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How to Become a Full-Time Value Investor - Rule Number 0

June 06, 2012 | About:

Investors can learn a lot by listening to Warren Buffett. I think they can learn even more by listening closely to Charles Munger. Unless Munger has something to add, he literally says “I have nothing to add.” If he does say something, you can assume it's worthwhile.

Rule number 1 - Buffett

Rule number one is, “Don’t lose money.”

Rule number two is, “Don’t forget rule number one.”

I must admit that I have always found this rule particularly uninspiring.

Yes, I understand the concept of “margin of safety.” I also know there’s nowhere to hide. There's risk in holding cash, bonds, gold, commodities and/or stocks. For me, stocks are easier to analyze. I prefer them to the alternatives. American stocks in particular are potentially less risky. There's more publicly available information about U.S. stocks than about any other asset class on the planet.

Thanks to the SEC, we know there are profitable companies out there that have more cash in the bank (after deducting all liabilities) than the stock sells for. That's as safe as it gets.

And then a tsunami comes along, 9/11 happens, Chavez or Kirchner nationalize something and/or management, aided by well-paid accountants, lies about the true state of the company.

Such events are somewhat unknowable and wholly unpredictable. More importantly, they can cause you to lose money regardless of your margin of safety.

That is why I find rule number one so uninspiring. There are many reasons investors lose money. Some of those reasons are within their control. “Don’t lose money” applies to the outcome. At best, the thoughtful investor is able to control the process.

Rule number 0 - Munger

Mozart became the most famous composer in the world but was utterly miserable most of the time, and one of the reasons was because he always overspent his income. If Mozart can’t get by with this kind of asinine conduct, I don’t think you should try.

Since I heard that, I have been taking it very seriously. I am now not spending 25% of my after-tax income. As Munger would say, I avoid a lot of dumb stuff by sitting on my hands. My friends and family haven’t noticed any lifestyle changes. They may or may not have noticed I smoke two cigars a month instead of two a week. I use my bike more often. My wife noticed our phones now accept inbound calls while she is calling outbound (Voipbuster/SIP). It's amazing how much money you can not spend without anyone noticing.

In any case, next time you scoff at a company with a single-digit net margin, think of your own personal “net margin.” How much cash do you have left in the bank after taking care of your expenses ?

Why is this important in the context of value investing?

1) As a consistent net buyer of stocks, you will be glad to see stock prices go down. You have a steady stream of excess cash to deploy. It gets easier, emotionally, to be bullish when others are fearful.

2) You can reduce your portfolio turnover. You don’t have to sell something to buy something else.

3) With 25% “net margin” and an assumed 8% rate of return, you can reasonably expect your personal portfolio to be worth about 20 times your annual cost of living within your lifetime.


4) You have instantly become a full-time value investor. When you're busy not spending money, you are accumulating wealth. On the rare occasions that you are spending, you will be more aware of the price you are paying and what you are getting in return.


5) You reduce risk on all levels. Should your income take a hit, you have lower costs and you will have saved up more. Also, if you make a serious investment mistake (rule number 1), you live to invest another day.

In short, underspend your income. Become a full-time value investor today.

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About the author:

I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. I can be reached at batbeer AT hotmail DOT com

Visit batbeer2's Website

Rating: 4.1/5 (69 votes)


Cornelius Chan
Cornelius Chan - 5 years ago    Report SPAM
Very well put.
Batbeer2 premium member - 5 years ago
@ C.W.R.


Cdubey - 5 years ago    Report SPAM
Currently I save 54% of my income after taxes. I realized a long time back that more than saving, it is about learning to live within 50% of your income. Even with no return on your investment in the next 20 years, you will have enough saved that 5% return afterwards will give you 50% of your annual income ! The number comes down quite fast if your investment returns, say 10% a year ...

I do not have a kid yet ... I don't think I will be able to keep up with this rate after she is born.

But one should not concentrate so much on saving that it becomes painful. After all, you get this life only once. It will be sad if you look back in your life and realize that you did nothing except save and invest money.

In conclusion, a good set of rules to live by.
AlbertaSunwapta - 5 years ago    Report SPAM
Great article!!!

It reminded me of my long forgotten letter to the Canadian MoneySaver newsletter where I argued that a penny saved is more than a penny earned. Advice from a twenty something.

However, starting out as a heavy saver I slowly abandoned my own advice over the years, now preferring to take a save a bit spend a bit approach to living. Moreover, I've taken the attitude that I'm not going to work at a job past the point of enjoying it. Worse, too many people continue to work at jobs they don't like by convincing themselves that there is a pot of gold at the end of the rainbow, that with pain now there will ultimately be gain. Well, they might drop dead or become infirm shortly after retirement. Gambling on perfect health in retirement is foolishness. It's a depressive-manic approach to life. Like saying I don't suffer fools lightly, but I gladly suffer myself as the fool.

So as with my save a bit spend a bit philosophy, I've added a work a bit (actually a hell of a lot), but break a bit philosophy. In fact over a year ago I gave a month's notice, quit my job, gave up on pensionable service, left without severance because I'm getting wiser with age. My advice is to save enough to take breaks throughout your career, bring forward some of your "retirement" years into your younger years and then plan to work later in life as compensation. Just as with investing, diversifying deals with uncertain, unknowable risks. The same advice should apply to your life and work and your personal time-line on this earth. Your time remaining may be very limited, it's unknowable, so is it intelligent investing to burn up your time working on the hope of enjoying some time later? Instead think of the practices that create free cash flow and then figure out what practices you need to follow to create free time flow. (Out of university I worked two full time jobs. The intrinsically smart ones took a year off to travel the world. I was a slow learner.) Mozart died at 35. Seems that he not only overspent his money, he over-worked his time.

So now I am ready to go back to work and dream of finding a socially valuable job that will keep me and my family happy well into my 70s and 80s - with some more breaks along the way, maybe even time to enjoy some Mozart.
Kfh227 - 5 years ago    Report SPAM
Arm chair value investors have read everything on Buffett. Real value investors have also read everything Munger has said..
Jean-Francois Nobert
Jean-Francois Nobert - 5 years ago    Report SPAM

good article
Benethridge - 5 years ago    Report SPAM
Well said. Great article!
Superguru - 5 years ago    Report SPAM
Saving is very good, exception is when you spend on something that saves time that you can use to earn much more. If you get help for $20 per hour and earn $100 per hour in that hour, that is money well spent.

or think of self as business, you need to spend to earn more money.
Richard.danu - 5 years ago    Report SPAM
Before there is a portfolio to manage and grow, there must be a budget for the house. Rule 1 is good, so is rule 2 BUT -- what if you buy and everything is turning sour grapes and you cash out at -10% (remember rule 1?) , eventhough indicators say "buy, buy, buy"... Does anyone have any strategy to manage that?

Batbeer2 premium member - 5 years ago
>> Does anyone have any strategy to manage that?

Yes. Underspend your income.
Praveen Chawla
Praveen Chawla premium member - 5 years ago
With saving money (underspending your income) you are also building a "margin of safety". My own retirement strategy is built around the strategy that I should accumulate 4X of what I (and my wife) need minimally.

It things remain within the flight trajectory - then we will have plenty to spend on luxuries and help others. If not - we have a margin of safety.
Ry.zamora - 5 years ago    Report SPAM
Unspoken lessons here:

1. Don't be a total spendthrift! (like me!! *laughs*)

2. "You" are also an investment. Not in terms of saving money, but in terms of clothes and appearance.

3. Moderation is key. :D

BTW batbeer, nice article.
Forexnutca - 5 years ago    Report SPAM
I highly recommend Quicken Home and Business (I'm not a intuit shareholder)....I can look at my household like I look at a businesses. I always ask myself, if I would invest in this company when I look at my CAGR on my networth. Regardless of the ups and downs of the stock market, I'm able to grow at 20% annually with a meager .33 debt to equity ratio. My wife and I are in the habit of entering all our receipts from all our "capex" and living costs.
AlbertaSunwapta - 5 years ago    Report SPAM
Foxexnutca, that's interesting. All I do is try to be opportunistic and upgrade during recessions.

Here's my thinking/process:

e.g.. I upgraded all the asphalt shingles and replaced all windows with triple pane in the mid 1990s when oil was very low and the local economy was in a near state of depression. My expectation was that when oil prices recovered all oil based and energy intensive products would spike upwards.

We also bought most of furniture at 50% - 60% off. (Ethan Allen cherry, etc.). It replaced plastic lawn furniture in the kitchen etc.

Since the local construction market was still slow here in the early 2000s, we renovated the main floor and second floor (probably for far less than half the price of even 5 yrs later).

In 2009 all cash went into the stock market.

Last year it the basement was due for a redo but but the economy here is very strong so I did much of it myself. (Under $20,000 vs $40 - 70,000 quoted.) Moreover, from the local Ethan Allen that was about to move, I managed to get about $7,000 in replacement value cherry kitchen cabinets for $500. Looks fine in a storage room.

NOTE: I envy many Americans right now. If I were living in the US now I'd be going crazy trying to upgrade my standard of living ASAP, BEFORE a market recovery. What a wonderful opportunity! We have two older cottages and a number of outbuildings that need a LOT of work.

PS Kfhh227. I've read everything Munger and Graham has written (and much of what they've said in transcribed and recorded speeches. I've read Galbraith, Fisher, and loads of other writings. (I have bookshelves overflowing with investment books. Crazy libraries sometimes even gave away low circulation investing books for $1.00!!!

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