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A Value Investing Checklist from ‘Poor Charlie’s Almanack’

'Poor Charlie's Almanack' by Charles T. Munger (ISBN 1578645018)

From Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

Risk—All investment evaluations should begin by measuring risk, especially reputational

  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss

Independence—“Only in fairy tales are emperors told they are naked”

  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong—the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)

Preparation—“The only way to win is to work, work, work, work, and hope to have a few insights”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why?”

Intellectual humility—Acknowledging what you don’t know is the dawning of wisdom

  • Stay within a well-defined circle of competence
  • Identify and reconcile disconfirming evidence
  • Resist the craving for false precision, false certainties, etc.
  • Above all, never fool yourself, and remember that you are the easiest person to fool

Analytic rigor—Use of the scientific method and effective checklists minimizes errors and omissions

  • Determine value apart from price; progress apart from activity; wealth apart from size
  • It is better to remember the obvious than to grasp the esoteric
  • Be a business analyst, not a market, macroeconomic, or security analyst
  • Consider totality of risk and effect; look always at potential second order and higher level impacts
  • Think forwards and backwards—Invert, always invert

Allocation—Proper allocation of capital is an investor’s number one job

  • Remember that highest and best use is always measured by the next best use (opportunity cost)
  • Good ideas are rare—when the odds are greatly in your favor, bet (allocate) heavily
  • Don’t “fall in love” with an investment—be situation-dependent and opportunity-driven

Patience—Resist the natural human bias to act

  • “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
  • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
  • Be alert for the arrival of luck
  • Enjoy the process along with the proceeds, because the process is where you live

Decisiveness—When proper circumstances present themselves, act with decisiveness and conviction

  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn’t come often, so seize it when it comes
  • Opportunity meeting the prepared mind; that’s the game

Change—Live with change and accept unremovable complexity

  • Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
  • Continually challenge and willingly amend your “best-loved ideas”
  • Recognize reality even when you don’t like it—especially when you don’t like it

Focus—Keep things simple and remember what you set out to do

  • Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat
  • Guard against the effects of hubris and boredom
  • Don’t overlook the obvious by drowning in minutiae
  • Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
  • Face your big troubles; don’t sweep them under the rug
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Bernard Baruch’s 10 Rules of Investing

Bernard Baruch (1870–1965) was the son of a South Carolina physician whose family moved to New York City when he was eleven year old. By his mid-twenties, he is able to buy an $18,000 seat on the exchange with his winnings and commissions from being a broker. By age 30, he is a millionaire and is known all over The Street as “The Lone Wolf”.

Bernard Baruch's 10 Rules of Investing Born in Camden, South Carolina, and raised in New York City, Bernard Mannes Baruch graduated from the City College of New York in 1889. His original job on Wall Street, at the brokerage firm of A. A. Housman & Co., paid $3 a week, but he became a millionaire by the time he was thirty. He was a director of the New York Stock Exchange, a front-runner in mining finance, and an irregular investor in properties ran by the Guggenheim household. Even though he did not sell out just before the stock market crash of 1929, as fable has it, he did recover the bulk of his fortune.

In his two-volume 1957 memoirs, My Own Story and The Public Years, Baruch left us with the following timeless rules for investing

Being so skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learned from my own experience which might be worth listing for those who are able to muster the necessary self-discipline.

  • Don’t speculate unless you can make it a full-time job.
  • Beware of barbers, beauticians, waiters—of anyone—bringing gifts of “inside” information or “tips.”
  • Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
  • 'Baruch My Own Story' by Bernard Baruch (ISBN 1607969130) Don’t try to buy at the bottom and sell at the top. This can’t be done—except by liars.
  • Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
  • Don’t buy too many different securities. Better have only a few investments which can be watched.
  • Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.
  • Study your tax position to know when you can sell to greatest advantage.
  • Always keep a good part of your capital in a cash reserve. Never invest all your funds.
  • Don’t try to be a jack of all investments. Stick to the field you know best.

Baruch would afterwards continue from Wall Street to Washington DC as an consultant to both Woodrow Wilson and to Franklin D. Roosevelt during World War II.

Later on, he became identified as the Park Bench Statesman, due to his keenness for debating policy and politics with his associates in the open air.

He lived until a few days before his 95th birthday in 1965. You could do worse than to invest and live based on these facts.

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Peter Cundill Quotes from ‘There’s Always Something to Do’

Peter Cundill Quotes from 'There's Always Something to Do'

F. Peter Cundill (1938–2011) was a Canadian value investor of the Benjamin Graham investment school. He was most well known for his flagship investment fund, Cundill Value Fund. His The Mac Cundill Value Fund Series A has returned 10.1% per annum during 1993 until 2003, compared with 8.1% for the benchmark Citigroup World Equity index, according to Morningstar.

  • On Forecasting: “I think that intelligent forecasting (company revenues, earnings, etc.) should not seek to predict what will in fact happen in the future. Its purpose ought to be to illuminate the road, to point out obstacles and potential pitfalls and so assist management to tailor events and to bend them in a desired direction. Forecasting should be used as a device to put both problems and opportunities into perspective. It is a management tool, but it can never be a substitute for strategy, nor should it ever be used as the primary basis for portfolio investment decisions.”
  • On Skepticism: “Scepticism is good, but be a sceptic, not an iconoclast. Have rigour and flexibility, which might be considered an oxymoron but is exactly what I meant when I quoted Peter Robertson’s dictum ‘always change a winning game.’ An investment framework ought to include a liberal dose of scepticism both in terms of markets and of company accounts. Taking this a step further, a lot of MBA programs, particularly these days, teach you about market efficiency and accounting rules, but this is not a perfect world and there will always be anomalies and there is always “wriggle room” within company accounts so you have to stick to your guns and forget the hype.”
  • On Patience for Investors and Selling Too Early: “This is a recurring problem for most value investors—that tendency to buy and to sell too early. The virtues of patience are severely tested and you get to thinking it’s never going to work and then finally your ship comes home and you’re so relieved that you sell before it’s time. What we ought to do is go off to Bali or some such place and sit in the sun to avoid the temptation to sell too early.”
  • 'There is Always Something to Do' by Peter Cundill (ISBN 0773535373) On Statistical Overvaluation: “I almost stopped selling Japan short in the last quarter of 1989 because I couldn’t stand it anymore. But intellectually I was convinced that I was right and so I carried on and then in the first quarter of 1990 the Japanese market fell by 25% in eight weeks and I made back everything I’d given away since 1987 plus a good deal more. But I tell you statistical overvaluation is a funny thing—it can go on for a very long time, far beyond the limits of rationality, and it is a problem for the value investor in two ways: it can tempt one to compromise standards on the buy side and it may lure one into selling things far too early. I have less of a problem with the selling temptation because I have always loved cash—if you’ve got lots of it you will never have to pass up a great opportunity.”
  • On Curiosity: “Curiosity is the engine of civilization. If I were to elaborate it would be to say read, read, read, and don’t forget to talk to people, really talk, listening with attention and having conversations, on whatever topic, that are an exchange of thoughts. Keep the reading broad, beyond just the professional. This helps to develop one’s sense of perspective in all matters.”
  • On Patience: “For all my emphasis on the virtues of patience in value investment it has to go hand in hand with minute attention to the detail, with conviction and determination, otherwise patience is just futile endurance.”
  • On Intellectual Distractions for Investors: “Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths.”

On the Worst Investment He Ever Made

The worst investment we have ever had was Cable & Wireless, which had built up a large cash pile through the sale of telephone companies in Hong Kong and Australia and their mobile telephone business in the UK. They were well negotiated, judicious sales. What they had left was a stand-alone operation in the Caribbean, which still exists, and they were in the fibre optic business that was blowing cash. So we said, look they’ve got cash, they’ve got a valuable, viable business and let’s assume the fibre optic business is worth zero—it wasn’t, it was worth less than zero, much, much less! Their accounting was flawed to say the least and they became obsessed by a technological dream. In this respect it was reminiscent of Nortel and that should have caused me to think twice.

I talked to John Templeton about it afterwards and he took a worse hit than us. He said “this is why we diversify, if you are right 60% of the time and wrong 40% you’re always going to be a hero, if you are right 40% of the time and wrong 60% you will be a bum.” I think he probably put it more elegantly than that! But there’s one more thing. We had put a huge amount of time and energy into that one and we were willing it to save itself and, on the face of it, it could have. What we needed was a dissenter in the team—a contrarian among contrarians, a lateral thinker watching out for the left field. On that occasion there wasn’t one. So my thought is, if there’s no natural sceptic on an investment maybe it would be wise to appoint one of the team to play Devil’s Advocate anyway.

'Routines and Orgies- The Life of Peter Cundill' by Christopher Risso-Gill (ISBN 0773544720) Peter Cundill was the founder of Cundill Investment Research and was named Canada’s fund manager of the year at the Canadian Investment Awards gala held in early December 2004. Born in Montreal and based in London, Cundill spent much of the year scouring the globe in search of value opportunities for Mackenzie Financial‘s Cundill fund family.

On Investors’ Biggest Challenges

The ultimate skill in this business is in knowing when to make the judgement call to let profits run. While it is true that 99% of investment effort is routine, unspectacular enquiry, checking and double checking, laboriously building up a web of information with single threads until it constitutes a complete tableau, just occasionally a flash of inspiration may be necessary. Once we have begun to build a position it has to be recognized that our intentions may change in the course of its construction. An influential, or even controlling, position quite often results from a situation where a cheap security does little or nothing price-wise for such a long time that we are able to buy a significant percentage of the equity. Whether our intentions remain passive under these circumstances depends on an assessment of the outlook for the company and the capability of its management, but I don’t think that we ought to be pro-active merely for the sake of it. My task is principally the identification of opportunity and the decision to press the buy button. This may sometimes turn out to be a catalyst in itself, but normally we should rely on others to do the promotional work or to put the company directly into play. Otherwise it will turn into a constant and time-consuming distraction from our prime objective of finding cheap securities to buy.

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You Can’t Prove Anything About the Future

'Security Analysis' by Graham and Dodd (ISBN 0071592539) Venture investing plays an important role in entrepreneurship not only because financial resources are important to new ventures, but also because early investors help shape the ventures’ managerial and strategic destiny. Value investing is conceivably the most prevalent and durable style of investing.

However, despite its reputation, the theoretical foundations of value investing have developed little since the ground-breaking work of Benjamin Graham and David Dodd espoused in their classic Security Analysis (1934). They advise value investors to focus their attention on securities “which are selling below the levels apparently justified by careful analysis of the relevant facts.” They further encourage value investors to concern themselves with “the intrinsic value of the security and more particularly with the discovery of discrepancies between the intrinsic value and the market price.” In providing wide-ranging guidance for the estimation of intrinsic value, they write down that:

In general terms it is understood to be the value which is justified by the facts, e.g. the assets, earnings, dividends, definite prospects, as distinct, let us say, from market quotations established by artificial manipulation or distorted by psychological excesses. But it is a great mistake to imagine that intrinsic value is as definite and as determinable as is the market price. Some time ago intrinsic value (in the case of common stock) was thought to be about the same thing as “book value,” i.e. it was equal to the net assets of the business fairly priced. This view of intrinsic value was quite definite, but it proved almost worthless as a practical matter because neither the average earnings nor the average market price evinced any tendency to be governed by the book value. Hence this idea was superseded by a newer view, viz., that the intrinsic value of a business was determined by its earnings power. But the phrase “earnings power” must imply a fairly confident expectation of certain future results. It is not sufficient to know what the past earnings have averaged, or even that they disclose a separate line of growth or decline. There must be plausible grounds for believing that this average or this trend is a dependable guide to the future.

Variation in long-horizon security returns is governed by fundamentals. Reckoning the prospective yield by aggregating expected earnings over more than a few future years dominates existing approaches to measuring value. This analysis highlights significant opportunities for improvement in the relative-value metrics used by academics and practitioners. To determine the source of variation in future stock returns to various investment strategies. The book-to-market ratio is a comparatively poor measure of value and that much of its prognostic ability with respect to future stock returns appears to arise from other sources.

Investor Howard Marks Renowned investor Howard Marks (b. 1946) of Citibank, TCW Group, and Oaktree Capital Management at “Investor Series” interview with Oaktree founder and American investor Bruce Karsh at Wharton School, University of Pennsylvania:

There’s no such thing as analysis of what’s coming. We don’t know anything about the future, and you can’t prove anything about the future.

But if you’ve been in business and you’ve seen some cycles, and you’ve gained some experience and you’ve gone through those cycles with your eyes open saying “What are the implications of cycles for our behavior?”, then I think you can reach a point where you say, “You know what, it just feels like the power is in the hands of the issuers, not the buyers. It feels like there aren’t many sellers, just a lot of buyers. And the market is not acting in a disciplined way.”

We want to buy when the market in panicked, not when the market is sanguine. [Warren] Buffett says that “The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.”

When other people are optimistic, we should be worried. When other people are panicked, we should turn aggressive.

Comports with Sir John Templeton‘s famous dictums “If you want to have a better performance than the crowd, you must do things differently from the crowd” and “Invest at the point of maximum pessimism.”

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Warren Buffett on Taking a Few Big Swings

Warren Buffett on taking a big swing from a 1998 Q & A (video here) that he and Bill Gates did with students at the University of Washington (via valuewalk.com):

A few things have worked out very well [for me]. And the nice thing about the investment business is that you don’t need very many. You’ll see plenty of times when you get chances to do things that just shout at you. And the thing you have to do is, when that happens, you have to take a big swing. That is no time to be reading a book on the theory of diversification …. When you find something where you know the business is within your circle of competence, you understand it, the price is right, the people are right—then you take your thumb out of your mouth and you barrel in.

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100 Best Business Books of All Time

Following years of reading, appraising, and retailing business books, 800-CEO-READ creator Jack Covert, ex-president Todd Sattersten, and present general manager Sally Haldorson have selected and appraised the one hundred greatest business titles of all time—the ones that dispense the biggest payoff for today’s occupied readers. It’s a great list, and in the vein of all lists, bound by argument and long-windedness about what is and isn’t contained in this list. Each book gets a couple of pages of outline handling.

Best Business Books on Improving Your Life

Best Business Books on Leadership

Best Business Books on Strategy

Best Business Books on Sales and Marketing

Best Business Books on Economics and Metrics

Best Business Books on Management

Best Business Biographies

Best Business Books on Entrepreneurship

Best Narratives of Fortune and Failure

Best Business Books on Innovation and Creativity

Best Books on Big Ideas About the Future of Business

Best Business Books on Management and Leadership Lessons

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Charlie Munger’s 10 Rules for Investment Success

Charlie Munger's 10 Rules for Investment Success When Charlie Munger talks, people listen— particularly if they want to know how to invest their money.

Munger, who is the vice-chairman of Berkshire Hathaway, has delivered instrumental guidance to Berkshire’s renowned founder, Warren Buffett, and many others. By means of what Munger identifies as “elementary world wisdom,” Munger’s technique weighs risk and reward, make the most of fact-based data and abating emotion.

Keeping it simple, Munger declares, “I observe what works and what doesn’t and why.” Like Buffett, Munger pulls much of his motivation from post-Great Depression era investor Benjamin Graham, a “value investor.” Graham sought “mispriced assets” with values greater than people think.

Charlie Munger has some advice for investors.

  1. Measure risk: All investment evaluations should begin by measuring risk, especially reputational.
  2. Be independent: Only in fairy tales are emperors told they’re naked.
  3. Prepare ahead: The only way to win is to work, work, work, and hope to have a few insights.
  4. Have intellectual humility: Acknowledging what you don’t know is the dawning of wisdom.
  5. Analyze rigorously: Use effective checklists to minimize errors and omissions.
  6. Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.
  7. Have patience: Resist the natural human bias to act.
  8. Be decisive: When proper circumstances present themselves, act with decisiveness and conviction.
  9. Be ready for change: Accept unremovable complexity.
  10. Stay focused: Keep it simple and remember what you set out to do.

Munger has argued that if “you’re investing for 40 years in some pension fund, what difference does it make if the path from start to finish is a little more bumpy or a little different than everybody else’s so long as it’s all going to work out well in the end? So what if there’s a little extra volatility.”

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Read to Find Investment Ideas

Read to find investment ideas The secret of finding investment ideas can be summarized in one word: READ.

Of course, in order to spend a lot of time on business news, you must be interested in economic and financial affairs. But as you become more accustomed to accumulating and storing financial information, you will find the subject increasingly interesting, particularly if your interpretation of events leads to profits.

Nothing can motivate you more than your own success. The turbulence in the financial markets underscores the importance of becoming your own analyst. This will insulate you from other people’s opinions and will give you the confidence to pursue your own ideas and goals by checking out the facts.

The way to do this is with a disciplined system of reading and information gathering. Over time, you should acquire a financial file or library of companies, ideas and trends that warrant investment attention. To sniff out opportunities from the financial news requires an understanding of what to look for.

Two people might read the same article, one of whom may spot a nuance that suggests an important opportunity, while the other person sees nothing of significance.

What we aim to provide in this chapter are some hints and clues on what to look for in the financial news, what to read and how to accomplish all this in the least amount of time.

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Lessons from Edgar de Picciotto

Edgar de Picciotto of Union Bancaire Privee

Edgar de Picciotto, an early promoter of hedge fund investing, passed away on Sunday 13 March 2016 after a long sickness. On November 12, 1969, de Picciotto opened his own asset-management bank in a city dominated by such well-known private banking names as Pictet Group, Lombard Odier, Darier and Hentsch.

Edgar de Picciotto founded Union Bancaire Privee (UBP) in 1969. UBP is one of the most favorably capitalized private banks in the world, and a leading player in the field of wealth management in Switzerland with $110 billion in assets under management at the end of December 2015. Edgar de Picciotto, who was born of Syrian-Lebanese parentage, moved to Switzerland in the 1950s and worked as a financier before founding UBP’s predecessor in 1969. From the bank’s inconspicuous headquarters on one of Geneva’s chief luxury-shopping drags, he built a customer base of affluent individuals and institutions all over Europe, the U.S., and the Middle East.

De Picciotto was born in Beirut and hailed from a lineage of businesspersons, which lived from the 14th to the 17th century in Portugal, moving in later centuries via Italy and Syria to the Lebanon. He afterward lived with his parents and brothers in Milan, ultimately deciding to study mechanical engineering in France. However, it was financial engineering, which took his perpetual fancy. He earned his spurs and made financial contacts, working in his previous father-in-law’s bank in Geneva. In its 2015 annual report, UBP recalled,

As our 2015 Annual Report was going to print, we learnt with deep sorrow that Edgar de Picciotto, the Chairman and founder of Union Bancaire Privee, had passed away at 86 years of age.

Edgar de Picciotto was a recognized creative visionary and pioneer in a wide variety of fields in the banking industry. He quickly rose to become a leading figure of the Geneva financial hub, and one of the most respected authorities on investments around the world.

In just a few decades, Edgar de Picciotto turned UBP into one of the world’s biggest family-owned banks. Very early on, he also set up a governance structure designed to ensure the Group’s longevity by integrating the second generation of his family into the business.

UBP is his life’s work. UBP is his legacy to us. It now falls to us to grow UBP with the same entrepreneurial spirit that he used to create the Bank, by perpetuating the values that Edgar de Picciotto would wish to see upheld every day and in everything we do.

Edgar de Picciotto’s children and all the members of UBP’s management are determined to carry on the spirit that its founder instilled in it, and they know that they can rely on the professionalism and dedication of all UBP’s staff members to continue to grow the Bank’s business, while also maintaining its independence.

In 2002, news of merger talks between two family-controlled private banks, Union Bancaire Privee (UBP) and Discount Bank & Trust Company (DTBT) over forming one of Geneva’s biggest private banks became newest sign of the altering attitude among the country’s private banks. Withdrawing from UBP’s operational management 20 years ago, de Picciotto set up a governance structure designed to guarantee the bank’s durability. His son Guy de Picciotto has been chief executive officer since 1998, while his daughter, Anne Rotman de Picciotto, and his eldest son, Daniel de Picciotto, are on the board of directors.

Byron Wien, vice chairperson of Blackstone Advisory Partners, had the pleasure of calling Edgar de Picciotto his mentor.

My purpose in reviewing Edgar’s thinking over the past 15 years is to show how he consistently tried to integrate his world view into the investment environment. That was his imperative. He wasn’t always right, but he was always questioning himself and he remained flexible. When he lost money, it tended to cause minimal pain in relation to his overall assets, and when one of his maverick ideas worked, he made what he called “serious money.”

Lessons from Edgar de Picciotto of Union Bancaire Privee

Edgar de Picciotto as a Mentor

Mentors fall into two categories: there are those you work with every day who are incessantly guiding you to enhanced performance. The ability to serve as a great mentor is one of the most undervalued and underappreciated skills in finance. Perhaps better branded as a “role model,” an outstanding mentor can provide not only a wide-ranging knowledge base and technical skills, but also the sagacious financial judgment that implies the high-class investor. Perhaps of even larger importance, a mentor can express a “philosophy of practice,” including the optimal interaction with clients and economists, a procedure for remaining current with advances in the field, and a thorough concept of how the practice of finance fits into a full life. A sympathetic mentor can also provide counselling in selecting the best practice opportunity and can maintain a close relationship for many years.

Mentors are significant to all of us, as they teach us what can’t be learned from books or in the classroom. They set aside a concrete example of “how to get it done,” and, sometimes more importantly, what to be done, when to do it, and whom to engage in the effort. Their inspiration often carries us through when nothing else does.

  • Understand the consequence of understanding the macro environment. “Many people describe themselves as stock pickers … but you have to consider the economic, social, and political context in which the stocks are being picked.” De Picciotto indubitably showed he had a good nose for trends.
  • Meet as many people of authority as you can. “For him, networking never stopped.” De Picciotto took great pleasure from knowing smart people and exchanging ideas with them.
  • “Nobody owns the truth.” De Picciotto would test his ideas on those he cherished and, and if he ran into a convincing conflicting opinion, he would contemplate on it seriously and sometimes change his position. While he never lacked principle about his ideas, he was unprejudiced and malleable.
  • Value the trust and the delight of friendship and the vainness of resentment. De Picciotto was gratified of his own success but also an enthusiast of the success of others who were his friends.
  • Never talk about overlooked opportunities except when you are disapproving yourself. Be your own harshest critic. Even if you are an intellectual risk taker, you will make many mistakes. Diagnose them early, but never stop taking risks, because that is where the tangible opportunities are and your life will be more invigorating as a result.
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Value Investing: Philip Fisher on When to Sell a Stock

Common Stocks and Uncommon Profits, by Philip Fisher

Philip Fisher (1907–2004) is widely considered the pioneer and thought process leader in long-term value investing. Years after his death, Fisher

is widely respected and admired as one of the most influential investors of all time. Fisher developed his long-term investing philosophy decades ago

and discussed them in his seminal book, Common Stocks and Uncommon Profits. Common Stocks and Uncommon Profits was first published in 1958

and continues to be a must-read today for investors and finance professionals around the world.

Philip Fisher, Investor, Author of Common Stocks And Uncommon Profits Today, we will dig deeper into his selling discipline. For many investors, buying a stock is much easier than deciding when to sell it. Selling securities is much more difficult than buying them. The average investor often lacks emotional self-control and is unable to be honest with himself. Since most investors hate being wrong, their egos prevent taking losses on positions, even if it is the proper, rational decision. Often the end result is an inability to sell deteriorating stocks until capitulating near price bottoms.

Selling may be more difficult for most, but Fisher actually has a simpler and crisper number of sell rules as compared to his buy rules (3 vs. 15). Here are Fisher’s three rules for selling a stock:

  • Wrong Facts: There are times after a security is purchased that the investor realizes the facts do not support the supposed rosy reasons of the original purchase. If the purchase thesis was initially built on a shaky foundation, then the shares should be sold.
  • Changing Facts: The facts of the original purchase may have been deemed correct, but facts can change negatively over the passage of time. Management deterioration and/or the exhaustion of growth opportunities are a few reasons why a security should be sold according to Fisher.
  • Scarcity of Cash: If there is a shortage of cash available, and if a unique opportunity presents itself, then Fisher advises the sale of other securities to fund the purchase.

Many investors are reactive and sell at the same time everyone else does—when they’re fearful. But your emotions aren’t the best guide for making critical financial decisions. Long-term investors should not fear occasional swings in the market. When the market dips or takes an unusual turn, that is the perfect time to review your portfolio and re-evaluate your investing strategy.

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