All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass
Don't let “Mr. Market” tell you what to do with your money. Mr. Market is neurotic. He suffers from dramatic mood swings. One day, he's depressed. The next day, he's euphoric. It's too easy to lose money trying to keep up with Mr. Market. The only people who make money from your trades work on Wall Street
One of the mistakes that many people make in the stock market is buying something, watching it go up, and thinking they are smart. They find themselves thinking it is easy. They take a big profit and immediately go looking for something else. That's the time they should really do nothing. Self-confidence leading to hubris leading to arrogance — that is when you really should put that money in the bank and go to the beach for a while until you calm down. Because there are not many great opportunities that are ever going to come along. But you do not need many if you do not make mistakes
When you read an Ad saying
Canadian investors can benefit from a new principal protected investment that generates potential returns based on the performance of two mutual funds – one specializing in dividend–paying companies, the other specializing in growth–oriented companies
then you will know that somebody wants to sell you a mutual fund. It is always a great experience to read the mutual fund prospects, because you need to discover:
- Ownership costs: MER + sales commissions + trading fees. The “MER1” is easy to find out; the other ones are not so easy
- The “Top Holdings”: Bingo!
It's not too difficult to duplicate any income/dividend fund in the Canadian market with buying ~12 stocks directly. Go and try it by yourself: collect the “Top Holdings” of 10 to 20 mutual funds that you find interesting at globefund.com and you'll get lots of repeated names
You still have to find out which companies makes you sleep comfortable with
In my personal definition of “sleeping conformable with” means that I would get excited and buy more shares if the price drops below my current cost. This does not mean that I'll buy any stock with a falling price. It just mean that I'll buy more of a particular security if the price keeps going down. If I don't feel comfortable doing this on a particular case, then I won't acquire that security in the first place
How to Start: An Example
Let me give you an example that you might find interesting:
Have you used Avon cosmetics before?
Let's assume that you answer is “yes”, and let's say that you are very satisfied with their products
Go to avoncompany.com/investor and send an email requesting printed materials such as Avon's annual report, 10K, 10Q filings, or proxy materials. That email can just say something like this:
Can you please put me on your mailing list to receive annuals, quarterlies and press releases? Also, if you could send me the last four annual reports, plus any recent quarterlies, that would be appreciated. Thank you,
123 The Street
The City, Here
Canada H0H H0H
You can also request lots of Annual Reports at wilink.com
Two weeks or 2 months later you'll receive a mail package containing a bunch of papers from Avon, the company. You don't have to spend money: it's completely FREE
In the mean time, you can learn more about Avon Company in your free time at these sites:
This company is earning 5.03% (see “earnings yield”) right now. This means that they are earning $5.03/year for every $100 you spent in this security today, but they will give you $2.18 this year (see “dividend yield”) and will keep $2.85 ( = $5.03 - $2.18 ) that management will reinvest, so you might expect to get it back in the future if they don't steal or lose it
Let's say now that your have received all the printed papers from Avon. Read them backwards. In the front you'll see a lot of marketing material to catch retail investors. The important but dry part is at the end, in the “annotations” to the financial numbers
First question: do you understand these reports?
If you can explain it in plain words, then you understand the company. I personally need to see tables containing financial history for the last 10 years. Ignore any emphasis for the last year only
Second question: do you understand when that stock price drops?
This takes lots of time, thinking and research, but you must understand that the price will fluctuate and you must know some of the “drivers” that could make it fluctuate. Some companies are cyclical, and the price will drop if you buy it in the peak. You should know if this applies to Avon
You'll need just a few weeks to respond the 1st question, but you might spend months or even years to respond the 2nd one. That's OK
Let's say that you decide to invest in the Avon Company now
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years
You have just $500, and you decide that you can afford to completely ignore that money for 5 years. You can even afford to completely lose it: you won't feel bad because you lose even more, every month, on your car, insurance and gas
Write down the reason why you are going to buy Avon stocks. You figured out this reason when you responded the previous questions for yourself. You definitely will need this piece of paper in the future — I'll explain later
Before buying a stock I like to be able to give a two-minute monologue that covers the reasons I'm interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path. The two-minute monologue can be muttered under your breath or repeated out loud to colleagues who happen to be standing within earshot. Once you're able to tell the story of a stock to your family, your friends, or the dog (and I don't mean 'a guy on the bus says Caesars World is a takeover'), and so that even a child could understand it, then you have a proper grasp of the situation
You can buy $500 on Avon shares with just spending $9 in transaction fees, if you do it at shareowner.com or sharebuilder.com for example. Your total costs will be about 1.80% ( = $9 / $500 ) but for the first year only. If you own Avon through a mutual fund, then you will pay the MER + sale commissions + other costs every year. In Canada, the MERs alone are usually bigger than 2%/year
You'll sell Avon in the future as soon any of these reasons happens:
- The reasons why you bought it initially are not true any more
- You found a better investment opportunity
Be disciplined with these reasons. When you have some free time please read some quotation that you might even enjoy, at Warren Buffett — for example:
A story that was passed down from Ben Graham illustrates the lemminglike behavior of the crowd: “Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled—we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!” Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumor after all”
What the wise man does in the beginning, fools do in the end
If you love Avon products then you'll love to learn about the company, even if you decide not to invest in this security
You might learn what products or colours are in development, the target market for their brands, what is the real cost of the lip stick you are buying, who are making money when you but it (the retail store or the brand Avon), …
However, be aware that the stock market is cyclical, as you can see at Lessons Learned On The Stock Market
Rich Man, Poor Man: Richard Russell, The Dow Letters
You can read at Rich Man, Poor Man:
Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline and desire. I say, ‘`for the great majority of people" because if you’re a Steven Spielberg or a Bill Gates you don't have to know about the Dow or the markets or about yields or price/earnings ratios. You're a phenomenon in your own field, and you're going to make big money as a by-product of your talent and ability. But this kind of genius is rare.
For the average investor, you and me, we're not geniuses so we have to have a financial plan
Richard Russell also offers some important rules:
- Rule 1: Compounding
To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time
- Rule 2: DON'T LOSE MONEY
This may sound naive, but believe me it isn't
- RULE 3: RICH MAN, POOR MAN
The little guy is in hock up to his ears. As a result, he's always sweating — sweating to make payments on his house, his refrigerator, his car or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money — fast. And he dreams of those big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this money-nerd" spends his life dashing up the financial down-escalator.
But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser
- RULE 4: VALUES
The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run
The Scuttlebutt Approach: Philip Fisher
Philip Arthur Fisher (1907 – March 11, 2004) believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the tax-man as he held, and held, and held
Book: Common Stocks and Uncommon Profits, 1958
Book: Conservative Investors Sleep Well
Fifteen Points to Look for in a Common Stock
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
- How effective are the company's research and development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting controls?
- Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder's benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
These questions should be posed to suppliers, competitors, and consumers
The business 'grapevine' is a remarkable thing. It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company
Five Don'ts for Investors
- Don't buy into promotional companies
- Don't ignore a good stock just because it is traded "over-the-counter"
- Don't buy a stock just because you like the "tone" of its annual report
- Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price
- Don't quibble over eighths and quarters
There are only Three reasons to Sell
- If you have made a serious mistake in your assessment of the company
- If the company no longer passes the 15 tests as clearly as it did before
- If you could reinvest your money in another, far more attractive company. But before you do this, you must be very sure of your reasoning
If the job has been correctly done when a common stock is purchased, the time to sell it is — almost never
The Intelligent Investor: Benjamin Graham
The Oracle of Omaha: Warren Buffett
I look for something that I can understand to start with, there are all kinds of businesses I don't understand.
I don't understand what car companies are going to do 10 years from now, or what software or chemical companies are going to win/do ten years from now but I do understand that Snickers bars will be the number one candy company in the US - like its been for 40 years. So, I look for durable competitive advantage and that is hard to find. I look for an honest and able management and I look for the price I'm going to pay.
Twelve Pillars of Wisdom: John Bogle
Indeed, these twelve sensible guidelines to successful investing are lessons that investors should have learned before the bear market arrived, but that many are only learning now. Bull markets come and bull markets go, inevitably followed by bear markets, which too come and go. But these pillars of wisdom are timeless, and should serve us well in all seasons (John Bogle)
- Investing Is Not Nearly as Difficult as It Looks
- The intelligent investor in mutual funds, using common sense and without extraordinary financial acumen, can perform with the pros. In a world where financial markets are highly efficient, there is absolutely no reason that careful and disciplined novices—those who know the rudiments but lack the experience—cannot hold their own or even surpass the long-term returns earned by professional investors as a group. Successful investing involves doing just a few things right and avoiding serious mistakes
- When All Else Fails, Fall Back on Simplicity
- There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one
- Time Marches On
- Time dramatically enhances capital accumulation as the magic of compounding accelerates. At an annual return of +10%, the total value of the initial $10,000 investment is $108,000, at the end of 25 years, nearly a tenfold increase in value. Give yourself the benefit of all the time you can possibly afford
- Nothing Ventured, Nothing Gained
- It pays to take reasonable interim risks in the search for higher long-term rates of return. The magic of compounding accelerates sharply with even modest increases in annual rate of return. While an investment of $10,000 earning an annual return of +10% grows to a value of $108,000 over 25 years, at +12% the final value is $170,000. The difference of $62,000 is more than six times the initial investment itself
- Diversify, Diversify, Diversify
- By owning a broadly diversified portfolio of stocks and bonds, specific security risk is eliminated. Only market risk remains. This risk is reflected in the volatility of your portfolio and should take care of itself over time as returns are compounded
- The Eternal Triangle
- Never forget that risk, return, and cost are the three sides of the eternal triangle of investing. Remember also that the cost penalty may sharply erode the risk premium to which an investor is entitled. You should understand unequivocally that investing in a fund with a relatively high expense ratio—more than 0.50% per year for a money market fund, 0.75% for a bond fund, 1.00% for a regular equity fund—bears careful examination. Unless you are confident that the higher costs you incur are justified by higher expected returns, select your investments from among the lower-cost no-load funds
- The Powerful Magnetism of the Mean
- In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle
- Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds
- In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. In general, you should settle for a solid mainstream equity fund in which the action of the stock market itself explains about 85% or more of the fund’s return, or an low-cost index fund (100% explained by the market). But do not approach the selection of bond and money market funds with the same skepticism. Selecting the better funds in these categories on the basis of their comparative costs holds remarkably favorable prospects for success
- You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both
- Contrast a money market fund—with its volatile income stream and fixed value—and a long-term government bond fund—with its relatively fixed income stream and extraordinarily volatile market value. Intelligent investing involves choices, compromises, and trade-offs, and your own financial position should determine the most suitable combination for your portfolio
- Beware of "Fighting the Last War"
- Too many investors—individuals and institutions alike—are constantly making investment decisions based on the lessons of the recent, or even the extended, past. They seek stocks after stocks have emerged victorious from the last war, bonds after bonds have won. They worry about the impact of inflation after inflation, having turned high real returns into so-so nominal returns, has become the accepted bogeyman. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does
- You Rarely, If Ever, Know Something The Market Does Not
- If you are worried about the coming bear market, excited about the coming bull market, fearful about the prospect of war, or concerned about the economy, the election, or indeed the state of mankind, in all probability your opinions are already reflected in the market. The financial markets reflect the knowledge, the hopes, the fears, even the greed, of all investors everywhere. It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others
- Think Long-Term
- Do not let transitory changes in stock prices alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is “a tale told by an idiot, full of sound and fury, signifying nothing.” Stocks may remain overvalued, or undervalued, for years. Patience and consistency are valuable assets for the intelligent investor. The best rule: Stay the Course
Francis Chou Principles
Mr. Chou sticks with 10 core principles:
- Safety — Don’t pay more than 60 to 65 cents on the dollar for any risky debt
- Homework — It can take as much as a month of study to understand a company’s accounts, management and problems
- Diversification — Have at least 10 to 15 high yield or distressed bonds in the portfolio
- Patience — It can take two or three years for companies to be fixed or restructured
- Valuations — Do not ignore risk, even when investors fail to price it into assets
- Confidence — Make sure your estimates are accurate
- Modesty — Know what you do not know
- Position — When you buy into a bad situation, buy the most senior debt you can find
- Liquidity — a company has to have enough cash or saleable assets to pay bondholders
- Friends — the company should have the ability to go to the market to raise fresh capital that will at least indirectly benefit bondholders
The cardinal principle of investing is to think first about preserving capital before thinking about making money. The greater the probability of permanent loss of capital, the greater the spread should be between a particular debt instrument and risk-free treasuries
In bonds, Graham and Dodd’s Security Analysis emphasis on balance sheets is more important than looking at cash flow
Paul van Eeden
- In this audio, Paul van Eeden describes his Investment Philosophy and his methods of operation in (resource) exploration sector speculations — similar principles can be applied to Biopharma and Technology sectors, for example
- Suggested Reference Library — some books are even free on-line
- Investment Philosophies
- Audio file of Charles Munger talking at Harvard Law School, Causes of Human Misjudgment (More)
- Understanding Gold by Paul van Eeden is useful to understand monetary inflation (More Videos)
- Blog: Entropía en los Mercados — in Spanish