Michael Farmer

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       Go where there is little risk, but where there is potential for great reward—Opportunity.

·       Don’t get euphoric!—Wife’s wisdom.

·       Sell what you haven’t got and buy what you don’t want—Contrarian.

·       Fear God, not man—We’re not here forever.

BORN Kent, UK 1944.

EDUCATION Secondary school.

CAREER Farmer left school at 18 and went to work at A. J. Strauss, a metals trading firm in the City. He started as a ‘difference account clerk’. Between 1984 and 1989, he managed the non-ferrous metals positions at Philipp Brothers, the biggest global metal trader of that period. He left in 1989 to form the Metal & Commodity Company, a subsidiary of Metallgesellschaft AG, which became the world’s largest trader in physical copper and nickel and was floated on the London stock market in 1999. One year later it was sold to Enron. After taking two years off to study the Bible he founded RK Capital Management with two partners in 2004.

INVESTMENT PHILOSOPHY Farmer is a commodity investor specializing in copper. His road to success is concentration, experience, and profound knowledge. He and his team try to be more up-to-date about the copper market – both suppliers and customers – than anyone else. Often being contrarian in this highly volatile market also requires a big portion of guts and stamina. In 2006 the fund was up by 188% followed by 50% decline the year after. Farmer probably stands for one of the most volatile investments in this book. This, despite the fact that he does not deal much in options and futures, but instead trades physical base metals between producers and consumers. Farmer says his faith makes him a better money manager by keeping him humble.

OTHER He is nicknamed Mr. Copper and he is regarded as one of the most successful commodity traders in the world. He and his team manage at present £2.3 billion. In 2011 he topped Bloomberg’s league of global mid-cap hedge-fund returns, and was named the most successful small hedge-fund manager in the world. Despite the resent tough and volatile environment in the metal market - when peers has struggle and several closed down the operation – Farmer has the last three years delivered double digits yearly return. Farmer is often responsible for shipping around 15–20% of China’s copper supplies. He has donated £2.3 million to the British Tories and in 2012 was appointed co-treasurer of the Conservative Party. He is an active Christian.

Sources: Michael Farmer; RK Capital Management; Bloomberg; Wikipedia.

Philip Carret

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Philip Carret’s twelve commandments for speculators:

1.      Never hold fewer than ten different securities covering five different fields of business.

2.      At least once every six months reappraise every security held.

3.      Keep at least half the total fund in income-producing securities.

4.      Consider yield the least important factor in analysing any stock.

5.      Be quick to take losses, reluctant to take profits.

6.      Never put more than 25 % of a given fund into securities about which detailed information is not readily and regularly available.

7.      Avoid ‘inside information’ like the plague.

8.      Seek facts diligently; advice never.

9.      Ignore mechanical formulas [such as price–earnings ratios] for valuing securities.

10.   When stocks are high, money rates rising, and business prosperous, at least half a given fund should be placed in short-term bonds.

11.   Borrow money sparingly and only when stocks are low, money rates low or falling, and business depressed.

12.   Set aside a moderate proportion of available funds for the purchase of long-term options on stocks of promising companies whenever available.

BORN Lynn, Massachusetts, USA 1896. Died 1998.

EDUCATION He graduated from Harvard College and spent one year at business school.

CAREER Carret first spent a couple of years working in the financial industry. Then, while a reporter and feature writer for the financial magazine Barron’s he began managing money for family and friends in 1924. He went on to establish what evolved into the Pioneer Fund in 1928. Later he founded Carret Zane Capital in 1962. He kept managing the fund until 1983, aged 87.

INVESTMENT PHILOSOPHY The title of one of his books, The Art of Speculation, gives the false image of a short-term trader. Carret was the opposite, being the first famous value investor. He did his own research, analysed data, and only invested in a company if its stock price did not reflect the company’s real value, and if he saw potential for growth. His remark ‘There is no substitute for buying quality assets and allowing them to compound over the long term. Patience can produce uncommon profits’ described his main objective. Small over-the-counter stocks represented a substantial part of his portfolio and he preferred to buy semi-listed stocks, which were not so often subject to course manipulation. A strong balance sheet was a crucial prerequisite for investment. He believed that options were useful when the market was bad, and as a rule he even kept cash available just for that. Leverage was used only when the market was low and there was extreme fear. He was mainly a stock market investor, but also used the bond market from time to time. He regarded the footnotes appended to annual reports as the most useful source of information.

OTHER Carret is famous for having the longest history of investing. His had 55 excellent compounded gain years as a fund manager despite major depressions, recessions, and world war. He founded the Pioneer Fund six years before Benjamin Graham first published Security Analysis. He was said to be a voracious reader. Warren Buffett and Carret exchanged ideas on a regular base for several years. At the 1996 Berkshire Hathaway Annual Meeting, Warren Buffett said: ‘The main thing is to find wonderful businesses, like Phil Carret, who’s here today, always did. He’s one of my heroes, and that’s an approach he’s used. If you’ve never met Phil, don’t miss the opportunity. You’ll learn more talking with him for fifteen minutes than by listening to me here all day.’ Carret wrote two books and continued to work on Wall Street even after he had turned a hundred. He was an avid chaser of eclipses and travelled the world to view them. His grandfather had been Napoleon’s paymaster general.

Sources: Philip Carret’s twelve commandments for speculators; Pioneer Fund; Pioneer Investment; Wikipedia.

Author Interview: Sean Iddings and Ian Cassel; Intelligent Fanatics

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Sean Iddings and Ian Cassel are…

Sean is the founder of Unconventional Capital Wisdom, a registered investment advisor in New York State seeking to invest in high quality microcap companies led by intelligent fanatics. He is a member of MicroCapClub and writes about investments, entrepreneurship and leadership on a number of blogs and publications.

Ian is a full-time microcap investor and founder of MicroCapClub. Ian started investing as a teenager and learned from losing his money over and over again. Today he is a full-time private investor that supports himself and his family by investing in microcaps. Microcap companies are the smallest listed companies, representing 48% of all public companies in North America. Berkshire Hathaway, Wal-Mart, Amgen, Netflix and many others started as small microcap companies. Ian’s belief is that the key to outsized returns is finding great companies early because all great companies started as small companies.

MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap) trading on United States, Canadian, and UK markets. MicroCapClub was created to be a platform for microcap investors to share and discuss stock ideas. MicroCapClub’s mission is to foster the highest quality microcap investor community, produce educational content for investors, and promote better leadership in the microcap arena.

Both Sean and Ian co-created the book “Intelligent Fanatics Project: How Great Business Leaders Build Sustainable Businesses” (2016). The book is a culmination of years of experience, intense study and collaboration on the common patterns between some of the most successful companies and leaders of the 19th and 20th century. Their goal is to help both investors and entrepreneurs generate extraordinary long-term returns and positively impact the world. Now they are releasing their next book “Intelligent Fanatics – Standing on the shoulder of Giants” – with deep dives into nine new fanatics and their business stories.

www.intelligentfanatics.com; www.microcapclub.com; @iancassel; @iddings_sean

InvestingByTheBooks: Sean – it has barely been one year since we spoke about your first book, but it feels much longer. So much has happened in that time-span. How has the year been for you, both releasing the first Intelligent Fanatic-book but also working on this new one?

Sean Iddings: It has been a wonderful year. We released the first book a week before my daughter was born. So it’s been a fun trip balancing my new role as a father, co-writing another book and launching our new website along with everything else.

Let me say that I’m very thankful for the wonderful “partnerships” in my life, most notably my wife Samantha and in business with Ian. Life is so much more enjoyable when you get the right partners.

InvestingByTheBooks: Our exact feeling as well, working with Investingbythebooks.com! You decided to “eat your own cooking” in a way with your first book (“Intelligent Fanatics – How Great Leaders Build Sustainable Businesses”), which you unconventionally in true intelligent fanatic-style self-published (thanks Amazon!), instead of walking the beaten-down path of using a big publisher. How was that experience?

Sean Iddings: We’ve enjoyed the experience. Ian and I have been free to build the Intelligent Fanatic brand as we see fit. We continue to evolve and iterate it as we learn. I can imagine that traditional publishing would have been more restrictive. Our vision has always been much more than writing books. You can start to see that with our new website and research community.

InvestingByTheBooks: How much is this new book a “sequel” (in the sense of incorporating feedback and lessons learned from the first book), and how much is it meant to be a stand-alone product?

Sean Iddings: I’d say “Standing on the Shoulders of Giants” is the natural progression. It’s an extension of the first book in that it provides nine more intelligent fanatic case studies. We look at each leader’s story and identify what made them and their organization special. What’s different, thanks to feedback and personal reflection, is that the new book contrasts these leaders and their organizations against competitors. We feel it gives the reader a better picture of how special these leaders and their organizations truly were/are. And this book is less from an investor’s perspective. It’s more holistic.

This time we asked ourselves: how do these leaders deliberately prepare? We want to know so we can apply the same techniques ourselves.

 We believe this is the question everyone should be asking themselves if they want elite level results in any endeavor they choose. Be it investing, and operating or leading a business. Work to become an intelligent fanatic and you’ll have few “competitors”.

 And the pattern we find amongst nearly all our cases is that they optimised the use of mentors – either directly or indirectly. 

 InvestingByTheBooks: At InvestingByTheBooks, we used to have the full “Standing on the shoulder of giants” - quote on our website. It’s such a powerful concept. Tell us why you chose this title for the book?

Sean Iddings: It comes back to the master-apprentice model. I wasn’t surprised when I saw the pattern occurring again and again amongst intelligent fanatics. I have a jazz/rock music background where “standing on the shoulders of giants” is very common amongst those who achieve the highest levels. And I have experienced it personally, although I’m not an elite musician by any means, so it’s in my bones.

You could even call many of these virtuoso musicians intelligent fanatics themselves. And you find these people in other fields as well. We felt this was a perfect angle to go with the book especially since we all want to achieve intelligent fanatic-level results.

InvestingByTheBooks: There is one chapter on each of the nine Intelligent Fanatics and the company they created/changed. In terms of how you built the stories this time around – did you change anything in the creative process? Why/why not?

Sean Iddings: Nothing changed in our process. We kept our eyes and ears open to finding this book’s cases. For instance, we stumbled on Milliken & Co. while doing a due-diligence trip for a microcap company. We actually took a tour of one of Milliken’s plants, talked with one of the senior executives and heard stories of Roger Milliken. And we’re thankful to the many contributions from readers of our first book as they gave us many great potential candidates to look into.

InvestingByTheBooks: Most of the intelligent fanatics in the book have been the subject of a memoir or biography. Was this something you saw as an added benefit? Which one would you really recommend we read?

Sean Iddings: There is a method to our madness. We are fanatical about the details. We prefer to get as close to our subjects as possible. When there is a memoir, autobiography, or possible interview(s) from an IF this is gold to us. We want to internalize their experiences, their wisdom, their words direct from the source. The more layers between us and the fanatic, the higher the chance of missing the true lesson. It’s the same as the musician internalizing the sounds of their musical heroes. They go directly to the source material. It’d be silly to internalize the hacked up versions of those same songs done by the 15 year old down the street, right?

Of course when an autobiography, memoir or interview is not possible it is best to get accounts from people close to them. Well done biographies get as close to the source as possible and provide varied views.

Our books and case studies really are just a launching point in studying these individuals. We suggest reading all the sources in our book’s Notes. And to make it even easier we’ll have all our extensive notes from each book and cases available to premium members of our site.

InvestingByTheBooks: The definition – your definition! - of an Intelligent Fanatic on the book´s back cover is really dense with key words, all extremely important. I have really tried to memorize and internalize these lines, in order to bring it into my work. But I think a key concept is also the discussion you have inside the book of the difference between an IF and a genius. How does one go about trying to tell the difference between the two?

Sean Iddings: We’re humbled that you are trying to internalize our definition, but be warned. It changes constantly as we continue to learn. So be prepared to relearn it often.

But you made an astute observation. There must be a clear line in the sand drawn between genius and an intelligent fanatic.

First, you don’t want to be misguided by the genius. Geniuses naturally see the world differently then us common folk. Warren Buffett is one of a kind because he naturally absorbs practically everything he reads. When he says read 500 pages a day that works for him. It’s horrible advice for everyone else. It’s like Mozart, who could recall and play perfectly every song he heard once. It’s once a generation or less that someone has that ability (in the whole world). I’m more interested in how the fanatics work to get close to genius because most aren’t endowed with a naturally superior mind like Warren’s.

Second, geniuses are so rare that once they’re gone the company often loses its luster. Walt Disney was a genius. When he was gone there was a long period of stagnation. No one could fill his shoes. Intelligent Fanatics on the other hand often are better at building their future leadership bench. Take for instance Peter Kiewit. He built Kiewit Corporation into a mammoth mentoring machine. The company continues to excel more than 40 years after he has left.

InvestingByTheBooks: The level of detail in the stories is just phenomenal and give the selections a very authentic feel. But still you have managed to keep the book very concise. What specific areas of the narrative around the IF and the company did you choose to focus on and what parts do you leave out?

Sean Iddings: We focus on the most important attributes of each story, culture and leadership method. We cherry picked the better attributes, as we want to internalize the best qualities of others. No human being is perfect. We all have flaws. So it’s best to throw them out.

There are a few examples where we showed an IF’s flaws just to prove that each fanatic is not perfect, and also because those flaws were material to the story.

InvestingByTheBooks: The chapter about Jack Henry is one of my favorites in the book, mainly because of the richness of the story with many aspects about an employee-first culture. But I also found it fascinating how close they were to never get to achieve all this success, due to a “mid-life crisis” and a takeover that was aborted at the last minute. They share this with many other IFs of course. But could their “fix the problem, no matter what” philosophy eventually fizzle out as the company is now too big, making oversight and trust hard to enforce?

Sean Iddings: That is a great question. In my opinion, I could be wrong, the stronger the culture the less likely that things fizzle out as the company gets larger. I can imagine that it does get harder to maintain, though. The one area where I do see a problem is with growth by acquisition, which Jack Henry has been focused on. There gets to be a point where a company gets too big and can't find the "right" acquisition candidates. And I've found that many companies have a very hard time changing around a well-ingrained decent to poor culture. I like to study nature, and there are many instances where mother nature has a natural limit to growth. For instance, bee colonies get to a certain size and will start to break off into new colonies. There are other examples. Bigger surely isn't better, and I think companies need to be aware of reaching the size that is suitable to them and start to figure out ways to break up and focus on managing internal growth. I think Kiewit Corporation provides a great model. Level 3 Communications started out as a subsidiary of Kiewit's Diversified Group and was later spun off in 1998. The company turned out to be a huge win to Kiewit in terms of returns and impact on the telephony/internet industry. Now if Level 3 continued to be a part of Kiewit Corp., there would have been less focus on that operation as well as their core construction business

InvestingByTheBooks:  The dilemma in the chapter on McDermid Inc and Dan Leever upon being rolled up into Platform Chemicals is certainly familiar. What would have been your course of action here?

Sean Iddings: I hope that now given what I know about McDermid's past, that I would have not done the LBO with private equity Dan did. It's a continual reminder to pick the right partners, ones who are aligned in spirit, vision, and finances. Give up some of that control to non-like minded partners, and you are at their mercy. I'm fortunate to be learning this lesson vicariously while I'm still young.

 InvestingByTheBooks: Both your first book and this one deals with past Intelligent Fanatics. Is there a danger of running into a “Good To Great” problem (where the staying power of a few companies profiled proved to be less than stellar) preventing a book on current IFs?

Sean Iddings: While such a book might be interesting, and probably sell well, we think there is more to be learned from with proven past fanatics. Like footprints in the sand, we can see the exact path past fanatics took and what happened. And with careful study, see what they saw along the way. These individuals then provide us the perfect “roadmap” for us to follow forward today.

InvestingByTheBooks: We are glad that somebody values principle over sales…! And it might be a discussion that is more interesting to have as an interaction with your members on the site, as it is more of a debate rather than learning valuable lessons from previous, proven “giants” of corporate history?

Sean Iddings: That, too. And we can test to see how well such a corporation is doing today.

InvestingByTheBooks: In a choice between a more well-known person/company or someone flying below the radar to portray, was there a conscious decision to mainly go for the latter one in the book?

Sean Iddings: Yes, we specifically looked for under the radar fanatics. We think there are hundreds if not thousands of them that are out there that few people are aware of. And their stories/lessons are amazing!

InvestingByTheBooks: Can you have a true IF in a large cap company? Apart from Warren, who would be your pick for best Large Cap IF of today?

Sean Iddings: Sure, there are plenty IFs in large cap companies, especially in private companies.  As I mentioned earlier, Warren is more of a genius so I wouldn’t pick him. And for me it’s like picking my favorite musician or song. There are a few good ones and you can learn something from all of them.

InvestingByTheBooks: We have already taken up too much or your - and our readers´- time! Final question; when will we have the first profile of a female Intelligent Fanatic?

Sean Iddings: We already profiled Mary Kay Ash in our first 40-page case study to members on our site. There are other examples, but there are fewer females in history of course leading businesses of large size. This is changing though.

InvestingByTheBooks: Thank you so much. A true pleasure. All the best to you and your family – at home and at work!

 InvestingByTheBooks, December, 2017

www.investingbythebooks.com

@Investbythebook

William J. Ruane

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Buy good businesses. The single most important indicator of a good business is its return on capital. In almost every case in which a company earns a superior return on capital over a long period of time it is because it enjoys a unique proprietary position in its industry and/or has outstanding management. The ability to earn a high return on capital means that the earnings which are not paid out as dividends, but rather retained in the business, are likely to be reinvested at a high rate of return to provide for good future earnings and equity growth with low capital requirement.

Buy businesses with pricing flexibility. Another indication of a proprietary business position is pricing flexibility with little competition. In addition, pricing flexibility can provide an important hedge against capital erosion during inflationary periods.

Buy net cash generators. It is important to distinguish between reported earnings and cash earnings. Many companies must use a substantial portion of earnings for forced reinvestment in the business merely to maintain plant and equipment and present earning power. Because of such economic under-depreciation, the reported earnings of many companies may vastly overstate their true cash earnings. This is particularly true during inflationary periods. Cash earnings are those earnings which are truly available for investment in additional earning assets, or for payment to stockholders. It pays to emphasize companies which have the ability to generate a large portion of their earnings in cash.

Buy stock at modest prices. While price risk cannot be eliminated altogether, it can be lessened materially by avoiding high-multiple stocks whose price–earnings ratios are subject to enormous pressure if anticipated earnings growth does not materialize. While it is easy to identify outstanding businesses, it is more difficult to select those which can be bought at significant discounts from their true underlying value. Price is the key. Value and growth are joined at the hip. Companies that could reinvest at 12 per cent consistently with interest rate at 6 per cent deserve a premium.

BORN Chicago, USA 1925. Died 2005.

EDUCATION Ruane graduated from the University of Minnesota in 1945 with a degree in electrical engineering and a Master’s from Harvard Business School in 1949.

CAREER After one year at General Electric he went to work for Kidder Peabody, where he stayed for 20 years. Aged 45, Ruane founded his own investment firm, Ruane Cunniff, with partner Rick Cunniff, and the same year they launched their flagship Sequoia Fund.

INVESTMENT PHILOSOPHY As a student and disciple of value investment guru Benjamin Graham, his profile as a stock market investor is obvious. In addition to the above ‘insights’ it is worth mentioning his meticulous attention to detail. He needed to understand a company and therefore had no taste for tech stocks. The Sequoia Fund today holds a moderately diversified portfolio of 75 positions, both large and small caps. Average holdings are around three years.

OTHER He met Warren Buffett at an investment seminar with Benjamin Graham and he and Buffett became lifelong friends. Most of their customers came to Ruane Cunniff on Buffett’s recommendation. Ruane also served on numerous boards, including those of Geico, Data Documents Inc. and the Washington Post. He was a great philanthropist and adopted a block in Harlem, renovating buildings and establishing clinics and community service programs. He also funded educational programs on Indian reservations, and supported mental health charities. In addition, he set up TeenScreen, a nationwide organization that tests teenagers for symptoms of depression and other suicide risk factors. Humor and concern for others was his mantra.

Sources: Ruane’s ‘Four rules of smart investing’ from his lecture at Columbia University, compiled by Brian Zen; Life in legacy; Wikipedia.

James H. Simons

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       There is no real substitute for common sense except for good luck, which is a perfect substitute for everything.

·       Statistic predictor signals erode over subsequent years; it can be five years or ten years. You have to keep coming up with new things because the market is against us. If you don’t keep getting better, you’re going to do worse.

·       The most important issue is to hire great people because they do a first-class job, offer people great infrastructure, have an open atmosphere and get people compensated on the overall performance.

BORN Newton, Massachusetts, USA 1938.

EDUCATION Simons received a B.Sc. in Mathematics from MIT in 1958 and, aged 23, a Ph.D. in Mathematics from the University of California, Berkeley.

CAREER After four years as a member of the research staff at the Communications Research Division of the Institute for Defense Analyses he was appointed chairman of the math’s department at Stony Brook University. Aged 40 he left academia to run an investment fund that traded in commodities and financial instruments on a discretionary basis. In 1982 he launched the hedge fund Renaissance Technologies. He retired on 1 January 2010, but remains at Renaissance as non-executive chairman.

INVESTMENT PHILOSOPHY Simons is the most successful now living quantitative money manager. Renaissance’s models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions–a strategy that is not easy to copy. The Renaissance approach requires that trades pay off in a limited, specified timeframe. If a big transaction is about to take place on the market Renaissance pushes to the front of the queue. Simons himself explained the strategy in an interview: ‘Efficient market theory is correct in that there are no gross inefficiencies but we look at anomalies that may be small in size and brief in time. We make our forecast. Then, shortly thereafter, we re-evaluate the situation and revise our forecast and our portfolio. We do this all day long. We’re always in and out and out and in. So we’re dependent on activity to make money.’ In doing this, Simons surrounds himself with like minds: mathematicians, physicists, astrophysicists, and statisticians. About a third of the 275 employees have doctorates.

OTHER Renaissance Technology manages $15 billion at present and is one of the most profitable hedge funds in the world, despite its high fees. (5 % in fixed fee plus 44 % in performance fee) Simons alone earned an estimated $2.5 billion in 2008, and with an estimated net worth of $12 billion, he is one of the richest individuals in the world. The Financial Times named him ‘the world’s smartest billionaire’ 2006. Simons’s most influential research involved the discovery and application of certain geometric measurements, and resulted in the Chern–Simons form (also known as Chern–Simons invariants or Chern–Simons theory). Simons has been known to show up at formal business meetings without socks. He is an active participant in a variety of philanthropic endeavors. Supporting autism research is one.

Sources: James A. Simons – lecture at International Association of Financial Engineers annual conference 2006; as well as at MIT, 2010; Greenwich Roundtable Medallion Fund; Wikipedia.

Francisco Garcia Paramés

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Personality vs intelligence: 90 % of investors with whom we discuss our investments agree on the attractive nature of these investments. But only a very small proportion is prepared to take the next steps: invest and then wait for as long as necessary. One must be able to ignore market movements and any institutional obligations, even emphasize one’s convictions by increasing the investment when the markets do not look favourable. In short, it is essential to know oneself, and along with a normal IQ, the determining factor will be character.

A good backup to these qualities is references. For anyone (particularly in Madrid, which is not renowned for its investing tradition), the sense of security achieved by following in the steps of an experienced investor is very important. Both in the good times (when in either absolute or relative terms, things are going well) and the bad, analysing the careers of investors who have been through similar situations allows one to act with conviction and maintain a long term view, something which can sometimes be lost.

Never stop learning: When we invest, we must have strong conviction and determination in the process. To have permanent doubts is pointless, in spite of the fact that uncertainty is a constant. But that conviction must go hand in hand with a permanent capacity to learn – not an easy thing to do. For example, a couple of years ago at Bestinver, following a good track record over the previous fifteen years, we came across a (little) book by a well-known investor which caused us to fine-tune our strategies, although without actually altering the essentials. It is not easy to conjugate ‘conviction’ and ‘open mind’ in the same sentence, but it must be done!

Economic framework: The majority of well-known investors command a relatively superficial knowledge of the so-called ‘economy’. I arrived at the Austrian School of economics after eight years as an investor, and I did so precisely because it provided a theoretical framework to what I was seeing every day in the market, namely, human action. Only here it was it explained in incentives, objectives, consequences, etc – that is, life itself. Thanks to Mises and Hayek, among others, we can navigate through an investors’ world with a compass that shows us over which waters we can sail, and which we cannot.

BORN Galicia, Spain 1963.

EDUCATION García Paramés has an Economics degree from the Complutense University of Madrid, and took an MBA at the IESE Business School (Barcelona) 1989.

CAREER García Paramés started his career at Bestinver as a stock analyst in 1989. His passion for investment led him to asset management, and he was soon named CIO of the company, where he remains to this day.

INVESTMENT PHILOSOPHY García Paramés’s management style is based on the strict application of the principles of value investment (Graham, Buffett, etc.), within a framework of a profound knowledge of the Austrian School’s theory of economic cycles. Pricing power and cash flow are important parameters in the analyses. García Paramés avoids investments where he cannot forecast the next ten years. During the last few years the portfolio has shifted to only include quality companies. He never fights the management.

OTHER Nicknamed ‘the Warren Buffett of Europe’, his more recent fund, Bestinver Internacional (Global Equity Fund), launched 1998, has an annual return of almost 11 %, beating the benchmark (2 %) by a factor of more than five. Bestinver has now more than than $12 billion in asset under management. He is a self-taught investor, similar to some of the other superstars. It is especially impressive since he is from Spain, which has no long tradition of investing. He speaks and reads five languages.

Sources: Francisco García Paramés; Bestinver; Wikipedia.

Charles M. Royce

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       We are risk managers first and foremost.

·       You cannot eat from the table of relative returns.

·       Bad business models can’t be cured by valuations.

BORN Washington DC, USA 1939.

EDUCATION He received a BA in Economics from Brown University and an MBA from Columbia University.

CAREER Prior to founding Royce & Associates in 1972 at the age of 32, Royce was director of research at Scheinman, Hochstin, Trotta, a brokerage firm. He was also a security analyst at Blair & Co. for a spell. Royce remains president and CEO of Royce & Associates, and is still portfolio manager for several funds in the group.

INVESTMENT PHILOSOPHY Royce is a disciplined small cap long-term value stock investor. His is a bottom-up investment approach looking for high quality companies with the potential for a successful future that have the following characteristics: strong balance sheets: high internal rates of return; and the ability to generate free cash flow and dividends.

He bases his assessment of a company’s value on either what he believes a knowledgeable buyer might pay to acquire the company or what he thinks the value of the company should be in the stock market. Mid-2012 the average position was valued at 1.8 times book value, and had a trailing price earnings multiple of 14.7, as opposed to 15.3 for the Russell 2000 Index.

Unlike most other small-cap investors, Royce is not focused on growth companies. The typical target is a high quality smaller company that is cheap because of cyclical or temporary company-specific issues, often an obscure small cap in a mundane market with a good track record. Further, he prefers to buy into companies whose management has been in place five years or more. The average holding horizon of a position is three to five years.

Royce’s is a very demanding strategy in both time and effort. A great deal of time is spent interviewing senior management as well as customers, suppliers, and competitors. Royce tries to reduce the risk by owning a wide variety of stocks, across many sectors and industries.

OTHER Despite the long period in question – fully 40 years – the fund has far outperformed the benchmark (Russell 2000) in every single short- and long-term time frame, an impressive achievement considering assets under management now amount to roughly $40 billion. Royce made recently a $5.5 million gift to his alma mater, Brown University, to fund six professorships. He is engaged in several philanthropic projects as well as the restoration and preservation of landmark buildings. He belongs to the Episcopalian Church and always wears a bow tie.

Sources: Charles M. Royce; Royce Pennsylvania Mutual Fund; The Royce Funds; Forbes.

Shuhei Abe

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

I believe that the most important thing is to understand what you’re good at. There are many legendary investors who have experienced remarkable success. In my opinion, each of these investors has had their own unique way of understanding and simplifying the complexity of their environment. Except for the first few years, I have been investing in a declining market for more than two decades. I survived because I stuck to the areas that I feel I understand. Despite extreme pessimism, there have always been opportunities where I could arbitrage the value gap. When price is excessively below a firm’s value, you can still make money even in the worst of market environments.

My first principle is that no one can correctly predict the future. Therefore, when you evaluate potential investments, your thinking model should be simple. The variables that you consider in your model should not be too many. In the end, trying to predict something you cannot know is like throwing a dart in the dark. The foundation for your investment decision should therefore be based on what you can see and what you can hear.

When evaluating a potential investment, I look at three variables. First, I consider the sustainability of the firm’s business model. Any business can be described by a simple equation, or sales less expenses. As an example, when analysing a firm’s future sales, growth is defined by whether the unit price can be increased and more units can be sold. Secondly, it is important to evaluate the general industry outlook and its potential size to determine the company’s edge and ability to maintain its profit margin. Naturally, a strong company in a growing market would make an attractive investment candidate, but in Japan, I have observed cases where a company is still able to grow in a shrinking market. And finally, who is the person that decides the future course of the firm. Is he or she trustworthy? Is he or she creative and innovative? Does he or she have a track record or the potential to build a scalable business? Focusing on these three variables alone, I believe you are able to identify whether the company has a real edge or not. In my view, this approach makes it easier to make an investment decision rather than trying to consider all potential variables.

BORN Sapporo, Japan, 1954.

EDUCATION Abe graduated in economics from Sophia University in Tokyo, followed by an MBA from Babson College in the US in 1982. He completed Harvard Business School’s Advanced Management Program in 2005.

CAREER Abe began his career as an analyst for the Nomura Research Institute (Japan). He continued with three years in Japanese equity sales for Nomura Securities International in New York. Aged 31 he formed Abe Capital Research in 1985, where he managed Japanese equity investments for American and European investors. Four years later he founded the Tokyo-based SPARX Group. Abe continues to lead the SPARX Group as chairman and CEO.

INVESTMENT PHILOSOPHY Abe is a value investor, but likes to focus on evaluating the industry and business models. In addition he spends a great deal of time assessing company management. He is said to have an aggressive investment style, taking large stakes in companies and then working with management to enhance the value of their firms. This approach – relationship investing – includes teaming up with strategic operating partners to help companies realize their full potential. He is regarded as an activist.

OTHER He is said to be a disciple of George Soros, whom he has worked for. Abe was one of the first hedge-fund managers in Japan. SPARX Group is also the first independent, publicly traded investment firm in Japan, with approximately $7 billion in assets under management and offices in Hong Kong and Seoul. From being a Japanese equities small-cap boutique he has transformed the company into one of Asia’s largest alternative investment firms. He is a guitar player and painter in his spare time.

Sources: Shuhei Abe; SPARX Asset Management; Wikipedia.

T.Boone Pickens

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Chief executives, who themselves own few shares in their companies, have no more feeling for the average stockholder than they do for baboons in Africa. Always keeping in mind that shareholders are the owners of a company, while members of the management are employees.

Far too many executives have become more concerned with the four P’s – pay, perks, power, and prestige – rather than making profits for shareholders.

Show up early, work hard, stay late. Work eight hours and sleep eight hours, and make sure they are not the same eight hours.

BORN Oklahoma, USA 1928.

EDUCATION Pickens graduated from Oklahoma A&M (now Oklahoma State University) with a degree in geology in 1951.

CAREER He started his career at Phillips Petroleum in 1951. In 1956 he founded the company that would later become Mesa Petroleum, which turned into one of the world’s largest independent oil companies. In the 1980s, Pickens became famous as a corporate raider, with several big deals of which Gulf Oil was among the largest. By the mid-1990s he gave up his raiding after a brutal and expensive fight with Unoca. In 1997 Pickens founded BP Capital Management. He holds a 46 % interest in the company, which runs two hedge funds, Capital Commodity and Capital Equity.

INVESTMENT PHILOSOPHY Pickens is an oilman and shareholder activist who in later years has become a hedge-fund manager. He is entirely concentrated on the energy sector, mostly in oil. His analysis starts at the top, with a scenario for the different forms of energy, from where he drills down to the individual company. He prefers to seek out badly run companies where he can influence their governance and management. In his role as a hedge-fund manager he has a different strategy to his earlier days, when he was an activist and would even buy whole companies (in those days there were many deals which never came to fruition, but with enough noise and fuss the stock rose nevertheless and Pickens was able to exit with excellent profits).

Pickens’s key characteristics as an investor are his knowledge of the energy sector, endurance, and courage. He is possibly one of the most risk-inclined investor in this book. One example is how through his company Mesa Petroleum he bought the thirty-times larger Hugoton Production. His hedge funds are not for the weak of heart either. One of them was founded in 1997 and lost 90 % in two years. The other hedge fund showed an annual return of 38 % for six years, before becoming one of the greatest loss-makers in the sector in 2008. Pickens’s reckless style is perhaps best described in his own words in a quotation from Katherine Burton’s book Hedge hunters: ‘Most of my ideas work, but the timing gets screwed up every once in a while.’

OTHER He was involved in the creation of the United Shareholders Association. Pickens has been (but not any more due to strides in technology have altered the energy landscape) outspoken on the issue of peak oil, and advocates alternative and renewable energy sources such as solar and wind. In 2007 Pickens earned $2.7 billion as the Capital Equity Fund increased 24 % after fees, and the $590 million Capital Commodity fund grew 40 %. Pickens has donated more than $1 billion to charity. According to Forbes he is “only” worth 1.6 billion US dollars today.

Sources: T. Boone Pickens, The First Billion is the Hardest (2008); Katherine Burton, Hedge hunters: After the Credit Crisis, How Hedge Fund Masters Survived (2007); boonepickens.com; Businessweek; Insider Monkey; CNBC

Richard Perry

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Richard Perry’s investment aphorisms:

·       Every investment should be measured on an expected value basis – how much can I make, how much can I lose, and what are the probabilities associated with each outcome.

·       Don’t listen to what people say or write, try to intuit what they mean.

·       Good investors use a combination of brains and gut. To paraphrase Leonardo Da Vinci, one must understand the science of art and the art of science.

·       By the time your analysis is perfected the investment opportunity is probably gone.

·       There are many different investment strategies. Focus on the ones you do best and avoid the ones you do poorly.

·       Value is buying a dollar for 50 cents and having a business plan that turns that 50 cents back into a dollar. Value traps are buying a dollar for 50 cents and a business plan that makes that dollar worth dramatically less than 50 cents.

·       People will behave as they are incented to behave.

·       Translate complex theories into simple statements.

·       Beware of obsolescence.

·       Sales and marketing are critical components of a successful business.

·       Invest like a local.

BORN Los Angeles, USA 1955

EDUCATION Richard Perry has a BA from the University of Pennsylvania’s Wharton School in 1977, and an MBA from New York University’s Stern School of Business in 1980.

CAREER Perry began his career at the options trading desk at the investment bank Goldman Sachs in the mid-1970s. When he left in 1988 to start the hedge fund Perry Capital he was working in equity arbitrage, while lecturing on finance at the Stern School of Business at New York University. He has been CEO of Perry Capital from the start.

INVESTMENT PHILOSOPHY Perry could be described as an event-driven, value-oriented, multi-strategy hedge-fund manager. He controls a number of strategic positions simultaneously, and bases his business model on having several different income streams. One strategy is to seek out companies that have the potential to restructure through acquisitions or disposals, often those in reconstruction after bankruptcy. Another area is investments in distressed loans. However, he also invests in unlisted companies and property, and uses his cash supply to lend money at high returns to investors who are not able to lend from banks. He usually works with a neutral portfolio and with lending. He has called his approach ‘expected value analysis’: it is based on calculating the percentage likelihood of various outcomes and multiplying them by the current bond price, after which he compares the expected value with the current market price to determine whether he should buy or sell. Every now and again he becomes deeply engaged with a particular investment. Recently, he became the principal owner of Barneys New York, a luxury American chain store.

OTHER At present Perry manages $10 billion in assets. For the first 19 years, his hedge fund did not have a single deficit year. Perry was also one of a few on Wall Street to start betting against subprime mortgages as early as 2006. He is the chairman of the board of Barneys New York Inc. and a member of the boards of trustees of Facing History and Ourselves. His mentor at Goldman Sachs was Robert Rubin, US Secretary of the Treasury during the Clinton administration. Perry is an avid collector of pop art and a triathlon runner.

Sources: Richard Perry; Perry Capital.

Ray Dalio

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

While most others seem to believe that mistakes are bad things, I believe mistakes are good things, because I believe that most learning comes via making mistakes and reflecting on them. Blaming bad outcomes on anyone or anything other than oneself is both incorrect and subversive to one’s progress. It is incorrect because bad things come at everyone, and it is your challenge and test to successfully deal with whatever comes at you. Blaming bad outcomes on anyone or anything other than oneself is essentially wishing that reality were different than it is, which is silly. It is also subversive because it diverts one’s attention away from mustering the personal strength and other qualities that are required if one is to produce the best possible outcomes. Remember, Nature is testing you, and it is not sympathetic.

Everyone has weaknesses. The main difference between unsuccessful and successful people is that unsuccessful people don’t find and address them, and successful people do. That is why, as one of our managers has observed, reflective people are much more successful than deflective people.

In order to make money in the market you have to be an independent thinker. And, I think, creative too.

BORN Queens, New York USA 1949.

EDUCATION Dalio received a BA from Long Island University and an MBA from Harvard Business School in 1973.

CAREER Dalio worked on the floor of the New York Stock Exchange and invested in commodity futures. After his MBA, he started work as director of commodities at Dominick & Dominick LLC. In 1974, he became a futures trader and broker at Shearson Hayden Stone. In 1975, aged 26, he founded the investment management firm, Bridgewater Associates where he is president, co-CIO and mentor.

INVESTMENT PHILOSOPHY Dalio is a hedge fund investor with macro investments as his specialty. He is a master of the diversification needed to enable him to steer his giant funds. He bets mainly on economic trends, such as changes in exchange rates, inflation, and GDP growth round the globe. He spends most of his time trying to figure out how economic and financial events fit together in a coherent framework. Bond and currency markets, in which Dalio is an expert, are widely believed to represent the greatest bulk of profits historically. But he is also active in other asset classes. Gold was one of the company’s largest contributors in 2010. In stocks Bridgewater tends to make relatively small, but numerous equities investments, sometimes having several hundred equity positions. He regards the consensus as ‘often wrong’, which is why he judges independent thinking to be the main criteria in managing money.

OTHER He is said to be intelligent and idiosyncratic, and manages the world’s largest hedge fund with $140 billion in assets and 1,200 employees. In 2011, Bridgewater was ranked both the largest and the best-performing hedge-fund manager in the world, which is a unique combination. With its 39 billion profit in US dollars for clients Bridgewater has furthermore become the hedge fund with the second highest yield ever in absolute figures. The last 18 years’ performance is estimated to have been 15 % annually before fees. One of the more striking features of Bridgewater Associates is the corporate culture that Dalio has created. Dalio has presented the concept in a 123-page online book, Principles. He bought his first shares at the age of 12, and according to the Forbes he had a net worth of US$12.9 billion as of 2013. Dalio is a practitioner of transcendental meditation; his main hobby is music – jazz, blues, and rock ‘n’ roll (his father was a jazz musician). Recently, he joined a philanthropic campaign, pledging to give away at least half of his money.

Sources: Ray Dalio, Principles; CNBC; Bridgewater Associates; gurufocus.com; The New Yorker, 2011; Wikipedia.

Author interview: Aswath Damodaran - Narrative and Nubers

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Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University where he teaches corporate finance and valuation courses in the MBA program. He received his MBA and Ph.D degrees from the University of California at Los Angeles. Mr. Damodaran’s research interests lie in valuation, portfolio management and applied corporate finance. His papers have been published in several of the most prestigious academic journals and he has published 10 acclaimed investment and finance books, including the best-selling Damodaran on Valuation.

http://pages.stern.nyu.edu/~adamodar/

http://aswathdamodaran.blogspot.se/

InvestingByTheBooks: Thank you for agreeing to talk to us about your latest book Narratives and Numbers. I very much enjoyed reading it and one thing contributing to this was that you seamed to enjoy writing it. Could you start by discussing this personal journey of yours from being a numbers guy to a more balanced position?

Aswath Damodaran: I am a natural number cruncher and when I first starting doing and teaching valuation, I gravitated towards a purely numbers approach. It was a few years into the process that I realized that while I could work through the mechanics of valuation, I had no faith in my own valuations (partly because I knew how easily I could make them move by changing a few numbers). It was then that I started recognizing that my spreadsheets would become valuations only if I attached stories to them. When I started, it was hard work but I have to tell you that it has become easier over time.

IBB: With regards to valuing corporations with a very wide value potential distribution compared to those with a more narrow potential I agree that both are technically possible to value with a DCF. However, while the latter type more rarely gets mispriced, when they occasionally do, you can be relatively more certain about your margin of safety and given our human propensity for over-optimism I’m afraid that a wide distribution simply means a larger outlet for that bias. What is your view on this?

AD: I think that the margin of safety is one of the most over rated concepts in investing. While there is the notion that having a large MOS is somehow costless, it is worth reframing the trade off in using a MOS. In effect, you are trading off one type of error (that you will buy an over valued stock by mistake) for another type of error (that you will not buy an under valued stock). In my view, that trade off starts to cut against you sooner than you think and as your portfolio gets larger. If you are one of those incredible investors who keep finding stocks that go up 40% a year, by all means have a large margin of safety. When For the most part, when I hear an investor boast about having a 40% MOS, my response is that the investor either is mostly invested in cash or that he or she has no concept of value.

IBB: How will we ever persuade sell-side analysts to treat quarterly earnings releases as opportunities to revisit and update their view on the long-term fundamental story instead of playing the “against the consensus-game”?

AD: Why bother? That’s their job. Treat them for what they are… Equity research analysts are traders, not investors, and they play the momentum game. They have only a glancing interest in the value of stocks and have far more incentive to keep track on the mood on a stock. I just wish that they would stop doing their “kabuki” DCFs.

IBB: Daniel Kahneman has when it comes to forecasting been discussing what he calls the inside view and the outside view where the latter relates to the more statistical answer to the question: when others in general have been in the same situation, what on average happened? I read your narrative process as a way to improve on the inside view but aren’t you still missing to factor in the outside view?

AD: My step 5 in converting stories to numbers is, keeping the feedback loop open and it, is just my way of saying that the only way that you will improve your stories is by listening people who think least like you and disagree with you the most. So, listen to others when they tell you that you are wrong, don’t be defensive and don’t be afraid to say those words “I was wrong”.That outside view does not necessarily come from other valuation people or analysts but from the world around you.

IBB: I liked the notion that exactly as stock market stories can create herding and mispricings on the stock markets, quantitative over-usage of the same type of factors can do the same. You mention somewhere in the book that you think that it is those who can remain flexible in their thinking that will succeed. Could you explain further what you mean?

AD: To the extent that we look at the same data and see the same patterns and follow those patterns, big data is going to create its own form of herding. You see this in almost every aspect of life where data has become a big part of decision making. One reason that I trust multi-disciplinary thinkers more is that they use both the data and common sense. Being flexible requires you to be open to information in every form.

IBB: What you call narratives are really the description of the fundamental value creation of the company but how do you prepare your students for the constant cacophony of shorter term stories, rumors, suggestions and emotions on the stock market? Do you for example feel that checklists can help?

AD: I think of your core story as a filing mechanism that allows you to read news about the company as it happens and file into the right folder. In fact, I try to do this with Uber in the book when I explain how I used the hundreds of news stories that came out about Uber between June 2014 and September 2015 to reframe my story.

IBB: I think the concept of blending a going concern valuation with a liquidation valuation is very interesting. How would you go about when thinking about the probability of default given the reportedly shortening life span of companies?

AD: Shortening life span does not necessarily translate into default. Most companies just fade away over time or get acquired as going businesses, rather than come to an abrupt end. What causes default is the addition of a triggering mechanism, usually in the form of debt. And with debt, estimating that probability of default becomes easier since you are looking at the likelihood of a firm not being able to make contractual payments.

IBB: With regards to the limited success rate of macro forecasting I agree fully. Does this mean that investors should simply stay away from stocks where one or two top-down variables determine the stock price or do you have a solution for how to handle them?

GZS: It is not that they should stay away. You can still find a macro stock at a micro moment. For instance, with banking stocks, it is quite clear that the dominant risks now are regulatory changes and interest rate levels, both macro variables. But in October 2016, I valued and bought Deutsche Bank because I felt that there were enough micro variables that I could focus on to make it a good buy.

IBB: Thank you for taking the time and sharing your insights. Lets hope your book unites the two camps of numbers people and storytellers.

InvestingByTheBooks, March 3, 2017

John Neff

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Conventional wisdom suggests that, for investors, more information these days is blessing and more competition is a curse. I’d say the opposite is true. Copying with so much information runs the risk of distracting attention from the few variables that really matter. Because sound evaluations call for assembling information in a logical and careful manner, my odds improve, thanks to proliferating numbers of traders motivated by tips and superficial knowledge. By failing to perform rigorous, fundamental analyses of companies, industries, or economic trends, these investors become prospectors who only chase gold where everyone else is already looking. Mutual fund investors who think they can make money by chasing the hottest fund are panning the same overworked streams.

Many circumstances and yardsticks have changed. Companies cited have grown, merged, or, in some cases, closed their doors. Dividend yields are not so lavish nowadays, and erstwhile P/E ratios seem almost quaint. Brief security analyses are not intended as current recommendations, but as testimony to the thought processes that shaped Windsor’s fortunes. Are they still valid? I think so. The relationship of total return to the P/E ratio still governs my investment decisions, and the returns meet my high standards.

If a lesson emerges besides the merits of low P/E ratios, it should be that successful, long-term investment strategies need not rest on a few very risky glamour stocks. The record will show that we painted our canvas using a broad palette. At various times, Windsor owned representatives of all but two industries, and many were revisited more than once. Some payoffs were of the championship variety; others were nothing to be proud of. Now and then, we hit home runs, but our scoring relied chiefly on base hits. To go home winners, that’s all investors need.

BORN Wauseon, Ohio, USA 1931.

EDUCATION Neff graduated summa cum laude with a BA from the University of Toledo in 1955. He obtained his MBA from Case Western Reserve University in 1958.

CAREER Neff started as a securities analyst with the National City Bank of Cleveland 1955. He joined the Wellington Management Co. in 1964, becoming the portfolio manager of the Windsor, Gemini and Qualified Dividend Funds. He retired in 1995 after more than three decades.

INVESTMENT PHILOSOPHY Neff’s investment strategy was in reality a blend of contrarian, growth and value investing. He calls himself a low price–earnings investor. He focused on the least popular stocks, but they needed to have an organic growth in excess of 7 %, yield protection, and be a solid company. Investments were always based on rigorous fundamental analysis, examining both management and the books in detail. Future earnings were everything and he regards ROE (return on equity) as the most important single yardstick of what management has accomplished for shareholders. On average, Neff’s stocks had a P/E ratio that was half that of the rest of the market. The number of holdings was rarely under 100. He was known for his discipline and his long working days, and for being highly knowledgeable about the companies he invested in.

OTHER The Windsor Fund was the best performing mutual fund during his tenure and became the largest fund, closing to new investors in the 1980s. Of the 31 years he managed the fund, he beat the market in 22 years. He was said to take the week’s entire Wall Street Journal copies home for a second read over the weekend.

Sources: John Neff, John Neff on Investing (2001); CFA Institute; Wikipedia.

Robert Maple-Brown

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

§  Firstly, I am a ‘value’ investor and I believe that extensive fundamental analysis of each investment is very important.

§  Secondly, although I believe that diversification is important, I believe Australian equity portfolios should only have about thirty individual investments.

§  Thirdly, ‘value’ is not the same as ‘cheap’, and so the industry in which the company operates and the quality of its management are all-important in determining ‘value’.

BORN New South Wales, Australia 1940. Died 2012.

EDUCATION Maple-Brown graduated from the University of New South Wales in 1965 with a degree in Commerce, and become a Chartered Accountant five years later.

CAREER Maple-Brown joined the merchant bank International Pacific Corporation, which later became Rothschild Australia. After being responsible for the investment management division, he left in 1984 to form Maple-Brown Abbott Ltd. aged 44. He was CEO until 2000 and was non-executive chairman until his death.

INVESTMENT PHILOSOPHY Long-term bottom-up value stock picking is probably the best description of Maple-Brown’s investment style. Confident that markets are inherently inefficient, he took advantage of inevitable periods of excess pessimism by buying when valuations were depressed and selling when valuations became extended during periods of excess optimism – a contrarian approach. Maple-Brown’s investments in general had lower price–earnings ratios, lower valuations of book value, stronger balance sheets, and a higher dividend yield than the market.

The focus was on balance sheet strength and by reconciling reported profits with underlying cash flow. He invested in all asset classes, but was famous for his stock market investments and did not back off in case of pushing for changes in management when necessary.

OTHER Maple-Brown’s value-based investment philosophy started the tradition of value investing in the Australian market. Adjusted for having around 20 % in cash on average, the fund has beaten the benchmark substantially since its inception, and currently manages in excess of $9 billion. He had the long-term performance record in managing Australian equity portfolios and balanced funds. Maple-Brown was inspired by Benjamin Graham in the 1960s.

Sources: Robert Maple-Brown; Maple-Brown Abbott Pooled Superannuation Trust; Wikipedia.

Neil Woodford

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy. 

Long term. Taking a long-term view is an increasingly unfashionable approach in today’s environment. In recent years, average holding periods for equities have shortened dramatically, reflecting a trading rather than an investing mentality. For me, investing in a company is an ongoing process: it starts with meeting the management team and undertaking in depth research of the business and typically I will build a holding over a period of time. While clearly things can change, my intention is to be a long-term owner of that company; I am not simply seeking a quick return. Many of the companies that are in my portfolios have been there for more than ten years and they continue to deliver the earnings and dividend growth that attracted me to them at the outset. As I alluded to above, markets can be driven by a number of things, and during those periods stocks can be mispriced for a considerable length of time. We saw this in the late 1990s with the TMT bubble and we have also seen it more recently in the postfinancial crisis period. However, sooner or later, markets return to valuing companies according to their fundamental characteristics, and so maintaining conviction during these times and focusing on the long-term is essential to fully participate in the returns that selected companies can provide.

Valuation. My second key element is fundamentals. Simply put, earnings and dividend growth drive share prices in the long term, and so these are the key metrics on which to focus. Dividends are one of the best ways to gauge the health of a business, as well as providing a good insight into the management’s capital discipline and recognition of shareholder returns. Research also indicates that those companies with the strongest dividend growth provide the best capital returns in the long term. Therefore, a company’s ability to consistently grow its earnings and dividends is a prime consideration in my investment approach. At the same time, a company fulfilling these requirements is not necessarily a good investment. Valuation is critical, and it is where I believe a company’s growth potential is not reflected in its valuation that will I consider investing.

Risk. This brings us to the final core element of my investment approach, which is the management of risk. I have an unconstrained approach within the portfolios that I manage and so I do not view risk as being relative to a benchmark index. To me, risk is the permanent loss of capital, and in that sense I have an absolute return mentality. Risk can never be completely eliminated from equity market investment, but there are steps that can help to reduce it. Understanding risk means understanding the underlying business: what it does, how it earns its profits, and how sustainable are those returns. Gaining this level of insight and knowledge of a company enables me to form an opinion on how that company should be valued. If the conclusion is that the company is undervalued then it represents a lower-risk investment—in other words, valuation is, in itself, an effective risk management tool.

BORN Berkshire, UK 1960.
EDUCATION Woodford holds a BA in Economics and Agricultural Economics from the University of Exeter; he later studied Finance at the London Business School.
CAREER He commenced his investment career in 1981 with the Dominion Insurance Company, and subsequently joined Eagle Star as a fund manager in 1987. One year later he joined Invesco Perpetual as a fund manager in the UK equities team, and is currently the company’s head of investments. He recently announced his departure from Invesco Perpetual to take place in 2014.
INVESTMENT PHILOSOPHY Woodford is a fundamental long-term bottom-up stock market value investor. He invests mainly in the UK. As follows of his extensive description above, his preference is for resilient companies whose growth and earnings he sees as stable, yet are underappreciated by the market. Not surprisingly he shows the best relative performance in turbulent market conditions. Woodford is something of an activist, pressing managers at companies to pursue share buybacks when the intrinsic value of a company well exceeds its share price.
OTHER As head of investments at Invesco Perpetual, Woodford controls over £30 billion of assets. He has been awarded several prizes. His hobbies include wildlife and horses.

Sources: Neil Woodford; Invesco Perpetual High Income Fund; Wikipedia.

Peter Lynch

Column in pdf...  Link to Amazon...

Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

The basic story remains simple and never-ending. Stocks aren’t lottery tickets. There’s a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you’ll do well. Corporate profits are up fifty-five fold since World War II, and the stocks market is up sixtyfold. Four wars, nine recessions, eight presidents, and one impeachment didn’t change that.

You don’t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce satisfying result. Why is this? Your losses are limited to the amount you invest in each stock (it can’t go lower than zero) while your gains have no absolute limit. All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.

Nothing has occurred to shake my conviction that the typical amateur has advantage over the typical professional fund jockey.

BORN Newton, Massachusetts, USA 1944.

EDUCATION Lynch graduated from Boston College in 1965 and took an MBA at the Wharton School of the University of Pennsylvania in 1968.

CAREER Lynch started as an intern with Fidelity Investments in 1966, partly because he had been caddying for Fidelity’s president, became an analyst, and in 1974 director of research. In 1977, Lynch was named head of the then small and obscure Magellan Fund. Lynch resigned as a fund manager in 1990 to spend more time with his family. Lynch has since taken different positions in Fidelity. At present he is vice chairman.

INVESTMENT PHILOSOPHY Lynch is one of history’s most illustrious growth-oriented stock investors. Lynch has invented several new approaches to investing. His most famous investment principle is simply ‘Invest in what you know’, popularizing the economic concept of ‘local knowledge’ – investors learn more from visiting the local grocery shop than staring at charts. Another key innovation was PEG (price–earnings ratio compared to growth). Lynch is also considered one of the foremost advocates of GARP (growth at reasonable price), but in well-managed companies with sound balance sheets. He does not care about liquidity in the stock, and prefers small and mid-size companies. He also favors turnaround cases and asset plays. Overall he has a very flexible investment strategy, to the extent of being known as ‘The Chameleon’. Companies, which invest in luxury head offices at the cost of returns to shareholders, are never admitted to the portfolio.

OTHER Outperforming the benchmark by over 13 percentage points in 13 years without leverage is probably a record for a mutual fund, especially when value stock performed better than growth stock during the period, and Lynch didn’t invest in tech stocks such as Microsoft and Cisco, which were two of the best performing stocks in the market. The Magellan Fund increased from $18 million to $14 billion during his management. When he resigned, Magellan had more than 1,000 individual positions. Lynch recommends investors to stay in the stock market even when times are bad, as the risk of missing the next rally is worse. The only time to prefer other investments is when bonds give more than 6 % higher interest than dividend yield. Lynch is also the inventor of ‘ten-baggers’–companies whose value increases tenfold. When managing the fund he read 700 annual reports yearly. He has written three books. Since his retirement, he has been an active participant in a variety of philanthropic endeavors.

Sources: Peter Lynch, One up on Wall Street (2000); Fidelity Investments; Magellan Fund; Investopedia.

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