Reblog: 6 Things I Learned From Big Mistakes


Michael Batnick’s new book, Big Mistakes: The Best Investors and Their Worst Investments came out this week.

There are far too many investing books that dissect the past successes of history’s greatest investors. These books make it easy for investors to assume emulating these greats should be effortless. I know that’s what I thought when I read about Buffett and Graham when I first started investing.

Most investors would be far better off trying to avoid mistakes than replicate their favorite billionaire’s track record. This book chronicles every mistake imaginable in the markets and it does so in a refreshing way by showing even the most intelligent among us screw up.

Here are six things I learned from the book:

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Reblog: Why Everyone Is a Value Investor


Mention value investing and the phrase brings up different connotations for different people.

Some investors see value as a style as a dead regime, something stuffy old investors like Warren Buffett (Trades, Portfolio) live by, and their devout following of the strategy has cost them big time as they have missed out on some of the market’s best opportunities.

On the other hand, you have the devout value investors, those who remain fully committed to the strategy initially set out by Benjamin Graham and his partner David Dodd, all those years ago, even though this strategy has generated relatively lackluster returns over the past decade.

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Reblog: Seth Klarman: Mainstream Investing Has It Backwards


Some years ago Seth Klarman gave a fantastic speech at the MIT Sloan Investment Management Club. During his speech Klarman suggested that the mainstream approach to investing has is backwards saying:

“Right at the core, the mainstream has it backwards. Warren Buffett often quips that the first rule of investing is to not lose money, and the second rule is to not forget the first rule. Yet few investors approach the world with such a strict standard of risk avoidance. For 25 years, my firm has strived to not lose money—successfully for 24 of those 25 years—and, by investing cautiously and not losing, ample returns have been generated. Had we strived to generate high returns, I am certain that we would have allowed excessive risk into the portfolio—and with risk comes losses.”

He went on to discuss how you can successfully exploit opportunities by remaining calm, cautious and focused in the manic world of investing. Here is an excerpt from that speech:

As the father of value investing, Benjamin Graham, advised in 1934, smart investors look to the market not as a guide for what to do but as a creator of opportunity. The excessive exuberance and panic of others generate mispricings that can be exploited by those who are able to keep their wits about them.

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Reblog: How to Value Invest in a Bull Market: Advice From Irving Kahn


You might not be aware of him, but Irving Kahn is one of the best value investors to have ever lived.

Unlike other, more famous value investors, Kahn kept a relatively low profile during his career, but that does not mean his advice is any less relevant.

Born in 1905, Kahn’s investing career began in 1928. He continued value investing until his death a few years ago. Kahn was one of the few value investors who were able to learn from the godfather of value investing himself, Benjamin Graham. In fact, Kahn worked closely with Graham over his career, even assisting as Graham’s teaching assistant at Columbia University Business School. He went on to contribute to Graham’s bible on value investing, “Security Analysis,” by providing some statistical help.

Such a close relationship with Graham helped Kahn build his value mentality, and he was able to add to this base education over the course of his career as he rode through the peaks and troughs of the market.

Indeed, Kahn’s long life gave him an unrivaled knowledge of the market, stocks and trading psychology. Kahn’s career started in the days when it was not easy to find an undervalued equity; you had to do the hard work yourself:

“I understand that net-net stocks are not too common anymore, but today’s investors should not complain too much because there were only a handful of industries in which to look for stocks in the old days. Now there are so many different types of businesses in so many different countries that investors can easily find something. Besides, the Internet has made more information available. If you complain that you cannot find opportunities, then that means you either haven’t looked hard enough or you haven’t read broadly enough.”

Kahn wrote few thought pieces over his career but those he did pen are fascinating. In 2012, a letter to Kahn’s investors from himself was published on Bloomberg. It contained some advice on the state of the market and thoughts on the market rally that was in place since 2009:

“I’ve seen a lot of recoveries. I saw crash, recovery, World War II. A lot of economic decline and recovery. What’s different about this time is the huge amount of quote-unquote information. So many people watch financial TV—at bars, in the barber shop. This superfluity of information, all this static in the air.

There’s a huge number of people trading for themselves. You couldn’t do this before 1975, when commissions were fixed by law. It’s a hyperactivity that I never saw in the ’40s, ’50s, and ’60s. A commission used to cost you a hell of a lot; you couldn’t buy and sell the same thing 16 times a day.”

With many decades of experience behind him at this point, Kahn’s views on the level of trading being conducted by investors are fascinating. This was only a few years ago, and in that time trading volumes have picked up further still. If Kahn thought there was too much information around in 2012, what would he have thought today?

What was his advice at the time? Well, Kahn warned readers that, considering the level of the market and overtrading, it’s best to look to protect the downside, don’t take on too much risk and stick to the basics because you never know when the decline will come:

“You say you feel a recovery? Your feelings don’t count. The economy, the market: They don’t care about your feelings. Leave your feelings out of it. Buy the out-of-favor, the unpopular. Nobody can predict the market. Take that premise to heart and look to invest in dollar bills selling for 50¢. If you’re going to do your own research and investing, think value. Think downside risk. Think total return, with dividends tiding you over. We’re in a period of extraordinarily low rates—be careful with fixed income. Stay away from options. Look for securities to hold for three to five years with downside protection. You hope you’re in a recovery, but you don’t know for certain. The recovery could stall. Protect yourself.”

The original article is authored by Rupert Hargreaves and is available here.


Reblog: Popularly Followed Investment Philosophies


Legendary investor Warren Buffet laid the ground rules for investment philosophy when he set two rules for investing. Rule Number 1 of investing according to Buffet is never losing money and Rule Number 2 is Don’t forget Rule Number 1.

But that is easier said than done, especially for a retail investor or a novice investor. In order not to lose money in the market is to pick up stocks which are close to the bottom. No fund manager, not even Warren Buffet has been consistently able to pick the bottom. But what differentiates a professional to a rookie is the ability to patiently wait and stick to their well-defined set of rules. It is not important to pick the bottom to make money, but as far as the price is right all that is needed to sit on the investment and patiently watch it grow. As the saying goes in the market it is not the brain that brings home the profit but its stomach to hold through the times.

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Reblog: How to Build a Warren Buffett Portfolio


Warren Buffett is recognized as the greatest investor of all-time because of his discipline and conservative approach to investing.

Instead of focusing on the short term, Warren Buffett focuses on the long term.He also has a low appetite for risk, buying companies that active traders would find boring beyond all belief.

Buffett once described his investment style as, “I’m 85% Benjamin Graham.” (Benjamin Graham is known as the godfather of value investing. His book, The Intelligent Investor, is respected as a classic on Wall Street.)

Just look at Warren Buffett’s company Berkshire Hathaway’s (BRKA) stock price appreciation over the past 20 years. And yes, you are reading that correctly, the stock currently trades for over $260,000… per share.

Berkshire currently holds a market cap of approximately $430 billion, making Warren Buffett the third richest person on the planet.

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Repost: Eight common behavioural mistakes in a bull market


 

The famous economist John Maynard Keynes once said, “Markets can remain irrational longer than one remains solvent”, guessing the levels of the markets could turn out to be a futile exercise and one that could cause damage.

However, what really matters is the balance of mind and behaviour particularly during times of exuberance in the markets where stocks tend to run ahead of fundamentals. While behavioural fallacies are common in all kinds of markets, here are a few that need a serious check in a bull market.

Every time just after I sell a stock it makes a new high. Let me buy it again

If one recollects, a short para written in Benjamin Graham’s investment classic “The Intelligent Investor”, it illustrated a famous story about physicist Sir Isaac Newton, who back in 1720 bought the shares of South Sea Company, considered as a hot stock at that time in England. When prices soared, he said that he could calculate the motion of heavenly bodies, but not the madness of the people. Soon Newton sold his stock pocketing 100 percent gain. However, feeling he sold early, as the prices further spiked, a month later he again purchased the stock and lost more money than he gained after his first purchase. The moral is that even the world’s greatest scientist could not understand the crowd and lost huge money.

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Reblog: A Real Life Example of the Philip Fisher Scuttlebutt Approach


One of the greatest investors of all time, a man named Philip Fisher, developed a famous approach to investing research known as the “scuttlebutt”. He said that there was a lot of knowledge about a company that could give insight into its investment merits if the investor could merely find it out and synthesize it into a somewhat accurate and cohesive view of an entire corporation. Peter Lynch, arguably the greatest mutual fund manager in history, engaged in this when he was jumping on beds at La Quinta and driving around town checking out a new food chain known as Dunkin’ Donuts.

My husband and I drove quite a distance to check out some companies that had finally hit our “severely undervalued” targets after years and years of watching the stocks. One of the firms happened to be a confectioner. We spent the day speaking with a small business owner who had extensive experience with this particular company and bought more than $500 worth of products to take back to our office, have analyzed, and compare to the other manufacturers in the industry. We learned a great deal about the business that is common knowledge to those who work in the sector but you can’t necessarily glean from the regulatory filings such as the 10-Kand annual report.

For instance, there appears to be a struggle at headquarters between two factions: Those who want to dilute this particular brand and sell it through mass distributions outlets and those who want to keep it a premium product sold through a chain of heavily-controlled storefronts.

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Reblog: The Individual Investor’s Edge


“The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.” — Warren Buffett, 2013 Letter to Berkshire Hathaway shareholders

As Albert Einstein wisely stated, compound interest is the eighth wonder of the world:  He who understands it earns it while he who doesn’t pay it.  The vast majority of individuals who take the initiative to accumulate savings should follow Warren Buffett’s advice on using index funds and dollar cost averaging to achieve satisfactory returns over time.  For those earning at or above the median wage in the United States, it would be very difficult to end up poor if one simply saves ten to fifteen percent of gross income and dollar cost averages into the S&P 500 over several decades.

But what about non-professional individual investors who want to achieve better than average results?  In the short run, the stock market resembles a manic-depressive character who bids up prices one day and sends them down the following day without much of a reason for the change in sentiment.  Benjamin Graham’s “Mr. Market” character perfectly personifies the psychology of financial markets in the short run.

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Reblog: 5 Books That Inspired Warren Buffett


An interesting vlog that appears on inc.com. It speaks of the 5 books that inspired Warrent Buffet. The link to the video is here.

The names of the 5 books are here:

The Intelligent Investor – Benjamin Graham

Common Stocks and Uncommon Profits – Philip A. Fisher

Business Adventures 12 Classic Tales from the World of Wall Street – John Brooks

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

Outsider – Thorndike