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Here is an article on an investor who has made a fortune in the chinese stock market by buying quality companies.It always amazes me how the principles of value investing are able to work so well in capital markets other than the US despite different regulatory climate.Somehow , the principles of value investing are universal and allow one to profit handsomely provided one does his due dilligence.
Link
Tuesday, June 26, 2007
Thursday, June 21, 2007
Blast from the Past
Firstly,apologies for the lack of recent posts.I came across this interview and just wanted to share with the rest of the value investing community.Here is an old message board post dated Feb 24,1996.An old stockbroker recounts a chance meeting with the legendary Benjamin Graham.
You asked me to elaborate on a meeting I had some years ago with the late Benjamin Graham and to make this information available to this discussion group.
In order to make my discussion of the meeting meaningful, it is necessary to briefly discuss what had led up to my meeting. On September 23, 1974 Barrons had published an interview with Mr. Graham under the title, Renaissance of Value. In that discussion Mr. Graham described how he and others had made money in the stock market for many years.
He had formed a small hedge fund (assets $5 million) to invest in undervalued stocks. They mostly bought shares in companies which were selling below net net working capital. To determine net net working capital, current liabilities, long term debt (if any) and any preferred stock are subtracted from current assets. The remainder is net net working capital. Let's say that net net working capital per share is $20. If you can buy the stock at, say, $15 you almost certainly have a bargain. If you bought an entire company at that price you would get the
fixed assets free, the fact that it was going business free and the use of the company name (if it is valuable) free. That is what his fund, the Graham-Newman fund did. They also were involved in arbitrage. Remember that this was before many people had access to computers. Let's say the
same company shares trade in London and New York. If there was a price difference they would lock that difference in hoping to perhaps earn 15% on their money with no risk. For example, if Imperial Chemical sold at $21.50 in London and for $20 in New York you could short the London stock and go long the U.S. stock and make the spread.
I understood instantly how they had made a lot of money and began investing in net net working capital stocks myself. The difference was immediately apparent. I had winners and some which didn't do much but I didn't have any serious losses in the companies which did poorly after
purchase. For the first time, I began to make quite a lot of money in the stock market. We had just come through a two year drop which did not hurt either. I contacted Mr. Graham through Forbes and flew out to meet with him in La Jolla in the spring of 1976 (he died later that year).
I was a stock broker at the time and was full of the usual questions.
When do you sell? Can you predict the stock market? How many stocks should you own etc.? In each case he would cite their experience. He thought it a waste of time to try to predict the stock market and found such questions foolish (his pupil, Warren Buffet and Peter Lynch would agree). He advised selling if a stock went up 50% or at the end of two years. His reasoning was that a depressed stock ought to rise in a couple of years or perhaps the company problems were insoluable. If is important to note that net net working capital purchases tended to be in companies with lots of problems that were not suitable to long term holding. When Warren Buffet bought Berkshire Hathaway he was following in Mr. Graham's footsteps but later, apparently under the influence of Charles Munger, he began buying better companies and holding. Mr. Munger and Mr. Buffet had the better idea. Finally, he thought ought to buy
shares in at least 15 companies. Some of his followers bought shares in dozens of companies and still earned great returns. Charley Munger, on the other hand, when he ran his partnership owned shares in very few companies.
All of his ideas were mechanistic by which I mean he had mechanical rules for buying and selling, etc. The reason was that he feared emotion overruling an investor's judgement. The rules forced the investor to act rationally. Warren Buffet's method of investing is much more flexible. You may know that Warren Buffet studied under Mr. Graham at Columbia University and worked for him at Graham-Newman for three years.
For a great picture of Benjamin Graham (and Warren Buffet), you may want to read, Supermoney by Adam Smith and the chapter, Lessons of the Master (the Master being Ben Graham). Sorry this response is so long but even this discussion is cursory. Hope this is what you had in mind.
Marshall Delano
You asked me to elaborate on a meeting I had some years ago with the late Benjamin Graham and to make this information available to this discussion group.
In order to make my discussion of the meeting meaningful, it is necessary to briefly discuss what had led up to my meeting. On September 23, 1974 Barrons had published an interview with Mr. Graham under the title, Renaissance of Value. In that discussion Mr. Graham described how he and others had made money in the stock market for many years.
He had formed a small hedge fund (assets $5 million) to invest in undervalued stocks. They mostly bought shares in companies which were selling below net net working capital. To determine net net working capital, current liabilities, long term debt (if any) and any preferred stock are subtracted from current assets. The remainder is net net working capital. Let's say that net net working capital per share is $20. If you can buy the stock at, say, $15 you almost certainly have a bargain. If you bought an entire company at that price you would get the
fixed assets free, the fact that it was going business free and the use of the company name (if it is valuable) free. That is what his fund, the Graham-Newman fund did. They also were involved in arbitrage. Remember that this was before many people had access to computers. Let's say the
same company shares trade in London and New York. If there was a price difference they would lock that difference in hoping to perhaps earn 15% on their money with no risk. For example, if Imperial Chemical sold at $21.50 in London and for $20 in New York you could short the London stock and go long the U.S. stock and make the spread.
I understood instantly how they had made a lot of money and began investing in net net working capital stocks myself. The difference was immediately apparent. I had winners and some which didn't do much but I didn't have any serious losses in the companies which did poorly after
purchase. For the first time, I began to make quite a lot of money in the stock market. We had just come through a two year drop which did not hurt either. I contacted Mr. Graham through Forbes and flew out to meet with him in La Jolla in the spring of 1976 (he died later that year).
I was a stock broker at the time and was full of the usual questions.
When do you sell? Can you predict the stock market? How many stocks should you own etc.? In each case he would cite their experience. He thought it a waste of time to try to predict the stock market and found such questions foolish (his pupil, Warren Buffet and Peter Lynch would agree). He advised selling if a stock went up 50% or at the end of two years. His reasoning was that a depressed stock ought to rise in a couple of years or perhaps the company problems were insoluable. If is important to note that net net working capital purchases tended to be in companies with lots of problems that were not suitable to long term holding. When Warren Buffet bought Berkshire Hathaway he was following in Mr. Graham's footsteps but later, apparently under the influence of Charles Munger, he began buying better companies and holding. Mr. Munger and Mr. Buffet had the better idea. Finally, he thought ought to buy
shares in at least 15 companies. Some of his followers bought shares in dozens of companies and still earned great returns. Charley Munger, on the other hand, when he ran his partnership owned shares in very few companies.
All of his ideas were mechanistic by which I mean he had mechanical rules for buying and selling, etc. The reason was that he feared emotion overruling an investor's judgement. The rules forced the investor to act rationally. Warren Buffet's method of investing is much more flexible. You may know that Warren Buffet studied under Mr. Graham at Columbia University and worked for him at Graham-Newman for three years.
For a great picture of Benjamin Graham (and Warren Buffet), you may want to read, Supermoney by Adam Smith and the chapter, Lessons of the Master (the Master being Ben Graham). Sorry this response is so long but even this discussion is cursory. Hope this is what you had in mind.
Marshall Delano
Sunday, May 27, 2007
How to become a billionaire investor
Charlie Munger has had a tremendous influence on Buffett's investment decisions.Many credit Munger as helping Buffett move away from the "cigar butt" style of investing to one where there is a constant emphasis on buying quality businesses.Here is a old Munger lecture from Harvard Law Bulletin where he shares his insights into investing.Sometimes the best investment advice comes from value investors such as Charlie Munger rather than overpaid financial planners.
In the Money
Alumni financiers take stock of the market and careers spent trying to beat it
Charlie Munger gave up law to pursue his fortunes as an investor. Jim Cramer never even tried to be a lawyer, and went straight to Wall Street. Jim Donovan and Todd Buchholz saw law school as an imperative step on the road to a successful business career. Sean Healey, who once dreamed of teaching law, discovered his place was in the investment world instead.
But these five HLS alumni would never say they abandoned their legal training. They just redirected it toward the place they each found more alluring: the world of high finance.
Today, they have nearly 100 years of combined experience in investing and business, and have been responsible for billions of dollars in assets. Each is wealthy in his own right and has, directly or indirectly, helped others to become quite comfortable too. And while each is at a different place in his career--one is more than half a century out of HLS, another not even ten years--all share an appetite for taking big risks for big gains. Yet, they also possess the coolheaded confidence that is essential when millions are at stake on a regular basis and market fluctuations send shivers down Wall Street.
Investment Values
The cultish devotion of Berkshire Hathaway shareholders is legendary in the financial world. After all, more than a few people have become independently wealthy as a result of the investing genius of CEO Warren Buffett.
But while Buffett's name alone has long been synonymous with Berkshire Hathaway, there is one person in the company even he looks up to: his partner and old friend from Omaha, Charlie Munger '48.
"I call myself the assistant cult leader," joked Munger.
The pair has had a prosperous partnership--spanning four decades--and they've done more together than just build a holding company worth billions. They have been stalwarts of ethical business practices, have rooted out fraud, and have even championed abortion rights and the establishment of Planned Parenthood.
Primarily involved in property and casualty insurance, Berkshire Hathaway has smaller holdings in publishing, candy, footwear, and furniture. By the end of 2000, its revenues had ncreased to $34 billion, its profits to almost $3 billion. Shares in Berkshire, just $12 each in 1965, hit $71,000 by year's end.
Munger, who is Berkshire's vice chairman, now finds himself a very wealthy man. A voracious reader and devotee of great thinkers like Ben Franklin and Samuel Johnson, he credits their wisdom for his success. "They were both utterly brilliant men. And powerful communicators. Both have helped me all the way through life. Their lessons are easy to assimilate."
Berkshire has its own interesting lessons for the world, he says, and they come from the company's high standard of ethics and its bottom-line achievements.
"I'm proud to be associated with the value system at Berkshire Hathaway," Munger said. "I think you'll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich--who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich--in money--not just in reputation."
Even so, Munger does not pretend that what he and Buffett have accomplished is just a matter of being good guys. It also takes sharp wits, strategy, and a lot of discipline. Still, Munger contends that more people could do well in investing than actually do, if they'd employ some of the basic "mental methods" he and Buffett have used.
"The number one idea," he said, "is to view a stock as an ownership of the business [and] to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you're paying for. Move only when you have an advantage. It's very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor."
And Berkshire, he says, is not in the business of making money by calling macroeconomic swings. "We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years."
At 77, Munger is busier than ever. Aside from his work with Buffett, he is chairman of the L.A.-based legal publisher the Daily Journal Corporation and CEO of Wesco Financial Co., a subsidiary of Berkshire Hathaway. He has a large family and spends a great deal of time with his wife, children, and grandchildren. He's also a long-standing philanthropist who has bolstered education and health care causes in Los Angeles, where he has lived for five decades.
Munger quit practicing law in 1965 after 17 years, because "sometimes you're on the wrong side. Often you're dealing with unreasonable people where you can't fix things fast. It's inefficient. I like the discipline of backing my own judgments with my own money. It suits my temperament better. Of course, I also realized that the upper potentialities were better outside of law."
Now a billionaire, Munger seems somewhat surprised by just how successful he has been in his life. When he graduated from HLS, Munger said, "Practically nobody expected to be rich, or had any examples that would lead him to expect to be rich. That has totally changed. We've had the most massive creation of wealth for people a lot younger than those who formerly got wealth in the history of the world. The world is full of young people who really want to get rich, and in those days nobody thought it was a reasonable possibility."
Wednesday, May 23, 2007
Fisher's criteria for selecting potential 100 baggers
Fisher advocated a scuttlebutt approach to investigating companies.That meant speaking to suppliers, competitors, and consumers while filtering out the good companies from the poor ones through a 15 point checklist.One of Fisher's best stock picks was Motorola which later became a 100 bagger.The key is to use this checklist every time you look at a company.
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
- How effective are the company's research and development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting controls?
- Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder's benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
Philip Fisher's speech to Stanford Business School
One of the greatest investing minds shared insights with students of Stanford Business School in one of his last public speeches.Buffett credited Philip Fisher with inspiring him to look at good businesses and consider intangibles such as branding,competitive position and etc.The speech is a rough summary taken from an old Motley fool discussion board post(2001).
The setting is a lecture at Stanford Business School. Phil Fisher lectured the class of his former (1961) student, Prof. Jack McDonald.
Prof. McDonald: (introduction)
- Mentions in passing to that Warren Buffett had some very nice things to say about Philip Fisher at Berkshire's last annual meeting.
- McDonald: Phil Fisher said that we ought to analyze the suppliers and competitors and customers. Modern business strategy owes a debt to Phil Fisher and we ought to acknowledge our intellectual heritage.
- Phil Fisher was a pioneer in high-tech growth investing. In 1961 McDonald's class studied Texas Instruments because Mr. Fisher was interested in semiconductors ... and Phil Fisher was one of those people who said, "Why don't we look and see if the semiconductor can be embodied in a great company like TI?"
- Thanks to Phil Fisher, Prof. McDonald enjoyed a 100-bagger. (Motorola)
- Briefly mentions Dell Computer and a member of the class who six years ago invested $10,000 -- now worth over $1 million.
- Once you get diversified with 7 to 10 stocks in a portfolio, most of the benefits of risk reduction have taken place.
- McDonald wants his students to understand that the standard in Mr. Fisher's mind of understanding a company has always been so high compared to what most of us think about ...
Phil Fisher:
- Advice: (1) Buy a house, (2) save and (3) invest for the long term.
- P/E's don't tell you what's good, just what's cheap.
- What's good? Most important is outstanding management.
- If you can recognize what to look for, you're on your way.
- A typical company gets comfortable, doesn't like change, but has competitors down the street who are thinking of something new that's going to obsolete the status quo. Your company has got to be the one running ahead of that change.
- One way to recognize proper management is to look for their response to that change. The importance of that difference may be translatable into huge market share or even survival.
- Job #1: Identify the key problem today.
- Fisher identified one major problem facing companies today: Young couples with young children. Often both parents work. Companies that successfully address this issue have an enormous competitive edge over companies that haven't.
- "It amazes me that so little attention is paid to something that produces big results. Almost nobody gets to the heart of where the problem lies. Anybody can win the loyalty of their employees by giving away the store. But that company isn't going to prosper."
- Response to attendee: "In my own management, having even as many as eight stocks is the beginning of a real danger signal."
- Fisher: "I believe strongly in diversification. But I do not believe in over-diversifying."
- Fisher: "I'm very nervous about this market ... there are too many damn fools and complete ignoramuses who have never had any finanacial experience before that own too big a portion of stocks today ..."
- When to sell? If the company deteriorates. "However, my record of holding stocks a very long time is well known. But I've still made more mistakes by selling some of these good stocks too soon than I have in any other factor of handling my investments."
- International investing? Don't think so.
- Must build up personal contacts before investing in a business, therefore traveling is a necessary evil. Neglect it at your own risk.
- If you haven't met management, you haven't done your job.
- Fisher always wants every source of contact he can get.
- Quantitative factors are overrated. Quality's what counts.
- We have a huge volume of financial data, but the quality hasn't improved much.
- Two things to look for: candor and personal commitment.
The setting is a lecture at Stanford Business School. Phil Fisher lectured the class of his former (1961) student, Prof. Jack McDonald.
Prof. McDonald: (introduction)
- Mentions in passing to that Warren Buffett had some very nice things to say about Philip Fisher at Berkshire's last annual meeting.
- McDonald: Phil Fisher said that we ought to analyze the suppliers and competitors and customers. Modern business strategy owes a debt to Phil Fisher and we ought to acknowledge our intellectual heritage.
- Phil Fisher was a pioneer in high-tech growth investing. In 1961 McDonald's class studied Texas Instruments because Mr. Fisher was interested in semiconductors ... and Phil Fisher was one of those people who said, "Why don't we look and see if the semiconductor can be embodied in a great company like TI?"
- Thanks to Phil Fisher, Prof. McDonald enjoyed a 100-bagger. (Motorola)
- Briefly mentions Dell Computer and a member of the class who six years ago invested $10,000 -- now worth over $1 million.
- Once you get diversified with 7 to 10 stocks in a portfolio, most of the benefits of risk reduction have taken place.
- McDonald wants his students to understand that the standard in Mr. Fisher's mind of understanding a company has always been so high compared to what most of us think about ...
Phil Fisher:
- Advice: (1) Buy a house, (2) save and (3) invest for the long term.
- P/E's don't tell you what's good, just what's cheap.
- What's good? Most important is outstanding management.
- If you can recognize what to look for, you're on your way.
- A typical company gets comfortable, doesn't like change, but has competitors down the street who are thinking of something new that's going to obsolete the status quo. Your company has got to be the one running ahead of that change.
- One way to recognize proper management is to look for their response to that change. The importance of that difference may be translatable into huge market share or even survival.
- Job #1: Identify the key problem today.
- Fisher identified one major problem facing companies today: Young couples with young children. Often both parents work. Companies that successfully address this issue have an enormous competitive edge over companies that haven't.
- "It amazes me that so little attention is paid to something that produces big results. Almost nobody gets to the heart of where the problem lies. Anybody can win the loyalty of their employees by giving away the store. But that company isn't going to prosper."
- Response to attendee: "In my own management, having even as many as eight stocks is the beginning of a real danger signal."
- Fisher: "I believe strongly in diversification. But I do not believe in over-diversifying."
- Fisher: "I'm very nervous about this market ... there are too many damn fools and complete ignoramuses who have never had any finanacial experience before that own too big a portion of stocks today ..."
- When to sell? If the company deteriorates. "However, my record of holding stocks a very long time is well known. But I've still made more mistakes by selling some of these good stocks too soon than I have in any other factor of handling my investments."
- International investing? Don't think so.
- Must build up personal contacts before investing in a business, therefore traveling is a necessary evil. Neglect it at your own risk.
- If you haven't met management, you haven't done your job.
- Fisher always wants every source of contact he can get.
- Quantitative factors are overrated. Quality's what counts.
- We have a huge volume of financial data, but the quality hasn't improved much.
- Two things to look for: candor and personal commitment.
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