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Investment Lessons Learned from the Poker Table

in Process

“I don’t know.” These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss. I received a few e-mails from people who had a problem with a phrase in one of my blog posts this fall. In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road. I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many e-mails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen. I don’t know whether...

Time for an All-Terrain Investment Portfolio

in Process

As investors today we feel something like a traveler preparing to drive across an unknown continent. A look in the rearview mirror tells us we should pick a race car, and if the road continues to be as it has been, then our trip may be fast and uneventful. But what if the road that lies ahead is rocky, full of holes and maybe even strewn with giant boulders? A sports car will not get past the first potholes. What we need is a four-wheel-drive, all-terrain vehicle. This monster will not have the speed or the sex appeal of the shiny red convertible, but it will complete the journey. Its position at the finish line will depend entirely on one unknown — the road ahead. If it is a smooth, unbroken route, then our Land Cruiser will be left in the dust by the Ferraris and Maseratis. It will complete the journey; it just won’t be the first to cross the finish line. But if my prediction is correct, you’re going to be mighty glad to be in the ATV — you might even end up at the head of the pack. On the surface the U.S. and global economies appear to...

For Investors, Discovering Truth Takes Time

in Process

The Roman philosopher, playwright, statesman and occasional satirist Lucius Annaeus Seneca wasn’t talking about the stock market when he wrote that “time discovers truth,” but he could have been. In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random. Here are two real-life examples: Let’s say you had the smarts to buy Microsoft in November 1992. It would have been a brilliant decision in the long run — the software giant’s stock has gone up manyfold since. But nine months later, in August 1993, that call did not look so brilliant: Microsoft shares had declined 25 percent in less than a year. In fact, it would have taken you 18 months, until May 1994, for this purchase to break even. Eighteen months of dumbness? In the early ’90s the PC industry was still in its infancy. Microsoft’s DOS and Windows operating systems were de facto standards. Outside of Macs and a tiny fraction of IBM computers, every computer came preinstalled with DOS and Windows. Microsoft had a pristine balance sheet and a brilliant co-founder and CEO who would turn mountains upside down to make sure the company succeeded. The...

Me, My Boy and Warren Buffett

in Process

I have a confession to make. I want my company to someday be called Katsenelson & Kids. That doesn’t have to be its official name, but I want to work with my kids. I want my kids to be value investors. I know I am supposed to want them to be doctors or nuclear physicists. I don’t. Maybe if you go Freud on me, you’ll tell me this is my way of not wanting to let them go. But I don’t want to push them into investing unless they absolutely love it. I want them to be happy. So far, none of my three kids — especially my 15-month-old, Mia Sarah — has shown any interest in following in my footsteps. Six or eight times a year, I am invited to give a talk on value investing to undergraduate and graduate students at the University of Colorado Denver or Denver University. I really enjoy these talks. They are always structured in a Q&A format (I thereby pass the burden of class preparation on to the students). As part of their homework, they have to read my articles and come to the class with questions. At these talks I always get the question “How...

How Emotional Intelligence Can Make You a Better Investor

in Process

Your knee hurts, so you pay a visit to your favorite orthopedist. He smiles, maybe even gives you a hug, and then tells you: “I feel your pain. Really, I do. But I don’t treat left knees, only right ones. I find I am so much better with the right ones. Last time I worked on a left knee, I didn’t do so well.” Though many professionals — doctors as well as lawyers, architects and engineers — get to choose their specializations, they rarely get to choose the problems they solve. Problems choose them. Investors enjoy the unique luxury of choosing problems that let them maximize the use of not just their IQ but also their EQ — emotional intelligence. Let’s start with IQ. Our intellectual capacity to analyze problems will vary with the problem in front of us. Just as we breezed through some subjects in college and struggled with others, our ability to understand the current and future dynamics of various companies and industries will fluctuate as well. This is why we buy stocks that fall within our sphere of competence. We tend to stick with ones where our IQ is the highest. Though we usually think about our capacity to...

Making Money by Agreeing to Disagree

in Process

"You can have comfort, or you can have value. You cannot have both." — Jim Grant, on CNBC It is very comfortable and enjoyable to own a company everyone loves. You can brag about it to your neighbor, bring it up at social gatherings. But there is usually a significant price to pay for that comfort — the stock is fully valued. This is why value (cheap) stocks have historically beaten the bejesus out of growth stocks. The reason is very simple: Both love and discomfort are priced into stocks. Love is priced into fancy valuations, and the hated ones are cheap. This instinctive comfort-seeking doesn’t stop with stocks; it spills over to the people we choose to share ideas with. As investors, we tend to look for people who share our views, but we should do the opposite. During the 2012 Berkshire Hathaway annual meeting, Warren Buffett said something that really resonated with me while answering a question about his political views’ impact on Berkshire: "If you are going to choose your friends and your investments by if they agree with you, you are going to have a very peculiar life." Let me tell you a true story (as opposed to just...

The True Value of Macro Forecasting for Value Investors

in Process

While in Omaha for the Berkshire Hathaway annual meeting a couple of weeks ago, I participated in an investment panel hosted by a local chapter of the Young Presidents’ Organization. I had the privilege of sharing the stage with such industry giants as Tom Russo, a partner of Gardner Russo & Gardner (famous for knowing more about consumer stocks than the management that runs them), and Tom Gayner, president and CIO of Markel Corp., a specialty insurance company that on many levels resembles the Berkshire of 30 years ago. We were asked how much time a value investor should spend on macro forecasting. Usually macro forecasting is frowned upon in the value investing community, and Berkshire CEO Warren Buffett has everything to do with that. He is famous for saying (and I am paraphrasing), “My decision making would not change even if I knew what the Federal Reserve will do with interest rates next month.” There is sound logic behind this: Forecasting the economy is incredibly difficult in the short run. The economy is not unlike a black box with hundreds of gauges on it that in the near term give you conflicting readings about what’s inside it. For this reason macro forecasting was disapproved of...

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How buying a cow is like investing in stocks
Tevye from Fiddler on the Roof explains

(Chapter 4 from Vitaliy Katsenelson`s 
Little Book of Sideways Markets)

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