Book Review: The Little Book of Market Wizards

9781118858691_MF5.inddOver time, I have reviewed a decent number of “Little Books.”  I have a theory as to why I like some of them, and not others.  I like the ones that take a relatively narrow concept and summarize it.  An example of that would be Mark Mobius’ book on emerging markets, or Vitaliy Katsenelson’s book on sideways markets.

But when a concept is broad and not friendly to summary, a “little book” is not so useful.  As examples, John Mauldin’s book on Bulls Eye  Investing went too many directions, and Scaramucci on Hedge Funds could not adequately summarize or describe a large topic.

There are other “Little Books” that I have read that did not even get a review… probably about 10% of the books I read in entire never get the review written because they were so bad, or just hard to decide what the book was.  (What do you want to be if you grow up dear? ;) )

Sorry, too much intro.  For those at Amazon, there are useful links at my blog.

Jack Schwager is generally a good writer, and expert at talking with clever investors in order to break down the main points of how they invest (without giving away the store).  In this “Little Book” he goes a different direction, and looks for commonalities among various clever investors, with each chapter covering a different topic.

My view is that most clever investors fall into one of a bunch of categories, much of which boils down to time horizon for the preferred investment.  Going down the continuum: day trader, swing trader, longer-term trader, momentum-oriented growth investor, growth investor, growth-at-a-reasonable-price investor, and value investor.  After that, you might differentiate between those that go for relative vs absolute returns.

As such, the book posits a bunch of topics that apply to different groups of clever investors.  I think it would have been better to have segmented the book by classes of investors, because then you could have a coherent set of commonalities for each main investor type.

As it is, the book relies heavily on anecdotes, which isn’t entirely a bad thing; nothing motivates a topic like a story.  But if you were reading this to try to develop your own philosophy of managing money in order to fit your own personality, you might have a hard time doing it with this book.  I think you would be better off reading one of Schwager’s longer books, and reading about each clever investor separately.  At least then you get to see the full package for an investor, and how the different aspects of investing in a given style work together.


Already expressed.


If you just want a taste of what a wide variety of different investors do to be effective, this could be the book for you.  For most other people, get one of Schwager’s longer books, and read about the different investors as individual chapters.  If you still want to buy it, you can buy it here: The Little Book of Market Wizards: Lessons from the Greatest Traders.

Full disclosure: I received a copy from the author’s PR flack.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Goes Down Double-Speed (Update 2)

This is the third time I have written this article during this bull market.  Here are the other two times, with dates:

The first time, we had doubled since the bottom.  Second time, up 2.5x.  Now it is a triple since the bottom.  That doesn’t happen often, and this rally is getting increasingly unusual by historic standards.  That said, remember that every time a record gets broken, it shows that the prior maximum was not a limit.  If you think about that, after a bit you know that idea is obvious, but that isn’t the way that many people practically think about extreme statistics.

Let’s look at my table, which is the same as the last two times I published, except for the last line:


Since the second piece, the gains have come slowly and steadily, though faster than between the first and second pieces.  As I said last time,

In long recoveries, gains first come quickly, then slowly, then near the end they often come quickly again.  Things are coming quickly again now, but who can tell how long it might persist.”

Indeed, and after the first piece, the market did nothing for about 16 months, after which the market started climbing again at a rate of about 1.5% per month for the last 27 months.  Though not as intense as the rally in the mid-’80s, this is now the third longest rally since 1950, and the third largest.  It is also the third most intense for rallies lasting 1000 calendar days or more.  This is a special rally.



And now look at the cumulative gain:



Does this special rally give us any clues to the future?  Sadly, no.  Or maybe, too much.  Let me spill my thoughts, and you can take them for what they are worth, because I encouraged caution the last two times, and that hasn’t been the winning idea so far.

  1. To top the rally of the ’90s for total size, we would have to see 2700 on the S&P 500.
  2. It is highly unlikely that this rally will top the intensity of that of the ’50s or ’80s.  Gains from here, if any, are likely to be below the 1.7%/month average so far.
  3. For this rally to set a length record, it would have to last until 12/14/16 (what a date).
  4. Record high profit margins should constrain further growth in the S&P 500, but that hasn’t worked so far.  As it is, there are very good reasons for profit margins to be high, because unskilled and semi-skilled labor in the capitalist world is not scarce.
  5. Rallies tend to persist longer when they go at gradual clips of between 1-2%/month.  Still, all of them eventually die.
  6. At present the market is priced to give 5.5%/year returns over the next 10 years.  That figure is roughly the 85th percentile of valuations.  Things are high now, but they have been higher, as in the dot-com bubble.  We are presently higher than the peak in 2007.
  7. On the negative side, it doesn’t look like the market is pricing in any war risk.
  8. On the positive side, I’m having a hard time finding too many industries that have over-borrowed.  Governments and US students show moderate credit risk, as do some industries in the finance and energy sectors.
  9. Finally, the most unusual aspect of this era is how little competition bonds are giving to stocks.  In my opinion, that idea is getting relied on too heavily for a relative value trade.  Instead, what we may find is that if bond yields rise, stocks, particularly dividend paying stocks, will get hit.  By relying on a relative yield judgment for stocks, it places them both subject to the same risks.

I still think that we are on borrowed time, but maybe you need to regard me as a stopped digital clock with a date field, which isn’t even right twice per day.  Historically, if the rally persists, stock prices should only appreciate at a 8-9% annual rate with the bull this old.

That’s all for now.  I’m not hedging my equity portfolio yet, but maybe my mind changes near 2300 on the S&P 500, should we get there.

PS — the title comes from the fact that markets move down twice as fast as they go up, so be ready for when the cycle turns.  The first article in the series focused on that.

The FSOC is Full of Hot Air

I’ve written about this before, but if the FSOC wants to prove that they don’t know what they are doing, they should define a large life insurer to be a systemic threat.

It is rich, really rich, to look at the rantings of a bunch of bureaucrats and banking regulators who could not properly regulate banks for solvency from 2003-2008, and have them suggest solvency regulation for a class of businesses that they understand even less.

And, this is regarding an industry that posed little systemic threat during the financial crisis.  Yes, there were the life subsidiaries of AIG that were rescued by the Fed, and a few medium-large life insurers like Hartford and Lincoln National that took TARP money that they didn’t need.  Even if all of these companies failed, it would have had little impact on the industry as a whole, much less the financial sector of the US.

Life insurance companies have much longer liability structures than banks.  They don’t have to refresh their financing frequently to stay solvent.  It is difficult to have a “run on the company” during a time of financial weakness.  Existing solvency regulation done by actuaries and filed with the state regulators considers risks that the banks often do not do in their asset-liability analyses.

Systemic risk comes from short-dated financing of long-dated assets, which is often done by banks, but rarely by life insurers.  I’ve written about this many times, and here are two of the better ones:

MetLife and other insurers should not have to live with the folly of “Big == Systemic Risk.”  Rather, let the FSOC focus on all lending financials that borrow short and lend long, particularly those that use the repurchase markets, or fund their asset inventories via short-term lending agreements.  That is the threat — let them regulate banks and pseudo-banks right before they dare to regulate something they clearly do not understand.

One Less Mentioned Reason for Stock Buybacks

Buybacks are not my favorite way to redeploy excess capital, in general.  But let me describe to you when they are useful and when they are not [taken from this article]:


  • Buybacks are preferred on a taxation basis to dividends.

  • But buybacks are especially good when the stock is trading below its franchise value, and especially bad the further above franchise value the stock is trading.

  • Using slack capital to improve operations, or do little tuck-in acquisitions is probably best of all.  Organic growth is usually the best growth, and small acquisitions can facilitate that.  Small acquisitions are usually not expensive.  Be wary of acquisitions to increase scale, they don’t work so well.

  • Paying a dividend makes management teams more cognizant of the cost of equity capital, which makes them more effective.

  • In the reinsurance business in Bermuda, companies with slack capital tend to buy back shares below 1.3x book value, and issue special dividends if they are above that level.

The whole article is worth a read, but there is one more factor that drives buybacks, especially illogical buybacks where they pay more than the per share intrinsic value of the company: they don’t want to get taken over by another company.  After all, the current management team may never have such nice jobs ever again.

Buying back stock at uneconomic prices temporarily keeps the stock price high, and removes cash from the balance sheet that an acquirer could use to help purchase the company.  We haven’t seen it in a while, but some companies under threat of a takeover would do a semi-LBO and borrow a lot of money to buy back stock, making a purchase of the company less attractive.

Thus, I’m not sure we could ever get rid of buybacks, even when they don’t make sense, except perhaps in the long run by selling the shares of companies that are too aggressive in the buybacks.

Closing Note

I rarely disagree with Josh Brown, but I did not find the HBR article he cited criticizing buybacks to be compelling.  I would find it really difficult to believe that management teams avoid projects offering organic growth at rates exceeding the implied yield from buying back stock.  Also, there are many different ways to run businesses in our country, and if public companies suffer from a buyback bias, then private companies might be able to think longer-term, and invest in profitable organic ventures.

Thus I would not blame buybacks for other problems in society; I might blame too much investment in residential housing and financial institutions, but even then, I would not be certain.  What we invest in as a society does affect future growth, but it is difficult to see where the end-investments take place.  Money from a stock buyback might get redeployed into a business startup.  It may be that public businesses are light on organic investing, and take less risk in investing via buybacks. But that is why we have startups, private equity, etc., much of successful of which go public or get acquired by public companies.

Anyway, just a few thoughts…



Enjoying Yahoo Finance Portfolio News

Title: Neat and Tidy | Photo Credit: dolanh

Title: Neat and Tidy | Photo Credit: dolanh

I would like to thank Yahoo Finance for cleaning up their news stream that accompanies portfolios that are set up at their site.  It used to be that I would have to copy the news flow from Yahoo Finance, drag it into an Excel spreadsheet, and do some complex operations to separate the wheat from the chaff.  Eventually, I got good enough at doing so, that it only took me five minutes a day to do that.

Fortunately, that only lasted for 18 months.  Now I can just look at the news flow on the portfolio pages, because almost all of the news-clutter is gone.  I’m not asking for perfection from Yahoo Finance.  It’s good enough that I can skip over the few remaining low-quality news sources.

I say this with some hesitation, because after writing for enough time on the web, I have friends in many publishing organizations on the web.  Thus, I would rather not publicly mention names of those excluded, or those who possibly should be excluded from those still allowed into the feed at Yahoo Finance.  I will only say to avoid robotic content.  Yes, we can create programs that can fully or partially automate the writing of certain news stories, but from my experience, those stories are low value, and frequently contain errors that a human specialist could have culled out.

To close: Thanks to Yahoo Finance for making the portfolio news feeds far more useful!

Book Review: The Education of a Value Investor


Before I start, I would like to remind readers of a Q&A that I did with the author, which is available here. [For readers at Amazon: Google "Aleph Education of a Value Investor". There are other useful links in the version at my blog.  Wish Amazon allowed for links...]

This is a good book if you know what you are getting and want that.  If you want a book to compare it to, I would class it with Benjamin Graham: The Memoirs of the Dean of Wall Street.  The reason for this comparison is that the book focuses on character development, and spends relatively little time on detailed value investing methods.  It spends a lot of time on the good parts of the lifestyle of a value investor, and this is where the book has its highest value.

Is it possible to “get rich quick?”  I don’t think so, but it is possible to become rich if you focus, make few decisions, but they are the right actions to take.

This book describes the transformation of the author, who went from someone trying to get rich quick in the short-run, and failing, to being an investor who could wait until he had a good idea to invest in, and then concentrate his capital in the best ideas that he had, and succeed.

But getting there was not a linear matter.  First, he had to figure out he was miserable.  Then, he had to find a new way to support himself, handicapped because the last firm he worked for had a bad reputation.

He picked up an interest in value investing, particularly the style that Buffett follows, which led him to a clutch of contacts in the value investing world who would help to shape his view of the world.

Without spoiling the book, some events happened that enabled him to set up his own investment shop where he does value investing for clients and himself.  And as such, he lived happily ever after?

Well, not yet.  He meets one key person, Mohnish Pabrai, who helps him think through the key aspects of his business.  He makes a number of additional friends who are value investors, and he figures out what he is good at analyzing and acting on, and where he is less capable.  Armed with that data, he acts to make his entire life more effective for himself, his family, and his clients.

He moved so that he could be out of the “New York Vortex,” where groupthink can carry you along.  He moved to a quiet area, and set up an office where he could think, and the odds of being disturbed would be low.  He set up an action area and a contemplation area.  He limited electronics to the action area and made it uncomfortable to stay in the action area.  This enabled him to think longer-term, and avoid taking actions because others were doing so.  He also had to learn how to get advice from other intelligent investors, without letting their views short-circuit his thinking processes.

He enjoyed life a lot more.  He also realized he had enough assets to manage, and so he didn’t need to market much, which allowed for a focus on serving current clients well.  About the only thing he needs to do is develop a sell discipline, and that is not an uncommon problem with most asset managers.  [Two of my articles on the topic: one, two.]

Near the end of the book, he shares eight pointers that will improve the investing of most people, if they are willing to think long-term.  I endorse the principles there, though there may be other ways to achieve the same disciplined attitude.  He also gives four case studies that affects the checklist that he uses for making investments.

Now, I have purposely left out the most colorful part of the book, the lunch with Warren Buffett, to the end of this review.  He and Mohnish bid together for the lunch and win.  The main thing he takes away from the affair was how much Buffett focused on his guests, and not on himself.  Indeed, at the end of the book, he credits his relationship with Mohnish in helping him to become more selfless in many of his attitudes.  To him, that is the real prize, much as he has done well as an investor and a businessman.


Can all of ethics be summed up as being farsighted and unselfish?  No.  Those are good things, but the Bible has many more things to teach than that.


This book will help you understand the internal attitudes of some value investors.  It may help you invest to some degree, but that is not the main point of the book.  After all, what is it worth to be a great investor if you aren’t happy?  Being happy as an investment manager is the main point of the book.  If you still want to buy it, you can buy it here: The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment.

Full disclosure: I received two copies from the author’s PR flack.  Good thing too, because someone swiped one of them before I finished reading it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Ranking Industries by Range

As part of a continuing quest to turn up stock ideas in the midst of a market hitting new highs, I wanted to trot out a less commonly used statistic called “range.”  Range is the distance that a company’s stock price is between its 52-week low and 52-week high.  0% means the current price is at the 52-week low, and 100% means the current price is at the 52-week  high.  So far, simple, right?  How might industries look if their weighted average range statistics were calculated, weighted by market cap?

RANGE_16247_image002The top zone, which is shaded light red, are industries that are above the median range statistic in the market which is around 78.5% (average is around 72.2%).  The industries shaded yellow represent industries where the stocks are closer to their 52-week high than their 52-week low, but are have average range statistics lower than the median of the market.  Finally, the industries shaded green, what few there are, their current prices are closer to their 52-week low on average.

Personally, I would be inclined to look through the industries toward the bottom of the list, looking for misunderstood companies that have good potential of future outperformance.  That said, someone thinking that this rally would have a long way to go would be incented to look for companies at the top of the list who have trends that are underdiscounted.

As it is, this is where the industries are priced in terms of the past 52 weeks.  You could look at the industries with the view of finding things that are out of place, and prices could shift in the future to reflect it.

If nothing else, this is food for thought.  Technology, Utilities and Healthcare look strong.  Basic materials, Capital Goods, and Consumer Durables look weaker.

All for now.  Be careful.

Book Review: Business Adventures

71062OPNjPL._SL1500_Do you like economic history?  I do.  I often think that we spend too much time on the numbers in business, and not enough time on the qualitative reasoning that goes into making good business decisions.

This particular book gained some notoriety of late when both Bill Gates and Warren Buffett said they were fans of the book.  Could a book get a more powerful set of recommenders? Unlikely, and as a result, the book was pulled back into print. [Those reading this review at Amazon, there are links at Aleph Blog to flesh this point, and other points out.]

The stories are taken from articles written in The New Yorker from the 1960s by John Brooks, who wrote what was one of the best summaries of the markets in the ’60s, “The Go-Go Years.”

If you don’t like economic history, this will not be the book for you, because the old stories will not resonate, and say to you, “We never learn.”

Consider the wealth of situations covered in the book:

1) There was a surprising fall in the market in 1962.  We have experienced much the same with “flash crashes” recently.  They had a hard time figuring it out as well.

2) There was much work put into testing the Edsel, but it was a flop.  Does that never happen today?  What of New Coke? Various Microsoft products?

3) Even in the ’50s and ’60s there were people looking to convert wage income into less-taxed capital gains income.  The tax code was filled with loopholes.  After a brief tax code cleanup in the mid-’80s, we are back to the same problem today.  Is it any surprise corporations do not manage their businesses for pre-tax economic outcomes?

4) Insider trading scandals are nothing new; we just dress them up in new clothes each decade.  Watch the fun as an oil company delays the release of what a gusher they have drilled, while employees/friends take positions.  And, to no surprise, there are different legal results as different parties knew differing amounts on how certain the information was.

5) New technology?  Something so big that the name of the company becomes the generic name for the product?  Where they set up a center for research in areas not directly related to their main business?  Google!  Okay, Xerox…  (At least Google is trying to profit from their innovations.)  How does a company manage to avoid becoming trapped in one area of technology?  Well, it didn’t work for Xerox, but maybe modern companies can avoid the same problem.

6) Can financial companies rescue a fellow company to protect the good reputation of the industry?  In this case they did, but did Wall Street retain the knowledge for the future?  LTCM was saved, though Bear Stearns didn’t do its part.  Wonder if that eventually cost them?  How many companies were rescued by fellow companies during the recent financial crisis?  A bunch, and some that should not have been rescued.  And some like Lehman Brothers, that were too big to be privately rescued…

7) Price fixing?  Collusion?  Management teams that neglect oversight of employees until they are caught doing something wrong, and then cut the employees free [fire them] while management survives with nary a bruise?  This never happens today, right?  If nothing else, companies should have seen that bigness causes its own set of problems — how do you create an ethical culture across a large organization?

8 ) Or consider the story of Piggly-Wiggly, where the founder squeezed the shorts trying to manipulate his company’s stock, only to take on so much debt in the rescue that eventually he had to declare bankruptcy.  Though the occasions are different, think of many companies that took on too much debt to go private over the last 30 years.

9) What does a man do after a long time in public service?  Many go into business, and for a timely example, think of Eric Cantor joining Moelis.  Does it have to corrupt the former politician or bureaucrat?  No, but it will change you at minimum.

10) There were many angling for corporate governance reform in the ’60s.  This is still a live issue today with “say on pay,” voting rules on directors, shareholder proposals, splitting the role of CEO and Chairman, etc.  Corporate power is undiminished.  Do shareholders own the company, or does management?  Who do the directors care about more?

11) A clever knowledge worker knows a great deal about how a given product is made.  Can he take work at a competing firm?  There are many today who fight back against employment agreements, alleging “restraint of trade.”  This is not a new problem.

12) How do central banks preserve the value of the currency?  Do they work together or separately?  They work together if the cost isn’t high, and separately when the cost is high?  It seems not that much changes over time, aside from the fact that our currency doesn’t have gold backing, or any other kind of anchor for value.  Okay, I guess some things *do* change.

All that said, in short, every chapter of the twelve in the book has relevance to the modern era.  The real question to the reader is whether you want to think about how these stories relate to the present day.  I think the effort is worthwhile, and the engaged reader will benefit from the effort.




This book is good for those who like economic history, and want to learn from the lessons of the past.  If you require immediate and obvious relevance, look elsewhere.  If you still want to buy it, you can buy it here: Business Adventures: Twelve Classic Tales from the World of Wall Street.

Full disclosure: I looked to get a copy via interlibrary loan.  That failed.  Then I noticed that it was digitally available on a preview website for book reviewers.  That’s where I found it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

My Time on RT America’s Boom Bust

You can never quite tell where blogging may take you.  I know that if I lived near New York City, some opportunities would open up that presently aren’t likely.  Living near Baltimore/DC has had its share of opportunities, though.

In general, if I get asked to appear somewhere, I’ll try to make time on my schedule for doing so, whether it is:

  • Internet TV
  • Internet Radio
  • Local Radio
  • Fox Business News (with Cody Willard)
  • Speaking at a local High School
  • Speaking to a local College
  • Speaking to meetings of the Society of Actuaries, local Actuarial Societies, local CFA Societies, etc.
  • Talking to the staff at SIGTARP, giving a lesson on how insurance companies work
  • And more… if someone had told me all of the things that I would do as a result of saying “yes” to Jim Cramer’s invitation to write for eleven years ago, I would have been surprised.  The thing I would have been most surprised at would have been the total amount of words that I have written.  I viewed myself eleven years ago as a mathematical businessman, but not a writer.

About five days ago, I was invited to appear on RT America’s show Boom Bust.  What I did not know at the time was that Ed Harrison of Credit Writedowns was behind getting me onto the show.  I’ve known Ed for some time — he was one of the original attendees at the only Aleph Blog Lunch.

I also didn’t know what I would be talking about on the show, so when I got pulled into the makeup room (me?) ten minutes prior to airtime, I was saying to myself, “I guess I have to ‘wing it.'”  Then Ed popped his head through the door and said “Hi,” and explained everything to me.  What a relief!  I went back to the Green Room, scribbled out a few notes — not that I could take it with me, but just to get my mind in order for what I *might* be asked about.

As it was, it went fast, like every other time that I have been on live TV or radio.  What was eight or so minutes felt like two.  Are there things I would have said differently with more composure?  Yes.  But that’s part of the fun of it: thinking on your feet, because I knew little about what the actual questions would be.

If you want to, enjoy watching the video of RT America Boom Bust.  My particular portion is on from 3:30 to 12:00 or so.  Ed Harrison is on at the end.  I stayed to watch that segment live, and talk with Ed and the charming host Erin Ade afterwards.  It was a fun end to my workday.

Q&A with Guy Spier of Aquamarine Capital


In the near future, I will be writing a a review of Guy Spier’s The Education of a Value Investor, which will be released next week.  Until then, to whet your appetite, here is an 11 question Q&A that I did with Guy, for which I give him thanks, because his time is valuable.

  1. What company have you owned the past that was the most surprising to you? (In prospect or in retrospect)

I think that many have surprised me in one direction or another, but one of the more memorable was Duff and Phelps Credit rating – which I purchased in the mid-1990’s at a 7 Price to Earnings ratio. The company proceeded to increase in value by seven times over 2-3 years before being purchased by Fimalac, the owner of Fitch. I had expected the stock to double, but I did not understand that I had purchased a super high quality business with a manager who was committed to devoting every cent of free cash, which was in excess of reported earnings, to repurchasing shares.

  1. Which rule(s) of your checklist would surprise average investors the most, if any?

I actually think that none of them would. They are common sense items that anyone would look over and say, “yes – that makes obvious sense”. What is key is not that they are surprising, but that in the wrong state of mind, I might easily skip over a particular factor in evaluating an investment.

  1. Would you advise young people to get a CFA charter or an MBA or is there a better way to become an investor?

I don’t think that either is necessary in order to become a good investor. Attending the Berkshire Hathaway meetings, studying Warren Buffett and reading the Berkshire Annual Reports, along with Poor Charlie’s Almanack are an absolute necessity, in my view.

  1. Would you ever consider setting up your own holding company like Buffett did? (Permanent capital has its attractions…)

Yes. It’s a no brainer to do it if you have the skills. I hope that I have the skills, but I don’t think that the time has been ripe for me. Mohnish Pabrai has recently launched Dhandho Holdings which I think will be an extraordinarily successful enterprise over the years. It’s one to watch.

  1. What would you say is the most common mistake that value investors make? Does this matter if the value investor is amateur or professional?

I think that all-too-often, we feel like we are forced to take a decision. Warren Buffett has often said that, unlike baseball, there are no “called strikes” in investing. That is a truism, but the point is that too many of use act like it is not true. Amateur investors, investing their own money, have a huge advantage in this over the professionals. When you are a professional, there is a whole system of oversight that is constantly saying, “What have you done for me lately!” or in baseball terminology, “Swing you fool!”

 Amateur investors who are investing unlevered funds that they don’t need any time soon have no such pressures.

  1. Financial companies are usually a big part of the portfolio of value investors, because they seem cheap to industrials and utilities. But every now and then financials wipe out in a credit crisis. Why don’t many value investors pay attention to credit conditions?

Yes, that’s absolutely true. Many value investors love the financial industry: Probably because, in a certain way, we are in it ourselves. And yes, value investors probably pay far too little attention to the credit cycle. In my case, I think that I was utterly convinced that my stocks were sufficiently cheap, such that I could invest without regard to financial cycles. But I learned my lesson big time in 2008 when I was down a lot. I now subscribe to Grant’s Interest Rate Observer so as to help me track the credit cycle.

  1. Are your wife and children happier as a result of the changes to your life since becoming a value investor in the style of Warren Buffett?

Absolutely. I spend more time with them. I am simply around more, although that can come with its own irritations. You might have to ask them.

  1. I appreciate your “investing tools,” and I do things mostly like that, but isn’t the main goal of them to be reasoned, dispassionate, independent-minded, etc.? The actual form of the rules is less important than the effect it has on our personalities in making decisions rationally, yes?

Yes – I 100% agree and thus a different personality might have a very different set of rules to guide them. That’s why the book is about my education as a value investor. It’s personal and idiosyncratic. I would fully expect someone else to come up with different rules of behavior.  I do hope though that it will allow people to see that getting to a reasoned, dispassionate, independent minded state is a struggle for this investor, at least and that thinking about our meta environment and making good decisions about that is just as, if not more important than the actual investment decisions.

  1. How do you balance keeping an independent view versus interacting with respected professional friends who have their views?

I try to switch off, or distance myself from people who I think communicate in a way that is not productive for me. The key is to have the kind of discourse that allows other people to come to their own conclusion. Asking open ended questions and not telling someone what to do are important aspects of that. When I come across people who do that, I try to build closer relationships with them. If they don’t I might still keep them in my circle, but I would not allow myself to interact with them too often – because I don’t want to be swayed.

  1. How do you feel about those who use 13F filings to generate ideas?

Mohnish Pabrai taught me to be a cloner. In the academic world, plagiarism is a sin. In business, copying other people’s best ideas is a virtue, and it is no different in investing. I would go further. In the same way that if I wanted to improve my chess, I would study the moves of the grandmasters, if I want to improve my investing, I need to study the moves of the great investors. 13F’s are a great way to do that.

  1. How do you feel about quantitative value investors?

I am not sure that I understand the way that you are using the term. If you mean to use statistical methods to uncover value, Ben Graham style, then I’m all for it. That is what I did when I created my Japan basket. That said, I found it hard and monotonous work. Monotonous because, in the case of Japan it did not lead to greater knowledge or wisdom about the world, because there was a limit on the degree to which I could drill down. But that said, I do run screens for value on S&P CapitalIQ from time to time, and then drill down on some of what comes up.

Again, thanks to Guy Spier for taking time to answer some questions for us… his book is being released on September 9th.  Look for it.

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