Monday, December 16, 2013

Dozen Things Learned from Marty Whitman/Third Avenue

another great post by 25iq

1. “The cheaper you buy, the greater the potential investment reward.”  This is a simple idea which many investors do not understand since they are driven to buy when “Mr. Market” is euphoric since the human instinct is to follow the crowd.  Fighting this herding instinct is a trained response. As James Montier of GMO said his past week: “The golden rule of investing: no asset (or strategy) is so good that you should invest irrespective of the price paid.”  Re Montier see:

2. “The cheaper you buy, the less the inherent risk.” Life is easier and more profitable as an investor if you avoid making mistakes. Too many people think that dialing up risk is the best way to increase returns.  If you buy at a discount you have a margin of safety which will help protect you from making mistakes and will improve your odds of success.  Walter Schloss took this idea to the limit:

3. “Market prices do not determine business value.” Price is what you pay and value is what you get. More generally, Bob Shiller is right (people are often not rational) and Eugene Fama is wrong (because he has confirmation bias).  Ben Graham is the creator of the Mr. Market idea and my post on him is here:”>

4. “[Buy] companies with very strong financial positions whose securities are priced at significant discounts to private market value.” Acquiring a margin of safety by buying the asset at a discount to the price an informed private investor would pay is essential to the value investing “system.”  It is important to understand that value investing is a system and the elements of the system are not optional. The value nvesting system has evolved since the time of Ben Graham to include elements of Phil Fisher as I explain here:”>

5. ”Concentrate on ‘what is’ in terms of understanding a business, in contrast to ‘what the market thinks.’” It is best to focus on what is going on now in a business and not what you think/predict may happen in the future.  “Predicting the present” is infinitely easier than predicting the future. Understanding the present is easier if you know what you are doing and the underlying business is understandable. Read Jeremy Gratham on this: and Bruce Greenwald too.

6. ”Value investing means being price conscious rather than outlook conscious.” Prices of assets will be taken up and down by the always bipolar Mr. Market.  If you are patient and rational and otherwise follow the value investing “system”, Mr. Market will inevitably deliver his financial gifts to you. You can’t predict when it will happen, but you can certainly wait patiently for the gift to eventually be presented.  If you always bet with the crowd you cannot beat the market, especially after fees. To outperform the market sometimes you must be a contrarian and you must be right on those occasions. Read Seth Klarman on this subject and you will benefit:

7. “Value investing just does not work for people deeply involved in trying to predict near-term stock prices or general trends for securities markets or commodities markets.” It is fun to make predictions! People love to buy lottery ticket stocks! But don’t confuse that fun with something that makes financial sense.  A value investor wants to make bets where the odds are substantially in his or her  favor. Bet seldom, but when the odds substantially favor, you must bet big. Being ready to bet big when the situation presents itself is critical. Reading Howard Marks is arguably best on this:

8. “We ignore outlooks and forecasts… we’re lousy at it and we admit it… everyone else is lousy too, but most people won’t admit it.” Understanding the limits of your own competence is valuable. Everyone can use colleagues who can give them perspective on decisions. Don’t go near the edges of your own competence especially if you don’t know precisely where they are.  Only bet when you are not the patsy. If you do not know who the patsy is, it is you. Michael Price speaks well on this “avoid making forecasts” topic:

9.  “We deal in probabilities, not predictions.” Investing is a probabilistic exercise. The frequency of an investor’s correctness should not be the focus but rather magnitude of correctness. There is risk, uncertainty and ignorance involved in investing.  Process matters in investing and on that and everything about investing read Michael Mauboussin. My post on that is here:

10. “We attracted a lot of market timers and asset allocators. I don’t need those … amateurs in my fund.” Market returns will always be lumpy. Drops in the prices of stocks are inevitable and it is then when people tend to panic and want to sell. Whitman does not want investors who panic and want to sell when prices are low. My Bruce Berkowitz post elaborates on this point:

11. “Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise.” Occam’s Razor is a favorite idea of many value investors. Wikipedia states regarding Occam’s Razor: “among competing hypotheses, the hypothesis with the fewest assumptions should be selected.”  Einstein is famous for saying, “Everything should be made as simple as possible, but no more simple.”  On this point, read everything Charlie Munger related (which investors should do anyway).  Read Jason Zweig on this and everything regarding investing and prosper:

12. “In the financial world, it tends to be misleading to state ‘There is no free lunch.’ Rather the more meaningful comment is ‘Somebody has to pay for lunch.’” See my post on John Bogle regarding the inevitable math of fees and expenses:

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