One of our favorite investors here at The Acquirer’s Multiple is Philip Carret. Carret wrote one of the best books on investing called – A Money Mind at Ninety. There’s a great passage in the book, taken from his 1990 speech at Contrary Opinion Forum, in which he provides two valuable insights for investors. The first relates to borrowing money to buy stocks, and the second relates to how much emphasis investors should place on a company’s annual report.
Here’s an excerpt from the book:
What should a contrarian whose policy is to invest in attractive securities, regardless of his own or anyone else’s forecast of future market behavior, do now? The answer, in my judgment, is simple. The job of a security analyst, or a money manager, is to determine relative values. If security X appears to be relatively cheaper, by a wide margin, than security Y, the holder of Y should sell it and buy X.
This is far more difficult than it may at first appear. The suggested wide margin is insurance against the errors of judgment of which all of us are guilty. There is also another alternative-do nothing. More fortunes are made by sitting on good securities for years at a time than by active trading.
I well remember a luncheon with a friend who was a limited partner in a stock exchange firm. The third member of the luncheon party was an active partner of the firm. They had just been to the funeral of a friend whom they regarded highly. He had been a floor trader for his own account, had made and lost several fortunes.
When he felt confused about the market it was his practice to board the Queen Mary, stay on the ship when it reached England and return to New York. The sea breezes having blown cobwebs out of his brain, he would resume active trading. What was his fortune when he died, I inquired? “Oh, he was broke,” I was told. Personally, I have never thought it would be sensible to lose even one fortune. There is a simple way of avoiding such a catastrophe – never borrow money, at least for speculation.
One of the most astute investors I have ever known was a remarkable exemplar of long-term investing. He owned several hundred different securities, accumulated in small increments over many years. He liked to talk about his successes. One, in particular, was fascinating. In his twenties he invested $1,400 in a relatively obscure company. Over the ensuing 60 years the stock was split repeatedly, for a net result of 360 shares for each original share. At that point the $1,400 had become $2 million.
Fred at one time checked the company by talking to the management. “They seemed to know what they were doing,” he told me. That is security analysis in a nutshell. If the figures look right and the management knows what it is doing, why does one need a 40-page report?
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