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Brokers

Mike Burry on brokers:
http://www.siliconinvestor.com/readmsg. ... gid=372976
10/20/1996 8:59:00 PM

Which online commodities broker? I use Lind Waldock. They have
an online software package. But I don't use it because I like
to talk to my broker and hear the order, so I don't have any good
recommendations.

Checklist for Investment Decisions

The Checklist Manifesto
There's a really good section in chapter 8 of "The Checklist Manifesto" about using checklists when making investment decisions. I should type up the checks that are mentioned.

Ray Dalio
Ray Dalio talks about having created a checklist of all the things that can influence the markets.

The Intelligent Investor
from Daniel Kahneman via Jason Zweig in commentary on Ch 20 of Ben Graham's Intelligent Investor:

Well-calibrated confidence
- Do I understand this investment as well as I think I do?
- How much experience do I have? What is my track record with similar decisions in the past?
- What is the typical track record of other people who have tried this in the past?
- If I am buying, someone else is selling. How likely is it that I know something that this other person (or company) does not know?
- ditto for selling
- Have I calculated how much this investment needs to go up for me to break even after my taxes and costs of trading?

Correctly-anticipated regret
- How will I react if my analysis turns out to be wrong?
- Based on the historical performance of similar investments, how much could I lose?
- Do I have other investments that will tide me over if this decision turns out to be wrong? Do I already hold stocks, bonds, or funds with a proven record of going up when the kind of investment I'm considering goes down? Am I putting too much of my capital at risk with this new investment?
- When I tell myself, "You have a high tolerance for risk", how do I know? Have I ever lost a lot of money on an investment? How did it feel? Did I buy more, or did I bail out?
- Am I relying on my willpower alone to prevent me from panicking at the wrong time? Or have I controlled my own behavior in advance by diversifying, signing an investment contract, and dollar-cost averaging?

Source: Daniel Kahneman / Jason Zweig in commentary on Ch 20 of Ben Graham's Intelligent Investor

Diversification

Index funds / passive investing

2017.05.30 - FT - The hidden dangers of passive investing

index-tracking products are no miracle remedy. They’re more like antibiotics: valuable when deployed in moderation, but likely to do more harm than good should their use become widespread. Indeed, if passive equity funds were to continue their present growth trajectory, they would own all listed stocks by 2030. That could threaten the free-market economy. To see why, it’s necessary to look more closely at the workings of index investing and the structure of the passive fund industry.

Under index-tracking, the shares of companies with large weightings in the major indices attract more capital irrespective of their underlying performance. So in a system in which passive funds monopolise investment flows, the price of a security ceases to function as a gauge of a firm’s underlying prospects. This distorts the cost of equity and the price of credit. In such conditions, serious misallocations of capital would become the norm, creating asset bubbles on the one hand and leaving innovative firms starved of funds on the other. That wouldn’t be good for productivity or growth.
Taking the commoditisation of the asset management industry to its logical conclusion, entire industries could end up being swallowed up by the big three.
And what happens when a small group of passive shareholders — investors who can’t vote with their feet — control most or all of the companies in a given industry? Two developments are likely. The first is a weakening of corporate governance standards.
The second is an erosion of competitive forces, whereby the overlapping holdings of the dominant passive shareholders create the conditions for oligopolistic corporate practices to emerge. Several recent academic studies have found that competition has diminished in industries where company shareholdings are concentrated among a small group of mostly passive investors, hurting consumers in the process.
About the author: Renaud de Planta is chairman of Pictet Asset Management and managing partner of the Pictet Group

How Important is Management?

this'll be where I discuss how important management is when looking at a company

Paul Taylor on the importance of management:

Travers: Is management quality important when you're looking at a company, and if so, how do you evaluate the team?

Taylor: I believe that you want a business a monkey can run, because eventually, a monkey will run it. This means that I look for a good business first before looking at management. A good business is one that generates free cash flow and can be easily understood.

As far as specific management evaluation, like most things in life you pay attention more to what management does instead of what they say. For example, how many options do they grant? What do they do with free cash flow? How many shares do they own? Do they think like owners? Are they deliberate with their decisions? Do they acknowledge and act to fix mistakes?

My response: iirc that "business a monkey could run" line is used by Buffett and Munger a lot, but it seems to depend on the particular investment style that a manager has. If you're going to be holding a company for the rest of your life and the current CEO is in his 60s, then yes, you probably want to pay more attention to the fundamental business than to the good attributes of the CEO. But if you're looking at a relatively young company with a relatively young CEO, I think it makes sense to spend a lot of time trying to figure out just how driven the CEO is. For example, I doubt the "business before management" line of reasoning would have led someone to invest in Andrew Carnegie's first company, or Sam Walton's, or Walt Disney's, or Steve Job's; but investing in those guys seems like it would have been a great idea, because they're so driven and so smart.

Margin of Safety (the idea, not the book)

Ben Graham's Thoughts

Chapter 20 in The Intelligent Investor is where Graham writes about margin of safety:

re: bonds
"This past ability to earn in excess of interest requirements constitutes the margin of safety that is counted on to protect the investor against loss or discomfiture in the event of some future decline in net income."

re: stocks
"In the ordinary common stock, bought for investment under normal conditions, the margin of safety lies in an expected earning power considerably above the going rate for bonds." (p514)

"A true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience" (p520) [as opposed to

In the quote below he seems to be defining MoS as the expected yield of the stock (which I think is just the inverse of your own calculation of the PE you're paying) minus the bond-alternative opportunity cost (ie the ability to earn X interest from bonds at lower risk).

The margin of safety is the difference between the percentage rate of the earnings on the stock at the price you pay for it and the rate of interest on bonds, and that margin of safety is the difference which would absorb unsatisfactory developments.

Source: a speech in '72, taken from Jason Zweig's footnote on p515 of the Intelligent Investor, softcover 2006 edition

Michael Burry's Thoughts
http://www.siliconinvestor.com/readmsg. ... id=5566315

1998/8/22
I disagree with the premise that a margin of safety comes primarily from "if liquidation occured what would we have." Two reasons:

1) Even on value stocks, the liquidation value is often a fraction of the price paid. In a liquidation, even value investors lose a large part of their collective shirt. Net nets are one exception, and even most of them aren't really an exception due to inventory bloat.

2) Value stocks are more likely to undergo liquidation as a group than the S&P Index. Often these are poor businesses and there is a reason they are trading just above or near liquidation value. This is my hypothesis, and I have no proof for this.

That said, I think that the liquidation value is indeed one component of a margin of safety (and it may even be the first thing to look at), but the rest comes from time-consuming research that confirms liquidation won't occur and that the business should be valued much higher for one reason or another, IMO. This part is an awful lot of art and not much science IMO.

re: point 1
- If a "value stock" is defined as "a stock with a big margin of safety", then his first point would seem to be using circular reasoning, because he'd basically be saying "The idea of having a 'margin of safety' can't require that investors avoid losses from liquidation, because even stocks with a large margin of safety can lose investors money in a liquidation".
- [continuing the previous point] I think what he's actually doing is trying to come up with a definition for the term "value stock" that fits the famous investments typically considered to be value investments (ex: Buffett buying GEICO stock when the company was facing trouble). And he's saying that even in those famous cases, the investors would have lost a lot of money if there had been a liquidation.

My Thoughts on Various Topics

Investment Philosophies / Methods / Concepts

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