Bitcoin

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I’ve rarely had so many people asking about a topic since Internet stocks in 1999…

As my own answer typically frustrates my discussion partner, let me stand on the shoulder of giants and share their thoughts:

Warren Buffett article. Important quote: “There are basically two kinds of assets. One you look to the stream of income it will produce; the other you hope like hell that someone will pay you more for it.”

Charlie Munger video. Less diplomatic than Buffett, Munger says Bitcoin is “total insanity”. I encourage you to watch (at least) 2 minutes of the interview as from 38:40.

Robert Shiller’s piece “What is Bitcoin really worth? Don’t even ask”.

I have more like these but I guess you get the point (unless you agree with Marc Andreesen’s “old white men crapping on new technology they don’t understand”).

For a good tutorial, check out this Bitcoin for Dummies.

And if you’re still convinced Bitcoin is healthy for your wealth, you’ll enjoy this Bill Miller interview. A good rule, even from a believer: “Don’t put more money into Bitcoin than you can afford to lose 100% of because there’s a nontrivial chance it can go to 0”.

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Book review: The Deals of Warren Buffett

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If you want to learn about Warren Buffett’s life, you should read his biography by Roger Lowenstein.

If you want to learn about his investment approach, you should read The Warren Buffett Way.

If you want to learn about his investments, check out Glen Arnold’s new book, The Deals of Warren Buffett: Volume 1, The First $100m.

Of course, you may want to go directly to the source, ie. Buffett’s Partnership Letters and Berkshire Hathaway Shareholders Letters, which I warmly recommend.

Glen Arnold’s book covers 22 investments, in chronological order, from Cities Services in 1941 (Buffett was 11 years old) to Wesco Financial in 1974. There is quite some overlap with Yefei Lu’s book, Inside the Investments of Warren Buffett.

Arnold’s book helpfully summarizes Buffett’s thought process for each investment and provides the key figures that Buffett has at his disposal. The author offers at the end of each chapter some useful learning points stemming from these case studies, of which I selected nine:

  • Look for pricing power (Dempster Mill). The ability to spot the potential for raising prices because of some degree of customer captivity was evident time and again in Buffett’s career.
  • When the odds are good, invest a lot (American Express). Buffett invested up to 40% in American Express in the 1960s.
  • Businesses needing little additional capital to generate increased profits can be a goldmine (Disney). Such business can produce very high returns on capital employed.
  • Be prepared to observe a good company for years before investing (National Indemnity Insurance). This is why I keep a watchlist.
  • Hold on to a good thing for years (National Indemnity Insurance).
  • Good jockeys will do well on good horses, but no on broken-down nags (Hochschild-Kohn).
  • Partner with keen cost-cutters (Associated Cotton Shops).
  • Float is a very useful way to leverage (Blue Chip Stamps). Mohnish Pabrai expands on this here.
  • Evaluate what is in the mind of customers (See’s Candies). This is closely linked to the pricing power point.

I recommend The Deals of Warren Buffett to beginner investors who want to develop sound investment principles.

Closed-end funds: still a land of opportunity?

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Closed-end funds remain a fascinating topic and an interesting source of investment opportunities. For an overview of the closed-end puzzle and a behavioural theory, have a look here and here at the papers by Nobel winner Richard Thaler, written in collaboration with Andrei Shleifer and Charles Lee.

My favourite closed-end fund investments meet the following 3 criteria (in this order):

1. The underlying assets are attractive.

2. The fund trades at a significant discount to its net asset value (NAV).

3. There is a catalyst that will lead to a narrowing of the discount.

A couple of examples:

Aberdeen Emerging Markets Smaller Company Opportunities Fund. The fund is managed by the experienced Aberdeen team, has a reasonable TER of 1.55%, and trades with a discount to NAV of around 7%. Whilst the discount is lower than in the past few years, there is now a clear catalyst, as announced here.

Pantheon International Plc. Pantheon invests in private equity funds globally. Over the past 20 years, it has delivered a compound annual return to investors of 12%. It currently trades at discount to NAV of 17% (again, the discount has been wider in the past). Pantheon continues to buy back shares and is working to narrow the discount (see recent announcement).

 

Book review: Big Money Thinks Small

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This book is a solid candidate for the best investment book of the year!

Joel Tillinghast, the author who has successfully managed the Fidelity Low-Priced Stock Fund for almost 3 decades, introduces 5 key investing principles:

 

 

1. Invest patiently and rationally / not emotionally.

2. Invest in what you know / not in things you don’t understand.

3. Invest with capable, honest managers / not with crooks.

4. Invest in resilient businesses with a niche and strong balance sheet / not in faddish, commoditized businesses with a lot of debt.

5. Invest in bargain-priced stocks / not in pricey “story” stocks.

This emphasis on a margin of safety is nothing new. What is enriching, however, are the insights Joel Tillinghast shares when covering a variety of topics including technology stocks, commodities, accounting, psychology. The author’s learnings on Enron / Petrobras / CMGI / Valeant are also very interesting.

Some thoughtful bits and pieces:

“While I generally avoid commodity businesses, if you must invest in one, go with oil, because of the limit on supply and relatively inelastic demand”.

“Contrary to popular wisdom, picking stocks based on low P/Es and high free cash flow yields often works particularly well with technology stocks”.

What could look like anecdotes and unrelated points come together to form a valuable approach to investing – one business at a time (ie. thinking small). This is not a cookbook with recipes; it’s a collection of investment widsom.

I’ll certainly re-read many passages of this book over and over again. Highly recommended for seasoned investors.

Book review: The Best Investment Writing

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In this new book, the editor Meb Faber brings together an eclectic collection of investment texts.

You won’t find here some classics like Warren Buffett’s Superinvestors of Graham-and-Doddsville or Charlie Munger’s Psychology of Human Misjudgment or John Maynard Keynes’ essay.

Rather, this volume 1 includes texts by acclaimed investing journalists (Jason Zweig, Barry Ritholz), bloggers (David Merkel, Ben Carlson), academics (Aswath Damodoran), advisors (Ken Fisher).

The 32 articles are all useful. I especially liked Morgan Housel on competitive advantage, Ben Carlson’s 20 rules of personal finance, and Todd Tresidder’s due diligence questions before making any investment.

As there is hardly a common thread across the articles, I find it hard to write a comprehensive review; suffice to say that this is an interesting collection of articles.

Let’s see what Med Faber has in store for volume 2.

Book review: Invest like a Guru

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I’ve been a user of GuruFocus.com for some time. When looking at a stock, I like to check on the site its Piotroski F-Score, potential warnings signs, and trades of renowned investors. Hence I was interested to better understand the philosophy behind GuruFocus.com, which founder Charlie Tian describes in Invest Like a Guru.

A physicist by training, the tech bubble was a defining moment for Charlie Tian. Following his poor experience with stocks during that period, building on the teachings of Peter Lynch, Warren Buffett and Donald Yacktman, Tian developed one of his core principles: Buy Only Good Companies. By ‘Good Companies’, the author means consistently profitable businesses (with double-digit operating margins and returns on invested capital) that can continuously grow revenues and earnings through their operations.

Chapter 6 provides a useful 20-item checklist for investing in good companies at fair prices (see pages 102-103). Also, the author has developed a series of Warning Signs (e.g., weak Altman Z-Score, asset growth faster than revenue growth, issuance of new shares), which are flagged on GuruFocus.com

The author prefers to stay away from cyclical stocks – especially leveraged cyclicals – and deep value situations where value erodes over time. Based on investors’ experiences with Sears, Weight Watchers, BlackBerry, Tian comes to a surprising conclusion for a value investor: “never buy low-quality companies again, no matter how undervalued they seem to be!”. This is too radical for me.

I find Invest Like a Guru a helpful companion to GuruFocus.com, with useful suggestions to avoid permanent losses of capital.

 

Stocks on the watchlist: an update

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For some time, I’ve been keeping a watchlist of stocks on this blog. This list of 9 companies has not changed since the beginning of the year. Here’s how the stocks have performed year-to-date (for simplicity, in local currency).

Alphabet +17%.

Admiral Group +10%.

Visa +17%.

Ryanair +9%.

Roche +15%.

S&P Global +25%.

Kinepolis +25%.

DeVry +21%.

Van Lanschot +25%.

Some observations:

  • In a bull market, it’s the smaller value plays that perform best (e.g., Van Lanschot, DeVry).
  • Depending on the specific circumstances, both “averaging up” and “averaging down” make sense in a portfolio.
  • It’s time to update the list!

Stocks for the (very) long run

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Interesting data from the Credit Suisse Global Investment Returns Yearbook 2017, compiled by London Business School professors (authors of this book). It shows the real rates of returns of world equities over various periods.

The data is based on an all-country world equity index denominated in USD, in which each of the 23 countries is weighted by its starting-year market capitalization.

It clearly confirms that equities offer attractive returns in the (very) long run. If you started investing on 1 January 2000 (not a great entry point…), you suffered negative real returns in your first decade but you are now nicely in profit territory. If you started on 1 January 1970 (not a great time either…), you made 5.2% per year on average.

At a time when assets are expensive, geopolitical risks abundant, monetary policy less supportive… it’s encouraging to look at stocks as (very) long term investments.

Warren Buffett’s 2016 annual letter

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I summarize below the insights of Warren Buffett’s from his 2016 Berkshire Hathaway letter published today, around 3 topics: stocks for the long term, active vs. passive investing, and share buybacks. It would be foolish to paraphrase Buffett so I simply quote some key parts from his letter.

On stocks for the long term.

“American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively financed American businesses will almost certainly do well.”

On active vs. passive investing.

Buffett’s 10-year bet that a S&P 500 tracker will outperform 5 selected funds of hedge funds is looking good (see details here). According to Buffett: “the disappointing results for hedge-fund investors that this bet exposed are almost certain to recur in the future”.

“There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat. There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose abilities would equal those of the people I’ve identified. The job, after all, is not impossible.

There are three connected realities that cause investing success to breed failure. First, a good record quickly attracts a torrent of money. Second, huge sums invariably act as an anchor on investment performance: What is easy with millions, struggles with billions (sob!). Third, most managers will nevertheless seek new money because of their personal equation – namely, the more funds they have under management, the more their fees.”

On share buybacks.

“The question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent. It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed. What is smart at one price is stupid at another.”

How to monitor funds and ETFs

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For the private investor, there are plenty of tools to monitor stocks (e.g., Google Finance, Yahoo Finance). Following up on mutual funds or exchange traded funds (ETFs) is a bit more difficult.

To do so, check out the Portfolio section of the Morningstar web site (of your country). You can easily construct portfolios of funds and other instruments, which I find very useful.

As an example, I put together a list of global equity funds I like to follow, as well as a MSCI World ETF.

Morningstar portfolio

Over the past 5 years, it’s not been easy to beat this $#& tracker…