In an article last year, I used a quote by Seth Klarman (Trades, Portfolio) that said investing was an "arrogant act." Having just published my 100th article here on GuruFocus, it seems to me being a writer on value investing could fall under the same definition. First, one has to assume that he or she has something valuable to add to the dialogue. Second, one must be able to package this so-called wisdom in such a way to make your points succinctly and in an engaging style. Lastly, the writing must provide readers with an interesting perspective missing in the conversation. Each of these alone is a difficult goal to meet, but achieving a blend of all three really is a leap of faith - and ego.
I bring this up because this will be my last article on GuruFocus for the foreseeable future. I have greatly enjoyed meeting you either in person at the GuruFocus conference or via the GuruFocus website. It means a great deal that so many of you would take the time to read my writing, provide feedback (good and bad!) and ask incredibly astute questions. Without a doubt, the GuruFocus community has made me a better writer and investor.
I will likely be posting new articles on Dorfman Value Investments' website. Feel free to visit to get updates and new content. I'm also in the throes of finishing a book that I hope to complete by the fall. It certainly portends to be an interesting time in both the markets and life in general.
As I look back at my writings over the past few years, I realize there has been several key themes. I thought in this last article I would summarize these.
Be ruthless in reviewing your process
All too often, you hear about investment managers who remove their losers at the end of the quarter and replace them with stocks that did well. This process is called window dressing and should be a tremendous warning for investors. If a money manager takes the time to fool his investors, it isn’t a real leap before he begins fooling himself. A money manager should spend a great deal of time reviewing his picks’ performance and the process he utilized to select them. Before I remove or add anything to the portfolio, I write a detailed investment case that includes all my assumptions, estimates and projections. Each year I review these to assist in writing my annual report. I am always surprised by what I got right, and more importantly, what I got wrong. Is it a fun exercise? Absolutely not. Is it a vital tool? You bet. Always strive to improve your process.
Never stop learning
Going hand in hand with the previous topic, never stop learning. One of my favorite stories is the Duke of Wellington’s answer to how he won at Waterloo, “Simple. They came on in the same old way, and we beat them back in the same old way.” Nothing is prone to failure so much as the oft-repeated method of victory. As a famous German general once said, “Victory achieved once brings confidence, multiple victories breed hubris. Do not fight this war using the strategy from the last war.”
The key to success on Wall Street is a hybrid approach based on a firm value strategy flexible enough to change with the times. A great example of this was Warren Buffett (Trades, Portfolio)’s acquisition of Burlington Northern Santa Fe. For decades the railroads had been a capital-intensive business with extremely low margins. The changes driven by intermodal transportation, cost cuts through increased productivity, and better use of assets created an entirely different industry in 2015 than it was in 1960. Buffet’s ability to maintain his value-based approach with a willingness to recognize changes in the railway industry led to a particularly profitable transaction.
Revel in the role of market iconoclast
Being different and challenging the major tenets of Wall Street (frequent trading, high costs, etc.) are a must for beating the markets. As Jack Bogle pointed out, “If you invest in the market through an index, your return must be the market return less costs.” Beta – in many cases – is your friend. It might mean the stock doesn’t react the way the markets do, but how else can you beat the these very same markets? In Japanese, the verb to be wrong is “chigaimasu.” Interestingly the verb also means to be different. Most certainly, to be different on Wall Street does not always mean being wrong. Take heart in the fact that many of the most successful investors have been unique in their thinking.
Patience is your greatest asset
I frequently quote the old adage that “to catch the biggest fish, you must cast the longest line.” Compounding value takes time. For those lucky enough to double their portfolio in six months, I congratulate them. For the vast majority of us, slow and steady wins the race. The ability to be patient is perhaps the hardest trait to develop as a value investor. Everything on Wall Street shrieks action. From day trading to walking sound wave Jim Cramer, Wall Street begs you to take action right now. In most cases, it isn’t you on the winning side of such a bet.
Cash: The once and future king
One thing has never changed on Wall Street – cash is still king when all else fails. The 2008 to 2011 market returns showed those with a reasonable amount of cash were prepared to take advantage of depressed prices. In some cases the wisdom to avoid the bubble bursting or the courage to invest near the market bottom made the career of investment managers. In both cases, these managers needed cold hard cash to withstand the drawdown or load up before the bull market of the past seven-plus years. As hard as it may seem, the ability to hold cash – while painful at times – generally provides investors with options essential to success.
Leverage: Working with the devil
The opposite of holding cash is the use of leverage – both on the level of your portfolio holdings (lots of short-term or long-term debt) and your portfolio itself (margin trading). Many people fail to realize that Triple Leveraged Oil Fund can drop just as spectacularly as it might move up. More importantly, margin calls generally happen at the worst of times forcing investors to sell assets at truly unfortunate prices. It’s no different for corporations. Valeant Pharmaceuticals (VRX, Financial) is a walking example of this. The fire sale of its assets forced on the company will likely impair the company’s returns for the foreseeable future.
Conclusions
I’ve found following these rules has stood me in good stead through bull and bear markets alike. Is it for everybody? Absolutely not. But if nothing else, I suggest investors focus on the first two subjects. Investing requires a solid process. Successful investing means spending the time to learn new approaches, new concepts and new industries on a daily basis.
Thank you again for taking the time to read and comment on my writings over the years. It has been a real honor to be associated with GuruFocus and all of my readers. I wish you the best in your investing future. And for a final time, I look forward to your thoughts and comments.
Disclosure: No conflicts.
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