Here’s what I’ve been reading for the past three months:

• Value Investing Makes Sense – Jean Marie Eveillard is a French-born value investor who had a successful career that began running a mutual fund at SocGen, which became First Eagle. He describes his journey from the discovery of value investing, why he transitioned from Graham-style to a Buffett-style strategy, and the experiences that led to his long-term success. The book is only available in print, as far as I know, and is not the easiest to find.  (notes)
• American Business History – Walter Friedman explains why the U.S. is so unique compared to the rest of the world when it comes to businesses. He covers the factors that drove business dynamism since before the early colonies. If you like history and business, this is a good book for you. (notes)
• Men and Rubber: The Story of Harvey Firestone – Harvey Firestone’s autobiography recalls the story of how he turned a small tire company into an industry leader. The book includes a detailed perspective of the early automobile industry and insights into the problems new businesses continue to run into today. (notes)
• Immoderate Greatness: Why Civilizations Fail – Major civilizations throughout history, much like markets, cycle from rise to peak, to collapse. The book focuses on the primary drivers of the decline and fall of civilizations. It’s not the most optimistic book, nor unbiased, and for a short book, the author over-relies on analogies that could have been cut out. Notes to come.
• The Buffett Essays Symposium – The book is an annotated transcript of an event held in 1996 to discuss topics covered in Warren Buffett’s essays. You get a mix of different views from Buffett, Munger, and others on corporate governance, investing, M&A, accounting, and more. If you’ve read The Essays of Warren Buffett, you might find this interesting. Notes will be published once I’ve finished it.

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Quote for the Week

When you want to understand the perversity of risk, it’s important to recognize that the riskiness of investing comes only partly from the things you invest in. A lot of the risk comes from the behavior of the participants. Almost any asset can be risky or safe, depending on how other investors treat it.

You asked earlier about the formative influences on me. Entering the equity business in 1968 at an institution that practiced nifty-fifty investing was a formative influence because over the next five years or so, we lost 80 or 90 percent of our clients’ money while investing in the best companies in America. That was a pretty good object lesson that the safety or risk in investing doesn’t come from the securities you buy or the companies whose securities they are. Safety and risk come from how the investments are priced. We lost that money because we bought those stocks at price/earnings ratios of 80 and 90, as I recall.

I said in my book that there’s no asset so good that it can’t be overpriced and become a bad investment, and very few assets are so bad that they can’t be underpriced and be a good investment. People just don’t understand this. They say things like, “This is a great company, and you should buy the stock.” If it’s a great company, maybe you should buy the stock — but only at a good price. — Howard Marks (source)

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Stocks can be crushed in bear markets with no guarantee of recovery. But markets, more broadly, tend to move in cycles. The worst can become first and vice versa.

The S&P 500 is the perfect example of this cyclicality where last year’s worst performers are this year’s darlings. The sector returns, specifically, show that the worst-performing sectors last year — Info Tech, Consumer Discretionary, and Communications — are the three best performers year to date.

With cycles, it’s relatively simple to guess what might qualify for some reversion to the mean. Just look to the most extreme market performers. Except, it’s difficult to guess when it happens.

Hindsight, of course, makes it easy to explain why two of those three sectors performed so well thanks to the bump from AI. Yet, how many predicted they would have such a phenomenal start to the year?

Market history is filled with examples of worst-performing asset classes over one or more years that find their way to the top of the list once (almost) everyone least expects it. Put simply, bear markets in asset classes and sectors turn into bull markets eventually.

The lesson is not about timing but rather staying put. Being invested throughout the cycle brings the upside of surprising bounces, without the need to know when to get back in. Continue Reading…

Note: No posts next week due to the U.S. holiday.

Quote for the Week

It is easy, of course, to pick out good companies, companies that are better than other companies. But that is not the same thing as picking out good stocks to buy at their current prices. The reason should be obvious. The good companies sell at high prices in relation to what they show, and the companies that are not so good sell at low prices in relation to what they show. And which one is the better one to buy cannot be decided in any simple, offhand manner such as saying it is always better to buy your jewelry at Tiffany’s than at Macy’s. That may or may not be true. — Benjamin Graham (source)

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As bull market enthusiasm wanes, stocks correct and overcorrect. The excess in stock prices burns off. Large-caps become mid-caps, mid-caps become small-caps, and valuations change.  That change in valuation creates opportunities.

As you’ll see below, not all stocks in an index trade at the average valuation. But first, let’s start with how things have changed in the last 6 to 12 months.

Market Volatility Cooling

Market volatility is a decent substitute for investor fear or reluctance to own stocks since the biggest spikes appear near the largest market declines. Continue Reading…

Quote for the Week

We do pay attention to what’s going on; we read extensively; we listen to what our friends in the business say, what the sell side people say, what people on television say. All of that is input into the way we think about things. But, our judgment is that the market is pretty good about incorporating the present state of affairs into stock prices or bond prices. And so, as I’m fond of telling the analysts, if it’s in the newspapers, it’s in the price. So you really need to understand what isn’t in the price, what isn’t being discounted, what events can happen that will lead the market to think differently about things. — Bill Miller (source)

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