Novel Investor

Compounding investing wisdom...

Lessons from the 2019 Berkshire Letter

by Jon

Warren Buffett began his 2019 Shareholder Letter with a review of a short but groundbreaking book. The findings would change what the author, and everyone along with him, believed ever since.

Edgar Lawrence Smith set out to prove a theory that bonds were better investments than stocks during periods of deflation, while stocks were better than bonds during inflation.

Instead, he found that stocks were better investments all around. His work, Common Stocks as Long Term Investments would be published in 1924. The ideas didn’t catch on until John Maynard Keynes popularized the book with a written review in May of 1925.

Smith’s findings completely upended the widespread view that bonds were “safe” and stocks were speculative. And the book would go on to play a role in the ensuing market bubble that burst in 1929. Continue Reading…

The Man Who Made a Killing on the 1929 Crash

by Jon

Floyd Odlum was an opportunist. He took advantage of a bad situation to become one of the richest people in America shortly after the crash of 1929.

Odlum saw an opportunity amid the rubble of investment trusts. Investment trusts were like the first iteration of today’s closed-end mutual funds.

They were first introduced in the U.S. around 1926, in the form of trading corporations, with the sole purpose of investing pooled capital into stocks. And like many new investment vehicles, it didn’t take long for them to become wildly popular with investors.

By 1929, roughly 640 trusts existed with about $4 billion in assets. In ’29 alone, trusts accounted for one-third of the $6 billion in new offerings — about $1 billion of that was estimated just in August and September alone. Continue Reading…

Wise Words from Philip Carret

by Jon

Philip Carret has one of the longest successful track records on Wall Street. But before his Wall Street career, he was a pilot in WWI, a Harvard graduate, and finally a reporter for Barron’s.

A series of articles for Barron’s led to his first book, The Art of Speculation. In it, he describes his concept of value investing.

In 1928, Carret founded the Pioneer Fund, one of the first mutual funds in the US. The fund got off to a horrible start thanks to the ’29 crash and the Great Depression. But they both survived. And despite the early losses, the fund performed phenomenally over the 55 years he ran it.

I think it’s safe to say Carret practiced the art of patient investing longer than anyone. He was still managing money when he died in 1998 at the age of 101. Thankfully he shared some of his (almost) eight decades of investing experience over the years.

Here’s Carret: Continue Reading…

Phil Fisher: Scuttlebutt and Assessing Management

by Jon

Most of the great investors are divided over the need for qualitative analysis. The two biggest areas are measuring management and moats.

Both sides make solid arguments because you’re trying to assess something that can’t be easily measured. That’s why qualitative analysis is more art than science. Put simply, some people got it, some people don’t (like me).

Those who are gifted in the art — like Buffett, Fisher, and Lynch — have an innate ability that normal humans don’t have…and their returns show it.

However, the likes of Graham and Schloss did quite well despite taking the other side of that argument. They didn’t think they could successfully do it, so they avoided talking to management like the plague.

Of course, both sides are correct…investors do better when they stick with what they’re (honestly) good at and avoid the rest.

That said, Phil Fisher mastered qualitative analysis. He wanted a company with great management at a reasonable price. He felt management was the most important ingredient to separate a business from its rivals. Continue Reading…

Ben Graham’s Last Investment Fund

by Jon

James Rea mailed a computer print out of his stock list to Ben Graham. Rea had never met Graham. He had no clue Graham existed. At least, not until clients said he should read an article by Graham.

It turns out Rea’s list was filled with the type of stocks Graham had written about for years. His letter eventually led to a phone call from the legend, which led to a meeting, then a research collaboration, and finally a private investment fund.

After some debate, Rea and Graham agreed on 10 stock criteria to base their research around. The period covered was 1925 – 1975.

Graham’s goal was simple:

To try to buy groups of stocks that meet some simple criterion for being undervalued — regardless of the industry and with very little attention to the individual company.

He wanted to bypass time-consuming analysis for a more diversified “group” approach to stock selection using a few simple metrics. And their research backed up the idea. Continue Reading…

Why a Bull Market Ends

by Jon

When? That’s what everyone wants to know. The answers to why a bull market ends come pouring in the second the when is confirmed.

But the explanations why are usually complex. They certainly won’t help anyone predict the next turn. They’re often secondary, or scapegoats, to what really happened.

The 1982-87 bull market is a good example. The five year period saw steady gains in most quarters: only 5 out of 20 quarters were negative, with no declines of as much as 10%. And 1987 started off hot, up 21% in the first three months, before peaking in August.

The bull market that culminated in Black Monday ended because…Computers! Computerized trading, that is. That one gets piled on all the time. Portfolio insurance and leverage also got blamed. And they sound good too. Continue Reading…

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