1. “Of course, the macro questions are the hardest ones to figure out. I am not trained to be an economist, and I don’t think economists get it anyway. I am left with the bottoms-up, 10Q by 10Q analysis, and hope I have enough sense of where we are in the cycle…” Michael Price is another successful investor who ignores macro forecasts in favor of a bottoms-up analysis.
2. “Never, never pay attention to what the market is doing. … Stay away from the crowd.” Mr. Market is not always wise. He sometimes will sell you a stock at a bargain or pay you more than it is worth. The art of knowing the difference is value investing. Falling in with the crowd will put you under the sway of Mr. Market because Mr. Market is the crowd.
3. “The key question in investing is, what is it worth, and what am I paying for it? Intrinsic value is what a businessman would pay for total control of the business with full due diligence and a big bank line. The biggest indicator to me is where the fully controlled position trades, not where the market trades it or where the stock trades relative to comparables.” By thinking like a business owner Michael Price becomes a better investor. Buying share of stock in a business is owning a partial stake in a business. If a share of stock is not a partial stake in a business, what exactly is it? Anyone who thinks a share of stock is a piece of paper that people trade back and forth is in deep trouble as an investor.
4. “We like to buy a security only if we think it is selling for at least 25% less than its market value.” It is refreshing to hear an investor assign a number of a “margin of safety”. My assumption is that this 25% figure is a rule of thumb. Many value investors would say that the margin of safety they are looking for is relative based on the risk of the particular business (e.g., the risk of a bakery business is not the same as the risk of a biotechnology company).
5. “If you really [want] to find value, you [must] do original work, digging through stuff no one else [wants] to look at. …The really important thing is to eliminate the Wall Street consensus, the Wall Street research. You need to understand where the company is in the world and what the competition is for the products, whether the products are any good, and whether or not the company has any pricing power or barriers to entry. … Think about the business, think about what you see without any input from Wall Street, do [your own] primary research.” To generate alpha in investing you must occasionally be contrarian and be right about that contrarian view. In short, you must find a mispriced bet. To find a mispriced bet you are best positioned if you are looking where fewer people are looking.
6. “You can get lost in the spreadsheets. You can’t rely on the projections that you put in the spreadsheets alone… Depending too much on the Excel spreadsheet and forecast of discounted cash flows is a big mistake.” Extrapolating the past into the future is a parlor trick favored by consultants and analysts. This process may seem logical to many people but it is pregnant with danger. Complex adaptive systems produce changes that can’t be extrapolated. Things that can’t go on forever, don’t.
7. “The worst mistake investors make is taking their profits too soon, and their losses too long.” This is classic “loss aversion” at work. People hate taking a loss even if it is sunk. Unless you are a trained investor your emotions can get the best of you.
8. “A good time to start in [the investing] business is when markets are terrible…. We wait for bad news… I love to read about losses.” A value investor likes prices to fall, especially when they have dry powder and can take advantage of the drop. A classic value investor looks at a price drop of a stock they like as a chance to buy more, whereas the ordinary investor may panic and sell.
9. “I couldn’t care less about getting zero on my cash. That’s ammunition.” Cash has optionality. Yes, that optionality has a cost which includes inflation. Especially when inflation is low and prices of stocks are high, the price of the optionality can be well worth paying.
10. “For rates of return, smaller is better. Returning excess returns at $20-$30 billion is not so easy.” The more money an investor must put to work, the harder it is to generate investing alpha. Many opportunities are small in size relative to a big fund. People only get so many investable ideas during the course of a year and some of them are not very big. Another risk is psychological since sometimes an investor will compromise their principles on a big investment just to be able to put money to work.
11. “We know it’s easy to get swept away in a growth market. But I’ve been in this business more than 25 years and I’ve watched investors figure out a way to justify incredible multiples, only to see valuations collapse back to the underlying worth of the company. The key in the business is weathering the bear markets, not outperforming the bull markets.” Value investing shines brightest when stocks are falling in price since they were purchased based on value. Value investing principles can also help you avoid the flip side of bubbles (panics).
12. “A lot of people have the brains. It is the judgment with the brains that matters, and that comes with experience and from thinking about things in the right way.” Intelligence without judgment and the right temperament won’t make someone a good investor. Intelligence can actually be a problem since the smarter you think you are, the more you may get into trouble trying to predict things that are not predictable.