The strategy of putting all your eggs in one basket and watching that basket is less risky than you might think.
My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings. A holding period of more than one year also works quite well as the factors are persistent in years 2 and 3.
Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.
I think the exercise of trying to figure out how to simplify concepts has been incredibly helpful to me over the last 13 years of teaching and I hope my students have benefited from it.
I don’t know too many people that are good at timing the market relative to macro-economic events.
Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.
It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns.
If I plug my estimates into the Magic Formula, and it comes out cheap, that’s good.
Something out of the ordinary course of business is taking place that creates an investment opportunity. The list of corporate events that can result in big profits for you runs the gamut – spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions.
If you spend your energies looking for and analysing situations not closely followed by other informed investors, your chance of finding bargains greatly increases.
The way we make money as a group is that we don’t pay a lot for anything, and most of the stocks we buy have low expectations.
I wait until an investment idea is so good, it hits me over the head like an anvil.
We are busy surviving, herding, fixating on what just happened, and being overconfident!
Remember, it’s the quality of your ideas not the quantity that will result in the big money.
The more confidence I have in each one of my stock picks, the fewer companies I need to own in my portfolio to feel comfortable.
Figure out what something is worth and pay a lot less.
Even after you learn where to look for new ideas, the notion that you can cover even one-tenth of these special corporate events is a pipe dream.
In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.
Stock prices move around wildly over very short periods of time. This does not mean that the values of the underlying companies have changed very much during that same period. In effect, the stock market acts very much like a crazy guy named Mr. Market.
Although over the short term, Mr. Market may set stock prices based on emotion, over the long term, it is the value of the company that becomes most important to Mr. Market.