Thursday, 11 September 2014

Ten things I learned from Robert Hagstrom's The Warren Buffett Way

1. I am attracted by this narrative:
“Warren Buffett is not easy to describe. Physically he is unremarkable, with looks that are more grandfatherly than corporate Titan. Intellectually he is considered a genius, yet his down to earth relationship with people is truly uncomplicated. He is simple, straightforward, forthright, and honest. He displays an engaging combination of sophisticated dry wit and cornball humor. He has a profound reverence for those things logical and a foul distaste for imbecility. He embraces the simple and avoids the complicated” – page 17

2. People always say “you are the average of the five people around you”. Now that we know there are three great influences around:
“Warren Buffett's education is, as we shall see, a synthesis of three distinct investment philosophies from the minds of three powerful figures: Benjamin Graham, Philip Fisher, and Charlie Munger” - page 21

3. On Benjamin Graham:
“Graham said that having a good memory was his one burden. The memory of being financially ruined twice in a lifetime led him to embrace an investment approach that stressed downside protection versus upside potential” - page28

4. On Philip Fisher:
“He [Fisher] argued that reading financial only the financial reports of a company is not enough to justify an investment. The essential step in prudent investing, he explained, is to uncover as much about the company as possible, from people who are familiar with the company. Fisher admitted that this was a catchall inquiry that would yield what he called scuttlebutt” – page 34

5. Enough said.
“He [Warren Buffett] even named his firstborn son after his mentor: Howard Graham Buffett” – page 38

6. Buffett mix = Graham + Fisher
“Warren Buffett once said "I am 15 percent Fisher and 85 percent Benjamin Graham". This remark has been widely quoted, but it is very important to remember that it was made in 1969... My hunch is that if he were to make a similar statement today, the balance would come pretty close to 50/50” – page 42-43

7. Institutional imperative = mindless imitation of their peers
“Review annual reports from a few years back, paying special attention to what management said then about the strategies for the future. Then compare those plans to today's results; how fully were the plans realised? Also compare the strategies of a few years ago to this year's strategies and ideas; how has the thinking changed? Buffett also suggests it can be very valuable to compare annual reports of the company in which you are interested with reports of similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparisons can yield insights” – page 58

8. Buffett’s metric: ROE (not EPS) and owner earnings:
·         “Buffett considers earnings per share a smoke screen. Since most companies retain a portion of their previous year's earnings as a way to increase their equity base, he sees no reason to get excited about record EPS” – page 59
·         “Accounting earnings are useful to the analyst only if they approximate the company's expected cash flow… But even cash flow, Buffett warns, is not a perfect tool for measuring value; in fact, it often misleads investors. Cash flow is an appropriate way to measure business's that have late investments in the beginning and smaller outlays later on, such as real estate development, gas fields, and cable companies. Manufacturing companies, on the other hand, which require ongoing capital expenditures, are not accurately valued using only cars flow…A company's cash flow is customarily defined as net income after taxes plus depreciation, depletion, amortisation, and other noncash charges…Instead of cash flow, Buffett prefers to use what he called "owner earnings" - a company's net income plus depreciation, depletion, and amortisation, less the amount of capital expenditures and any additional working capital that might be needed” – page 62

9. William Ruane on “focus investing”:
Instead, they rely on their own intensive company investigations. "We don't go in much for titles at our firm," Ruane once said, "[but] if we did, my business card would read Bill Ruane, Research Analyst."  Such thinking is unusual on Wall Street, he explained. "Typically, people start out their careers in an analyst function but aspire to get promote to the more prestigious portfolio manager designation. To the contrary, we have always believed that if you are a long term investor, the analyst function is paramount and the portfolio management follows naturally" – page 160

10. Market efficiency and two kinds of investment ideas:
Is it true, he wondered, that no matter how hard we try we'll never be able to find an idea that the market hasn't already discounted? To address the question, [Jack] Treynor asks you to distinguish between "two kinds of investment ideas: a) those whose implications are straightforward and obvious, take relatively little special expertise to evaluate, and consequently travel quickly and b) those that require reflecting, judgment, and special expertise for their evaluation, and consequently travel slowly." "If the market is inefficient," he concludes, "it will not be inefficient with respect to the first kind of idea, since by definition the first kind is unlikely to be misevaluated by the great mass of investors." To say this another way, the simple ideas - price to earnings ratios, price to book ratios, p/e to growth ratios, 52-week-low lists, technical charts, and other elementary ways we can think about a stock - are unlikely to provide easy profits. "If there is any market inefficiency, hence any investment opportunity," says Treynor, "it will arise with the second kind of investment idea - the kind that travels slowly. The second kind of idea - rather than the obvious, hence quickly discounted insight relating to "long term" business developments - is the only meaningful basis for long term investing." – page 207

Wednesday, 27 August 2014

S&P 500 passes 2,000

On 26 August 2014, S&P500 closed at 2000.02, more than tripled since its March 2009 low at 666.

S&P500 first broke through 1,000 at 1998 and 16 years later, it passes 2,000.