Anthony Bolton’s 3 Secrets of Successful Investing

Tags

, , , , , , , , , ,

Anthony Bolton

Famous fund manager from well-known asset management firm Fidelity Investments, Anthony Bolton, has recently stepped down from active investment management after many decades of managing money.

Bolton is recognised for managing the Fidelity Special Situations fund for 28 years which ended in 2007, where he achieved an annualised returns of nearly 19.5% per annum, turning a £1,000 investment into around £147,000. He is also an accomplished writer and is a columnist in the Financial Times’ money section. Recently, he shared with The Telegraph 3 key principles of his investment philosophy.

They are as follows:

(I) It’s Easier to Spot Opportunities in Smaller Companies

The key to buying shares for less than their true value is spotting something that the rest of the market has missed. But large companies are scrutinised in great detail by a large number of people – analysts who work for stockbrokers or fund managers, the media and other private investors. It’s a different story for smaller firms.

While BP, for example, has 30 or so stockbrokers’ analysts looking at it all the time, some small quoted companies are covered by just a handful, or even none at all. It’s therefore much more likely that a significant fact – perhaps one that gives a company the edge – goes overlooked.

“With a small company I could go to a meeting with the management and come out knowing more about that firm than anyone else,” Mr Bolton said. “That’s not possible with a larger business.”

(II) Look for New Opportunities – But Don’t Forget About the Shares You Already Own

Mr Bolton said running a fund successfully was a team effort involving plenty of backup from his analysts.

Many fund managers say the same and it’s tempting to put it down to modesty or toeing the corporate line, perhaps with an eye to reassuring investors that the fund can maintain its performance if the top man leaves.

But the reason Mr Bolton gave for needing a team was deeper than that – and carries a lesson for private investors.

“I use my analysts to watch the fund’s existing holdings while I look for new opportunities,” he said. “It’s important to do both when you’re running a fund.”

Individual shareholders can’t employ a team of analysts, of course. But they can make sure that they keep monitoring their existing holdings at the same time as looking out for new bargains.

(III) Fundamentals and Market Sentiment Are Both Important

Mr Bolton said two things were important when choosing which shares to buy: the fundamentals of the company and stock market sentiment. “Ideally you get both right,” he said. “I would avoid buying even a good company when sentiment is poor.”

But he added that timing the market was difficult, as his Fidelity China Special Situations fund showed. It lost about 30% of its value in its first 18 months, before recovering all its losses and more recently. “Markets always overreact,” Mr Bolton added.

“It has taken three years for the fund to come right.”

 

For anyone who is interested, the full article from The Telegraph can be found here.

Additionally, the veteran fund manager has also authored a book about his years of investing and money management. His book, Investing Against the Tide: Lessons from a Life Running Money, was published back in 2009.

More information about asset manager Fidelity can be found here.

Hugh Young’s 10 Golden Rules of Equity Investing

Tags

, , , , , , , , ,

Hugh Young

Hugh Young, star portfolio manager and now managing director of Aberdeen Asset Management Asia Ltd, has developed a set of “golden rules” over his years of experience in investing in equities.

Compiled by the renowned asset management firm with their aim of passing down Young’s well-earned wisdom to the rest of their team, it has been released with the following statement: ‘None of the investment tenets that follow should surprise you and they all share one very distinct trait: a belief in common sense.’

Here are Hugh Young’s 10 Golden Rules of Equity Investing:

(1) Treatment of Minority Shareholders

When considering a company, the first question you need answered is ‘who controls it?’ The second is ‘do you trust them?’ Minority shareholders are just one of many company stakeholders (others include employees, the government, suppliers, bankers and major shareholders such as a founding family). While you should not, as a minority shareholder, expect priority over the other stakeholders, you should expect to be treated fairly.

And this depends on whether you can trust whoever controls the company to act in a fair manner. The controlling party need not be a shareholder. In the case of electric utilities, the respective government can often exercise considerable control over tariffs. Electricity prices are a socially-sensitive issue which politicians may sometimes pander to at the expense of minority shareholders. But it is also true, more often than not, that the controlling party is a shareholder, usually the founding family or a conglomerate.

It requires a certain amount of faith, but the best way to judge whether the controlling party will act fairly in the future is to see whether it has acted fairly in the past. Those that have a good track record of equitable treatment of minorities should be held in high regard. Until they slip up that is, though in my experience past behaviour is a pretty accurate predictor of future behaviour.

(2) Remember that Companies are About People Not Assets

A company is essentially a group of people with a common goal, namely to create the best possible product at the best possible price. This is what I call ‘quality’. Sure, companies need fixed assets but they are worthless without people. Once one thinks in these terms, one can appreciate that predicting the long-term performance of a company is all about assessing the quality of its people.

(3) Balance Sheet Strength is Critical

Companies fail largely because their businesses are poorly financed. A strong balance sheet tells you many things. Most importantly, it tells you that the company is very unlikely to fail. But balance sheet strength is not just about the liabilities. It’s also important to look at the assets. What a company does with its cash is very instructive. Does it have too much? Is it gambling with it by investing it in exotic financial instruments? Cash generation is paramount but, once generated, a company must invest it wisely, keep it safe or pass it to shareholders. A balance sheet is like a backbone; it tells you about the character of a company.

(4) Understand What You’re Buying

You don’t have to understand how silicon chips work to buy a silicon chip make, but you do have to understand what they are used for, as well as some of the basics of manufacturing process such as the inputs and costs. On the other hand, simple products like mortgages can be wrapped in businesses that are hard to understand. If there is something about a business that doesn’t make sense, such as how an industry with low barriers to entry creates profits well in excess of the cost of capital, walk away. As the old adage goes, if something looks too good to be true, it probably is.

(5) Be Wary of Over-ambition

It is often tempting for companies to expand capacity or even invest in areas outside their core area of expertise. One should be wary of such ambition, as it naturally means a reduction in focus on core capacity, let alone the implications for balance sheets. A focus on the top line tends to be great for stakeholders such as employees, suppliers and bankers, but rarely for minority shareholders.

(6) Think Long Term

Unless you need your money back soon, you should think long term and avoid getting caught up in the daily noise of markets. This is for two reasons. First, it makes sense to align your own investment time horizon with that of the companies in which you invest. You’ll find that all good companies – and even some bad ones – have a long term perspective. If a company builds a factory, for example, it expects to generate returns from it for at least ten years, as you should from its shares. The second reason is that short-term price movements are mostly inconsequential as they are largely about temporary loss (and gain) of capital. What you should be worried about is permanent loss of capital and this is all about assessing a company’s long-term business prospects.

(7) Benchmarks are Measuring Devices not Portfolio Construction Tools

The worst reason in the world to buy something is because somebody else did. This is essentially what you would be doing if you allowed your portfolio to mimic the benchmark index. A company’s weighting in the index tells you only what has happened in the past, not what will happen in the future. Furthermore, there is a lot of rubbish in most benchmarks that with a little hard work can be avoided. Successful investing requires thinking differently. This may at times feel uncomfortable but you should learn to embrace the feeling as a sign you’re on the right track. To put it in the simplest terms, to beat the benchmark you must deviate from it.

(8) Take Advantage of Irrational Behaviour

The efficient market hypothesis is nonsense. Markets are driven by humans, humans are irrational, thus markets are irrational. Occasionally, something happens and investors panic. You should take advantage of these instances, not join the stampede (or, if you are going to rush for the exit, be the first). Think of a 20% fall in a share price as you would a 20% sale at a department store, an opportunity to buy cheap.

(9) Do Your Own Research

In the case of the medical or engineering professions, for example, there is usually a precise standard for a given procedure. In the investment industry, while this may be true with respect to, say, ethics, when it comes to investment decisions, not following others is the key to success. Indeed, you want to be ahead of the herd, and this means doing your own research. Broker research has its uses, but it is no substitute for doing your own analysis and coming to your own conclusions. It’s about being accountable for your decisions as much as anything.

(10) Focus on Industries in Which it is Possible to have a Sustainable Competitive Advantage

Some industries produce more economic profit than others. How much economic profit a sector or industry tends to produce is often a function of how difficult it is to enter. High entry barriers can therefore provide a sustainable competitive advantage for incumbents. Take banking. Unlike retailing or steel manufacturing, there are all sorts of obstacles to starting a bank. Not only does one need licenses from one or more regulators, but one has to build up trust with depositors as well as a network of companies to lend to. As such, banks tend to produce excess returns on capital which can often be sustained over the long term. Assuming, that is, that they stick to the simple business of lending and deposit taking.

*Content published by Aberdeen Asset Management and strictly for information purposes only. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document. No warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in the content. 

The Most Important Thing – A Book Review

Tags

, , , , , , , , , , , , , ,

the most important thing

“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” ~ Warren Buffett

Howard Marks, investor, co-founder and chairman of Oaktree Capital Management, has compiled his letters, notes and thoughts of investment management over the years into this succinct volume for anyone to pick up and ponder over.

Howard Marks

Known in the investment community as the “Oaktree Memos”, this compilation done by Marks is a summary of his thoughts about money management for the long term, his insights into the economy and investor psychology.

Written originally for his colleagues at Oaktree and his clients, Marks has organized all of his letters and notes into topical subjects, and each chapter in ‘The Most Important Thing’ contains his notes that he organized and categorized from his years of experience in the investment business.

The topics (chapters) that are covered in the book includes some of the following:

  • Philosophy of Value Investing
  • Market Efficiency
  • Nature of Risk
  • Risk Management
  • Market Cycles
  • Patience in Investing
  • Understanding Uncertainty
  • Contrarian Psychology
  • Defensive Investing

Readers must note that this book contains no models and formulas – unlike many investment books. It is entirely focused on investment philosophy and psychology and fundamental concepts. There are no ‘case studies’ whereby the author talks about his investment experience in certain situations – it is solely Marks’ thoughts about different scenarios whereby he was undergoing and examining at various points of time. For example, there are countless notes about his thoughts on the 2007-2008 Global Financial Crisis when he was experiencing its unfolding following the wake of the sub-prime meltdown.

Since the book is a compilation of his notes and memos, there maybe times when readers would feel that there might be a lack of transitions between some of the different paragraphs.

Marks, having spent time with Citibank and TWC Group before he co-founded Oaktree Capital, has garnered experience in equity research, high yield fixed income and distressed debt investing, is pretty much against the idea of short term trading. Readers must therefore take note that Marks is an investor, and not a trader. This book contains nothing on short term trading or speculation, and is very much against the idea of trading in the short term.

However, this succinct collection of notes would greatly delight and refresh the motivated value investor, and would probably be a great book for contrarian investors. With his background in distressed debt investing, his insights on market efficiency/inefficiency and as well as contrarian instincts are spilled all over his memos. Marks’ thoughts on the nature of risk and reward and handling uncertainty greatly reflects the thoughts of many investors who found the models from academia too irrelevant.

His thoughts about the hard work and effort needed to generate alpha and the importance of what he calls: ‘Second Level Thinking’ is interesting and brings to life what Benjamin Graham used to famously declare decades ago: “The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.”

Here is a link to a short interview with Howard Marks on his book and his advice:

Overall, a good book that is succinct and very readable – a great add-on to the serious investor’s library!

 

Investment Lessons From A Sovereign Wealth Fund (Part I)

Tags

, , , , , , , , , ,

GIC

Singapore’s famous sovereign wealth fund, the Government of Singapore Investment Corporation (GIC Private Ltd) has been charged with the task of managing the island country’s foreign reserves. With its objective of preserving and enhancing the international purchasing power of the reserves, and the aim of achieving good long-term returns above global inflation over the investment time horizon of 20 years, the sovereign wealth fund is known for its well structured investing mandate and responsible management of the government’s money.

A sovereign wealth fund normally is restricted by a strict mandate that is laid down by the government, leading them to naturally become long term investing companies because every investment decision made has to undergo strict review processes by the government before they are implemented. Shrewd and disciplined long term investors can learn a few investment lessons when looking at how a sovereign wealth fund manages the government’s portfolio. Below are three prospective lessons that long term investors can learn from the insights shared by Singapore’s GIC:

(I) Harvesting Risk Premiums By Adopting A Long Term Investing Approach

In the realm of financial markets, riskier asset classes should deliver better returns in order to compensate investors for taking on more risk. Investors trade off uncertain pay-offs for potentially higher returns over time by investing in risky assets. This extra return earned by adopting higher level of risks when investing in risky assets is known as the asset’s risk premium. However, in order to harvest these risk premiums, patience and a long term horizon is required because these so called ‘extra returns’ accumulate slowly and unpredictably over the course of time. As stated by GIC: “Successful investing, especially for a large portfolio, requires a suitably long-term horizon because economic and corporate changes often unfold across market cycles and not within a market cycle.”

(II) Build A Diversified Portfolio of Various Asset Classes

GIC invests its assets across a wide spectrum of various asset classes, thereby essentially creating a diversified portfolio for the government of Singapore. As legendary investor Sir John Templeton advocates, “Diversify. In stocks and bonds, as in much else, there is safety in numbers.” Investors would do well to have their own investments diversified across asset classes such as fixed-income instruments, real estate and equities to create a diversified portfolio.

GIC portfolio

GIC manages the Singapore government’s portfolio based upon their mandated Policy Portfolio, which comprises of the below six different asset classes:

  • developed market equities
  • emerging market equities
  • nominal bonds and cash
  • inflation-linked bonds
  • private equity
  • real estate

Often, a well diversified portfolio is amongst one of the best means with which to capture global growth and ensuring any positive surprises are captured and unwanted surprises are avoided, preventing events that would lead to an investor’s portfolio being in tatters. More information on GIC’s investment framework can be found here: http://www.gic.com.sg/en/our-business/investment-framework

(III) Be A Contrarian 

Throughout the course of financial markets history, boom and bust cycles have often led to prices of assets and securities wildly deviating from their justified fair value. The job of the shrewd, intelligent investor is to take advantage of this. As a long-term investor, GIC has the flexibility to take a contrarian stance, taking positions against the crowd when markets deviate significantly from their fair value. GIC basically buys assets when their prices are below intrinsic value and sells them when they become overvalued. However, this normally results in short term under-performance, and investors who adopt a contrarian and long term approach when managing their portfolios have to be patient and keep the bigger picture in mind. As GIC stated: “We can only enjoy the rewards of long-term investing if we are prepared to tolerate short-term losses or under-performance relative to market indices from time to time.”

(The information and chart above have been taken from an article that was sourced from the GIC Report on the Management of the Government’s Portfolio for the Year 2011/2012 released on July 30, 2012). More information about GIC can be found at their website: http://www.gic.com.sg/en/

Blessed New Year and Happy Investing in 2014!

Devising & Implementing A Search Strategy

Tags

, , , , , ,

Searching

A search strategy is paramount to the active money manager, trader and investor. The financial markets have expanded much since the great secular bull market started in the US in the 1980s, and as the industry has grown phenomenally, so has the number of participants who are getting involved with it. Devising and implementing a search strategy that is coherent with one’s investment system is critical for successful investing, portfolio management and naturally, money making.

But what exactly is a Search Strategy? To put it simply, it is the process of finding potentially successful investments.

Anybody who manages money actively actually subconsciously and constantly employs their own search strategy to seek out ventures and places to put money in. However, there are no secret formulas for effective search strategies, because it is subjective and highly linked to one’s own investment system.

For example, quantitative portfolio managers and algorithmic traders employ sophisticated technologies to formulate and program their screening systems – to effectively optimize and automate their search strategies. Below are three key suggestions that could help in formulating and implementing a coherent search strategy.

(I) Consistent With Investment System

Search strategies have to be coherent and consistent with the methodology and philosophy of an investment system. An algorithmic trader has to rely on sophisticated computer technology for his search strategy as his methodology of making money in the markets essentially rely on those instruments and the technology that he employs. A long term, value investor might not necessarily need the devices that a high-frequency trader employs, and perhaps uses a different search strategy. Remember, a search strategy is subjective (no two successful investors have identical search strategies) and is an extension of an investor’s investment system and methodologies.

(II) Based On Strengths & Interests

The second point offered is essentially an extension of the investment system and methodology that an active investor employs. A person who enjoys looking at ratios, numbers and is competent in analyzing financial statements would make a great value investor, and in fact might have a search strategy that is based entirely on reading, absorbing and analyzing hundreds or even thousands of reports. Berkshire Hathaway’s Warren Buffett is a famous example of such a person. Operating in one’s area of competency and devising a search strategy from there that is coherent with one’s own investment system can go a long way for improving active investing performance.

(III) Uniquely Tailored To Produce An Edge

Peter Lynch

As mentioned earlier, no two successful traders or investors have identical search strategies, as it is an extension of an investor’s unique investment system. Star Manager of Fidelity Investments, Peter Lynch, is famous for his ‘hitting the streets’ approach when he was the portfolio manager of Fidelity’s Magellan fund back in the 1980s and 1990s. He likes to talk about the best stock investments being the ones that you can observe everyday on the streets. Lynch uses that as one of his search strategies – to find potentially good companies that are out of Wall Street’s radar. He constantly observes his surroundings and looks out for potential candidates that might fulfil his criteria and then decides whether to do more research and homework on them.

jim rogers adventure capitalist

Famed US investor and globetrotter Jim Rogers, is known for his two round-the-world travels first in a motorcycle and then in a car that landed him in the Guinness Book of Records. He always writes that studying history, reading philosophy and occasional travelling will help further insights and broaden perspectives when investing. True to his own investment philosophy and system, Rogers looks at long term historical trends, top down financial markets research and analyses and observations from his frequent travels to seek out potential investments. From his global travels he evaluates emerging and frontier markets from the ground up and over the years he has sharpened this habit into his own unique search strategy.

The above points suggested for devising and implementing search strategies are not exhaustive. In fact they are not entirely mutually exclusive either. Additionally, search strategies also adapt and change from time to time depending on the philosophy of an investor. All successful active investors and traders have a coherent and unique search strategy – and that goes a long way on one’s quest for alpha as it helps one to navigate the complex maze of our financial markets.

Bruce Bower’s Lessons from a Citibank Trader

Tags

, , , , , , ,

bruce bower

The financial markets are complex and dynamic, and actively managing money as an investor or a trader demands energy, tough work and a lot of discipline.

Portfolio Manager Bruce Bower understands this, and in an article last year from SMB Capital’s SMBU website, Bower shared his early years of experience when he first joined the investment industry as a trader.

Many of the lessons and interesting insights shared by Bower echoes throughout what has been shared thus far on BillionaireInvestor. Here are some of the key takeaways that we can learn:

(1) Find A Mentor

Trading and Investing is a skill, half art and half science. Like any other skills in life; whether its cooking or writing or martial arts, they all require huge amounts of discipline, time and effort to be able to acquire, much less master them. A surgeon becomes good at surgery through years of study and experience. A musician studies and practices for many hours everyday to become proficient at his instrument. Being a good trader or investor demands the same amount of discipline, practice and effort – making money is simply not as easy as what many think. But all forms of skills requires a mentor to impart and facilitate. Finding a good mentor for your investment journey will shorten your learning curve, and guide you along the way.

Bower got a job at Citibank’s currency and fixed income trading desk, and he found a mentor in one of Citibank’s best proprietary traders, and he utilized the opportunity well to learn as much as he could.

(2) Stick To Your Investment System: “It’s OK not to have a position”

Be sure to take positions that meet your investment criteria. Traders are often biased towards action and believing that they always must have a position. However, if one diligently read about the great traders of our time, one will undoubtedly realize that they spend most of the time researching and taking positions that only strictly meet their investment criteria. The size of their positions are usually directly proportionate to the amount of conviction they have with regards to their views of the market.

Another way to view this is to always monitor the risk/reward metrics of any investment idea that is being generated. If the upside potential / reward isn’t worth the downside risk then it simply doesn’t count as a good trade. Some traders like to go for 2:1 reward/risk ratio: meaning that they only take trades that have an asymmetric profile in terms of profit and loss.

(3) Sit With A Position If It Remains Valid

Traders are often impaired by emotional and psychological fears when faced with adverse price movements or when the market moves against their positions. A healthy and bullish price movement often contains corrections along the way, normally within a range of 20 – 30%. Traders who ride through the move normally feel anxious when corrections occur – with good reason, as traders would want to lock in their gains.

One way to ensure that one could stay in a position is to list out the reasons for the investment thesis or the reasons for taking a particular position. Markets are prone to adverse movements from a lot of ‘noise.’ When markets do move against positions or undergo corrections, Bower said that the Citibank trader that he understudied often goes through his investment thesis again to see if it still remains valid. If it is still valid, the trader holds on to his position. If there are market events that knocks out the reasons and hence makes the position invalid, it simply has to be cut. Going through the list of reasons for taking the trade will help you to remain disciplined and calm when your emotions might otherwise get the better of you.

There are other insights shared by Bower, and the above three points are major and familiar points that have been echoed time and time again by the investment industry and their professionals.

For more of what Bower has to say, here is the link to the full article: http://www.smbtraining.com/blog/what-i-learned-from-the-best-trader-at-citibank

For more information about Bruce Bower and his work, here is the link to his website: http://howoftrading.com/

Happy Trading!

Investing like a Fund Manager

Tags

, , , , , , , , , , ,

Peter Elston

Peter Elston, Head of Asia Pacific Strategy and Asset Allocation at Aberdeen Asset Management, was recently interviewed by Channel NewsAsia and featured on their program ‘Money Mind.’ The program gave viewers a glimpse of the asset management industry’s work process and the inner workings and thoughts of a fund manager.

Many retail investors and non-investment professionals often wonder how the professional investors and financial experts manage assets and capital. This interview with Elston offered certain insights at the thought processes of a professional fund manager and as well simple fundamental knowledge into how large institutional portfolios are managed.

Below are major points and takeaways of Money Mind’s interview with Peter Elston:

Quantify the Investment Process:

Like the legendary investor Sir John Templeton, Elston stresses that quantifying the investment process is extremely vital for investment management. Objectifying and quantifying decision parameters and gauges helps the investor to remain calm and disciplined to carry out important decision making. 18th Century philosopher David Hume once famously proclaimed that reason is the slave of human emotion, and modern day neuroscience studies seem to confirm this phenomena. When huge unexpected movements happen in financial markets, emotions tend to get the better of many investors – only the disciplined ones who have quantified their investment parameters will know how to respond and make decisions based on those parameters.

Elston has repeatedly mentioned throughout the interview that its all about “numbers, numbers, numbers” when being asked on how he responds to world events. The idea that he stresses is “to be as rational as possible in all possible circumstances.” This doesn’t necessarily mean that investors should automate and formulate algorithms, but it does mean that investors should have a cool and disciplined system that uses quantitative reasoning in light of irrational markets situations.

Be Sure to Profit from Fear or Greed: 

The shrewd investor must be positioned to profit from bouts of human emotions being manifested in the financial markets. Quantifying the investment process, as mentioned earlier, will help the investor execute this classic golden mantra and be well positioned to profit from fear or greed. Throughout history, humans have been known to overreact, and sometimes panic can manifest into huge amounts of selling pressure in the markets – further depressing asset prices. The intelligent investor will use these emotional floods repeatedly to his advantage.

Stress Test Your Portfolio and Perform Scenario Analysis:

It is extremely important to have an opinion on the overall situation of the portfolio’s position in light of major near future major events. Institutional investors and professional money managers often perform scenario analyses and stress-test their portfolios repeatedly based on those research and analyses. From there, they could come up with hedging strategies or rebalancing adjustments to optimize their portfolios and the positions of their assets.

Basic decision trees and path dependency frameworks can serve as aid tools to many investors. It is near impossible to predict the future, or the direction of interest rates, or the exact value of a currency pair within a certain time frame. However, what is extremely crucial is how one responds and reacts to what is transpiring! As what legendary investor George Soros proclaims: “It doesn’t matter if you don’t know what is going to happen, what is more important is how you respond to it.” Mapping out decision trees and setting down various probable courses of actions from there will give investors some form of idea (as well as the costs and benefits of those actions) into optimally positioning themselves against future events – whether positive or adverse.

If anyone wants to improve his or her investment performance, he or she ought to formalize their investment systems and perhaps adopt a similar framework and practices of the asset management industry as explained and shared above.

Lessons from Dr Marc Faber (Part II)

Tags

, , , , , , ,

Marc Faber

Famed Swiss Economist and Investor, Dr Marc Faber, has garnered a wealth of investment experience throughout his career and life. He currently resides in Thailand, runs Marc Faber Limited, and monitors economic growth in Asian markets closely.

He has shared his economic insights, in-depth study of financial markets, and knowledge in his book: ‘Tomorrow’s Gold.’ It is a well-paced, elegantly written, and brilliant book that would be a great add on to the serious investor’s library.

Tomorrow's Gold

Here are some main points and takeaways from Faber’s book and career:

1) Study History:

The only thing that mankind ever learnt from history is that we never learn from it – writes 19th century German statesman Otto Von Bismarck. Turning the clocks forward into the 21st century, it seems that Bismarck is not entirely wrong about his sharp observation and comment on mankind.

Faber explores the history of financial markets, particularly the history of financial panics, manias and bubbles. He has pointed out that he enjoys the works of the renowned economic historian Charles Kindleberger.

Knowing the history of manias and bubbles will equip the student of history with certain patterns, parameters and signs that he or she can identify or observe in the present. This will greatly sharpen the thinking and objectivity of the serious investor.

2) Do Your Own Homework and Research 

It is of utmost importance that every serious investor must put in the time and effort to conduct their own research, study and due diligence when managing their own money. Nobody’s advice, no matter how capable that person is, will help you in the long run in investing.

Faber also quoted the famous English philosopher, Bertrand Russell, who said: “The degree of one’s emotion varies inversely with one’s knowledge of the facts – the less you know, the hotter you get.” We may all get excited on hearing what seemed to be fantastic investing opportunities, but merely investing based on those emotions is the fastest way to the poorhouse. Studying about the opportunity and getting to know the facts will help objectify the thinking and decision making process.

3) Do Things That No One Else Is Doing

Faber has explicitly mentioned in his website that he greatly enjoys Paulo Coelho’s ‘The Alchemist.’ He writes: “This is not a typical investment book written by another Wall Street shark or by someone who won a lottery and then writes how you can with his system also win the lottery. This book, however, will give you an insight that in order to fulfill your dreams much hardship will have to be endured and also that you must do things no one else would remotely consider doing. It is a book you will never forget and never regret having read.”

One has to take the road less travelled some times. This requires audacity, boldness and a tough mental state. Often, the road less travelled can be psychologically daunting and mentally challenging. One has to be exceptionally brave, ignore conventional wisdom and daring to be different. The rule of thumb is simple: when a route gets very crowded, it is time to avoid it.

Faber makes his case for it throughout his book, applying contrarian investment wisdom to the markets.

Faber has also recommended reading the works of the famous Austrian economists like Joseph Schumpeter, Ludwig Von Mises and Friedrich Hayek. He is known to align himself with the Austrian school, and is often a fierce critic of the Neo-Keynesian way of running economics.

In ‘Tomorrow’s Gold’, Faber covers inflationary and deflationary cycles, and how astute investors can take advantage of such conditions. The book also has chapters on Long Wave / Kondratieff Cycles and his own economic model on growth in Emerging Economies.

More information can be found on his website: http://www.gloomboomdoom.com/

Lessons from Dr Marc Faber (Part I)

Tags

, , , , , , , , ,

Marc Faber under Skagenfondenes nyttårskonferanse 2009. Foto:Gunnar Lier

Dr Marc Faber, renowned economist, investor and publisher of the popular Gloom, Bloom & Doom Report newsletter, has something to say to all investors. Hailed by some as a financial markets guru and a brilliant economist, he has an uncanny track record of calling certain major events that utterly shook the world (1987 crash, Collapse of the Japanese Bubble in 1990, the 1997 Asian Financial Crisis, etc).

Born in Zurich, Switzerland and obtaining his doctorate in Economics at the age of 24, he is also known for being a Contrarian in his investing philosophy. He was a Managing Director at Drexel Burnham Lambert when the firm was the junk-bond king of Wall Street. Having spent a quarter of a century in Hong Kong, he currently resides in Thailand, running Marc Faber Limited as a fund manager and investment advisor.

Here are 10 Observations that he has shared from his website:

1. There is no investment rule that always works.

If there was one single rule, which always worked, everybody would in time follow it and, therefore, everybody would be rich. But the only constant in history is the shape of the wealth pyramid, with few rich people at the top and many poor at the bottom. Thus, even the best rules do change from time to time.

2. Stocks always go up in the long term.

This is a myth. Far more companies have failed than succeeded. Far more countries’ stock markets went to zero than markets, which have survived. Just think of Russia in 1918, all the Eastern European stock markets after 1945, Shanghai after 1949, and Egypt in 1954.

3. Real Estate always goes up in the long term.

While it is true that real estate has a tendency to appreciate in the long run, partly because of population growth, there is a problem with ownership and property rights. Real estate in London was a good investment over the last 1000 years, but not for America’s Red Indians, Mexico’s Aztecs, Peru’s Incas and people living in countries, which became communists in the 20th century. All these people lost their real estate and usually also their lives.

4. Buy Low and Sell High.

The problem with this rule is that we never know exactly what is low and what is high. Frequently what is low will go even lower and what is high will continue to rise.

5. Buy a basket of high quality stocks and hold!

Another highly dangerous rule! Today’s leaders may not be tomorrow’s leaders. Don’t forget that Xerox, Polaroid, Memorex, Digital Equipment, Burroughs, Control Data were the leaders in 1973. Where are they today? Either out of business or their stocks far lower, than in 1973!

6. Buy when there is blood on the street.

It is true that very often, bad news provide an interesting entry point, at least as a trading opportunity, into a market. However, a better long term strategy may be to buy on bad news, which has been preceded by a long string bad news. When then the market no longer declines, there is a chance that the really worst has been fully discounted.

7. Don’t trust anyone!

Everybody is out to sell you something. Corporate executives either lie knowingly or because they don’t know the true state of their business and the entire investment community makes money on you buying or selling something.

8. The best investments are frequently the ones you did not make!

To make a really good investment, which will in time appreciate by 100 times or more, is like finding a needle in a haystack. Most “hot tips” and “must buy” or “great opportunities” turn out to be disasters. Thus, only take very few investment decisions, which you have carefully analyzed and thought about in terms of risk and potential reward.

9. Invest where you have an edge!

If you live in a small town you may know the local real estate market, but little about Cisco, Yahoo and Oracle. Stick with your investments in assets about which you may have a knowledge edge.

10. Invest in Yourself!

Today’s society is obsessed with money. But the best investments for you may be in your own education, in the quality of the time you spend with the ones you love, on your own job, and on books, which will open new ideas to you and let you see things from many different perspectives.

Additionally, Dr Faber is also known to be aligned to the Austrian School of Economics. For anyone who wants to understand more on financial markets and economics, he has recommended reading the works of the great Austrian economists like Joseph Schumpeter, Ludwig Von Mises and F.A. Hayek.

More information at his website: gloomboomdoom.com 

Trader Anton Kreil Shares His Insights and Experience

Tags

, , , , , ,

Anton Kreil

Successful trader Anton Kreil shares his insights and experience in an interview session at Cass Business School, City University London.

The interview covered a wide range of topics that include everything from money management, trading, to Kreil’s experience back in Goldman Sachs and JP Morgan.

Here is a short summary of some interesting points raised and discussed in the interview:

(i) Be a Self Starter and do not trust the ‘marketing gimmicks’ or ‘advice’ 

AK: As a trader you need to be a self starter. You have to be inquisitive and curious, you have to be incredibly disciplined and committed to your work; you have to be hungry for the markets. It takes a great deal of work to succeed in the markets. Do not buy the hype out there that it is easy. Most of those ‘advices’ are marketing gimmicks from brokerage houses and market makers.

(ii) On Fundamental / Technical Analysis:

AK: Suppose by your fundamental research you know that X is going to do very well the next year. You check the technicals and realized that your fundamental view of X is going to be wrong for a period of a few months. You then put X onto your watchlist and monitor it. This combination of both FA and TA will help you increase the probabilities in your favour, and when “all the planets are aligned,” you have more confidence to take that trade.

(iii) Anton’s take on Day Trading:

AK: The markets these days are filled with many computers, high frequency traders and algorithmic trading systems that fire huge amounts of market and limit orders into various instruments across the board. The human click trader will always be slower than the automated computers detecting price and market inefficiencies and slower in placing orders. The probabilities are against the human day trader. I don’t have to worry about the computers and algos because I take a longer term view these days – I trade and hold positions for weeks to months / quarterly.

(iv) Is the Bottom Up / Warren Buffett-Peter Lynch model obsolete?

AK: It is not entirely obsolete. Even though my approach is top down, sometimes, if you do not check the bottom details and you miss a factor of consideration that perhaps its vital for that particular investment – you could be making a serious mistake. For example: shorting a stock at intrinsic value.

(v) The Trader needs Volatility

AK: The short term trader needs to embrace volatility. He/she needs to trade volatile instruments.

Point V brings to mind the quote from hedge fund manager Louis Bacon, who said that a speculator must embrace disorder and chaos.

Catch the interview session to hear more from Anton!

Here is part 1 of the interview:

More information about Anton Kreil and his work is available at his personal website : http://www.antonkreil.com/home/

Follow

Get every new post delivered to your Inbox.