"The Most Important Thing" by Howard Marks is a bit of a misnomer, it should be entitled the "Most Important Things" since he covers an important investing topic in each chapter. Overall this is a great book for any value investor. Marks does a great job of explaining the philosophy of value investing and understanding investment risk.
The following excerpt succinctly describes value investing: "The relationship between price and values holds the ultimate key to investment success. Buying below value is the most dependable route to profit. Paying above value rarely works out as well. What causes an asset to sell below its value? Outstanding buying opportunities exist primarily because perception understates reality. Whereas high quality can be readily apparent, it takes keen insight to detect cheapness. For this reason, investors often mistake objective merit for investment opportunity. The superior investor never forgets that the goal is to find good buys, not good assets."
And in this paragraph Marks describes investing defensively to minimize risk: "Risk control and margin for error (when price is below value) should be present in your portfolio at all times. But you must remember that they're "hidden assets." Most years in the markets are good years, but it's only in the bad years-when the tide goes out-that the value of defense becomes evident. Thus, in the good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place...even though it turned out not to be needed."
Here's a brief clip where Marks describes overconfident investing:
Joel Greenblatt has done it again. Here's written another excellent book that breaks down the complex subject of investing in stocks into a way that anyone could understand. Greenblatt is also the author of "The Big Secret for the Small Investor." I'm a huge fan of the Greenblatt's down to earth investment strategies. He's what the industry would term a "value investor". In "The Big Secret for the Small Investor" Greenblatt recommends investing in value oriented index funds. To understand this concept it's best to read the book itself, but to put it in a nutshell, indexes usually weight the holding of stocks based on market capitalization. The danger lies in being weighted to heavily in stocks that have reached unreasonable highs. Thus, you would not be following the old adage of buy low, sell high if you are investing in a regular index fund. A value index fund differs in that weighting of the holdings. There are several different ways this can be done, but the important thing to understand is that the way your holdings are weighted in an index fund can help you improve your overall investment return.
In "The Little Book that Still Beats the Market", Greenblatt discusses two main metrics that should be looked at when choosing individual stocks in your portfolio. These two important metrics are earnings yield and return on capital. Earnings yield measures the same thing as the price to earnings ratio (PE) and is simply the inverse of the PE.Typically, you look for a low PE (for a value investor) because it means that you are paying less for a dollar of a company's earnings. Earnings yield is the exact opposite, so in this case you're looking for a high earnings yield.
For example, if a company earns two dollars per share a year and the shares are selling for 10 dollars a share the price to earning ratio would be (10 divided by 2) 5 and the earnings yield would be (2 divided by 10) 0.2 or 20%. Both numbers are measuring the same thing, which is the price you are paying for a dollar of a company's earnings. So whether you're looking at a low PE or high earnings yield, you're still trying to look for the best bang for your buck. This metric tells you whether you're getting a company at a bargain price.
The second metric is the company's return on capital. This statistic measures the ability of a company to convert the company's capital to earnings. For example if you invested $10 to start a lemonade stand (i.e. signs, chairs, cups, lemonade, etc...) and made $20, your return on capital would be 2 or 200% (20 divided by 2). The higher the number the better, meaning that the company is efficient at using it's capital to generate earnings.
Putting it altogether, Greenblatt recommends ranking companies by their earnings yield and return on capital choosing company that have both high earnings yield and return on capital. It's important to find both factors in the stock because it means you're buying an excellent company at an excellent price. Knowing this why wouldn't everyone be doing it. Greenblatt explains that this strategy can lead to short term under performance, but over the long term (5+ years) you can expect returns that exceed the market average.
Keep savin' and with your savings be sure to get your money working for you!
Here's Greenblatt discussing the investment strategy in this book:
Warren Buffett is undoubtedly the best investor of all time. When people hear about Warren Buffett they wish to imitate his investment results and because of this countless books have written about his investing philosophy. To get a deeper understanding of how Warren's investment philosophy came to be, it's important to understand what Warren Buffett is like as a person. In Roger Lowenstein's "Buffett: The Making of an American Capitalist" he paints a picture of how Warren grew up, his development as a young adult, and his triumphs and failures managing his holding company Berkshire Hathaway.
Warren Buffett has always been a business person at heart. In his youth he used to buy a 6 pack of Coke from his family's grocery store for 25 cents and sell individual cans to his neighbours for 5 cents each to net a tidy profit of 5 cents. He also ran a paper route as a boy, which taught him the art of sales, how to make deliveries on time, and how to collect payments from customers. As a teenager Warren bought a few used pin ball machines and placed them in local barber shops, Warren eventually sold this business. After which he invested the money in a fixer up Cadillac that he would rented out. Throughout his youth he gained valuable experience running various businesses. One of Warren's most memorable quotes is "being a businessman has made him a better investor and being an investor has made him a businessman."
An important relationship that developed in Warren's investment career was when he went to graduate school at Columbia University, where he was mentored by Benjamin Graham, the author of Security Analysis and The Intelligent Investor. Benjamin Graham's investment philosophy made a lot of sense to Warren. Graham's investment philosophy was to purchase stocks that the market had undervalued. This was the "cigar butt" approach to investing, where you could pick up a cigar butt off the floor virtually for free and get a few puffs out of it. Warren followed this practice until he studied Philip Fisher's investment philosophy which was based more on valuing companies based on their brand value, the quality of management and other less quantitative qualities. Warren started looking for companies that were not only cheap relative to value metrics but also had a long term competitive advantage in its industry. This blend of investment philosophies is the reason for Warren's success.
One of the most incredible investment stories of our time is the story of how Warren turned a dying textiles manufacturing company, Berkshire Hathaway, into the world's most prosperous holding company. When Warren purchased Berkshire Hathaway he was still using the "cigar butt" approach to investing, purchasing the company because it was priced cheaply. The business was cheap because the textiles industry was dying in North America, losing market share to cheaper textiles manufactures operating in developing countries. Warren had tough management decisions to make in order to keep Berkshire Hathaway from becoming a failed investment. He could either keep plunging capital into the textile mills or start diverting precious capital to more lucrative investments. Fortunately, with Warren's incredible vision he chose the latter. Warren diverted Bershire's capital by purchasing insurance companies, which had a much better return on capital. Eventually all of Bershire's mills were closed, however what remained was the most successful holding company of all time.
A final note on Warren is that although he is one of the top ten wealthiest people on earth, he lives a very modest lifestyle. He has lived in the same house that he bought in the 1960's. He doesn't believe in giving his children a huge inheritance, in fact he believes in having high inheretence taxes so that the wealth one accumulates should return to the capilist system that helped create it. He believes in taxing the wealthy at higher rates. Warren himself plans on giving all of his wealth away to charity. He tap dances to work everyday and loves his job. If you're a frugal person than Warren's investment philosophy is for you and learning from him would be beneficial for your investment portfolio. If you study enough about Warren perhaps one day you will create your own Berkshire Hathaway.
The last 6 months of stock market trading on the TSX has been especially troubling. We've watched it drop from it's high of 14, 469 to 11, 670. A decline of nearly 20%. In the last two days it looks like a rebound is taking effect. So are we out of the forest yet?
It's impossible to predict the short term movements of the market and it would be foolish to try. However, with the recent turmoil many bargains may be popping up. For long-term value investors these market corrections can present incredible value opportunities.
To get a better idea of how to spot great deals in the market place read "The Little Book of Value Investing" by Chris Browne. A lot of people panic when they see the value of the portfolio drop precipitously and bale out shortly before the market recovers. Value investors inherently avoid the herd mentality and are constantly on a hunt for bargains while looking more towards long term prosperity.
To quote Warren Buffet druing the bottom of the bear market in October 1974 when Forbes magazine asked him how he felt, Warren responded "Like an oversexed guy in a whorehouse. Now is the time to invest and get rich." Don't forget another great quote from the Oracle of Omaha, “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Don't take my word for it, listen to the man himself:
