Key takeways from One up wall street

 

3 ways to invest in trend without paying a high price.

A) Look for non trend companies that indirect benefit from the trend (offshoot of the old picks and shovels strategy).

B) Free trend play. A business relating to the trend is embedded in another business with real earning and a reasonable stock price.

C) Tangential benefits, where an old fashioned brick and mortar business benefits from using the trend to cut costs and streamline operations.

If you own a retail company, another key factor in the analysis is figuring out whether the company is nearing the end of its expansion phase, whether shake shack has established itself in 10% of the country, it’s a far different prospect than having stores in 90% of the country.

You have to keep track of where the future growth is coming from and when it’s likely to slow down.

The six categories

The slow growers -Expected to grow slightly faster than the GDP. Generally pay dividends.  Avoid them. If growth in earnings is what enriches a company, what’s the sense of wasting time on sluggards.

The stalwarts - are expected to do 10-12% annual growth earning

You have to consider taking profit more readily than you would with a high growth. Stalwarts are stocks that you generally buy for a 30-50% gain then sell and repeat

Beware of possible diworseification that may impair value

See how the company has fared during previous recessions and market drops 

The fast growers-small aggressive new enterprises that grow at 20-25% a year.

These upstart enterprises learned to succeed in one place and then duplicate the winning formula over and over, mall by mall, city by city. Look for the ones that have good balance sheet and are making substantial profits. The trick is figuring out when they will stop growing or does it still has room to grow and how much to pay for the growth.

One mistake to avoid, does the idea work elsewhere? Wait to see if the good idea from the city, would actually succeed someplace else. There’s no point buying the stock until the company has proven that the cloning works

If a fast grower embark on acquisition, pay attention as the fast growth might be over. In the growth phase, it would have invested all its money in its own expansion.

Track whether the expansion is speeding up or slowing down

Cyclicals- Do not mistook it with the trusty stalwarts.

You have to be able to detect the early signs that business is falling off or picking up

Keep a close watch on inventories 

Turnarounds

Look at perfectly good company inside a bankrupt company

Look at minor tragedy perceived to be worse than it was, and in minor tragedy, there’s major opportunity 

Stay away from the tragedies where the outcome is unmeasurable

How is the company supposed to be turning around? Has it rid itself of unprofitable divisions?

The asset plays- a company that’s sitting on something valuable that you know but Wall Street has overlooked.

-tax loss carryforward, cash, land holdings

Spin offs

A month or two after the spinoff is completed, check to see if there is heavy insider buying among the new officers and directors 

Take note of institutional ownership. The lower the better

Prefer low growth industry, especially boring ones. There would not be competition or potential rivals.

-This allows the market leader to continue to grow and to gain market share from weaker rivals

Prefer investing in companies that does steady business ie soft drinks, drugs, razor blades as compared to fickle purchases such as toys.

Prefer companies that is a user of technology

Prefer companies that the insiders are buyers

- at a minimum, the company will not go bankrupt in the next six months

-when management owns stock, rewarding the shareholders becomes a priority.

- it’s more significant when employees at the lower level add to their positions. 

-In normal situation, insider selling usually means nothing, they may need to pay tuition, satisfy a debt but in rare cases, where the stocks has rise substantially and 9 officers are selling majority of their shares. Do take note.

Stock to avoid

- avoid the hottest stock in the hottest industry 

- avoid diworsefication- acquirer that overpaid for company that beyond their realm of understanding-from an investor’s point of view, you can find turnaround opportunities among the victims of diworseification that have decided to restructure

- it’s not always foolish to make acquisitions. It’s a very good strategy where the basic business is terrible, for instance if Warren Buffett had stuck to textiles.

Future Earnings

-Even though you can’t predict future earnings, at least you can find out how a company plans to increase it earnings, then you can check periodically to see if the plans are working out.

Inventories

-with a manufacturer or a retailer, an inventory buildup is usually a bad sign, when inventories grow faster than sales, it’s a red flag

-on the bright side, if a company has been depressed and the inventories are beginning to be depleted, it’s the first evidence that things have turned around

On profit margin

-the company with the highest profit margin is the lowest cost operator and the low cost operator has a better chance of survival if business conditions deteriorate.

When to sell

All the evidence tells you it’s going higher, and everything is working in your direction do not sell

Try to review the reason why you bought it in the first place

When to sell a stalwarts, the stock has a substantially higher pe, while similiar quality companies are much lower

When to sell a cyclical, is that inventories are building up and the company can’t get rid of them, which means lower prices and lower profits down the road. 

Union contracts expiring and labour leaders are asking for restoration of wages

Best time to sell a turnaround is after it’s turned around. All the troubles are over and everybody knows it.

Key takeaway from Richer, Wiser, happier

 







John templeton

Lessons to be etch into the brain.

You have to buy at a time when other people are desperately trying to sell, the point of maximum pessimism.

Templeton’s six guiding principles 

First, beware of emotions. People get led astray by being excessively careless and optimistic when they have big profits and excessively pessimistic when they have big lossess.

Second, beware of your own ignorance, you need to understand what it is that you’re buying.

Third, you should diversify broadly to protect yourself from your own falliability.

Fourth, successful investing requires patience.

Fifth, the best way to find bargains is to study whichever assets have performed most dismally in the past five years, then to assess whether the cause of this woes is temporary or permanent.

Sixth, one of the most important things as an investor is not to chase fads.

Howard marks 

The future may be unpredictable, but this recurring process of boom and bust is remarkably predictable.

We can’t demand a more favorable set of market conditions. But we can control our response, turning more defensive or aggressive depending on the climate.

Both in markets and life, the goal isn’t to embrace risk or eschew it, but to bear it intelligently while never forgetting the possibility of an unpleasant outcome.

When analysing any asset, what is the amount of optimism that’s in the price .

Joel greenblatt

I don’t buy more of the ones I can make the most money on. I buy more of the ones that I can’t lose money on.

Bill Ruane 

Invest in a small number of stocks that you‘ve  researched so intensively that you have an informational advantage.

Nic sleep and Zakaria

There is the idea of focusing on whatever has the longest shelf life, while always downplaying the ephemeral.

There is the realisation that one particular business model- scale economies shared-creates a virtuous cycle that can generate sustainable wealth over long period.

In a world that’s increasingly geared toward short-termism and instant gratification, a tremendous advantage can be gained by those who move consistently in the opposite directions.

McLenanan

Focus considerable attention on exposure and preparing for a future that may look nothing like recent experience. Beware of the habit of trusting that the future will resemble the recent past.

Future is so uncertain that investors should structure a portfolio that can endure various states of the world, focus heavily on avoiding permanent losses

Focus on resilient wealth creation, imperative to eliminate debt, avoid leverage and beware of excessive expenses. You don act rationally when you’re investing borrowed money.

Be keenly aware of our exposure to risk and should always require a margin of safety.

Sent from my iPhone

Key takeaways from Reed Hasting's book no rules rules

First

Build up talent density by creating a workforce of high performers

Introduce candor by encouraging loads of feedback.

-Frequent candid feedback magnifies the quality of the team.

-Solict feedback constantly and respond with belonging cues.

-Feedback guidelines

Giving feedback

1)Aim to assist- given with positive intent

2)Actionable-feedback must focus on what the recipients can do differently

Receiving feedbacks 

3)Appreciate-become neither defensive nor angry

4)Accept or discard- required to listen and consider but not required to follow

Remove controls such as vacation, travel, and expense policies.

-encourage mangers to set context about how to spend money

- fire people who abuse the system and speak about the abuse openly

-employees will be able to make quick decisions to spend money in ways that help the business 

-without the time and administrative costs associated with purchase orders and procurement process, you will waste fewer resources 

-employees will respond to their new freedom by spending less than they would in a system with rules.

Second

Strengthen talent density by paying top of market

- don’t pay performance based bonuses. Put these resources into salary

Increase candor by emphasizing organisational transparency 

-share sensitive financial and strategic information with everyone in the company.

-if information is about an employee’s personal life, tell people it’s not your place to share.

-As long as you’ve shown yourself to be competent, talk openly about your own mistakes, will increase trust and goodwill.

Release more controls such as decision making approvals

-Ownership of critical, big- ticket decisions should be dispersed across the workforce at all different levels.

-Do not seek to please your boss.

-A worker’s performance will be judged on the collective outcome of his bets, not on the results from one single instance.

-To make good bets, farm for dissent, socialise the ideas and for big bets, test it out

-When a bet fails, sunshine it openly so everyone can learn from the mistakes.

Third

Max up talent density by implementing the keeper test

-which of my people would I fight hard to keep if they were leaving

-Reduce fear, encourage employees to use keeper test prompt. How hard would you work to change my mind if I were thinking of leaving 

Eliminate most controls by leading with context not control

-if you want to build a ship, don’t drum up the people to gather wood? Divide the work and give orders. Instead, teach them to yearn for the vast sea.

-when considering whether to lead with context or control depends on whether your goal is error prevention or innovation. If focus is on eliminating mistakes, then control is best

-For leading with context to work, the necessary conditions are high talent density, a goal of innovation rather than error prevention and a loosely coupled system.

-Once these elements are in place, instead of telling them what to do, get alignment by providing and debating the context to allow them to make good decisions.

Review Erin Meyer culture map

Common stocks and uncommon profits key takeaways

What to buy
Does the company have products/ services with sufficient market potential to make possible a
sizable increase in sales for several years.
-As the industry grows, would it be relatively simple for newcomers to start up and displace the leading units (new sales growth potential has low barriers to entry)

Does the company have a worthwhile profit margin.
-the only reason for considering a long range investment in a company with an abnormally low profit margin is that there might be a strong indication that a fundamental change is taking place within the company
-One deviation is companies deliberately elect to speed up growth by spending profit they would otherwise earned.

What is the company doing to maintain or improve profit margins.
-Success of a stock purchase does not depend on what is generally known about a company at the time the purchase is made. It is the profit margin of the future that it’s important to the investor.

Does the company have outstanding  labor relations.

Does the company have outstanding management.

Does the company have a long range outlook in regards to profit.

Does the management talk freely to investors or “clam up” when troubles occur.

Will the growth of the company require issuing shares negating the existing stockholders’s from anticipated growth.

When to buy 
The company is doing things under the guidance of exceptionally able management. The investor should be throughly sure in his own mind that these troubles are temporary rather than permanent. If these troubles have produced a significant decline in the price of the affected stock and give the promise of being solved in a matter of months rather than years, he can consider that this is a time when the stock maybe bought.

There is a worthwhile improvement in earnings and this particular increase in earnings has not yet produced an upward move in the price of that company’s shares.

An investor should ignore any guesses on the coming trends of general business. He should invest the appropriate funds as soon as the suitable buying opportunity arises.
He is making his bet upon something which he knows to be the case, rather than upon something which he is largely guessing.

He should stagger the timing for further buying. By doing so, if the market has a severe decline during this period, they will still have purchasing power available to take advantage of such a decline.

When to sell
1)A mistake has been made. The factual background of the company is less favorable than originally believed.
-More money has been lost by investors holding a stock they really did not want until they could at least come out even.

2)Sales should be made if the company no longer posses the desirable investment characteristics as to the same degree it qualified at the time of purchase.
-Deterioration of management
-Deterioration of moat
-Lack of growth prospects. Whether at the next peak of a business cycle, per share earnings will show at least as great an increase from present levels as the present levels show from the last known peak of general business activity.

3)Selling a satisfactory holding in order to get a better one.

Once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling at all.

An investor should never sell out of an outstanding situation because of the possibility that a bear market may be about to occur. Do not risk losing a permanent position in a company which over the years should continue to show unusual further gains just because it is currently overpriced. Do not disturb a position that is going to be worth a great deal more in future.

When do stockholders get no benefits from retained earnings?
Managements pile up cash far beyond any present or prospective needs of the business.

Substandard management can get only a sub normal return on capital already in the business, yet use the retained earning merely to enlarge the inefficient operations rather than to make it better.
-Economic environment forces each competitive company to spend money on so-called assets which in no sense increase the volume of business, but which would cause a loss of business if the expenditure had not been made.
-flaw in accounting shows no differentiation between such assets and assets which have actually increased the value of the business.

If invested in the right company, investors are better off when the management of such companies reinvest increased earnings than they would be if these increase earnings were passed on to them as larger dividends which they would have to reinvest themselves.

High dividends yield does not mean much. An otherwise good management which increases dividends and sacrifices worthwhile opportunities for reinvesting increased earnings is like a farmer rushing to sell his livestock rather than raising them to a maximum profit.

Don’t for investors
Don’t assume that the high price at which a stock maybe selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted in the price.
-A stock discounting its future earnings ahead might be overpriced but the assumption is that the company would be trading at the average pe of the index. If this is an outstanding company, new products and earnings in the ensuing decade will swell earnings, and the industry is promising, the pe in future would still be much above than the market pe
-If the earnings spurt that lies ahead is a one-time matter and the company’s nature is not such that new sources of earning growth will be developed. The high price earning ratio does discount future earnings.

Don’t quibble over 50cents and 1 dollar
- if the stock seems the right one and the price seems reasonably attractive at current level, buy” at the market” the additional 50cents paid is insignificant as compared to the foregone profit if the stock is not obtained.

First dimension of a conservative investment
Not only must it be a low cost producer, it must give promise of continuing to be so in the future.

Second dimension of a conservative investment- human factor
The company with real investment merit is the company that promotes from within. A large company’s need to bring in a new chief executive from the outside is a damning sign of something basically wrong with the existing management.

There must be evidence that the employees feel that their company is a good place to work.

Key takeaways from Dead companies walking

Companies failed because of one or more of the six common mistakes.

1)They learned from only the recent past.
-Instead of paying attention to larger, less frequent cyclical patterns.
Most people confine themselves to the history of the previous few years and assume that the more distant past is less important or relevant.

2)They relies too heavily on a formula for success.
-following the GARP formula will cause you to miss exceptional companies such as Costco, Mastercard, Starbucks.
-Beware of companies subscribing to the risky formula of hypergrowth ie aggressive store expansion.

3)They misread or alienated their customers.
-Ron Johnson and JC penny.
4)They fell victim to a mania
5)They failed to adapt to tectonic shifts in their industries.
-Blockbuster retail strategy to tackle Netflix.
-Watch out when two troubled businesses combine. Two money losing companies with identical obsolete business models do not merge to become one profitable business.

6)They were physically or emotionally removed from their companies’ operations.
-Ron Johnson and JC penny, Eddie lampert and Sears. Their self-
Imposed distance from their own workers. You are not able to make major changes in a company with thousands of employees unless you connect with them directly.


The two best indicators of a company on its way to bankruptcy - rapidly shrinking revenues and a quickly rising debt load.

Whenever you see ”sluggish economy” chestnut in a disappointing earning report, make sure to check how the company’s competitors are faring.

Key takeaways from How to win friends and influence people.

Fundamental techniques in handling people
Principle 1
Don’t criticize, condemn or complain.
-Criticism does not persuade people. It puts a person on the defensive and usually makes him strive to justify himself.
-Criticism is dangerous, because it wounds a person’s pride, hurts his sense of importance, and arouses resentment.
-An animal rewarded for good behavior will learn much more rapidly and retain what it learns far more effectively than an animal punished for bad behavior.

Principle 2
Give honest and sincere appreciation.
-Everyone likes a compliment. The deepest urge in human nature is “the desire to be important”
-Try to figure out the other person’s good points.

Principle 3
Arouse in the other person an eager want.
-The only way to influence people is to talk in terms of what the other person wants and not your own.
-If you need to persuade somebody to do something. Pause and ask yourself: “How can I make this person want to do it?”
-Understand the other person’s point of view and see things from that person’s angle as well as from your own.

Six ways to make people like you
Principle 1
Become genuinely interested in other people
-If you want to make friends, put yourself out to do things for other people- things that require time, energy unselfishness and thoughtfulness.

Principle2
Smile
-A smile enriches those who receive, without impoverishing those who give.

Principle 3
Remember that a person’s name is to that person, the sweetest sound.
-take the time and energy necessary to remember names.

Principle 4
Be a good listener. Encourage others to talk about themselves.
-Remember that the people you are talking to are a hundred times more interested in themselves and their wants and problems than they are in you and your problems.
-Ask questions that encourage people to talk about themselves and their accomplishments.

Principle 5
Talk in terms of the other person’s interest.
-By talking about things you knew would interest and please the other person. You made yourself agreeable.

Principle 6
Make the other person feel important and do it sincerely.
-The desire to be important and the craving to be appreciated is the deepest urge in human nature.
-Almost all the people you meet feel themselves superior to you in some way, and a sure way to their heart is to let them realise in subtle way that you recognize their importance, and recognise it sincerely.

12 ways to win people to your way of thinking.
Principle 1
The only way to get the best of an argument is to avoid it.
-If you argue, you may achieve a victory sometimes, but it will be an empty victory because you will never get your opponent’s good will.
-Listen first. Give your opponents a chance to talk. Do not resist, defend or debate.
-Look for areas of agreement. Dwell first on the points and areas on which you agree.
-Look for areas where you can admit error and say so. It will help disarm your opponents and reduce defensiveness.
-Promise to think over your opponents’ ideas. Your opponents might be right
-Postpone action to give both sides time to think through the problem.
-Could my opponent’s be right? Is there truth or merit in their argument?
What price will I have to pay if I win? If I am quiet about it, will the disagreement blow over?

Principle 2
Show respect for others opinions. Never say, you’re wrong
-Nothing good is accomplished and a lot of damage can be done if you tell a person straight out that he or she is wrong.
-When someone asserted something that I thought an error, deny yourself the pleasure of contradicting him abruptly and answering by observing that in certain cases, his opinion would be right.
-Forbade the use of word that import a fixed opinion such as certainly and adopt conceive, appear to me at present.


Principle 3
If you are wrong, admit it quickly and emphatically.
-If we know we are going to be rebuked, we should do it ourselves.

Principle 4
Begin in a friendly way
-The friendly approach and appreciation can make people change their minds more readily than all the bluster in the world.

Principle 5
Get the other person saying “yes,yes” immediately
-In talking with people, keep on emphasizing on the things which you agree.
-When you have said “no”, all your pride of personality demands that you remain consistent with yourself.

Principle 6
Let the other person do a great deal of the talking
-They know more about their business and problems than you do. So ask them questions.
-Our friends would rather talk about their achievements than listen to you yours. Because when our friends excel us, they feel important.

Principle 7
Let the other person feel that the idea is his or hers
-People have much more faith in ideas that they discover themselves.
-It is wiser to make suggestions and let the other person think out the conclusion.
-It’s bad judgement to try ram your opinions down the throats of other people.
-We much prefer to feel that we are acting on our own ideas. We like to be consulted about our wishes, our wants and our thoughts.

Principle 8
Try honestly to see things from the other person’s point of view
-Always think in terms of the other person’s point of view, and see things from that person’s angle as well as your own.
-Before asking anyone, try to think the whole thing through from another person’s point of view. Ask yourself:” Why should he or she want to do it?”

Principle 9
Be sympathetic with the other person’s ideas and desires.

Principle 10
Appeal to the nobler motives
-Individuals who are inclined to chisel will in most cases react favorably if you make them feel that you consider them honest, upright and fair.

Principle 11
Dramatise your ideas

Principle 12
Throw down a challenge

Nine ways to change people without giving offense or arousing resentment
Principle 1
Begin with praise and honest appreciation
-It’s always easier to listen to unpleasant things after we have heard some praise of our good points.

Principle 2
Call attention to people’s mistakes indirectly
-Many people begin their criticism with sincere praise followed by “but” and ending with a critical statement. The praise seemed only to be a contrived lead in to a critical inference of failure
-Use the word “and” instead of “but”

Principle 3
Talk about your own mistakes before criticizing the other person
-Admitting one’s own mistakes-even when one hasn’t corrected them can help convince somebody to change his behavior.

Principle 4
Ask questions instead of giving direct orders.
-Always gave suggestions, not orders.
-Makes it easy for a person to correct errors.
-Saves a person’s pride and gives him or her a feeling of importance.
-People are more likely to accept an order if they have had a part in the decision that caused the order to be issued.

Principle 5
Let the other person save face.

Principle 6
Praise the slightest improvement and praise every improvement. Be “hearty in your approbation and lavish in your praise”
-Singled out a specific accomplishment, rather than just making general flattering remarks, making it more meaningful.
-Abilities wither under criticism, they blossom under encouragement.

Principle 7
Give the other person a fine reputation to live up to.
-If you want to improve a person in a certain aspect, act as though that particular trait were already one of his/her outstanding characteristics. Give them a fine reputation to live up to.

Principle 8
Use encouragement. Make the fault seem easy to correct
-Tell people they are doing it all wrong, and you have destroyed almost every incentive to try to improve.
-Be liberal with your encouragement, make the thing seem easy to do and let the other person know you have faith in his ability to do it and he will practice.

Principle 9
Make the other person happy about doing the thing you suggest.
-Do not promise anything that you cannot deliver. Forget about the benefits to yourself and concentrate on the benefits to the other person.
-Know exactly what it is you want the other person to do.
-Ask yourself what is it the other person really wants.
-Consider the benefits that person will receive from doing what you suggest.
-Match those benefits to the other person’s wants.
-When you make your request, put it in a way that will convey to other person the idea that he personally will benefit.

Franklin’s book loan
Ask the other person to do a small favour- the performing of which gave him a feeling of importance.

On Fragility & Optionality

• Fragility from excessive debt.
• Fragility from absence of entry of barriers.

1. Unable to prevent competitors from taking market shares. (exceptionally prone are high margin gadgets)
2. Patent protection is not a source of competitive advantage.
3. First mover is not a source of competitive advantage.

• Fragility from likely disruption.
• Fragility from dependence.

1. High customer concentration
2. High supplier concentration
3. Dependence on debt/equity market
4. Protectionism(subsides from government)
5. Outsourcing of manufacturing supply(Nvidia). Although this leads to high margin in the short run, might lead to future competition from it outsourcers.
6. Dependence of commodity price.

• Fragility of the low margin business.

1. High input prices
2. No pricing power
3. Easy to slip into losses if something unforeseeable changes.

• Fragility from hidden structural risks

1. Responsible for liabilities even if the company is not negligent(PG&E)

• Fragility from a rigid cost structure.

1. High operating leverage.
2. High fixed costs(Airlines)

• Fragility from Asset Liabilities Mismatch.

1. Long term assets funded with short term borrowing.(LTCM)

• Fragility from the presence of multiple independent risk factors.

1. 90% chance an undesirable event won’t happen during year. 4 such independent events. What’s the chance that none of these events will occur during a year.0.9*4=65.6%
2. What’s the chance that at least one of them will happen during a year.1-65.6%=34.4%
3. What’s the chance that at least one of them will happen sometimes during the next 5 years?1- probability of none of these events occurring sometime during the next 5 years 1-(0.3439)^5=99.52%

• How to avoid fragility?

1. Avoid
2. Position sizing
3. Uses a lower valuation

• Fragility model is a series of win followed by a huge loss.
• Optionality model is a series of loss followed by a huge win.