Value 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

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

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

Warren Buffett’s Ground Rules | Jeremy Miller


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In this book, financial analyst Jeremy Miller summarizes Warren Buffett’s letters to his partners in Buffett Partnership Ltd. (BPL). The letters were written during the 1950s and 1960s and were before the Berkshire Hathaway era. It was the time in Buffett’s career when he managed the least amount of capital and was able to use all the tools he learned from Benjamin Graham.

A Brief can be read here.