Novel Investor

Compounding investing wisdom...

A Too Familiar Tale of Investing in Bull Markets

by Jon

Similar stories play out in every bull market. Someone somewhere begins investing for the first time. First in mutual funds until they get a taste for better returns.

This story, in particular, begins in 1957. A lone investor makes his first foray into the stock market. An inheritance from his father’s death left him with more money than he needed, so where to invest it? The family suggested mutual funds for the long term. So that’s what he did.

His returns were average.

But the market was booming. The post-war boom struck the 1950s with one of the longest bull markets ever. People who never invested before were drawn to the stock market because of the possibility to turn meager savings into a small fortune. Our lone investor included.

It started with a conversation with his cousin. “Do you have money in the market?” “No, except mutual funds.” “You should talk to my broker.”

And so it began. Continue Reading…

Wise Words from Walter Schloss

by Jon

Walter Schloss was a flexible investor. He’s the perfect example of someone who stayed true to his investment philosophy but adjusted his strategy to the changing times.

The changes Schloss made weren’t drastic like Warren Buffett though. Schloss knew his limits. His strategy changed slightly over decades because he had no choice. The opportunities disappeared.

In the late 1940s at Graham-Newman, under Ben Graham’s tutelage, he hunted for Graham’s net-nets — companies trading below net working capital or net current assets.

That strategy carried over to his own firm in the 1950s until the opportunities dried up. With net-net’s no longer prevalent, he relied more on book value. First, he looked for stocks trading at a third of book value, then book value or less, and finally, a slight premium to book value. Other factors were involved but he understood assets best.

Schloss’s gradual evolution over his 45-year investing career paid off. His limited partners benefited with a 15.7% annual return after fees.

A fee structure, by the way, that would make any fund managers squeamish. Schloss believed his pay should be tied to success. So he got 25% of realized gains. But if there were losses, his limited partners were made whole before he earned a cent. He only got paid when his partners made money.

Investors can learn a lot from Schloss’s six-decade-long career. Thankfully, he shared his experiences over the years. Continue Reading…

Surviving the “Averages”

by Jon

There are averages but relying too much on the “average” can lead to ruin. And uncertainty is behind it all.

A good example of this was laid out in an old book about making investment decisions on drilling oil wells. It turns out, wildcatting is a risky endeavor.

A wildcatter can gather every bit of information possible but they’ll never be certain if there is oil under the ground until they drill. The key to successfully drilling oil wells is to not bet so much money on any single well that a string of bad bets ruins you. Continue Reading…

Lessons from the 2021 Berkshire Letter

by Jon

The Berkshire Hathaway annual letter was released this past weekend. It was one of Warren Buffett’s shortest letters to date.

But it wasn’t without a few lessons. As usual, Buffett scattered several lessons and reminders for investors throughout. The lessons were just briefer than normal. Let’s dive in.

Buy Businesses, Not Pieces of Paper

Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

Buffett makes two important points. He’s not trying to profit off of short-term swings in the market. He knows market timing is a fool’s errand. Continue Reading…

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