100 Things I Learned from Investing (76-100)

August 17, 2012 | Comments (5)

written by

Calvin Leung

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76. Excellent communication skill is one of the most obvious indicator of a good manager. Senior management needs to clearly describe their vision to people they work with. You may be assuming that they must have this basic skill when they got promoted to the job, but you would be surprised that this hasn’t been true for a lot of companies’ top management. Jim Ballsilie from RIM is a good example.

http://www.businessweek.com/magazine/content/10_42/b4199076785733.htm

77. Everyone makes mistakes, including the best management.  Management who fail to mention or apologize for their own mistake could indicate ego problems.

78. Google Trends could help measure the public perception (I call that “Hippiness”) of a specific range of product. Great growth story could be discovered here before the wall street analyst find them.

79. In the process of researching a company, it is also important to check out every single competitors it has. Sometimes you might find better opportunities in the same industry.

80. For small investors, “cigar butt” type of value investing has even more problems – You have no control over the management on how to realize the existing intrinsic value. Rate of return decreases over time as you wait for the market or the management to realize the intrinsic value of the share you bought. That “free last-puff cigar butt” is on someone else’s hand, and you have to sit there and wait for it. Meanwhile, you may be missing out some of the better stuff around the corner.

81. Do not place bets just because they have good management. “When a manager with a great reputation meets a company with a bad reputation, it is the company whose reputation stays intact.” – Buffett

82. Ask yourself – can you afford to lose all the money you are going to invest overnight? If your answer is no, you better keep that money in a savings account.

83. Write down a list of events that would trigger an immediate “sell” in your portfolio when those events occur.

84. I have my own set of “KPIs” to measure the performance of certain management in different businesses. They are rated on their integrity, intelligence and effort. Promise/delivery ratio, Quarterly to Quarterly financial forecast accuracy, communication skills, compensation/annual profit growth ratio, shareholder friendliness are some of the examples.

85. Be very careful when there is a “disruptive innovation” that changes everything in an industry. It doesn’t apply to the technology industry only. HMV, Blockbuster, Barnes and Noble are solid example of what technological change could do to traditional retail businesses.

86. I look at my list of “to buy list” every day and I keep a minimal rate of return requirement in mind. I wait for the price to drop below a point that would secure me a reasonable rate of return before I consider putting my money in.

87. Honestly evaluate how much time you could put into investment research and analysis. Time constrain the amount of stocks you could carefully go through, and it could hurt your rate of return. Years ago I read from a hedge fund manager that if you can’t do this full time with at least $1 MM invested capital, it’s better to just buy an index fund and spend the time to develop your career instead. I agree to a certain point, but I also enjoy the learning process. I believe the experience, knowledge and fun I gained over time is the intrinsic return besides money. These returns  actually compound overtime, along with my money.

88. Contrary to Buffett, I do read analysis pieces from different Wall Street analysts. I isolate their opinions and look for facts they are presenting, and then filter out the facts that doesn’t matter in the long run. Given that they are hired to cover a certain industry and stocks full time, chances are that they have probably spent more time on digging information about the stock than I do. If you think you know better, (either you spent full time researching the company or you have been following the company for years) their reports tend to repeat what each other say and they could be a waste of time.

89. A good real estate agent could walk into a house and know roughly how much it would be sold for. They never needed a calculator with them. That’s because they have seen countless similar houses transactions and understand how each attribute affect the valuation of a house. As a business investor, it would be beneficial to have gone through a lot of business to develop that “sixth sense” over time.

90. Read widely to look for growth stories: Do you know how much people love their Chipotle and the secret chipotle sauce? Have you read that lululemon fan blog? Do you know about OPI nail polish? How about that funny looking Croc Rx shoes that are all over hospitals?

91. Look for successful domestic business that has a plan for overseas expansion – Another growth potential.

92. Cost control should not be done during the bad times only – Management should be looking for ways to cut cost every day, and mention how they are doing it in every annual report.

93. Shareholder meetings rarely give me any additional insight into a business, but if it’s happening near where you live, attend for the opportunity to ask questions on your mind. Bonus if they serve good snacks/drinks or give out samples of their products.

94. I don’t try to predict what the world’s economy will be like in the next quarter or so. A lot of times, economy is affected by the decision made by a small group of people, and predicting their decisions is almost like predicting when a cat will lick its tail again.

95. Look outside the buy and hold strategy. If you have the extra time, engaging in arbitrage or special situation deals could churn out just as much cash as what a business could.

96. Use technology to help you filter through different news and data. In the Old School Value Best Investment Sites Magazine, it includes several useful content organization sites that helps you to efficiently consume contents.

97. You could make a bad decision and get a great outcome (like a lottery ticket), and you could also get a bad outcome with an intelligent decision.

98. Short term price volatility measures the psychological fluctuations (in another word, craziness) of the market, not risk as we define it.

99.  Never recommend or even talk about specific stocks to your relative or friends, for their own good. Besides the possibility of getting all the blame for a bad idea, people might just take your good idea and execute in a bad way. Try to share the philosophy instead.

100.  At the end of the day, it’s all business. If there is a short term trade that could guarantee a 1% return on my investment in 5 mins, with no to minimal downside risk that I could fully understand, I will certainly participate. Do not let certain framework hold you back from different opportunities to make money. In 1997, Buffett tried to corner the silver community market by buying up 130 million ounce of silver. It was a one-time trade, a short term opportunity, on a commodity of which its real value is based on the supply and demand of the market. It’s hard to fit this into the value investing model for typical businesses, but it made Berkshire handsome returns.

A New Series is Coming

That ends this series on 100 things learned from investing. Looking back, Daniel and I have certainly made a lot of mistakes and learned many lessons but all of which are helping us grow as better investors. I hope you have found these lessons valuable and worth considering.

But stay tuned – a new series is coming up!

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  • http://studentofvalue.com Student

    Congratulations on rounding up a nice series, Calvin. But I have to disagree with #82, vigorously. If you have to be ready to lose all your money, how is investing any different from the casino? What about the safety of principal and an adequate return?

    I would agree with you if you meant it in the sense that one shouldn’t put in the stock market the money one is going to need tomorrow. That is because the market is unpredictable in the short term. But counting your money as good as gone is a different thing.

    About #100 and Berkshire’s returns from the silver investment, they made, on average, 5-6% per year for 10 years (if the public information is correct). Less or at par with the S&P 500 over the same period. Hardly spectacular.

    Again, thank you for the nice series of articles. I hope you don’t take my comments as adversarial. Just sharing some thoughts and facts.

  • http://www.investmentruth,com Stock Investment Strategies

    I thoroughly enjoyed reading these last 25 “Things I Learned from Investing”, particularly your insights about management. I totally agree with No. 77 since I have witnessed ‘ego problems’ first hand. An inflated ego can certainly blind a manager’s perception of what is really happening with a particular company or the industry they are involved. That dovetails into No. 79 since not only does investor research undercover other investment opportunities with competitors, but management’s responsibility should always include a review of their competitors to make sure they are both competitive and innovative.

  • http://ca.linkedin.com/pub/calvin-leung/1b/b29/4b5 Calvin Leung

    Thank you for your comment! First of all I like your choice of username – to be good investors is to be good students.

    And I have to agree with what you said, #82 is probably a badly worded one. I understand that business investing is not like casino where the probability is always against you no matter which game you choice to play. Through careful investigations, we should be able to find investment with a good probability of making us money. What I’m referring to in #82 is the “struck-by-lightening” probability that one could experience throughout their investing career. For me, I wouldn’t put more than 50% of my portfolio into any single company at this stage. I am aware that there is always the possibility of total loss in any investment no matter how careful I invest. What I meant to say was that if someone is totally dependant on that money for their life necessity, they should probably keep that in a very safe place.

    This is also related to one of my worst weakness. I always look for “cat risk” (#25 in this series) first as I’m going through different investing materials. The interesting thing is that after spending months into researching a company, running through years of annual reports multiple times and just after I put my money in, I have this fear that something very odd might happen to the management or the product overnight that would destroy any businesses. I guess this is the fear I get from reading about business and investment disasters, similar to the effect of watching horror movies before you sleep.

    In 2009, Lazare Kaplan International (LKI) has discovered that they have lost a substantial amount diamond. A portion of the book value was gone and the stock was suspended from trading since then. They are a 100 year old diamond cutting company and they are the largest in the diamond cutting business. They have a secret formula that helps them cut a higher proportion of stones to “ideal” grade compared to other competitors. they also has a patented process that could improve the color grading of a diamond. They have the reputation and scale, and they were a solid net-net according to the balance sheet before the incident happened. But again, this is not totally rare in the net-net game.

    Any suggestions to improve #82?

  • http://studentofvalue.com Student

    Lazare’s case is amazing. Over half a billion worth of diamonds are “lost” or “missing” and information is super scarce. Suspicious. I don’t know what to make of it.

    About cat risk, there are catastrophes due to freak occurrences and catastrophes in the normal course of business. For example, meteors hitting See’s Candy’s factories would be quite weird. Nokia and RIM falling from grace is more or less business as usual in the tech sector.

    I guess, it’s about what is knowable and what is relevant. Catastrophic risk is very relevant, but not always knowable. The first type of risk above goes under “unknowable.” No need to worry about it. You can be struck by a lightning, a falling piano, or a drunk driver any time you are out, but not many people are concerned by this. It would be too debilitating to think this way.

    As for risks one can reasonably expect, one can decide whether to take them or not. Technology is most prone to disruption. A lot of debt leaves less room for error. These are factors the investors may know something about.

    My take on #82 would be “Think about your priorities.” Investing comes somewhere down the list, depending on the individual, but definitely after “food and shelter.” Therefore, no investing until you have secured this for a period you are comfortable with.

    In a roundabout way, it again comes down to “don’t risk money you can’t afford to lose.” Just the accent is not on writing off the money, but rather on fitting your investments in the bigger picture of your life. As Buffett put it, don’t risk what you have and need for what you don’t have and don’t need.

  • http://myinvestmentideas.com suresh

    We need to learn from our lessons and correct ourselves, else we keep onlearning them for life. Good article.

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