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Investors think in dogmatic terms when it comes to optimizing an investing strategy.
However, as John Train illustrates in Money Masters of Our Time, a variety of strategies have led to some of the greatest outperformers in history.
As I explored the book, I noticed that, while each investor had a unique approach, they all left very, very valuable clues to their success.
Many of these insights apply broadly to the art of investing.
Whether you're a long-term value investor, a quality-focused investor, a seeker of deep value plays, an activist, a speculator or even a trader.
In today's episode, we'll dive into the key lessons that I took from each investor that was profiled in this great book.
You'll learn about Warren Buffett's concept of controlled greed and why it's so beneficial, as long as you emphasize the controlled part of that equation.
We'll explore why T Rowe Price shifted away from his signature growth strategy, only to return to it after facing widespread imitation.
I'll share Jim Rogers' affinity for making these large basket bets on emerging markets and his thought process for determining which ones were worth investing in.
We'll also discuss why the size of a fund can hinder performance and why this is a crucial factor to consider when investing with top-tier managers.
Now, one of my favorite takeaways is from the chapter that was on Peter Lynch.
In this section, I'll explain why Lynch made well over 15000 trades throughout his career and the critical insights behind his approach.
While I wouldn't replicate his methods here, Understanding his reasoning sheds light on how investors can think about position sizing when analyzing new investments.
Now, there's much to cover in this episode, but no matter your investing style, I'm confident you'll walk away with a fresh perspective on the fascinating world of investing.
Now, let's jump right into this week's episode.
Since 2014, and through more than 180 million downloads, We've studied the financial markets and read the books that influence self-made billionaires the most.
We keep you informed and prepared for the unexpected.
Now for your host, Kyle Grieve.
Welcome to the Investors Podcast.
I'm your host, Kyle Grieve, and today we're going to dig into some of the insights from some of the greatest money masters in history.
We're going to look at a number of outperforming investors outlined in the book Money Masters of Our Time by John Train.
Now, instead of profiling each individual investor, I'm going to focus more on just timeless principles that I think can be adapted and applied to any intelligent investing framework.
Now, what I really enjoyed about this book was the vast array of strategies that were used in the investors who were outlined.
Train says that investors that he picked come from just several different schools of investing, whether that be growth value technology, emerging markets microcaps turnarounds top-down, bottoms-up and so on.
He then further refines these into three distinct investing philosophies.
One, futurology, peering into the fog a bit farther than the crowd.
Two lab analysis, studying with a little more care and imagination than others what's under the magnifying glass right now.
And then three, opening up a new category in overlooked areas.
So Train said Which method you prefer should depend on how you think and what's not overpopulated at the moment.
Thus, the outstanding investor knows when to change styles.
That's the point of my epigraph.
Times change and we change in them, unquote.
Now, even though I consider myself a value investor, many of the investors outlined in this book didn't necessarily align with that philosophy.
And that's okay because I found even the investors who did not share in my affinity for value investing had some fascinating stories to tell and strategies to share about their own experience that could be transferred to investors, I think, of any type.
So today I'm going to focus on a couple key insights from each of these investors that were profiled in the book.
So let's start by talking about Mr. Grow's stock, T. Rowe Price.
So a few things really stood out to me about T. Rowe Price.
The guy was just incredibly disciplined and well-organized.
Train said, when he bought a stock at 20, he also established that he would sell some at say, 40 and did even if things had changed for the good.
If he had decided to buy more stock at 13, he would have, even if the news from the company was discouraging.
I think discipline is just a major factor in the success of investing.
And straying away from what makes you successful in the first place can be just a recipe for disaster.
But to have discipline, you must first have conviction in your ideas.
You need to have the conviction to tell yourself that you are right and the market is wrong, which is exactly what you would be doing if you're buying a stock when the market is deciding to sell it.
Now, the point about discipline and conviction goes hand in hand with Mr. Price's contrarian nature.
One exciting aspect of being contrarian that Train mentions is that being a strong-willed loner usually means that you have weak followers.
Now, Price eventually sold his organization, but he was pretty fearful that his predecessors were just not fit to succeed him.
One of the more interesting parts about T. Rowe Price was also his levels of modesty.
Despite turning 1000 in 1934 into 271000 in 1972, a 16 compounded annual gain, he didn't actually believe himself to be an investing prodigy by any measure.
He said that any non-professional could be able to copy his approach successfully.
So for any growth-oriented investors out there, pay attention here, as there are some really good tenets of his system.
So the first one here is superior research and development for product development and market development.
The second is a lack of cutthroat competition.
The third, a lack of exposure to government regulation.
The fourth, low total labor costs, but well-paid employees.
And the fifth is a greater equal to 10 return on invested capital, with sustained high profit margins and superior growth of earnings per share.
Now, once you own a business that has all these characteristics, you should stick with the company in the highest growth industries for as long as that progress continues.
Now there is a problem that I think many investors go through when searching for high growth investments in high growth industries.
And this is the problem of overcapacity.
When you have too much capital going into an industry, the creative destruction of capitalism happens, which reduces growth metrics to average over time.
Now.
Another important lesson from T Rowe Price was the ability to switch investing strategies when things started getting a little bit frothy for him.
Due to the success that he had, he had a ton of imitators.
And similar to the characteristics of hot industries.
These cloners made T Rowe Price's strategy less and less effective.
It got to a point where investments that he would have bought in the past were just being bid up way too high, at 50 60, 70 times earnings in the late 1960s.
As a result, he started buying inflation-resistant stocks in real estate, natural resources gold and silver definitely not the growth-type businesses that he'd been accustomed to in the past.
But as all market cycles do, the growth stocks he once loved became cheap again by 1974, and he once again adopted his original strategy.
I think this speaks volumes about the strength of staying true to your investing principles while allowing your strategy to evolve in an ever-changing macroeconomic environment.
The next investor I want to discuss needs no introduction, as that's Warren Buffett.
John Trane had some very unique takes on Mr. Buffett that I'd like to share.
Trane said that Buffett is in the vulture business, but he's a cheerful sort of vulture.
I think this is a compliment, as any value investor who relishes buying hated stocks could be seen as a type of vulture.
Although one could make the argument, as Train does, that Buffett has often bailed out friends such as John Goodfriend at Solomon, while also increasing Berkshire's asset base in a sort of greenmail way.
But let's get back to some of the less discussed points on Buffett from this chapter.
Now my favorite point that Train discovered was on Buffett's six characteristics that were needed to succeed in investing.
And the first one was the one that really caught my eye.
You must be animated by controlled greed, and fascinated by the investing process.
Now this concept of controlled greed and fascination is profound.
I think you will find the part about the fascination by the process to be a characteristic that's found in basically all people who vastly outperform their peers.
Now reaching a point that few others ever will reach requires a fascination, or even an unhealthy obsession, with your craft.
Being a basketball fan, I can attest to the fact that Michael Jordan and Kobe Bryant both had this fascination with the game of basketball.
They worked harder than everyone else and were true students of the game.
But the controlled greed part is going to be an attribute found mostly in business people.
The key word there is controlled.
In the movie Wall Street, Gordon Gekko says.
The point is, ladies and gentlemen, that greed for lack of a better word is good.
Greed is right.
Greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
But Gecko fails to heed Buffett's advice on the controlled part and lets the greed get better of him in that movie.
Warren and Charlie had a third partner, Rick Guerin, that is much less talked about because he's just no longer in the picture.
But Rick Guerin was involved with Charlie and Warren on a number of deals such as seized candies and blue chip stamps.
So here's what happened to Rick Guerin and Warren Buffett's words.
Charlie and I knew that we would become incredibly wealthy.
We were not in a hurry to get wealthy.
We knew it would happen.
Rick was just as smart as us, but he was in a hurry.
And so actually what happened some of this is public was that in 73 74 downturn, Rick was levered with margin loans.
And the stock market went down almost 70% in those two years.
And so he got margin, called up the yin yang, and he had to sell his Berkshire Hathaway stock to me.
I bought Rick's stock at under $40 a piece.
And so Rick was forced to sell shares at $40 a piece because he was levered.
Now, as of November 17th, 2025, those shares are now worth $756,000.
So while trying to obtain wealth is a necessary fuel to incentivize business people to continue making smart investment decisions, you must always be wary of not allowing that greed to get out of control.
The last interesting point on Buffett that Trains makes is in regard to some of the secret sauce of Buffett's success.
These qualities that Buffett has are not widely shared by others, and he names about four.
So the first one is have 10 or 15 years of intensive theoretical and practical training, including a number of years under the greatest investors, before you start yourself.
The second is be a genius of sorts.
The third is possess a high degree of intellectual honesty.
And the fourth is avoid any significant distractions.
Now I've often struggled to grasp why so few investors will ever attain anywhere close to the success of Warren Buffett.
And I think that these four qualities do a very good job of describing why it will be so hard to find the next Warren Buffett.
So I'll close this part on Buffett with a fifth quality that Warren possesses that very few others do.
And that is the ability to start investing at the age of 11 and adding a decade or two to his compounding, compared to the average money manager.
Now, other than Benjamin Graham and early Warren Buffett, the next investor here in the book that I want to talk about probably had the strongest characteristics of a true deep value investor of anyone else.
While John Templeton didn't appear to place as large of an emphasis on asset plays as Benjamin Graham did, he looked for businesses that nobody else wanted.
He wanted to purely buy businesses that others were just throwing away.
And he was willing to wait up to four years or so for the business to reach intrinsic value via multiple expansion.
Now.
Over his long and illustrious career, he tried many different things, but his overarching strategy was to search for markets around the world for stocks that were just selling at a small fraction of their true worth.
Templeton was one of the first Americans to see the potential in Japan before their stock market bubble popped.
And his ability to search for beaten down stocks was what led him to enter Japan at a great time and exit Japan, more importantly, before the market punished the massive, massive amounts of speculation that were going on in Japan during the 1980s.
John Templeton looked at multiple areas of the market to find the best opportunities, but his top three strategies were one small cap companies, two international markets and three unloved stocks.
John wanted to be looking at stocks that were completely neglected.
He understood that price inefficiencies would be greatest in that kind of cohort.
And as a true value investor, price inefficiencies are precisely what you're looking for.
He also searched for businesses that other investors wouldn't even bother studying.
Now, my biggest takeaway from this chapter on John Templeton was some of the exciting stories that the author John Train shared regarding Templeton's contrarian nature.
Let's imagine that you're a book collector and a bargain hunter.
You get out of the rain and enter a hole-in-the-wall bookstore with more cobwebs and spiders inhabiting the store than the actual customers.
As you walk in, you see the cleanest area of the entire bookstore.
There's a beautifully well-kept glass-encased presentation containing a few very popular and expensive book titles.
As a bargain hunter, you appreciate the titles. but the associated costs raise your blood pressure.
And you know that probably a good sign that you're just not going to be interested in those titles.
Now you walk up to the owner and you ask, what books do you have that you just can't sell?
The owner walks you down to the basement and leads you to the corner of a musty basement.
The cobwebs and dust are at full force, the closer to the corner that you get.
He tells you that he hasn't been able to sell any of these books for the past few years and he wants to just get rid of them.
So they're being sold at a 50% discount to their sticker price.
He then leaves you to peruse them.
Now, this is heaven, you tell yourself.
So this is just a simple example of the types of investments that Templeton was searching for.
He wanted what nobody else wanted or even looked at.
Now, in investing terms, Train mentions a few characteristics of unloved stocks.
One, brokers have a very hard time selling it.
And two, it has a small float.
So I'll add just a few other characteristics that I think I've encountered that also mean a stock is unloved.
One is that it has zero institutional ownership.
One method that I really like doing is just hopping onto my Yahoo Finance app, clicking on a stock.
And then, when you expand some of the options, you can actually get a look at the institutional ownership.
You might need to verify it with another source.
But generally speaking, if a business has 0 institutional ownership, it tells you that on Yahoo, on the app, and it's really helpful.
And then the other method here is just if you call into a business and start telling them that you're an analyst or you're just a personal investor wanting to learn more about the business, If you talk to that contact in the IR and they tell you that no one's contacted the business for years, that's obviously another really really good signal that nobody else is looking at the company.
Now, if you enjoy cheap stocks, I would highly suggest that you look for these characteristics, because you're probably going to be able to find a diamond or two in the rough.
Now, the next investor I want to discuss is Richard Rainwater.
Richard has a novel investing method that I would consider kind of top down.
He looks into the future to identify really promising areas.
Then he looked for a business that would flourish in that future that he envisioned.
He then makes a few concentrated bets in the sector.
But, unlike many stock investors who just sit back and allow the future to develop based on the management in place, Rainwater is an activist.
So he'll get on the board and he'll forcefully mold the business, hire and fire talent finance, merge and do whatever needs to be done until the company approaches his own vision.
Now, this is an interesting way of investing because it eliminates the necessity for a good management team.
Richard was looking for a business that would flourish in his vision for the future.
And if he found the right company, he would acquire shares in it, despite his assessment of management.
He could then use his know-how, his connections and his contacts to bring the right people in place that could execute his initial vision.
This is interesting because it's almost like a private equity strategy, but in public markets.
So here's Rainwater's six-part strategy.
One, target a major industry and disrepute that's due for a change.
Two, find a particularly attractive company or a sector within that industry.
Three find a company with long-term, sustainable competitive advantages, or what some people would call an impregnable business franchise.
Four, find a world-class player to run the show.
Five, never enter into an investment alone.
And finally, six, improve the risk-reward ratio through financial engineering.
My big lesson from Rainwater is in regards to finding the right business.
If you find the right one that also has a wonderful manager already in place, fireworks are going to happen.
I'm not sure how many other takeaways you can get from Rainwater, considering he had the ability to bring entirely new management in place, a strategy that not a lot of other investors are going to be able to pursue.
But one of the really good examples is actually in Disney that he did.
So he liked Disney for a couple of reasons.
It had low debt.
It had a great library of intellectual property.
It had the Disney characters, and it had theme parks.
In Richard's view, Disney was just undervalued.
So the year before getting his stake in Disney, he purchased a company called Arvita, which was a land development firm.
So he bought that for $20 million in cash, and he assumed $270 million in debt.
He then swapped this business for a 10% stake in Disney worth $200 million.
So after he got his piece of Disney, his work wasn't done yet.
He needed to find a new manager.
So he actually worked with George Lucas.
And he ended up installing Michael Eisner as a new CEO of Disney.
And after he'd done all this, he was asked what needed to be done in order to fix Disney.
And he said the fix was just really easy.
All he had to do was change the CEO.
Now let's look at the following investor in this book, which is Paul Cabot.
So Mr. Cabot provided me with a few just very interesting insights.
The first thing that stood out to me was Paul's thirst to find the truth.
This is an area of my own investing that I'm spending more and more time focusing on.
Cabot said the following.
First you've got to get all the facts and then you've got to face the facts, not pipe dreams unquote.
So this concept is powerful because it just fights the human affinity to confirm our own biases.
Too many investors spend inordinate amount of time confirming what they already believe to be true.
Now, from my research on Munger and inversion, I have learned that Spending time on what you could be wrong on and trying to come to the truth of the matter, should be a part of your learning and thinking process, and probably a very, very large part.
And you know, there's just nothing wrong with admitting that you were wrong.
Charlie says, any year that you don't destroy one of your best ideas is probably a wasted year.
Now, an interesting corollary to this that Paul Cabot shared is his admiration for tenure.
He believed that to become a realist, you needed experience.
And to gain that experience, you needed to have lived just a long time.
So Train mentioned that with age, he became more cautious.
Cabot thought young people were too optimistic.
He thought they'd come up with too rosy scenarios and that they were willing to take more chances.
Cabot said, I've only got confidence in older men who've been through depressions recessions, wars and the rest of it.
Now, that's kind of a fair point.
Younger people tend not to have been jaded by multiple bad events.
And since they're younger and tend to be in capital accumulation mode, they are more likely to try and grow their wealth faster than say, an older person might.
Additionally, just kind of go back in time here about 20 years.
Since 2004, the S&P 500 has only had four years of negative returns.
So most investors who have had money in the market in the last 20 years or started investing in the last 20 years have probably a very optimistic view of the market compared to hardened veterans who have been in the market since say, the 1970s.
The last lesson on Cabot that I highlighted was about the moral aspect of investing.
So John Train asked Paul Cabot how he dealt with it.
Cabot pointed out that at one time, his fund owned some liquor stocks.
He mentioned that they would occasionally get letters from shareholders who would object to these holdings.
So Paul would answer that the businesses that they owned were all legal and they were making profits in a completely legal way.
So he ended up telling these partners that if they wanted to assert a moral principle beyond the legal one, then all they had to do was sell his state street stock.
Now I kind of agree that morality and investing don't mix, but I also think there are specific industries that I personally find off-putting, and I would just never put a dime into them.
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For me, businesses that manufacture cigarettes or weapons that kill people, or even pharmaceuticals don't interest me whatsoever.
And I have my own reasons and you may completely disagree with them and you may have completely different reasons than I do.
And this is why I think that investing in morality shouldn't be mixed.
Now let's shift gears to one of my favorite investors who's profiled in this book.
And that was Philip Fisher.
Other than Buffett, I probably had the most notes on Philip Fisher.
I've already discussed his book in a lot of detail on TIP 646.
So if you resonate like I do with Philip Fisher, I recommend listening to that episode.
Now, the central theme I want to tackle when looking at my notes was Philip's insistence on finding businesses that could be held for a long period of time.
Philip wasn't searching for just good investments.
He wanted a few outstanding ones, and that was his words.
But, using his method, you had to really really nail the quality of the business to find these outstanding investments that could be held for long periods of times or deserved to be held for long periods.
Businesses that deserve to be held for long periods have the following attributes that Fisher talks about.
So the business should grow over the years in intrinsic value, which in turn will grow your investment.
I think that's a pretty obvious one.
If we want to compound our money in the market, price generally will converge with intrinsic value.
The next one here is that you should be unwilling to sell your stock because it's increased significantly in price.
Grow indefinitely.
So selling just because a share price had a good year means you are missing a large amount of upside.
And then, just to add to that point, I think that the fact that a company's share price is growing is actually really good feedback that your thesis was accurate.
I know in value investing, a lot of investors love when stock prices go down so they can buy more.
I do too.
But the fact is, if you plan on holding a business for 10 years hopefully, maybe if you have right one in your portfolio there might be a time where you want to put more money into that one position.
And in that case you might be paying more in terms of the stock price, but you might be paying a better price in terms of valuation.
Let's say you initially buy it at a PE of 15.
A couple of years later, maybe the price goes up a couple of times and now you can buy it at a PE of 10.
That's still a rational decision.
So the next one here is that outstanding businesses grow, and much of this growth is due to reinvested profits.
So Fisher makes a point here that you don't really want to be looking for businesses that are paying dividends.
You should actually be searching for businesses that can reinvest in themselves at high rates of return.
And I've gone over the math of this, but essentially, compounding machines want as much capital inside of the compounding machine as possible, which is why you'll see certain businesses that have these super high returns on invested capital utilize debt, because they can oftentimes kind of juice their returns using debt.
Now, the last one here, is that Fisher talks about perception a lot.
I think quality businesses tend to be perceived in a more positive light than lower quality comparables.
This is advantageous especially when you can purchase a quality business at a low multiple, because you get the twin engines of growth in EPS growth and multiple expansion.
Now, outside of this theme, I noticed that Philip Fisher was just a very rational person.
For instance, when talking about conservative investments, he had a very different way of looking at them.
So he didn't consider blue chip investments to be conservative, which I think the majority of people and listeners probably do.
So he thought of these types of businesses as more likely to lose ground to up and comers and just were not conservative because of that.
So he proposed that a conservative investor is one who owns winners dynamic, well-managed enterprises that, because they are well-situated and do almost everything right, continue to prosper, grow and build value year after year.
So the final point on Fisher I'd like to share is in regards to buying.
Since many of our TIP listeners love quality investments, I think Fisher has some very good takeaways to help identify opportunities to buy quality businesses at reasonable prices.
So here are some of the points I highlighted that I think are most relevant today.
So there's three.
The first one here is buy during the startup period of new manufacturing, distribution or technological upgrades.
This can have the effect of suppressing cashflow as the business deploys capital expenditures.
The market can sometimes treat the decreased cashflow as a negative, which can often punish the share price.
But if you have a keen eye for these kinds of events and understand that CapEx cycles are necessary for the growth of a business, then you can capitalize on these types of events.
So I'll briefly mention here just Dino Polska, which I think is a really good example of this.
So Dino in 2024, the top of its CapEx cycle dropped in share price by nearly 40%.
So I think part of the reason for this.
There's many reasons and I'm not going to get into too many of the details, but one of the big reasons is that their store count has decreased.
And part of the reason that their store count has decreased is because Dino Polska doesn't borrow very much money from banks.
They want basically as much funding for the business that's for growth and for maintaining the business to come from internal cash flows.
So Dino Polska lately has been increasing their distribution centers.
And because they don't have access to unlimited capital, they have to reallocate money from opening new stores into these distribution centers.
And the reason they are making more and more distribution centers is to help support more and more stores down the road.
So you can kind of see how, if you have this view on their CapEx cycle and you think that it's correct and that hopefully the store count will once again reaccelerate, then you can see how this would be beneficial to investors who are bargain hunting for what I think to be a quality business.
So the second one here is buying a business on bad corporate news.
So Fisher mentions things like strikes, marketing errors, or other temporary misfortunes.
So I think meta is a pretty good example of this.
You can make the argument that it also has to do with CapEx, but I don't know.
For this case, I'm just going to make the case that it's bad news.
Mark Zuckerberg mentioned that he was going to invest $10 billion into the metaverse.
And this was news that just kind of shocked and obviously was not received well by the market.
So the stock had been trading at 340 after the news was announced, chalked off all the way down to 90.
So this also coincided with the bear market.
So there's kind of a Lollapalooza effect of multiple bad things happening at once.
But these are the types of things where, if you'd understood meta, understood the cash flows, understood the core business of it, you might've been able to identify that it was trading at a ridiculously cheap price there in 2022 and added or started a position in the business.
Now the third buying opportunity is when a business has a plant that just has poor efficiency, but that efficiency can be fixed.
If a business can say, upgrade a plant, work through some of the bugs it's having, the efficiency can often skyrocket as a result.
A great example of this is ADF Group, a business that I don't own.
So this is a business which over the past few years has upgraded its plant to utilize automation.
As a result, the net margins have just completely skyrocketed, which have drastically improved the company's operating leverage.
So here's how net margins have grown since 2020.
In 2020, they were negative 1.2%, following year 4%.
Year after that, 3.4%, then 6%, then 11.4%, and the trailing 12 months is 15%.
So these are great buying opportunities for quality businesses.
I think another one that wasn't mentioned by Fisher is buying when a business is negatively associated with another company.
Many super high quality tech businesses had their share price just pummeled in 2022 just because the general market faced these massive sell-offs.
If you have the conviction to buy during these periods, you can often pick up shares of just super high quality businesses at depressed levels.
So the next investor I'll cover here is another one that probably needs no introduction, and that's Benjamin Graham.
So I'm just going to do a brief one here, as I didn't feel that there was too much new information that hasn't been covered in a lot of detail, say in his book or his biography.
But there was an idea that I wanted to cover that I personally find interesting and different from a lot of the other quality investors that you'll find.
And that is Graham's sell criteria.
When you contrast his sell criteria with someone like Philip Fisher, you can very obviously see that the two of them were playing just a much, much different game.
While I'm more attracted to Fisher's framework, there are also a lot of value investors listening.
And I think Graham had a great framework for investors that are more interested in buying cheap and selling when price meets intrinsic value.
So Graham's sell criteria were the following.
One, sell after your stock has gone up 50%.
Two, if criterion one has not been met, sell after two years.
And three, sell if the dividend is omitted.
Now I think this method worked super well for Graham and it can probably work well for other value investors who are comfortable with higher levels of portfolio turnover.
While I have no problem with dividends being omitted high quality business Technion, for instance, used to pay a dividend, but they've gone away with it because they have high returns on reinvested capital.
But low quality cigar butts the type of businesses that Benjamin Graham was looking for send kind of a strong signal if they stopped paying their dividend.
If a business stops paying a dividend, it's usually doing it because it doesn't have the profits that are necessary to support it.
Now in Graham's case, he noted that a business with a high dividend yield boosted his strategy in terms of return.
So if the dividends were to stop, his prospective returns would decrease.
So now I'll shift to an investor who is just the polar opposite of Ben Graham, and this is Mark Lightbone.
Mark Lightbound was an incredibly successful emerging market manager.
Unlike say, a Jim Rogers, who would identify an interesting company and then just buy all the stocks that were for sale in that country, Lightbound would be highly selective in searching for winners.
So here's three factors in how he identified value.
The first thing he would do would be to determine the cashflow that would be generated by the business.
So the first way he did this is by adding net profits plus depreciation and amortization, the conventional definition of cashflow.
And then he would subtract the expenditures required for the company to stay in business but not necessarily to grow fast.
The second tool he would use here that he thought was even better than the first one, was to take operating profits, add back depreciation amortization, then subtract capex and working capital needed to maintain the expected growth rate of the business.
Train writes.
This calculation should reveal whether the enterprise will still spin off cash in hand to its owners or instead demand fresh equity to support growth.
It also shows an attractive price range to conduct your own buying.
So this tool was really interesting because it actually reminds me a lot of Buffett's owner's earnings, except that Lightbound used a CapEx number that would support growth, whereas owner's earnings uses a number just to support maintenance.
So the numbers would be a little bit different, but I think both tools are very, very interesting.
The third tool here that he would use to identify value is what he could sell that business for over and above what you paid, which that's just goodwill, right.
Let's say you put a million dollars into a business, can you now sell it for $3 million?
So that was the third way that Lightbound was looking at businesses.
This is an interesting concept, as it clearly states that he wasn't interested in buying businesses that would be evaluated purely off of tangible assets.
He wanted a business that would be building up hopefully, their intangible assets or had high levels of earnings power that would allow the business to be priced well above book value.
So one more here that I wanted to mention is to figure out just what stage a business is in in terms of when value is going to be added and when that value is going to actually arise.
So Mark was interested in knowing things like from which activity which decisions?
What market is it going to be generated from?
This would help him optimize his own understanding of a business's competitive advantage, profit margins and durability.
Now Mr Lightbound, like Buffett, preferred high-quality businesses which required little to no incremental investment to grow.
And he also wanted businesses that would pay cash to the owners, so the money could be redeployed elsewhere.
If management was reluctant to return cash to shareholders, that was perfectly fine with them, but they should definitely be skillful at reinvesting into the business at high returns on incremental invested capital.
Now, I noted two additional insights that I wanted to share with you.
Lightbound noted that too many analysts were able to look smart at dinner parties and just relay facts, but they were unable to kind of organize these facts into broad conclusions.
Many analysts would become engrossed with finding the facts but missed the bigger picture.
This is a very important concept as it relates well to noise that is all around us, trying to send us signals that may or may not have relevance.
The last point on Lightbound I'd like to mention is concerning his due diligence process.
Lightbound used a network of people to learn about a business's owners and managers.
He wanted to know if the managers he was researching were straight or not, and if he could trust them to be good stewards of his capital.
So instead of just looking inside of the business, or maybe looking at customers suppliers, he would actually tap into the backers of the company, people like bankers and brokers, to help them come to an accurate conclusion on that matter.
Now, if you have access to these types of people, I think that's a great source to learn more about management, but probably not going to be something that everyone can access.
The next investor I want to profile here is John Neff, who's probably the closest investor to Ben Graham in the entire book.
So John Neff is a value investor, most definitely in the traditional sense.
He buys stocks when they're cheap and he sells stocks when they get expensive.
He loves misunderstood and woebegone businesses that he thinks have wide divergences in price and value.
Now, Neff's early career in value investing brings a great insight.
So early in Neff's career, he was a security analyst with Cleveland's National City Bank.
But given his proclivity for misunderstood stocks, he'd often be at odds with other members of the trust committee.
As you can probably guess, these committee members preferred owning just big names, stocks that everyone knew, stocks that would reassure customers but probably offer inferior returns compared to what Neff was finding and looking for.
This is an important lesson because it shows that an investor working with others where the goals are misaligned can end up creating resentment in one or both parties involved.
John Neff had an interesting addition to his traditional value investing strategy, and this was an insistence on income.
So Neff preferred income as he thought it was relatively undervalued versus the market's hunger for growth.
In Neff's view, businesses with strong growth had multiple drawbacks.
They suffered from high mortality rates.
Growth doesn't continue for long after it's recognized.
And lastly, he thought that you could earn higher returns in slower growing businesses that paid a higher dividend right now.
So Neff is an interesting contrast to someone like a T Rowe Price who insisted on growth businesses for most of his career.
I think Neff's approach just shows that there are multiple ways to win in the market, and utilizing a strategy that just resonates with you will probably bring you the most wealth and the most joy.
Now let's come to the third point here, because I know we have a lot of different types of investors tuning into the show.
And I think his points benefit both dividend-focused investors, while giving investors who are looking at growing businesses something to ponder.
So Neff looks at this problem through the lens of certainty.
So let's say we have two potential investments.
Let's call it A and B.
You're analyzing them both and looking at what you can make the following year.
Let's say A appears to be a compounder that can reinvest 100% of its profits back into the business.
Therefore, it doesn't pay a dividend.
Now let's say this business you model for about a 15% growth in per share earnings.
Now let's compare that to company B.
B can only grow their per share earnings at about 10, but it also has a 5 dividend yield.
So when Neff compared these two, he would actually prefer B.
And the reason is because he thinks the certainty of getting 50 returns due to the dividend income is greater than just focusing on a business reinvesting in itself.
Now, the primary difference between Neff and Graham was that Neff wasn't looking at businesses strictly in a quantitative way.
Some of the criteria that he insisted on were things like a sound balance sheet, satisfactory cashflow, an above average return on equity, able management, the prospect of continued growth, an attractive product and a strong market in which to operate.
So these criteria definitely differ from traditional Graham-style investing.
Even though you'll note that growth did factor into his selection process, Neff made sure to note that he felt high growth rates didn't actually offer the best opportunities.
Neff felt that investors will think that a business with a low growth rate indicates that something is wrong with the business.
So Neff fished in this pond of 8 growing businesses because he felt this was where he could get a good mix of a bargain price and inherent growth.
Now Julian Robertson.
The next investor I want to talk about ran what I would consider kind of a classic hedge fund.
This is where you go long on ideas you like and short positions that maybe your long positions are going to crush in reality.
A good example from Julian Robertson's history was Walmart.
So Robertson observed that Walmart wasn't at a time necessarily a monopoly, but the business had just these amazing competitive advantages that made it very difficult to compete with.
And since he researched the industry so closely...
He felt that he could short the competition that Walmart was stealing market share from.
While this type of investing doesn't resonate with me at all, I know many hedge funds out there run very similar systems.
My other takeaway from this chapter on Julian Robertson was concerning growth.
So John Train compared Robertson to Icarus, who crashed at sea when flying too close to the sun.
As Robertson realized, more and more success which he had a ton of, don't get me wrong his fund took on more and more capital.
But eventually, the excessive amounts of capital caused his ship to crash down to earth due to the fact that it could just no longer function as it once had.
Now this is more of a problem for institutions that are likely to increase their assets under management with more success.
I just think institutions that maybe run, for instance, like a small cap strategy.
They need to be wary of how much capital they're bringing in.
Because if your AUM goes from 100 million to 500 million, that's definitely going to change the types of businesses that would maybe be movers for you in the past, but not movers for you now.
So let's move on to Jim Rogers, who's an investor who's best known for investing internationally, kind of like John Templeton.
There's an interesting dichotomy when I think of Jim Rogers after reading this book.
On the one hand, I don't resonate with his investing style at all.
But on the other hand, I very much resonate with the fact that he travels a lot and that he was a master at creating this kind of union between traveling, learning new things, seeing interesting things and then also profiting from all those interesting things that he learned during his time traveling around the world.
So let's first cover his investing strategy.
So he had four tests to determine if a country was any good to invest in.
The first one was that it must right now be doing much better than it had been doing previously.
The second, it must also be better off than is generally realized.
So that just kind of plays into perception.
The third is that the currency must be convertible.
If it is going to be convertible in a month, then he'll wait that month until he starts investing into that country.
He says there's plenty of time to invest after the currency has become convertible.
And the fourth is that there must be liquidity for the investor.
Jim Rogers knew, I guess, that sometimes he might be wrong and he wanted to be able to safely exit an investment if he wanted to.
So John Train added two profound points to Roger's strategy that I thought were brilliant.
So the first one here that The government significantly liberalizes investment conditions.
And the second is that local pension funds are partly privatized, which allows them to buy stocks in that market.
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All right, back to the show.
Train added these two points because he noted that obviously all this new liquidity entering the market would often make the market in its entirety go up.
Now-
All these points so far sound reasonable to me, but here's where his method just doesn't resonate with my investing style.
So Train discusses an example of Portugal.
Rogers negotiated with Portuguese authorities and he became convinced that Portugal was safe to invest in.
Now, this was in 1984.
He had been following the country closely for over a decade.
And after he got permission, he invested in every single stock on the Portuguese stock exchange.
Now, it was only 24, but still every single one.
So for investors who like making basket bets, I 100 see the allure of this system, but it's just not something that resonates with me personally.
Now, the next part about Roger's strategy that does resonate with me is the traveling part.
Train mentions that Roger's learned about a lot of the new opportunities through travel, reading history and reading philosophy, and not from business school.
So for a while, Jim Rogers was teaching security analysis at Columbia's School of Business.
And to these students he said study history and philosophy, do anything in preference to going to business school.
Wait on tables.
Hitchhike in the Far East, unquote.
Trane added that only if you do these types of things can you then develop a rounded perspective on life.
The last point I'll make here on Jim Rogers is in regard to information.
Rogers believed that having no information was better than having the wrong information.
His point being that, if the basic facts are wrong, additional errors are likely to build on top, leading to an even more wrong conclusion.
I think this is a very powerful notion today with just how easy access to information is.
And I think it shows how vital it is to ensure that the information that you're getting is accurate.
And that means doing your own due diligence.
Jim Rogers is a good segue into the next investor I'd like to discuss, which is George Soros.
They were partners for a time.
So Soros had an insane run, compounding money in his publicly held portfolio at 33 per annum for 29 years.
It's just an outstanding track record.
And what's even more interesting is how he did it.
So he's a speculator.
He's not a true investor like Warren Buffett.
He also uses leverage and derivatives.
So he's just a different animal than a lot of the value-based investors that we've talked about so far on this episode.
But someone who's had that much success always leaves lessons and clues, even if their investing style is so much different.
So one area of Soros that I found insightful and somewhat surprising is that he didn't spend time on economic study.
For someone who made much of his fortune speculating on what appeared to be large economic events.
I found that really surprising.
But when you dig in and consider some of the sources that he had, you can see that he had this ability to get straight to the matter of what was important for him to know, I guess without taking economic study into too much a focus for him.
For instance, he participated in the Council on Foreign Relations.
He had friendships with high-ranking US officials at the time, such as Secretary of State Madeleine Albright and Assistant Secretary of State Peter Tarnoff.
And John Train points out that Soros had access to high levels of government in most of the significant countries of interest to him.
So He just had access to things that the normal person wouldn't have access to.
So to me, Soros had a very specific niche where he could work and succeeded very well in that niche.
Now, in terms of replicating that network of people to draw insights from, you'd be very hard pressed to build the type of network that Soros had.
And I think without that network, I don't think that Soros' strategy would have worked.
Now, this is an interesting lesson and reminder to just be careful who you take advice from.
There are people in money management playing vastly different games than I am.
If I were to take advice from a momentum trader who planned on buying and selling the stock over a four-hour time period, that information for me would be next to useless.
For another momentum trader, it might be the best information they've had all year.
For me, I prefer businesses I can hold for years, not hours.
But it can sometimes be easy to confuse advice from people playing different games and assume that they're always playing the same game as you.
If Soros gave me advice, he may have been completely correct, but I would have no way of verifying it because I didn't have the ability to call up the Secretary of State and ask them their opinion on a specific geopolitical event that would need to happen in order to make money on a trade.
So John Train outlines two of Soros' principles of speculation that I think are worth mentioning here.
They're one.
They are, one, start small.
If things work out, build up a larger position.
This ties in with his view that, in a world of floating currencies, trends get steadier and steadier and more determinable as they develop.
The second point here is that the market is dumb, so don't try being omniscient.
Soros says, investors operate with limited funds and limited intelligence.
They do not need to know everything.
As long as they understand something better than others, they have an edge, unquote.
Even though I don't consider myself a speculator, these two principles actually really resonate with me.
On the first point about starting small, I especially like this one business that I know a little bit about and I wanted a small piece of and I wanted to deepen my understanding of it.
So in that case, I just took a 1% position in my portfolio.
And now I officially kind of gave myself some skin in the game.
Now I've done enough work to know that I probably want to make this a larger position.
But once you put in just a smaller position, you get this commitment bias.
And I think you can use that bias to your advantage to really make sure that you're doing the right, proper due diligence to learn more about that idea talking to people about the industry, learning about competitors and all that sort of background research that needs to go into making an idea, hopefully a more concentrated idea.
And then you know.
Other thing that's interesting about having these smaller positions that you eventually grow over time is that if you like it, you can just make the position bigger.
If you're unsure that, you like it.
You can hold the position for a time and then see what happens over the next, say six months or a year.
Are you gaining conviction?
Cool.
You can add to it.
Are you losing conviction?
Then maybe you need to just get rid of it.
And then I personally like 10%-ish positions.
I like ones that I can hopefully put a lot of my capital behind.
I realized that not all of my picks actually deserve that amount of capital.
So I'll have some positions that maybe aren't going to be 10% positions by cost basis.
And I might hold onto it for a long period of time and that's okay.
But For me, a business kind of needs to prove itself before it becomes a bigger position.
And I think utilizing these kind of smaller initial stakes helps you determine whether a business is worth owning more shares of or not.
Now onto the second point.
Soros clearly didn't have a very high opinion of the levels of intelligence on Wall Street.
But I think his points about understanding something better than others is probably the most important part.
This is just how you identify your edge and try to take advantage of it.
Speaking of edge, Soros has some interesting advice on it.
He feels he can gain an edge in the game by constantly questioning his own analysis.
His awareness of his own fallibility and that of markets is his advantage.
So constantly questioning your own analysis is just vital to success, because we are the easiest people to fool.
Now let's shift to talking about another investing legend, which is Philip Kure.
I resonated with a lot of the points that he made, and that's probably because he had a deep affinity for over-the-counter stocks.
The primary reason he gave for liking these stocks were because they were less subject to manipulation and they were just less affected by crowd psychology.
While I personally don't care for over-the-counter stocks, I share in his love for stocks that are undiscovered, which Phil was also looking for.
So he had a few investing precepts that I found informative and kind of novel.
At least once in six months, reappraise every security that you hold.
Be quick to take losses and reluctant to take profits.
And seek facts diligently, advice never.
Now let's go through these in a little more detail.
I think it's vital to reappraise your holdings every six to 12 months.
It can help keep you up to date, but still zooms out a little bit to decrease the effects of noise.
Sometimes you might find a business just no longer has the advantages that it once had, or maybe debt levels are getting uncomfortably high, or maybe management is making foolish decisions.
The regular reappraisal can be a good way of making sure you aren't overstaying your welcome on a bad investment.
Now, his point about being quick to take losses and reluctant to take profits is provocative.
Is he referring to taking losses just because a business's stock price has gone down?
Or is he saying that if a business has cracks in its fundamentals, you should get out before those cracks become gaping holes?
You'll have to read the chapter and decide that on your own.
It was the part about the reluctance to take profits, part of the sentence, that really interested me the most.
I think this is just the key to great investing that I think Philip Fisher definitely talked a lot about.
And if you're looking to invest in companies that can continue to improve, fundamentally speaking, you want to hopefully be reluctant to take profits.
Good businesses will go up in price and will continue increasing its fundamentals.
Now the market tends to get that part pretty easily, but don't make the mistake of selling a holding just because it doubles in price.
If that happens, I mean you might pat yourself on the back, but Multiple years later, when the business just continues compounding, you're probably going to be full of regret rather than the joy that you once had.
So finally, the point about focusing on the facts really resonated with me.
If you're researching a business or an industry, you need to focus on the facts that are out there.
In the research process you might find other analysts that are great at dispensing advice, but advice unfortunately, is exposed to a lot of bias.
Facts are the truth of the matter, whereas advice is just an opinion.
So do your best to stick with the facts as much as possible and make your own opinions.
Let's now talk about another investor who reminds me somewhat of Soros in the fact that his strategy is not easy to replicate.
And that's Michael Steinhardt.
So I can see the allure of investors who want to try and replicate a strategy.
He did 27% returns compounded annually for 20 years.
But there's an interesting relationship that Michael had in the markets.
So, instead of hobnobbing with upper levels of government, like Soros did, he had these incredible relationships with the brokers who bought and sold stocks for him.
So here's what Train wrote.
Some Wall Street houses have so much influence that when they change an opinion, they can move the markets by themselves.
Steinhardt wants to get the first call when the key analyst of such a firm changes his mind.
Not because the analyst is necessarily right, rather because the people he calls after Steinhardt will think he'll be right.
So if you read in the papers that some wizard believes that the prospects are improving for Texas Instruments, don't be surprised if the stock has already gone up.
Steinhardt probably got the first word, unquote.
Now, if you listen to the show regularly, you know I'm a major fan of incentives.
So what were the incentives for the brokers to relay this information to Steinhardt?
Well, for one thing, commissions.
If you provided Steinhardt with interesting ideas, he would buy or sell to you on the spot, creating windfall commission profits on the order.
Or if a broker was trying to unload a stock they were maybe having a difficult time selling, Steinhardt would take it off their hands at a slight discount.
In return for these favors.
If Steinhardt believed a stock maybe would go down in price due to some sort of bad news or event, he could get a broker to take it off his hands before word got out.
Now this information arbitrage game reminds me of the great windfall that was made by Nathan Rothschild during the Battle of Waterloo in 1815.
So the Rothschilds had set up this complex network to relay information at insanely fast rates for the time, of course.
So he had things like a private courier system with shipping agents.
He had fast and light vessels that were ready to sail at any time.
He had a relay of horses to deliver messages and even had a farm on the coast for carrier pigeons.
So the Rothschilds learned that the English had defeated Napoleon on the night of Monday, June 19th 1815.
They called the Prime Minister of England to give the news.
They then proceeded to provide that news to the government.
Then Nathan Rothschild headed back to the stock exchange, where he was now the only person that was aware of this important news item.
It's kind of unknown how much they made, but by some accounts they doubled their net worth within a year after this event.
So Steinhardt's method like Rothschild's requires the right infrastructure.
And if you're able to build it, good things can happen.
The last one I'll make here on Steinhardt is the reason that he had these great relationships with brokers in the first place.
He was a trader.
Train mentions his portfolio would turn around every month or two in a good year.
And Steinhardt said he traded this way because he just liked small moves.
And that's the way that he traded.
So I think the fact that he was a big time trader obviously put him in the good graces of the brokers, because they knew that he was a type of person that would continue giving them commissions.
Whereas someone like Warren Buffett sure, Warren's obviously going to buy and sell massively sized positions, but his general strategy is to hopefully hold them for a really long period of time
So they're not going to make a commission on a very regular basis.
The chapter on Ralph Wenger might have actually been my favorite in the entire book.
So Ralph Wenger seemed to be the type of investor who thought closest, in my opinion, to Charlie Munger.
And this is because Ralph Wenger was a fan of using metaphors in his investing which, when you think about it, is exactly what a mental model is.
The chapter opens up with this wonderful metaphor about zebras in the investing industry.
So Wenger says zebras have the same problems as institutional portfolio managers.
They both seek profits.
Portfolio managers seek above average performance and zebras search for fresh grass.
Two, they both dislike risk.
Portfolio managers can get fired while zebras can become another animal's meal.
And third, they both move in herds.
They look alike, think alike, and they stick together.
Wenger says a key distinction in zebra herds are the inside zebras and the outside zebras.
The inside zebras are where the institutions are.
Zebras in the middle of the herd are the safest from predators, while those on the outside are at more risk.
But the ones on the outside eat the greener, longer grass.
But during times a lion is seen around the herd, it's the zebras that are on the outside that will make the first meal, while the zebras on the inside will hopefully live another day.
Renger writes.
A portfolio manager for an institution such as a bank trust department cannot afford to be an outside zebra.
For him, the optimal strategy is simple.
Stay in the center of the herd at all times.
As long as he continues to buy popular stocks, he can't be faulted.
To quote one portfolio manager, it really doesn't matter a lot to me what happens to Johnson & Johnson as long as everyone has it and we all go down together.
On the other hand, he cannot afford to try for large gains on unfamiliar stocks, which would leave him open to criticism if the idea fails.
Needless to say, this inside zebra philosophy doesn't appeal to us long-term investors.
We have tried to be outside zebras most of the time and there are plenty of claw marks on us unquote.
Now, I absolutely love this metaphor, as it does a great job of explaining Warren Buffett's view on the institutional imperative that pervades the investment industry.
Wenger says as long as a metaphor remains apt for a portfolio holding, the business is considered a hold.
But once the metaphor no longer applies to a business, then the stock should be sold.
Wenger, like Correa, focused his efforts on inefficient areas of the market.
In Wenger's case, this was smaller companies.
He was practicing value investing in a small cap world.
He wanted to buy businesses where price was below value, same as a lot of other investors that we've talked about today.
He would patiently wait for businesses to grow, and then he would sell once they reached intrinsic value.
Wenger noted that part of the reason small caps were mispriced were that institutions would often sell some of these small companies at a discount just to raise capital to buy more mature businesses that were already fully valued.
Kind of illogical, but I think that's what still goes on today.
Now similar to Chuck Ackery's three-legged stool strategy.
Wenger had a tripod that he referred to as part of his own investing strategy.
This tripod included growth potential, financial strength, and fundamental value.
Now, nothing here is too groundbreaking, but the one area I liked was concerning value.
Ralph thought that investors go through times when they confuse a company with its stock.
Ralph wanted a good company that appeared to be an unattractive stock.
I think that's a great lesson, because those are the types of investments that you can have a lot of success in.
And it helps you stay grounded in reality.
A stock isn't a company.
The minute you forget that, you put yourself at a major, major disadvantage.
Now there's no shortage of research that you can go out there and look for on why I personally give preference to smaller companies outperforming larger ones.
But Wenger cites an interesting study I've never seen before, published by Ibbotson Associates in 1995.
So this study tracked the return of stocks from a 70-year time period between 1925 and 1995.
In that period, large companies returned a very respectable 105 on average and the small companies returned 125 on average.
So when Wenger was asked for his reasoning for this difference, he came up with a metaphor.
He called it Darwinism in the marketplace.
He hypothesized that managers of small companies respond better to change.
Their small size also gives them more room to grow by quickly implementing initiatives that mature companies are just unable to do.
And lastly, large companies are better understood by the market as that's where all eyes tend to be.
Small caps just don't get the same attention.
So the last insight I got from this great chapter was regarding Wenger's thoughts on tech stocks.
So he believed that you shouldn't invest in the tech stock itself, but in the business that will improve as a result of using a transformative technology.
This makes me think of an automation manufacturer called House of Design.
While they are an interesting private company, I'm actually more interested in who their customers will be.
I already know one of their customers, a holding of mine is Atlas Engineered Products.
And part of my conviction for Atlas is based on the improvements that are likely to occur inside of Atlas as they roll out this automation or rolling out technology used upstream from them.
Now, Robert Wilson is similar to some of the other traditional hedge fund managers outlined in this book, as he would go both long and short as part of his strategy.
Once short of stock, he would begin rallying support behind his ideas.
While I have no interest in shorting a business, this is still valuable information to search for, as his ideas, if true, probably meant that there was something fundamentally wrong with the business.
A few interesting concepts that Robert Wilson would try and describe to people that would listen as to why a stock would be overpriced, were things like a grim outlook on the future, obsolescent plants, insincere management, tougher competition, increased costs, decreased demand for their product, product obsolescence, financing issues and regulatory problems.
Now, it's important to remember that short sellers, unfortunately, tend to have perverse incentives.
For instance, short sellers have attacked a business that I've discussed numerous times on TIP, which is Evolution AB.
You can learn more about the short report on my co-hosted episode with Clay on TIP 604.
The problem with short sellers is that they are actively trying to get a stock price to go down as they make money as a result.
But the problem is that they're often wrong on their assumptions.
For instance for Evolution.
They were wrong on the assumption that Evolution was knowingly taking in gross gaming revenue from countries in which iGaming was illegal.
In reality, Evolution did everything it needed to appease regulators.
Problem of using a virtual private network to attempt to bypass regulatory requirements was actually up to the operator to do.
Evolution just provides the games.
But as a result of the short report, Evolution's share price dipped considerably.
Nonetheless, I think Wilson's reasoning on why a business might be overpriced, given above, is still a powerful tool to monitor all of your businesses.
Identifying potential problem areas in your businesses is smart because it can help you monitor how management is trying to solve them.
And if you can identify that there's a problem that's unsolvable, that might be a case that you just need to head to the exit for an investment.
A great Wilson concept that has saved him the most amount of money as an investor is this.
Don't try to anticipate how fast competition will undercut an established company.
There's no use theorizing how competition will unfold.
It's best to wait and see what really happens.
With Tampax, for instance, one could have started worrying about competition 25 years ago.
However, one could have made a fortune in the stock before the problem became acute, as it finally has.
This makes me think of a concept that Michael J Mobison has mentioned, which is the competitive advantage period.
The competitive advantage period, or CAP, for a business is how long returns above the cost of capital will be earned.
For a business like Tampax, that period was very long.
I think this cap period is part of the reason that many high quality businesses end up being undervalued.
The market will default to using a number such as five years, where the cap period continues, and then they reduce the growth to a perpetuity number, such as 2.
But there are many good businesses that have decades long competitive advantage periods.
And if you identify them, then you can pay optically high prices for a business and make excellent returns, as long as they are making returns above their cost of capital.
I'll finish the section of Robert Wilson with a quote regarding the points that we just covered.
Don't worry about a healthy company's competition.
Every good run will end, but don't anticipate.
It's better to sell a winning stock too late than too soon, unquote.
So the final investor covered in this book is going to be Peter Lynch.
This chapter on Peter Lynch was phenomenal as well because, even though Lynch has written two books, there was a lot of information from Train's interview with Lynch that weren't really mentioned in either of his books.
My favorite part of the Peter Lynch chapter was in better understanding why Lynch owned so many stocks, especially when he understood very well that only a few winners were needed to produce good results.
So Lynch said that he'd bought over 15000 stocks in his entire career, which lasted only 14 years, which is relatively short compared to many of the other managers that were profiled in his book.
I was interested in finding out more about why.
Why did he buy so many stocks when it appeared that he just did so much due diligence and so much work where it felt like maybe he had the ability to identify winners in a specific industry?
But his strategy, Train points out, was more of being a market maker.
He was very adept at understanding the rhythm of stocks in a specific industry.
And he could therefore trade in and out of different names, making smaller profits repeatedly, which led to his outstanding results.
Lynch took a more top-down approach in his investing.
He'd look at an industry that he liked, then buy all of the stocks in that industry.
He said that after three months he'll be happy with maybe a quarter of these picks, after doing additional research.
But because he followed the industry as a whole so closely, he could better identify when the fundamentals were improving or deteriorating for a specific business in the industry and then add or subtract from his positions.
Now I'm kind of speculating here, but I think Lynch understood the power of having skin in the game.
He knew that if he had money in all the businesses in an industry, he would follow up on all those businesses very, very closely.
And when he identifies a winner, he could reallocate funds into that winner.
I've often thought about how to best go about tracking the competition of the businesses that I own.
My framework is simple.
First, when reading a business's earnings calls, I'll note that sometimes competitors are named and I'll add them to a list.
Then I'll use something like Seeking Alpha. they categorize peers on a company's profile.
Now, often the peers that they have on Seeking Alpha aren't actual peers at all, but sometimes they have suggestions that are actually good and ones that I maybe wouldn't have thought of.
Third, I'll head over to Google and I'll just search for public businesses in XYZ industry.
That often will yield a few additional names.
And then lastly, I, once again, will use Seeking Alpha.
I'll create myself a portfolio and I'll add all those names to it.
You can also just use something like Yahoo Finance, which I know is completely free.
Then what I can do is I can just go to all these different portfolios.
Let's say Evolution, I'll just call it Evolution's competitors or iGaming or whatever, click on that.
And then, using something like Seeking Alpha, it shows me any new news, earnings reports and analysis that are in relation to the business that I own and its competitors.
While I admit I probably don't track competitors as closely as the businesses that I own myself, I still think that this is a pretty decent workaround.
It's important to track competitors because it can often point out why your business is superior.
It can also show some of the competitive practices in an industry.
Additionally, if you see that your business is doing poorly, it can be worth seeing how competitors are faring as well.
If you have a business in your portfolio that may be doing bad, and then you look at all the other competitors and they're doing even worse well, then you know that you're probably in good shape and that you probably don't need to hit the panic button.
The last part I'll mention about Lynch was on his multi-bagger concept.
I think some investors get so caught up in the 100-bagger concept that they sometimes just skip good investments because they have no chance to getting to 100X.
I think this is probably a suboptimal way to invest.
You can do very, very well, just like Lynch did just getting good businesses that can double 5X or 10X in reasonably short periods of times.
The fact is most businesses aren't going to 100X.
Of course, there will be outliers.
And it's important to remember that.
But I think Lynch understood this very well and used his kind of value approach to find businesses that could be multi-baggers without having to fall in love with them and riding too many of them on the way up and on the way down.
So that's all I have for you today.
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