Sunday, October 11, 2015

Investing is a Personal Journey

What do you want to do? What do you want to own? What is your approach? These seem like simple but are actually complicated questions. Although you and I can study the processes of great investors like Warren Buffett for example and even own some of the same securities, we cannot be Warren Buffett as we have to follow our own journey and live with the results. The investing world is outcome oriented, but to be successful over time an investor's decision making process must be personal, disciplined, adaptable and process oriented.

Michael Mauboussin illustrated this concept in a 2004 research paper where he categorized the process used to make decisions (in the probabilistic field of investing) and outcomes as; (a) good decision making process = deserved success or bad break; or (b) bad decision making process = dumb luck or poetic justice.(1)

To survive over the long-term, a successful investor's decision making process and overall approach must fall into category (a) which says bad breaks will come and go but deserved luck will eventually emerge over time. So if you have not done so already, you will need to develop a sound process, knowing that your short-term results will not be indicative of long-term results. Since you are completely responsible for your results over time you must take this to heart in your decision making process.

In an age of information overload, you must learn to source and process information effectively as well as focus only on what is truly meaningful. This is an acquired skill that is influenced by your investment process, background and personal circumstances.

Through experience as an individual investor that will include losses and setbacks you will have the  opportunity to figure out what advantages and disadvantages you have compared to professional investors on Wall Street. It is important to have this awareness or to develop this understanding. While individual circumstances vary, there are some advantages and disadvantages generally common to all individual investors which include but are not limited to:


1) Ability to enter or exit a position or market at your will assuming you have staying power with your capital. Professionals do not have this level of flexibility;
2) option to hold onto investments for the period of time you choose (minutes, hours, days, weeks, months, years and decades, etc.). Professionals do not have this flexibility due to the fund flows of their investors which they do not control, among other factors;
3) ability to not be focused on meeting or beating performance benchmarks in the near term or over time; 
4) flexibility to pursue a strategy that matches up with your strengths, weaknesses and circumstances. Professionals cannot do this as they must live within the constraints of their asset class and investment mandate; and
5) ability to self critique your process and performance in private along with the ability to avoid chasing performance.


1) In general, less skill and training;
2) less access to timely and quality information along with less knowledge about how to use it;
3) potentially higher information and transaction costs;
4) typically less access to company management teams, experts and centers of influence, among other factors; and
5) performance risk that exists due to lack of sound approach and quality decision making.

My recommendation is that as you develop, alter or refine your process-approach you take the above and other personal circumstantial issues into consideration. Doing so will increase the odds of  achieving better long term results. There is also a massive amount of information available on investment approach and process that I will highlight over time. Savvy consumption and application of this information is critical to long term success as investor. The journey is yours.

(1) Michael J. Mauboussin, "Decision-Making for Investors, Theory, Practice and Pitfalls," Legg Mason, Mauboussin on Strategy, May 24, 2004.

Saturday, October 3, 2015

Not Quite Peter Lynch and Neither is Your Expert

Earlier this week I had a chance to spend some time with an estimated 200 professional investors (pros) at an institutional investment conference.(1) The pros were there to listen to and engage in Q&A with the senior management from well known and widely followed companies in the gaming industry that included MGM, BYD and WYNN, among others. The pros represent the largest and most sophisticated institutions in the markets. The pros were mostly men without ties who updated company models-notes on their laptops while listening to the company executives speak about issues of the day within their companies and industry. This gathering was closed to the public and had the typical look and feel of similar events with the companies selling their scripted stories designed to put forth the message they want to tell the pros (i.e. the market). The pros in turn, listened for any hint of new information that might impact their company models and forward looking assumptions.

Company executives know the drill here as conferences like this occur year round with the pros. The pros (who know the drill as well) are a highly educated, talented and hardworking group of individuals who possess high level analytical skills were there as part of their ongoing effort to figure out the potential future value of these companies by focusing on any new information that might impact the value of company debt and equity. The pros know the detailed company stories, numbers and models far better than individual investors can imagine. Their collective model assumptions and opinions represent what is known as the "consensus" which drives stock and bond prices of these companies. In other words. the decisions and actions of this group act as a key price setting mechanism for debt and equity issued by the companies who presented this day.

If you do not understand this already, you need to understand the pros set the market price as you and I, as individual investors do not. The other thing you must understand is that this crowd is smarter than you and I. In other words "fuggedaboutit" if you think you can beat the pros (i.e. market) over time using less sophisticated thought processes, strategies and analytical techniques.

The relevant point here is that the majority of this talented group cannot beat the market despite industry expertise, access to the companies and the skill they possess. In August 1975 Charles Ellis wrote a now famous article for the "Financial Analysts Journal" titled "The Loser's Game."(2) In the introduction the article Ellis wrote the following:

"Gifted, determined, ambitious professionals have come into investment management in such large numbers during the past 30 years that it may no longer be feasible for any of them to profit from the errors of all the others sufficiently often and by sufficient magnitude to beat the market averages."

His point was that the professionals were not beating the market as the market was beating them. This remains true today as the overwhelming majority of active fund managers (i.e. the experts) do not beat the market despite their superb skill level. The question here today is that if the probability of the pros beating the market in any given year today is 10% or less and lower for consecutive years, what is the probability you can beat the market over time based on your skill level? The answer is near zero to zero. On this point Ellis argues that the premise professional money managers can beat the market is false. Ditto for the overwhelming majority of individual investors in spite of psychological resistance to this reality by some.

So one of the basic questions you the investor must answer is do you want your money to be actively or passively managed? In other words, if you and your professional guru(s) cannot beat the market, join it. If you do, the odds are that you will beat 90% or more of professional money managers as well as your own performance as an active investor.

The advantage of passive investing is low cost diversification compared to active management, among other factors. Passive investing has been around for a while and has taken off since the 2008 financial crises as most managers (i.e. experts) have not kept up with the market. Warren Buffett also recommends this approach. It is also worth noting that in this day and age, the related strategy of smart beta funds have emerged that have some combined characteristics of both passive and active investing but may impose higher fess than purely passive investment options. There are a number of sponsors that offer passive and smart beta instruments and lot's of information available today on these important topics. I include some sources below related to passive investing as a starting point.

Passive investing is an important strategy and one that deserves serious consideration. If this concept is new to you, I would start with Charles Ellis's book, "Winning The Loser's Game."(3) Even if it is not, I strongly recommend the book. I would also spend time on the Vanguard website and in John Bogle's writings on this subject as well as the "Wealthfront"(4) website.

I have been and remain both an active and passive investor. Peter Lynch of Fidelity beat the market for 11 out of his 13 years as an active professional investor and made Magellan one of the most successful funds in history. His record is near impossible to beat by most professional or individual investors.

(1) Deutsche Bank and UBS Gaming Investment Forum, September 28, 2015.
(2) Charles D. Ellis, "The Loser's Game," The Financial Analysts Journal, July/August 1975.
(3) Charles D. Ellis, "Winning the Loser's Game, Timeless Strategies for Successful Investing," Sixth Edition, July 9, 2013.

Saturday, September 26, 2015

Are You a Market Forecaster and/or Market Timer?

This is what I often hear on Main Street and by so called experts about the economy, market, stocks and bonds, etc.

1) The market has gone up, so I like stocks;
2) the market is going down/up based on my opinion which is based on my favorite expert's opinion. He hates/loves stocks, so I hate/love stocks;
3) I can't admit that I don't understand stocks so I avoid stocks. To feel comfortable with myself, I look for forecasters and experts who support this view and advocate avoiding the stock market;
3) the Fed has manipulated the stock market and stocks will eventually crash, so I continue to avoid stocks;
4) the economy is bad, sluggish and risky so I will wait for things to get better and then buy stocks;
5)  the economy is bad and will stay bad forever so I only own treasuries at 2% yields. This is what my bond guru and/or favorite economist is saying, so I believe it. I have been in bonds and out of stocks since 2008;
6) because of Central Bank actions in recent years, I strongly believe inflation is going to take off so I am betting on this in the bond market by buying TIPS and avoiding stocks.
7) I only buy stocks when the side I am on wins the White House after the country has gotten back on track and regained its sanity after opposition is run out of office;
8) the U.S. is in a state of decline as it is not what it used to be in general, so I am avoiding stocks;
9) I am forecasting that the economy is going into decline so I continue to avoid stocks;
10) I believe the economy in the U.S, is going to significantly expand so I am going to buy stocks now or in the future;
11) China is in decline so I am avoiding stocks and commodities;
12) the economy has been sluggish, risky or in decline for several years so I have avoided stocks for several years;
13) I have missed the stock market move since 2008/2009 but do not want to miss anymore of the gains so I am getting into the market;
14) my favorite market guru has turned bullish so I am now bullish and will jump in the market;
15) I strongly believe the stock market is going up so I want to buy stocks.

Do one or more of these statements sound familiar? If so, then you may very well be a market forecaster and/or timer. The sobering truth is that if your investment decision making is based on forecasting and/or market timing you have no chance of beating the market over time. It is also true that if you consume market and economic forecasts and timing views, follow expert predictions and believe in forecasts you will be flooded with largely useless information that you do not know is useless and waste your time doing so.

In the book "Investment Fables, Exposing the Myths of "Can't Miss" Investment Strategies," 2004,  Aswath Damodaran (the highly regarded professor at NYU's Stern School of Business) said the following about market timing:

"If you can time the markets you can make immense returns, and it is this potential payoff that makes all investors into market timers. Some investors explicitly try to time markets by using technical and fundamental indicators, whereas others integrate their market views into their asset allocation decision, shifting more money into stocks when they are bullish stocks. Looking at the evidence, though, there are no market-timing indicators that deliver consistent and solid returns. In fact, there is little proof that the experts at market timing-market strategists, mutual funds and investment newsletters, for example-succeed at the endeavor.

Notwithstanding this depressing evidence, investors will continue to time the markets. If you choose to do so, you should pick a market-timing strategy that is consistent with your time horizon, evaluate the evidence on its success carefully, and try to combine it with an effective stock-selection strategy."

There has been a large amount of material written about forecasting. For a recent quality read on forecasting and the futility of predicting economies and stock markets see, "The Signal and the Noise: Why Most Predictions Fail - but some don't," 2012 by Nate Silver. I also recommend Philip Tetlock of the University of Pennsylvania who is an expert on the limitations of forecasting. Great investors such as Warren Buffet and Peter Lynch are known for spending little if any time on economic forecasts and market predictions. They are also not known as market timers.

For what it is worth, my real world experience lines up with the view of Damodaran, Silver and Tetlock as well as Buffet and Lynch.

Tuesday, September 22, 2015

How to Start

The best way to start is to put your toes in the water after you have done some reflection and made some basic decisions based on your homework and the knowledge foundation you have built. I started by buying stocks in high school. I lost money. I did not lose money because they were bad stocks or companies. I lost due to inexperience and lack of knowledge. I did not know how big my deficits were at the time as I was ignorant and did not know it. Looking back years later I eventually came to this realization.

Achieving proficiency as an investor takes at least a decade in my opinion and possibly longer. Along the way, many successful investors I know lost money in their first decade as an investor as they lived through the process of figuring out what style and approach worked for them. It is not easy sticking it out this long if you are achieving sub par results. Developing the skills required for eventual long term success takes time and losses. Charlie Munger's quote about investing hits the nail on the head as he says something along the lines of: "investing is not supposed to be easy. Anyone who finds it easy is stupid." Howard Mark's of Oaktree Capital Management recently published a fantastic easy titled "It's Not Easy" that deconstructs Munger's quote and describes why making money by investing is so difficult. I would highly recommend Mark's essay which was published recently and can be found on the Oaktree website.

I know that losing money while you become seasoned is not appealing but a necessary ingredient for future success. In my opinion a necessary part of the learning process. The key is to figure out why you lost (and no it is not the market, economy, the US president or your neighbor's fault, etc.). The responsibility for your losses, decisions and results lie squarely with you. Once you internalize this reality you will have a chance to make progress. Some folks get here faster than others. Some folks never get here.

There are ways to shorten the learning curve to make the process less painful. One of the best methods I know is to stand on the shoulders of giants by studying what they have done and how they did it. Education and open mindedness go a long way here. However, even if you study successful investors you will ultimately be required to find your own way in this journey by making your own decisions and taking responsibility for the results.

Monday, September 21, 2015

Where to Start

The question is where to start down the investment road? The answer is with serious soul searching. This is where you should start. Serious thinking is required here. Some of the questions that should be contemplated are:

1) Why are you investing? What do you want to accomplish?
2) When will you need the money that you are investing?
3) Can you stay committed to investments that you make?
4) How will you react to and deal with volatility?
5) Will you try to beat the markets?
6) How much risk can you take?
7) Who are you? Are you humble? Are you sure of yourself?
8) What type of investments/markets are you interested in?
9) Do you have any past experience? If so, what were your results?
10) How do you deal with mistakes and setbacks?
11) How disciplined are you?
12) How persistent are you? Are you a goal setter?
13) How will you deal with losses and/or gains?
14) Have you developed your approach?
15) How much knowledge do you have?
16) What are you expectations?
17) Are you aware of common investment pitfalls?
18) How do you react to news?
19) How much time and effort will you put into the process?
20) How will you gather information to make decisions?
21) What will you do if the market beats you?
22) What are your financial goals? What do you expect to accomplish financially from investing?
23) Are you comfortable making decisions that are not in sync with the market or other investors?
24) Are you willing to learn or do you know enough already?
25) Do you want to be an active or passive investor?
26) Is there a specific investment strategy that appeals to you?
27) As an investor do you know what your advantages and disadvantages are vs. the markets or other investors?
28) Do you believe in luck, skill, probabilities?
29) How often will you make buy/sell decisions? On what criteria?
30) How much will you rely on forecasts-predictions?
31) Can you make decisions with less that complete information?
32) Will you take responsibility for your results?

The list goes on and on. How can you truly know the answers to some of these questions? The answer is you probably cannot know the answer to all of these questions until you are in the game. If you are in the game and have not been there before my suggestion would be to put less money at risk vs. more money at risk. Losing money is a decent way to focus attention and learn from mistakes. As for mistakes, it is easy to make them. Fortunately you do not have to perfect as you are going to make mistakes. All the investors I know of have made mistakes at one time or another. You should also realize that the answer to some of the questions listed here can/may/will change over time.

There are plenty of books and other material that can help you through this process and influence your thought process. Experts and others may/will influence you as well which may be good or bad. Reading and soul searching are linked here. I have found the study of psychology-behavioral economics to be helpful in learning about myself and my weaknesses. Self awareness is very important as well as the ability to deal with adversity, opposing information, confirmation bias, anchoring and other common pitfalls in the information gathering and decision making process.

In summary, the more work that is done here, the better off you will be. Be mindful of the fact that the work will take time measured in months, years, etc.

Sunday, September 20, 2015

Great Investors are Voracious Readers

I have been studying accounting, business, companies, economics, finance, history, industries, investing, math, philosophy, psychology and science, among other topics in earnest in for several decades. The acquired knowledge is humbling as I have barely scratched the surface of knowledge here. The farther one travels the less one knows.

My humble opinion is that you cannot succeed over time as an investor without reading in these areas and others. You will need to read extensively over the entire course of your investing life. Intellectual independence and curiosity is a common trait of successful investors. Furthermore, you will need to specifically learn how to read as an investor due to the massive amount of information flowing at you on a daily basis. Learning how to process and use information is a critical skill for successful investors. More on this later.

I learned accounting by earning a CPA certificate in national CPA-Consulting firms. I also learned about business as well as a large number of companies and industries. If you have not done this, it is safe to say that you will not need to become a CPA but will need to learn accounting which is the basic language of business and a required skill needed to read company financial reports (a significant activity for advanced investors), among other things. Knowledge of businesses, industry and business models, etc. is important. I also added to my knowledge base by studying the CFA body of knowledge for levels 1 and 2 of the CFA program.

Listed below is part of my historic reading list in select areas of investment and finance relevant to individual investors. I consider this list to be foundational in nature and critical as the starting point for the development of the essential knowledge needed to be a serious investor:

  • All the major books written about Warren Buffett over the past 25 years plus Berkshire's annual reports - letter to shareholders.
  • Most of the major writings written by and about Charlie Munger.
  • All of Peter' Lynch's books. In the case of "One Up On Wall Street" about 10 times.
  • George Soros, "The Alchemy of Finance."
  • David's Swensen's, "Unconventional Success" written for individual investors.
  • Peter Bernstein's book about risk titled "Against the Gods."
  • Marty Whitmans's books on value investing.
  • Jack Schwager's trader interview-investor book "Market Wizards."
  • Charles Ellis, " Winning a Losers Game,"
  • Howard Marks, "The Most Important Thing."
  • Robert Menschell, "Markets Mobs & Mayhem."
  • Aswath Damodaran, "Investment Fables", "Investment Valuation" and others.
  • John Mihaljevic, "The Manual of Ideas."
  • Guy Spier, 'The Education of a Value Investor."
  • McKinsey & Company, "Valuation."
  • The books and writing of John Bogel, founder of  The Vanguard Group.
  • Benjamin Graham, "The Intelligent Investor" plus Graham and Dodd's "Security Analysis."
  • Joel Greenblat, "You Can Be a Stockmarket Genius."
  • John Train, "The Money Masters."
  • Peter Tanous, "Investment Gurus."
  • Dimson, March and Staunton, "Triumph of the Optimists."
  • Michael Mouboussin, various research reports and books ("Expectations Investing" and "More than You Know").

People who are serious about developing basic knowledge and skills needed to become skilled investors should start with this list and find their own path. Please keep in mind that this list is not complete and is viewed as a starting point. My actual list is longer and I have put this together based on my recollection of books that have had the biggest influence on me over several decades. I have reread many of the books listed here. I will add to this list over time. This list is the beginning as there is work to do in other areas to acquire basic and more advanced technical skills essential to the art/craft of investing. Please note that my focus here is on books as I will address other key reading/information sources in future posts.

Saturday, September 19, 2015

Current Holdings

Life has been busy during 2015 outside of my portfolio but relatively quiet in terms of portfolio activity. Current portfolio holdings (in order of position size) include Costco (COST), Berkshire Hathaway (BRK-B), Google (GOOG), the S&P 500 ETF (SPY), IBM (IBM), Microsoft (MSFT), MSCI (MSCI), American Express (AXP), Union Pacific (UNP), Express Scripts (ESRX), Caterpillar (CAT) and Full House Resorts (FLL).

COST was purchased over a decade ago at approximately $30 per share. BRK was acquired in recent years at approximately $65 per share, GOOG was purchased about a year ago, MSFT was purchased around $20 per share and AXP was purchased at around $78 dollar per share after the loss of the Costco card agreement. IBM and ESRX were acquired due low valuation.

CAT and UNP were purchased during 2015 due low valuation/stock price weakness tied to the decline in oil-energy-commodity prices and perceived weakening demand in China. MSFT, MSCI, AXP and FLL were value bets and/or special situation positions with activist investor activity.

Based on topics included in my January 3, 2015 post combined with discussion of past, present and future holdings I will attempt to answer some basic investment "how to" questions for emerging non-professional investors.

Sunday, January 11, 2015

Current Thoughts on Oil Prices - should you bet with the Saudis?

The large sudden decline in the price of oil is significant. In April 2011 I posted my view that I could not reliably predict the price of oil and gas (see "Current Thoughts on Oil Prices," April 2011). My view today remains the same due to the multitude of variables that influence the price of this commodity. In light of the significant downward move in oil prices I have surveyed current news flow and research in an effort to assess the current and future situation. Much  has been written about this subject so I will not replay information that is readily available. Frankly, it may not be worthwhile to spend time reading this particular post due to the volume of information currently being published.

 If you are still with me, my summary view is:

 1) The so called expert forecasters (i.e. the energy industry itself, Wall Street and big time money managers, economists, etc.) completely missed the boat as they did not forecast the current extraordinary move. So why should you rely on their forecasts now as they have been totally wrong based on their pre move $100+ per barrel of oil consensus view? (1)

2) The folks who have jumped in so far looking for a bottom have been wrong. (1)

3) There is not one key factor to focus on in terms of figuring out the future. However, the variable that I will focus on will be Saudi behavior. The Saudi's appear to be sacrificing short term price for long term market share and eventually a higher price as their current price move takes out production capacity (supply) and stimulates longer term demand. They are betting that this in turn, leads to sustained increases in longer term oil prices. In other words a driver buys Hummer today instead of Prius because of current low prices and consumes more fuel over the next 3 years (demand increase), alternative energy - pipeline, etc. projects become less economically viable at lower oil prices (supply decrease) which in turn leads to sustained oil dependence and higher oil prices over time, etc.

4) The Saudi's willingness to invest in price (a short-term investment) for a long term multi-year to decade gain in an effort to produce a high ROI over time (measured in years). Time will tell if their bet pays off. Should you bet with the Saudi's? This is an individual question. My view here is that one needs a horizon and a willingness to gamble on a situation where the payoff probability is very difficult to measure. Please note that I currently do not own any energy stocks but have owned Exxon during the past couple of years.

At the risk of being blinded by confirmation bias (i.e.searching for information that confirms one's own belief or hypothesis on this subject) one of the best current readily available articles I have found was written by Aswath Damodaran from NYU. See his blog titled Musing on the Markets, blog post "The Oil Price Shock: Primary, Secondary and Collateral Effects," December 22, 2014. In this post Damodaran discusses expert forecasting errors and the futility of predicting commodity prices, among other topics. This well written article is a very worthwhile read and is consistent with my view on this subject.

Time for a Sunday drive in my gas guzzling new truck.

(1) For additional information see "The Oil Price Shock: Primary, Secondary and Collateral Effects," Musings on the Markets, Aswath Damodaran, December 22, 2014.

Saturday, January 3, 2015

Brief Investment Thought Process Compilation

Below is a brief "back of napkin" brain dump of personal thoughts on investing written from my vantage point as an individual investor. I will explore the topics written here in more depth over time. Investing should be business like and process driven to some degree. At the same time it is not a completely scientific endeavor as it involves a degree of creativity and artistry. I have presented my handwritten notes as opposed to a flow chart to make the point that the process is not linear-neat-tidy as well as illustrate the interconnectedness of many elements that go into the effort and process. The best investors I know of, run at higher and more elaborate thought processes than others. They typically possess common sense and can quickly boil down complex ideas to salient points. They are also calm but passionate and have typically worked at the craft for years to decades. In short, they can "see around corners." Business-investing knowledge and thought processes are cumulative in nature and are built over long periods of time measured in years to decades. Building involves trial-error and growth-set backs that form the basis for mastery of a craft. The notes below are my own. My actual topic list is much longer. I recently sat down for a few minutes to scratch out what thoughts, processes, beliefs and concepts come to mind. They have evolved over time and will continue to do so.Investing is ultimately an internal journey as the markets typically do not know if you are invested and do not care. Longer term skill development and thought processes are more important than short term outcomes which is often not well understood by investors.