Comments on Distressed Debt Investing: How to Become a Better Investor and Privacy Policy...

I'm going to comment on this old post because ...

2009-12-21T22:42:55.539-05:00

I'm going to comment on this old post because I just came across the blog recently - hopefully you still care!

"It is said that Warren Buffett reads multiple annual reports a day - maybe after reading so many, his brain has somehow made the connection that this combination of factors, combined with this valuation, leads to superior investment performance. Maybe Seth Klarman has seen so many bankruptcies and reorganization, he can accurately predict the probability of XYZ occurence, its payoff, and therefore his potential gain vs downside risk."

My only issue with this statement is that there are lots of other highly "experienced" investors who have read a million annual reports, but are not nearly as good as Buffett or Klarman. So in my opinion, it can't just be the repetition, but the repetition plus something else - I'm not sure exactly what, but one can draw some conclusions if they think about it. I also think this "something else" is attainable, not some birthright, but as you've sort of alluded to here, it's hard to say exactly what it is.

I think your industry concentration idea is a good one. Course, it depends on how broadly you define an "industry." As an extreme example, I'm not sure you could have a whole fund based around health insurers, but you could easily build a fund around financial institutions.

(Of course, now I'm curious what industry you've chosen, hah.)

Here's an interview you might like where a small fund manager echoes your thoughts: http://cornerofberkshireandfairfax.ca/?p=12

" 'Having taken a relatively unconventional approach, how would you suggest an aspiring fund manager start?'

I would suggest that you pick a niche (small local banks, local manufacturing cos. etc.). Whatever is the popular product or service in your area or region and become the expert. I mean own it. Talk to everybody associated with it (management, suppliers, customers etc.) and learn everything about it. Then ask those same people who helped educate you (the bankers, directors, customers etc.) to pool their money together and let you manage it (do the leg work) by investing in those types of companies."

Great blog and great post... FYI Daniel Coyle'...

2009-08-28T02:58:25.730-04:00

Great blog and great post...
FYI Daniel Coyle's The Talent Code is another interesting book drawing on yet more of Andersson's research.
I read the paper and I found it fascinating. I agree with your assessment that he seems unduly beholden to the ridiculous efficient market theory.
He also seemed to focus too much attention on the impact of transaction costs. In the age of discount online brokers do transaction fees really adversely impact performance to the extent that he suggests?
The paper also doesn't (and maybe can't) address the ability of an indivudual investors to allocate across the capital structure generally, whether specializing in an industry or not.

I suspect beating the stock market may not be as difficult as the paper suggests if one is not always fully invested in it (a la some mutual funds) and holds other asset classes.
One's chances may improve greatly by having a diversified portfolio that is heavily in cash when conditions warrant it (as Klarman and Buffett are both known to do)

Ben

speaking as someone who day-trades futures contrac...

2009-08-26T11:59:09.636-04:00

speaking as someone who day-trades futures contracts, i completely agree with this idea of "deliberate practice". having spent several months developing a single strategy, a set of rules, and a set of performance metrics, then actually *executing* the plan, i can understand how most people lose money in the futures markets, since it seems that most of the traders i talk to are woefully underprepared / under-practiced.

i have no idea what kind of environment you're in, but i recommend that you try to choose an area that gives you lots of chances for practice. for example, you cite tiger's constant practice. do the same thing - pick an area where, every day, you have *lots* of chances to hit the ball.

stated another way, you want to pick an environment where you can hit that 10,000 hour mark as fast as possible.

you know...you should check out Brett Steenbarger's "Enhancing Trader Performance" book. it sounds like you don't "trade" per se, but a lot of the concepts in there can be applied to longer-term investing types of strategies.

drop me a line if you want to chat a little more (stephen at stephenarehart dot com). take care, and good luck!

stephen

Hi, I enjoy your articles much. I agree with all ...

2009-08-26T06:23:11.603-04:00

Hi,

I enjoy your articles much. I agree with all of your points except the one where you say "concentrate on stocks in a few industries". Because you will never know when / where the pricing discrepancy will occur ( Ex: Technologies companies after 2000 , Even Seth Klarman mention about Isreli Tech company “Radvision” in Security Analysis -Introduction during dot com bubble burst)

I believe that basic trait of any value investor is to uncover the pricing discrepancies (and reduce the pricing discrepancies if he can).

Good example is Buffet’s investment in Sanborn map. I don’t think Buffet has any specific insights in geospatial maps and products. He just uncovered a company with pricing discrepancies.

Atlast some excerpts from the book "Margin of safety"

David Dreman recounts “the story of an analyst so knowledgeable about Clorox that ‘he could recite bleach shares by brand in every small town in the Southwest and tell you the production levels of Clorox’s line number 2, plant number 3. But somehow, when the company began to develop massive problems, he missed the Signs... .’ The stock fell from a high of 53 to 11”.

Although many Wall Street analysts have excellent insight into industries and individual companies, the results of investors who follow their recommendations may be less than stellar.

(May be it will be a great help if you are working in Hedgefund as Industry expert)

Regards
Vishnu

I am actually reading "Buffett" right no...

2009-08-25T22:43:01.343-04:00

I am actually reading "Buffett" right now, and what struck me last night (before reading this) is that Buffett actually spent several years just reading annual reports and trying to figure out investment strategies before he truly got started. There was some comment about when some opportunities arose (I think it was a bank) in the late 60's, he had been reading that company's annual report for 7 or 8 years, and had read hundreds of other bank annual reports as well. So he had a huge knowledge base to rely on. Furthermore, since he has almost photographic memory, it seems as though that information is much more readily accessible than to the rest of us who have to construct patterns to remember information better.

Eddie Lampert once said that analyzing merger arbi...

2009-08-25T19:52:49.698-04:00

Eddie Lampert once said that analyzing merger arbitrage deals at Goldman Sachs was like shooting free throws over and over again. For every deal that was announced, he would have to quickly come up with different outcomes and assign a probability to each.

I would guess that after a while you would get a pretty good intuitive feel for whether a certain deal is a good investment. It would also help with the ability to value a wide range of companies.

Drucker always argued that the time and energy it ...

2009-08-25T14:16:08.524-04:00

Drucker always argued that the time and energy it takes to build a new competence or to eradicate a weakness is wasted because you can spend fraction of that time and energy to further enhance your current skill competence yielding greater benefit for the job at hand.