Every month I will try and discuss briefly the books I read the prior month and how, as a new investor, I found the material to be.
In this review I will briefly discuss the biography of Andrew Carnegie that I read.
What I will not be doing is providing an extensive background on the book itself. You can read standard book reviews at Amazon.com or other places.
What I hope to simply do is describe as briefly as possible what I found relevant or helpful to my goal of investing.
It also should be said that I firmly agree with the likes of Buffet, Munger, & c & c., who state that they read at least five hours a day on a variety of subjects. For me I think the point is that the more data points you can obtain the more successful you might be at selecting and performing analysis of companies to invest in.
With that in mind I will try to select two books a month to review, one will be on investing, the other on some subject which might not be clearly related. Most of my selections will come from recommendations that people like Buffet and Munger have made.
This past month I read a biography of Andrew Carnegie, although this book was not the exact one recommended by Munger, the subject is. As you may be familiar with Carnegie is considered to be the first or one of the first of the “robber barons” or to put it more politely the first “corporate king.” What most people do not realize that after selling what was to become U.S. Steel (X) for which his share was about $350 million, Mr. Carnegie spent the last 15 or so years of his life giving $325 million of it away at his death. P. 538 of the book. To put that into context the book states that in today’s dollars Mr. Carnegie’s $375 million would have been well over $100,000,000,000.00.
Also after reading this book I firmly believe that Mr. Carnegie’s attitude to wealth and giving it away to benefit society as opposed to retaining it within ones family has inspired both Gates and Buffet as well as others.
Now the two most important things I learned from the book with respect to investing reaffirmed two points I had seen mentioned before.
On page 89, 104 and 143 of the book there is a description how Carnegie would create a merger deal or sell bonds and receive stock of the company in lieu of any cash payment for his services. This theme occurs often in the book. Carnegie, unlike many of his partners, never wanted to take cash payments or even overly large dividends. Rather Carnegie continually deferred any realized gain in exchange for larger positions in companies. One because he realized he could make more in the long run and because more stock meant more power. Essentially that is how Carnegie built his wealth (of course the details I have glossed over, I merely cite to the process). Carnegie at every turn simply refused to realize any capital gain and instead accumulated larger and larger stock positions as a means of obtaining future greater wealth and control.
To me this sounds exactly like what Buffet and others believe in. Buffet is often quoted as saying that he is a “buy and hold” investor as in buy and hold forever. Why because I think Buffet agrees with Carnegie, that deferring current gains for future gains is the way you achieve great wealth. Not that achieving wealth is the goal, merely a by product of creating the best business in comparison to others. Carnegie wanted to be the best business man of his time and beat all others, becoming one of the richest was merely a consequence. Buffet also is said to desire to create a lasting monument to his genius; the money is merely the result. The only way they could do this is by reinvesting into those business which they controlled.
And that is the point I learned. Over 100 hundred years ago, the great wealth of Carnegie was earned not by buying and selling but by buying and reinvesting and delaying realized profit. This is similar to what Buffet, once he finds a company he wants to own at the price he wants, he does not sell absent some change in the fundamental nature of the business. In essence, the way to grow your own business (your investment portfolio) is to resist the temptation to take a profit on an increase in price of your investments in the short term in return for the compounding which occurs over time.
The second thing from the book is that Carnegies’ partners did not share his enthusiasm for deferring profits; they wanted money now and did not share Carnegie’s vision as to reinvestment of profits. They are quoted as saying that “Carnegie never wanted to know about the profits, he just wanted to know the costs.” Page 137. Carnegie’s mother taught him at a young age that if you mind the pennies the dollars take care of themselves. P. 24.
The message here is that when investing you should not focus on how much you think the price of a stock will be in the future, that is your profit; rather you should focus on how much you pay for it. That way the profit takes care of its own. If you buy a stock based on what you think it might be worth in 5 or 10 years as opposed to buy a stock at a discount to what it is worth now, then you are deepening on too much of a profit and not on the costs. Carnegie did not worry about how much he could sell steel for; he worried how much he could make it for. Because if he could make it for less than other companies than he knew he could make a profit because if his costs was lower than any one else’s than he could sell it fro less than the other companies cost, still make money, and drive them from the field. Again this is Buffet or more likely Graham (whose book I have read but not yet reviewed) who explains often that you should purchase a good company at a discount or with a margin of safety. In essence if you find a good company that is selling for less than it is worth than you have built in a margin of safety. Even if the stock reverts to its actual value, let alone exceed it, than you have made your money on the cost and not the profit.
So as an individual investor if you are keeping your costs below that of your competitors (other stock buyers) than you will make money because you are not depending on the profit increase because you have locked in a profit. In other words if you buy something that is worth a dollar for a dollar the only way to make money is wait until you convince someone else to give you more than a dollar for what you bought. But if you buy something for less than a dollar, 10, 20, 50% less, when it is actually worth a dollar than you have already made money.
Actually there was a third thing for the book. Carnegie was credited with a mantra that goes “put all good eggs in one basket and watch that basket.” Page 114. Carnegie therefore developed a philosophy contrary to popular wisdom. How often have we heard that we should NOT put all our eggs in one basket as if that was dangerous? Over 100 years ago Carnegie is saying that the true path to unlimited success is to focus your resources into a limited amount of endeavors and then watch those investments like a hawk. This is the same thing that Buffet says as well as other, that too much diversification is a bad thing. If you research stock and it is a great company selling at a discount, why not put a great portion of your capital into it and then watch it. After all is that not what Buffet has done by having virtually all his wealth tied to BRK? Hi eggs are all in one basket which he watches like a hawk. Now this is not to say that everyone should pick just one thing to invest in, it just means that if your idea is sound than putting a lot of money in to it is not risky. The problem does not come about because you have too much money in a few investments; rather the problems come about because the analysis is not done properly before you invest.
Well that is all for now. I see that I have 2 readers. Thanks for reading. If you or anyone else has a comment or a suggestion how I can make my blog more reader friendly or interesting please do not hesitate to comment. My Ernest hope is that I can save a new investor a lot of time trying to figure out what is what.
I hope to get my first review done over the long weekend upcoming.
Tuesday, February 14, 2006
Posted by Steven at 2/14/2006 10:35:00 PM
Friday, February 10, 2006
Please see my earlier post “My First Steps” prior to reading this post.
And then…I am cruising my local Border’s like usual, looking for books about investing. I had bought this book
But like I said above I really was not excited about submitting to the mutual fund world.
But I was also not attracted by the books that say things like, “turn a $1 into (insert some large figure here)” or “time the market” & c & c. They sounded either trite or involved complicated day to day systems.
And then…I found this book
And then… as I sat there and flipped through the pages, suddenly I could see, as if a cool breeze came and blew the fog from the field of investing, how simple the answers were. Here was a book that set forth a simple philosophy of investing which I could understand (as far as the formula contained within the book, others can do a much better job than I expounding on its merits or lack thereof).
I had read somewhere that (I believe Mr. Buffet) had commented that in explaining what is generically known as “value investing” he found that people either got it or didn’t. And in that instant I got it (okay maybe it still took a little while but allow me the literary license if you will).
To help understand what I got it is necessary to understand me a bit better. I HATE paying retail or full price for anything. It is quite rare that I will spend more than $50 without doing some quick research to see if I can buy it cheaper somewhere else (I have always found it strange that the majority of people I know or the exact opposite. The less the cost the more they focus trying to save, i.e., will drive around for half hour to get gasoline for $.03 less a gallon, but when they bought the car they are driving they spend no time at all trying to find the best deal).
And then…here was a book explaining very simply that the way to invest was to buy good quality items for a discount. Now clearly I have simplified the thought process and have condensed many hours of thought into a few lines. But my point was Mr. Greenblatt’s book unlocked a thirst for information that I continue to build on as try to determine what companies I will invest in.
What I “got” is an understanding that essentially to be successful in investing you first need to a) identify great companies b) then as best as possible determine what they are truly worth and c) and buy them when they are being sold for less then they are worth. (the means to the end is not important as long as the core principles are retained see tilsonfunds.com/superinvestors.pdf
Why I was so excited was that this is how I have always lived my life. Example:
About two weeks before Christmas 05, the wife says she wants an air hockey table for the garage (I know cool wife that I have). Anyway I research them find out that the size and type I want run about $300 to $500 dollar range, more than I want to spend. About a week before x-mas my local SAM’s Club gets a bunch of table sin of good size for $348 and change, but like I said too much.
Anyway the day before x-mas the wife and I are in Sam’s Club (yes I really like that store and (WMT) too) and they got the table for $298, better but not great. Anyway the day after x-mas back in Sam’s Club (told you I liked it) and BAM!! The sign says $174 and change!!! I look at the wife, she looks and me, and we pull the trigger.
The point of the story is I figured out what I wanted (identified a company) figured out what it was selling for at different places (determined its value) and when I saw it at a price I knew to be a good value I bought it (purchased stock). That’s why I have been so excited, because successful investing only requires me to approach buying companies as I buy everything else (of course that is not to say that I don’t have a lot to learn about the abc’s as listed above).
Now since that time I have continued reading both blogs, commercial websites, books, articles, and anything else that I thought was useful. Of course that has taken a lot of my time and provided the motivation to start this blog, both to help me refine and further my knowledge and hopefully save others like me some time. In the last month I have read this book
and this one
(while I will not endeavor to provide a full book review in time I will provide readers with what I took from the material I have read as it relates to investing). There are a lot of other articles that I have read as well that I will discuss has time goes by.
So that’s about it. I will say that after looking at Mr. Greenblatt’s book, I went on Amazon.com to see the reviews, found a yahoo group listed in one of the first reviews, which led me to this wonderful blog http://www.shaidardashti.com/ which is my selection for my first review.
I could not figure out where to start my reviews so I just decided to start with the first blog I came upon which is Shai Dardashti’s. I do not have a timeline as to when I will finish my review, as I want to provide the best and informed review I can. I also will be sending my review and comments to each person prior to posting to address any comment I may have regarding how I found it to be as a new investor.
Posted by Steven at 2/10/2006 03:37:00 PM
Thursday, February 09, 2006
The best way for me to begin is to detail my first steps in beginning to invest, my decisions on why I am investing, and what I hope to accomplish (be forewarned that I will be mentioning many different websites, books, and blogs that I have encountered. At some later date I will be reviewing most if not all of them, I provide links to them merely as a reference and not has a recommendation).
In Oct/Nov of 05, after spending the last few years getting my house in order (finishing school, starting career, buying my first house, and getting married) I realized I needed to begin to plan for my future. The question therefore was “how to invest?” I quickly discovered that what I thought were investment advisors where actually simply stockbrokers who were actually just salesmen. Now that does not mean there is not value in what they are saying, but like everything in life, the more hands that touch what it is your buying the more it will cost and the less you will save.
So I thought that maybe I should research how to invest in the least expensive manner possible, i.e., reducing costs. At first, like most new persons, I turned toward mutual funds. I read about mutual funds and realized that not all funds were the same. I quickly discovered what a load/no-load fund was, what a management fee was, what a 12-b fee was, and collectively what an expense ratio is. Needles to say I discovered that some mutual funds could be quite expensive.
For my basic research of funds I relied on morningstar.com, moneycentral.msn.com, and finance.yahoo.com. I liked using the screener at Yahoo the best to screen for no load funds with low expense ratios. I found the best place for comparing a family of funds performance over time is at morningstar.com in the “funds” tab and select the “fund family data” drop down window. (For those of you who already own mutual funds a great site to visit, and one that I will review in good time, can be found at fundalarm.com).
I quickly narrowed down my choices of funds to two families, Vanguard and Dimensional Fund Advisors (DFA).
My research demonstrated that for me, the two funds represented the best ratio of cost to return benefit for a new investor as myself.
Of course as one of the largest funds vanguard.com is the best place to research vanguard funds, but most people do not really know about DFA.
DFA was started about 20-25 years ago by what I understand to be the “modern portfolio theory” (MPT) academics, i.e., the efficient market theory. Here is the homepage, dfaus.com, and the academics involved, dfaus.com/dimensional/academics. Please note that the academics involved include those who are considered the “fathers” of the MPT field of investing.
Now the thing about DFA is that they are marketed to large institutions and can only be bought by individuals through fee only financial planners certified by DFA to sell the funds. The least expensive way to invest in DFA I found was here, cardiffpark.com, the most comprehensive explanation of DFA I found here, ifa.com (not withstanding that they are selling their services this website did a pretty good job of explaining to me, someone who is very math deficient, the whole concept of the risk reward analysis. Another site that I may review in the future).
Now at this point in my story, about mid-December, I had made up my mind to go into mutual funds, but the thing that kept on nagging me and turning me of most of all about funds is that they make money no matter how good or bad the performance is.
Now I understand that there are fixed costs involved, rent supplies, administrative staff expenses, & c & c. But I did not like that the fund managers get paid not just when they do not beat the market (Dow, S&P but that they get paid even when they have negative return. Now in my business, if you don’t win you don’t get paid. I like it that way because it motivates me and I would rather have a bigger upside then a guaranteed salary, just my personality.
So it really bugs even when a fund losses money they get paid. But I just did not see, hiring a stockbroker, or spending a lot on another education. And then……
Posted by Steven at 2/09/2006 06:30:00 PM
Tuesday, February 07, 2006
I am very new to investing and have found lots of sources on the web. My hope in starting this blog is to provide a resource for other individuals new to investing to hopefully save time in looking for and/or figuring out what investing sites are right for them. To this end my goal will be to provide review of various investing websites that I have found and my opinion as to how they have helped me and to what degree. Please note that I do not have a technical or financial background to explain whether a particular website is sound in describing the investing method, I merely offer a new investors opinion as to whether the content of a website/blog provided clarity to a new investor or raised more questions left unanswered. Simply put, does what the writer have to say make sense to me and presented in a way I can understand? It is up to each individual to determine whether there is validity of what is comprehend (i.e., a blog on the merits of a ponzi or pyramid scheme may be clear and simple to understand and therefore be a good site in that respect, the validity of the material presented and whether to follow the advice given is a question left for the individual to determine).
Posted by Steven at 2/07/2006 10:23:00 AM