Tag Archives: Benjamin Graham

October 27, 2011 · 8:00 am

Buy high, sell low

If I tell you that investment banks way of making you rich is advising you to “Buy high and sell low”, you’d call me stupid, you’d think I got the sentence wrong (obviously the way to become rich is “buying low and selling high”).

Take a look at the chart below. It’s taken from an investment bank report of EADS at the end of 2007 (let me omit the name of the bank out of courtesy… nevertheless, all banks incur in the same vices).

EADS historical prices from 2005 to end 2007 and investment bank's target prices and recommendations.

Along almost 3 years time, the bank recommends you to buy at 6 different points in time with prices ranging from 26€ to 34€. In the same period it recommends selling 3 times with prices ranging from 18€ to 21€. That is indeed buying high and selling low.

Margin of Safety

Each time that the bank recommended “Buy” the stock actual price was just between 7-16% below the bank’s estimated target price (e.g. 31.5€ vs 34€, -7%). Benjamin Graham concept of “margin of safety” advises you to invest only when the margin between the price you’ve estimated as the stock’s intrinsic value and its current price is above 30%, otherwise possible errors in your judging of the price will eat away possible gains.

That means, that if the intrinsic value of EADS had been well estimated at 34€, and the price was 31.5€, still the recommendation should have been “hold” or “sell”, never “buy”. A “buy” should have come only when price was below 23.8€ for a target of 34€…

That was regarding the margin of safety… was the intrinsic value of EADS really 34€? I have checked statements of EADS several times since its creation. I have never come to that figure as its intrinsic value. Even discarding all the one-offs that have occurred in the last years, the conservative price I reached never went upper than 24€ (a price reached at some point in 2011 – when I sold my stock). That means that the stock would have been a “buy”, had I been the banker, only when its price was under 17€ (which was never the case in the period shown in the report – but for a long period afterwards).

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October 24, 2011 · 8:00 am

Risk

Few days ago I wrote a post about what was supposedly my risk profile as an investor. I mentioned in that post that the mainstream perception of risk is quite different to the one I had. Which is the perception I have?

My perception of risk is 100% shaped by that of Benjamin Graham, and so well described by Warren Buffett several times. I looked for a good example in the internet that I could quote and refer you to, here it is:

Finance departments believe that volatility equals risk. They want to measure risk, and they don’t know how to do it, basically. So they said volatility measures risk. I’ve often used the example of the Washington Post’s stock. When I first bought it in 1973 it had gone down almost 50%, from a valuation of the whole company of close to $170 million down to $80 million. Because it happened pretty fast, the beta of the stock had actually increased, and a professor would have told you that the company was more risky if you bought it for $80 million than if you bought it for $170 million. That’s something I’ve thought about ever since they told me that 25 years ago and I still haven’t figured it out.

If you want to read more about it and other related issues, take a look at the website from which I got this quote, Buffett FAQ.

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April 29, 2011 · 8:00 pm

Woodstock for Capitalists

Right now, while this is being published and if everything is going as planned, Luca and I are in Omaha, Nebraska. By now we should be already registered to attend tomorrow the annual shareholders meeting of Berkshire Hathaway, company famous for its CEO and Chairman, Warren Buffett.

While studying an MBA at EOI business school in Seville some 5 years ago, I developed a special interest in investing. I started reading some books and this led me to the bible of them all, Benjamin Graham’s “Intelligent Investor”, which I have referred to in this blog a number of times.

Warren Buffett, of World fame, was one of Graham’s disciples. He started very early setting up small businesses and investing in stocks. Decades later, he is known as the “oracle of Omaha” and considered to be on of the best investors ever.

About 2 years ago, Luca and I decided to invest in Berkshire Hathaway, mainly to acquire the right to attend this weekend’s party (you may call us freaks, right). Sure, we have arranged a nice holiday trip around it passing by Montreal, DC, Chicago and even Des Moines (!). But the end of this trip, was attending the shareholders’ meeting (others travel to attend a concert of U2!).

If you want to grasp what the experience may feel like, start by reading one of his letters to the shareholders of BRK, e.g. this year’s letter [PDF]. It’s 26 pages, ok, but it won’t take you more than 1 or 2 hours, and who knows, it may change your view of saving, investing, managing businesses, doing you a great favour. Apart from that, you’ll have a great fun reading it, as it is a very entertaining and humorous piece.

Finally, a positive note from an extract of the letter to reflect on, in today’s times:

“Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.”

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February 26, 2011 · 11:00 am

Resist the bias to act

Some days ago I tweeted about the swings of Mr. Market lately. The consideration of the stock market as Mr. Market is a metaphor that we owe it to Benjamin Graham.

Since a picture is worth a thousand words, I wanted to share a snapshot of the swings of our “J&L” ( ;-) ) portfolio in the past few weeks. One could read the picture as “you have lost 114$ in the past weeks”. That same person on January 28th would have said “you’ve lost 2,000$ in the last 10 days”.

"Resist the human bias to act", Charlie T. Munger

In fact we have not lost a nickel in these weeks, since we haven’t sold any stock. I love a quote from Charlie T. Munger, Berkshire Hathaway vice chairman, which goes: “Resist the natural human bias to act”.

You actually don’t need to buy or sell stock when the market is in the mood. It is as easy as not doing it. You may buy only when you see a margin of safety and sell only when the stock has reached what you considered it to be at its intrinsic value.

You can see that in these 5 weeks we could have lost up to 2,000$ twice; we didn’t. The only tools we counted with: patience and not “listening to Mr. Market”.

Precisely today, it is published the letter of Warren Buffett to Berkshire shareholders. Whether you are planning to invest in stocks or only want to have a fun read, take a look at it.

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January 4, 2011 · 7:00 am

My investment fund

After two years of investing for fun, I was troubled because neither the ING internet banking tool nor Google Finance enabled me to correctly monitor the profitability of our investments.

  • Google Finance shows each new addition of capital as an increase of assets (price) in the same way as if a particular stock had increased its market price. So after a year our portfolio showed an increase of 97%… but most of it was due to new additions of capital.
  • While with ING, each time we added some cash it lowered the profitability as it went directly to the denominator of the equation (the same happens with Google Finance “gain”).

I discussed this with Luca, read a little bit and then I found out that the best way would be to treat ourselves as a mutual open-ended fund (fondo de inversión). I had to define a net asset value per share (valor liquidativo de la participación) at the beginning of the period and then treat each addition of capital as an issue of new shares to ourselves.

After spending sometime digging in the files and emails of the past two years, reading a bit about how to treat these values, etc., from now on we can readily compare at any moment our “J&L investment fund” with any other fund, stock or index. So did I…

If we had a commercial mutual fund we would announce ourselves with something like:

  • In the year 2010 the gains of the fund were +22.8% compared to
    • S&P 500 ~ +13% (target index)
    • Dow Jones ~ +11%
    • NASDAQ ~ +17%
    • IBEX 35 ~ -17%
    • Euro Stoxx 50 ~ -10%
  • The gains of the fund since its creation in January 2009 have been +86.6%, with a compounded annual gain of +37.6%.

Not bad.

Nevertheless, if we compare it to the leading Spanish value investing fund managers from Bestinver, in 2010:

  • Bestinfond ~ +19%;
  • Bestinver Internacional ~ +26%;
  • Bestinver Bolsa ~ +5%

Since January 2009 both Bestinfond and Bestinver Internacional have fared better than “J&L”, though not Bestinver Bolsa.

Today, now that is already defined, the net asset value per share is 57.19€… however “J&L fund” is not yet that open-ended: it’s open to our own additions to the fund but not to third-party capital… maybe in a couple of years we go and set up an investment club or fund :-) .

After reading Ben Graham’s book “Intelligent Investor” I wanted to give it a try with investing, this is why I invest in stocks myself, but, clearly, if you are tempted to follow third-party advice, rumours, tips, etc., you’ll be better off just investing in a low-cost index fund (a strategy described by Burton G. Malkiel’s book “A Random Walk Down Wall Street”) or take a look at the above-mentioned value investing managers.

NOTE: “J&L fund” numbers are pre-tax of capital gains, include dividends (after-tax) and are net of transaction costs & commissions.

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October 19, 2010 · 1:00 am

Venture Capital & Crowdfunding

I started giving loans through Kiva almost two years ago. About at the same time, after gathering some savings, I started investing again in the stock market.

Last month, I attended TEDxMadrid, where Nicolás Alcalá explained how a movie he and his team are working on (“El Cosmonauta”) will be financed through crowdfunding. I then discussed with a friend that precisely I was looking for a similar approach, but applied to general businesses: a kind of Kiva for for-profit start-ups.

Subsequently, I first found Kickstarter about a month ago through Fred Wilson (@fredwilson). However, in Kickstarter the funders of projects are not entitled to equity in the venture nor a share of the future profits. The funders get some merchandising or recognition for the helping hand they have given, depending on the amount they have invested.

Then I found GrowVC.

From what I gathered, this is more or less what I was looking for: a way to invest some small amount of cash (~1,000$ a year) together with other funders into a larger pool that will act as a Venture Capital operation, sharing the future profits of the business that was funded.

With this post I wanted to share these initiatives with you and also to explain what I was looking for. Now, let me throw an open question to readers: anyone knows a similar concept that I may be interested in? If so, please, let me know.

(Bear in mind that I haven’t got, yet, hundreds of thousands of Euros to invest following this approach… the larger part is invested in a much more Graham-like defensive approach)

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October 11, 2010 · 12:33 pm

The Snowball, Warren Buffett bio (book review)

Last Christmas, my brother gave me “The Snowball: Warren Buffett and the Business of Life“, by Alice Schroeder. He completely hit on the spot, though I only started reading it during last August holidays (Luca also started reading it to the point that she ended up buying her own Kindle version of it!).

The book is a thorough review of Buffett’s life, including relationships with family & friends and investment decisions. I had previously read other books about Buffett, but they were merely about his investment “strategy” so to say, nothing compared to this one. To complete the book, the author made over 250 interviews, so you can imagine the many insights contained in it.

There are many lessons or just ideas that can be taken from this book. Let me just point the few I can recall at the moment of writing this post:

  • The Inner Scorecard: the idea of acting and valuing yourself according to what you care about and not according to what others’ deem important.
  • The concept of margin of safety: from Benjamin Graham (recommended reading ”The Intelligent Investor“).
  • Circle of competence: the idea of looking for simple business that have an enduring competitive advantage (technology companies are not that simple).
  • Cigar butts: companies which are worth more “death than alive” (looking for cheap price to book).
  • Snowball: the idea that compounding interest acts as a snowball falling down the hill, the sooner you start the larger the ball will be down the road (thinking about retirement here).
  • The story of the genie: or that you should invest in your own health as your body is the only one you are going to be given in this life.
  • The Ovarian lottery and the idea that philanthropy achieves more if exercised now and trying to maximize its impact.

Throughout the book you get to learn about many great entrepreneurial characters (e.g. Rose Blumkin, Bill Gates); about the workings of the board of directors of some companies (e.g. Coca Cola, Berkshire Hathaway); about some of the most impressive falls in corporate history (e.g. Solomon Brothers, Long Term Capital Management); about several depressions, recessions and crisis; and above all you learn about what were the thoughts and calculations behind some of Buffett’s investments decisions since the early 1940′s to date.

I definitely recommend this book (700+ pgs.).

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April 26, 2010 · 12:00 pm

Value investor: Joel Greenblatt

Last week, I watched an online interview by Steve Forbes to Joel Greenblatt, a value investor, author of the book: “The Little Book That Beats the Market”.

I read this book about two or three years ago and I remember it as a very enjoyable read (just about 150-200 pages). He proposes a formula to automate the stock picking process that would result from applying value investing principles by a person that doesn’t want to get too much involved.

During much of the interview he discusses how they have tested the formula, how it beat the market in this and that time, etc…

Summarizing, he admits that he based the formula in:

  • From Benjamin Graham: buying cheap.
  • From Warren Buffet: not only buying cheap, but buying a good company.
  • Last but not least: you need long periods of time, thus, patience.

This last requirement is what most speculators (vs. investors) lack of.

If you are interested in the formula, you may use it for free in his website.

Nevertheless, if I were you I wouldn’t stop there, but read “The Intelligent Investor” (especially chapters 8, 14 & 20)… the sooner, the better.

To my friends: if you are interested in Greenblatt’s book, I also got it, if you want to borrow it…

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