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Kindle Notes & Highlights
by
Gautam Baid
Read between
December 17 - December 30, 2023
As Buffett notes, “Value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get.”
When you pay low entry prices, you don’t need many good things to happen for you to get a good return.
If you plan to hold a share for the long term, the rate of return on capital it generates and can reinvest at is far more important than the rating you buy or sell at. —Terry Smith
Since stock markets typically value companies on the not unreasonable assumption that their returns will regress to the mean, businesses whose returns do not do this can become undervalued. Therein lies our opportunity as investors. —Fundsmith Equity Fund Owner’s Manual
Firms with excellent profitability tend to outperform those with the worst return on capital. The outperformance improves if high-quality firms are purchased at a fair price
The purchasers view the current good earnings as equivalent to “earning power” and assume that prosperity is synonymous with safety [emphasis added]. —Benjamin Graham, The Intelligent Investor
Always remember Howard Marks’s two rules: Rule number 1: Most things will prove to be cyclical. Rule number 2: Some of the greatest opportunities for gain and loss come when other people forget rule number 1.
It is why Gerald Loeb said, “The market is better at predicting the news than the news is at predicting the market.”
(John Maynard Keynes identified my problem: “The difficulty lies not so much in developing new ideas as in escaping from old ones.”
• When only a single firm in the entire industry is profitable, then the commodity in question may be at or near the bottom of the cycle
Special situations are the happy hunting grounds for the simon-pure analyst who prefers to deal with the future in terms of specific, measurable developments [emphasis added] rather than general anticipations. —Benjamin Graham
Carefully look at what other great investors are doing. This includes following their 13F filings. 2. Look at “cannibals,” or companies that are buying back huge amounts of their own stock. 3. Carefully study spinoffs.
“Spinoffs are an interesting place to look because there’s a natural constituency of sellers and there’s not a natural constituency of buyers.”
Institutions don’t want it (and their reasons don’t involve the investment merits). In addition to the reasons outlined so far, it is common for the spinoff entity to be loaded up with debt or cash.
Insiders want it. Always obtain a sound understanding of the incentives management has for performance within the spinoff.
A previously hidden investment opportunity is created or revealed. Greenblatt writes, “This could mean that a great business or a statistically cheap stock is uncovered as a result of the spinoff.”
Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return [emphasis added]. The worst business to own is one that must, or will, do the opposite—that is, consistently employ ever-greater amounts of capital at very low rates of return. —Warren Buffett
Great businesses typically are characterized by negative working capital, low fixed asset intensity, and real pricing power.
Negative working capital means that customers are paying the company cash up front for goods or services that will be delivered at a later date.
Buffett says, “The best business is a royalty on the growth of others, requiring little capital itself.”
“The single most important decision in evaluating a business is pricing power [emphasis added]. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
“The worst business of all is the one that grows a lot, where you’re forced to grow just to stay in the game at all and where you’re reinvesting the capital at a very low rate of return. And sometimes people are in those businesses without knowing it.”
We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year. —Charlie Munger
The bitterness of poor quality remains long after the sweetness of low price is forgotten. —Benjamin Franklin
This is the most nuanced and misunderstood aspect of investing: a fair price may be a lot more than you would think if profitable reinvestment really can take place [emphasis added]. —Tom Gayner
What is most important…is that stocks are not bought in companies where the dividend pay-out is so emphasized that it restricts realizable growth. —Phil Fisher
ROIC can be calculated as owner earnings divided by invested capital, in which invested capital equals working capital (excluding excess cash) plus net property, plant, and equipment.
The record of these 25 companies confirms that making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produces exceptional economics [emphasis added].
Capitalism is brutal. Excess returns attract competition. Only a few rare businesses enjoy excess returns for many years by creating structural competitive advantages or economic moats.
One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. —Warren Buffett
So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions [emphasis added].
The stock market is a giant distraction to the business of investing. —John Bogle
Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.”
Benjamin Graham had said, “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful [emphasis added].”
Make the most of a bull market to earn. Make the most of a bear market to learn.
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
“Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.”
As Buffett has said, “Bull markets can obscure mathematical laws, but they cannot repeal them.”
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
“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 [emphasis added].”
Diversification is the best way to admit you have no idea what’s going to happen in the future. It’s how you prepare a portfolio for a wide range of future possibilities and admit your own infallibility. —Ben Carlson
For individuals, any holding of over twenty different stocks is a sign of financial incompetence. —Phil Fisher
“Efficiency is doing things right; effectiveness is doing the right things.”
“To us, investing is the equivalent of going out and betting against the pari-mutuel system. We look for a horse with one chance in two of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t [emphasis added]. It’s just that simple.
As people become more skillful, luck becomes more important.
The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task
All I want to know is where I’m going to die, so I’ll never go there. —Charlie Munger
There are old investors, and there are bold investors, but there are no old bold investors. —Howard Marks
