Investors I Respect

Work, Careers and Money
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In another thread we discussed Warren Buffett. While some felt that he mightn’t belong among the “most admirable people”, most agreed he was a great investor/businessman. Are there any other investors you regard well?

I find that some of the most thoughtful business/market commentary comes from good investors. Some of them write quite entertainingly as well. I make it a point to read their reports even though I do not invest with them all. Here is my list:

  1. Buffett: Ofcourse, this goes without saying. He’s a very interesting writer and speaker. His old annual reports are a more worthwhile read than many modern finance textbooks.
  2. Munger: Buffett’s “partner” is also eminently sensible.Check out the annual reports to the part of Berkshire that he manages independently.
  3. Marty Whitman: Known as the “vulture” because a big chunk of his investment is in troubling firms. He runs Third Avenue Funds.
  4. Bill Gross: The so called “bond king” who manages billions for PIMCO. His monthly “outlook” reports are usually lots of fun.
  5. Bill Miller, at the Legg Mason “value fund” is an interesting read. (Only the value fund, the rest are run by others.)
  6. Then, there are other fund managers who write well, but intermittently. Sometimes their reports are simply the facts, at other times they’re more interesting. Examples are: folks at the Clipper Fund, the Weitz Fund, Longleaf Partners, Dodge and Cox .

Any similar market commentary that you can recommend and that is easily available on the web?

Notice: I own some of the stocks/funds mentioned, but this is not a recommendation to invest… only to read. Also, this recommendation does not mean these people are philosophically top-notch. One might even disagree with some of their views on economics and business; however, they are usually thought-provoking.

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Oh yes, other than good investors, there’s another set of free stuff that’s worth a read: annual reports. (Don’t laugh.)

You don’t have to be an accounting major to enjoy an annual report, you just have to love a good story and be interested in how businesses work. If you don’t like the accounting, stop after you read the CEO’s letter. The most interesting way to do this is to take (say) three years of reports and treat them like a story with three chapters.

Read the oldest one first. The CEO will usually explain the business, tell you what went wrong and what went right; what they’re fixing and what they’re planning to do even better. Then, read the one from the next year. See what worked and what didn’t. See what the CEO is saying now. Try to guess if he’s rationalizing a failure. See if his new plan makes sense or if it appears to be action for action’s sake. Then go on to the latest year and see if you guessed right.

It’s like a Potter book where you will be waiting for next year’s sequel.

If this sounds really weird, I’ll just climb back into my nerdy nest. <_< . Otherwise, to get started go here… get the hardcopies mailed to you.

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Are you a hardcore investor?

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“Hardcore” cropping up again? <_<

But, no, I’m not. I mostly invest in mutual funds. Capitalism (division of labor): find people I can trust and let them do their job. I know enough to decide on whom to trust as a doctor or as an investor. I cannot hope to be as good as these folks I trust when it comes to a field where they are the experts. For instance, many of the funds I invest in have a few people at the fund doing research. Yet, in a quarter they might invest in less than 10 new companies. They read a lot. They often meet management. They often meet suppliers or customers or competitors. They’re the hardcore investors, not me.

On the other hand, I find it all really interesting, but more in hobbyist’s way – that’s why I described it as a process similar to reading a story. To me, reading about a business is interesting the way reading about ancient history might be interesting.

5

Hardcore is everywhere, man.

How much startup money is needed for these types of services, typically? And, if you don’t mind, how much do you pay for your services?

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I use mutual funds. Basically, the people who run these firms take a percentage per year as their fee. Depending on the fund, they might charge a percentage to get in (like a joining fee) and/or they may charge a percentage to withdraw. Here’s a page (link) by the SEC that describes the types of fees one may encounter.

To me, personally, there are two things that are important:

  1. Extremely long-term net (i.e. net after fees) performance. By long term, I mean 10 years at least. If the fund has not done better than one of the common indexes (e.g. S&P500) over a long period, then it’s of not interest to me. If it has done well only because it had one great year which affected the overall 10-year average a lot, I’m suspicious.
  2. The philosophy of the fund manager. It needs to make some sense to me, else I’m staying out. So, if someone has a great 15 year record and they say something about making money on derivatives etc. or anything else that I do not understand, I’d stay away.

As to how much is needed to get in… it varies. Of the funds I listed, they have varying rules for what is the minimum they will take. If memory serves me, Clipper has a $2000 minimum and the others are all higher (at varying points).

Note that this is long-term investment I’m speaking of. If one needs a certain amount in (say) 3 years as a down payment for a house etc., that’s different.

I wish Scott was around (just because he’s on honey moon, does that mean he doesn’t log in here! hmph!! <_< ) … I’m sure he could give more detailed advice.

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I admire the investment philosophy and practice over at Tweedy Browne. Fortunately for me, I got into their global fund before it closed to new investors.

I admired the style of the now retired John Templeton in regards to emerging markets investing, but am not sure the firm with his name still adheres fully to his style. John Templeton however is a very negative influence on philosophy generally, given his foundation’s attempts to destroy science by infiltrating it with religion.

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It’s amazing that you mention TweedyBrowne: because, that was the one name on my list that I did not make public in the post above. My hestitancy is that despite their great philosophy, their American fund has not done significantly the S&P500 over 5 and 10 years. I just checked and see that their Global Fund does significantly better than the relevant benchmark.

The other comment I’d make is that thought I listed Bill Gross, I see him more as the devil’s advocate when the equity guys are predicting great times to come.

Andrew, do you use the MotleyFool boards? It’s has been a couple of years since I did, and I was wondering if they’re good these days.

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Just a quick update to say that the founder (and two others) from the Clipper Fund mentioned above have resigned their jobs.

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I wish Scott was around (just because he’s on honey moon, does that mean he doesn’t log in here! hmph!! :slight_smile: ) … I’m sure he could give more detailed advice.

Ok, I was able to view the site on my honeymoon but needless to say I had other things on my mind than posting. :dough:

I’ll post an intelligent answer as soon as I get a chance. I’m actually limited to what I can say due to contractual and regulatory means.

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There are a few ways to start investing. 1) going through a mutual fund 2)investing in individual securities through a discount stockbroker 3) hiring a professional financial advisor

  1. This is actually the cheapest and easiest way to start. Some mutual fund companies will allow you to ivest as little as $25 every other week in one of their funds. With mutual funds, you are pooling your funds with other investors and are allowing a manager or team of managers to manager the funds for you. It allows you to spread your funds across numerous stocks at once that you normally wouldn’t be able to do. Also, if you pick a good fund manager they are applying their expertise to pick stocks in particular fields you may not have a great deal of knowledge like biotech stocks or bonds, etc. The downside is your money is generally locked in with a certain fund company and you are limited to exchanging between the funds of a specific company.

You can also do the same thing and buy treasury bonds directly from the government through the Treasury Direct program. You get more stability but you give up A LOT of returns.

  1. This is what I do. I work for Scottrade and we do stock trades for a flat rate of $7 and you can pick up many mutual funds for no additional cost other than what the fund company charges. Downside to picking individual stocks is you are tying your cart to one ox and your success or failure is tied to that company. Ideally, you should diversify across a spectrum of companies to help spread your risk. True discount stockbrokers are really like hired guns that will help you place trades, expalin problems, fix things etc. The firms will generally provide you with better or at least different research than you’d be able to find on your own searching the internet. Also, you have the ability to switch your funds between investments more easily. The downside is the onus is on you to do the research, and make the hard choices.

In my experience, the individual investor is actually pretty good at picking when to buy stocks but run into trouble knowing when to sell.

  1. Hiring a financial advisor has benefits and risks as well. Generally, they take a percentage of your money each year in the form of fees or charge hefty commissions on trades. This is done in exchange for their expertise in knowing when to buy and sell as well as what to buy and sell. A good advisor can also help you with complicated things like estate planning, tax issues, etc. A good advisor is literally worth their weight in gold but a bad one will cost you quite a bit.

One of the best ways to invest is one that most people completely ignore is their 401ks. In general, most people think of it last when they do planning. If you stick say 12% of your pay into your 410k and just stuck it in cash or a money market, most companies with match 1/2 of that and put in 6%. This is done on a pretax basis and you end up paying less in taxes but have an effective yield of 50% given the companies match. Downside is your are usually very limited in your choices of what funds to buy. Also, as seen with oh so many companies will by default stick the money in your company stock. As long as the company does well you’re ok. Problem is you are absolutely putting your eggs in one basket and if the company fails you not only loose your investment but also your job.

So back to my point: the hard part is picking what to invest. When it comes to stocks, Standard and Poors provides decent advice. Yes, they are occasionally very wrong but they are one of the only companies that aren’t compensated by the companies they research. They go out and do the research then sell the research to brokerage firms. Most any brokerage offers their reports, especially discount brokerages. Many companies provide their own reasearch but will frequently profit from whether you buy the stocks they recomend. So their may be a conflict of interest. But that is still up to the individual investor to decide if the firm or advisor they are dealing with is free of those conflicts.

S&P offers model portfolio recomendations that give investors ideas of where to look. When it comes to mutual funds, companies like Morningstar and S&P provide the same reasearch for funds. They analyze the managers and the mix of stocks in their portfolios. One of the hard things with mutual funds is they can and do change management. So you may buy a fund that is a well run fund that invests in a balanced portfolio of stocks, bonds, cash, and gold that may drift into something entirely different under a new manager. Again, this is a case of the investor having to pay attention to what they buy.

Ideally, if you hire a manager they will do this part for you and will buy and sell for you. Again, this is a bit of a crap shoot and doing research is your friend.

Personally, I have admired men like Bill Gross, Warren Buffet, and Bill Miller. Again, there are also companies like American Funds that use a team approach to management and don’t use young managers. This is something most people overlook. Some fund companies cycle their fund managers in and out on a regular basis. The theory is this provides new blood and fresh perspectives but what they ignore is it takes years to really get a good grasp on a market. Also, when it comes to choosing a broker/advisor/etc, it can be hard to find someone that has been doing it for a while.

The average length of employment as a stockbroker is around 2 years if I remember correctly. It’s a very hard job and tends to eat people up. One really good way to check up on your broker is to do a search here at the NASD’s site. All brokers and people selling investments including variable annuities are required to be licensed. The site links any potential issues like accusations of theft, bankruptcy, etc of your brokers. It is a far from perfect system that will occasionally have wrong information but it will be a good place for you to start a discussion with your broker.

Disclosure: I am a broker and as I mention I work for Scottrade. I am not compensated on commissions or sales. I’m actually salaried. However, there are a large number of firms that you can choose from and to be honest, their is no one firm that fits everyone’s needs. Again, do your research, ask questions. I specifically don’t recomend any investments as my role now is really as a trader and do a great deal of customer service and support. I don’t “pick” stocks or funds professionally any more and some of the managers I mention have made some real bad picks in the past.

The Motley Fool forums aren’t a bad place to look but any chat rooms or bulletin board has to be taken with a VERY big grain of salt. And I will say it one more time: caveat emptor.

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Another interesting investor I came across recently is Robert L. Rodriguez. In this speech (link) at Wharton, he speaks of how he developed as an investor. Check it out and you’ll see what I meant by this being interesting stuff – rationality rules!

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There are two things I forgot in my post regarding cost. The minimum investments with discount brokers ranges from an initial deposit of $500 to open an account to $50,000 to avoid expensive “service fees.” Full service brokers and advisors can start at having a minimum of $50,000 to $1,000,000+.

Also, there were two people I completely forgot to mention. One is Yaron Brook who has a good course available at the AynRandBookstore.com site. The other is John Hoenig who is the hedge fund manager at capitalistpig.com. He is a frequent contributor to investment shows and while I don’t agree with him on some matters, like a one size fits all trading style, I do like him. And he is an Objectivist as well. His book is not bad at all but is a bit dated. Though I believe he’s coming up with a new one that if I read the review correctly should really shatter alot of the assumptions in the marketplace or at least attempt to.

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I wonder if you have read either of Victor Sperandeo’s books. His book was full of Ayn Rand quotes and themes. Other than that though, it was about trading commodities, etc. etc. and I didn’t get much out of it.

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Scott - can you answer a question I’ve had for awhile? Is it possible to trade, perhaps actively, in a tax-free retirement account, so that one would not need to go through the hassle of accounting for each trade for tax purposes? I understand that there’s penalties for withdrawing from such an account, but I’m focusing just on the aspect of trading within that account. If it is possible, are there regulations/limits on such trading, differentiated from what one could do in a regular account?

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Scott - can you answer a question I’ve had for awhile? Is it possible to trade, perhaps actively, in a tax-free retirement account, so that one would not need to go through the hassle of accounting for each trade for tax purposes? I understand that there’s penalties for withdrawing from such an account, but I’m focusing just on the aspect of trading within that account. If it is possible, are there regulations/limits on such trading, differentiated from what one could do in a regular account?

Yes, you can trade actively in an account like an IRA. First, there are different kinds of IRA’s. The kind most people are aware of is the one you get at your bank. It 9 times out of 10 a CD that locks your money at at a certain rate for a certain time. Those you can’t trade since it’s locked in. What I am talking about is a brokerage IRA. It’s simply a brokerage account that is coded as an IRA and is forced to follow some rules.

In fact, it is possible in theory to daytrade in an IRA but there are some problems. There are IRS & industry rules that are specifically meant to keep people from trading to much in an IRA using the assumption the old adage “traders loose” is correct. IRA’s are forced to be maintained as “cash” accounts that follow strict rules of settlement. Basically, when you sell something, your money is not available for use to purchase something else for 3 business days after the trade date. It’s called T+3. (Non-IRA accounts can trade with margin to sidestep that rule but that is something else entirely) There is a backdoor way around the rule but even then most places have shut that down.

The main thing that prevents people from trading actively in an IRA is you are limited to what you can put in. This year you are limited to putting in $4000 unless you are over 50 then you can put in an extra $500. That is not alot to trade with. If you figure you but 200 shares of a $20 stock, then you are able to do 1 trade every 4 days. So that isn’t to active. You can however roll over a 401k plan from a former employer into an IRA and if you worked there for a while and you did the smart thing and save everything you can in it. That will give you a chunk of money to trade with and give you some freedom.

The benefits of doing that are you do not have to pay taxes on capital gains or dividends. So instead of losing between 28% & 50% of your gains thanks to taxes. Compounded over time the differences are astounding. That is why I mentioned maxing out your 401k. Another big downside to trading actively in an IRA is your losses can not be written off. So if you loose money in your regular brokerage account you will be able to write some of your losses off but in an IRA the money is gone.

So yes, you can trade in an IRA but not as actively as in a regular account. Yes it saves a great deal of time not having to fill out a Schedule D. Though you have to weigh that versus the amount you can contribute and the opportunity cost of not being able to invest as freely as you want.

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Thanks very much for taking the time to answer, I found your answers useful.

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Thanks very much for taking the time to answer, I found your answers useful.

You’re very welcome. It really is rare that even customers say a simple thanks for advice.

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A colleague of an acquaintance trades in stocks uses a program that apparently “does most of the work for him” (I’m quoting my acquaintance) He picks stocks and the software apparently tells him if he should buy sell or hold. A couple of question about this:

Do programmes like this work?

Is it recommended for newbies to trading?

Am I better off doing something else?

I want to start investing and I have a little bit of capital to play with.

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A colleague of an acquaintance trades in stocks uses a program that apparently “does most of the work for him” (I’m quoting my acquaintance) He picks stocks and the software apparently tells him if he should buy sell or hold. A couple of question about this:

Do programmes like this work?

No. At least I’ve never heard of one that really works. I always ask this:If the program makes trading succesfully that easy, why are the programmers wasting their time selling software and not just trading full time? I’ve seen so many of these come and go. What should be a warning is the sales tactics they use. Generally, they advertise on late night infomercials between the Tony Little exercise machines and Carlton Sheets welfare to millionaire in real estate with no money down. Then they get you to come to a free seminar. The seminar then sells you the software at a relatively decent cost. What gets you is the fees related to the data feeds and constant “upgrades”. Sorry but none of them have ever really passed the smell test.

Is it recommended for newbies to trading?

No. But then people that I have seen that are succesful traders over the long run don’t use simple software. Most have relatively expensive systems that are really just versions of institutional trading platforms. They are very very expensive. That is a total of about 3 people in 11 years. I’ve had quite a few investors that did well however.

Am I better off doing something else?

I want to start investing and I have a little bit of capital to play with.

I always tell people get the basics down first. Instead of trying to trade, start with investing. Once you get that down then start trading. Most people don’t realize trading and investing are really two different things. Investing really implies doing your research on a company, buying it with expectation of gains, setting buy and most important sell points, and then making your investment.

Trading generally is buying on a hunch or listening to the “sizzle” on a stock or watching a point on a chart and expecting past performance to match the future with anticipation of unloading it quickly for a good profit. I’ve seen some people trade like mad dogs and make a killing. I’ve seen them do that for up to a year. But generally they self destruct. Trading is really more akin to gambling. There are a gazillion “proven” systems for winning at poker or craps etc. But, Las Vegas is built on the bones of people with “proven” systems. Sure, there are occasionally people who make a killing but the difference is they generally got out at some point. That or the inefficiency in the system they were exploiting gets closed to them.

A good place to start is to listen to Yaron Brook’s talk about investing. Or, another book alot of people have said they liked was The Motley Fool Guide to Investing. I like the Motley Fool guys even if they do endorse my competition. ha ha. Their show on NPR is a pretty decent source for intelligent, no nonsense advice.