If you are an active asset manager your raison d’être is to outperform the market, i.e. the other investors. Yet, many pension funds, insurance companies and mutual funds haven’t specified what their competitive edge is. Instead too many mimic what others do, hire qualified personnel and give them good remuneration, close their eyes and hope for the best. The result is almost...
The US shale revolution is redrawing the energy map of the world. In 2014 the US replaced Saudi Arabia as the world’s largest producer of oil. The forecaster of such a development 5 years ago would have been taken away by men in white coats. The US has also overtaken Russia as the world’s largest producer of natural gas. This secular growth of this non-OPEC supply source...
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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.
The first key point is to focus on a relatively narrow area and become very expert in it.
The second and most important thing is to cut losses and run profits. Most people do the opposite – they tend to snatch profits and hug losses. In this way inevitably they end up with big losses and small profits instead of the other way around.
The third point is to concentrate on growth shares with forward price earnings ratios less than their future growth rate.
The fourth point is that I am great believer in the importance of cash flow. I always make sure that EPS are exceeded by cash flow on a regular basis. In this way I eliminate potential Enrons.
BORN Chester, UK 1929.
EDUCATION Slater left grammar school at the age of 16 and became a Chartered Accountant when he was 24.
CAREER Slater spent his first nine years after school in industry, culminating in his appointment as deputy sales director of the Leyland Motor Corporation. After successfully writing an investment column under the pseudonym ‘Capitalist’—the ghost portfolio of ‘Capitalist’ appreciated by 68.9 % against the market average of 3.6 % – in 1964 he launched Slater Walker Securities, which collapsed in the wake of the secondary banking crisis of 1973–75. Slater famously found himself to be a ‘minus millionaire’, owing £1 million more than his assets. Within a few years he repaid all of his debts with interest. In 1976 he started to invest in property and later in the mining industry as well as biotech and agriculture. In early 1990 he devised a public company statistical guide, Company REFS, for investing based on his investment principles. Since 1975 Slater has been a very active stock market investor and remains so today.
INVESTMENT PHILOSOPHY Slater is a small-cap growth stock market investor. The key figure in his investment approach is the price–earnings growth factor (PEG). A PEG of below one, with earnings growth higher than the multiple, is attractive. His approach is similar to Peter Lynch’s, and there is some debate over which of the two devised the PEG. There is, however, no doubt that Slater popularized it in the UK. In addition, Slater demands that a company should show cash flow in excess of earnings and it must have been growing for at least the last three years. Also the company should not be over-geared. His preference for small companies is based on the conviction that ‘elephants don’t gallop’, an expression that he coined. Slater mainly depends for his investments on public data; however, he requires at least three analysts’ forecasts before investing. The management’s behaviour in terms of their buying shares and being optimistic in their annual reports are also important parts of his approach. Slater has a humble attitude to the market and does not attempt to forecast which way it is going at any point in time. He regards running profits and cutting losses as a key factor in successful investment. His investment style is probably one of the most accessible in the book.
OTHER Despite not managing other people’s money, there is a lot of evidence of Slater’s investment strategy being successful. His business column and recommendations over the years have proved to be very profitable. A public fund based entirely on his principles would be up 188 % against the market’s 73 % in the last three years, and 77 % up over the market’s 7 % during the last five years. Slater is first and foremost known in the UK for trying to help the man in the street invest successfully. He has written five investment books as well as thirty books for children. He is still a very active investor and still answers questions about investing on his homepage.
Sources: Jim Slater; www.jimslater.org.uk; MFM Slater Growth Fund.
“At any given time there exists an inventory of undiscovered embezzlement in […] the country’s businesses and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there...
We have arrived at our concluding and in our view arguably most interesting piece on information technology. Software & Services is the third of the industry groups that constitutes the Information Technology sector. The other two, Technology Hardware & Equipment plus Semiconductors & Semiconductor equipment, have been covered in previous issues of The Companion. Software & Services is further broken up into three industries, namely 1) Software...
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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.
Just as outright euphoria is often a sign of a market top, fear is, for sure, a sign of a market bottom. Time and time again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors. When the world wants to buy only Treasury Bills, you can almost close your eyes and get long stocks.
The only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit.
Beginning at a very early age, I have made cumulatively more judgments, and more investments decisions based on the same kinds of data, than almost anyone else. This process unconsciously leads to a sharpening, a fine-tuning, that, over time, results in fewer mistakes. In this repetitious behavior, a learning occurs that is not consciously understandable but allows one to develop ‘good instincts’. Often listening to an idea led me to an entirely different conclusion to that envisaged by the proponent of that same idea, whose knowledge was far deeper than mine.
BORN New York, USA 1940.
EDUCATION In 1960 Steinhardt graduated from the Wharton School of Finance at the University of Pennsylvania in only three years.
CAREER Steinhardt began his career on Wall Street in research and analyst positions with mutual-fund company Calvin Bullock followed by a similar position at the brokerage firm at Loeb, Rhoades & Co, before founding Steinhardt, Fine, Berkowitz & Co., a hedge fund, in 1967. He retired and closed the fund in 1995. In 2004 he made a comeback through Wisdom Tree, which is the seventh largest index fund in the US based on ETF.
INVESTMENT PHILOSOPHY Even if the fundamentals were the starting-point, he usually ended up being a short-term investor with the normal holding being no longer than a month. ‘Our investment style is four yards up the middle in a cloud of dust’ as he himself described his investment style with the help of a metaphor from American football. He invested in all forms of assets, but stocks were usually in the majority. In the final years of the fund’s existence he also invested abroad, but with dreadful results. In contrast to the other traders in this book, Steinhardt was the opposite of a trend-follower. He preferred to go against the market and short his favorite companies. Neither did he care for technical analysis and graphs. Contrarian is probably the best description of his style, but in large part he was highly individual, and hard to copy. He had no rules or valuation frameworks, but tried simply to think differently. Steinhardt was known for his ability to predict the direction of the stock market. In his time, he was said to have been the most demanding boss on Wall Street.
OTHER He was one of the first prominent hedge-fund managers. No one has been so successful (over 30 % annual gross performance in 28 years) or had that stamina using such an intense investment strategy as Michael Steinhardt. One dollar invested in 1967 in his fund would have grown to $481 in 1995, compared to $19 for S&P 500 in the same period. Having in mind that Steinhardt on average only was roughly 35% net long in his portfolio over the time tells you how good he must have been on both picking winners and losers in the stockmarket. In 2001 he published his autobiography: No bull: my life in and out of the markets. Since retirement he has managed his own money and collected art. He is also a major philanthropist, active in Jewish causes.
Sources: Michael Steinhardt, No bull: my life in and out of markets (2001); Investopedia; Wikipedia.
In many professions experts face a constant rise in complexity due to increased domain knowledge. The traditional way to handle this has been to specialize into an ever-smaller niche to increase skill and to be able to keep the expert status. Besides creating the undesirable second order effect that too few have the ability to overview and understand larger areas, this strategy...
Technology Hardware & Equipment is one of three industries that make up the Information Technology sector, the others being Software & Services plus Semiconductors & Semiconductor Equipment. The Technology Hardware & Equipment industry further contains three sub-industries: 1) Communications Equipment, 2) Technology Hardware, Storage & Peripherals and...
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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.
Be very careful of any forecast. Usually, analysts, fund managers, and strategists can foresee the future only when it coincides with their own wishes, whereas they ignore the most obvious facts when these facts are not welcome.
Watch day and night (the latter very important) with curiosity what is happening around you because the greatest investment opportunities are always hidden in the most unlikely places.
We all need to remind ourselves that we have no idea how the world will look like in five years, let alone ten. Therefore, some of our business or investment decisions will be very wrong. But, what we need to focus upon is what the consequences could be, if we are wrong.
Investors mostly fail because they find it very hard to do nothing. But by spending a day in a round of strenuous idleness without your mobile phone and Blackberry, you may see the future more clearly. Remember, patience is also a form of action.
BORN Zurich, Switzerland 1946.
EDUCATION Faber studied economics at the University of Zurich and, at the age of 24, obtained a Ph.D. in Economics.
CAREER Between 1970 and 1978, Faber worked for the investment bank White Weld & Company Ltd. in New York, Zurich, and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the managing director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, Marc Faber Ltd., which acts as an investment advisor and fund manager. In addition, he publishes a widely read monthly investment newsletter The Gloom Boom & Doom Report, writes books, and is a regular contributor to several leading financial publications around the world.
INVESTMENT PHILOSOPHY Faber invests and advises all over the world in almost all asset classes. He relies on his command of economic history as well as his time as a trader. He focuses on macro, strategy and gold. For people in the investment community, he is maybe known as the most notorious bear in the market and at the same time a contrarian investor. The first is not always true. He has made several bullish calls, of which Brazil stocks in 1990s and world stock market in spring 2009 are the most remembered. The following cornerstones advice gives a sense of his investment philosophy: (i) Everything comes to the investor who buys out-of-favour and neglected assets. (ii) The best way to make money is to buy value stocks: low price to sales, low price to book, low price to cash flow, high dividend yield. (iii) Never forget to diversify properly. (iv) Never get carried away by a lucky investment with outsized gains. (v) Stay single! Even if he digs into specific stocks and sectors he spends most time on the macro level. He is keen on the Austrian School of economics.
OTHER He is well-known for being prescient about the 2008 financial crisis; the Asian crisis months before it happened; warning his clients to cash out before Black Monday in 1987; forecasting the burst in the Japanese bubble in 1990; correctly predicting the collapse in US gaming stocks in 1993; foreseeing the Asia-Pacific financial crisis of 1997/98; and so on. His mantra is ‘Follow the course opposite to custom and you will almost always be right’. His book Tomorrow’s Gold was for several weeks on Amazon’s best-seller list. The Gloom Boom & Doom Report uses economic, social, and historical trends to warn investors when investment themes have become widely accepted and are, therefore, highly priced and risky, while it continuously searches for opportunities in unloved and depressed markets. Gold is the asset where he has been most successful. His web site is illustrated with 17th century paintings of “The Dance of Death” and he is nicknamed Dr Doom. He has a collection of a quarter of a million Mao badges and has a ponytail.
Sources: Marc Faber; gloomboomdoom.com; Wikipedia.
In this text we investigate if today’s lower interest rates motivate higher equity valuation multiples. We in this try to understand a stock’s estimated fundamental value and not necessarily forecast its future short to mid-term market price. The answer to the above question is no, and the reason is that lower cost of capital is counterbalanced by adjustments in factors like...
Semiconductors & Semiconductor Equipment is one of three industries that make up the Information Technology Sector, the others being Software & Services plus Technology Hardware & Equipment. As is evident by the name this industry contains two sub-industries: the larger Semiconductors and the smaller but important sub-suppliers within Semiconductor Equipment...
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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.
Value investing makes sense and it works – over time. Benjamin Graham’s book The Intelligent Investor and Warren Buffett’s letters to shareholders in Berkshire Hathaway’s annual report are not about complex mathematical models; they’re about common sense.
In 1984, Buffett showed that the returns – over time – of the value investors were much above average. In a 2004 update, the late Lou Lowenstein showed again that the returns over time of ten value funds (including our own First Eagle Global) were much above average. So why so few value investors? They’re patient, long-term investors who therefore every now and then lag behind their peers and the benchmark. And to lag is to suffer. Value investors understand that the rewards come over time. No immediate gratification.
In the recent (and continuing) financial crisis, many value investors learned a lesson: it’s no longer enough to be entirely bottom-up investors. A key question today is whether we are still in the economic and financial landscape of the post-Second World War period or are we in a new, so far undefined landscape?
BORN Poitiers, France, 1940.
EDUCATION Eveillard is a graduate of Écoles des Hautes Études Commerciales, an esteemed French graduate school for business studies.
CAREER He started his career in 1962 with the French bank Société Générale until relocating to the US in 1968. Two years later, Eveillard began as an analyst with the SoGen International Fund. In 1979, he was appointed as the portfolio manager of the fund, later renamed the First Eagle Global Fund. After managing it for over thirty years, he now serves as senior adviser.
INVESTMENT PHILOSOPHY Eveillard is a long-term international stock market value investor, with a history of investing against the herd. In contrast to most value investors, he also has a top-down scenario. Another difference is in valuations, where he focuses on the enterprise value to EBIT. Preservation of capital is of highest priority. In general he buys stocks of companies that are financially safe, where there is very little or no debt, and whose intrinsic value is seen as being well above the current stock price. He is suspicious of low tax, which he thinks is usually a sign that profits are overstated. His remark ‘I know the argument that you should only own your best 30 or 40 ideas, but I’ve never proven over time that I actually know in advance what those are’ explains why he usually has more than 100 positions in his portfolios. He has kept a gold position in his funds as ‘calamity insurance’ for several years. He regards his investment style to be sometimes in the Benjamin Graham (deep-value) mode, but more often in the Warren Buffett mode.
OTHER Eveillard took the First Eagle Global Fund from $15 million to its current $20 billion in assets. He managed the fund alone for the first seven years. When Eveillard’s successor abruptly resigned, he made a comeback aged 67. He is fond of the Austrian School of economics. In 2003, together with Ralph Wanger, he was the first to receive the Lifetime Achievement Award from Morningstar for building one of the most successful long-term records in the investment business. Through the Eveillard Family Charitable Trust he has provided support to a wide range of institutions in the arts, education, and social services. He enjoys going to the opera, and collects drawings in the same contrarian manner as he acquires securities.
Sources: Jean-Marie Eveillard; First Eagle Global Fund 1979–2011; Forbes, September 2009; Wikipedia.
This initial piece will discuss a topic central to The Companion – how do small-cap investors actually work? What is their strategy when it comes to selecting stocks to own? Hence, the topic for the text is the target audience of the text. Obviously, the content will then not come as a...
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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.
A stock’s price is rarely the same as the company’s value. Reason for that is the valuation process is flawed. Stock prices are heavily affected by market dynamics and by investors’ emotions. These emotions swing widely from pessimism to optimism. Also, many investors buy stocks with the intention of holding them for several years based upon information that really only applies to a short-term time horizon. While the information they are using to invest may be valuable, it is often the wrong information for their investment timeframe. If people invest in a company based on current information, they have to be prepared to act on any changes to that information in a much shorter timeframe than most investors are prepared to do. So therefore I respond more readily to new information than other investors. Nevertheless, one has to constantly compare a stock’s technical and fundamental earnings growth rate against other stocks that may not be in the portfolio, but that have even better technical and fundamental outlooks. It is interesting to note the 80:20 rule here: fewer than 20 % of my stocks have produced more than 80 % of my gains.
Often when I talk to consultants, they like to see a very systematic, value-based process. They think that each stock has to be submitted to some type of disciplined, precise, and uniform evaluation. But the real world is not that precise. I’m convinced there is no universal valuation method. In fact, in the short run, valuation is not the key factor. Each company’s stock price is unique to that company’s place in the market environment and to its own phase in its corporate development. We don’t ignore value, but realize in the short-to-intermediate term it is not the determinant factor in a stock’s price movement. It has been said in the short term, a stock’s price is like a voting machine, but in the long term it’s a weighing machine. Over a full market cycle, the daily price action of a stock is irrelevant to the longer-term worth of a company.
Most people believe high turnover is risky. Again, I think just the opposite. High turnover reduces risk when it is the result of taking a series of small losses in order to avoid larger losses. I don’t hold on to stocks with deteriorating fundamentals or price patterns. For me, this kind of turnover makes sense. It reduces risk. More money can be made buying high and selling at even higher prices. I try to buy stocks that have already had good price moves, that are often making new highs, and that have positive relative strength. These are stocks in demand by other investors. The risk is that I’m buying near the top. But I would much rather be invested in a stock that is increasing in price and take the risk that it may begin to decline than invest in a stock that is already in a decline and try to guess when it will turn around. The above philosophy is most successful in a bull market. In bear markets, the largest gains may come from stocks that have declined the greatest percentage from their previous highs. Look for individual stocks with saucer bottoms or other technical indications that the stock is about to rebound. Another strategic approach is to buy a class of stocks and/or a specific sector (such as technology) in the bottom decile(s) from their former peaks. Some of the best opportunities may be in stocks recovering from a significant market decline. For example, in the short-to intermediate term, tech stocks that have been oversold have doubled in just one quarter from a major bottom. Further gains could ensue after that. In the long term, classic growth stocks can provide the best returns over a full market cycle. Remember, most investors over-diversify; it’s best to concentrate on your best ideas.
BORN Chicago, USA 1942.
EDUCATION Driehaus earned his B.Sc. in 1965 and in 1970 took an MBA at DePaul University’s College of Commerce (now the Driehaus College of Business).
CAREER After 14 years as a stock analyst and fund manager, in 1979 Driehaus founded the brokerage Driehaus Securities Corporation LLC. Three years later he founded Driehaus Capital Management LLC, where he is still responsible for investments and chairs the board.
INVESTMENT PHILOSOPHY Driehaus is best categorized as an international growth investor. His cornerstones are accelerating sales and earnings plus relative price momentum. In addition, he looks for companies with strong, consistent, and sustained earnings growth. He is principally a bottom-up investor. He believes the application of technical analysis is essential to identify timely investments in attractive stocks and industries.
OTHER In 2000, Driehaus was named in Barron’s ‘All-Century’ team as one of the 25 most influential people in the mutual-fund industry in the past hundred years. Driehaus has roughly $7.5 billion in assets under management. Through philanthropic- and community-service-oriented projects he supports conservation of classic architecture and the arts, reflecting his belief that beauty and the arts provide much-needed balance in a person’s life. 2008 opened the Richard H Driehaus in Chicago.
Sources: Richard H. Driehaus; Driehaus Capital Management LLC; Mid Cap Growth Composite.
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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.
· You make most of your money in a bear market. You just don’t realize it at the time.
· Great companies bought at great prices should be like great friends—you do not want to drop them precipitously.
· History provides a crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.
BORN Peoria, Illinois, USA 1909. Died 1994.
EDUCATION Davis graduated from Princeton University and took a Master’s at Columbia University in 1931. He earned a Ph.D. in political science at the Graduate Institute of International Studies, Geneva, in 1934.
CAREER His studies complete, he first worked at his brother-in-law’s investment firm for five years before becoming a freelance writer. Aged 38 he got $50,000 in seed capital from his wife and founded Shelby Cullom Davis & Company, mainly to manage insurance stocks. Between 1969 and 1975 he was also US Ambassador to Switzerland.
INVESTMENT PHILOSOPHY Davis was a specialized stock market value investor. He only invested in companies he knew well and where he had an edge (insurance companies in most cases). He focused on fundamentals, and especially looked for a solid balance sheet making sure the insurer did not hold risky assets such as junk bonds. He then measured the management quality and made trips to meet with management and drill them. He searched for what he called ‘compounding machines’, but equally he liked a boost from earnings and from investors bidding up the multiple. The strategy was known as the ‘Davis Double Play’. It was a buy-and-hold strategy, and he kept a long-term perspective through bull and bear markets. He was probably one of the first US investors abroad when he invested in Japanese insurance companies in the early 1960s. He recommended diversification, so that the ones you were wrong about were balanced by the ones you were right about.
OTHER By the time of his death in 1994, he had turned the original $50,000 stake into $900 million. In 47 years he had increased his stake 18.000 fold! The strategy of focusing on the insurance industry came to him after he had studied Benjamin Graham’s writings. Davis made the Forbes 400 list in 1988, and other than Warren Buffett he was the only one to make the list by picking stocks for a living. He gave all his wealth to a charitable trust and was known for extreme frugality – instead of playing tennis with new balls he used old, ratty ones.
Sources: John Rothschild, The Davis Dynasty (2001); Investopedia; Wikipedia.
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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.
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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.
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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
@Investbythebook
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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.
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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.
