking advantage of occasional periods when their stocks seem to be mispriced. Though it contradicts academic theory, we believe a concentrated portfolio of businesses that has been intensively researched and carefully purchased will generate higher returns with less risk over time than a diverse basket of stocks chosen with less care. However, a concentrated portfolio may deliver results in an individual year that do not correspond closely to the returns generated by the broader market.

I found my favorite Mahatma Gandhi quote here on Goodreads :

“Do not worry in the least about yourself, leave all worry to God,' - this appears to be the commandment in all religions.
This need not frighten anyone. He who devotes himself to service with a clear conscience, will day by day grasp the necessity for it in greater measure, and will continually grow richer in faith."

Market value / GDP

Great historical chart of Market Value/ GDP from http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

From Importance of ROIC Part 1: Compounders and Cheap Stocks One very crucial point is often left out of these studies…. Holding period. Most of these studies pick a group of stocks based on some value measure (low P/E, etc…) and then after 1 year (or sometimes 2 years), sell those stocks and replace them with a new set of stocks that match that valuation criteria. Most of the studies turn their portfolios over once a year. Over short periods of time, paying low P/E ratios or low EV/EBIT ratios will work very well, as the market typically corrects itself over 1-3 years or so. But over time, if you intend to participate in the long term results of your business and own the stock for 5-10 years or longer, you should be much more concerned with the quality of that business. I prefer to find really cheap stocks, but I want them to be businesses that I think can grow intrinsic value.

From Importance of ROIC Part 1: Compounders and Cheap Stocks

 One very crucial point is often left out of these studies…. Holding period. Most of these studies pick a group of stocks based on some value measure (low P/E, etc…) and then after 1 year (or sometimes 2 years), sell those stocks and replace them with a new set of stocks that match that valuation criteria. Most of the studies turn their portfolios over once a year.

Over short periods of time, paying low P/E ratios or low EV/EBIT ratios will work very well, as the market typically corrects itself over 1-3 years or so. But over time, if you intend to participate in the long term results of your business and own the stock for 5-10 years or longer, you should be much more concerned with the quality of that business.

I prefer to find really cheap stocks, but I want them to be businesses that I think can grow intrinsic value.

Guy Spier's Time essay and Jason Zweig's Guy Spier article

On Buffett from : http://content.time.com/time/business/article/0,8599,1819293,00.html

"It's very important to live your life by an internal yardstick," he told us, noting that one way to gauge whether or not you do so is to ask the following question: "Would you rather be considered the best lover in the world and know privately that you're the worst — or would you prefer to know privately that you're the best lover in the world, but be considered the worst?"

Buffett has made a fine art of keeping this kind of distracting noise at bay: he said he even limits his contact with managers of businesses in which he invests, preferring to assess their companies' financial records — a more neutral source of information. Equally vital to his success, Buffett said he focuses only on investments that lie well within his "circle of competence." As a result, he confided, whenever he makes an investment, he has no doubt at all that he's right

"Successful stocks don't tell you when to sell. When you feel like bragging, it's probably time to sell."
-- John Neff

Quoth @LizWiseman: #Stress is caused by lack of control, not difficulty of work. People like hard work. #ChurchillClub #futureofwork

Warren Buffett on the impact driverless and safer cars will have on the insurance business:

“If they really work well then they are good socially. But sure, they could reduce the cost of insurance. Anything that improves, reduces accident rates, reduces death rates will reduce the cost of insurance. That’s basically a good thing for society. Overall the world would be better off if we didn’t have any car accidents.”

Warren Buffett on whether he would prefer investing in Blackberry or Bitcoin:

“I’d probably short them both.”

If a business earns 6% on capital over forty years, you’re not going to make much different than 6% return, even if you buy it at a huge discount. Conversely, if a business earns 18% on capital, you’ll end up with one hell of a return long term, even if you pay an expensive looking price."
-- Charlie Munger