The Most Important Thing: Uncommon Sense for the Thoughtful Investor


The Most Important Thing by Howard Marks has changed my perception of risk and made me question my investing style. In it, he espouses second-level thinking and prefers defensive investing to offensive investing. He elaborates on the need to be aware and attentive of cycles and the oscillating pendulum between euphoria and extreme pessimism. He also believes in the appreciating the role of luck in our investments and the importance of knowing what we do not know, and as such avoiding pitfalls. To him, lower returns taken with much less risks is always preferred to higher returns achieved by taking on larger risks. He deems it a success if Oaktree (his fund) keeps up with the market during bull years, but outperforms during the bear years. Oaktree Capital Management specializes in off-the-beaten-path and contrarian investments, and favors companies with tangible assets. The firm’s motto is “if we avoid the losers, the winners will take care of themselves.”

This is a very enlightening book, especially for young investors like myself, who lack the experience in the market. It gives one a new perspective on risk and returns, and I would highly encourage any investor looking to refine their thought process to read it. As a person whom Warren Buffet once said, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book”, I am confident the reader of The Most Important Thing would similarly take back nuggets of wisdom from it. 


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Becoming Warren Buffet (2017) Documentary

As I had some free time over the week, I have been catching up on my reading and spending time reflecting. I came across this documentary: Becoming Warren Buffet (2017) and downed the show in one sitting. A very inspirational and enlightening video on one of the world’s richest men. The most important parts of the show though, wasn’t really about how he made his wealth, but rather, how his beliefs and thinking changed along the way, especially the way he viewed money after his wife’s death. That scene was indeed very touching. You might just take home a gem of wisdom or two from this man. Watch it now to see for yourself!

 

The Art of Execution

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The Art of Execution by Lee Freeman-Shor is a study of how some of the world’s best investors invest. Over seven years, 45 of them were given between $25m and $150m to invest by Lee in their ten best ideas. Despite being wrong most of the time, many of these investors still made alot of money, and this boiled down to their execution.

The author classified the investors into different categories:

1. The Rabbits
The Rabbits were the least successful of them all. They fell prey to many biases, framing, primacy, anchoring were some of them. The author advises that the only situation to a losing situation is to sell out or significantly increase your stake. Materially adapting is crucial in surviving and prospering. One of the reasons why the Rabbits held onto losing investments was the fear of the unknown: if they sold out, the shares might rally, and they would miss out. It was better to stick with a current loss than worry about a double whammy. The key question he dishes out to investors is “If I had a blank piece of paper and were looking to invest today, would I buy into that stock given what I now know?” If the answer is a no or a maybe, one should sell. Doing nothing when one is losing is never an option. Always have a plan of action as to what you would do in a losing position, even if you still think you are right.

2. The Assassins
The Assassins killed all losers at 20-33% using stop losses. Some sold stocks which went down by any amount and showed no signs of recovery after a certain period of time. In essence, the assasins cut their losses early when they realised the stories were changing.

3. The Hunters
The Hunters were a group of investors who added onto their bets when the odds turned from great to extraordinary. They purchased more of the stock when it dropped further, allowing them to recoup their losses and even make profits when the share prices recovered. They were confident in their analysis, and took action to support their beliefs.

4. The Raiders
The Raiders were not very successful in their investments as they tended to sell off their winning positions too quickly. The author shares that most of the successful investors he managed made money because they won big in a few names, while ensuring the bad ideas did not materially hurt them. Raiders, on the other hand, did not let their winners run, but sold it off at tiny profits due to fear and short term thinking.

5. The Connoisseurs
The Connoisseurs were the most successful of them all, treating each investment like vintage wine. If it was off, they got rid of it immediately, but if it was good, they knew it would only get better with age. Many of them were not interested in small scale success, but invested big and focused. They were not scared of riding a big winner and often practised taking some profit over time instead of selling it all at one go.

The author concludes with a winner’s checklist:

1. Invest in your best ideas only
2. Size up your position properly by investing a large amount of money in each idea, but not so much that one decision determines your fate
3. Be greedy when winning
4. Materially adapt when you are losing
5. Only invest in liquid stocks

Overall, I find this book a good read, and a reminder of some of the good practices out there in the investment community. The part I find the most challenging right now would be adding onto a losing position or cutting loss as it takes a strong belief in your analysis and the courage to act on it.

The Chinese Way to Wealth and Prosperity

TheChineseWaytoWealthandProsperity
Due to my busy work schedule over the past few months, I haven’t had time to read much. However, a short break over the past few weeks gave me some respite from work, and I managed to spend some time reading some of the books I borrowed from the local library.

The Chinese Way to Wealth and Prosperity by Michael Justin Lee is a study of the financial habits and traits of the Chinese in achieving financial success. It espouses basic yet prudent financial concepts that I believe everyone should consider. Some of these include the importance of education, the value of guanxi, being frugal and start saving and investing early, deferring gratification, investing in real estate, and avoiding gambling which is a typical bad habit of the Chinese.

What caught my attention, however, were three topics that the author shared:

  1. Go Mobile

Being willing to uproot and reroot in another country is a character than many of the early Chinese business pioneers possessed. I believe that this valuable trait – the courage and ability to adapt well to their environment, paved their way to success. They left their home country in search of a better life elsewhere and many achieved great success in the countries where they settled in. This is largely evident in our neighbouring countries in Malaysia, Indonesia, Philippines, Vietnam, and even in Latin America where I stayed for 3 months. The author urges the younger generation to seek out and embrace opportunities far from our own backyard. For those who do not want to venture abroad, he suggests that we invest beyond our backyard in emerging economies beyond our comfort zones to obtain ideal investment returns.

2.  Keeping Debt to an Absolute Minimum

I know this advice is very commonly preached, but the author managed to frame it in a new perspective. Unlike authors like Robert Kiyosaki who preaches that there is a difference between good and bad debt, Lee believes that there are only two types of debt: bad debt and regrettably necessary debt. In his words, “Debt can be appropriate. Debt can be necessary. Debt is always regrettable. But debt can never be truly good.” He views money spent paying down debt as an investment in oneself and a repurchase of one’s human capital. One is buying back his freedom in doing so. I feel this is true as a borrower is never “free”; he is always a “captive” of the lender. Proverbs 22:7 says that, “The rich ruleth over the poor, and the borrower is servant to the lender.”

3. The Power of Mindfulness

In deferring gratification, the author preaches about the being mindful in the process. He argues that deferring gratification need not be torturous, and joy may even arise out of it. It all depends on how one lives his life. “Those who work mindlessly are not being diligent. Those who study mindlessly are not concentrating. Those who live mindlessly are wasting their lives. Therefore, developing the skill of mindfulness is an attempt to become more fully alive in all areas.” One can still be happy deferring gratification and living simply. This is something I am working towards and have experienced more of in the past year, where I look forward to the simple joys of life.

Overall, I would recommend this book to anyone, as the concepts are logical and wise. They are applicable to anyone desiring an improvement in their finances.

 

One Up On Wall Street

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One Up On Wall Street by Peter Lynch explains how the investing guru picks his stocks; often found in his travels and daily life. The author is considered one of the greatest money managers in America, having achieved an annual average of 29% over a span of 13 years when he was the head of the Magellan Fund.

Lynch explains how retail investors like us are able to gain an edge over professionals, who are limited by the nature of their jobs. He explains how he classifies stocks into different categories, and how he paints a story for each stock, so as to track its progress. In tracking the development of the story, there are primarily five ways a company can increase earnings – reduce costs, raise prices, expand into new markets, sell more of its product in old markets or dispose of a losing operation. He uses a two-minute drill that covers the reasons he is interested in the stock, events that have to happen for the company to succeed, and the risks and pitfalls that stand it its path. Stocks which are boring, dull tend to excite him more than the latest trend, as he feels these are the ones which tend to be ignored by the market. Spinoffs, low institutional ownership and lack of analyst coverage, low growth industries, niche businesses which produce products which consumers have to keep buying, users of technology, consistent insider buying and company buyback of shares, consistent earnings, strong balance sheets, relatively low pe ratios w.r.t the industry are attributes which attracts him. Lynch also debunks myths and addresses the concerns of many retail investors, and provides advice when it comes to portfolio management.

In conclusion, I find this book easy to read and packed with Peter Lynch’s experiences as a fund manager. The book is focused on the American market and thus, many of the stocks mentioned may seem unfamiliar to Asian readers. Nevertheless, the principles are valuable and I’m confident retail investors like me will find it useful.

 

 

Building Wealth Through REITS

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Building Wealth Through Reits by Bobby Jayaraman is a book dedicated to the study of Real Estate Investment Trusts. It covers issues pertaining to different types of Reits, eg. Retail, Industrial, Healthcare and Commercial. Reits are basically a form of property investment where the investor, as a part owner of the assets under the Reit, acts as a mini landlord, receiving rental fees for the properties being leased out. In order for Reits to not pay corporate tax, they are mandated to pay out 90% of their earnings, which provides regular dividends to the investor. The MAS has also restricted the gearing level of Reits to 35%, and 60% if they are able to obtain credit ratings from the credit agencies. In addition, Reits are only allowed to develop properties up to 10% of the total value of properties held on their book, which keeps their business model as a landlord clean. These rules help prevent Reits from taking excessive risks, and serve as a form of protection to the investor.

The book also covers how to go about analysing and valuing a Reit, and includes interviews with the management of a few Reits, which gives a glimpse into their management quality and mindset. In essence, the strength of a Reit lies in the quality of assets it owns, and the capability of its management.

I believe that Reits present a strong case for the income investor, and are here to stay. Nevertheless, one still has to be careful and perform due diligence as monetary easing across the world has inflated asset prices which may overstate the value of assets under Reits.

 

 

Small Change: Investment Made Simple

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Small Change: Investment Made Simple by Goh Eng Yeow is the first book written by a Singaporean that is under my reading list. Goh Eng Yeow is a well-known Straits Times journalist and money correspondent who writes frequently on personal financial matters.

I believe the book targets those who are too busy or find themselves struggling with understanding how to invest. The author espouses the usage of simple investment methods like index investing, where one puts a fixed amount of money into buying the index at regular intervals. In such a way, also known as dollar-cost averaging, the investor does not time the market (a common mistake of many investors); he buys more when the index goes down and less when the index goes up. This helps save the average investor from the effort and time required to study individual companies as he is investing in the overall market.

Other snippets of his advice are to not overtrade, buy for the long term, start investing early, don’t let emotions cloud our judgement, don’t bank on the ‘greater fool’ theory, buy low beta stocks, and more importantly, don’t get obsessed with money.

In conclusion, I find his sayings peppered with many truths. The book has only 98 pages, but is filled with principles that could help a novice investor along his way. The rules of investing are not hard to understand, but rather, hard to implement as I often find ‘myself’ getting in my own way. The principles laid out in this book will serve as a good reminder to me throughout my own investment journey.