Monday, May 13, 2013

Heins & Tilson, The Art of Value Investing

Since 2005 John Heins and Whitney Tilson have published the newsletter Value Investor Insight, which features two in-depth interviews with professional money managers each month. An annual subscription (with access to all the back issues) is $349. Or, for about a tenth the price ($45 retail, $28.58 on Amazon) you can get several years’ worth of insights that appeared in the newsletter from a who’s who of value investors.

When a foreign political figure was accused of plagiarizing his dissertation, he was mocked with the meme Ph+D = (Ctrl+C) + (Ctrl+V). The Art of Value Investing (Wiley, 2013) is also the product of—in this case, totally legitimate—copying and pasting. Although it may not warrant a Ph.D. itself, its readers will get a broad, non-technical education from over a hundred successful practitioners.

The authors divided the book into twelve chapters. They then took snippets from published interviews, occasionally from publicly available sources as well, and arranged them by topic, some four or five to a page. Not every snippet is mind-numbingly brilliant, but taken together they offer a collective portrait—to the extent that such a thing is possible—of the value investor.

Here I’ll share six quotations, five from value investors and the final one from Dan Ariely, the popular author and professor of behavioral economics.

“Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The low-risk, high-uncertainty [situation] gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much.” (Mohnish Pabrai, p. 69)

“There’s the perception that having specific catalysts for all your positions mitigates risk, when in fact we believe the opposite is true. If there’s an obvious catalyst, there’s an excellent chance that it’s at least partially priced into the stock, which increases your risk in the event it never shows up. As long as the potential return in an investment is significant enough, and the potential downside is limited, we’re okay with dead money.” (Tucker Golden, p. 168)

“I’m still more back-of-the-envelope when it comes to valuation. To me it all comes down to the assumptions you’re making. If they’re correct, a back-of-the-envelope calculation works perfectly well. If they’re not, sophisticated modeling isn’t going to help.” (Robert Kleinschmidt, p. 198)

“I’ve never considered it a legitimate goal to say you’re going to invest at the bottom. There is no price other than zero that can’t be exceeded on the downside, so you can’t really know where the bottom is, other than in retrospect. That means you have to invest at other times. If you wait until the bottom has passed, when the dust has settled and uncertainty has been resolved, demand starts to outstrip supply and you end up competing with too many other buyers. So if you can’t expect to buy at the bottom and it’s hard to buy on the way up after the bottom, that means you have to be willing to buy on the way down. It’s our job as value investors, whatever the asset class, to try to catch falling knives as skillfully as possible.” (Howard Marks, p. 208)

“We practice the Taoist wei wu wei, the ‘doing not doing’ as regards our portfolio. We are mostly inert when it comes to shuffling the portfolio around.… We believe successful investing involves anticipating change, not reacting to it.” (Bill Miller, 235)

“With investing, focusing on what’s already happened is generally a bad strategy. The decision at any point should be only about looking forward. Just adjusting how you set up your spreadsheets and what you track on reports could help in this regard.” (p. 245)

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