GrahamAndDoddsville.net wants to wish all of our American readers (and everyone else) a happy, healthy, and safe Thanksgiving!
Enjoy the videos below to help kick-off a relaxing vacation. They are 4 of my favorites. I’m not sure whether they should make you laugh or cry. In any case, they make me thankful for being a value investor!
“I Want To Buy Salesforce.com”
“What do you think the stock is worth?”
“More.”
“More than what?”
“More than it is trading for.”
Marks’ memos are a must read. If you have what Seth Klarman believes to be the ‘value investing gene’ – you are likely to find yourself nodding yes as you read along.
A compilation of Marks’ memos were recently published in a book called The Most Important Thing. You can also read the originals, which can be found here.
Over the coming days, I will post some older articles by Howard Marks to the SuperInvestor Resources page. In general, Marks’ clarity makes him a very ‘quotable’ investor. One of my all-time favorite quotes is:
Certain common threads run through the best investments I’ve witnessed. They’re usually contrarian, challenging and uncomfortable— although the experienced contrarian takes comfort from his or her position outside the herd. Whenever the debt market collapses, for example, most people say, “We’re not going to try to catch a falling knife; it’s too dangerous.” They usually add, “We’re going to wait until the dust settles and the uncertainty is resolved.” What they mean, of course, is that they’re frightened and unsure of what to do.
The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left . When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain. Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.
It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling—and if our view turns out to be right— that’s the route to the greatest rewards earned with the least risk.”
In this clip from the 1991 comedy, Other People’s Money, Danny DeVito gives a 3 minute explanation of value investing – Benjamin Graham Style – with the clarity of a Warren Buffett.
Amid the many uncertainties of next Tuesday’s presidential election lies one sure thing: Many people will feel in their gut that they knew the result all along. Not only felt it coming, but swear they predicted it beforehand — remember? — and probably more than once…
Most will also have a ready-made argument for why it was inevitable that Mitt Romney, or Barack Obama, won — displaying the sort of false, after-the-fact “foresight” that psychologists call hindsight bias.
Political pundits aren’t the only ones to suffer from hindsight bias.
“The important thing to know about hindsight bias is that it not only changes how you see the world, but also how you see yourself in it,” said Neal Roese, a professor of marketing at the Kellogg School of Management at Northwestern University, who just published a review paper on the bias with Kathleen D. Vohs of the University of Minnesota. “You begin to think: ‘Hey, I’m good. I’m really good at figuring out what’s going to happen.’ You begin to see outcomes as inevitable that were not.”
Investors must be extra careful to remain aware of how hindsight bias might affect their decisions.
Once they know an outcome, people tend to inflate their initial predictions by an average of 15 to 20 percent, Dr. Roese said — ample wiggle room to retrospectively alter almost any prediction from “it’s going to happen” to “it probably won’t,” be it a tennis match, a legal decision or a presidential race.
It’s only natural.
One reason it’s hard to avoid this bias is that it mirrors how the brain operates biologically. The brain cannot possibly make sense of incoming sensory information instantaneously; it continually reconstructs, inserting meaning and making judgments very quickly, but post hoc.
Can we change human behavior?
The solution is contained in the psychological processes that underlie the bias itself, studies suggest. Take the presidential race. It’s a dead heat in the polls, and the fact that so many will argue after the vote that the winner was inevitable implies that they have front-loaded arguments to support both outcomes. One way to counteract the bias is to play out those possibilities before the final outcome.
As a child Arnold Van Den Berg was smuggled into an orphanage to flee the Nazis After the war, Van Den Berg moved to the United States. His first job out of school was as a salesman for Capital Research, a mutual fund company. In 1974, Van Den Berg founded Century Management, based in Austin, Texas.
For the past 38 years, Van Den Berg’s firm has adhered to the classic tenets of value investing as pioneered by Benjamin Graham. By focusing on the private market value of a business to determine intrinsic value, Van Den Berg and his team set out to uncover securities selling in the open market at a large enough discount from intrinsic value to provide for a sufficient margin of safety.
(That sure sounds easy on paper… But if it is so easy, why do the majority of professional money managers underperform the benchmarks year after year?)
This video of Century Management’s Annual Client Review, which was held on September 15, 2012, provides a unique and valuable insight into the mind of a true Supeinvestor.
UPDATE 11/07/2012: I just found this video of a lecture Arnold Van Den Berg recently gave to students at Texas Lutheran University. In this lecture, Mr. Van Den Berg tells his amazing story of how a child who survived the Holocaust grew up to become an American success story and Superinvestor. If this story doesn’t inspire you, then there may not be any hope!
The October issue of Harvard Business review included an article by Legg Mason Strategist and Columbia Business School Professor Michael Mauboussin titled “The True Measures of Success”.
About a dozen years ago, when I was working for a large financial services firm, one of the senior executives asked me to take on a project to better understand the company’s profitability. I was in the equity division, which generated fees and commissions by catering to investment managers and sought to maximize revenues by providing high-quality research, responsive trading, and coveted initial public offerings. While we had hundreds of clients, one mutual fund company was our largest. We shuttled our researchers to visit with its analysts and portfolio managers, dedicated capital to ensure that its trades were executed smoothly, and recognized its importance in the allocation of IPOs. We were committed to keeping the 800-pound gorilla happy.
Part of my charge was to understand the division’s profitability by customer. So we estimated the cost we incurred servicing each major client. The results were striking and counterintuitive: Our largest customer was among our least profitable. Indeed, customers in the middle of the pack, which didn’t demand substantial resources, were more profitable than the giant we fawned over.
What happened? We made a mistake that’s exceedingly common in business: We measured the wrong thing. The statistic we relied on to assess our performance—revenues—was disconnected from our overall objective of profitability. As a result, our strategic and resource allocation decisions didn’t support that goal. This article will reveal how this mistake permeates businesses—probably even yours—driving poor decisions and undermining performance. And it will show you how to choose the best statistics for your business goals.
Both the article and book mention Michael Lewis’ Moneyball. I think this clip from Moneyball provides a perfect analogy for Professor Mauboussin’s premise.
Meanwhile, in concert with my last post, I will begin adding material to the VI Resources, SI Resources, and Security Analysis pages. Not all additions will make it to the front page of the blog, so check back to see what is new.
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