The secret behind great investments is `gutsy moves'

The masters don’t gamble. “They invest deliberately and purposefully, and they outperform the average investor as a result.”

Markets have been going down and up. If that makes you feel queasy, here is help. “You can achieve success in the stock market if you follow a set of well-defined investment principles and refuse to abandon them when the market acts irrationally,” assures Scott Kays in 5 Key Lessons from Top Money Managers, from Wiley.

First check if you belong to the majority in the world of investment that comprises those who want hot stock tips. “Unwilling to learn the rudiments of investing, they invest in companies because `they’ve been going up.’ The thrill of the action is as important to them as the profits they make.” To them, investing is not about maximising the returns over time.
The minority are the few who study the art of investing “in a constant effort to increase their knowledge and improve their skills.” Kays points out that these people take time to learn what matters when buying the stocks. “They don’t gamble; they invest deliberately and purposefully, and they outperform the average investor as a result.”
Chapter 1, titled `The return of common sense’, reminds us that many complex investment strategies only veer investors away from the crux. “What kind of pattern is the stock’s price chart forming? What was the stock’s relative strength last week? The masters classify these questions as irrelevant distractions.”
More right than wrong
Great investments are about `gutsy moves,’ requiring the execution of the fundamentals, using `straightforward methodologies,’ even as lesser mortals look for `something flashy, something unusual, to give them an edge.’ The difference is simple: “The naïve talk of what should do well over the next few weeks; the masters consider the long term.”
The author devotes a chapter each to five top money managers, beginning with Andy Stephens of Artisan Mid-Cap Fund. The art of portfolio management, the way Stephens does it, is to be right more than being wrong ? at least to be right in a bigger way. “It’s a trade-off between capitalising on opportunities and protecting my downside if I make a mistake,” he says.
Structural competitive advantage that he seeks in enterprises has four components, viz. dominant market share, proprietary asset, lowest cost structure, and defensible brand. “Firms that possess two or more of these advantages will likely perform in the upper quartiles of their industries. Because their cash flow is safeguarded, investors can value these firms with a higher level of confidence.”
Lessons from mother
Next expert is Bill Nygren of Oakmark Select Fund, who learnt all about investing from his mother. She kept the family on a strict budget, he remembers. “A true value shopper, she visited three supermarkets each week, checking out the specials they were each running… If an item was fully priced, she bought less of it or passed on it completely.”
Kays notes that buying quality, undervalued-companies gets you only halfway to a successful investment experience. “Knowing when to sell a security is just as important. Fortunes have been lost because investors have tried to squeeze every penny out of winning situations and held on to positions long after they should have gotten rid of them.”
Sell a company when its price reaches 90 per cent of its fair valuation, Nygren advises. “Liquidate a position when a company fails to perform fundamentally as you expected. If you realise you made a mistake, the sooner you admit it and deal with it, the more likely you will minimise its impact on your performance,” are further insights of immense value.
No lottery tickets
The third expert that Kays introduces you to is Christopher C. Davis of Selected American Shares. The foundational principle he adopts to select securities is, “Stocks are not pieces of paper like lottery tickets, but they represent ownership interests in real businesses.” Once you accept that, answer the following two questions: “What kind of businesses do you want to own? And, how much should you pay for them?”
According to Davis, “Businesses that grow their values at above average rates for long periods of time make the best investments.” His three criteria of superior businesses are: Financial strength (as evidenced by a strong balance sheet and high returns on invested capital), competitive advantages (such as brands, patents and economies of scale), and shareholder-oriented management (with a strategic vision and a realistic plan).
To assess the last criterion, that is, shareholder orientation, Davis digs deep to understand `the thought process and logic’ of the company managers’ capital allocation decisions. “Before he invests in a company, he ensures that managers have a strong understanding of their cost of capital and the return they expect to achieve on investments.”
Compound mystery
Bill Fries of Thornburg Value Fund, the fourth expert you encounter in the book, recounts how his eighth-grade teacher unlocked the mystery of compound interest, and sparked his interest in saving and earning money on money!
What is his investment technique? He divides his portfolio into three types, viz. basic value, consistent earners, and emerging franchisees. Fundamental research
that he uses filters out for promise and discount. “A cheap stock can remain cheap indefinitely,” he cautions. Identifying cheap stocks is easy; what’s tough is “finding companies that can achieve a healthier than generally expected future.”
Two core philosophies
The fifth expert is John Calamos Sr, of Calamos Growth Fund. His core philosophies are two. One, “to create wealth, you have to give up some of the upside to preserve capital on the downside.” Calamos quips, “I’m long-term bullish, short-term scared, all the time.” While the economy can create significant prosperity over time, “the stock market can drop unexpectedly at almost any moment,” he warns. “When that happens, he wants to maintain his principal intact, even if that means missing out on some of the market’s growth during the good times,” explains the book.
His second philosophy reads, “No strategy works very well for very long, so you have to keep evolving your process.” Calamos says there is no `magic quantitative equation’ that works all the time. “If such a formula existed, everyone would use it and it would no longer work. What works at any point in time constantly shifts.”

Additional Readings:
Additional Reports:
Off-Topic Readings:
Parting Thought:
  • No matter how great the talent or effort, some things just take time: you can’t produce a baby in one month by getting nine woman pregnant.” – Warren Buffett
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