\u00a0<\/span><\/p>\n\u201cIt turns out that value investing is something that is in your blood. There are people who just don\u2019t have the patience and discipline to do it, and there are people who do. So it leads me to think it\u2019s genetic.\u201d \u2013 Seth Klarman<\/p>\n
\u201cIt sounds kind of crazy, but in times of turmoil in the market, I\u2019ve felt a sort of serenity in knowing that I\u2019ve checked and re-checked my work, one plus one still equals two regardless of where a stock trades right after I buy it.\u201d \u2013 Seth Klarman<\/p>\n
\u201cFor forty years I\u2019ve seen the manic-depressive cycle of investor psychology swing crazily: between fear and greed \u2013 we all know the refrain \u2013 but also between optimism and pessimism, and between credulity and skepticism. In general, following the beliefs of the herd \u2013 and swinging with the pendulum \u2013 will give you average performance in the long run and can get you killed at the extremes.\u201d \u2013 Howard Marks<\/p>\n
“Great investors are not unemotional, but are inversely emotional – they get worried when the market is up and feel good when everyone is worried.” – Bill Miller<\/p>\n
“If we decide we are wrong about something, we exit. Period.” -David Einhorn<\/p>\n
“Always remembering that we might be wrong, we must contemplate alternatives, concoct hedges, and search vigilantly for validation of our assessments. We always sell when a security’s price begins to reflect full value, because we are never sure that our thesis will be precisely correct.”- Seth Klarman<\/p>\n
“Having a large amount of leverage is like driving a car with a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver. There will be fewer accidents but when they happen, they will be fatal.” – Warren Buffett<\/p>\n
\u201cTo achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t.\u201d \u2013 Seth Klarman<\/p>\n
\u201cBuying\u2019s easier, selling\u2019s hard \u2013 [it\u2019s] hard to know when to get out.\u201d \u2013 Seth Klarman[17]\n
\u201cI think markets will never be efficient because of human nature.\u201d \u2013 Seth Klarman<\/p>\n
Look at the numbers and think for yourself. \u2013 Unknown<\/p>\n
\u201c\u2018Experience\u2019 is what you got when you didn\u2019t get what you wanted.\u201d \u2013 Howard Marks<\/p>\n
\u201cMany shall be restored that now are fallen and many shall fall that are now in honor.\u201d \u2013 Horace<\/p>\n
“For years, when someone asked me what my biggest fear was as an investor in managing my portfolio, my answer was that it was buying too soon on the way down from often very overvalued levels. I knew a<\/p>\n
market collapse was possible. And sometimes, I imagined that I was back in 1930 after the market had peaked the year before, and then dropped 30%. Surely, there would’ve been some tempting bargains then.<\/p>\n
And just as surely, you’d have been crushed by the market’s subsequent plunge over the next three years \u2014 down to below 20% of 1929 levels. A fall from 70 to 20, and from 100 to 20, would feel almost exactly the same by the time you hit 20.” \u2014Seth Klarman<\/p>\n
\u201cIf only one word is to be used to describe what Baupost does, that word should be: ‘Mispricing’. We look for mispricing due to over-reaction.\u201d \u2013 Seth Klarman<\/p>\n
\u201cAt Baupost, we constantly ask: ‘What should we work on today?’ We keep calling and talking. We keep gathering information. You never have perfect information. So you work, work and work. Sometimes we thumb through ValueLine. How you fill your inbox is very important.\u201d \u2013 Seth Klarman<\/p>\n
\u201cWhile some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.\u201d \u2013 Seth Klarman<\/p>\n
\u201cI think Buffett is a better investor than me because he has a better eye toward what makes a great business. And when I find a great business I\u2019m happy to buy it and hold it. Most businesses don\u2019t look so great to me.\u201d \u2013 Seth Klarman[18]\n
Regarding a focus on daily price movements: \u201cI don\u2019t have a Bloomberg on my desk. I don\u2019t care.\u201d \u2013 Seth Klarman[19]\n
“It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy. Value investing, the strategy of buying stocks at an appreciable discount from the value of the underlying businesses, is one strategy that provides a road map to successfully navigate not only through good times but also through turmoil. Buying at a discount creates a margin of safety for the investor\u2014room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies. Following a value approach won\u2019t be easy for everyone, especially in today\u2019s media-dominated, short-term oriented markets, in that it requires deep reservoirs of patience and discipline. Yet it is the only truly risk averse strategy in a world where nearly all of us are, or should be, risk averse.” \u2013 Seth Klarman<\/p>\n
\u201cThe greatest long-range investment profits are never obtained by investing in marginal companies. Investors desiring maximum gains over the years had best stay away from low profit-margin or marginal companies.\u201d \u2013 Phil Fisher<\/p>\n
\u201cAs time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.\u201d \u2013 J. M. Keynes<\/p>\n
\u201cWe believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.\u201d \u2013 Warren Buffett<\/p>\n
\u201cQuality is more important than quantity. One home run is much better than two doubles.\u201d \u2013 Steve Jobs<\/p>\n
\u201cFocus and simplicity\u2026once you get there, you can move mountains.\u201d \u2013 Steve Jobs<\/p>\n
\u201cThe only way to do great work is to love what you do. If you haven\u2019t found it yet, keep looking. Don\u2019t settle.\u201d \u2013 Steve Jobs<\/p>\n
\u201cOur business is a little bit of a fraud, right? We offer the possibility of attaining what\u2019s not possible attainable for everyone.\u201d \u2013 Seth Klarman[20]\n
The four most dangerous words in investing: This time is different. \u2013 Attributed to John Templeton<\/p>\n
Invest at the point of maximum pessimism. \u2013 Attributed to John Templeton<\/p>\n
\u201cIf a business is not ethical, it will fail, perhaps not right away but eventually.\u201d \u2013 John Templeton<\/p>\n
\u201cI never ask if the market is going to go up or down because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it’s worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.\u201d \u2013 John Templeton[21]\n
\u201cOne of my favorite clich\u00e9s [is] the French saying: \u2018The more it changes the more it\u2019s the same thing.\u2019 I have always thought this motto applied to the stock market better than anywhere else. The economic world has changed radically and it will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my clich\u00e9 is sound\u2026then the stock market will continue to be essentially what it always was in the past \u2013 a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today\u2019s free lunches are paid for doubly tomorrow.\u201d \u2013 Ben Graham<\/p>\n
\u201cThere are those who don\u2019t know and those who don\u2019t know they don\u2019t know.\u201d John Kenneth Galbraith<\/p>\n
\u201cUndervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by over-enthusiasm or artificial stimulants.\u201d \u2013 Ben Graham<\/p>\n
\u201cThe central principle of investment is to go contrary to the general opinion, on the grounds that if everyone agreed about its merits, the investment is inevitably too dear and therefore unattractive.\u201d \u2013 J.M. Keynes<\/p>\n
\u201cAs time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. . . . One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.\u201d \u2013 J.M. Keynes<\/p>\n
\u201cYou have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map \u2013 way off the map.\u201d \u2013 Warren Buffett<\/p>\n
\u201cThe investor\u2019s chief problem \u2013 even his worst enemy \u2013 is likely to be himself.\u201d \u2013 Benjamin Graham<\/p>\n
\u201cBetter to buy a great business at a fair price than a fair business at a great price.\u201d \u2013 attributed to Charlie Munger<\/p>\n
“I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.\u201d \u2013 Charlie Munger<\/p>\n
\u201cThis is really crucial: Warren [Buffett] 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.\u201d \u2013 Charlie Munger<\/p>\n
\u201c(Value) investing is not a paint-by-numbers exercise. Skepticism and judgment are always required.\u201d \u2013 Seth Klarman[22]\n
\u201cThe art of stock picking is more about synthesizing information across disciplines and making decisions than a strict devotion to finance.\u201d \u2013 Allan Mecham<\/p>\n
\u201cEvery corporate security may be best viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise.\u201d \u2013 Benjamin Graham<\/p>\n
\u201cWe don\u2019t deal in absolutes. We deal in probabilities.\u201d \u2013 Seth Klarman[23]\n
In 2005, a group of students from the University of Kansas met with Warren Buffett. Their first question was whether he would still be able to earn investment returns of 50% annually. Buffett responded:<\/em><\/p>\n\u201cYes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today\u2019s environment because information is easier to access.<\/p>\n
\u201cYou have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map \u2013 way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3\/share when it was earning $20\/share! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.\u201d<\/p>\n
\u201cIntelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word \u201cselected\u201d: You don\u2019t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.\u201d \u2013 Warren Buffett<\/p>\n
\u201cHaving great clients is the key to investment success.\u201d \u2013 Seth Klarman[24]\n
\u201cRationalism crashes in the tails.\u201d \u2013 N.N. Taleb[25]\n
\u201cIt is easier to rationalize than it is to be rational.\u201d \u2013 unknown<\/p>\n
\u201c[Todd Combs is] one of those rare people in finance who just really enjoys the process. He really wants to find the truth, and what is the value of a company. He\u2019s not a person who wants to delegate that to someone else or not do his own work\u2026He just really loves what he does.\u201d \u2013 Charles A. Davis<\/p>\n
\u201cThe plural of \u2018anecdote\u2019 is not data.\u201d \u2013 Ben Goldacre<\/p>\n
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” \u2013 George Soros<\/p>\n
“The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don\u2019t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don\u2019t worry about sleeping at night. But it\u2019s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially.” \u2013 Warren Buffett<\/p>\n
\u201cThe central idea in The Black Swan <\/em>is that: rare events cannot be estimated from empirical observation since they are rare<\/em>.\u201d \u2013 N.N. Taleb[26] [emphasis original]\n\u201cYou will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.\u201d \u2013 Warren Buffett<\/p>\n
\u201cFace up to two unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.\u201d[27] \u2013 Warren Buffett<\/p>\n
\u201c\u2026although I do not suppose that either of us knows anything really beautiful and good, I am better off than he is, for he knows nothing, and thinks that he knows. I neither know nor think that I know. In this latter particular, then, I seem to have slightly the advantage of him.\u201d \u2013 Socrates<\/p>\n
“I stopped wasting time on what [other] people claimed a stock was worth and started looking at the numbers.\u201d \u2013 Irving Kahn[28]\n
\u201cThis may surprise you, but there were a large number of valuable buys during the Depression.” \u2013 Irving Kahn[29]\n
\u201cWith each investment you make, you should have the courage and the conviction to place at least 10 percent of your net worth in that stock.\u201d \u2013 Warren Buffett<\/p>\n
\u201cI would rather lose half of our clients than half of our clients\u2019 money.\u201d \u2013 Jean Marie Eveillard<\/p>\n
\u201cIck investing means taking a special analytical interest in stocks that inspire a first reaction of \u2018ick.\u2019\u201d \u2013 Mike Burry, Scion Capital<\/p>\n
\u201cI hated discussing ideas with investors, because then I become a Defender of the Idea, and that influences your thought process.\u201d \u2013 Mike Burry<\/p>\n
\u201cWe don\u2019t have to be smarter than the rest. We have to be more disciplined than the rest.\u201d \u2013 Warren Buffett<\/p>\n
\u201cTypically\u2026his way of thinking is that there are disqualifying features to an investment. So he rifles through and as soon as you hit one of those it\u2019s done. Doesn\u2019t like the CEO, forget it. Too much tail risk, forget it. Low-margin business, forget it. Many people would try to see whether a balance of other factors made up for these things. He doesn\u2019t analyze from A to Z; it\u2019s a time-waster.\u201d \u2013 Alice Schroeder on Warren Buffett and his decision-making process[30]\n
\u201cGo for a business that any idiot can run, because sooner or later any idiot probably is going to run it.\u201d \u2013 Peter Lynch<\/p>\n
If it\u2019s growing like a weed, it might be a weed. \u2013 Unknown<\/p>\n
\u201cHard work, honesty, if you keep at it, will get you almost anything.\u201d \u2013 Charles Munger<\/p>\n
\u201cYou know, you never get the high and you never get the low.\u201d \u2013 Walter Schloss<\/p>\n
\u201cThe person who turns over the most rocks wins the game.\u201d \u2013 Peter Lynch<\/p>\n
\u201cNever confuse genius with a bull market.\u201d \u2013 Various<\/em><\/p>\n\u201cOrganized common (or uncommon) sense is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little.\u201d \u2013 Charlie Munger<\/p>\n
\u201cDon\u2019t pass up something that\u2019s attractive today because you think you will find something way more attractive tomorrow.\u201d \u2013 Warren Buffett[31]\n
\u201cIt takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.\u201d -Warren Buffett<\/p>\n
“Cash combined with courage in a time of crisis is priceless.” \u2013 Warren Buffett<\/p>\n
\u201cThe lesson of Buffet is, to succeed in a spectacular fashion you have to be spectacularly unusual.\u201d \u2013 paraphrasing Mike Burry<\/p>\n
\u201cYou don\u2019t have to be the smartest analyst, you just have to be the most dogged.\u201d \u2013 paraphrasing Michael Burry<\/p>\n
\u201cRead every line item until you get it.\u201d \u2013 paraphrasing Michael Burry<\/p>\n
\u201cI don\u2019t believe anything unless I understand it inside out. And even if I understand something, it is not uncommon that I disagree with accepted view (even if it\u2019s a Nobel laureate).\u201d \u2013 Mike Burry<\/p>\n
\u201cI have always believed that a single talented analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.\u201d \u2013 Mike Burry<\/p>\n
\u201cThe key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.\u201d \u2013 Warren Buffett[32]\n
\u201cMoney managers have to account for their actions to their shareholders, which means they have an undue fear of underperformance. We invest only our own money. Our investments are driven by optimism, not fear.\u201d \u2013 Richard Chandler[33]\n
\u201cIf you are invested in big companies in big countries, that means there is a ready audience of benchmark-following investors who must buy the asset.\u201d \u2013 Rich Chandler[34]\n
\u201cBy buying big \u2013 going narrow and deep, as opposed to a diversifying \u2013 you maximize your successes.\u201d \u2013 Richard Chandler[35] [Note: in growing $10 million into $5 billion over 20 years, a mere five investments have been responsible for 90% of the gains.]<\/em><\/p>\n\u201cWe like investments where the risk is time, not price.\u201d \u2013 Richard Chandler[36]\n
\u201cWe\u2019re just very much a plain-vanilla, long-only investment fund.\u201d \u2013 Richard Chandler, noting that Sovereign Global Investment has averaged leverage of less than 1% of assets since 1990 and has not borrowed at all since 1998, enabling the Chandlers\u201cto take a very long-term view of risky markets, their key competitive advantage at a time when many investors, particularly highly leverage hedge funds, invest with a short-term horizon.\u201d[37]\n
\u201cWe learned to build our emotional muscles, helping us make it through major market falls and grind through the trying times without losing our equilibrium.\u201d \u2013 Richard Chandler[38]\n
“The market gives you the opportunity to arbitrage what the emotional investor will pay or sell at versus the fundamental value of a company, but you’ve got to pull the trigger promptly without hesitating. We’ve disciplined ourselves mentally and prepared ourselves in terms of information, as well as relationships with brokers, to do that.” \u2013 Richard Chandler[39]\n
\u201cNever underestimate the gullibility of large pools of money.\u201d — David Swensen[40]\n
\u201cWe\u2019re in the business not so much of being contrarians deliberately, but rather we like to take perceived risk instead of actual risk. And what I mean by that is that you get paid for taking a risk that people think is risky, you particularly don\u2019t get paid for taking actual risk.\u201d \u2013 Wilbur Ross<\/p>\n
“Investment is the discipline of relative selection.” Sid Cottle<\/p>\n
\u201cThose who spend too much will eventually be owned by those who are thrifty.\u201d \u2013 John Templeton<\/p>\n
\u201cRisk means more things can happen than will happen.\u201d \u2013 Peter Bernstein<\/p>\n
“What if I am wrong? Any rational investment plan has to start with that question.” -Peter L. Bernstein<\/p>\n
\u201cIf everyone thinks one way, it is likely to be wrong. If you can figure out that it is wrong, you are likely to make a lot of money.\u201d \u2013 Jim Rogers<\/p>\n
\u201cMarkets look a lot less efficient from the banks of the Hudsonthan the banks of the Charles.\u201d \u2013 Fischer Black[41]\n
\u201cAnyone who believes a growth rate in excess of 15% per annum over the long term is attainable should pursue a career in sales, but avoid one in mathematics.\u201d \u2013 Warren Buffett<\/p>\n
\u201cThey are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle\u2026Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen\u2026I mean, when times are good, it is kind of like Cinderella at the ball. She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall. And that’s what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall.\u201d \u2014Warren Buffett’s answer to “What are the key lessons you took from the financial crisis?”<\/p>\n
\u201cOnlookers frequently confuse edge with style\u2026Edge means generating excess returns because of mispricing. Style suggests being in the right place at the right time. Sometimes edge and style overlap, sometimes they don\u2019t.\u201d \u2013 Michael Mauboussin[42]\n
\u201cEdge also implies what Ben Graham\u2026.called a margin of safety. You have a margin of safety when you buy an asset at a price that is substantially less than its value. As Graham noted, the margin of safety \u2018is available for absorbing the effect of miscalculations or worse than average luck.\u2019 \u2026Graham expands, \u201cThe margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.\u2019\u201d \u2013 Mauboussin[43]\n
\u201cAt the core of an analytical edge is an ability to systematically distinguish between fundamentals and expectations. Fundamentals are a well thought out distribution of outcomes, and expectations are what\u2019s priced into an asset. A power metaphor is the [pari-mutuel] racetrack. The fundamentals are how fast a given horse will run and the expectations are the odds on the tote board. As any serious handicapper knows, you make money only by finding a mispricing between the performance of the horse and the odds. There are no \u2018good\u2019 or \u2018bad\u2019 horses, just correctly or incorrectly priced ones.\u201d \u2013 Michael Mauboussin[44]\n
\u201cThe low-risk, high-uncertainty situation gives us our most sought after coin-toss odds. Heads, I win; tails, I don\u2019t lose much!\u201d \u2013 Mohnish Pabrai<\/p>\n
“There are no bad days in the market. When the market is down, you\u2019ve got bargains, and it\u2019s lovely to think of what you are buying at low prices. When the market is up, the bargains have gone, but you\u2019re rich.\u201d \u2013 Bruce Greenwald<\/p>\n
\u201cWarren Buffett has said many times that people either get value investing in five minutes or they won\u2019t get it in five years. So, there is something in the human brain, that for some of us, makes all the difference in the world right away and the patience it requires is part of the wiring process.\u201d \u2013 Mohnish Pabrai<\/p>\n
\u201cThe curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.\u201d \u2013 Friedrich Hayek<\/p>\n
To thrive as a value investor you have to \u201crisk being called a dummy from time to time.\u201d \u2013 Christopher H. Browne<\/p>\n
\u201cPeople are, by and large, quite poor at judging correct absolute values but are astute about determining relative values. Psychologists call this coherent arbitrariness, which suggests that individuals are coherent when they compare prices on a relative basis but arbitrary when those prices are considered versus fundamental value.\u201d \u2013 Michael Mauboussin[45]\n
When the price of an asset rises, demand generally falls (and vice versa). When the price of a financial asset rises, however, demand generally rises (and vice versa). \u2013 Anonymous<\/p>\n
Nothing so induces a change in attitude as seeing a friend or neighbor get rich. \u2013 Anonymous<\/p>\n
\u201cValue stocks are about as exciting as watching grass grow. But have you ever noticed how much your grass grows in a week?\u201d \u2013 Christopher H. Browne<\/p>\n
“A man with conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point.” \u2013 Leon Festinger<\/p>\n
Investors need cash and courage, and \u201ccourage is a function of process.\u201d \u2013 Seth Klarman<\/p>\n
\u201cInvestment management is a \u2018grunt work\u2019 business. Were you to visit our offices, you would be reminded more of the reading room in a college library than some frenetic trading room.\u201d \u2013 Christopher H. Browne[46]\n
\u201cNothing tells in the long run like good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the Stock Exchange. It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions which he should arrive at by reason. His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none.\u201d \u2013 Andrew Carnegie<\/p>\n
\u201cThe trick in life is not to die. The trick in investing is not to lose.\u201d \u2013 Bruce Berkowitz<\/p>\n
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.” – Warren E. Buffett, 1994BerkshireHathaway Shareholder Letter<\/p>\n
“We prefer knowing to thinking, because knowing has more immediate value.\u201d \u2013 Neal Gabler<\/p>\n
\u201cMy father, Benjamin Shiller, told me not to believe in authorities or celebrities \u2014 that society tends to imagine them as superhuman. It\u2019s good advice. People are snowed by celebrities all the time. In academia people have this idea of achieving stardom \u2014 publishing in the best journals, being at the best university, writing on the hot topic everyone else is writing about. But that\u2019s what my father told me not to do. He taught me that you have to pursue things that sound right to you. In 2004, when I wrote the second edition of my book Irrational Exuberance, I said in the preface I was worried that the boom in home prices might collapse, bring on bankruptcy in both households and businesses, and lead to a world recession. I remember thinking that this sounds kind of flaky \u2014 nobody else is saying this, I can\u2019t prove it, this could be embarrassing. But I had learned from my father not to care what other people think. This was my book, and I believed this, so I just said it.\u201d \u2013 Robert Shiller<\/p>\n
\u201cA person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.\u201d \u2013\u00a0 Daniel Kahneman<\/p>\n
A central theme [behavioral psychology] is \u201cthat people who face a difficult question often answer an easier one instead, without realizing it.\u201d \u2013 Daniel Kahneman<\/p>\n
\u201cWe were required to predict a soldier\u2019s performance in officer training and in combat, but we did so by evaluating his behavior over one hour in an artificial situation. This was a perfect instance of a general rule that I call WYSIATI, \u201cWhat you see is all there is.\u201d We had made up a story from the little we knew but had no way to allow for what we did not know about the individual\u2019s future, which was almost everything that would actually matter. When you know as little as we did, you should not make extreme predictions like \u201cHe will be a star.\u201d \u2013 Daniel Kahneman<\/p>\n
\u201cThe illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [investment management] industry.\u201d \u2013 Daniel Kahneman<\/p>\n
\u201cThe exaggerated expectation of consistency is a common error. We are prone to think that the world is more regular and predictable than it really is, because our memory automatically and continuously maintains a story about what is going on, and because the rules of memory tend to make that story as coherent as possible and to suppress alternatives. Fast thinking is not prone to doubt. The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.\u201d \u2013 Daniel Kahneman<\/p>\n
\u201cTo know whether you can trust a particular intuitive judgment, there are two questions you should ask: Is the environment in which the judgment is made sufficiently regular to enable predictions from the available evidence? The answer is yes for diagnosticians, no for stock pickers. Do the professionals have an adequate opportunity to learn the cues and the regularities? The answer here depends on the professionals\u2019 experience and on the quality and speed with which they discover their mistakes.\u201d \u2013 Daniel Kahneman<\/p>\n
\u201cThe more successful a company becomes, the more difficult it is to continue the record: Competition, governmental controls, and increasing market saturation all play a role in slowing growth. Too, a management team skilled a t running a rapidly growing $50 or $100 million corporation may be lost at the $300 to $500 million sales level. Product and markets seemingly invulnerable to competition are suddenly inundated by it. Untouchable patents are circumvented by new discoveries. Costs cannot be controlled and prices cannot be raised, so profit margins are squeezed. Markets that appeared open for years of brisk growth become saturated. Political or economic events occur, such as an oil embargo or a sharp recession, totally beyond the control of even the most astute management, wreaking havoc in the marketplace. History constantly reminds us that in an uncertain world there is no visibility of prospects. Future earnings cannot be predicted with accuracy.\u201d \u2013 David Dreman, Contrarian Investment Strategies: The Next Generation<\/span><\/p>\n\u201cThe [availability, recency, anchoring, and hindsight] heuristic biases, which are all interactive, seem to flourish particularly well in the stock market and to result in a high rate of investor error. We are too apt to look at insufficient information in order to confirm a course of action, we are too inclined to put great emphasis on recent or emotionally compelling events, and we expect our decisions to be met with quick market confirmation. The more we discuss a course of action and identify with it, the less we believe prior standards are valid. So each trend and fashion looks unique, is identified as such, and inevitably takes it toll. Knowledge that no fashion prevails for long is dismissed.\u201d \u2013 David Dreman, Contrarian Investment Strategies: The Next Generation<\/span><\/p>\n\u201cExperience teaches us that when \u201ceveryone\u201d comes to the same conclusion, that conclusion is just about always wrong.\u201d \u2013 David Dreman, Contrarian Investment Strategies: The Next Generation<\/span><\/p>\n\u201cA good starting point [in the measurement of investment risk] is the preservation and enhancement of your purchasing power in real terms.\u201d \u2013 David Dreman, Contrarian Investment Strategies: The Next Generation<\/span><\/p>\n\u201cA realistic definition of risk recognizes the potential loss of capital through inflation and taxes, and would include at least the following two factors:<\/p>\n
\n- The probability that the investment you chose will preserve your capital over the time you intend to invest your funds.<\/li>\n
- The probability the investments you select will outperform alternative investments for this period.\u201d<\/li>\n<\/ol>\n
\u2013 David Dreman, Contrarian Investment Strategies: The Next Generation<\/span><\/p>\n\u201cThe qualitative factors upon which most stress is laid are the nature of the business and the character of the management. These elements are exceedingly important, but they are also exceedingly difficult to deal with intelligently.\u201d \u2013 Graham and Dodd<\/p>\n
\u201cInvesting should be dull, like watching paint dry or grass grow.\u201d \u2013 Paul Samuelson<\/p>\n
“As value investors, our business is to buy bargains that financial market theory says do not exist. We\u2019ve delivered great returns to our clients for a quarter century\u2014a dollar invested at inception in our largest fund is now worth over 94 dollars, a 20% net compound return. We have achieved this not by incurring high risk as financial theory would suggest, but by deliberately avoiding or hedging the risks that we identified.” \u2013 Seth Klarman<\/p>\n
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” \u2013 Seth Klarman<\/p>\n
“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” \u2013 Seth Klarman<\/p>\n
\u201cCredit is money of the mind.\u201d \u2013 Jim Grant<\/p>\n
“Value investing is literally a treasure hunt for value. Regardless of the economic, investment and political environment, we must be unshaken in our conviction. We must abide by our fundamental value disciplines to sniff out undiscovered opportunities. We must possess deep patience and have considerable stamina to withstand share price volatility and client criticism. We must be prepared to be temporarily wrong in the short-run and to withstand the “heat”. We must stick to our value philosophy and remain committed no matter how tough the investment climate may become. From our clients’ point of view, we want them to fully understand our value philosophy, investment style and deep commitment. We ask them to be patient in both good and difficult times. In return we will endeavour to give 100% of our abilities toward our common goal of investment excellence.” \u2013 Irwin A. Michael<\/p>\n
\u201cThe model I like to sort of simplify the notion of what goes on in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.<\/p>\n
\u2014Charlie Munger, “Art of Stock Picking”<\/p>\n
\u201cWith a profession such as investing, people see the ‘doing’ as the buying and selling. It is difficult to come home from work, and answer your spouse’s question, ‘what did you do today?’ with ‘well, I read a lot, and I talked a little.’ If you’re not buying or selling, you may feel you aren’t doing anything.” \u2013 David Abrams<\/p>\n
Lou Simpson manages his portfolio according to five basic principles. He outlined these timeless principles in GEICO’s 1986 annual report:<\/p>\n
\n- Think independently.<\/li>\n
- Invest in high-return<\/li>\n<\/ol>\n
\n- businesses that are fun for the shareholders.<\/li>\n
- Pay only a reasonable price, even for an excellent business.<\/li>\n
- Invest for the long term<\/li>\n
- Do not diversify excessively.<\/li>\n<\/ol>\n
1. \u201cThink independently. We try to be skeptical of conventional wisdom, he says, and try to avoid the waves of irrational behavior and emotion that periodically engulf Wall Street. We don\u2019t ignore unpopular companies. On the contrary, such situations often present the greatest opportunities.<\/p>\n
2. \u201cInvest in high-return businesses that are fun for the shareholders. Over the long run, he explains, appreciation in share prices is most directly related to the return the company earns on its shareholders\u2019 investment. Cash flow, which is more difficult to manipulate than reported earnings, is a useful additional yardstick. We ask the following questions in evaluating management: Does management have a substantial stake in the stock of the company? Is management straightforward in dealings with the owners? Is management willing to divest unprofitable operations? Does management use excess cash to repurchase shares? The last may be the most important. Managers who run a profitable business often use excess cash to expand into less profitable endeavors. Repurchase of shares is in many cases a much more advantageous use of surplus resources.<\/p>\n
3. \u201cPay only a reasonable price, even for an excellent business. We try to be disciplined in the price we pay for ownership even in a demonstrably superior business. Even the world\u2019s greatest business is not a good investment, he concludes, if the price is too high. The ratio of price to earnings and its inverse, the earnings yield, are useful gauges in valuing a company, as is the ratio of price to free cash flow. A helpful comparison is the earnings yield of a company versus the return on a risk-free long-term United States Government obligation.<\/p>\n
4. \u201cInvest for the long term. Attempting to guess short-term swings in individual stocks, the stock market, or the economy, he argues, is not likely to produce consistently good results. Short-term developments are too unpredictable. On the other hand, shares of quality companies run for the shareholders stand an excellent chance of providing above-average returns to investors over the long term. Furthermore, moving in and out of stocks frequently has two major disadvantages that will substantially diminish results: transaction costs and taxes. Capital will grow more rapidly if earnings compound with as few interruptions for commissions and tax bites as possible.<\/p>\n
5. \u201cDo not diversify excessively. An investor is not likely to obtain superior results by buying a broad cross-section of the market, he believes. The more diversification, the more performance is likely to be average, at best. We concentrate our holdings in a few companies that meet our investment criteria. Good investment ideas–that is, companies that meet our criteria–are difficult to find. When we think we have found one, we make a large commitment. The five largest holdings at GEICO account for more than 50 percent of the stock portfolio.<\/p>\n
On talking to companies: <\/em>\u201cThat\u2019s a good discipline \u2013 you should spend your day talking to operators, not to Wall Street.\u201d \u2013 Jeffrey Ubben<\/p>\n\u201cMost of our investments are a product of what we’ve learned from working with and investing behind really great management teams. We’re very isolated. We’d rather spend our time learning from successful operators and investors. CEO’s making strategic decisions every day — they are essentially investors themselves — allocating capital in the most shareholder-friendly way. This approach keeps us independent and it keeps our portfolio unique.\u201d \u2013 Cara Goldenberg<\/p>\n
\u201cWe have a network and investor base that is totally different from most hedge funds. Our reference list is our management teams. People say, \u2018can you give me your list of references?’ And we send a list of CEO’s. And they say, \u2018No, we’d like to speak with your investors.\u2019 We say, \u2018Those are our investors.\u2019\u201d \u2013 Cara Goldenberg<\/p>\n
\u201cMy job is not to ignore the current and potential macroeconomic environment nor is it to forecast it. It is to choose a select number of companies that have the right combination of characteristics that will allow it to survive and thrive in nearly any scenario.\u201d \u2013 Peter Kinney[47]\n
\u201cThe only way to test a hypothesis is to look for all the information that disagrees with it.\u201d \u2013 Karl Popper<\/p>\n
\u201cHaving spent 15 years\u2026doing nothing but short selling, I can argue with some authority that, as an investment strategy, shorting suffers from each one of these characteristics of a bad business.\u201d \u2013 Joe Feshbach<\/p>\n
\u201cCosts and liabilities are rarely overstated.\u201d \u2013 Seth Klarman<\/p>\n
\u201cCrooks are exposed when they run out of money.\u201d \u2013 Chris Browne<\/p>\n
\u201cWe are in a zero-sum game, so by definition you can\u2019t be with the consensus and add value because the consensus is reflected in the price. You have to be able to think independently. And independent thinking is something I worry about in terms of the industry. There are some fantastic people in the industry. I don\u2019t actually know what a hedge fund is. A hedge fund is a bouillabaisse of all different people doing all different things. But hedge funds on average (this is a great concern) are not doing enough independent thinking. The beauty of being in the hedge fund business is that it\u2019s the only business in the world that I know of that is really not cyclically dependent. Your environment is not your determinant. You\u2019re free to do whatever you want. There\u2019s no such thing as a bad environment. You can go short. You can go long. You can take spreads. You can do anything you want, just as long as you do it prudently. You have that sort of freedom. So there\u2019s no reason for us, for the industry as a whole, to perform this way.<\/p>\n
\u201cThe average correlation between the hedge fund index and the average portfolio of stocks and bonds is 76 percent. Why is that? There\u2019s no good reason anybody lost money last year (2009). You can go short, you can go long, you can take spreads. If we as an industry are going to be able to make a contribution to the rest of the world in terms of the investment community, we have to do independent thinking to be able to take uncorrelated positions. That\u2019s our responsibility. Too many people in the hedge fund industry in my opinion are just basically carrying their beta through, replicating certain return patterns.<\/p>\n
\u201cWhat we do is we\u2019ve replicated almost every style\u2013we\u2019ve taken 14 different styles of hedge funds\u2013and we\u2019ve taken their return series. The average correlation is between 50 and 60 percent of a manager with that return style. And we\u2019ve been able to replicate that return style by just creating a passive mix. For example, emerging market managers\u2026 you could just be long the emerging markets and whether you are up or down would drive their returns. Trend following strategies in terms of commodities are strategies that could be replicated by simply trading off moving averages. So you need to have more of an independent point of view in order to create uncorrelated alphas.\u201d\u00a0 — Ray Dalio<\/p>\n
\u201cIt is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges.\u201d \u2013 John Maynard\u00a0 Keynes<\/p>\n
“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one knows something about… It is a mistake to think that one limits risk by spreading too much between enterprises about which one knows little and has no reason for special confidence…” – John Maynard Keynes<\/p>\n
\u201cAn investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money.\u201d \u2013 J.M. Keynes<\/p>\n
\u201cIt\u2019s not bringing in the new ideas that\u2019s so hard; it\u2019s getting rid of the old ones.\u201d \u2013 John Maynard Keynes<\/p>\n
\u201cIn the long run, we are all dead.\u201d \u2013 John Maynard Keynes<\/p>\n
\u201cWorldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.\u201d \u2013 John Maynard Keynes<\/p>\n
\u201cI believe in market economics. But to paraphrase Churchill \u2013 who said this about democracy and political regimes \u2013 a market economy might be the worst economic regime available, apart from the alternatives. I believe that people react to incentives, that incentives matter, and that prices reflect the way things should be allocated. But I also believe that market economies sometimes have market failures, and when these occur, there\u2019s a role for prudential \u2013 not excessive \u2013 regulation of the financial system.\u201d \u2013 Nouriel Roubini<\/p>\n
\u201cBut in the financial markets, without proper institutional rules, there\u2019s the law of the jungle \u2013 because there\u2019s greed! There\u2019s nothing wrong with greed, per se. It\u2019s not that people are more greedy now than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there\u2019s less fear. And second, b prudential regulation and supervision to avoid certain excesses.\u201d \u2013 Nouriel Roubini<\/p>\n
\u201cTHERE ARE IDIOTS. Look around.\u201d \u2013 Larry Summers<\/p>\n
\u201cWe don\u2019t go in much for titles at our firm, [but] if we did, my business card would read \u2018Bill Ruane, Research Analyst.\u2019\u201d \u2013 Bill Ruane[48]\n
\u201cI don\u2019t believe all this nonsense about market timing. Just buy good value and when the market is ready that value will be recognized.\u201d \u2013 Henry Singleton<\/p>\n
John Kenneth Galbraith:<\/p>\n