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Showing posts with label Book Review. Show all posts
Showing posts with label Book Review. Show all posts

Thursday 6 July 2017

Highlights from Book - Common Stocks and Common Sense - Edgar Wachenheim

Common Stocks and Common Sense by Edgar Wachenheim is a case-study based book on investing. In structure it is similar to Beating the Street by Peter Lynch. Edgar used to run Greenhaven Associates with an excellent long term track record. In the book, he goes through some of his picks, the rationale of why he bought them, his process of stock selection and the emotions that goes with investing. It is a good book dealing with real-life examples of a good value investor. 

Below are the key points I noted from the book.

The strategy is to try to purchase deeply undervalued securities of strong and growing companies that hopefully will appreciate sharply as the result of positive developments that already have not been largely discounted into the prices of the securities.

I do my best to make decisions that make sense given everything I know, and I do not worry about the outcomes.

When an investor is barraged with particularly bad or good news, he can reread the memos, notes, and models he wrote before the occurrence of the news. He then can ask himself three questions: What really has changed? How have the changes affected the value of the investments under consideration? Am I sure that my appraisal of the changes is rational and is not being overly influenced by the immediacy and the severity of the news?

When we purchase a stock, we are interested in what the company will be worth two or three years

I knew that my projections of IBM’s earnings and values were nothing more than best guesses based on incomplete information. However, having the projections to work with was better than not having any projections at all, and my experience is that a surprisingly large percentage of our earnings and valuation projections eventually are achieved, although often we are far off on the timing.

I greatly admire Warren Buffett. He is one of the great investors of all time. But I strongly disagree that the shares of most wonderful businesses can be held forever because most wonderful businesses become less wonderful over time—and many eventually run into difficulties.

My job would be a lot easier and much more relaxing if I could fill a portfolio with outstanding companies that I never would sell. But our ambitions lead us to seek shares that are temporarily deeply undervalued and then sell the shares when they become fully valued. This is an approach to investing that is less relaxing and that requires considerable effort and time, but that has worked for us.

I almost always start my analysis of a company by studying its balance sheet. It is said that a shareholder makes money off the income statement, but survives off the balance sheet, and I agree.

When studying a balance sheet, I look for signs of financial and accounting strengths. Debt-equity ratios, liquidity, depreciation rates, accounting practices, pension and health care liabilities, and “hidden” assets and liabilities all are among common considerations, with their relative importance depending on the situation. If I find fault with a company’s balance sheet, especially with the level of debt relative to the assets or cash flows, I will abort our analysis, unless there is a compelling reason to do otherwise.

If a company’s balance sheet passes muster, I then try to get a handle on management. The competence, motivation, and character of management often are critical to the success or failure of a company. To form an opinion on management, I normally pay careful attention to the management’s general reputation, read what the management has said in the past, assess whether the management’s stated strategies and goals make sense, and analyze whether the management has been successful carrying out its strategies and meeting its goals.

However, I am humble about my abilities to accurately assess managements. Experience shows that investors can be unduly impressed by executives who are charismatic or who purposely say what investors want to hear—who play to their audience. Also, investors frequently will undeservedly credit management for a company’s favorable results and vice versa. Favorable or unfavorable results often are fortuitous or unfortuitous.

After trying to get a handle on a company’s balance sheet and management, we usually start studying the company’s business fundamentals. We try to understand the key forces at work, including (but not limited to) quality of products and services, reputation, competition and protection from future competition, technological and other possible changes, cost structure, growth opportunities, pricing power, dependence on the economy, degree of governmental regulation, capital intensity, and return on capital.

Our models normally include earnings projections for the next two or three years. Our valuation is based on a multiple of projected earnings and cash flows.

In the stock market, it is best to be flexible and not be tied to conventions or rules.

My own policy is that no single stock should equal more than 12 percent of the total value of a portfolio and that no single industry should equal more than 25 percent of the total value. When measuring the percentages, I use the cost of the stock rather than its market price. That way, I am not forced to reduce the size of a position that appreciates faster than the portfolio as a whole.

Current fundamentals are based on known information. Future fundamentals are based on unknowns. Predicting the future from unknowns requires the efforts of thinking, assigning probabilities, and sticking ones neck out—all efforts that human beings too often prefer to avoid.

In the investment business, relatively unpredictable outlier developments sometimes can quickly derail otherwise attractive investments. It comes with the territory. So while we work hard to reduce the risks of large permanent loss, we cannot completely eliminate large risks. However, we can draw a line on how much risk we are willing to accept—a line that provides sufficient apparent protection and yet prevents us from being so risk averse that we turn down too many attractive opportunities. One should not invest with the precept that the next 100-year storm is around the corner.

I revise models frequently because my initial models rarely are close to being accurate. Usually, they are no better than directional. But they usually do lead me in the right direction, and, importantly, the process of constructing a model forces me to consider and weigh the central fundamentals of a company that will determine the company’s future value.

I strongly believe in Warren Buffett’s dictum that he never has an opinion on the stock market because, if he did, it would not be any good, and it might interfere with opinions that are good. I have monitored the short-term market predictions of many intelligent and knowledgeable investors and have found that they were correct about half the time. Thus, one would do just as well by flipping a coin.

In the end, the psychological rewards of being right can be as important as—or more important than the monetary rewards. And they are interrelated. When you feel good, you are more likely to do well.

But I believe that investors sometimes need to be open to new ideas that challenge previous convictions. In the investment business, as in life, one becomes disadvantaged if one develops tunnel vision.

Often, when I am in a quandary about whether to sell one of our holdings, I sell half or some other fraction that makes sense under the circumstances.

Occasionally, a black swan adverse event does derail one or more of our investments. When this happens, we must be ready to unemotionally rethink the economics of continuing to hold the investments—and, if necessary, sell.

When we are wrong or when fundamentals turn against us, we readily admit we are wrong and we reverse our course. We do not seek new theories that will justify our original decision. We do not let errors fester and consume our attention. We sell and move on.

Our central strategy is to purchase deeply undervalued securities of strong and growing companies that likely will appreciate sharply as the result of positive developments.

To successfully assess probabilities and make good investment decisions, an investor should hold considerable amounts of information about the companies and industries he is investing in. Having superior information (both quantity and quality) can give an investor a competitive edge. To obtain information, we spend a large percentage of our time researching the fundamentals of companies.

Pay more attention to what managements do than to what they say. Remember, managements, like most other people, tend to act in their self-interest.

Favor managements who are highly incentivized to achieve higher prices for their shares.

Friday 3 April 2015

Book Review: The Education of a Value Investor by Guy Spier

I just finished reading Guy Spier's The Education of a Value Investor. Guy is a well-known value investor who runs the Aquamarine Funds and is based out of Zurich. He has been educated at some of the most renowned educational institutions like Oxford and Harvard Business School. In his book he goes over his career as an investor and money manager and shares his wisdom. 

This is not a how-to book. It has very little in terms of the author's investment process. He does not even talk much about his stock picks and the rationale behind investing in them. As the subtitle in the name of the book suggests, this book truly ties to capture the author's quest for wisdom, enlightenment and through them, wealth. This book is more about getting wiser through self-reflection than about investing.

The book starts with his joining a Wall Street investment banking company D H Blair. His disillusionment with his education starts then. He starts to question the efficacy of an education which cannot help him make the right choices in life. He starts to hate his job and sometime during this period discovers Warren Buffett through a book (Buffett: The Making of an American Capitalist by Roger Lowenstein). This opens up a new world for him. A world of ethical living and value investing. He then goes ahead and makes dramatic lifestyle changes to "bring in Buffett into his life". 

During this period, he met Mohnish Pabrai, an event which again transformed and changed the course of his life. They developed a deep bond of friendship which amongst other things led them to jointly bid for a charity lunch with Buffett.

The book chronicles multiple things that he did to lead a life that was congruent to his beliefs. He moved away from the competitive madness of New York and settled in Zurich, stopped subscribing to his Bloomberg terminal. He started writing thank you notes to people everyday and other such things.

The book is fascinatingly intimate and authentic. Spier talks about his thought processes, his doubts, his shortcomings very openly. This is what drew me to the book. I could identify myself personally with a lot of it. I had, and continue to have similar questions, doubts and dilemmas, both in my life and in investing.

My biggest takeaway from the book is that it seeded the thought of transforming my life, one step at a time, by making small changes which can compound over a long time, by surrounding myself with the people I like, admire and respect, caring for people and doing small things everyday to help others and most importantly, setting up myself in an ecosystem which suits my inner self and helps me to lead a life congruent to my core beliefs. Just for this, this book is a must read.

Friday 15 August 2014

Book Review - The Thoughtful Investor by Basant Maheswari

Over the last one month, other than the annual reports and other research reports, I have been busy reading two books, i) The Thoughtful Investor and ii) The Manual of Ideas. Today I am sharing my thoughts on the first one. I will post the review of the second book in a short while.

Firstly, The Thoughtful Investor is not a mere book on investment. It is more a description of an investment journey that the author Basant Maheshwari has undertaken. A lot of retail and HNI investors in India have probably visited the website/forum he started and moderates, theequitydesk.com, better known as TED amongst followers. 

The first thing that stands out is the exhaustive contents of the book. Very few things that a serious investor needs to thing about is left unaddressed in the book. It covers the psychological aspects of becoming a good investor, the pains of holding too long and the use and misuse of leverage. It gives a reasonable overview of fundamental analysis - though you will need to know the basics as that is not really covered here (and that is how it should be - this book is not really for beginners). It also has a very nice section on portfolio construction - a facet I have seen only very senior and serious investors focussing on, and something which is perhaps the most critical for overall returns than individual stock selection. The book ends with a checklist that can be picked up as-is or modified based on your individual experiences.

What is refreshing about the book is that it captures the passion of an equity investor through the struggles of making and losing money. There are very few good books on experiences of individual investors, specially Indian, and this is definitely one of them. 

The only improvement area for the book that I felt could have been better was the editing. There are quite a few typos and grammatical errors, which at times take away from the pleasure of reading a well-written book.

Every good book should provide atleast one takeaway. The main takeaway underlying theme that I felt coming out throughout was of making enough absolute returns to become financially free. I have heard a few folks complaining about the price of the book (it is priced at 999 rupees) and asking whether it is really worth that price. To me, if you are a serious investor investing in Indian equities, you should read the book, if for nothing else, than to just drill the key takeaway from the book in your heads. Being financially free is definitely worth much much more than the 999 rupees you pay.

Friday 17 June 2011

Book Review: The Only Three Questions That Count by Ken Fisher

I picked up this book because of two reasons, one because I had read few of his articles in Forbes, but primarily because he is the son of the legendary Phil Fisher.

The book looks at three questions that every investor needs to ask himself. They are:
Q1. What do you believe that is actually false (wrong)?
Q2. What can you fathom that others find unfathomable?
Q3. What the heck is my brain doing to blindside me now?

Question 1 delves into variant perception. That is, what do you think that is different from the consensus. Because the only way to make money is when you are right and the majority is wrong.

Question 2 delves into your personal strategic competitive advantage. What is your differentiator? Or in Warren Buffet's language, what is your circle of competence? Unless you have a definite competitive advantage, it is going to be very difficult to make better than average returns.

Question 3 digs deeper into behavioral psychology. As an investor, you have to be very very careful of how the inherent biases are affecting your decision making. Fear, greed, loss aversion and other such biases are always at work and investors have to be on their conscious guard against them. (For a great book on psychology of various biases you can read - Influence by Robert Cialdini.)

The book is interesting in parts. But it actually does not contain anything new. Also, I got the overwhelming feeling that the author was trying to impress upon the reader that he is some hotshot money manager. His continuous stress on the Price/Sales ratio, which supposedly the author had pioneered keeps getting bombarded at the reader as if it was the discovery of the 8th wonder of the world.

Overall, a mediocre book which you can decide to pass.

Saturday 9 April 2011

Book Review: Warren Buffet Portfolio by Robert Hagstrom

This book came very highly recommended to me. Hagstrom's more popular book The Warren Buffet Way was the first book related to investments that I had read. I was eager to read this to understand the approach for creating a portfolio. However, this book was a big let down. Hagstrom, to my mind, has tried to rehash some very popular and easily accessible material from Buffet's shareholders, Poor Charlie's Almanac and other such sources and put together a book. There is nothing is this that a reader can learn from that he won't get from reading the Buffet's letter to shareholders and books on Munger. 

The idea that is propagated throughout the book is to build a focused portfolio of not more than 10-15 stocks. Have a holding period of not less than 5 years. Increase your knowledge about every company you hold. Learn about them, their industry and competitors. 

In a nutshell, a book that has no new insights and repeats very well-known investment ideas and themes. Better to avoid.

Monday 4 April 2011

Book Review: Investment Gurus by Peter Tanous

I just completed reading Peter Tanous' Investment Gurus. This book has been written on the lines of the Market Wizards series by Jack Schwager.That is, it is a collection of interviews with famous money managers. Added to those are a list of academicians. The list of interviewees are a very good collection of money managers. It includes people like Peter Lynch, Mario Gabelli, William Sharpe, Richard Driehaus and Eugene Fama.

The focus of the book is on finding out the method that each use to consistently beat the markets and to understand if the efficient market theory actually has any basis in reality.

This is a good book to read if you want to flip through the investment strategies of some very well-known and outperforming managers. If you want to have in-depth understanding of any theory, then this is not the book for you.