Novel Investor

Compounding investing wisdom...

Buffett’s No Called Strikes

by Jon

Warren Buffett often uses baseball to describe investing concepts. His no called strikes analogy is a reminder that doing nothing is an important option. Of course, it’s more important than ever in a world dominated by noise, that drives actions, in an industry that profits from transactions.

Unlike baseball, there are no limits to the number of investment pitches you see. There’s no umpire judging the quality of the pitches you see and pass up either. But the peanut gallery still exists in some form — clients or the media — pressuring you to swing at anything.

Here’s the thing. If you don’t like the pitch, don’t swing. You can stand at the plate, with the bat on your shoulder, doing nothing but waiting…for the perfect pitch.

He used the analogy in a Fortune interview in 1974 to explain his style of investing. I can’t say if it was the first time he used it, but the timing was impeccable. He had walked away from his partnership in 1969 at the market peak, only to reappear at the ’74 bottom. Then he relayed a simple message of patience. Continue Reading…

Lessons From The Man Who Solved The Market

by Jon

Jim Simons, and Renaissance Technologies, has one of the best track records ever. It’s also a mystery. Greg Zuckerman’s latest book, The Man Who Solved the Market, helps pull back the curtain — a little bit — to see exactly what drives their returns.

Unfortunately, the lessons from the book are not in the strategy itself. It’s not something anyone can simply replicate.

Instead, the book does a great job explaining the history of the firm, the people, and the massive amount of effort and complexity that went into their success.

If anything, these were the lessons that stood out. Continue Reading…

Hitting the Links

by Jon

I’m out of town for the week visiting family and playing some golf, so just the links today.

Also, no posts next week because of the Thanksgiving holiday. I’ll be back to the regular grind after that. Have a great Thanksgiving!

Here’s what I’ve been reading this week. Continue Reading…

Lessons from “Letters of a Self-Made Merchant”

by Jon

John Graham was a wealthy pork packer based near the Union Stock Yards in Chicago. His son Pierrepont was headed to Harvard for his first year of college.

That bit of news kicked off a series of letters from ‘ole dad offering advice that started with education.

Of course, Graham is a fictional character in the book Letters of a Self-Made Merchant to His Son written by George Lorimer in 1901 but the advice still works.

The book is filled with early 1900s maxims and wisdom on education, business, life, and more. Continue Reading…

Wise Words from Seth Klarman

by Jon

Anything written by Seth Klarman is hard to come by. His book, Margin of Safety, is out of print and can only be found used at a famously high asking price. His Baupost letters are highly protected. And the few articles can be traced back to the ’80s and ’90s.

But in the writing, it’s apparent that Klarman is a value investor deeply rooted in Ben Graham’s teaching. The recurring theme — protecting capital is goal number one.

Another theme is the combination of flexibility and turning human nature to his advantage. The human psyche has some general tendencies that work really well in most circumstances except when it comes to investing. Klarman bargain hunts with that in mind but it often leads to areas investors are rushing to avoid.

There are other themes too, which are best left in his own words.

Here’s Klarman: Continue Reading…

The Price of Excellence

by Jon

Some people happily pay a premium for quality. If you think a product — like iPhones, designer bags, or shoes — is higher quality, it might be worth paying more. Sometimes you actually get more than your money’s worth. Other times, the premium is the cost of being associated with the logo.

It’s no different with stocks.

Investors pay a premium for stocks labeled “quality” or “excellent.” Sometimes, it’s worth it.

In 1987, Michelle Clayman tested the performance of so-called “excellent” companies based on fundamentals relayed in the book In Search of Excellence.

The book labeled 36 publicly traded companies as “excellent” based on specific fundamental criteria: asset growth, equity growth, return on capital, return on equity, return on sales, and price to book. Clayman looked at the performance of 29 companies (of the 36 still in existence) to see how well “excellence” performed. Over a five year period (1981-1985), an equal-weighted portfolio of the 29 “excellent” stocks beat the S&P 500 by 1.1% per year. Continue Reading…

Learning

Return Tables

Connect