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Bharat Shah breaks down compounding machines. He points out the characteristics that drive companies to compound over long periods of time and the characteristics investors need to profit from them.
Compounding investing wisdom...
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Buy the Book: PDF
Bharat Shah breaks down compounding machines. He points out the characteristics that drive companies to compound over long periods of time and the characteristics investors need to profit from them.
by Jon
Probably the most widely followed stat in baseball is batting average. It measures a player’s success rate for each at-bat. Whether they get a single or a home run, a hit is a successful at-bat.
The average batting average in Major League Baseball is .250. So the average player gets a hit one out of every four at-bats. The best baseball players hit a little better than a .300 batting average. A .400 average is the holy grail that hasn’t been achieved since Ted Williams did it in 1941.
Except, in baseball, not all hits are equal. And with such a low success rate, what the player does with each at-bat becomes important. That’s where slugging percentage comes in.
Slugging percentage measures a player’s ability to hit extra-base hits. A single is one base, a double is two bases, and so on. It measures the average bases earned per at-bat which you get by taking the total number of bases earned divided by total at-bats.
So if a player wants a high slugging percentage, they need to hit doubles or better fairly often. And a high slugging percentage tends to lead to scoring runs, which is how you win games.
What does this have to do with investing? Continue Reading…
by Jon
Fred Schwed Jr.’s classic, Where are the Customers’ Yachts? was first published in 1940. The title was borrowed from a quip William Travers made in the late 1800s.
As the story goes, Travers was with some friends in Newport to watch a boat race. After learning several boats were owned by Wall Street brokers, he asked, “Where’s the customer’s yachts?”
Schwed’s book was one of the first to mix humor with finance to warn people of Wall Street’s shortcomings…starting with the title. Wall Street has a history of enriching itself at the customer’s expense. But he didn’t stop there. He knocked Wall Streeters for their continual need to predict the future — and continuously getting it wrong.
However, the book wasn’t the first time Schwed blasted Wall Street for its shortcomings. A short piece, he wrote, in the March 1939 issue of Forum and Century magazine offered a glimpse of what was to come.
Schwed went after Wall Street for the endless confidence in knowing what happens next, the ignorance of uncertainty, the endless search for patterns in the market, CEOs playing the blame game, and the customers for being gullible. Continue Reading…
by Jon
Here’s what I’ve been reading the past three months:
by Jon
It’s impossible to know in advance how any investment will turn out. Only in hindsight will you know for sure. So it’s likely that you’ll always put too much or too little money into any one investment.
This is why position sizing — the amount held in one investment in relation to the total portfolio — is so difficult yet important. Especially when it comes to losing money. Having too much money in a single investment that turns out badly can cost you dearly.
Bill Miller relayed this lesson when he talked about one of his biggest losses. It involved Enron.
Enron was a Wall Street darling, throughout the 1990s, that had a magical ability to grow earnings at will. Its stock hit a peak of $90 per share in the summer of 2000. But the price dropped over the next year or so.
Throughout the decline, the CEO, Kenneth Lay, assured shareholders and employees that the company would rally, urging them to buy more Enron stock, while quietly selling his shares.
The magic turned out to be accounting fraud. Continue Reading…
by Jon
The 1929 crash was a defining moment for Benjamin Graham. His brief track record before the crash earned 25% returns for his clients, beating the Dow by 5%. But leverage got the best of him in 1929.
His fund lost 70% from 1929 to 1932 versus the Dow’s 80% loss — one of the worst ways to beat the market. The loss had a dramatic effect on his views toward investing.
It also meant he went unpaid during the period. His fee structure was set up so that he only got paid if his clients made money. To supplement his lack of income, Graham took a book deal to write Security Analysis. It was the first book to lay out a framework for sound investing.
Graham made his clients whole by 1935 but he emerged from the crash a much more conservative investor. He swore off leverage and made risk — losing money — his top priority.
In 1949, he wrote The Intelligent Investor, which laid out three important concepts. His parable of Mr. Market taught that you can use market fluctuations to your advantage or your peril if you get too caught up in it. His concept of margin of safety adds a layer of protection from unexpected risks in investing. The third is a bit more obvious but worthy of a reminder. Investing is about buying pieces of a business not pieces of paper. Continue Reading…