From my favorite website!!!! Enjoy........Bedtime stories!!!!

[soulsimple]

100 Ways to Beat the Market #1: Focus on Annual Reports

HOW TO SPEND YOUR TIME

A few years ago, Warren Buffett was on the Fox Business Network discussing the sale of Berkshire’s shares of PetroChina. Fox anchor Liz Claman asked Buffett how he was able to come up with the idea to invest in PetroChina in the first place.

Buffett replied, “Other guys read Playboy, I read annual reports.“

A biography of value investor Peter Cundill was recently published entitled There’s Always Something to Do. Truer words have never been spoken. There always is something to do.

The question is are you doing the right things.

Buffett spends his time reading annual reports.  Moreover, he isn’t reading willy-nilly. He’s reading with purpose. Buffett focuses on trying to figure out how much a business is worth.

In the case of PetroChina, in 2002 Buffett figured the whole company was worth about $100 billion. The entire business was selling in the market for about $37 billion. Buffett bought $488 million worth of shares which he sold in 2007 for $4 billion. Buffett earned a 700%+ return on a half a billion dollar investment in five years by sitting in his office and reading annual reports.

How do you spend your time? How many annual reports have you read in the past week?

Being a great investor requires brutal honesty. There’s always something to distract you and get you off your game. Being brutally honest about how you spend your time is the first step to spending it on what really matters.

Focus on reading annual reports. You’ll be richer for it.

[Laughing Gor]

I read playyboy.

[soulsimple]

100 Ways to Beat the Market #2: Learn from the Super Rich

WHAT YOU CAN LEARN FROM TIGER 21, AN INVESTMENT CLUB FOR THE SUPER RICH

If you have $10 million dollars of investable assets, you may be able to join a super-exclusive investing club called Tiger 21. The group’s 140 members together have investable assets of more than $10 billion.

However, having money isn’t enough. You’ll also need to show that you built your fortune and that you have something to offer the group. Rich seat warmers need not apply.

Members meet once a month to discuss investment ideas and participate in discussions led by world-class experts. The heart of the monthly meeting – and arguably its most valuable component – is the portfolio defense.

During the portfolio defense, a member discloses and defends his portfolio holdings. He is then given candid feedback from other members. The defender also gets a tape recording of the session for further review.

Having to defend your portfolio to a group of highly-capable wealthy investors is characterized as daunting, stimulating and highly valuable.

We could all benefit from such an experience.

Many – if not most – investors continue to hold securities for fuzzy reasons. Perhaps a stock was purchased in a bout of exuberance and you have a nagging feeling there are flaws in your thesis. Perhaps you ventured outside of you circle of competence and made unfounded assumptions. Perhaps the stock was purchased by your last advisor and it’s there because you haven’t gotten around to selling it.

Start by taking Buffett’s simple advise and write down your investment thesis for each security. A couple of paragraphs should suffice if you really know why your holding it. This should include why its cheap or, if it’s fairly valued, why its intrinsic value will grow at a satisfactory rate.

If you can’t do it, you just flunked your own personal Tiger 21 portfolio defense for that holding, and you should seriously consider exiting the position.

You could also find a way to create your own feedback loop alla Tiger 21. The trick is finding knowledgeable investors or businesspeople who are willing and able to go through the process.

One simple idea is to publish your investing theses on investing web sites such as SeekingAlpha, Value Investors Club or GuruFocus and then defend your idea in the ensuing discussion.

With a little creativity and desire you can find a way to do this.

The bottom line is that we all have blind spots. We all fall victim to human frailty and cognitive biases. We all have gaps in our knowledge. The problem is that your portfolio may contain one or more, at worst, ticking time bombs and, at best, chronic underperformers that can be hazardous to your wealth.

After all, even Buffett needed a Charlie Munger.

[soulsimple]

100 Ways to Beat the Market #3: Figure It Out or Pass, Don’t Guess

A recent article in The New Yorker profiled hedge fund titan Ray Dalio. Dalio’s fund, Bridgewater Associates, is the largest hedge fund in the world.

The article describes a weekly meeting at the fund where fifty or so partners and analysts discuss important economic trends and look for opportunities. Dalio describes it as a “What’s going on in the world?” meeting.

During the meeting profiled, there was a discussion about the Chinese economy. The question arose how a slowdown in the Chinese economy would effect commodity prices. After the co-chief executive gave his opinion, Dalio asked for additional input. An associate jumped in and expressed his view that a slowdown in China could have a major impact on global supply and demand.

Dalio impatiently replied, “Are you going to answer me knowledgeably or are you going to give me a guess?”

The associate said he would give a educated guess. Dalio cautioned him not to and reminded him of his tendency to offer an opinion without doing the careful painstaking work necessary to back it up.

There is a little of this associate in all of us.

It’s commonplace to throw around opinions in everyday social interactions regarding everything from politics, to sports to business. That’s all well and good, but, when it comes to investing serious money, such sloppy thinking can be costly.

The article states that, “Eventually, the young employee said that he would go away and do some careful calculations.”

If you want to beat the market, don’t satisfy yourself with educated guesses. Do your own work. If you can’t figure it out, move on. Once in awhile you’ll find something and, if you’ve done your own “careful calculations”, you’ll have the conviction to make a meaningful purchase.

[soulsimple]

100 Ways to Beat the Market #4: Go Back to Buffett

In his classic book Mastery (which I highly recommend), George Leonard provides a road map to long-term success and mastery of your craft. It’s relevant to our subject because, if you want to consistently beat the market, you must pursue investment mastery.

The first of Leonard’s five keys to mastery is instruction. Leonard states, “For mastering most skills, there’s nothing better than being in the hands of a master teacher.”

There is none better than Buffett: not only is he the best investor of our era but also he has shared an enormous amount of his thinking.

My advice is to carefully go back and read or re-read all Buffett’s output. Study it like a chemistry textbook. Study it like Eddie Lampert did. Take careful notes. Let it deeply inform your investment process.

Start with the partnership letters and then work through all the Berkshire shareholder letters. Get a hold of the meeting notes from Outstanding Investor Digest going back to the 80’s. (They may be available through some good libraries. Order back copies if you have to.) They are pure gold. Move on to the speeches and videos. The 1991 speech at Notre Dame is a gem.

Then move on and go through the best of the secondary literature. Don’t miss Seeking Wisdom and Of Permanent Value.

Of course, no study of Buffett would be complete without also going back through Munger’s body of work, starting with the excellent Poor Charlie’s Almanac.

This will take some time. Enjoy the process. Consider it your own post-graduate program in successful investing. Turn down the noise and turn up the wisdom.

Finally, I’ve heard people say that you don’t want to slavishly follow Buffett. They say to seek your own voice. That’s true to a point. Those who master a subject must first master the fundamentals and trace the path forged by the great ones. This takes time and dedication. Only then are you really ready to cut your own path.

[soulsimple]

100 Ways to Beat the Market #5: Remember The Single Most Important Thing

Howard Marks has written a book called The Most Important Thing: Uncommon Sense for the Thoughtful Investor. The book has been well received. Marks is well known for his client memos which are considered must reading by investors. They receive high praise from the likes of Warren Buffett and Seth Klarman.

The most important thing turns out to be numerous important things. The table of contents lists twenty.

However, in his July 1, 2003 memo, Marks stated, “The most important thing – above all – is the relationship between price and value.”

If you want to beat the market, you need to consistently buy securities that are cheaper than the market. This means that what you get in return for putting out your cash – the present value of the sum of all current and future earnings – is greater than what you would get if you bought an index fund or ETF.

Investing is not so much like scientific research where you are constantly pushing the boundaries of knowledge through the application of the scientific method, as it is like basketball where the best players spend countless hours in the gym honing fundamentals – shooting, dribbling, passing, conditioning – which are substantially similar to what players were working on thirty or forty years ago.

Buying cheap is the sine qua non of investing fundamentals.

Too many investors look for their edge in some special insight into a given security rather than patiently waiting for Mr. Market to offer it on the cheap. Stock investment websites spew forth investment ideas by the truckload. Truly great investment ideas are hard to find.

Here’s Marks again from the same memo quoted above, “During the course of my 35 years in this business, investors’ biggest losses have come when they bought securities of what they thought were perfect companies – where nothing could go wrong – at prices assuming that degree of perfection . . . and more.”

Discipline yourself to buy cheap. Unless there is a compelling reason, why not wait until a security you like shows up on the 52-week low list? Also, have some dry powder to buy more if it goes even lower. Mr. Market frequently way overshoots the mark when he gets in a lousy mood. Walter Schloss – who averaged 20% (before fees) for five decades – liked to buy stocks trading near the low of the past few years.

Don’t compromise on price or you will lock your capital up in mediocre investments. This is not a formula for beating the market. Most of the time, the market’s prices are reasonably well aligned with business values. Have the patience to wait for those times when the gap between price and value is screaming. A feeling of revulsion – if not by you, at least by the crowd – is usually a pretty good tell.

[Profit88]

I read about Tiger 21 a few months back and thought it'll be fun if we one day have a similiar club in Malaysia. It should be capped at 108 members - just like the 108 Water Margin heroes 

A gathering of accomplised equals - that's what an investing club should be. Unfortunately, in Malaysia, many such clubs are little more than cults centred around a few so-called "taikos" and "sifus" protected by blind newbie followers who "attack" anybody who dares to have a different opinion.

[USuck]

I read about Tiger 21 a few months back and thought it'll be fun if we one day have a similiar club in Malaysia. It should be capped at 108 members - just like the 108 Water Margin heroes 

A gathering of accomplised equals - that's what an investing club should be. Unfortunately, in Malaysia, many such clubs are little more than cults centred around a few so-called "taikos" and "sifus" protected by blind newbie followers who "attack" anybody who dares to have a different opinion.

I sokong! Too much hooligans in the forum. Admin why you censor my previous avatar? You hooligan also? 

[soulsimple]

100 Ways to Beat the Market #6: Focus on What is Knowable and Important

It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension comprises what is knowable and unknowable and the vertical dimension comprises what is important and unimportant.

 

                     Knowable       Unknowable

Important

 

Unimportant

 

It should be obvious that you should not spend any time on what is unknowable and unimportant.

The trick is steering clear of the Unknowable/Important box and the Knowable/Unimportant box.

The Unknowable/Important box is very tempting. Lots of people pretend to have something worthwhile to say about things that fall into this quadrant. This is where most macro forecasts live and discussions about timing and short-term price movements. Promoters like to set-up shop here. This is the domain of unfounded opinions where the prognosticator’s incentives almost never align with your interests.

The Knowable/Unimportant box is also tempting. An example is useful here. Buffett pointed out that it was knowable quite early on that automobiles and airplanes were destined to rise and become a central part of modern life. These insights were not particularly useful to investors because a) it was impossible to handicap the eventual winners in those emerging industries and b) even if you could, they were unattractive investments given their reliance on massive low-return capital investments.

The trick is to focus on what is important and knowable. For example, it is very important to try to understand where a prospective business investment will be in ten years, even if it cannot be done with precision. It’s equally important to limit the time you invest thinking about investments to those businesses where this is actually possible. You can’t do this very often, but this is what you should be looking for.

Focus on spending your day in this quadrant. This is where meaningful decisions are made. This is where you can gain an edge over those who are unwittingly wasting time on the unknowable and the unimportant.

The temptation to be drawn to these time wasters is real and strong. It is deeply grounded in human nature. The Internet only exacerbates this tendency.

Challenge yourself. Examine your day and resolve to improve where you’re spending your time and what questions you are asking.

[soulsimple]

100 Ways to Beat the Market #7: Avoid Hot Industries with No Barriers to Entry

A Lex column in yesterday’s Financial Times, “Solar: the sun also sets”, is yet another stark reminder that a growing industry does not necessarily make a good investment.

The solar panel industry is expanding rapidly as measured by worldwide megawatts of solar panel shipments. By that measure, business is up approximately sixteen fold in the past five years.

In stark contrast, solar energy stocks, as measured by the Mac Solar Energy Index, are badly trailing the S&P 500. The problem is overcapacity and cheap products coming out of China. One casualty, Evergreen Solar, just filed for bankruptcy protection.

Investors are easily enamored with hot industries with seemingly unlimited growth opportunities. However, in many cases, the businesses in these industries do not have any durable competitive advantages. Competitors pile in and drive margins into the ground.

Society may be the ultimate beneficiary if competition drives down prices far enough for solar power to compete with fossil fuels, particularly if it can be done without subsidies. Investors in this sector may not be so lucky.

Steer clear of hot industries with no barriers to entry. Don’t invest in a business without a moat. Pay attention to whether managers gets this and what steps they are taking to strengthen their hand. This may be the single most important factor if you are a long-term investor.

[rite_brain]

thanks mate,
good read for a "lazy" holiday 

[rite_brain]

I read about Tiger 21 a few months back and thought it'll be fun if we one day have a similiar club in Malaysia. It should be capped at 108 members - just like the 108 Water Margin heroes 

A gathering of accomplised equals - that's what an investing club should be. Unfortunately, in Malaysia, many such clubs are little more than cults centred around a few so-called "taikos" and "sifus" protected by blind newbie followers who "attack" anybody who dares to have a different opinion.

yeah,
chair by our talk cock king KIM 

[soulsimple]

100 Ways to Beat the Market #8: Have the Right Psychological Framework Regarding Losses

It is common in market downturns to hear and read about mounting investor losses. Pundits talk about the hundreds of billions or even trillions of dollars of wealth that have been wiped out. Of course, some real wealth is wiped out in market downturns as overvalued stocks come back to earth and when investors lock in losses by selling as a result of fear or a liquidity crunch.

Ben Graham taught us a better way in The Intelligent Investor. ”The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price speculation.”

To be a true investor has some requirements:

1) That you can reasonably value a prospective business before making an investment.

2) That you don’t overpay.

3) That you consider yourself a part owner in that business.

4) That you have enough cash from income or savings to not be forced to sell.

5) That you avoid leverage.

Perhaps most importantly, you need the right emotional framework to not panic when everyone around you is losing their head. There is no shame in feeling the pangs of fear when facing stiff quotational losses. We can’t undo the way we are wired. We can, however, choose our response to a given emotional reaction. As Steven Covey teaches, ”Between stimulus and response there is a space. In that space lies our freedom and power to choose our response. In those choices lie our growth and our happiness.”

[soulsimple]

100 Ways to Beat the Market #9: Cash is King!

One of the realities that makes value investing possible and profitable is that market prices vary more – sometimes much more – than underlying business values. Joel Greenblatt is fond of illustrating this point by getting out the newspaper and showing his students the huge variances in prices between 52 week highs and lows. This, of course, is also the lesson of Graham’s famous Mr. Market parable.

To take advantage of these opportunities requires cash.

You not only need to have cash on hand to provide reasonable buying power when the market goes into a funk, but also you need to have enough cash on hand to never be in a position of needing to raise cash in a down market by selling your undervalued holdings. If you don’t have any cash, you won’t be able to profit from Mr. Market’s gifts. If you need to sell your holdings in a severe market decline, you turn your primary advantage as a value investor on its head and make it work against you.

There is no precise formula on how to do this but a few common sense principles should go a long way.

1. Have sufficient liquidity from income and savings that you can go three to five years without needing to tap into your equity holdings.

2. If one of your holdings becomes materially overvalued – thereby discounting years of the most optimistic expectations for progress in the underlying business – sell it to restock your cash position.

2. Maintain a meaningful portion of your portfolio in liquid form so you have buying power when opportunity presents itself. This is not to say that you should never be fully invested, but the bar should be set pretty high for you to part with that last 20% of your portfolio held in cash. The prospective investment should be screaming at you, and you should be fully cognizant of the opportunity costs of committing these funds.

3. As a compliment to point 2, consider a meaningful investment in companies such as Berkshire Hathaway that have the ability to buy opportunistically on your behalf. For example, Berkshire has a huge cash stock pile of around $40 billion, annual earnings power of approximately $12 billion, ready access to funding, and – most importantly - the skills and attitude to put it to work when opportunity presents itself.

[soulsimple]

"Remain disciplined and humble this week."
Greg Speicher

[soulsimple]

100 Ways to Beat the Market #10: Focus on maximizing portfolio earnings ten years out

In his 1991 shareholder letter, Warren Buffett wrote that investors should focus on building a portfolio that maximizes look-through earnings ten years into the future. Look-through earnings are your share of the earnings of a company whose stock you own. For example, if you owned 100 shares of Acme Corp. and it earned $1 per share this year, your look through earnings this year would be $100. Focusing on future look-through earnings is rational because your success as a long-term focused investor will be driven primarily by the economic performance, i.e. future earnings, of the businesses in which you invest.

As Buffett points out, this will force you to think about the long-term prospects of the business, rather than where the company’s stock will be in twelve months. It will also cause you to focus on a number of other important questions about the company’s earnings.

What portion of the earnings comprise free cash versus earnings that need to be re-invested to either maintain or grow the company?

What are the prospects for re-investing the company’s earnings and at what rate of return?

Is the management skilled at capital allocation and can it be trusted to put shareholder’s interests first?

How susceptible over the long-haul is the company’s position to competition?

How much are you paying today for your share of the earnings?

The answers to these questions will determine your estimate of earnings ten years from know. Of course, it is not possible to make this estimate for many businesses either because of the nature of the business or your lack of expertise.

Using this framework also allows you to determine you odds of outperforming the S&P 500 over the next ten years. Once you’ve plugged in your estimates of where your portfolio companies will be in ten years, you can compare them against your assumptions for the S&P 500′s earnings.

Given that the S&P’s economic performance is largely driven by the U.S. economy, start with your assumptions for nominal GDP growth, for example 3% real growth and 3% from inflation, along with something for dividends. You’ll also want to plug in your assumptions of where corporate profits stand as a percent of GDP and whether you expect that percentage to increase or decrease. Finally, you may choose to make an adjustment for the growing portion of S&P companies’ earnings that come from outside the United States.

If you can put together a portfolio whose look-through earnings will be higher than what you could expect to get ten years from now by investing in an index fund of the S&P 500 and you build in a margin of safety, you’ll have a pretty good shot at beating the market.

[soulsimple]

100 Ways to Beat the Market #11: Seek a margin of safety in certainty

Having a margin of safety is the cornerstone of intelligent investing. Buffett has said that chapter 20 of Benjamin Graham’s The Intelligent Investor which deals with the concept of having a margin of safety is one of the most important things ever written about investing. That Seth Klarman named his book Margin of Safety tells you something about the centrality of this concept.

Most often, a margin of safety is thought to reside in the gap between the price you pay and the value you receive, and rightly so. In addition, though, a margin of safety can be found in the certainty with which you believe a company will be worth far more in ten years than it is worth today. This is particularly true if you run a focused portfolio.

Buffett has said that he would sell a stock of a business that he was 90% certain would be worth more in the future if he could replace it with a stock of a business whose prospects were 100% certain. Moreover, he has said that he is not in favor of compensating for uncertainty by using a higher discount rate, which he views as nonsense. This notion of finding a margin of safety in certainty is essentially a positive embodiment of the famed first rule of investment, namely don’t lose money.

Commenting on when he was on Coke’s board, Buffett once said that, although he understood why it was done, he didn’t see much point in doing an ROI analysis on Coke’s prospective investments in growing the business because of his supreme confidence that the returns would be more than satisfactory.

If you want to beat the market, spend time looking for companies that you are virtually certain will be worth far more in ten years than they are today and then patiently look for an opportunity to buy shares at a reasonable price. Be patient and don’t commit your capital at prices that will lock you into mediocre returns. On the other hand, be reasonable. Businesses of this caliber rarely sell at deeply distressed prices.

[soulsimple]

100 Ways to Beat the Market #12: Swear Off Market Forecasts

When John Griffin started Blue Ridge Capital in 1996, it was a very difficult period because he did not have a long-term track record, and everyone was fixated on his short-term record, i.e. what he had done in the prior week, month, year, etc.

When Griffin started, he had a large amount of cash to deploy.  It was very stressful to go from the comfort of holding cash to putting it at risk.  At the time, he wrote on the board in his office, “The future is uncertain; it is always a difficult time to invest.”  He constantly reminds himself and his staff of this.

Today the markets feel particularly uncertain. Hardly a day passes when I don’t see an article about retail equity investors dumping their stocks because they can’t bear the high level of volatility. They often claim that they’ll return to the equity markets when things calm down and prospects become clearer.

The problem with this is that the future is never clear. There may be times when people think the future is clear – typically good times or in the latter stages of a bull market – but this is generally self-delusion based on over confidence. Yet, most people continue to be lured by the siren song of market forecasters, and opportunists are happy to oblige as evidenced by cable financial networks ever readiness to put on an endless stream of market prognosticators.

So, what’s the answer? After all, investing inherently involves making judgments about the future. One rational answer lies in focusing on individual companies where you can occasionally – if you work hard enough at it – gain a powerful insight into one of their future prospects that can fuel the level of commitment and certainty necessary to invest a meaningful amount of your capital.

Great companies with important economic advantages have provided satisfactory returns – or better – in spite of the many vicissitudes the markets have faced over the past century. When you find such a company and Mr. Market makes it available at a good price, you commit a costly sin of omission if you sit on your hands because of an uncertain macro environment, provided – again – that you really know what you’re doing. Worse yet would be to sell such a great holding after a sharp decline in its quotational value because you couldn’t stomach the volatility.

[soulsimple]

100 Ways to Beat the Market #13: Use a good filter with your search strategy

When Bill Ackman was recently interviewed on Bloomberg Television, he was asked if he was interested in Hewlett Packard given its recent large sell-off.  Ackman commented, “One of the things I learned a lot earlier in my career is to do a calculation which I call return on invested brain damage, which is before I make an investment which requires brain damage, or a lot of work and energy, I figure out how much money I can make.  The higher the brain damage, the higher the profit has to be to justify it.”

Ackman does not want to spend time on an idea if the payoff isn’t large, particularly if it is a complex idea requiring extensive analysis. Ackman also said, “I have the fairly quaint notion that the value of anything is the present value of the cash you can take out of the business over its life.” So, if a business is not predictable, he will take a pass and look for something that is.

Buffett has similar filters before he will get interested in an idea.

First, he’s looking for “seven footers”. Making an analogy to putting together a basketball team, Buffett wants ideas with obvious big upside potential. Only after finding a seven footer would he invest the time to check his skills, character, grades, etc. He also wants ideas where, if he could, he would put his entire net worth in the idea. He is not interested in taking a flyer on something.

The lesson here is obvious. Time is short. Don’t squander it on ideas that don’t offer large asymmetrical payoffs, especially if its something you could literally spend a year on and end up with a lot of superficial knowledge but no real insights into its future prospects.

[stockraider]

When warren was young having....about US 20 million.....he is investing like Leno & raider margin of safety model raking 40-60% return p.a, loh....!
General Raider think u should maintain this version model unless & until u have more than US 200 million in your disposal loh...!

Today Warren Buffet had many many billions.....therefore he had change investment style loh....!
Furthermore....he have an unfair advantage....good good company look for him offering him a discount to buy at Warren's term loh...!

So follow warren.....completely.....is like monkey see......monkey do.....not completely savvy for average investor loh....!
 

[stockraider]

One thing for sure is warren make much less than 20% p.a. sometime this return even lesser return than blur blur, leno and raider loh....!
This is bcos his fund is too large loh....warren did mentioned in his old days....he make easily 60% p.a.


Conclusion.......this mean old days........using Graham model his return is much higher loh...........!
This mean warren still beat Leno, blur blur & raider flats..........if he play the old game mah.........!
This means investment model of leno, blur blur and raider are still veri good & boleh pakai mah.........!
 

[soulsimple]

One thing for sure is warren make much less than 20% p.a. sometime this return even lesser return than blur blur, leno and raider loh....!
This is bcos his fund is too large loh....warren did mentioned in his old days....he make easily 60% p.a.


Conclusion.......this mean old days........using Graham model his return is much higher loh...........!
This mean warren still beat Leno, blur blur & raider flats..........if he play the old game mah.........!
This means investment model of leno, blur blur and raider are still veri good & boleh pakai mah.........!
 

as long as u r happy with whatever u r doin, ok lor!!!! i m happy for u!!!! for me, i m perfectly happy with what i m doin today, i may not b very good at it but i m totally happy with whatever outcome it brings me. whatever it is, i hope it is for the glory of God. thats all, simple as that.


good luck n hope u r happy with whatever comes your way too!!!!
 

[soulsimple]

100 Ways to Beat the Market #14: Don’t dabble

When an average person goes to an accountant, they expect, and usually receive, value in exchange for payment. Likewise, when hiring a plumber, electrician, attorney or any number of other specialists, the average layperson receives reasonable value in the exchange.

When it comes to money managers, though, this may not be the case. There is a lot of data that shows that, as a group, money managers’ performance equals that of the general market minus the frictional costs they incur in the form of fees, commissions, slippage, and taxes. How could it be otherwise? Many savvy investors such Bogel, Buffett and Greenblatt advise that average investors simply invest in an index fund and pocket these frictional costs. This is certainly a rational approach, and, as long as expectations are kept in check, it is likely to generate a reasonable return over the long term. Also, it has the added benefit of minimizing, if not eliminating, self inflicted wounds.

What about going it alone as an active investor? I think Buffett is correct that a person who spends an hour or two a week on investing has the potential to get a significantly worse result than simply buying and holding an index fund, particularly if he is doing focused value investing. Being able to value a company is sine qua non for successful value investing and this requires time and experience. Without good valuations grounded in independent work, you will lack the necessary conviction to buy meaningful positions and hold them through the inevitable ups and downs of the market. You could also get seriously burned if you buy something that looks “cheap” that really is a lousy, deteriorating business.

So why do many investors – even those who call themselves value investors – continue to dabble?

First, speculating can be very exciting and enticing. People can go to great lengths to speculate, even if it means dressing it up as value investing. Second, because investing outcomes are a result of both luck and skill, it is easy to draw the wrong lessons from one time successes or bull markets that generate good results for everyone, even know-nothings. These misguided lessons can lead to the conclusion that it is easy to make money in the markets. This is closely related to over-confidence bias which continues to draw patsies into the markets even when they bring nothing to the table and can offer no sound reason why they should generate a sound return when trading against well informed, sophisticated counter-parties.

Therefore, if you want to beat the market, don’t dabble. Dedicate yourself to it in a serious fashion or find a professional with the right investing framework and psychological makeup who will. Short of that, you’re better off investing in an index fund.

[soulsimple]

100 Ways to Beat the Market #15: Become a master

Some years ago, George Leonard wrote a wonderful book called Mastery which gives wise advise on how to become highly skilled at something.  The book has helped many people in numerous endeavors and continues to be widely read today.  I contend that consistently beating the market requires a high level of skill and that one would be well served by paying attention to what Leonard has to say on the subject of mastery.

Leonard teaches that true mastery requires an understanding that learning a new skill comprises brief periods of progress punctuated by long, successively higher plateaus, and even this does not always happen in regular clockwork fashion.  During these plateaus further progress seems elusive.  Yet, even without being conscious of it, learning continues.  Lessons are being assimilated and the mind and body are preparing for the progress necessary for reaching the next plateau.

The key is recognizing and accepting that this is the nature of pursuing mastery.  And that learning to love the plateau is an essential requisite for getting where you want to go.

Leonard further explains that there are three opposing and deficient character types which thwart the pursuit of mastery and short-circuit its attainment: the dabbler, the obsessive and the hacker.  The dabbler begins the pursuit of mastery and initially makes good progress.  However, once the dabbler hits the first inevitable plateau, he loses interest and moves on to something else.  The obsessive thrives on getting better and settles for nothing less than continual progress.  To fuel this progress, he throws himself into the task at hand and presses hard – too hard.  Eventually he becomes burnt out and moves on to something else.  Finally, there is the hacker. After some initial progress, the hacker hits a plateau where he is content to stay, never spending the time or effort to grow and move on to greater levels of skill.

To beat the markets requires mastery.  Learn to love the plateau by finding joy in doing the necessary work, confident that real progress will follow and true skill will develop in time.

[Guesst]

Very good postings.. thanks soulsimple!!

[KC TAN]

 

[iiinvestsmart]

100 Ways to Beat the Market #15: Become a master


To beat the markets requires mastery.  Learn to love the plateau by finding joy in doing the necessary work, confident that real progress will follow and true skill will develop in time.

How many hours are you willing to invest to be the best you can?

The magic number is 10,000.

http://www.thesundaily.my/news/186509

[soulsimple]

100 Ways to Beat the Market #16: Filter by opportunity cost

Charlie Munger has said that one the most effective filters you can use to optimize the allocation of capital is to compare a prospective stock purchase to your best current holding. If it’s not as attractive, don’t buy it.

Instead, consider buying more of your best holding. This type of thinking will force you to move capital into optimal opportunities and will prevent the dillution of your efforts. Munger also points out that it is a powerful time saver. If your idea is not as good as your best holding, you can forgo wasting time doing any further research.

Another variant of this idea is to compare your idea to buying Coca-Cola. Coke is a great company: virtually unlimited growth prospects, Fort Knox balance sheet, unassailable franchise, low capital intensity, minimal regulatory and litigation risk, strong management, etc. Always remember that (most of the time) you could just buy Coke and your almost guaranteed of getting a good, if not spectacular, result. Run down your idea against Coke and honestly determine if it is worth it on a risk-adjusted basis. This may keep you from doing some dumb things with your precious capital.

[ikan Besar]

once a upon a time there is a long long long long long long long banana longer than
the klang river bcos this banana is too greedy it want to grow longer
half way eaten up by the buayas
end of the story



 

[soulsimple]

100 Ways to Beat the Market #17: Select securities with a higher expected return than the market

If you want to beat the market, you need to have a clear understanding of what drives market returns. Generally speaking, you can expect the returns of the the S&P 500 to be closely correlated with the growth of corporate earnings. Corporate earnings in turn are closely tied to GDP growth. After all, per Buffett, you can’t expect a component part – corporate earnings – to indefinitely grow at a faster rate than the aggregate to which they belong – the overall economy.

You can provide your own estimates, but assuming that real GDP growth averages 3% and that inflation is at 3%, your would get a 6% return. Add in 1.5% for dividends and you are 7.5%. If you are expecting more than this, then you need to provide and defend your assumptions.

Is the market’s return on equity closer to the high end or the low end of its historic average? Are multiples of earnings high of low? What are your expectations for interest rates going forward? These all play a roll in setting expectations.

What is the point of this exercise if you are trying to best the market?

In sports, top athletes carefully study their opponents so they can get an edge. If you clearly understand what drives overall stock market performance, you can make a rule for yourself that you will only buy securities that offer superior expected returns both as a function of the businesses’ underlying economics and also the price you are paying for their securities.

If you buy better businesses at better prices, you will beat the market.

[soulsimple]

100 Ways to Beat the Market #18: “Handle the basics well”

In his 1994 shareholder letter, Warren Buffett extols the phenomenal performance of Scott Fetzer: it earned an extraordinary return on equity without the benefit of a monopolistic position, leverage or strong cyclical tail winds. Scott Fetzer’s return on equity – had it been included in the 1993 Fortune 500 – would have earned it a number 4 ranking. Buffett attributes the company’s success to the managerial performance of Ralph Schey, Scott Fetzer’s CEO.

But here’s the somewhat surprising point. It’s not because of any managerial gymnastics on Schey’s point. It’s because – as Buffett points out – Schey handles the basics extraordinarily well and doesn’t allow himself to get diverted.

Schey, “Establishes the right goals and doesn’t allow himself to get diverted.”

Buffett explicitly points out that this approach applies not only to the management of a business, but also to investing. Extraordinary things are not necessary to get extraordinary results. Yet, the temptation remains to complicate things. We allow ourselves to be pulled in a million directions, even more so today because of the unlimited potential distractions that the Internet provides.

If you want to beat the market, keep it simple. Decide what your goals are. Put in place a rational process to achieve them and then work hard.

[soulsimple]

just an extra story, just in case u hav nothing to do on a sat nite.........

http://www4.gsb.columbia.edu/null/download?&exclusive=filemgr.download&file_id=7310273

enjoy!!!!
 

[passionprint]

soulsimple, gd article but i dont think value investing works for msia stock market, rather scalping....

"reminiscenes of a stock operator"~ more fun in it* =))

[soulsimple]

soulsimple, gd article but i dont think value investing works for msia stock market, rather scalping....

"reminiscenes of a stock operator"~ more fun in it* =))

hav u tried it?
from what i know, doin n ownin a business is the same everywhere, may it b msia, spore, australia, bangladesh, tanzania or  in fact anywhere at all. its earnings that counts. n off course value is value, no matter where. value comes from price that u pay!!!!

 

[limmyfox]

 
(But headache already. Didn't expect weekend to have so much reading material...)

[khomsar]

When warren was young having....about US 20 million.....he is investing like Leno & raider margin of safety model raking 40-60% return p.a, loh....!
General Raider think u should maintain this version model unless & until u have more than US 200 million in your disposal loh...!

Today Warren Buffet had many many billions.....therefore he had change investment style loh....!
Furthermore....he have an unfair advantage....good good company look for him offering him a discount to buy at Warren's term loh...!

So follow warren.....completely.....is like monkey see......monkey do.....not completely savvy for average investor loh....!
 

congrats raider For being d most successful investor in this forum. Appreciate if u can share d stock counter that u recently go in for your medium terms investment (6 months). Tq

[soulsimple]

100 Ways to Beat the Market #19: Avoid businesses subject to disruption

The value of a business is the present value of all future cash flows that it will produce. Determining these future cash flows is the serious work of a securities analyst. Ratios that look at past and present performance often reveal little about a business’s future prospects. Thinking is required, and that can’t be automated or delegated.

Frequently, these future cash flows simply cannot be determined with precision. One risk that you must be on guard against is whether a business is subject to disruption. You need to consider what could kill the business? This is a foundational question, perhaps the most important.

If the business is generating a good return on capital – and these are the types of businesses you should be looking at – you can be certain that there are those who would love to storm the castle and steal the gold.

One of the biggest disruptors is the Internet. We all know that it’s a game changer for many businesses. Before making any investment, you need to think long and hard about whether your prospective investment is subject to Internet disruption and, if so, to what degree. It’s the difference between investing in businesses like Borders or Circuit City that were massively affected by the Internet and BNSF that is largely impervious to Internet disruption.

So how do you think about Internet disruption? A checklist is a good tool here. Make a list of the issues and factors you need to think about and then run it down when contemplating a purchase.

I just came across a good one in Bill Ackman’s analysis of Lowe’s. Ackman is considering the impact of online shopping on home centers such as Lowes and Home Depot.

Here’s Ackman’s checklist of conditions that render on-line shopping most appealing:

1.Product is relatively high-priced (i.e., sales tax savings are more material)
2.Product is not needed immediately
3.Shipping cost is low
4.Shipping is unlikely to damage the product
5.Professional installation is not needed
6.Item is not purchased as part of a larger project
7.End-user of the product is making the purchasing decision
If you want to beat the market, carefully and systematically think about how your investments could be disrupted. Use a checklist to capture the issues and then have the discipline to put your checklist into practice. You’ll be richer for it

[soulsimple]

100 Ways to Beat the Market #20: Buy Berkshire Hathaway at 1.1x book value or less

One simple way to beat the market is to buy and hold Berkshire Hathaway stock at a good price. Buffett acknowledges that it is challenging to find intelligent ways to invest Berkshire’s massive and growing cash holdings. Nevertheless, he is clear that his goal is still to beat the S&P 500 which he believes he can do, albeit at a diminished level of outperformance vis-a-vis Berkshire’s earlier halcyon days. It is worth noting that Buffett is famously conservative in his missives about his ability to continue to outperform.

Berkshire’s recent performance compared to the S&P 500 is noteworthy. Berkshire has outperformed the S&P 500 in each of the ten most recent five-year periods by an average margin of just over 7%. For the record, Berkshire has never had a five-year period where it underperformed the market.

Buffett believes that Berkshire’s stock is undervalued at 1.1x book value (or approximately $109,000 per A share). He’s right. If you net out the equity investments ($67 billion as of Q3, 2011) and use Buffett’s estimate of normalized after-tax earnings ($12 billion), Berkshire has an earnings yield of about 10%. These earnings are being generated by a diversified portfolio of high-quality businesses that includes a number of bullet-proof, growing world-class franchises such as GEICO and BNSF.

Berkshire enjoys a number of advantages which should continue to increase its intrinsic value.

1.Berkshire has outstanding veteran managers who are unencumbered by bureaucracy or quarterly earnings numbers. They focus solely on building long-term value.
2.Berkshire can not only purchase operating businesses, but also marketable securities. This gives it a much higher likelihood of finding attractive investments compared to the typical S&P 500 corporation which is constrained to allocate capital within its own industry. Moreover, Berkshire has advantaged access to many deals based on Berkshire’s reputation, deep pockets, and ability to act quickly.
3.Berkshire has a shareholder-oriented culture. Board members (excluding Buffett) own over $3 billion in stock, and compensation is completely aligned with shareholder interests. Moreover, Berkshire is imbued with a culture of frugality. This means that Berkshire’s wealth will increase the value of shares rather than line the pockets of management.
4.Berkshire enjoys cheap leverage in the form of insurance float. Although it is impossible to predict with any amount of precision, it seems likely – based on Berkshire’s track record – that float will continue to grow. Berkshire can also borrow at low rates given its strength.
5.Buffett is still at the top of his game and getting better. The IBM purchase shows his savvy and growing circle of competence and, in my humble opinion, has a reasonable likelihood of adding $10 billion in value over the next 10 to 15 years. Todd Combs and Ted Weschler are warming up in the bull-pen and were hand picked by the same guy who spotted Lou Simpson.
Of course, not losing money should be top of mind when considering an investment. Berkshire has a fortress balance sheet with massive cash holdings as a hedge against economic disruption that puts Buffett in a position of strength to take advantage of opportunities when others are scrambling. Also, Berkshire’s commitment to repurchase shares below 1.1x book puts a floor under the stock.

[soulsimple]

100 Ways to Beat the Market #20: Buy Berkshire Hathaway at 1.1x book value or less

Also, Berkshire’s commitment to repurchase shares below 1.1x book puts a floor under the stock.

investment made simple 

[money_builder]

investment made simple 

good post !!

[soulsimple]

100 Ways to Beat the Market #21: Be prepared

A couple weeks ago, my favorite college football team was playing in their big rivalry game. It was a close game that went back and forth. At the two minute mark, my team had the ball, trailing by three, with an opportunity to win the game, if they could execute their two-minute drill and score a touchdown. Unfortunately, they fell short, not just because they did not make plays, but also because they seemed confused and poorly prepared.

Knowledgeable football fans know that the key to an effective two-minute drill happens long before the actual game. It is all about preparation. There is little or no time to figure it out in real time when you have the pressure of trying to come from behind and win the game.

For me, this was yet another reminder that you need to be prepared ahead of time in the markets. You cannot wake up on the morning of a big down day in the market and expect to make good decisions on what to buy if you have not already done your homework.

These are the days when opportunity presents himself. Buffett recently said he was buying heavily on the big down days in August. Templeton would do his valuation work when the markets were calm and then put in his standing purchase orders at deeply discounted prices. Then he would wait.

You need a well conceived watchlist if you want to beat the market. Your watchlist does not need to be long. It needs to be thoughtful. Start with a short list of high conviction ideas that you truly understand. Determine an appropriate buy price by valuing the businesses on the list and selecting a reasonably discounted entry point.

These optimal opportunities do not come along everyday, but they do happen. If you are honest, you can probably recognize many sub-optimal purchases that you have made because you missed these types of opportunities and were willing to pay too high a price for at least some of your securities.

Resolve to correct these poor tendencies. Read my eBook on the investment process for more advise on improving your process. There are no short cuts or magic valuation algorithms. It is about sweating the details day in and day out. That is how consistent market-beating performance is earned.

[soulsimple]

100 Ways to Beat the Market #22: Do the math!

I have made the point in the past that, if you want to beat the market, you need to pick stocks of companies that have a higher mathematical expectancy than that of the S&P 500. Of course, this could come in many forms, for example, a higher earnings yield, better growth prospects, higher certainty in the company’s future prospects, or a cheaper stock price in relation to the business’s underlying assets.

To determine a stock’s mathematical expectancy, you need to do the math.  For example, if you buy a stock that sells for a P/E of 30 and that you project to grow at 12% per year – something very few companies can do – for the next 10 years, what will your return be if it sells at a market-average multiple of 15 in year 10? It turns out that your return would only be about 4.5% – hardly mouthwatering! Moreover, you would have given yourself little or no margin of safety.

When he spoke at Columbia in 2010, Tom Russo explained how Buffett thought about Internet valuations during the tech bubble of the late 90′s. At the shareholder meeting, a questioner pressed Buffet on why he was not buying tech stocks such as Cisco. At the time, Cisco was earning about $1 billion annually and had a market cap of approximately $500 billion. Buffett started out by saying that the same $500 billion – Buffett often thinks in terms of buying the entire company – would earn $30 billion if invested in 10-year treasuries. Moreover, Buffett had some doubts whether the $1 billion in earnings was solid, given such items as options. So after year one, if you invested in Cisco, you would be in the hole for $29 billion in earnings. Take the analysis out two years and the earnings deficit would become much bigger still. Buffett doubted a person investing on these terms would ever catch up with the earnings forfeited by not simply buying treasuries.

There it is: simple math – no algebra, fancy spreadsheets, or Greek letters.

Next time you are looking at an investment, do the math. In fact, do the math on all your current holdings, if you have not already done so. Use common sense. Make reasonable assumptions. Consider what would happen if things do not go well. Build in a margin of safety.

It is not complicated, yet many do not have the discipline to do the basic blocking and tackling that makes all the difference. Resolve today to always “do the math”.

[soulsimple]

100 Ways to Beat the Market #23: Sit still!

I like to read through the back issues of Value Investor Insight as part of my search strategy. It is a good way to become familiar with a lot of different companies. There is also tons of solid investing wisdom to be had, as Whitney Tilson and his partners hand-pick the best modern practitioners of value investing in all its various forms.

One profile that recently caught my eye was that of Pacifica Capital which is run by Steve Leonard. Steve is a sharp guy who made a fortune in real estate by adroitly putting the lessons of Mr. Market to work in the real estate market. Then, in the late 90′s he formed a money management firm and built a strong performance record.

Steve is a focused value investor who concentrates his capital in stocks of good businesses with strong management. He is patient enough to buy them at attractive prices and then hold on as they appreciate, all of which brings me to the point of this article: patience.

Steve has a great quote on Pacifica’s website:

“With individual stocks, 10% of the time they’re cheap enough to buy, 10% of the time they’re expensive enough to sell, and the rest of the time you should just hold them if you own them and avoid them if you don’t.”

Sorry if this is not new information. But this series is about what it takes to beat the market – not being novel – and patience is about as fundamental to that objective as anything I can think of. All the great ones agree on this point and many are quick to point out that most investors – no matter how much they pay lip service to it – do not possess enough of it.

Buffett talks about investors inability to do nothing and just sit still. In distilling the essence of his investing discipline, he sings the praise of “lethargy, bordering on sloth.”

Why not double or triple your investment discipline (even if it cannot be measured with anything approaching precision)? Resolve to wait for the S&P 500 to be off by at least 20% before making a purchase. Or insist that a stock be on the new low list before loading up. Or wait for those magical times when the yield on normalized current earnings exceeds 15%. Or wait until your relatives or friends are asking if it would not be prudent to get completely out of the stock market, or – notwithstanding your esteem for the wisdom of the Mr. Market parable – you cannot help feeling a little queasy about your own equity holdings.

However you get there, limit your buying to the 10% of the time – per Steve Leonard – when stocks are really cheap. Otherwise, just sit still and prepare.

[D ' LADY]

I am sit still infront my TV ....watching ....

T I N T I N......

[soulsimple]

I am sit still infront my TV ....watching ....

T I N T I N......

3D?

Enjoy!!!!
 

[godjitla]

100 Ways to Beat the Market #13: Use a good filter with your search strategy

When Bill Ackman was recently interviewed on Bloomberg Television, he was asked if he was interested in Hewlett Packard given its recent large sell-off.  Ackman commented, “One of the things I learned a lot earlier in my career is to do a calculation which I call return on invested brain damage, which is before I make an investment which requires brain damage, or a lot of work and energy, I figure out how much money I can make.  The higher the brain damage, the higher the profit has to be to justify it.”

Ackman does not want to spend time on an idea if the payoff isn’t large, particularly if it is a complex idea requiring extensive analysis. Ackman also said, “I have the fairly quaint notion that the value of anything is the present value of the cash you can take out of the business over its life.” So, if a business is not predictable, he will take a pass and look for something that is.

Buffett has similar filters before he will get interested in an idea.

First, he’s looking for “seven footers”. Making an analogy to putting together a basketball team, Buffett wants ideas with obvious big upside potential. Only after finding a seven footer would he invest the time to check his skills, character, grades, etc. He also wants ideas where, if he could, he would put his entire net worth in the idea. He is not interested in taking a flyer on something.

The lesson here is obvious. Time is short. Don’t squander it on ideas that don’t offer large asymmetrical payoffs, especially if its something you could literally spend a year on and end up with a lot of superficial knowledge but no real insights into its future prospects.

Nice one

[soulsimple]

100 Ways to Beat the Market #24: Don’t skip the thorough analysis!

Most of us do not easily part with our money. We like to think of ourselves as shrewd. We want good, reliable information before making a purchase. Yet, something interesting often happens when we decide we want something – we change from a dispassionate rational shopper to falling in love with the object we desire – particularly when there is a real or perceived scarcity factor involved. Our rationality can quickly give way to anxiety, greed and impetuousness. It is as if the brain short circuits and goes directly for the kill, as other more balanced considerations fade into the background.

It was against the backdrop of this reality that Ben Graham formulated his wise and proven approach to investing, he himself having been almost wiped out by the 1929 crash. At its heart, Graham’s approach to investing is very simple and rests on a relatively small number of timeless principles. Buffett has traditionally singled out two: The Mr. Market parable which crystallizes the proper way to think about market prices and the Margin of Safety which both minimizes the possibility of permanent loss of capital and provides a hedge against human error and ignorance.

I would argue that an equally important principle is encapsulated in Grahams definition of investing itself as found in The Intelligent Investor, to wit, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” [Emphasis added]

Now, it is said that the road to hell is paved with good intentions. No value investor worth his salt would not agree that he should do his homework before pulling the trigger on a new investment. The problem comes when that dispassionate analysis gives way to the greedy impulsiveness described above.

“This one is going to get away.” “Its about to run up in price.” “So and so has already established a large position.” “I’ll initiate with a starter position.” Man’s capacity to rationalize is limitless, and his good intentions provide flimsy guardrails. None of these reasons even remotely equates to “thorough analysis”.

Thorough analysis is part of the margin of safety. It reduces mistakes. It squeezes out luck and injects skill into the equation. It fosters conviction – the kind that really counts when prices inevitably move against you in the short or medium term.

Do not skip thorough analysis. If you got away with it in the past, consider yourself lucky and resolve never to do it again. (The funny things about markets is that they can sometimes teach the wrong lessons.) Chances are you can look back over your investing career and identify several investments where you skipped this step and lost money. In investing, just playing good defense and not having periodic material losses will go a long way to improving your long-term compounding.

Think of thorough analysis as an intergal part of investing. Resolve to not commit capital if you do not do this. Consider selling positions where you skipped the thorough analysis, or at least roll up your sleeves now and do it for all your holdings. Most skip this at their own peril and, if you do it religiously, it will go a long way towards identifying market-beating investments.

[soulsimple]

100 Ways to Beat the Market #25: Ask the right questions.

Investing is simple but not easy.

Likewise, basketball is simple but not easy. All you need to do is put a ball with a 9″ diameter into a hole with a 17″ diameter. Simple, right? That is until you have a great athlete in your face playing defense along with the pressure of performing when it really matters.

Investing is simple because all you need to do is buy a meaningful amount of a business that is selling for less that it is worth and hold on until the market recognizes its miscalculation. This is not easy because it requires a rational framework that fully respects both the intelligence and skill of your counter parties and the high degree of efficiency often present in markets, along with the emotional discipline to act rationally in the face of fear and greed.

One common error of investors is to make things too complicated. One embodiment of this is the complex financial models found in analysts’ spreadsheets. Without a grasp of the right questions and a good dollop of wisdom, these can often obfuscate as much as enlighten. There is a reason Buffett does not even use a calculator when valuing a company.

The key to being a great investor is knowing how to ask the right questions and then only investing when you can actually answer them with a high degree of certainty and conviction. You do not need to do this very often. In fact, it is probably not possible to do it very often.

When NBA rookie Derrick Williams worked out with Kobe Bryant over the summer, he asked Bryant what moves he should work on. Bryant told him it was not a question of having a lot of moves, but rather having a small number that he could actually execute and finish – that were unstoppable.

If you want to have that kind of success as an investor, spend your time figuring out the pivotal questions upon which your investing thesis is based. Eschew false precision and seek broad certitude.

Consider how Greenberg explained at Columbia how he decided to invest in Google. Greenberg admits that there is a lot that he does not know about Google. But he does know that people now spend 30% of their time online and that 10% of advertising is done online. He is willing to bet that over the next five to ten years the percentage of advertising done online will catch up with the percentage of people’s time spent online. He does not know exactly how it will play out, but he does believe that Google, with a 50% market share in online advertising, will get its fair share.

Focus on asking the right questions – the big, broad ones that really matter. If you get these right, the answers will shakeout out into the knowable and unknowable. If you focus on investing in the first camp and have the discipline to not overpay, you are well on your way to beating the market.

[soulsimple]

100 Ways to Beat the Market #26: Buy stocks that will double in five years.

For many years, Warren Buffett’s stated goal was to increase the intrinsic value of Berkshire Hathaway by 15% per annum. By doing this, investors could expect Berkshire’s value – and, with time, its stock price – to double every five years. (In the Berkshire Owner’s Manual, Buffett candidly states that this is the upper limit of what investors should expect today given Berkshire’s massive amount of capital and the difficulty for any large business to compound intrinsic value at 15%.) Prem Watsa’s stated goal at Fairfax Financial is to increase book value by 15% per year.

Finding stocks that will double in five years is, I believe, an aggressive but realistic objective for an active individual investor who develops the requisite skills and works hard at it. If you achieve this goal over the long term – regardless of whether your annual returns are lumpy along the way – you can expect to soundly beat the S&P 500. Your much smaller capital base is a distinct advantage vis-à-vis large investors such as Buffett or Watsa who need to deploy billions of dollars.

What you are essentially trying to do is to figure out what a business’s shares will be worth in five years and then to look to buy them at half of that today. How you get there will be some combination of growth in intrinsic value and buying shares at a discount to intrinsic value. One example is to find a company that can grow earnings at 15% for the next five to ten years and then buy it at fair value. You then sit tight as the stock price rises in tandem with earnings growth. Another approach is to find a stable, high quality business and buy it for 50% of its intrinsic value with the expectation that, over the subsequent five years, the market will re-price the security to reflect its intrinsic value. If it happens sooner, your rate of return is even higher. Finally, there is the combination approach where your double comes not only from growth in intrinsic value, but also the closing of a valuation gap.

One more thing: however you get to your double, you should always include a consideration of certainty. One way to think of it is that your outcome will be a function of your expected return and the certainty with which you will obtain it. Ideally you want investments where the expected mathematical annual return is 15% and the certainty with which you will obtain it is near 100%. You may want to consider changes in your portfolio if you can exchange your current holdings – after consideration of taxes, if any – for ones that offer a higher expected return or a higher certainty of obtaining generally the same return as an existing holding.

There are other frameworks for beating the market, but this is a good one. It is both conceptually simple and within reach. It goes without saying that compounding at this rate over long periods can generate real wealth.

[soulsimple]

100 Ways to Beat the Market: #27: Look for disconfirming evidence.

At the USC Law Commencement Speech in 2007, Charlie Munger praised Charles Darwin as a model of rational, objective thought, particularly his habit of trying to consciously overcome first-conclusion bias. This is one of the many forms of over-confidence bias that can be damaging to your wealth.

Munger stated that Darwin, “tried to disconfirm his ideas as soon as he got’em. He quickly put down in his notebook anything that disconfirmed a much-loved idea. He especially sought out such things.”

Following Darwin and Munger, we too should seek out that which disconfirms our own investment theses. Put simply, you should try to kill our own ideas. It is far too easy to fall in love with a stock and then let your own rose-colored glasses glibly filter away anything negative about the business. Of course, this is delusional: the market does not care if you like a stock and reality will ultimately have its way.

This type of disconfirming thinking was on full display at the 4th Annual Pershing Square Challenge, in which Columbia Business School students compete for a $100,000 prize in an American-Idol like stock picking contest.

One of the finalist teams pitched Aeropostale (ARO). They argued that Aeropostale is a best-in-class retailer which earns consistently high returns on equity. They highlighted the company’s multi-year same-store sales growth, and growth opportunities coming from international expansion, e-commerce sales, and P.S. from Aeropostale, a new concept which targets pre-teens. Also, they liked Aeropostale’s valuation – the stock was then in the mid 20’s – because they thought it gave no credit for Aeropostale’s growth prospects and that the company’s unlevered balance sheet provided an attractive target to leveraged buyout firms.

The Aeropostale team received a respectful grilling from the judges, which comprised a cadre of value-oriented hedge fund heavyweights led by Bill Ackman. The hedge fund judges did not appear overly taken with the team’s thesis. The concerns the judges raised, which were summarized at the end of the presentation by Ackman, provides a text-book example of the types of things you should be looking for when you seek disconfirming evidence. Of course, it goes without saying that raising a concern is not tantamount to proving that it will come to pass, but the process of raising objections and dealing with them is critically important in reducing mistakes and generating market-beating performance. If you do this religiously, you will have a leg up on all your competitors and counter-parties who do not.

Returning to the Aeropostale pitch, here is Ackman’s summary of the disconfirming concerns.

1. Aeropostale does not do anything proprietary; in other words, they do not have a moat. They piggyback off the intellectual property of other teen retailers such as Abercrombie & Fitch.

2. Aeropostale’s thinner margins vis-à-vis its competitors makes it more vulnerable to higher commodity prices.

3. The growth opportunity is overstated. Aeropostale has already saturated the United States. In fact, Ackman questioned whether the total number of U.S. stores already exceeds the number of quality U.S. malls.

4. There is upward rent pressure and Aeropostale is susceptible to negative leverage if margins compress, given its fixed costs.

5. The market is used to strong same-store sales growth and could re-adjust Aeropostale’s multiple downward if the business generated negative numbers. [Note: the stock subsequently sold off to under $10 a share on poor same-store sales, among other factors, and has since rebounded to $16 per share.]

The lesson here is to look for disconfirming evidence, write it down (given the brain’s seemingly unlimited capacity to rationalize away this type of information), and take the time to give it serious thought before going forward.