Investing

Books

Investing the Templeton Way | Templeton & Phillips


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Published in: 2008

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The book is written by Lauren C. Templeton and Scott Phillips and is about Sir John Templeton’s investment career. Templeton ran the fund company Franklin Templeton Investments and outclassed its comparative indices during its seven decades under Templeton.

A LAISSEZ-FAIRE CHILDHOOD. Templeton was known for his curiosity and optimism. He learned early on that the stubborn one could outwork his opponents – “the doctrine of the extra ounce”. What distinguished the best from the average is often that extra hour of study or work. From childhood he also took an interest in seeing the world.

”Success is a process of continually seeking answers to new questions”

A GLOBAL CITIZEN. Templeton believed that borders were something artificially created by man and nothing that should stop an investor from looking for value in all corners of the world. In addition to better chances of finding value, Templeton also argued that it increased his chances of better returns at lower volatility. He was a diligent traveller and carefully studied the countries he visited. This made him dare to invest where others didn’t.

THE POINT OF MAXIMUM PESSIMISM. In the 1920s, Templeton’s father was a lawyer and from his office window he could see when bankrupt farms were sold in the town square. Most of the time he ignored the auctions, but when there were no buyers out in the town square, he walked downstairs and bought the farms at scrap prices. Much later, and in a better market, the father then sold the farms at a good profit. This theory of buying at maximum pessimism was later on applied by Templeton to the global stock markets.

“People are always asking me where the outlook is good, but that is the wrong question. The right question is: Where is the outlook most miserable?”

TEMPLETON’S SPIKE STRIP. On several occasions during his career, Templeton used the “spike strip approach” in markets that had reached maximum pessimism. He distributed his capital evenly over, for example, all shares traded below $1. The same approach was used when he successfully shorted 84 IT companies just before the IT bubble burst.

A FOCUS ON MICRO RESULTS IN STRONG BETS ON MACRO. Templeton was often praised for his well-timed macro bets, for example both when he went long Japan (50s and 60s) and when he went short Japan (80s and 90s). There was no advanced macro analysis behind the decisions. The focus arose when Japan during the time periods had many low- and high-valued shares. In order to identify and carry out these counter-works, Templeton was a diligent student of historical bubbles.

MINIMIZED THE FX-EXPOSURE. Templeton was careful to avoid countries with unstable economies and stuck to those that had a debt / GNP ratio’s below 25% and a positive current account – i.e. exported more than they imported. He considered that the currency cycles generally lasted several years and could vastly affect an investment’s outcome. He also carefully studied historical devaluations to learn what had gone wrong and what type of properties those countries and currencies had.

MARKET VALUE VS. REPLACEMENT VALUE. Templeton observed many historical periods when market prices for properties far exceeded the replacement value as well as periods when properties were valued below the replacement value. He applied the same way of thinking with great success to all sorts of industries that were currently in crisis.

MORE CLEAR-MINDED WHEN AWAY FROM THE BUZZ. Templeton began his career on Wall Street but later moved to the Bahamas. Templeton’s performance was significantly better when he worked upstairs in a Bahamas police station than when he had a stylish Wall Street office. He was able to behave more rational when he was freed from the daily buzz of Wall Street.

Books

Dear Chairman | Jeff Gramm


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Published in: 2015

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Dear Chairman is about shareholder activism in the United States over the past century. The book is written by Columbia professor and fund manager Jeff Gramm and consists of eight studies based on investor letters, newspaper clippings and interviews. According to Gramm, the starting point for shareholder activism was Benjamin Graham’s collision with the Northern Pipeline in 1926. As America then became richer and shareholding more widespread, more and more disputes over corporate control broke out.

STARTS OUT IN THE 1920SIn 1926, Benjamin Graham discovered that the profitable Northern Pipeline (NP) had $90/share in bonds while the stock price was $65. NP held its AGM in Oil City, Pennsylvania, far from the company’s headquarters – probably so that the board and management would get work undisturbed. Graham went there but had forgotten to pre-register his case and had to go home unheard. After working with major shareholders and after several rounds with the board, Graham got hold of two of five board positions. He then got the company to distribute the excess capital to the shareholders.

THE SALAD-OIL SCANDAL IN THE 1960S. Buffett started his partnership in 1956, and experimented in the beginning with everything from activism to short selling and pair trades. A classic story is that of American Express’s (AE) salad-oil scandal that erupted in 1963. The share price fell sharply and Buffett realized that the scandal did not damage AE’s highly profitable core business and invested 40% of the partnership’s capital in the company. He then began to persuade management and the board not to fight against the compensation of the swindlers. Legally, AE did not have to pay any compensation and shareholders loudly began to complain that a payment would still take place. Buffett realized that a lack of compensation could damage AE’s good brand and customer confidence and in the long run overthrow the company. If they took a big “one off”, AE would quickly be on the track again – which got to be the case.  

THE RANSOM LETTERS OF THE 1980S. The 1980s were the decade of “corporate raiders” and the big names on Wall Street were Carl Icahn, Michael Milken and T. Boone Pickens. “Bear hug letters” (an unwelcome but generous takeover bid), greenmail (targeted buyouts by individual shareholders), hostile takeovers (takeover attempts without board / management approval) and poison pills (a protection against hostile takeovers – often via the articles of association) were new words used extensively in the financial press. The activist investments of the decade were to a large degree made possible by cheap capital from Michael Milken. He was the “father of junk bonds” (high-yield bonds with little security) and through this built up a fortune. After a too long time in the grey zone, the happy 1980s resulted in 10 years in prison and a $600m fine for Milken. In the end, however, he came out after only two years.    

THE TOWN-HANGINGS OF THE 2000S. In the late 1990s and early 2000s, hedge fund manager Daniel Loeb introduced a new type of activism – public shaming. Loeb’s approach was to take a position of power in problem companies and replace inefficient management to reverse the negative development. To get the attention of key people, he sent out open letters in which he clearly expressed how management exploited the shareholders through passivity, dishonesty, or laziness. The open letters contained everything from personal attacks to curse words and proved to be highly effective. Loeb had found the key point of key people – if there is one thing CEOs and board members care about, it is their reputation.

”Sometimes a town hanging is useful to establish my reputation for future dealings with unscrupulous CEOs”
– Daniel Loeb

ACTIVISM IS NOT ALWAYS A GOOD THING. Studies have shown that activism is generally value-creating. However, not all outcomes will be good. Gramm takes up the example of BKF Capital, where activists ran a marginally profitable fund company into non-existence. The activists felt that earnings were burdened by unusually high staff costs and saw potential for quick gains if wage levels were trimmed. But when wages were reduced, the staff disappeared and with the staff, the investors disappeared. The fund company’s AUM fell rapidly and after only a few years the business was wound up.

ACTIVISM AS AN ASSET CLASS. According to Gramm, activism entered the institutional world in the late 1980s after GM, through greenmail, bought out major owner Ross Perot. The purchase took place at a large premium and Perot’s billion profit was financed at the expense of other shareholders. Thereafter, the major institutional shareholders increasingly began to side with the activists. It was also in connection with this that greenmail was banned. Nowadays, even normally passive institutions are open to follow successful activists.

Books

A Tiger in the Land of Bulls and Bears | Daniel Strachman


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Published in: 2004

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Throughout most of the 1960s and the 1970s, the Jones partnership and a handful of others dominated the hedge fund industry. As Alfred Jones slowed down in the late 1970s, three wise men took the torch: George Soros, Michael Steinhardt, and Julian Robertson. This is the story of Julian Robertson and Tiger Management. By the time Roberson had decided to call it quits, the Tiger organization had grown to more than 2,500 times its original size 18 years earlier. Its assets had grown from $8.8 million to almost $25 billion, or 259 000%. The firm’s compound rate of return to partners during its existance, net of all fees, was 31.7%.

BACKGROUND. Julian Robertson was born in 1932 in Salisbury, North Carolina. In 1955, when he was 23, he entered the Navy as an ensign through the Reserve Officers Training Corps and served on a munitions ship. In 1957 he started his career on Wall Street as a sales trainee at Kidder Peabody & Co and spent 22 years at the firm. When colleagues had a little extra money they would ask Robertson to manage it for them. He earned a reputation as someone who could gather information, process it, and figure out ways to make use for his advantage to make money.

LAUNCHING THE HEDGE FUND. Robertson and his then partner Thorpe McKinsey launched Tiger in May 1980 with $8.8 million under management (McKinsey left Tiger in 1980 for personal and professional reasons). Robertson liked the idea of being compensated based on performance. His strategy was built from value investing and Benjamin Graham and David Dodd.

NETWORK OF INFORMATION. Over the years, Robertson built a Rolodex of thousands of people he had met on his travels around the globe. Although processing numbers is clearly a talent, his ability to gather and process information about a company outside of its financial statements is also uncanny.  

THE KEY BEHIND ALL INVESTMENTS WAS THE STORY. If the story made sense, then the investment made sense. If there was no story or it was not easily understood, then it had no place in the portfolio. When the story changed, the investment had to change as well. If the story remained the same, the position should get bigger.  You also need to have conviction when making investment decisions. Simply put – you must be willing to go for it. If you don’t believe in it or don’t have conviction in the position, you need to forget it and move on. 

LESSONS FROM 1987. When it comes to managing money, the hardest part is not actually managing the money: the hardest part is raising the money to be managed. 35% of the key to any successful money management business sustained solid performance over a significant period. The other 65% is client relationship management. In the wake of serious disruption in the fund’s performance numbers, it is very important that the assets don’t walk out the door.  

LONG/SHORT AND GLOBAL MACRO. Tiger had mastered the long/short game and was in the 1980s looking for new, bigger, and more liquid markets to enter. The answer was global macro. Robertson liked the idea of being a global macro trader/manager because it offered him two things: significant returns with the use of less capital, and more respect from his peers because he was trading in the same markets as George Soros.  

RIGOROUS PROCESS. Once an analyst recommended an investment, Robertson and the rest of the investment team further scrutinized it. Ideas was questioned with rigor and discipline under conditions that could be described as fierce. The investment selection process was a brutal one that relied on incredible amounts of research and conviction, because they knew that idea generation was the firm’s competency.  

A TIGER PERSON. A Tiger person had the following characteristics: (1) smart, bright, and quick with functional intelligence, (2) strong sense of ethics, (3) background in sports and interest in physical fitness, (4) interest in charity and public welfare, (5) sense of humor and fun to be around, (6) a good resume. Many stayed at Tiger even under the less-than-optimal conditions because they were making more money than they could anywhere else on the street.

INTERNET FRENZY. Growth stocks may have a year or two when they suffered, but if they were true growth stocks, they would continue to grow over time. This strategy worked well for much of the 1990s, but in 1998 and 1999 it did not. As the bull raged on within the technology bubble, hot money was dumping old-time names like Gillette, Coca-Cola and Cisco. Companies with no earnings were seeing their stock prices triple and quadruple overnight. People were quitting their jobs to become day traders, the folks at CNBC became minor celebrities and a cab driver or hot dog vendor could make a fortune in stocks. The fund was down over 19% in 1999, and money was pouring out of the fund.

CALLING IT QUITS. By March 2000, as the Nasdaq headed for the 5,000 level, Roberson had decided it was better to close the fund than to sell it (for which he had tried). The pain had grown to great, and he was no longer willing to try to navigate a market that he did not understand. The market, and the Nasdaq in particular, fell apart a few weeks and months after he decided to close. The problem was that while Robertson believed in the value philosophy, his investors had given up hope. He knew that the strategy would eventually pay off, but he didn’t know when.

LOST THE HUNGER. One analyst described the early years as “none of us knew what we were doing so we took risks, not because we were gamblers but because we did not know any better. This led us to significant rewards – if I or any of us knew any better we would have been scared out of our minds, but back then it was simply par for the course. By the time I left, the firm was filled with Wall Street lifers who looked at going to Tiger as the last stop of the career. They were not hungry; they were not interested in taking risks”.

THE USE OF LEVERAGE. Through the use of leverage, Tiger was able to commit capital aggressively to the best long and short investment situations. Leverage allowed the firm to increase exposure to the best opportunities available while reducing overall market directional exposure. While the use of leverage contributed significantly to the firm’s success over the years, Roberson’s ability to understand risk was what allowed it to post such significant profits. The team was active in finding company-specific risks because it believed that its ability to analyze those risks was one of the firm’s greatest strengths.

THE TIGER CUBS. There is a group of 30-40 managers that Roberson invests with and counsels and seek counsel from. At one point or another, all have worked with him or for him. They have been dubbed “the Tiger Cubs” by the press. There is another group of managers, the second generation of Tiger Cubs, that work in what used to be Tiger Management offices. Robertson is helping these managers along by providing them with back-office support and other tertiary money management services. He is also working with these managers to develop their organizations. Some hedge fund industry observers estimates that almost all of the 35 to 40 managers who have gone out on their own after leaving Tiger have hit the ball out of the park in terms of assets raised and performance numbers.  

Books

Market Cycles | Howard Marks


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Published in: 2018

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Howard Marks, co-founder of Oaktree Capital Management, sums up his 28 years in his current role and 22 years before that as an asset manager: the trick is not to be the hottest stock picker. The trick is to survive. We will be wrong more often than we expect. The future is not ours to know. Being wrong comes with an activity whose outcome depends on an unknown future. However, we can calibrate the portfolio after the cycle – and thereby improve our odds.

THE PILLARS OF LONG-TERM GROWTH. Output of an economy is the product of hours worked and output per hour. As the population grows, hours worked tend to grow, and so does GDP. The growth in the population means that there are more people working every year to manufacture and sell products (as well as more people to buy and consume them). Productivity changes occur gradually and require long periods to take effect. They stem mainly from advances in the production process. Long-term growth is determined by fundamental factors such as the birth rate and increase in productivity (but also by other changes in society and the environment). These factors usually change relatively little from year to year, and only gradually from decade to decade.

SHARE OF INCOME FOR CONSUMPTION. Consumption fluctuates more than employment and income. Residents can choose to spend a higher proportion of their income on consumption when: (1) the daily headlines are favorable, (2) they believe that the election result supports a stronger economy, (3) higher income or lower taxes, (4) consumer credit has become more accessible, (5) an increase in asset prices has made them feel richer, or (5) their team won the World Cup.

2-3% IS THE NORMAL GROWTH RATE. The normal growth rate of US GDP appears to be around 2-3% per year. Growth can be 1% or hit 4-5% (during boom times or during a recovery from a slowdown). The annual growth rate can be negative by a few percent and if it remains negative for two quarters in a row, it is called a recession.

PRODUCTIVITY. Population growth and productivity have declined in the United States and other developed countries. This indicates a slower growth in the coming years than in the years after the Second World War. Emerging markets – and China in particular – have been growing rapidly in recent decades, and although their growth is slower at the moment, they may well outgrow the developed world in the coming decades.

OPERATIONAL LEVERAGE. A company’s profit is often far from stable from year to year. Profits are significantly more volatile than GDP. Sales and costs vary for many reasons, and different types of costs vary in different ways, especially in response to changes in sales. If a company’s revenue increases by 20%, its rental costs will not increase initially, its expenses for machinery will probably not increase initially and its expenses for purchasing goods will increase immediately and proportionately. Thus, total costs may increase less than revenues. The second form of leverage is from debt financing. Companies vary in operational and financial leverage.

VALUATION PENDULUM. Markets rarely go from “underpriced” to “fairly priced”. Usually, it continues from “fairly priced” to “overpriced”. For the 47 years from 1970 to 2016, the average annual return was 10%. Only 3 out of 47 years, however, the stock market closed + -2% from normal, ie between 8-12%. In 13 of the 47 years, the stock market closed more than 20 percentage points from normal – either up more than 30% or down more than 10%.

BUY WHEN PRICE < VALUE. All you need is (a) an estimate of value, (b) emotional strength to continue, and (c) eventually your estimate of value will prove to be correct. However, asset classes move in a pendulum. Risky assets outperform when valuations are penalized too much. Then they underperform until they again have adequate risk premiums. Not only are good times followed sooner or later by bad times, but often good times give bad times (unwise debt issuance or over-expansion).

IT’S ALL PERSPECTIVES, NO FULL PICTURE. There is a story about a group of blind men who walk on the road and meet an elephant. Everyone touches different parts of the elephant and has different explanations for what they have encountered. We are the blind men. Although we have a good understanding of events we have witnessed, we do not get the overall perception we need.

PROBABILITY DISTRIBUTION. The future is not a single fixed outcome that is intended to happen, but a series of possibilities. At best, we have insight into the respective probability of the outcome. Investment success is like choosing a lottery winner: a lottery ticket (outcome) is drawn from a bowl (the whole opportunity set). A result is chosen from many possibilities. To win this game more often than you lose, you must have a knowledge advantage. The ball selector who knows the 70:30 ratio has an advantage. It is only if we know more than others (whether it consists of having better data, doing a superior job of interpreting the data we have, knowing what actions we should take) that our forecast will lead to our excess return.

Books

The Tao of Warren Buffett | Mary Buffett


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Published in: 2006

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Mary Buffett was for 12 years the daughter-in-law of Warren Buffett and has since released several books on Buffett’s views on investing. During years of family dinners, she has learned about investments, education, mentors, and life in general. The word “tao” is Chinese and means “way”, “path” or “doctrine”.

TWO RULES OF INVESTINGBuffett has said that “Rule no. 1 is never lose money. Rule No. 2 is to never forget rule No. 1”. You get rich by compounding capital over a long period of time. There can be no zeros in the protocol. In addition, time is the friend of a good investment outcome. The earlier you start the better. Buffett has joked “I made my first investment at eleven. I was wasting my life up until then”.

THINK BEFORE YOU ACT. It is difficult to get out of a signed contract – so do all the thinking before you sign. Think through all the scenarios, especially the negative ones. Thinking long and carefully before signing saves a lot of future thinking time if the decision turns out to be wrong.

”It is easier to stay out of trouble than it is to get out of trouble”

YOUR REPUTATION IS YOUR MOST IMPORTANT ASSET. Buffett is known for thinking about his reputation first. It takes 20 years to build a good reputation but five minutes to ruin it. If you think about it, you do things differently.

”It’s best not to do something that you know is wrong, because if you are caught, the price you pay may be more than you can afford.”

WATCH OUT FOR BAD HABITS EARLY IN LIFE. A well-known quote from Buffett is “The chains of habit are too light to be felt until they are too heavy to be broken.” However, it is not his own words, but the British philosopher Bertrand Russell’s. Early in life we can choose what habits we want. Later in life, we are stuck with the habits we have picked when we were young.

WATCH OUT FOR A CHERRY CONSENSUS. In the stock market, you get paid to go your own way – provided the analysis is correct. If you do as everyone else, you get what everyone else gets and can therefore not expect miracles. If a stock is liked by everyone, it is expensive. Then the upside is small if the business develops as expected, but the downside is large if something goes wrong. Buffett has said “The less prudence which with others conduct their affairs, the greater the prudence with which we should conduct our affairs”. On the same subject, he has also said that we should be fearful when others are greedy, and greedy when others are fearful.

BASIC MATH IS ENOUGH. According to Buffett, a successful investor only needs to be able to add, subtract, multiply and divide. In addition, he needs to be fluent in calculations of percentages and probabilities. When an investment is justified by Greek figures, it is not good – then the uncertainty is too great.

INTEGRITTY, INTELLIGENCE AND ENERGY. When Buffett hires someone, he wants them to have integrity, be intelligent and have a lot of energy. He is famous for saying “And if you don’t have the first, the other two will kill you.” If he has all three, he can leave them to take care of themselves and expect a good job.

DON’T POSTPONE LIFE. There will come a time when you should start doing what you really want. There are many who take job after job because it will look good on their CV. This behavior is only good for a while. Doing it for too long is like saving up sex for later in life.

DON’T LOOK BACK. Buffett has said that he never looks back. We all make mistakes and there is so much to look forward to in the future. Why then suffer from previous bad decisions that we still cannot do anything about. We can only live our lives forward.

ACCEPT MISTAKES. If you never make any mistakes, you never make any decisions. Mistakes are part of the game. Those who can make decisions will lead and those who cannot be led. Part of decision making is making mistakes. If you make twelve decisions in one day, something will be wrong. Buffett, on the other hand, always wants to be able to explain his mistakes, so he makes no decisions if he does not understand the situation.

Books

The Dhando Investor | Mohnish Pabrai


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Published in: 2007

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The value investor Mohnish Pabrai presents in the book what he calls a Dhandho framework for investing – how to get a high return at low risk. Since the launch of Pabrai Investment Funds, a copy of Buffett’s partnerships in the 1950s, Pabrai has outperformed all major indices and 99% of all funds. Dhandho means in Indian “endeavors that create wealth”, and with an annual return of 28% after fees, that is exactly what Pabrai has done.

Einstein has said: “Compounding is the 8th wonder of the world.”… “We, the compounders, agree with Einstein. It is all about the doubles. How long does it take to get a double and how many doubles can I get in a lifetime?” – Pabrai

HEADS I WIN, TAIL I DON’T LOSE MUCH. Pabrai sums up his investment philosophy as a constant pursuit of situations with minimal risk and maximum return: ”Heads I win, Tails I don’t lose much”, as oppose to the maxim ”high risk, high reward”.

RISK AND UNCERTAINTY. Financial risk can be defined in several ways: (1) risk of losing money permanently, (2) volatility and (3) uncertainty. The best situations arise when uncertainty is high but the risk of losing money is low. Low risk / high uncertainty can be identified in entrepreneurs such as Ray Kroc (McDonalds), Herb Schultz (Starbucks), Richard Branson (Virgin) and also Buffett and Munger. For example, the only capital ever to go into Microsoft was $500k. It can therefore not be said that Microsoft was a high-risk project. But it had high uncertainty. Bill Gates ended up in an extreme place on the “bell curve” but he took no greater risk of ending up there.

LOW RISK, HIGH UNCERTAINTY. Risk and uncertainty are two different concepts. A company’s future may be uncertain. But when you have carefully thought through possible future outcomes and come to the conclusion that the risk of permanent loss of capital is very low, you may have found a lucrative low-risk / high-uncertainty situation. When extreme fear strikes, stock markets can act irrationally. Bad news leads to extreme fear and low valuation as a result. Look for simple businesses that have temporary problems. Look for companies with low valuations and previous profit warnings. Lower expectations may actually mean lower risk of losing your money on the investment.

BUY EXISTING BUSINESSES. Pabrai believes that owning a few listed companies is the best way to build wealth. No major effort is required and in the stock market, a patient investor can occasionally find big discounts. There is also no need for a large amount of capital and there is a gigantic supply of investment opportunities. In addition, the transaction fees are relatively low.

SIMPLE BUSINESSES. “The Dhandho Way” is simple, which is also its power. To fight against your own psychological forces, you must, according to Pabrai, buy businesses that are so painfully easy to understand that in tough times you can remind yourself why you bought the stock. If you need a cumbersome spreadsheet and more than a short paragraph for your thesis, you should look for another investment opportunity.

SUSTAINABLE MOAT. Only businesses with a sustainable moat – ie sustainable competitive advantages – can earn an above average return on invested capital. Over time, the moat tends to shrink. Charlie Munger has said that of the 50 most important companies on the NYSE in 1911, there is only one left today – General Electric. The average life expectancy of a company on the S&P 500 has decreased from just over 60 years in the 1960s to 15-20 years in the last ten years.

FEW BETS, BIG BETS, INFREQUENT BETS. Warren Buffett has said that diversification can be seen as protection against ignorance. Having a portfolio of 100 companies makes it difficult to beat the indices. According to Pabrai, investing as well as gambling is: ”looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth”.

MARGIN OF SAFETY. The larger the discount to the intrinsic value, the lower the risk. And the bigger is also the upside. Stocks are often valued at or above the intrinsic value. Investors should be patient and wait until they find cheap stocks with a large margin of safety, low risk and potentially large upside. In the long run, the cost of permanent losses is high due to the interest-on-interest effect.

COPYCAT RATHER THAN INNOVATORS. According to Pabrai, innovation is a gamble while cloning is safe. Therefore, successful cloning is the best business. Look for businesses run by people who have demonstrated that they can learn and copy from the innovators time and time again.

Books

Investing with Anthony Bolton | Bolton & Davis


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Published in: 2006

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Anthony Bolton is Britain’s counterpart to the United States’ Peter Lynch. They both worked for Fidelity, managed large and well-diversified funds and outperformed their benchmarks. Bolton managed the Fidelity Special Situations fund between 1979 and 2007 and had an annual return of 20.4%, compared to the FTSE All-Share index of 13.8%. During the period, assets under management increased from £2m to £6bn. Between 1985 and 2002, he also managed the Fidelity European Fund, which also beat the market by a good margin.

A WIDE RANGE OF STRATEGIES. Bolton invested in turnarounds, “hidden” growth companies, asset situations, M&A targets and reconstructions. Common to his case was that according to some criteria they were attractively valued and that the companies had what were temporary problems. Turnarounds, however, were his “bread and butter” investments and he was skilled at predicting when the market would change its perception of a company.

AGAINST THE TIDE. His investment philosophy was based on going against the flow. If anything was popular in the financial community, he was not there. During the IT bubble, his funds had no exposure at all to the IT sector but were instead invested in classic industrial companies – which later led to good excess returns when the bubble burst. He felt that an investment should not be comfortable – then it was not good. And if you want a better return than other managers, you must have other holdings than them.

MASTERED THE KEYNESIAN BEAUTY CONTEST. Bolton played the perception game and looked for companies where he judged that the possibility of a perception change was likely – from disapproved to liked. It is when that pendulum turns that you get a good chance for great return in a relatively short time. He liked when analysts dropped a company – then the next pendulum could only go in one direction. Bolton’s holding period averaged 18 months and he sold when he figured his positions had reached fair value.

SEARCHED FOR INEFFICIENCIES. Bolton invested in smaller companies because the market there was less efficient. His sweet spot was market caps of £50-£500m. He was not afraid to invest in illiquid securities as long as he was convinced that the company’s intrinsic value exceeded the market value by a good margin. If the intrinsic value was higher than the current valuation, it was only a matter of time until the revaluation came, provided that the homework was properly completed.

BUY-AND-ROTATE. One of Bolton’s great role models was Warren Buffett, whom he studied carefully during his early years as manager. However, he did not share Buffett’s “buy-and-hold-forever” philosophy, but considered that a rotating portfolio offered a better opportunity for excess returns than a stagnant one. Bolton was totally immersed in the managerial job and has said that a successful manager must live with the market – this too he had in common with Lynch. He believed that the more stones you turn on, the greater the chance of finding the gold nuggets. The working days generally consisted of meeting companies (often 2-6 per day) and discussing portfolio holdings and new ideas with analysts. He had no feelings about stock prices. Had a share he had just bought gone down, but where he had changed his mind, he sold immediately without caring about the quick loss.

VALUE IS WHAT MATTERS. When investing internationally, he often compared the company he was looking at with the sector multiples of similar companies in other markets. If the discrepancy was too great, the opportunity for a good investment was good. The portfolio design was not governed by any macro view but by where there was value. If a particular sector or market was undervalued, Bolton was generally heavily weighted there. However, he rarely invested more than 20% in any single market and individual positions rarely exceeded 3%. On average, he had cash just under 10% of the portfolio and at most (on two occasions) the cash amounted to 15%.

OUTPERFORMED WITH A BROAD PORTFOLIO. Bolton proved that it was possible to beat the market with a well-diversified portfolio. During the first years, the fund usually had 30–40 holdings, but as it grew, it was forced, in order to maintain a small company focus, to add more positions. During the 2000s, he usually had around 200 holdings in the portfolio. Lynch advised Bolton that as the portfolio grew, he should not get caught up in “defensive investment” trap but instead continue to focus on “offensive” investment – the search for new opportunities. Bolton successfully defied “the size curse” and outperformed the market by a good margin even during the latter part of his career.

Books

Hot Commodities | Jim Rogers


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Published in: 2004

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The book was published in 2004 by financier and world tourist Jim Rogers, who co-founded the Quantum Fund with George Soros. Between 1970 and 1980, the fund had a CAGR of 46% versus S&P 500’s 4%. The fund years resulted in that Rogers could call himself financially independent by a good margin, after which he retired at the age of 38. He has since traveled around the world twice, once by motorcycle and once by car. The car trip has given him a place in the Guinness World Book on the topic “Most countries visited in a continuous journey by car”.

NEGATIVE CORRELACTION WITH STOCKS. During the 20th century, there were three bull markets in commodities; 1906–1923, 1933–1953 and 1968–1982. Over the past 130 years, equities and commodities have alternated in regular cycles lasting an average of 18 years. During the 1970s, commodities performed the stock market, but the following decade the outcome was the opposite. Between 1959 and 2004, commodities had a higher return, and slightly lower volatility, than the stock market. Rogers explains the negative correlation with the fact that when raw materials are cheap, companies can generally enjoy high margins. When commodities become more expensive, it hits the companies’ margins, which leads to depressed share prices.

ROGERS INTERNATIONAL COMMODITY INDEXIn 1998, Rogers began to worry about the valuation of the stock market and talked about investing in commodities and how the fast-growing Chinese market would act as a locomotive for commodity prices. Commodity prices were then, also adjusted for inflation, lower than at any time since the depression of the 1930s. He then created his own commodity index in which he also invested his capital ahead of the upcoming round-the-world trip. Rogers was right, between 1998 and 2008 commodity prices rose sharply. Since then, according to Rogers’ index, commodities have had a negative development until today [2021].

A FORGOTTEN ASSET CLASS. In 2004, the turnover on the world’s commodity exchanges was many times greater than on the stock markets. Oil had the highest turnover. Coffee has on most occasions qualified as the second most traded commodity, despite the fact that only 20% of the world’s population are coffee consumers. According to Rogers, commodities should not be ignored and he thought that he became a better equity investor with knowledge from the commodities sector. By understanding the mechanisms in the raw materials sector, an investor can better understand how they in the next stage affect everything from food producers to real estate companies.

BACK TO BASICS. When Rogers analyzes commodities, he goes back to business 101 – supply and demand. He uses the CRB Commodity Yearbook and studies supply, demand, how large the reserves are and whether there are producers in areas where there is unrest. He also examines which industry is in demand for the raw material and what substitutes there are if prices rise too sharply. In general, commodities perform well during times of high inflation.

TRADING COMMODITIES = TRADING FUTURES. There are three players in the commodities market: producers, buyers and speculators. The producers are the mining companies, the forest companies, and the oil companies. The buyers are the ones in the next step in the value chain who use the raw material. The speculators are the investors who bet on the commodity price, but who have no interest in using the commodity. The speculators therefore never trade in the futures during the last trading month, as they do not want to be forced to take deliver on a batch of commodities.

COMMODITIES > COMMODITY-RELATED COMPANIES. When financial advisers talk about commodity exposure, it is usually through commodity-related companies. However, Rogers believes that the raw material companies are significantly more risky than the raw materials themselves. This is also strengthened by a study from Yale which showed that commodities over time performed better than the commodity-related companies. One difference between commodity-related companies and commodities is that the former can go to zero, which is not possible for the latter. The former also depends on the quality of management and the company’s indebtedness.

A COMMODITY-BOOM CAN BE A BOOM FOR A COUNTRY. When strong periods in commodities begin, it has a positive effect on the commodity-strong economies in many respects. A profit-generating raw material industry seeps through the entire business community, which leads to generally good times and strengthened currencies. As prices for copper, lead and other metals rise, the consequence is that the economies of countries such as Canada, Australia, Chile and Peru are to expect good times.