My views on the market, tech, and everything else

A Dozen Things I’ve Learned from Bill Ruane about Investing

1. “Nobody knows what the market will do.” Investing based on macro market forecasting is folly.  Every investor in this series (over 20 now) believes in this bedrock principle. Where are the great investors who believe to the contrary?  Where is the list of great investors who outperform the market based on macro forecasting?  You may be thinking: “Ray Dalio at least.” A 25iq post on Ray Dalio is coming soon.

2. “Forget the level of the market. The only thing that matters is the specific situation having to do with your stocks.”  It is by focusing on understanding the very simplest systems (an individual company) that  an investor can outperform the market.  And more importantly, when you buy a stock for significantly less than its intrinsic value you do tend to catch a favorable wave caused by inevitable but unpredictable shifts in the economic cycle. You won’t time business cycles perfectly but you will find that they tend to work in your favor.  In other words, focusing on what a company is doing today by itself positions you well for tomorrow. And you have a margin of safety against mistakes and errors. If Bill Ruane has been put in a cave for many years and given no information about the general economy he would time business cycles well if all he had was information about the value of individual companies.

3. “Graham said, ‘Look at the company as a whole, not as a piece of paper. Then do a highly critical financial analysis’.” That Bill Ruane was at Colombia taking a class from Benjamin Graham at the same time as Warren Buffett is evident on this point. Investing is best accomplished when it is most businesslike. If you don’t understand the business you don’t understand the stock.  That you buy product x (for example, a flight to another city) does not mean you understand the business that provides the good or service.  Knowledge about a product or service is not the same as understanding a business (for example, an airline).  There are plenty of wonderful products and services made by companies that have a lousy business (often because all or nearly all of the value accrues to the consumer and little or nothing to the producer).

4.   “Put most of your money in six or seven stocks that you’ve really studied.” “Know-nothing” investors should buy a low fee index fund.  A very small number of “know-something” investors can outperform the market by concentrating their investments.  For a “know-something investor” concentration puts your money behind your best ideas and allows you to more intensively follow the company. Closet indexing is a fool’s errand.

5.  “Truth is in the details and this intensive research on stock ideas is of immense importance in avoiding big mistakes and  developing the positive convictions required to own and hold concentrated investment positions.” When the research behind a given investment is intensive it helps make you brave enough to buy when others are fearful and sell when others are greedy.  Doing your own work should provide you with an extra boost of confidence.

6.   “Use the results of [your own] own research, as opposed to using outside research.” If you are going to outperform the crowd you must have a view occasionally that is different than the crowd.  This requires that you acquire information that others do not have which is best found by doing your own research.  The importance of making contrarian bets is a corollary point to 5 above.  In other words, doing your own research makes you both braver and able to occasionally make contrarian bets and be right about those contrarian bets.

7. “You don’t need inside information. Don’t need charts and mumbo jumbo. It isn’t about momentum. It isn’t that guff the talking heads give you on CNBC.” There are lots of people who make their living selling noise to speculators and investors. Ignore them.  Noise peddlers do entertain some people with stories about momentum and charts that look like chicken entrails.  But don’t confuse what is speculation with investing.

8.   “If you get a great idea every other year, you’re really doing well.” The number of times you will be able to find an investment that is substantially in your favor that is also within your circle of competence is small.  Be patient, wait for the fat pitch, and then bet big on that swing.  If you are a “know-something investor” why not put a lot of money behind your very best ideas?

9.   “Staying small is simply good business. There aren’t that many great companies.“ It is beyond question that the size of the portfolio is a drag on performance.  The bigger the fund the harder it is to outperform.  Bill Ruane famously closed his fund to new investors to be “fair” to his clients and to goose his own returns since his own money was in the fund as well.

10. “You don’t act rationally when you’re investing borrowed money…. Don’t borrow money.  If you are smart, you don’t need to. If you are dumb, you don’t want to.”  When you borrow you put the power of compounding in place as a force against your success.  It magnifies failure as well as success. But just as importantly, it can interfere with sound judgment.  Anything that makes you less rational as an investor is problematic.

11.  “Ben Graham said to be careful of the good idea because it is apt to be terribly overdone. … The psychology of the market can take the market up and down, much further than you think. Psychology feeds on itself.”  The economy moves in cycles that are impossible to predict with certainty.  If you accept this as inevitable the cycles will be your friend since at times they will give you a chance to buy low and sell high.  That Mr. Market is bipolar is his gift to you.

12. “I have always thought of myself as a meek little lamb who is afraid of being fleeced.”  Risk matters. Trust matters.  Character matters. Be careful out there.

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