Macro Issues Are Everywhere, Does It Really Matter…?


“There’s too much emphasis on macroeconomics and not enough on

microeconomics. I think this is wrong. It’s like trying to master medicine

without knowing anatomy and chemistry.”

Charlie Munger

Since the recent correction, we’ve seen a bevy of reasons why the market is falling: interest rates might increase, China is falling off a cliff, here comes 2008 again. I thought it would be an important discussion and, at the very least,  clear some things up regarding China as a “reason” for the U.S. market decline.

Media reporters are just doing their job, however, it causes them to ‘latch-on’ or try to find certain “things” to justify any recent move in the stock market. Essentially, their job is to stay busy for the sake of being busy. If they can’t’ find a news story to talk about, they are out of a job. They are forced to talk or write about something (regardless if there is a legitimate news story or not). I have a simple reaction to almost any reason for a broad market pull-back —- it doesn’t matter! And it’s a waste of time to try to figure it out. An investor’s time is better spent on things that can bring about tangible results to your investing. Leave the sound bites and headlines for the media. Know where you might be in the cycle and focus on your businesses and their competitive positions in their markets. The businesses will tell you what is going on in the world and whether (or not) they are worthy of your investment.

Lets get back to China being the reason for the U.S market pullback. Nearly every headline we’ve read lately has put a sense of panic in the air that China’s economy  is falling off a cliff. This just isn’t true! China is actually growing. It may not be growing at the rate it once was (10%). Instead it’s growing dismally at 7%. I know, what a horrible economy. The U.S. may never grow at 7% again and we’re complaining about ONLY 7% growth. I understand that Chinese numbers aren’t the most trustworthy in the world, but, despite the conspiracy theorists, the truth probably lies somewhere close to this number.

But what if the Chinese slowdown continues?

It doesn’t matter. Less than 1% of our Gross National Product (GNP) is in sales to China. China is an incredibly small percentage of U.S. exports, however it’s a much larger percentage for other counties. This again puts the U.S. at a major advantage, not disadvantage.

Obviously, if China disappeared tomorrow, it could be a big issue. But alas, China is growing. We will actually go out on a limb and put a fairly high probability on China being around for some time to come. Not only that — we’d even be willing to bet that they continue to grow well into the future as their lower class citizens make their way to the middle class.  

If China doesn’t matter, why is the U.S. Stock Market in correction mode?

I don’t know (no one does). It could be a whole host of reasons. Maybe, the Chinese market selloff brought to light that U.S. earnings peaked months ago, we were on the upper echelon of historical and absolute valuation levels. In addition, the market hasn’t had seen a bear market since we bottomed in 2009. The market moves in cycles and we’re probably closer to a de-leveraging cycle than not. The pullback we are experiencing shouldn’t be a surprise to anyone.

Should we be buying hand over fist right now?

I don’t know (no one does). Regardless, I am using this opportunity to add to my favorite ideas slowly. We could easily go lower and I hope it does so we can buy more of our favorite businesses at bigger discounts to their intrinsic values.

Happy Labor Day!

Please, share your thoughts in the comments section below as I learn just as much from you as you do from me.

Lukas Neely is a former Hedge Fund Portfolio Manager and author of the Amazon #1 bestselling book (valuation), Value Investing: A Value Investors Journey Through The Unknown. His work has be cited on such sites at TED, Wall Street Journal, Bloomberg, ValueWalk, CBS, GuruFocus, and Seeking Alpha.  He is also the cofounder of Vantage Investment Research, the provider high quality investment idea generation, serving investment funds, portfolio managers, and sophisticated investors.

If you’d like to learn more about Value Investing: A Value Investor’s Journey Through The Unknowngrab the kindle version here, physical version here.

If after 10 minutes you don’t find at least 3 things you can do to make your life better I’ll refund your money.

That way you have nothing to lose… and everything to gain.

Do You Know What’s Important & Knowable?

Important and Knowable Image

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Mark Twain

When it comes to the stock market and investing, there are several tips and tricks that experts can express to new investors, but by far one of the most important pieces of strategic advice is to focus on what is important and knowable. There will never be a chart that tells you which investments will pay off and which won’t, which means that every investment has a level of risk associated with it. Choosing ingredients that are important and knowable might not bring you guaranteed success every time, but it certainly offers less risk and more simplicity than those which cannot be known or understood…

Not Everything That Can Be Counted Counts

One of the world’s best-known investors, Warren Buffett, has recently explained that most investors make a key mistake in their investment strategy. This mistake is that they put the emphasis on what they can know, but not enough on whether or not it is important. There are plenty of things that we know, but many of these issues really aren’t important. We know that the sun will come up tomorrow, but we cannot influence it and it doesn’t have an effect on how to invest either. So, although we know it, is it important?

When you invest in the stock market, you need to think about the things that are most important, rather than on what will happen and when. You need to learn things about the specific company that you are following on the stock market. A company that is doing well financially, that has a popular product and that has an excellent management structure is a company that you should look at investing in. If a business has created sustainable competitive advantages which produces tons of free cash flow, has readily attainable catalysts, reasonable debt levels, a competent management team and trades at a reasonable price, then not a whole lot else matters when it comes to investing.  It doesn’t matter what else you know about the company, so long as they fit in with your personal strategy. That is what is important.

A Matrix

It is very important to find the balance between important and knowable, since you need to know a number of things about the stocks, company and market before you are able to decide whether or not something is also important. As Greg Speicher says,

“It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension comprises what is knowable and unknowable and the vertical dimension comprises what is important and unimportant.”

important and knowable boxThe two boxes in that matrix you must avoid are the knowable but unimportant box, as well as the unknowable yet important box (in addition to the unknowable and unimportant box). Anything that falls in one of these two areas should be ignored as much as possible. You will never be able to figure out how to invest if you focus solely on things that you can never know, even if they may seem important (if you do, you may as well go to a Las Vegas casino), or on things that don’t matter anyway (that would be a complete waste of time and energy).

Moving Away From Macro Stuff

Too many of us still focus strongly on the macro stuff. We feel it is a safer bet, something that we can control better. However, it really shouldn’t be part of your investment strategy, if you want to see real positive effect on your finances.

Is it important and knowable?  If it is not both important and knowable you move on to the next idea.  The macro environment is very important, but it is not knowable to any high probability.  Therefore I pay very little attention to it.  Our time is better spent elsewhere.

Of course, the real difficulty is identifying whether or not something is important. Because of this, you could spend an inordinate amount of time getting to know things that may not matter in the future. It is for this reason that no market expert is able to really predict what will happen on the stock markets with any real degree of consistency. This is because as much as we can know certain things, we cannot know everything and much of it isn’t important anyway.

Long-Term Thinking

If you want to invest in stocks, you must think long term. If you understand this, you also understand why your portfolio will grow and shrink over time. That is something you know will happen, and something that is important as well. The importance of holding over the long-term through the “ebs and flows” of the market is the key to long-term thinking and compounding investment success.

By focusing on this important concept, you understand that the businesses you invest in will likely be worth more 5-10 years down the line, than when you initially invested (even if the stock drops at some point).  Investor’s shouldn’t let short-term trading and market fluctuation get in the way of your long-term thinking.

The reality of the matter is we cannot know what stocks will do in the short-to-intermediate term. It’s important to know, but it is inherently impossible to know with any high degree of probability.  So it’s a waste of time to devote too much time to it.

What you can know is whether or not a business has sustainable competitive advantages, as well as high quality assets and a high probability of producing free cash flow into the foreseeable future.  These are factors every investor should focus on, and will carry the majority of the weight in determining investment success.

If an investor does’t allow the market to compound investments over time because they want to trade actively, investors are cutting yourself off at the knees.

Remember: The market is there to serve you, not guide you!


Being armed with certain numbers and characteristics which are both Important & Knowable can help an investor focus on what’s matter’s most to the business and the investment.  The rest of it is just “noise.”

“I’m Not Cocky, I Just Know I’m Going To Win!”

Over Confidence

“We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false. We’re so afraid of that process so we don’t do it.”

Charlie Munger

Do you believe you are a great investor?

And if so, then why haven’t you made millions yet? Why aren’t you making the kinds of returns you thought you would / or that you should?  Why aren’t you even generating the returns of the general market?

Don’t worry.

This doesn’t mean you are a lousy investor either. In fact, you may even feel very confident that you are making the right investment decisions, and you probably have all the right skills to research your stocks and properly analyze a financial statement (very rare). You may even be paying the best possible commissions when it comes to your broker. The problem is not your skill, it’s your brain…

The human mind is an odd, very complex and amalgamated device. And it also has a number of hardwired functions that help us in terms of our overall survival, however, we aren’t cavemen anymore and the world is changing at a much faster pace than our brain can keep up with on a daily basis. This means that making investment decisions (or any decision for that matter) that are intelligent can be very difficult.

In fact, your brain could be killing the success of your portfolio. And although there are a number of traits that are causing this, one of the biggest mindset flaws in investing is overconfidence. Unfortunately, overconfidence affects a wide range of people (especially the smart ones).

According to Charlie Munger,

“Similarly, the hedge fund known as ‘Long-Term Capital Management’ recently collapsed, through overconfidence in its highly leveraged methods, despite I.Q.’s of its principals that must have averaged 160. Smart, hard-working people aren’t exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.”

Overconfidence and Overtrading

Research has demonstrated two key things. The first is that those who overtrade tend to have the poorest results. The second issue is that people who overtrade tend to be overconfident as well.  A 2006 study by Brad Barber and Terrance Odean found that “Of 66,000 households trading through a large discount brokerage, showed that over a five-year period, the most active investors, on average, underperformed a range of benchmarks.”

Overconfidence is also strongly seen in CEOs of large corporations. They are convinced that their vision is the right one and they force their opinions through in the firm belief that they are right. These are the very companies that see their stocks plummet, because they make bad decisions and reach for growth at any cost initiatives. Interestingly, overconfident investors seem to purchase stocks in those types of companies, and this includes fund managers.

“In a 2006 study entitled “Behaving Badly”, researcher James Montier found that “74% of the 300 professional fund managers surveyed believed that they had delivered above-average job performance. Of the remaining 26% surveyed, the majority viewed themselves as average. Incredibly, almost 100% of the survey group believed that their job performance was average or better. Clearly, only 50% of the sample can be above average, suggesting the irrationally high level of overconfidence these fund managers exhibited.”

A False Sense of Security

Basically, investors lure themselves into a false sense of security.  Investors who suffer from overconfidence think their gains are due to skill, instead of recognizing that rising stocks are lifting everyone’s portfolios.

A classic example of this is seen in the stocks of social media. When it was first announced that the biggest social media platform, Facebook, was going to IPO on the market, predictions and sales presentation overly hyped the offering.  This failed massively and people actually lost a lot of money on what was supposed to be a “sure win” as people panicked and sold during the sell-off after the IPO.

It is this very confidence in sure wins and in an investor’s capability of predicting things that has caused the issue in the first place.  Overconfidence bias stems from an investors inability to see true value in a business, and then attributing market returns to personal skill and decision-making ability.  However, when stocks decline it is not their fault; it’s due to ‘external’ market forces.

Just take a look at your typical internal dialogue of an Investors’s mind:

Overconfidence Investing Graph

How Does Overconfidence Hurt?

We are told in life that we must be confident in our own abilities. The idea of overconfidence is something that is generally reserved for people who believe they are more than capable of doing something when the reality is they are no better than average person (perhaps even worse). This is applicable to investors, too. The reality is that overconfidence is truly damaging to your portfolio. The biggest hurdle for people who have too much confidence is to understand that something that they believe to be true is sometimes simply false.

Overconfidence can cause an individual to see his/her own thoughts as rational and objective, and yet, see other people’s decisions as subjective or emotional.  When you become too confident, you are no longer able to see any evidence that proves your opinions are actually incorrect. It is important to develop strategies, systems and checklists as an investor to ensure you are attentive to the facts and evidence that are presented.


Having a healthy dose of confidence is a good thing, as it will allow you to make decisions.  However, being overconfident increases the probability of making rash decisions over the long run.  Stick with a rational and repeatable system of checklists and mental models, and never stop learning.

Investing Simplified

Please, share your thoughts in the comments section below as I learn just as much from you as you do from me.

Lukas Neely is a former Hedge Fund Portfolio Manager and author of the Amazon #1 bestselling book (valuation), Value Investing Edge: A Value Investors Journey Through The Unknown. His work has be cited on such sites at TED, Wall Street Journal, Bloomberg, ValueWalk, CBS, GuruFocus, and Seeking Alpha.  He is also the cofounder of EndlessRise Investment Research, the provider high quality investment idea generation, serving investment funds, portfolio managers, and sophisticated investors.

If you’d like to learn more aboutValue Investing: A Value Investor’s Journey Through The Unknown,grab the kindle version here, physical version here.

If after 10 minutes you don’t find at least 3 things you can do to make your life better I’ll refund your money.

That way you have nothing to lose… and everything to gain.



Barber, Brad M. and Odean, Terrance.  2000.  Trading Is Hazardous to You Wealth: The Common Stock Investment Performance of Individual Investors.  The journal of Finance.

Montier, James. 2006. Behaving Badly. Social Science Research Network.

Featured Graph Credit: Safal Niveshak

Margin of Safety Investing

Margin of Safety Bridge

“If you were to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”

– Benjamin Graham

When it comes to investing in the stock market few people can give you better advice than Warren Buffett. Back in 1971 Mr. Buffett gave a first-hand demonstration of the three key investment principles that everyone should keep in mind when making investment decisions.  We will discuss this in a minute with his purchase of Washington Post…

He explained that to be successful at investing you had to first change the way you thought about stocks; rather than looking at the numbers going up or down, instead you need to think of them as representing a partial ownership in a business. And you you needed to let the market serve you, not guide you.  But for the new investor, probably the most important thing they need to understand is how to determine a stock’s ‘margin of safety.’ Once they have grasped this concept they will be better equipped to make investment decisions with a lower level of risk.

What Is Margin of Safety?

According to the father of value investing, Benjamin Graham, the term “Margin of Safety” refers to an investment principle “in which an investor only purchases securities when the market price is significantly below its intrinsic value.” This means that if a stock is valued at $10.00 per share, for example, but is trading at $6.00 per share, the difference between the two prices would be considered the margin of safety. In short, the further a stock’s price dips below its intrinsic value, the greater your margin of safety will be.

The trick is properly calculating a business’s intrinsic value.

Stocks in general, tend to be unpredictable and their future performance can be difficult to anticipate. What one can measure with a certain degree of reliability is a company’s present assets. If you can look at these assets and determine their present market value, you have a pretty good chance of determining its future potential, and therefore getting a close approximation of its margin of safety through liquidation value or future cash flow.  While there may be no standard of measure that will help you to determine what the real intrinsic value of any stock should be, there are some basic principles that an investor can apply to create his or her own idea of how safe an investment is.

“Proper accounting is like engineering. You need a margin of safety. Thank God we don’t design bridges and  airplanes the way we do accounting.”

– Charlie Munger

Determining the Intrinsic Value of a Stock

The basis for discovering a stock’s “margin of safety” hinges on being able to ascertain the business’s estimated intrinsic value. We use the term here ‘estimated’ because it is literally impossible for anyone (including the most astute and experienced investors in the market) to be able to determine the exact intrinsic value of a business. This is because the intrinsic value is generally based on assumptions; the investor can only be expected to make an educated guess in this regard. This means that learning how to determine the margin of safety is of extreme importance when evaluating the investment opportunities before you. Your margin of safety will give you a certain amount of protection and allow room for error in light of the many fluctuations that could occur under the current market conditions.

So, how do we determine intrinsic value?

Investment gurus suggest that you look at stocks that hold plenty of tangibles (cash, property, inventory, etc.) rather than focus on those things that are hard to measure. Intellectual property, for example, may be of a certain value but it may be difficult to measure in plain old dollars and cents. By always buying your stocks when they are at a significant discount in comparison to their current business value, and by replacing current holdings as better bargains arise, you can maintain a pretty wide margin of safety. This could, in fact, keep you from experiencing any devastating losses even if the stock market numbers plummet.

Experts suggest that a margin of safety of 40% or more of the intrinsic value is usually sufficient. As an investor, you may choose to search out a wider margin for added security. At any rate, the general rule of thumb is that the wider your margin of safety, the less risk you’ll have of losing your investment. This does not, however, guarantee that you won’t lose money on your particular investment, but only that your risk of loss would be severely reduced if you demand a margin of error when you set your floor price.

How to Find the Best Deals

According to Benjamin Graham, the best way to find those bargain stocks with a wide margin of error is to look for companies that have tangible assets that are exceeding their current market value. When this concept was first introduced in the early ’70s, these types of deals were relatively easy to come by. However, as more and more investors learned of this strategy and entered the market, they became more difficult to find. This doesn’t mean that finding that safety net is impossible; there are plenty of ways to discover these stock market gems.

An example of such a deal took place in the early 70’s with the Washington Post, at a time when the publisher saw their prices plummet due to interactions with a number of different media companies. The entire company was trading at $100 million in market value, but Buffett anticipated that with a fire sale of its assets they could actually bring in as much as $400 million. This would create a margin of safety of 75%. Based on his conclusions, he invested $11 million dollars in 1973. Today his $11 million investment has grown to more than $1 billion.

Some might, at this point, wonder how Mr. Buffett could possibly determine the actual value of the assets in a company that he did not own? The answer is simple. With a little research he determined the value of the assets by making a comparison of similar businesses and what they were willing to pay for those same assets over the years.  Analysts say that had his margin of safety been off by a mere 25%, he still would have earned more than $300 million on his investment. Because he had such a large margin of safety, however, a high return in his investment was virtually guaranteed.

Using a combination of tangible assets and future free cash flow is the route to finding the right intrinsic value.  Once an intrinsic value is determined through asset value and discounted cash flow analysis.  At this point one would need to maintain the analysis and exercise extreme patience in waiting for the security to trade well below the calculation of intrinsic value.  Essentially waiting for the perfect pitch.

Below are sites you can find FREE screens to helping you find these types of investments:

Businesses Trading Below Tangible Book Value:

Businesses Producing Excess Free Cash Flow:

The Importance of Determining the Intrinsic Value

Many people do not completely realize that the margin of safety and the intrinsic value of a particular stock go hand-in-hand. If an investor is not able to determine the intrinsic value of a particular business, their margin of safety will be off and their level of risk will also be affected accordingly. They must, also, consider that even if their estimations of the intrinsic value are within realistic limits at the time of investment, they will still have to closely monitor how the business is performing. As the business performance changes so will its intrinsic value. As you measure these changes you’ll have to determine if your margin of safety is still wide enough for you to continue to hold your position, or if you decide to begin selling off your shares. This is why you must also search out businesses that have sustainable competitive advantages.

Another Factor to Consider

While it seems that the margin of safety idea is a sure-fire way for investors to hedge their bets, they do need to determine one other factor before making their decision to invest in a particular stock. It is extremely important that you understand the reasons behind why the stock is being undervalued. Making investments always carry a level of risk, so the more you know about why a stock has performed a certain way the better your chances of making a wise investment decision. When choosing these types of stocks, look for the underlying reasons why the stock has arrived at its current price.  This may require you to look at management styles and businesses where managers have a personal stake in the business.

Remember to Diversify — Not De-Worsify

Once you’ve determined that a particular stock has a high margin of safety and you’re ready to invest, resist the temptation to dump your entire nest egg into the decision. By nature, a stock may be strong and promising one day and then plummet to the earth the next. There are many things that can affect the price of a particular stock and you’ll need to keep abreast of its performance. It is best to diversify and spread your investment over a number of possibilities in order to make sure that you will continue to see your money grow.

An important rule of thumb is to never have more than 20 stocks in your portfolio. At this point, studies have shown that you begin to mirror the major indices with more than 20 stocks in a portfolio. Less than 5 may be too little for most investors to stomach. I, myself, tend to be more focused. I have invested my money on more than one occasion with that single position being more than 15% of the overall portfolio. I have gone over 20% on individual businesses, a few times as well. You must have an incredible temperament, long-term horizon and staying power in order to invest in such a focused manner.

When it comes to investing in the stock market it is important to be realistic about your expectations. While having a margin of safety can definitely work in your favor, nothing is guaranteed. As explained by Sham Gad in an article he wrote for Motley Fool, “Even the most astute investor can get burned by the market’s whims. A satisfactory margin of safety gives you the next best thing, and a value investor always demands it from his or her investments.”


In short, to be successful in the stock market you need to recognize the basic principles that have been proven over the years. Treat investing like you would any other business, and you’ll soon notice that your investments will perform accordingly. Once you learn how to choose investments with a wide margin of safety you’ll be able to gain confidence in your decisions and have pride as you watch your money grow.

Invest Different!


Margin of Safety Definition

Sham Gad Quote

Photo Courtesy of Boston College and Carroll School of Management

10 Rules For Finding The Best Stocks To Buy…

Best Stocks To Buy Confidential

Are you fed up with trying to find the best stocks to buy?

How much time are you wasting trying to find the next great investment opportunity?

We’ve got a secret for you….

Don’t do it by yourself.  It’s too hard!

With over 50,000 publicly traded companies in the world, trying to pick the best stocks to buy on your own is a sure way to frustration at best — Or even worse, you make the worst trading mistake ever….trading your precious time for money.

This is lost time and money that you’ll never get back, if you don’t know how to properly search for the best stocks.

If you’ve invested in the stock market before, you know how difficult it can be to find the best stocks to buy. However, this process must be done. Great investment returns won’t grow themselves. They need a solid foundation with which to blossom and grow.

A simple process that finds the best stocks to buy is the lifeblood of every great investor. The following rules are a simple process to help you find great investment opportunities fast.

Here Are The 10 Golden Rules For Finding The Best Stocks To Buy:

1) Have A System Or Process Of Investment (and try to follow it).

By failing to prepare, you are preparing to fail.

Benjamin Franklin

Whether you are a long-term investor like Warren Buffett or Seth Klarman, or even a shorter-term trader like Paul Tudor Jones, it’s vital that you establish a philosophy that’s similar to your personality and risk tolerance.

Here’s a simple question to ask yourself:

Do you have the temperament to see your investment decline by 50% without selling your position?

If yes, then value investing may suit you well.  If no, then you may enjoy the philosophies or strategies of more active traders.

This simple question will help you determine which side of the line you stand.

Focus on establishing a rational, repeatable, proven investment process from a Super Investor you admire, and don’t deviate from it too much (unless you develop your own philosophy).

Remember: All these stock ideas from Super Investors won’t mean anything if you don’t understand their investment philosophy.

Study up on the Super Investors.  Read about them and their past investments and decisions.  And choose a Super Investor philosophy that suits you best.

I believe every investor should have a mentor.  Pick one (or many), just make sure to stay within the boundaries of their proven philosophy.

2) Use Super Investors As A Starting Point To Determine Investment Opportunities.

If I have seen a little further it is by standing on the shoulders of Giants.

Isaac Newton

Let’s not kid ourselves here…technology is great.  It’s paved the way for some incredible discoveries, and it helps to improve the quality of life to billions of people everyday.

However, when it comes to being distracted with tons of big data it can be a burden at times for an investor. The data set that’s available today is too large.

The Super Investor process bypasses all the noise. It allows you to focus on a select few companies, and pinpoint the areas that matter most to investment success.

This is a Secret of the investing world that many investors are not using enough.

Hidden beneath the mountainous documents and data of SEC filings, lies a treasure chest of incredible opportunities. You just have to dig them up, and find them through all the 13Fs, 13Ds, 13Gs and proxy statements.

If you are going to invest in stocks, it makes perfect sense to start with investments that have already been vetted by the world’s greatest investment minds and analyst teams.  This is a “no-brainer”, however investors constantly want to make it difficult on themselves because we live in a world where simple is looked upon as lazy.  Some call it lazy…I call it smart.

Using the Super Investors investment ideas allows you to follow a simple process that consistently finds you the best stocks to buy.

Start viewing “simple” as a job well done.  You will have more time and energy, and your investing will take a giant leap forward.

This strategy doesn’t mean you disregard all logic, and stop the research process.  Listen to Super Investors that you respect or share similar philosophies.  It doesn’t mean you blindly accept them at face value and invest in their ideas no matter what.  That would be incredibly irresponsible.  You still need to finish the remainder of the golden rules to help decrease your risk.

It is important to note that investment funds generally report their end-of-quarter holdings with a 45 day delay. That’s why it is imperative that you align yourself with focused, long-term Super Investors that use very low turnover in their portfolio. And you want to pay particular attention to the top 10 positions. A Super Investors best ideas will be over-weighted in the 10 positions. This strategy will increase the likely-hood that the investment ideas are the best stocks to buy.

As you can see, this simple process allows an investor to narrow a universe of 50,000 stocks — into a couple hundred businesses that an investor can know very well.

How’s that for an investing hack?

At, we follow a list of 30 value investors that fit our long-term philosophy.  We couldn’t have asked for better analysts.

GuruFocus is by far the best resource for accessing Super Investor ideas and positions.

(finding just 3-5 great investment opportunities every year through this process, gives an investor a superior advantage versus the rest of the market.)

3) Explain Why You Are Buying The Stock In One Paragraph.

Acknowledging what you don’t know is the dawning of wisdom.

Charlie Munger

If you can’t explain why you are buying the stock in one paragraph — Then Don’t Buy The Stock.

Throw it in the garbage bin, and move onto the next idea or opportunity.  It’s not worth your time, and could cause psychological and emotional mistakes down the road if you don’t have the necessary conviction in your investment.

When you identify a potential opportunity, run it through your checklists and mental models to see if it passes some basic tests. After this quick analysis, you want to write down a few lines on why you want to buy the stock. In this paragraph, we want to focus on the big picture reasons for investment.  Jot down potential sustainable competitive advantages of the business and a rough estimate of intrinsic value.

Remember to keep this analysis somewhere safe.  You will want to review it periodically (every 6 months or so).  Make adjustments or modifications to your analysis with new information that is coming in after the 6 month period.  This will help you determine whether the business is on the right track or potentially deteriorating (at which point a decision may need to be made).

It is very important to stay within the confines of your circle of confidence.  If you know the industry dynamics of railroads better than the technology space, then focus on railroads.  It’s perfectly normal for you not to know everything about everything all the time.

Maybe you may understand the fundamentals of a particular business industry better than most.  Or maybe you may have expert knowledge of a certain business model.  Or maybe you don’t really want to know too much about the business, you just look for business that are trading at incredible discounts to liquidation value or intrinsic value.  Whatever you do well, keep doing it.

A great deal of permanent losses have occurred when investors get curious, and venture outside their circle of competence. Expand your horizons, however do it slowly.

4) Determine A Range Of Values For The Business.

The essential point is that Security Analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is adequate—e.g., to protect a bond or to justify a stock purchase—or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient.

Benjamin Graham

Valuation by its very nature is more art than science.  It’s not a static or straightforward endeavor, and it requires many assumptions.  However, mastery of the data isn’t necessary.  Contrary to popular belief, investors don’t have to be precise in the estimate of Intrinsic Value.  The art of valuation, in-and-of itself, is imprecise.  An investor that approaches valuation in a conservative manner will be a step above the rest. Abandon perfection and precision…and seek conservatism.

There are three main types of valuation techniques an investor should learn in order develop conviction in an investment when the world is falling down around you.  The three techniques include:

1) Discounted Cash Flow Valuation (DCF) is a method of using future free cash flow (FCF) projections and discounting them to arrive at a present value.  As you can imagine, they can be a significant amount of variable and assumptions that go into this valuation technique.  However, DCF is one of the most precise types of analysis for valuation with predictable FCF.  The only problem is…free cash flows aren’t very predictable.

Identifying sustainable competitive advantages in a business is the only way a business will be able to produce any type of free cash flow over a sustained period of time.  This makes the analysis of competitive advantages essential in the calculation of DCF.

2) Conservative Liquidation Valuation was made popular with Benjamin Graham’s Net-Net calculation. This was a conservative, back of the envelope calculation of liquidation value.

Net-Net = (Current Assets – All Liabilities) / Shares Outstanding

This calculation alone, implies that Graham (the father of value investing) was unable to determine a business’s Intrinsic Value with any high degree of conviction.  Another reason we want to use a range of values in our estimate of Intrinsic Value.

The tangible book value of the business can usually be used as a rough estimate of liquidation value too.

3) Sum-Of-The-Parts Valuation (SOTP) provides a breakdown analysis of each segment of the underlying business.  Each segment is valued using conservative multiples to revenue, EBITDA or Net Income for the particular industry.  Sometimes segments within a business can present hidden values, which can be spun-off and monetized to provide increased shareholder value.

This type of analysis is common in conglomerate type businesses.

A range of values can be calculated a number of different ways using these three main valuation techniques.  If it makes sense, you can take the average of the three valuation techniques above to arrive at conservative estimate of intrinsic value.  Or if the business is a high-quality, FCF producing business, you can use likely estimates for growth, FCF and discount rate, and take the average range of those calculations.  Or maybe the business is headed for bankruptcy, a conservative estimate of liquidation value would make sense in this scenario.

*An investor could even weight certain assumptions if they believed certain scenarios were more likely than others.

“The two most important things are real asset values and the ability to generate after-tax free cash flow. ”

Mason Hawkins

Remember: A stock isn’t just a piece of paper.  A stock represents a ownership stake in a REAL business.  That’s why valuation is so important.

So how do we handle valuing something that is inherently unpredictable and imprecise?

The ONLY way is conservatively!  And preferably at a discount to assets.

5) Buy At A Discount To Those Values.

When you buy businesses at steep discounts from real value, a lot of good things can happen.

Mason Hawkins

Ascertaining a conservative range of values is great, however it doesn’t do us any good if we don’t purchase at a discount to these values.

In relation to value, the price paid for your investment is the most important element.  The lower the price paid, the higher your ROI (all else being equal).

Ascertaining the “real” intrinsic value of a business is no easy task.

However, going through the three valuation techniques in a conservative manner can yield insight into a potential investment opportunity, if a stock is trading well below any, or all three of the valuation techniques.  This would give an investor a high degree of assurance that the Intrinsic Value of the business hovered somewhere well above current trading levels.  Thereby confirming a margin of safety in investment.

If you aren’t a seasoned security analyst, it’s probably best to buy assets at a discount, rather than earnings.  Earnings can fluctuate wildly in the short-term compared to asset values.  If an investor attempts to buy earnings at a discount, he/she would need to know the underlying business fundamentals intimately to arrive at a conservative estimate of Intrinsic Value.

Ideally, investor should be investing in businesses that offer at least a 60% discount to Intrinsic Value (preferably lower).  The further a stock moves away from its intrinsic value, the larger the margin of safety (all else being equal).

6) Be Contrarian (sometimes).

Do not follow where the path may lead. Go, instead, where there is no path and leave a trail.

Ralph Waldo Emerson

As an investor you can’t be afraid to buy stocks that others have left for dead. You will never be 100% certain in investing. If you believe your investment thesis still holds true, then you must have the courage in your convictions to let your decision play out. In order to control your flight response to combat fear and pain, give yourself room to buy more on the down side.  If you believe you’ve found a great investment opportunity, don’t purchase the entire position right away.

For example, lets say I want to establish a $10,000 position in AAPL which equate to 10% of my overall portfolio.  Because I am a horrible market timer, I will establish a core position of $5,000 (5% of portfolio) and add to my position if the stock continued to drift lower till I established my full $10,000 position (all else being equal).

It’s a technique to help investors average into great investments safety.

Value investing is at its core the marriage of a contrarian streak and a calculator.

Seth Klarman

When making contrarian investment decisions, it is vital that an investor control his/her emotions.  Emotion must be left at the door when investing.  Fear and greed are two powerful emotions that can wreck havoc to the decision making process, which then trickles down to your investment returns.  They is nothing worse than being right with your investment thesis, and then selling out of your investment at the lows right before the subsequent recovery.

The market will always attempt to cause the most amount of pain the the most amount of people.  Any time you find yourself leaning too far with the majority or the herd, it could be time to rethink your strategy.

Contrarian investors are always on the look-out for low-risk, high uncertainty investments.  Mohnish Pabrai (Pabrai Funds) calls it “heads, I win…tails, I don’t lose too much.”  Investors will be able to separate them selves from the rest of the crowd by consistently buying low-risk, high uncertainty contrarian investments with risk reward scenarios greater than 5:1,

7) Be Patient.

If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.

Warren Buffett

An investor should expect a convergence between Price and Intrinsic Value over the course of 2-3 years (sometimes more).  I believe this is an acceptable time period for an individual to be patient,  while you give your investment thesis time to play out. Sometimes the convergence gets there quicker, and sometimes it doesn’t get there at all.

If you succumb to the short-term whims of Mr. Market, you are severely handicapping yourself.  Allowing at least 2-3 years for your investment to work, gives you an superior advantage over other market participants.

Personally, I have held positions for up to 7 years (and counting).  Most worked out, some didn’t.

Stocks don’t go up immediately.  Be ready for that to happen.  In fact, be ready for the stock to go down in value after your initial purchase.  It will put you in a better state of mind by expecting a drop in stock prices.

I always hope that a stock goes down after I purchase it.  I know…I am sick.

Smart investors will be patient and give themselves room to purchase more at lower prices.  If it was a great investment at $15 per share, then it should be an even better investment at $10 per share.  That’s great investing.  Most people don’t think like this though.

8) Always Seek Catalysts.

Value investors are always on the lookout for catalysts. While buying assets at a discount from underlying value is the defining characteristic of value investing, the partial or total realization of underlying value through a catalyst is an important means of generating profits.

Seth Klarman

Catalysts help investors pinpoint potential events which will cause the business to grow and/or the stock to rise.

Cheap prices can sometimes be enough of a catalyst for share price appreciation, however we want a greater assurance for share price appreciation and margin of safety.

The presence of readily established catalysts helps to increase our margin of safety by potentially increasing the speed of return. Shareholders benefit in two ways after a stock is purchased at a discount from a business’s underlying value:

1) The stock begins to rise to converge with its underlying intrinsic value.

2) An event(s) occurs which causes the value to be realized instantly or over time by other market participants.

Although an investor will likely do extremely well over the long-term by purchasing businesses at deep discounts to their intrinsic values, we want further confirmation. An investor never wants to be completely held captive by the vagaries of of human nature and the often times irrational behavior of the markets.

Investors want to invest in in high quality business, at deep discounts to intrinsic value which have likely events in the horizon to bring about full value of that investment.

Investors call these events, catalysts.

Catalysts reduce risk and help investors by:

• Reducing their dependence on market forces for investment returns.

• Fast-tracking the time between price and value.

Here are a few catalysts that investors use to bring about full or partial value in an investment:

• Liquidations

• Spin-Offs or Divestitures

• Recapitalization

• Major asset sales (includes merger-arbitrage)

• Stock Buybacks

• Dividend Initiation or Increase

• Activist Involvement

• Future growth of the underlying business

• Future growth of the industry

• Volatility Squeeze

• Short-Interest

• Business Turnaround

9) Be Cautious Of Leverage.  

On Leverage: If you’re smart you don’t need it, and if you’re dumb, you got no business using it.


Leverage is a double edged sword.

As quickly as leverage can work well on the upside, it can turn at the flip of a switch.  It can work amazingly well during the boom times.  And it can be disastrous, and wipe you out on the downside if your not careful. Ideally, you never want to invest using leverage.

This goes for businesses too.  The majority of investor failures occur from investing in businesses that were over-leveraged.  As an investor, you never want to interrupt the power of compounding if you can help it.

Businesses with strong balance sheets can give investors the confidence to buy more of their favorite ideas when it seems the world is coming to an end.

Nothing kills a business faster excessive leverage.

Leverage brings added risk of permanent loss of capital to the individual and business alike.  As an investor, its best to stay away from leverage. If you’re investing correctly, the power of compounding will make you extremely wealthy in short order.

10) The Best Stock To Buy May Be One You Already Own.

Exactly when to sell – or buy – depends on the alternative opportunities that are available…It would be foolish to hold out for an extra fraction of a point of gain in a stock selling just below underlying value when the market offers many bargains.

Seth Klarman

Every investment decision you make should be weighed against the investments in your current portfolio.

Only sell your current positions if the stock becomes incredibly expensive, or if you find a better high-quality investment with a greater divergence between price and intrinsic value.  This will lower your risk profile, while increasing your potential rate of return at the same time.

What’s Next

What lies behind us and what lies before us are tiny matters compared to what lies within us.

Ralph Waldo Emerson

The sky’s the limit!

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