Archive for category Books
Given the nature of the season and with no reason, here are the quick lessons from 2018:
a) The Dumb Speculator: I used to think this as a very apocryphal story and always used to chuckle how silly the story is:
“Ben Graham told a story forty years ago that illustrates why investment professionals behave as they do. An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. “You’re qualified for residence,” said St. Peter, “but, as you can see, the compound reserved for oil men is packed. There’s no way to squeeze you in.” After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, “Oil discovered in hell.” Immediately, the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”
Well, I am chuckling no more. Truer than ever, I believed the entire fantasy for one story in 2018 and had to sell 30% from the top instead of selling near the top. I had all justifications and calculations for why the top was ‘THE top’ given it was ridiculously overpriced, but then I thought, why not…maybe there is truth to all those fantasies after all. Ultimately, it boils down to whether you clicked ‘Buy’/’Sell’ than all the million justifications and calculations you do within your head.
b) The Aggressive Investor: I almost always take concentrated positions (8-10% atleast) and there was this one concall from a capital goods company that I thought had cracked it all. Of course, I built a serious position in it (8%) – justified with ‘backed with conviction’, ‘motivated management’, ‘diversified revenue’, ‘normally valued’ etc.
Obviously, not just me but the entire market thought that the company had cracked it all. And then disappointment. The position corrected 50% and now is 40% below my buying price. The market – as simple as it sounds – doesn’t care about your conviction or management stories. It cares about earnings and the earnings disappointed big time.
c) The Sheepish Investor: Given the burns of the aggressive position, I course corrected and then said to myself – maybe, just maybe this isn’t a market to build concentrated positions and went the other way…building ‘2%-3%’ positions in 4-5 stocks. As such, there is no fault in building 2-3% positions. However, when your inherent investing nature is to think and build concentrated positions, these small positions are the first ones to be cut out off the portfolio when you have conviction in other stocks where you can build a position.
So, unless these small positions turn out to be massive multi-baggers (atleast 4-5x), they tend to be a waste of time and energy given there is neither conviction nor position to sustain and eventually reap those returns.
d) Take the Gains and Bear the Losses: After a longish period of 6 years, I took substantial money off the table in a number of stocks. Was in 20-25% cash most of the year. And that enabled me to bear losses from a few stocks (mostly the 2-4% positions).
Given that one makes the biggest mistakes in bull markets (greed, staying on till the last minute or beyond for max gains, thinking you can ride momentum, inability to find ideas and yet find it painful to sit on more than 25% cash etc.), taking those losses is still painful. One can find solace that some of these losses will be offset against gains and thereby tax incidence will be lower – but that’s a false solace that we try to find comfort in. The real truth of making mistakes lurks in the background (and really, no way to get around the fact of making mistakes, other than try to reduce incidence).
e) Saying Thank You: So many family and friends to say Thank You to. Family has no option but to stick to you through thick and thin, but friends have zero obligation to bear all the mindless chatter. Thank You to multiple friends – O, V, C, A, D, V. Each one of those names have taught me more than I can ever learn through a myriad books and mistakes. So, Thank You. I broke even this year (0% returns basically on the portfolio) and largely thanks to all of you and your sagely advice (kudos to O though, who has been a rock).
f) Saying One more Thank You: One landmark reached and crossed in my professional career of Management Consulting as well (became a Principal at my Firm). I absolutely love Consulting and Investing, and thankful to God that he has given me opportunities in both these fields to strive and ability to try to excel (excelling or not is a different matter). The rush that I get in the first week of any client situation (this year was in Singapore) and the rush to find an unique angle (s) to stocks which the market might have missed is something that can’t be explained, and only can be experienced.
Investing as such is complex, but when compared to vagaries of Life itself (in terms of health, happiness, laughter, family, friends, tears, sickness and death), Investing is probably the simplest of the lot. The worst you can do is 7% in a FD. The major lesson of 2018 is to not fret a lot and just live life being aware of mortality.
So, Thank You for this opportunity – it’s been a pleasure to see you off 2018. Welcome 2019. Let the fun and frolic begin.
P.S: Best books read this year – ‘How I lost a Million Dollars’, ‘Anti-fragile’ (again), ‘Factfulness’, ‘The Art of Learning’ (again), ‘A man for all markets’, ‘Letters from a Stoic’, ‘Markets Never Forget, but People Do’ are a few of them.
a) Once in a while it is good to go back and read up what the Gurus have said. Especially Graham. Did I say ‘once in a while’? Scratch that. I think it should be all the time for value investors. Ben Graham in his last days proposed 10 criteria which he said ”seemed to be practically a foolproof way of getting results out of common stock investments with a minimum of work.”
Here are the 10 criteria that make up the new Ben Graham Formula.
1) An earnings-to-price yield at least twice the AAA bond yield.
2) A price-earnings ratio less than 40 percent of the highest price-earnings ratio the stock had over the past five years.
3) A dividend yield of at least two-thirds the AAA bond yield.
4) Stock price below two-thirds of tangible book value per share.
5) Stock price two-thirds net current asset value.
6) Total debt less than book value.
7) Current ratio greater than two.
8) Total debt less than twice “net current asset value.”
9) Earnings growth of prior ten years at least 7 percent on an annual basis.
10) Stability of growth of earnings in that no more than two declines of 5 percent or more in the prior 10 years.
Now, now – 10 criteria. ‘Too tough. I am already switching off and moving along my internet surfing exercise’, eh?. Hold on. Read on for a while. According to the Gurufocus article “The Investment Methods of Benjamin Graham”, the first five criteria in the new Graham formula were related to reward and the second five to mitigating risk of loss of capital. One needs to select a stock with at least one from the reward and one from the risk mitigation section. Very few if any stocks will pass all 10 critieria.
Interesting. This is getting slightly easier. Just (atleast) one from the top 5 and another one from the bottom 5. Very nice. If only some researcher/investor did some analysis to tell me which criteria should I pick in each category so that my investment becomes multi-fold?
Good news! Someone has already done it. (Ok, I will stop it. I am sounding like someone on the TV shopping network commercial). In a “Test of Ben Graham’s Stock selection Criteria,” Henry Oppenheimer studied whether or not a set of Ben Graham’s investing criteria actually worked. Oppenheimer discovered that two of the Ben Graham criteria, number 1 and number 6, produced exceptional returns. Oppenheimer found that the mean return during the time studied (1974-1981) was 38% vs. the S & P 500’s 14%. A remarkable out-performance. He also found that using criteria 3 and 6 would have achieved mean annual return of 26%.
Nice. So, I’ll pick criteria 1, criteria 6, I will add my own criteria on return ratios and earnings growth etc., and ta-da, I have my list of stocks, no? Good thought process. Now think about – ‘what will happen if this list consists of only one stock?’, ‘what will happen if this list consists of 94 stocks?’. Would you invest in just one? Would you invest in 94? How would you segregate? Let me know your thought process.
Of course, Graham criteria was tested only on the US market and the results are dependent on the time period chosen. I am not aware of any such study done on the Indian markets though. If only some researcher/investor….. 🙂
b) Terrific list of 115 learnings, investing ideas and investment wisdom from the brilliant Greg Speicher (as always). A must read (and his blog is a must follow). Link here
c) I wanted to compile a list of good investment books I have read and a list I want to read this year in this post (I should probably make a tab to keep track). Please feel free to add to the list in the comments.
i) The Intelligent Investor and Security Analysis – Ben Graham
ii) You can be a Stock Market Genius – Joel Greenblatt
iii) Common Stocks and Uncommon Profits – Phil Fisher
iv) One up on Wall Street – Peter Lynch
v) Stocks for the Long Run – Jeremy Siegel
vi) Margin of Safety – Seth Klarman
vii) Reminiscences of a stock operator – Edwin Lefevre
viii) Black Swan and Fooled by Randomness – Taleb
ix) Thinking, Fast and Sl0w – Daniel Kahnemann
x) Predictably Irrational – Dan Ariely
xi) Extraordinary popular delusions and madness of crowds
Want to read (in no particular order)
1) Essays of Warren Buffett – Lesssons for corporate america
2) The five rules for successful stock investing – Pat Dorsey
3) Influence by Robert Cialdini
4) In an uncertain world – Robert Rubin
5) Against the Gods – The remarkable story of risk
6) Seeking Wisdom by Peter Bevelin (Munger’s ideas explained)
7) Financial Shenanigans – Howard Schilit
8) Behavioral Finance and Wealth Management
9) It’s when you sell that counts – Don Cassidy
10) The Richest man in Babylon
11) Contrarian Investment Strategies – David Dreman
12) The Little book of value investing – Christopher Browne
13) Where are the customers’ yachts – Fred Schwed
14) A short history of Financial Euphoria – JK Galbriath