How To Think Like Benjamin Graham And Invest Li... ##TOP##
Graham liked to look at the historical company performance over an extended period of time. He preferred companies that avoid losses during recessionary periods. This points to industries such as utilities, insurance, food processing, medical supply firms and pharmaceuticals. Graham recommended 10 years of positive earnings in his screen for the defensive investors. Unfortunately, most screening programs on the market today only cover five years of income statement data. Our screen designates positive earnings for the last seven years.
How to Think Like Benjamin Graham and Invest Li...
More stock financials and valuation data are provided, along with trading histories of institutional investors and company executives. Investors can make smarter long-term decisions using powerful tools like the All-in-One Screener, interactive charts and comparison tables. Market valuations as well as economic and industry indicators lead to a better understanding of market cycles and overall valuations.
Now, if you don't personally have any mutual friends with Charlie, both he and Warren have been generous with their time and you can learn to replicate their strategies through their writing, interviews, and the yearly Berkshire Hathaway Annual Meeting. A great resource when you have $10-15 million to invest. On the other hand, if you are managing $1 million or so, and you would like to build wealth like Li Lu, net nets are the way to go!
He focuses on classic value plays where he identifies companies that are like free lottery tickets where the potential upside is big and where there is little risk of losing any money. He wrote about his investment strategy in the book The Dhandho Investor. I described it in a blog post here.
You exchange your time for money, so start thinking about how many hours of your life it took to save up the money to buy something and ask yourself questions like, How much of my life did I trade for this? and, Is it worth it?
Quantitative investment analysis can trace its origin back to Security Analysis (book) by Benjamin Graham and David Dodd in which the authors advocated detailed analysis of objective financial metrics of specific stocks. Quantitative investing replaces much of the ad-hoc financial analysis used by human fundamental investment analysts with a systematic framework designed and programmed by a person but largely executed by a computer in order to avoid cognitive biases that lead to inferior investment decisions. In an interview, Benjamin Graham admitted that even by that time ad-hoc detailed financial analysis of single stocks was unlikely to produce good risk-adjusted returns. Instead, he advocated a rules-based approach focused on constructing a coherent portfolio based on a relatively limited set of objective fundamental financial factors.
Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) because they are not as important and attempts to predict their movement are almost always futile. Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by Joel Greenblatt in his book on special-situation investment You Can Be a Stock Market Genius.
The term "value investing" causes confusion because it suggests that it is a distinct strategy, as opposed to something that all investors (including growth investors) should do. In a 1992 letter to shareholders, Warren Buffett said, "We think the very term 'value investing' is redundant". In other words, there is no such thing as "non-value investing" because putting your money into assets that you believe are overvalued would be better described as speculation, conspicuous consumption, etc., but not investing. Unfortunately, the term still exists, and therefore the quest for a distinct "value investing" strategy leads to over-simplification, both in practice and in theory.
Li Lu started like most value investors and focused on statistical cigar buts Benjamin Graham style, looking for the last puff. Consequently, he transitioned to small businesses where he could become a specialist in the field, later focused on Asia. The main message is that the philosophy is always the same, it is just your core competence that expands.
What would Graham advise us in the aftermath of the bubble? I think he would warn us that harsh regulation creates a dangerous illusion that the markets have now been made safe for investors. No reform can ever eradicate the certainty that investors will, sooner or later, get carried away first with their own greed and then with their own fear. Human nature is immutable. Whether we like it or not, the financial future will suffer regular outbreaks of booms and busts. Like the bubonic plague, SARS, or swine flu, we shall never be able to predict exactly when they will arrive or just when they will end. All we can know is that they will remain inevitable as long as markets themselves exist.
Value investors spend a lot of time thinking about Return on Equity and Return on Capital. These are the concepts that allow them to differentiate the earnings power of one company vs. another. To Fama/French, value is determined strictly by a database screen that sorts based on book value and price. To a value investor, value is a function of margin of safety, which can be established only by measuring market price against a range of intrinsic values, constructed through a conservative estimation of future cash flows.
One less known descendent resembles Fama in their use of data, but comes to starkly different conclusions. The firm is named Euclidean Technologies and they use machine learning to do a bottoms-up comparison of the entire operating histories of current companies against thousands of other companies across the past 50 years. They do this to build a foundation for estimating the range of future cash flows a company, with a given set of operating characteristics, might deliver. Then, they invest with an uber-rational systematic process that is protected from the human psychological barriers to buying good companies when Mr. Market offers them at great prices. This approach aligns much more closely with the value investing system and is nothing like buying a collection of companies with the highest book-to-market ratio.
Ben Graham, one of the best investors in the 20th century, lays out some easy-to-follow guidelines on how to be a successful investor. His main categories for investors are either defensive (don't know much about analyzing stock or don't want to invest the time) and enterprising investors who are willing to spend hours reading and researching stocks.These guidelines are often so straightforward you think you must be missing something but the true challenge comes to adhere to this discipline when your real money is on the line.
In short, Graham's later success shows that investors need to have the right attitude when they invest: Take a close look at a company's financial figures and buy stocks that you think offer good value.
Most of the big names in value investing, from Warren Buffett to Seth Klarman to Marty Whitman, are of the contrarian type. Contrarian value investors take delight in zigging when the market is zagging; they like to buy stocks on the cheap when everyone else has assumed that the companies have died or are on their deathbed.
The most well-known activist investor is Carl Icahn, who has won Board seats at numerous companies and attempted to break up huge firms like Time Warner over the decades (sometimes succeeding at doing so).
However, Warren Buffet has went through many different phases of investing. He started out with the cigarette butts, or picking up really cheap stocks that were so cheap, they were almost free but still had some value left in them. He then looked for great companies and did not care AS much about the price, he looked for great businesses and bought them even at so-so prices. Most recently, many say that he is even willing to pay a higher price than ever for companies because he believes they are great businesses that he would like to hold on to for forever.
97 percent of mutual funds perform worse than index after costs. Sadly, I think this number is likely to grow. As the cost of information gets lower and easier to acquire via the internet, will there be any reason to employ humans to do actuall investment decisions?
The fact that the book has many direct quotes from Mr. Munger is a source of derision in some of the negative reviews, but it would be almost impossible to write a book purporting to explain the Munger way of thinking about life and investing without extensive use of quotations. Furthermore, although most of the quotes will be familiar ground for those who have followed Charlie Munger for years, the material will be new and captivating for other readers. The witty nature of many of the quotations will likely prompt a curious mind to seek additional information elsewhere.
Aggressive investors are willing to devote serious time and energy to research stocks and select good ones. They enjoy thinking about money and see smart investing as a competitive game they want to win. Their goal is to achieve better returns than the passive investor (Graham says an extra 5% per year, before taxes, is necessary to justify all the effort.) 041b061a72