Just wanted to share the Giverny Capital annual letter to investors, which in fact marks their 20th anniversary of running their portfolio.
It raises some pertinent points about long-term investing and why some are successful and why many others are not as successful as they like.
Giverny Capital is a Canadian firm that (judging by their record) seems to be very successful over the last 20 years using a long-term approach.
The letter can be found here.
I was thinking the same actually. I still haven't built a big watch list for investor letters, but I am finally starting to get around to it.Might not be a bad idea to start a thread a pile all these memos into them.
Hi all
Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?
https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors
The six traits mentioned:
Is 10 stocks concentrated or too diversed?
- Highly concentrated portfolios.
- No need to know everything and the ability to avoid getting caught up in the noise.
- A willingness to hold cash.
- Long time horizons.
- An acceptance of bad years.
- Preparedness to close funds.
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.
This article relates to management funds that I have not heard of (excluding Oakmark).
I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.
This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.
I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?
I love differing views.It all depends but usually it is between 5 and 12 stocks.
It is closer to 5 stocks in a trading portfolio and between 8 and 12 for a longer term portfolio.
This does not make sense to me. I'm reading it as though over-diversification is a bad thing (please correct me if I am wrong). Why would it matter if a portfolio is exclusively exposed to systematic risk? All portfolios are effected by total risk (systematic + unsystematic), and apart from potentially reducing your returns by spreading your investments too thinly, the only thing 'over-diversification' would do is reduce your portfolios total risk.While it is true that diversification reduces risk, a portfolio of shares that is over-diversified is exposed almost exclusively to market risk, which cannot be eliminated by diversification
I have to disagree. In my opinion, this would be dependent on your investment style and time horizon. I would be happy to hold sideways moving or slightly down trending stocks if they were bought at the right price and trading at significant discount to IV.It makes sense to simply get rid of the stocks that are going sideways or down. We only want to hold stocks that are rising in price. ( if going long)
I don't think there is a correlation between share price volatility and total risk for a long term value investor. If anything, I'm of the belief that it is actually the creator of some great opportunities in the market. Sure, for a trader, share price volatility can be dangerous as short term traders are forced to materialize losses when prices bounce around and trigger stop losses, but again, all dependent on your investment style and time horizon.If stocks are falling in price, it increases your risk
if you can, grab hold of a copy of today's Weekend West or locate Marcus Padley's column elsewhere. He pretty much covers the full breadth of your questions in "Commandments not set in stone".Hi all
Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?
https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors
The six traits mentioned:
Is 10 stocks concentrated or too diversed?
- Highly concentrated portfolios.
- No need to know everything and the ability to avoid getting caught up in the noise.
- A willingness to hold cash.
- Long time horizons.
- An acceptance of bad years.
- Preparedness to close funds.
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.
This article relates to management funds that I have not heard of (excluding Oakmark).
I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.
This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.
I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?
So you have found a group of shares that you like that are trading at a significant discount to IV based on your criteria and you decide to make an investment.I have to disagree. In my opinion, this would be dependent on your investment style and time horizon. I would be happy to hold sideways moving or slightly down trending stocks if they were bought at the right price and trading at significant discount to IV.
Each person has there own way of investing that they feel comfortable with....Now you may wish to do your own research, but let us take a person who has 21 stocks in their portfolio or use one of the listed funds.This does not make sense to me. I'm reading it as though over-diversification is a bad thing (please correct me if I am wrong). Why would it matter if a portfolio is exclusively exposed to systematic risk? All portfolios are effected by total risk (systematic + unsystematic), and apart from potentially reducing your returns by spreading your investments too thinly, the only thing 'over-diversification' would do is reduce your portfolios total risk.
Hi FaramirHi all
Can anyone discuss this document and if it is relevant to this thread? I keep seeing the name James Montier but I have no time to research him. I must read at least one of his books one day. Which would anyone recommend?
https://www.advisorperspectives.com...ck-at-james-montier-s-perfect-value-investors
The six traits mentioned:
Is 10 stocks concentrated or too diversed?
- Highly concentrated portfolios.
- No need to know everything and the ability to avoid getting caught up in the noise.
- A willingness to hold cash.
- Long time horizons.
- An acceptance of bad years.
- Preparedness to close funds.
I actually know little and I very little time to keep up with 'noise'.
I do hold some cash but I need much more.
Long time horizons? I am not young any more although I feel very young. I have just passed my mid-40s. I have the feeling that it might be too late for me?
My ego cannot accept bad years!
I haven't thought about closing anything.
This article relates to management funds that I have not heard of (excluding Oakmark).
I like this sentence:
But, unfortunately, investors cannot buy yesterday’s returns; they can only buy tomorrow’s.
This is the last sentence - any comments?
Just like with the crap tables and the roulette wheel, the most likely way to win the game of active management is not to play.
I cannot contribute anymore because some numbers in the tables just go over my head. I have a feeling that this post should be in the "A Long Bet" thread. I can always copy this post over?
Some Thoughts About Investing
Investment is most intelligent when it is most businesslike. — The Intelligent Investor by Benjamin Graham
It is fitting to have a Ben Graham quote open this discussion because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small non-stock investments that I made long ago. Though neither changed my net worth by much, they are instructive.
This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath than in our recent Great Recession.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
17
In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a bubble had popped – this one involving commercial real estate – and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.
Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.
I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.
Income from both the farm and the NYU real estate will probably increase in the decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.
I tell these tales to illustrate certain fundamentals of investing:
18
- Š You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
- Š Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
- Š If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
- Š With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
- Š Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
Š My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?
Hi Guys,
I was just rereading warren buffets 2013 annual letter, and came across this essay he wrote towards the end, I think it is a great take on long term investing.
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