How to identify companies that make lots of money for shareholders
Economic performance focuses on effective use of the capital invested in the company
Author: Rodney Smith
The smartest active managers are not conditioned to sell outperformers
The decision to sell a stock is, in many ways, trickier than the decision to buy. My own observation is that investors in common stocks should never be conditioned to sell outperformers. There is a time to fold ‘em. But its not simply because their price has outperformed the market or some benchmark.
There is lots to read while we are away
When I started investing just over 50 years ago, I read that over the long-haul stocks outperform bonds. Over the years, with all the ups and downs of the stock market, I’ve never had any reason to doubt that. But, the majority of publicly traded U.S. stocks underperform Treasury bills. That doesn’t mean you have to identify the next Magnificent Seven. The vast majority of wealth creation comes from a reasonably sized cohort of successful companies
19 Cardinal rules on selling stocks
There will be significant fluctuations in the price of individual stocks in one’s portfolio, but this is background noise. Against this noise the investor must monitor their portfolio to detect signs that the superb companies in their portfolio have not or are not deteriorating in character and quality. Where quality has deteriorated, the investor should not hesitate to sell.
Market (In)Efficiency and beating the market
Behavioral inefficiencies are likely the most enduring because human nature has not changed much over time and is unlikely to change much in the future.
The Winner’s Curse and Homo Investorus
The world does not operate in accordance with conventional economic or finance theory posited on the notion that people are both rational and selfish.
How I invest my money
We think the very term ‘value investing’ is redundant.
Be wary of using Return on Capital (ROC)
Superb companies produce a very high return on capital. But when substantial intangible assets don’t show up on balance sheets, the ROC numbers are unduly flattering to management.
Let’s face it, we’re really bad at patterns and statistics
In our hunt for the investment guru we get hit with a double whammy of cognitive errors. We see patterns in random data because we, as humans, love to find causes and patterns suggest causes. And, we jump to conclusions on the basis of statistically insignificant data, again, because we love to identify causes.
Cash flow absurdity and Warren Buffett’s Owner Earnings
Most analysts will talk of EBITDA, EBIT, NOPAT and what not. Warren Buffett’s approach is to think in terms of Owner Earnings. It is somewhat akin to free cash flow.
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