How Many Personal Finance Gurus Does It Take to Change a Light Bulb?

by The Graham Investor on February 10, 2014

One to tell you that you can’t just replace the one bulb because the light bulbs in your house are sucking up all your money, and you need a plan to get rid of all of them. First you need to rank all the light bulbs in order of worst to best energy efficiency. Then you get rid of them one by one, starting with the first one in your list. But before you even begin to do this, you need to make a stockpile of 1,000 candles in case of emergency. And there WILL be an emergency.

One to tell you that manually replacing light bulbs is inefficient and you need to automate the process. However, it’s not about how many light bulbs you need to change, it’s about how many you don’t buy. In order to understand this concept, you first need to stop drinking lattes because they are costing you $2000 a year that would be better invested in a system for automating light bulb replacement.

And one to ask you how much it is costing you to stay in that house with a non-functioning light bulb. How many years will it take for you to pay down that mortgage which is more than that house with the non-functioning light bulb is worth? Could you walk away from your obligation to change that light bulb and move to a smaller, cheaper house with a working light bulb instead?

Yet another to tell you, don’t buy another light bulb – what you really need to do is to think bigger – be an “investor” and a “business owner” and work towards owning an asset that will work for you, i.e. the company that makes light bulbs, with your cat as a silent partner. Then you can get all the light bulbs you need for free while making lots of money off of people who remain “employees”, every time they need to change their light bulbs.

A further one to tell you you don’t need a new light bulb to be happy. You just need to learn to live with the light bulb you currently have and feel in control of it. This means you need to keep tabs on your broken light bulbs at all times, and be sure to donate some of them to charity. Also, you must use your working light bulbs sensibly while trying not to be consumed with a desire to own more light bulbs.

Still another to tell you that what you need to do is buy 10 light bulbs, sell them to 10 people, each of which finds as many people as they can to sell light bulbs to while passing a percentage of the profit up to you, and teach them to teach these people to sell light bulbs while passing another percentage of the profit up the chain to you, ad nauseam. So, for a small initial investment in 10 light bulbs, you will be able to afford a lifetime’s supply of replacement light bulbs.

And finally the one who tells you they know of a light bulb that’s really going to take off in the next few days. You really want to buy as many of them as you can, and go in big because this opportunity is unprecedented and exclusive and the masses are not aware of it yet; so sell your house, car, grandmother…but you have to get in really quick as the opportunity will be lost within the next 2 hours.

Or, you can simply change the light bulb yourself. One needs to go on in your head first.

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Has Your Portfolio Suffered an ACL Tear?

by The Graham Investor on January 18, 2014

The nastiest injury in sports doesn’t appear to have a lot to do with investing. You probably don’t give your Anterior Cruciate Ligament much thought unless you are a football, basketball or soccer player who has just torn it – an injury that is becoming increasingly common. Rehab of an ACL tear can take months – years even – and the knee joint is rarely the same, even with ACL reconstruction. Part of the problem is that this ligament sits in the middle of the knee joint and is bathed in synovial fluid which is known to contain enzymes that prevent blood from clotting – after all, you don’t want a blood clot in the middle of your knee; it would make it impossible to bend. This makes it extremely difficult for the ACL to heal naturally. Surgical repair is possible, but is also difficult to come back from.

Now we’re actually getting to the investing analogy – how does an investor recover from a single big loss? Virtually every investor is going to encounter such a career-threatening “injury” to their portfolio eventually; one man’s 5% loss might be another man’s 50% loss – it depends on the individual and how he or she copes with it – but both may be the investing equivalent of an ACL tear. The investor might not return. Or he might return and yet not be as good as he was before at making investment decisions.

The ACL plays such a crucial part in limiting the knee’s range of movement that it is very difficult to perform without it. Studies of NFL players who experienced ACL tears show that a fifth did not return, and those who did were as much as a third less effective, statistically speaking, as before. ACL rehab is not so much as rehabilitation of the knee as it is about re-education of the muscles around the knee to get them to contract and relax in time with the knee’s movements and prevent over-extension in planes of motion that were previously restricted by an intact ACL. It’s also about overcoming the psychological scars – learning to trust your knee joint again and expunge any lingering doubts that you can function at the same (or greater) level.

How to you recover from a potentially career-ending injury and come back better than before? You analyze what went wrong (bad movement), fix the problem it caused (repair/rehab), and avoid making the same mistake again. The latter is not difficult. The real difficulty lies in actually having the nous to publicly accept your mistakes and analyze them. Most people prefer talking about their successes; it is very difficult to get them to talk about their failures in public.

Talking about their failures is exactly what some of the greatest value investors do. Both Mohnish Pabrai and Guy Spier have made a point of talking more in their annual meetings about the bad investments they made – the stocks that turned out to be total dogs – rather than about the ones that made millions. What they are actually doing, it seems to me, is thinking out loud and analyzing why the investment went wrong. They do this in order to refine their investing checklists for next time. Neither is going to rely on a mental checklist to pick stocks; there are simply too many factors to remember every time.

Atul Gawande, in his book “The Checklist Manifesto”, writes entertainingly about his work on hospital operating theater checklists and how they have saved many lives. He also writes about the origin of aviation checklists and how they have similarly saved lives by preventing accidents. How many of us would undergo major surgery or fly on airplanes nowadays if we knew the surgeons or pilots were not using checklists? Probably not many. Yet many people pick stocks on a whim and, when they lose money, put it down to the market misbehaving rather than any fault on their part. Yes it is quite possible they do have a sound, comprehensive mental checklist from years of investing. But perhaps they missed a step or two? Perhaps they need to add more steps? This can only be done by refining the checklist which, in turn, can only be done by a thorough analysis of the losers. There’s a pattern here.

True, investing is not the same life or death activity as performing brain surgery or flying an airliner. But consider this, neither Pabrai nor Spier have many losers. In fact it has become increasingly rare for Pabrai to lose money on an investment due to an adherence to continuous refinement of his checklist.

Here are a couple of places to start if you’re interested in creating and using an investing checklist:

David Parmenter has a nice Buffett-style checklist here.

Michael Shearn’s book “The Investment Checklist: The Art of In-Depth Research” has a very comprehensive list near the end.

The Checklist Manifesto: How to Get Things Right” by Atul Gawande

How the Pilot’s Checklist Came About

“Discipline is hard – harder than trustworthiness or skill and perhaps even than selflessness.We are by nature flawed and inconstant creatures. … We are not built for discipline. We are built for novelty and excitement, not for careful attention to detail. Discipline is something we have to work at.”                  — Atul Gawande, “The Checklist Manifesto”

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How Good an Interpreter Are You?

January 3, 2014

“The text has disappeared under the interpretation.” ― Friedrich Nietzsche, Beyond Good or Evil In 1956, Soviet leader, Nikita Khrushchev was alleged to have said “We will bury you!” at a reception in the Kremlin for Western diplomats – the attendant Press corps jumped on this quote and made it appear a lot more menacing […]

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What Are Stocks From Past Screens Doing Now?

November 7, 2013

What are stocks from the NCAV screen of a few years back trading at now? Luckily The Graham Investor keeps copies of weekly screens and can look at the “TGI Wayback Machine” in order to see how various ideas panned out. We also so many emails from people asking about historical performance of the screen […]

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Book Review: The Manual of Ideas – John Mihaljevic

November 5, 2013

The Manual Of Ideas: The Proven Framework For Finding The Best Value Investments. John Mihaljevic. Wiley, 2013. Many books have been written on Value Investing over the years since Benjamin Graham’s Security Analysis was first published. Most have been rather specific, detailing well-defined methods of actual stock valuation. Some detail a single such method (Greenblatt: […]

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A Calendar, a Calendar! Look in the Almanac

October 21, 2013

“A calendar, a calendar! look in the almanac; find out moonshine, find out moonshine” – Shakespeare: A Midsummer Night’s Dream Calendar based Investing can be extremely profitable with the correct approach. Moonshine it is not, although the Shakespearean character named Bottom was actually referring to moonlit nights. There are a number of well-known calendar investing […]

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John Maynard Keynes — Value Investor Extraordinaire

October 6, 2013

Most people are aware of the British economist John Maynard Keynes from his extensive contribution to macroeconomic theory and business cycles that have resulted in a school of thought known as “Keynesian economics”.  Keynes’ magnum opus is his 1936 book – “The General Theory of Employment, Interest, and Money” – a 472 page treatise that […]

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Eliminating the Chinese Reverse Mergers

May 13, 2013

Several people have asked me about the proliferation of Chinese Reverse Mergers (or Reverse Takeovers) appearing on the NCAV screens. For those not in the know, these are Chinese companies that have found their way onto the US Markets – mainly the OTC, but sometimes the Nasdaq – somewhat surreptitiously, by performing a reverse merger […]

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LULU’s Lemons – Seeing Through the Product Recalls.

May 3, 2013

In March, Lululemon Athletica recalled 17 per cent of its stretchy black yoga pants made from a fabric called “Luon” because they were apparently too revealing in certain yoga poses. The recall was expected to cost LULU up to $60 million. From the date of the announcement in mid-March to the end of March, the stock […]

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Interview With Mr Market

October 3, 2011

Exclusive! The Graham Investor has staged an amazing interview with Mr Market. Never before has anyone managed to interview this elusive fellow. The interview gives us a new insight into what goes on in the mind of one of the most enigmatic figures of history. Still going strong, and still beguiling investors, traders, and journalists, […]

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