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Kindle Notes & Highlights
by
Gautam Baid
Read between
August 10 - September 9, 2022
the market teaches us that a big difference exists between a great company and a great stock.
excessive greed and the subsequent tendency to debunk “traditional” measures of valuation.
Compounding at a moderate but steady rate of return over a long period of time is vastly superior to merely generating sharp outperformance for a year or two.
It takes a fairly short time to learn how to make money, but it takes a lifetime to learn how to not lose it.
As investors, our goal should be to minimize the number of decisions and to reduce the potential for unforced errors.
If investors focused on reducing unforced errors instead of trying to hit the next home run,
Investors are better off with a few solid long-term choices than flitting from one speculation to another, always chasing the latest hot stock in the market.
Poor businesses tend to remain poor, or they become slightly better but still remain below average (combined probability of 83 percent). There was only a 6 percent chance that the weakest businesses would transition to the “best performers” category.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.
The cycle for certain commodities and cyclicals, such as sugar, graphite electrodes, steel, hotels, and the like, usually lasts for a longer time than the cycle for other commodities and cyclicals.
Many times, even after a big miss on earnings and a sharp cut in analyst estimates, a commodity or cyclical stock actually goes up after bad earnings. This is a typical sign of a company or industry bottoming out—
Generally, the stronger the original resistance level was, the stronger the new support level will be.
stocks that show relative strength, that is, that go sideways or consolidate during significant market pullbacks, tend to outperform significantly during the subsequent market recovery;
The importance of insatiable intellectual curiosity, along with a deep passion for continuous learning, cannot be overstated in the investing profession.
In investing, all knowledge is cumulative, and the insights we acquire by putting in the effort today often help us in a serendipitous way at some time in the future.
Most of the time, sector leaders move up first and become expensive. Then the attention turns to the secondary players in the industry. Investors begin to realize that these secondary players are cheaper, and they bid them up.
A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.6
When the facts change, change your mind.
Multiplicative compounding of smaller multibaggers many times over helped me realize my dream. I experienced the joys of compounding.
For a successful investing career, what matters is the long-term compound annual growth rate in overall portfolio value with the least possible risk, not the number of stocks it took you to achieve it.
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.
The longevity of growth is always given a greater weight by the market than the absolute rate of growth,
A business with a perceived sustainable growth rate of 30 percent to 35 percent often ends up getting a 40× to 50× P/E (or an even higher valuation that generally keeps expanding throughout the entire duration of the bull run,
If it comes to a choice between a 15 percent grower at 15× P/E and a 30 percent grower at 30× P/E, investors always should choose the latter, particularly when longevity of growth is highly probable.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
airlines (characterized by hypercompetition).
although valuation is more important over shorter time periods, quality along with growth is much more important over long time periods (seven to ten years and longer).
making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produces exceptional economics
Great businesses create enormous wealth over long holding periods across market cycles, even in the midst of negative macro headlines about high inflation, rising interest rates, geopolitical tensions, weak macroeconomic data points, and political uncertainty.
As investors, we look for those companies that are fanatically obsessed with the well-being of their customers and that empathize with them more than their competitors do.
an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace
Bull markets typically are fueled by cheap liquidity and usually come to an end with a sharp spike in interest rates.
If any theme in the narratives of past financial crises is recurring, it’s the sudden withdrawal of market liquidity.
looking at the great bull markets of this century, the best environment for stocks is a very dull, slow economy that the Federal Reserve is trying to get going
Make the most of a bull market to earn. Make the most of a bear market to learn.
This is how John Templeton has described bull markets: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
As a bull market matures, many investors tend to move their portfolios from high-quality stocks with steady growth and high return on equity to cheaper but higher-growth stocks with poor management quality and inferior return ratios, and then to commodities and cyclicals, and then to turnaround situations that are currently loss-making, and then to microcaps with limited track records of operations, and finally to highly leveraged companies with projections of rapid revenue growth. At this point, the bull market usually tops out, and at the end of the euphoric phase, most investor portfolios
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“Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.”
A big bear market needs to be preceded by complete euphoria, a major unexpected negative dislocation, and a complete drying up of liquidity.
Risk is the potential for permanent loss of capital or purchasing power, whereas uncertainty refers to an unpredictable range of possible outcomes.
Statistical analysis shows that security-specific risk is adequately diversified after fourteen names in different industries, and the incremental benefit of each additional holding is negligible. —Mason Hawkins
overall market risk will not be eliminated merely by adding more stocks to your portfolio. —Joel Greenblatt
I size individual allocations in my portfolio according to my evaluation of potential risk, with the largest holdings having the lowest likelihood of permanent capital loss coupled with above-average return potential. I initiate new positions with a minimum weighting of 5 percent and subsequently average upward if the management executes above my expectations.
During periods of poor performance, the pressure always builds to alter one’s investment philosophy.
To make money they didn’t have and didn’t need, they risked what they did have and did need, and that’s foolish.
Always be aware of the potential downside. If the consequence of an action is not acceptable to us, then, no matter how low the probability, we must avoid that action.
“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
In a market crash, both quality and junk fall. Quality eventually rises again and junk never recovers.
After reaching a state of financial prosperity in life, ensure that you take all necessary steps to avoid being thrown back to the starting position.
