Library / Outstanding Investors

Date of review: May 2021
Book author: William Green
Вook published: 2021

Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life by William Green (2021)

For quite a while, I have been trying to read books mostly on specific sectors or companies, often written by founders of particular businesses. I find such books most useful in learning about new industries which often help to find new investment opportunities or look at stocks in your current portfolio from a new angle.

A story about Nomad Partnership

For quite a while, I have been trying to read books mostly on specific sectors or companies, often written by founders of particular businesses. I find such books most useful in learning about new industries which often help to find new investment opportunities or look at stocks in your current portfolio from a new angle. Currently, for example, I am reading a book about Alibaba as part of my research about this company and broader e-commerce sector in China.

I try to avoid books on successful investing unless they are written by investors themselves who have an outstanding track record or occasionally I read books about such investors written by journalists (not professional money managers).

The book Richer, Wiser, Happier was at the bottom of my reading list.

However, I decided to give it a go not least because of Chapter 6 which promised to tell a story about Nomad Partnership - a fund run by Nick Sleep and Qais Zakaria. Until recently, I have never heard about these successful investors. I was also intrigued to learn that when they closed their fund in early 2014 and advised their investors to just keep holding 3 stocks in their portfolios: Amazon, Costco and Berkshire Hathaway. Since early 2000, their fund returned over 20% of annualised returns which was 3x higher, compared to returns of MSCI World index.

I found the book quite interesting and useful, to my own surprise.

Key takeaways from Green's interviews with some of the best investors:

Four principles of Bill Ruane (which he learned from Albert Hettinger):

  1. ''Do not borrow money to buy stocks. You don't act rationally when you're investing borrowed money".
  2. Watch out for momentum. Proceed with extreme caution "when you see markets going crazy", either because the herd is panicking or charging into stocks at irrational valuations.
  3. Ignore market predictions: "I firmly believe that nobody knows the market will do…The important thing is to find an attractive idea and invest in a company that's cheap".
  4. Invest in a small number of stocks that you have researched so intensively that you have an informational advantage. It was the most important principle for Ruane, according to Green.

Lessons from Howard Marks:

  1. If you want to add value as an investor, you should avoid the most efficient markets and focus exclusively on less efficient ones.
  2. No value in macro forecasts. The future is influenced by an almost infinite number of factors, and so much randomness is involved that it's impossible to predict future events with any consistency.
  3. The future may be unpredictable, but there is a recurring process of boom and bust which is remarkably predictable. Most processes are cyclical. "I don't even think about the timing. In the investment business, it's very hard to do the right thing, and it's impossible to do the right thing at the right time".
  4. Important to step away from the crowd: "Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive".
  5. Important to remain humble, accept limits to your skills, ability to predict / see the future

5 Lessons on resilience (from various investors):

  1. Respect uncertainty.
  2. Reduce or eliminate debt, beware of excessive expenses, which can make us dependent on the kindness of strangers.
  3. Instead of fixating on short-term gains or beating benchmarks, focus on becoming shock resistant, avoiding ruin, staying in the game.
  4. Beware of overconfidence and complacency.
  5. As informed realist, you should be keenly aware of our exposure to risk and should always require a margin of safety.

Chapter on Joel Greenblatt:

The idea of Simplicity. Complexity can be a seductive trap for clever people. They were rewarded at school for solving complex problems, so it's no surprise if they are drawn to complicated solutions when confronted by the puzzle of investing. But in financial markets, as in martial arts, victory doesn't depend on dazzling displays of esoteric techniques. It depends on a firm grasp of the principles of the game and a deep mastery of basic skills.

Don't buy more of companies that you can make most money on. Buy more of companies that you can't lose money on.

Buy good businesses at bargain prices.

Five lessons from Nick Sleep and Qais Zakaria:

  1. Quality in everything (life, stock selection, investment management business).
  2. The idea of focusing on whatever has the longest shelf life, while always downplaying the ephemeral.
  3. One particular model - scale economies shared - creates a virtuous cycle that can generate sustainable wealth over long periods.
  4. It is not necessary to behave unethically or unscrupulously to achieve spectacular success, even in a vicariously capitalist business where self-serving behaviour is the norm.
  5. In a world that's increasingly geared toward short-termism and instant gratification, a tremendous advantage can be gained

The importance of right habits (based on the life and career of Tom Gayner):

Resounding victories tend to be the result of small, incremental advances and improvements sustained over long stretches of time.

Make your mistakes nonfatal. It's so fundamental to longevity. And ultimately, that's what success is in this business: longevity.

You cannot control the outcome. You can only control the effort and the dedication and the giving of one hundred percent of yourself to the task at hand.

2 sources of success for Jeff Vinik:

  1. Consistent approach to investing, focusing on individual companies with good earnings outlooks that are selling at very reasonable valuations.
  2. Very, very hard work. The more companies you can analyse, the more cashflow statements you can go through - the more good ideas you're going to find and the better the performance is going to be. There's no substitute for hard work.

Two lessons Pabrai learnt during their lunch with Warren Buffett in 2012 (which Pabrai won at an annual auction with his friend Guy Spier):

  1. Never use leverage (case of Rick Guerlin).
  2. Live according to your own inner scorecard.

Simple filters to streamline the stock research process that Mohnish Pabrai borrowed from Buffett:

1. Invest in a company only if it falls within your "circle of competence".

Pabrai asks himself before he starts analysing the company: "Is this something I truly understand?"

2. The company has to trade at a large enough discount to its underlying value to provide a significant margin of safety.

Pabrai doesn't bother to construct elaborate Excel spreadsheets that might give him an illusion that he can precisely predict the future. He wants an investment that's so cheap that it's a "no-brainer". "I have very simple criteria: if something is not going to be an obvious double in a short period of time - you know, two or three years - I have no interest". That is obviously from a 'previous version' of Mohnish Pabrai, because as he revealed in a series of interviews over the past 12 months he had been heavily influenced by Nick Sleep's focus on 'spawners' - companies that can create new products and grow business over many years rather than that are selling at 50 cents on a dollar.

3. Under Munger's influence, Buffett gradually shifted away from stocks that were merely cheap toward an emphasis on buying better businesses.

Among other things, this meant that a company should have a durable competitive advantage and should be run by an honest, capable CEO.

4. The company's financial statements should be clear and simple.

As Buffett observed, "The only reason that one may not understand a financial statement is because the writer does not want you to understand it". If it isn't easy to figure out how business generates cash today and roughly how much it's likely to generate in the years to come, Buffett puts such company into 'Too hard pile'.
In summary
"Be patient and selective, saying no to almost everything. Exploit the market's bipolar mood swings. Buy stocks at a big discount to their underlying value. Stay within your cycle of competence. Avoid anything too hard. Make a small number of mispriced bets with minimal downside and significant upside".

Six guiding principles for John Templeton:

1. Beware of emotions.

"Most people get led astray by emotions in investing. They get led astray by being excessively careless and optimistic when they have big profits, and by getting excessively pessimistic and too cautious when they have big losses". One of the primary services he provided as a money manager was to help his clients "get away from the emotionalism".

"To buy when others are despondently selling and to sell when others are enthusiastically buying is the most difficult. But it pays the greatest rewards".

2. Beware of your own ignorance, which is "probably an even bigger problem than emotion…

So many people buy something with the tiniest amount of information. They don't really understand what it is that they are buying". "The one with the greatest information is likely to come out ahead. It takes a huge amount of work and study and investigation". Templeton claimed that diligence had played a much greater role in his success than innate talent. He often spoke of his determination to "give the extra ounce" - to make the extra call, to schedule the extra meeting, to take the extra research trip. He was similarly dedicated to his lifelong programme of continuous self-education. As a young man, he said. "I searched for anything available in writing on the subject of investing, and I still do". Even in his eighties, he said, "I try to be more knowledgeable each year as an investor".

3. You should diversify broadly to protect yourself from your own fallibility.

Investing is so difficult, that even the best investors should assume that they'll be right no more than two-thirds of the time, however hard they work.

4. Invest in a company only if it falls within your "circle of competence".

Successful investing requires patience.

5. The best way to find bargains is to study whichever assets have performed most dismally in the past five years, then to assess whether the cause of those woes is temporary or permanent.

Most people are naturally drawn to investments that are already successful. Templeton took the opposite approach asking "Where is the outlook worst?"

6. "One of the most important things for an investor is not to chase fads".

"The best way for an investor to avoid popular delusions is to focus not on outlook but on value."

Importance of focus:

Great investors focus almost exclusively on what they're best at and what matters most to them. Their success derives from this fierce insistence on concentrating deeply in a relatively narrow area while disregarding countless distractions that could interfere with their pursuit of excellence.

The book also has a wonderful chapter on Charlie Munger, very entertaining and informative especially despite so many articles and a few books written on Munger. There is no point summarising it, it is worth re-reading in full every now and then.

The last chapter (Beyond Rich) is a bit more philosophical which puts main things in perspective. Among other things, Green describes the life of Arnold Van Den Berg who was a little Jewish boy living in the Netherlands when Germany invaded the country. He was lucky to survive and eventually escape the country.

The author shares a few of the general lessons on life, including coping with adversity, following your principles and values.

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