Samir Arora

@iamsamirarora
Depuis 2005 December 2018
THAT THERE ARE NO RULES

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THAT THERE ARE ALWAYS TWO
SIDES TO EVERYTHING

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For every Little Book on Growth Investing

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There is a Little Book on Value Investing

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Every time you read about Graham on value investing

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You can also read about Graham and growth investing

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If you believe that crowds are mad

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Remember crowds can have wisdom too

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It is not the philosophy that gets me, it’s
the pomposity. If they’d just laugh at
themselves! If they’d just say “ I think it
is like this, but von Leipzig said it was like
that, and he had a good shot at it too”.

If they’d explain that this is their best

guess.

Richard Feynman

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WHAT THEY DO TEACH YOU

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What they do teach you
▪ Buy stocks with high conviction
▪ Your favorite holding period should be forever
▪ Or: Hold stocks for the long term
▪ An investor should act as though he had a lifetime decision card with
just twenty punches on it
▪ Buy companies with good managements
▪ Diversification is a protection against ignorance. It makes very little
sense for those who know what they are doing
▪ Before investing in an idea based on some facts and analysis ask
“ Who doesn't know that?”
▪ To make money in a company you must know it better than anyone else
▪ Good people should not buy “vice/sin” businesses (like liquor, casinos,
cigarettes etc.)

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My philosophy: De omnibus dubitandum
Everything must be doubted

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Assertion 1:
We (should) buy stocks where we have high conviction

“…Conviction is higher in the paths we

chose not to follow because those
decisions were made before we chose the
ultimate course. This is true of everything
we do in life; every decision we make.”

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Assertion 2:
Our favorite holding period (should be) is forever

When we own portions of outstanding

businesses with outstanding managements,
our favorite holding period is forever.
Berkshire Hathaway letter to shareholders 1988

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Assertion 3:
We (should) own stocks for the long term

It is extremely improbable that 20 stocks selected from, say,

3000 choices are going to prove to be the optimum portfolio
both now and a year from now at entirely different prices
(both for the selections and the alternatives) prevailing at that
later date. If our objective is to produce the maximum after
tax compound rate, we simply have to own the most
attractive securities obtainable at current prices

Warren Buffett, January 18 th, 1965

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Assertion 4:
An investor should act as though he had a lifetime decision
card with just twenty punches on it
Overconfidence, Under-Reaction, and Warren Buffett’s Investments
John S. Hughes, Jing Liu & Mingshan Zhang

Data: From 13f filings April, 1980 to December, 2006.

2,140 quarter-stock observations on publicly traded holdings + 275
observations for which Berkshire Hathaway has received SEC approval
for confidential treatments that, as a consequence, surface in later
reports.

Findings:
Median holding period: One year
Approximately 20% of stocks held for more than two years
30% of stocks are sold within six months

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Assertion 5:
Buy companies with good managements

When will you know the management is good?

How will you separate The Halo Effect?

Show me a company that delivers high

performance and I can always find something
positive to say about the person in charge.

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The Halo Effect
May 2000: Price/share of CISCO: US$ 80
“Is John Chambers the world’s best CEO?..”, Fortune
“CISCO must be considered one of America’s truly outstanding companies”
“No net worker has ever had the laser focus on customers that CISCO has had
from Day one”
“John Chambers is the most customer-focused human being you will ever meet”
“John and (CFO) Larry Carter run such a tight ship, it’s almost unbelievable”
“Everyone flew coach”

May 2001: Price/share: US$ 15

“Cisco Fractures its Own Fairy Tale”, Fortune
“Cisco had exhibited a cavalier attitude towards potential customers”
Cisco’s sales techniques had been “irksome” and had “alienated” customers
“Acquisitions, forecasting, technology, and, yes, senior management-all have
failed Cisco in the past year”

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The Halo Effect
Study 1:
31 excellent companies identified in “In Search of Excellence”, Tom Peters & Bob Waterman
Total Shareholder Returns of these companies over 10 years after study (1980 to 1989):
▪ Outperformed S&P 500: 13
▪ Underperformed S&P 500: 18

Study 2:
16 excellent companies identified in “Built to Last”, Jim Collins & Jerry Poras
Total Shareholder Returns of these companies over 10 yrs after study (1991 to 2000):
▪ Outperformed S&P 500: 6
▪ Underperformed S&P 500: 10
Companies identified: 3M, American Express, Boeing, Citi, Ford, GE, HP, IBM, J&J, Merck,
Motorola, Nordstrom, P&G, Sony, Walmart and Walt Disney

Study 3:
10 years later, Same Same Jim Collins did more research on great companies and wrote a
book “Good to Great”
Surprisingly not one – that is right, not one- company was common in the 2 studies
Great companies identified this time: Abbott, Circuit City, Fannie Mae, Gillette, Kimberly -Clark,
Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens and Wells Fargo

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Assertion 6:
Diversification is a protection against ignorance. It
makes very little sense for those who know what they’re
doing

We don’t know we are ignorant till something

unexpected happens.

If concentrated funds do better, what if you buy

(say) 3 such funds? Do you still do better?

What if you are ignorant and concentrated?

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Assertion 7 :
Before investing in an idea based on some facts and
analysis, ask “Who doesn’t know that ?”

Howard Marks in his book

My son Andrew is a budding investor and he comes up
with lots of appealing investment ideas based on
today’s facts and outlook for tomorrow. But he’s been
well trained. His first test is always the same:

“And who doesn’t know that?”

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Assertion 8: To make money in a company,
you must know it better than anyone else

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Assertion 9: Good people should not buy “vice/sin”
businesses (like liquor, casinos, cigarettes etc.)

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SO WHAT SHOULD THEY TEACH
YOU?
KEEP IT SIMPLE

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BELIEVE IN EQUITY INVESTING

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Worldwide equity risk premium relative to long
bonds returns: 1900-2000
Geometric Arithmetic
Country
mean mean
Australia 6.3 8.0
Belgium 2.9 4.8
Canada 4.5 6.0
Denmark 2.0 3.3
France 4.9 7.0
Germany * 6.7 9.9
Ireland 3.2 4.6
Italy 5.0 8.4
Japan 6.2 10.3
The Netherlands 4.7 6.7
South Africa 5.4 7.1
Spain 2.3 4.2
Sweden 5.2 7.4
Switzerland + 2.7 4.2
United Kingdom 4.4 5.6
United States 5.0 7.0
World 4.6 5.6
* All Statistics for Germany exclude 1922-23 + Premia for Switzerland are from 1911

Risk premium: Premium received by investors from investments in

equities rather than in government bills/bonds

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• Barton Biggs concludes that in 20th century countries that he calls
“stable, lucky ones” that were spared catastrophe (US, UK, Australia,
Canada) had inflation adjusted returns for stocks trumping those for
bonds and bills.

• Surprisingly, the asset class returns in the loser countries (Germany,

Japan, Italy, France) show the familiar pattern of stocks beating
bonds, and bonds beating bills.

• Even in those countries in which the most extreme forms of risk were
manifest, the risky asset class of stocks produced superior returns
and the safe asset classes of bonds and bills underperformed.

Wealth, War & Wisdom

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 Total Real Return Indices: 1802-2003

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Returns Between September 1929 & November 1954

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BOTTOM UP RESEARCH WORKS BEST
IN SECTORS/THEMES WITH STRONG
TAILWINDS

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 LOOK FIRST FOR REASONS TO
REJECT, NOT FOR REASONS TO BUY

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“We know with much more clarity what is bad than what is good”
“via negativa” (acting by removing) is more powerful and less
error-prone than “via positiva” (acting by addition)”

Nassim Nicholas Taleb in “Skin in the Game”

“ “It is remarkable how much long-term advantage people like us

have gotten by trying to be consistently not stupid, instead of
trying to be very intelligent.”

Charlie Munger

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HAVE A DIVERSIFIED PORTFOLIO,
REJECT CONCENTRATION

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 TRY TO GET MORE
KNOWLEDGE,
NOT MORE INFORMATION

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 MONEY SAVED IS BETTER
THAN MONEY EARNED

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 Investing isn’t complicated.
Just buy stocks when they sell for
less than they’re worth.

How to know what they’re worth?

That’s really complicated !!!

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