Notes & Quotes
"To invest successfully...what's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
“The sillier the market’s behavior, the greater the opportunity for the business-like investor"
-- Waren Buffett
Most important chapters in the book according to Warren Buffett are chapters 8 and 20 on the investors and market fluctuations and the margin of safety.
Investment is most intelligent when it is most businesslike
Operations for profit should be based not on optimism but on arithmetic
If you have formed a conclusion from the facts and if you know your judgement is sound, act on it
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
Be prepared for opportunities
To be an investor, you must be a believer in a better tomorrow
The investor’s chief problem is himself
"For indeed, the investors chief problem and even his worst enemy is likely to be himself"
Danger of thinking an industry will outperform all others over time
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors"
“You should never succumb to the ‘certainty’ that any industry will outperform all others in the future"
This is especially relevant today where tech is looked upon as the industry to beat all others, also given my own biases.
The market is not efficient and prices cannot be assumed to be rational or predictable at any one moment
“The only indisputable truth that the past teaches us is that the future will always surprise us-always!"
“Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before."
Not losing is often a better strategy in the stock market than trying to win
“what you don’t do is as important to your success as what you do"
Simplicity over complexity
If you don’t understand it, forget it.
Avoid speculation and instead invest
“There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part"
“timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price"
On bargain stocks and investing
“A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years"
Investors and the price quotation of the stock market
“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more"
“At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies"
“He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored."
“Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop"
“The primary cause of failure is that they pay too much attention to what the stock market is doing currently"
The investor’s primary interest
Acquiring and holding suitable securities at suitable prices.
Characteristics of bull markets
1. a historically high price level
2. high price/earnings ratios
3. low dividend yields as against bond yields
4. much speculation on margin
5. many offerings of new common-stock issues of poor quality
Avoid high yield bonds
Expect opposites
When everyone else is enthusiastic, expect poor performance to come. When everyone else is pessimistic, expect positive performance to come.
History has shown this to be true.
Be prepared for these situations.
“the consensus is at its most cheery just when the stocks are most overpriced-and gloomiest just when they are cheapest"
History has shown that yesterday’s losers are often tomorrow’s winners
Advantages of continuous investments over time
“systematic and uniform purchases of common stocks may present no more psychological and financial difficulties than similar continuous payments for US savings bonds and for life insurance—to which they should be complementary"
The dangers of IPOs
“most new issues are sold under favorable market conditions—which means favorable for the seller and consequently less favorable for the buyer"
They are typically done so that the controlling interests can cash in on a favorable market.
When IPOs can be good
When IPOs happen in the middle of bull-markets.
On outperforming
“To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street."
“concentrate on the larger companies that are going through a period of unpopularity” — when there are disappointing results and/or unpopular
Be wary of anyone promising spectacular income or profits
Don’t take a single year’s earnings seriously
Read the company’s footnotes and look for anything fishy or doesn’t make sense
On the value of simple math over complex math in evaluating stocks
“In 44 years of Wall Street experience and study, I have never seen dependable calculations made about common-stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment"
Always have a margin of safety
“For the margin guarantees only that he has a better chance for profit than for loss—not that loss is impossible"
“For most investors diversification is the simplest and cheapest way to widen your margin of safety"
“To have a true investment there must be present a true margin of safety. And 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"
Problems to be on the lookout for:
1. Serial acquirers
2. Borrowing debt or selling stock to raise a lot of money (“cash from financing activities”)
3. Only has one major customer for all its revenue
Good signs for a company:
1. Large moat or competitive advantage
2. Marathoner, not a sprinter
3. Spends money developing new business
7 qualities for common stocks
1. Adequate Size of the Enterprise (large companies)
2. A sufficiently strong financial condition (current ratio > 2:1)
3. Earnings Stability (over 10 years)
4. Dividend Record (payments over 20+ years)
5. Earnings Growth (increase of at least 1/3 per-share earnings in the past 10 years, using 3 year averages)
6. Moderate P/E ratio (<15)
7. Moderate Price to Assets ratio (P/Book < 22.5)
A good company does not always make a strong investment
At some point in a stock’s life it will be a bargain and at another it will be expensive.
Return on invested capital calculation
ROIC = Owner Earnings/Invested Capital
Owner Earnings = Operating profit + depreciation + amortization of goodwill - Federal income tax - cost of stock options - maintenance capital expenditures - income over average rate of return on a pension fund
Invested capital = Total assets - cash + past accounting charges that reduced invested capital
Resources
For net-working-capital tests -> http://quote.morningstar.com/highlow.html?msection=HighLow
For annual reports -> EDGAR database at www.sec.gov
Company evaluations -> Chapter 11 and commentary