Zen- Vesting: The Road to Graham-and-Doddsville - The Journey's End

"Two roads diverged in a wood, and I took the one less travelled by. And that has made all the difference." (Robert Frost)

Maybe there has not been anything in the investing world more talked of, and less understood, than outperformance. It is every investor's wish to outperform the peers and the relevant benchmark. And yet, the great majority of investors do not achieve it. However, do those investors live in a blind and eager pursuit of it. And the more haste they make about outperformance, the further they part from their journey's end.

Wall Street: The Beaten Track That Leads To Nowhere

Most investors are obsessed with outperformance. They follow the cry of the masses and dedicate most of the time scrutinizing the outcome of their actions, and compare it to those of their counterparts.

Investors listening to the siren sound of consistent outperformance should expect to end up on Wall Street. A place occupied by few wealthy and many filthy. They must expect to continue their days in wandering and error.

Wall Street is a beaten track that leads to nowhere and thus, is the most dangerous road to follow in investing. And their companions on this road, instead of helping, try to constantly misguide them. Sooner or later one of those investors following the way to Wall Street will stumble and fall. And then another tumbles upon him. And so they follow, one upon the neck of another, until the road is littered with the corpses of those misguided investors.

That is Wall Street. A street that turns out over and over again to be nothing else than a heap of miscarriages.

Off the Beaten Track to Investment Success: The Road to Graham-and-Doddsville

Let us now turn our attention to what it is the way we should be at in order to “outperform” the beaten track of Wall Street.

If we are on the right track, we will wonder why we are alone for such a long time. Furthermore, shall we find every day how much wisdom we have sought and attained concerning our investment process, companies, ourselves and about others, Irrespectively of the daily, monthly or yearly results of our action or inaction.

Hence, investors who have good chance to "outperform" the market on the long- run are highly concerned about their process. And they are concerned about taking along with them a reliable compass about the companies they invested in, themselves and about fellow investors on their journey. Those investors will end up off the beaten track. A track that leads them to a place of repose. To a little village called Graham-and-Doddsville.

The true felicity of life in Graham-and-Doddsville is that it is free from noise. Here the investor can enjoy the present without any anxious dependence upon the future. In this little village he does not have to amuse himself with either excessive hopes or fears. He can just rest satisfied with whatever security he is holding. Because the margin of safety is abundantly sufficient for the investor that is aware of its ignorance and does not expect anything.

Tranquillity is maybe the most important trait of a “Value Investor”. It is a certain equality of mind. And no condition of fortune and misfortune can either exalt or depress it. Nothing can make it less, because it is the state of the “Value Investor's” perfection.

The value investor that thinks independently, judges correctly, is persistent and enjoys a perpetual calm is the one that will be the most successful. Because he takes a true prospect of the companies he invests in, Mr. Market, live and himself. He observes an order and measure in investing and existence, and squares his professional and individual life in accordance with that reasoning.

He does care about his investments, about the market and life, but he does so without any trouble. And he does so with an indifference towards the wheel of fortune and the opinion of others. Most importantly does he not fear, because fear makes a discord. The investor that fears the market will serve the market. But the market will serve those who are tranquil in mind and patient.

The investor who wants to excel in the business of “Value investing” therefore should not follow the crowd, like lemmings. He must leave the crowd, and govern his actions by reason and not by example.

The question of successfully investing is not to be decided by vote. Far from it. The plurality of voices, especially when diversity has broken down, is an argument of the wrong. Common investors find it easier to believe than to judge. They content themselves with what is conventional, and never examine whether it is right or wrong.

 

Reference:

Frances and Henry Hazlitt; The Wisdom of the Stoics; University Press of America 1984

Zen- Vesting: The Road to Graham-and-Doddsville (4)

“That which we manifest is before us; we are the creators of our own destiny. Be it through intention or ignorance, our successes and our failures have been brought on by none other than ourselves.” (Garth Stein)

In all our undertakings, might they be entrepreneurial or in stock market investing, we must first examine our own strength and weakness. Next, scrutinize the enterprise. And finally, the persons with whom we are dealing with.

It is my opinion that the first point is the most important when it comes to stock market investing. It is so crucial to know oneself because human beings are prone to overconfidence and to overvalue themselves and their skills. Human beings tend to reckon that they know and can do more than really is the case.

Especially in stock market investing should the investor never forget that all market participants are, to a certain extent, slaves to Mr. Market’s wheel of fortune. Some market participants, the “Value Investors”, are only in loose and golden chains. The majority, the speculators, in strait ones.

Even the people on Wall Street that bind most of the market participants are slaves themselves. Some to power, others to wealth. Some to offices, and others to contempt. Some to their superiors and institutions, others to themselves.

Even worse, is not life itself servitude? If it may so let us make the best out of it! Let us mend our fortunes in stock market investing with our philosophy to investing, knowledge about ourselves and fellow investors and virtuous behavior according to that knowledge

Let us not desire anything out of our reach, but rather content us with things we know and hopefully have at hand. Let us do so without envying the advantages and greatness of other investors. Because history has shown repeatedly that greatness often stands upon a shaky precipice.

Thus, let us never forget that it is less spectacular living upon a level, i.e. following the framework to investing outlined by Graham and Dodd and investing only within our circle of competence, but nevertheless much safer and quieter.

Reference:

Frances and Henry Hazlitt; The Wisdom of the Stoics; University Press of America 1984

Zen- Vesting: The Road to Graham-and-Doddsville (3)

The framework of Graham and Dodd is simple but not easy. More importantly, is the framework, like any other, worthless to those investors who do not know themselves. It is also worthless to those who do not have an independent opinion about a stock in question. Is the stock a cigar- but investment? Is it a compounder? Or is it something in between?

To come up with a satisfactory conclusion the "Value Investor" must scrutinize potential investments one by one. He must examine them not on the ground of what they are called by fellow investors, but what they truly are.

It makes no sense to set a high esteem upon wide moat, great management etc., if the investor does not first know what old-fashioned "Value Investing" really is about. Because this investor will never learn about the nuances of Value Investing". The nuances of a stock fulfilling one or more parameters of value, or a stock having a great many of them. They will never grasp how those stocks differ.

The framework to "Value Investing" outlined by Graham and Dodd is of great importance, even for “scuttlebutt” investors. And a few useful and simple rules at hand do more toward succeeding in "Value Investing" than whole volumes of complex ones.

The salutary precepts of "Value Investing", and getting to know oneself, should be the "Value Investor's" daily meditation. Because they are the foundations by which he ought to square his analysis and actions in stock market investing.

 

 

Reference:

Frances and Henry Hazlitt; The Wisdom of the Stoics; University Press of America 1984

Zen- Vesting: The Road to Graham-and-Doddsville (2)

"In character, in manner, in style, in all things, the supreme excellence is simplicity." (Henry Wadsworth Longfellow)

The knowledge taught by the old guards to “Value Investing” was mainly a certain quantitative framework toward stock selection. What to look for in financial statements and what to dismiss. It is a simple framework. And it is my belief that most “Value Investors” are much better off in that simplicity.

For some time, a great many of so called "Value Investors" starting to talk about that there is more to “Value Investing” than just the numbers. And many fellow investors have concluded that more must be learned and done. So, the crowd grew less careful about who they are as an investor and their circle of competence.

The simplicity of “Value Investing”, and its plain and open virtue outlined by the old masters, is nowadays often dismissed. And “Value Investing” turned into a dark and complex science. The new masters of “Value Investing” tell their disciples to think about moats and to discount the distant, unknown cash- flow into the present by using dubious discount rates. They are preaching that it is worth paying up for wonderful business. Or even worse, to dismiss the price being paid for a business at all and concentrate solely on the quality of the business.

There is no doubt that the argument: “It takes more than just the numbers to identify a great company” is justified as far as it goes. But such arguments are wicked. Because often they are taken too far. They are wicked because they lead fellow investors to focus their attention on the company way too much, and dismiss the cheery price paid too easily.

Furthermore, do these "Value Investors" forget to tell their fellow investors that if wickedness was simple, simple remedies also were sufficient to guard against it. But as complexity has taken root and spread through the value investing community, the need to make use of stronger remedies increased too.

Reference:

Frances and Henry Hazlitt; The Wisdom of the Stoics; University Press of America 1984

Zen- Vesting: The Road to Graham-and-Doddsville (1)

 “Have not the investors and security analysts eaten of the tree of knowledge of good and evil prospects? And by so doing, have they not permanently expelled themselves from that Eden where reasonable companies, cheaply priced, could be plucked off the bushes?" (Author Unknown)”

Nowadays, the majority of self- proclaimed "value investors" explicitly recommend picking stocks by picking great companies. They are not disciples of Benjamin Graham, whose concept to stock market investing they regard as outdated in a post-industrial era. But rather of Philip Fisher, who advocated a system to stock market investing called "scuttlebutt". The "scuttlebutt" approach involves talking to company managers, employees, customers, suppliers, and knowledgeable people in the industry to identify able managers of companies with extraordinary profitability and growth prospects. 

Or they are followers of Peter Lynch’s approach. Lynch, for example, used to purchase a company's stock based on the CEO’s impressive grasp of retailing facts and figures. This is Peter' s so called Principle Nr.14, which says if you liked the store, chances are you would love the stock.

In short, most "value investors" nowadays are obsessed with finding the next great moat company that will turn out to be a multi bagger. The price being paid for such a company is, at best, only of secondary importance.

Especially the “scuttlebutt” approach is extremely time consuming. Time, I argue, that would be better spent by firstly, studying the simple rules and the framework to investing outlined by Graham and Dodd. Then, to look inside oneself, trying to figure out what kind of investor one really is.

Knowing the basic rules to stock market investing, and more importantly knowing oneself, is not only a precondition for long- term success in value investing. It is also an eminent mark of wisdom.

"Value Investing" is a big tent, often squatted by value pretenders. Investors that keep a thrifty table and lavish out upon their building. The ones that are stingy at home but dissipative abroad. Such diversity of character is vicious because the effect is a dissatisfied and uneasy mind. One that is assaulted by terrible monsters one day and tempted by sirens the other when dealing with Mr. Market.

The wise "Value Investor", on the other hand, lives by rules, is self-aware, knows what he is looking for and acts according to that knowledge when dealing with Mr. Market. Investors who live and act according to that knowledge will walk through their investments instead of being carried by them like a straw in the river.

Reference:

Frances and Henry Hazlitt; The Wisdom of the Stoics; University Press of America 1984

Great Stock Market Operators Never Heard Of: Andrè Kostolany

Introduction

This post will introduce a stock market operator I fortunately encountered early on in my investment career, who saved me a lot of money and had a lasting impact on my philosophy to investing. His name was André Kostolany, a legend in Germany, but unbeknownst to the Anglo- Saxon investment community.

“At the stock exchange 2 + 2 are never 4, but 5 minus 1. Better be prepared to stomach the -1.” (André Kostolany)

 

It is the story about a speculator whose fame was not founded on the net worth accumulated during his investment career, which remains a mystery. But rather on the amount of practical experience he gained during his 70-year investment journey and his witty and funny way expounding it to his audience.

Kostolany was known for his pleasure-seeking lifestyle and speculating on the financial markets while extensively travelling. A one-minute Audi commercial from 1999 neatly encapsulates his personality, philosophy, and investment style. It even nails the trough of the long-lasting bear market in the commodity sector in one sentence. 

Kostolany was by no means a value investor in the spirit of Graham and Dodd, but rather a speculator resembling Jesse Livermore. He was a diehard contrarian that did not invest in a scientific manner, like running DCF models. He rather ran his operations on a philosophy of creative imagination. He was convinced that investing was not a science, but rather an art form and to be successful one should rather be a philosopher than a finance guy.

Procrastination: The Hidden Value of Delaying

The reason for me to write this little post, which I intended to do a long time ago and have successfully been avoiding for quite a while, is to make the case for procrastination when it comes to stock market investing.

People following a puritanical ideology would like to see procrastination right at the top of the seven deadly sins. But wrongly so! In some professional activities, like sports, design, stock market investing, to name just a few, it should be wholeheartedly embraced. Consciously procrastinating, and astutely combining the different forms, is an art and should strike you as an intelligent behavior.

In ancient times procrastination was highly esteemed. The wisest Greek and Roman leaders and philosophers were masters in playing pocket billiard. They would basically sit around all day long doing nothing apart from thinking and debating. Only when they truly had to would they move their bloomin’ arse.

Viewing procrastination as a sin is quite a new phenomenon coming up in the 17th century, a time the puritans gained the upper hand in society. One of their main advocates was Jonathan Edwards’s, who declaimed over and scared the hell out of procrastinators:

"Those who delay doing good works flatter themselves that they shall see another day, and then another, and trust to that, until finally most of them are swallowed up in hell, to lament their folly to all eternity, in the lake that burns with fire and brimstone.” 

On The Beauty of Value Investing

When I first encountered the Intelligent Investor by Benjamin Graham it was like a revelation. After finishing the book I was in the same emotional state like when I first saw Michelangelo’s frescos in the Sistine chapel. The strong feeling was even intensified when I read Security Analysis by Graham and Dodd.

Value Investing: The Wisdom of the Samurai (2)

Make no mistake dear reader. Stock market investing is a form of war. The enemy is the market, especially financial institutions and institutional investors. They have to be fought ruthlessly over a long period of time. But in order to take advantage of financial institutions, and crush the market over the long- haul, you need not only to have a sound process but also a strategy.

Value Investing: The Widsdom of The Samurai

We should make no mistake. Stock market investing is a form of war. The enemy is the market, which has to be beaten on the long- haul. And in order to beat the enemy we not only need to have a sound process to investing, but also a strategy. We need to know ourselves, the strength and the weakness, and we need to know about those of our enemies, our counterparts.

Inactivity: Why Doing Nothing Should Strike You As a Rational Behavior in Investing

Chris Brown from Tweedy and Brown once told an anecdote about an investment manager he had interviewed. The money manager proudly claimed that he made 250 company visits in one year. Gosch, Chris thought “What did this guy do? Drive by the headquater and wave?”

Shortly after, another international manager claimed that his team visited 400 companies in a year. Again, Chris thought, “What did these guys do? Fly over the headquater and wave?”

Musings On Value Investing: How To Succeed And Why Most Investors Won't

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” (Warren Buffett)

The process to value investing outlined by Graham and Dodd (GD) is simple and sound, but unfortunately not easy. Mainly because following it does not prevent from unforeseen adverse outcomes, especially in the form of short- term volatility.

Nevertheless, does it help to stack the odds of a satisfactory monetary outcome on the long- run for those investors with a reasonable analytic skill and, more importantly, the right mental framework.

Value Investing And The Irrelevance of Performance Consistency

The fund industry and institutional investors have long marketed the myth of performance consistency to the public. They are obsessed with the idea that great investors can always earn higher returns than the market, best on a daily basis and with low short-term volatility.

Value Investing And The Art of K- Level Thinking

Recently, I stumbled over a New York Times puzzle that is followed by an article. It asked readers to pick a number between 0 and 100 that is two-thirds of the average guess of the participants of the game (please play before reading further).

The Art of Value Investing: The Fiction That is a Fact

” (…) Today, as we honour the legacy of Graham and Dodd, it is important to remember that value investing is not a perfect science. Rather it is an art, with an ongoing need for judgement, refinement, patience and reflection. (…) ”  (Seth Klarman)

Value Investing And The Art of Knowing Nothing

Successfully implementing a value investing strategy requires a lot more than judging the quantitative and qualitative factors of a company and buying when the stock price is below intrinsic value. The Graham and Dodd framework is a simple framework but not easily implemented.

Peter Cundill - Value Investing And The Art of Being Flexible

This is a summary and interpretation of a  lecture on value investing and investing in Japan by the great value investor Peter Cundill. The presentation was held in 2005 at the Ben Graham Centre of Value Investing.

Value Investing and the Irrelevance of GDP Growth

Conventional wisdom holds that equity market returns are linked to GDP growth. Supply-side models assume that GDP growth of the underlying economy flows to shareholders in three steps.

First, it transforms into corporate profit growth.

Benjamin Graham the Shareholder Activist

"The choice of a common stock is a single act; its ownership is a continuing process. Certainly there is just as much reason to exercise care and judgement in being as becoming a shareholder." (Security Analysis; p.508)

Value Investing and the Art of Doing Nothing

"It is awfully hard work doing nothing."
(Oscar Wilde)

When I am asked what is the most difficult thing when applying a value strategy one thing right away comes into my mind. Doing nothing!