Greg Speichers _100 Ways to Beat the Market

8/3/2019 Greg Speichers _100 Ways to Beat the Market

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GREG SPEICHERS 100 WAYS TO BEAT THE MARKET

Greg Speichers 100 Ways To Beat TheMarket: #1, #2 And #3December 1, 2011

By Greg Speicher

5

By: Greg Speicher

#1 Focus on Annual Reports

How to Spend Your Time

A few years ago, Warren Buffett was on the Fox Business Network discussing the sale of

Berkshires (BRK.A)(BRK.B) shares of PetroChina (PTR). Fox anchor Liz Claman asked Buffett

how he was able to come up with the idea to invest in PetroChina in the first place.

Buffett replied, Other guys read Playboy, I read annual reports.

A biography of value investor Peter Cundill was recently published entitled Theres Always

Something to Do. Truer words have never been spoken. There always is something to do.

The question is are you doing the right things.

Buffett spends his time reading annual reports. Moreover, he isnt reading willy-nilly. Hes

reading with purpose. Buffett focuses on trying to figure out how much a business is worth.

In the case of PetroChina, in 2002 Buffett figured the whole company was worth about $100

billion. The entire business was selling in the market for about $37 billion. Buffett bought $488

million worth of shares which he sold in 2007 for $4 billion. Buffett earned a 700%+ return on a

half a billion dollar investment in five years by sitting in his office and reading annual reports.

How do you spend your time? How many annual reports have you read in the past week?

Being a great investor requires brutal honesty. Theres always something to distract you and get

you off your game. Being brutally honest about how you spend your time is the first step tospending it on what really matters.

Focus on reading annual reports. Youll be richer for it.

#2 Learn from the Super Rich

What You Can Learn from Tiger21, an Investment Club for the Super-Rich


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If you have $10 million dollars of investable assets, you may be able to join a super-

exclusive investing club called Tiger 21. The groups 140 members together have investable

assets of more than $10 billion.

However, having money isnt enough. Youll also need to show that you built your fortune and

that you have something to offer the group. Rich seat warmers need not apply.

Members meet once a month to discuss investment ideas and participate in discussions led by

world-class experts. The heart of the monthly meeting and arguably its most valuable

component is the portfolio defense.

During the portfolio defense, a member discloses and defends his portfolio holdings. He is then

given candid feedback from other members. The defender also gets a tape recording of the

session for further review.

Having to defend your portfolio to a group of highly-capable wealthy investors is characterizedas daunting, stimulating and highly valuable.

We could all benefit from such an experience.

Many if not most investors continue to hold securities for fuzzy reasons. Perhaps a stock

was purchased in a bout of exuberance and you have a nagging feeling there are flaws in your

thesis. Perhaps you ventured outside of you circle of competence and made unfounded

assumptions. Perhaps the stock was purchased by your last adviser and its there because you

havent gotten around to selling it.

Start by taking Buffetts simple advice and write down your investment thesis for each security.

A couple of paragraphs should suffice if you really know why youre holding it. This should

include why its cheap or, if its fairly valued, why its intrinsic value will grow at a satisfactory

rate.

If you cant do it, you just flunked your own personal Tiger 21 portfolio defense for that holding,

and you should seriously consider exiting the position.

You could also find a way to create your own feedback loop al la Tiger 21. The trick is finding

knowledgeable investors or businesspeople who are willing and able to go through the process.

One simple idea is to publish your investing theses on investing web sites such as

SeekingAlpha, Value Investors Club or GuruFocus and then defend your idea in the ensuing

discussion.

With a little creativity and desire you can find a way to do this.


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The bottom line is that we all have blind spots. We all fall victim to human frailty and cognitive

biases. We all have gaps in our knowledge. The problem is that your portfolio may contain one

or more, at worst, ticking time bombs and, at best, chronic underperformers that can be

hazardous to your wealth.

After all, even Buffett needed a Charlie Munger.

#3: Figure It Out or Pass, Dont Guess

A recent article in The New Yorkerprofiled hedge fund titan Ray Dalio. Dalios fund, Bridgewater

Associates, is the largest hedge fund in the world.

The article describes a weekly meeting at the fund where fifty or so partners and analysts

discuss important economic trends and look for opportunities. Dalio describes it as a Whats

going on in the world? meeting.

During the meeting profiled, there was a discussion about the Chinese economy. The question

arose how a slowdown in the Chinese economy would effect commodity prices. After the co-chief executive gave his opinion, Dalio asked for additional input. An associate jumped in and

expressed his view that a slowdown in China could have a major impact on global supply and

demand.

Dalio impatiently replied, Are you going to answer me knowledgeably or are you going to give

me a guess?

The associate said he would give a educated guess. Dalio cautioned him not to and reminded

him of his tendency to offer an opinion without doing the careful painstaking work necessary to

back it up.

There is a little of this associate in all of us.

Its commonplace to throw around opinions in everyday social interactions regarding everything

from politics, to sports to business. Thats all well and good, but, when it comes to investing

serious money, such sloppy thinking can be costly.

The article states that, Eventually, the young employee said that he would go away and do

some careful calculations.

If you want to beat the market, dont satisfy yourself with educated guesses. Do your own work.If you cant figure it out, move on. Once in awhile youll find something and, if youve done your

own careful calculations, youll have the conviction to make a meaningful purchase.

Read more: http://www.valuewalk.com/2011/12/greg-speichers-100-ways-beat-market-1-2-3/#ixzz1g305AFl1


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By Greg Speicher

2

By: Greg Speicher

#4 Go Back to Buffett

In his classic book Mastery(which I highly recommend), George Leonard provides a road map to long-

term success and mastery of your craft. Its relevant to our subject because, if you want to consistently

beat the market, you must pursue investment mastery.

The first of Leonards five keys to mastery is instruction. Leonard states, For mastering most skills,

theres nothing better than being in the hands of a master teacher.

There isnone betterthan Buffett:notonlyis he the bestinvestor of our era butalso he hassharedan

enormousamountof histhinking.

My advice is to carefully go back and read or re-read all Buffetts output. Study it like a chemistry

textbook. Study it like Eddie Lampert did. Take careful notes. Let it deeply inform your investment

process.

Start with the partnership letters and then work through all the Berkshire shareholder letters. Get a hold of

the meeting notes from OutstandingInvestor Digestgoing back to the 80s. (They may be available

through some good libraries. Order back copies if you have to.) They are pure gold. Move on to the

speeches and videos. The 1991 speech at Notre Dame is a gem.Then move on and go through the best of the secondary literature. Dont miss SeekingWisdomand Of

PermanentValue.

Of course, no study of Buffett would be complete without also going back through Mungers body of work,

starting with the excellent Poor Charlies Almanac.

This will take some time. Enjoy the process. Consider it your own post-graduate program in

successful investing . Turn down the noise and turn up the wisdom.

Finally, Ive heard people say that you dont want to slavishly follow Buffett. They say to seek your own

voice. Thats true to a point. Those who master a subject must first master the fundamentals and trace

the path forged by the great ones. This takes time and dedication. Only then are you really ready to cut

your own path.

#5: Remember the Single Most Important Thing

Howard Marks has written a book called The Most ImportantThing: UncommonSense forthe Thoughtful

Investor. The book has been well received. Marks is well known for his client memos which are

considered must reading by investors. They receive high praise from the likes ofWarren Buffett and Seth

Klarman.


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The most important thing turns out to be numerous important things. The table of contents lists twenty.

However, in his July 1, 2003 memo, Marks stated, The mostimportantthing above all isthe

relationship between price andvalue.

If you want to beat the market, you need to consistently buy securities that are cheaper than the market.

This means that what you get in return forputting out your cash the present value of the sum of all

current and future earnings is greater than what you would get if you bought an index fund or ETF.

Investing is not so much like scientific research where you are constantly pushing the boundaries of

knowledge through the application of the scientific method, as it is like basketball where the best players

spend countless hours in the gym honing fundamentals shooting, dribbling, passing, conditioning

which are substantially similar to what players were working on thirty or forty years ago.

Buying cheap is the sine quanon of investing fundamentals.

Too many investors look for their edge in some special insight into a given security rather than patiently

waiting for Mr. Market to offer it on the cheap. Stock investment websites spew forth investment ideas bythe truckload. Truly great investment ideas are hard to find.

Heres Marks again from the same memo quoted above, During the course of my 35 years in this

business, investors biggest losses have come when they bought securities of what they thought were

perfect companies where nothing could go wrong at prices assuming that degree of perfection . . .

and more.

Discipline yourself to buy cheap. Unless there is a compelling reason, why not wait until a security you

like shows up on the 52-week low list? Also, have some dry powder to buy more if it goes even lower. Mr.

Market frequently way overshoots the mark when he gets in a lousy mood. Walter Schloss who

averaged 20% (before fees) for five decades liked to buy stocks trading near the low of the

past fewyears.

Dont compromise on price or you will lock your capital up in mediocre investments. This is not a formula

for beating the market. Most of the time, the markets prices are reasonably well aligned with business

values. Have the patience to wait for those times when the gap between price and value is screaming. A

feeling of revulsion if not by you, at least by the crowd is usually a pretty good tell.

#6: Focus on What Is Knowable and Important

It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension

comprises what is knowable and unknowable and the vertical dimension comprises what is important and

unimportant.

Knowable Unknowable

Important

Unimportant

It should be obvious that you should not spend any time on what is unknowable and unimportant.

The trick is steering clear of the Unknowable/Important box and the Knowable/Unimportant box.


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The Unknowable/Important box is very tempting. Lots of people pretend to have something worthwhile to

say about things that fall into this quadrant. This is where most macro forecasts live and discussions

about timing and short-term price movements. Promoters like to set-up shop here. This is the domain of

unfounded opinions where the prognosticators incentives almost never align with your interests.

The Knowable/Unimportant box is also tempting. An example is useful here. Buffett pointed out that it wasknowable quite early on that automobiles and airplanes were destined to rise and become a central part

of modern life. These insights were not particularly useful to investors because a) it was impossible to

handicap the eventual winners in those emerging industries and b) even if you could, they were

unattractive investments given their reliance on massive low-return capital investments.

The trick is to focus on what is important andknowable. For example, it is very important to try to

understand where a prospective business investment will be in ten years, even if it cannot be done with

precision. Its equally important to limit the time you invest thinking about investments to those

businesses where this is actually possible. You cant do this very often, but this is what you should be

looking for.

Focus on spending your day in this quadrant. This is where meaningful decisions are made. This is where

you can gain an edge over those who are unwittingly wasting time on the unknowable and the

unimportant.

The temptation to be drawn to these time wasters is real and strong. It is deeply grounded in human

nature. The Internet only exacerbates this tendency.

Challenge yourself. Examine your day and resolve to improve where youre spending your time and what

questions you are asking.

Read more: http://www.valuewalk.com/2011/12/greg-speichers-100-ways-beat-market-4-5-6/#ixzz1g30CHnyN

Greg Speichers 100 Ways To Beat TheMarket: #7, #8, #9December 5, 2011

By Greg Speicher

1

By: Greg Speicher

#7: Avoid Hot Industries with No Barriers to Entry

A Lex column in yesterdays FinancialTimes, Solar: the sun also sets, is yet another stark reminder that

a growing industry does not necessarily make a good investment.


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The solar panel industry is expanding rapidly as measured by worldwide megawatts of solar panel

shipments. By that measure, business is up approximately sixteen fold in the past five years.

In stark contrast, solar energy stocks, as measured by the Mac Solar Energy Index, are badly trailing the

S&P 500. The problem is overcapacity and cheap products coming out of China. One casualty,

Evergreen Solar, just filed for bankruptcy protection.

Investors are easily enamored with hot industries with seemingly unlimited growth opportunities.

However, in many cases, the businesses in these industries do not have any durable competitive

advantages. Competitors pile in and drive margins into the ground.

Society may be the ultimate beneficiary if competition drives down prices far enough for solar power to

compete with fossil fuels, particularly if it can be done without subsidies. Investors in this sector may not

be so lucky.

Steer clear of hot industries with no barriers to entry. Dont invest in a business without a moat. Pay

attention to whether managers gets this and what steps they are taking to strengthen their hand. This

may be the single most important factor if you are a long-term investor.

#8: Have the Right Psychological Framework Regarding LossesIt is common in market downturns

to hear and read about mounting investor losses. Pundits talk about the hundreds of billions or even

trillions of dollars of wealth that have been wiped out. Of course, some real wealth is wiped out in market

downturns as overvalued stocks come back to earth and when investors lock in losses by selling as a

result of fear or a liquidity crunch.

Ben Graham taught us a better way in The Intelligent Investor. The true investor scarcely ever is forced

to sell his shares, and at all other times he is free to disregard the current price speculation.

To be a true investor has some requirements:

1) That you can reasonably value a prospective business before making an investment.

2) That you dont overpay.

3) That you consider yourself a part owner in that business.

4) That you have enough cash from income or savings to not be forced to sell.

5) That you avoid leverage.

Perhaps most importantly, you need the right emotional framework to not panic when everyone around

you is losing their head. There is no shame in feeling the pangs of fear when facing stiff quotational

losses. We cant undo the way we are wired. We can, however, choose our response to a given

emotional reaction. As Steven Covey teaches, Between stimulus and response there is a space. In that

space lies our freedom and power to choose our response. In those choices lie our growth and our

happiness.

#9: Cash is King!One of the realities that makes value investing possible and profitable is that market

prices vary more sometimes much more than underlying business values. Joel Greenblatt is fond of

illustrating this point by getting out the newspaper and showing his students the huge variances in prices


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between 52 week highs and lows. This, of course, is also the lesson of Grahams famous Mr. Market

parable.

To take advantage of these opportunities requires cash.

You not only need to have cash on hand to provide reasonable buying power when the market goes into

a funk, but also you need to have enough cash on hand to never be in a position of needing to raise cash

in a down market by selling your undervalued holdings. If you dont have any cash, you wont be able to

profit from Mr. Markets gifts. If you need to sell your holdings in a severe market decline, you turn your

primary advantage as a value investor on its head and make it work against you.

There is no precise formula on how to do this but a few common sense principles should go a long way.

1. Have sufficient liquidity from income and savings that you can go three to five years without needing to

tap into your equity holdings.

2. If one of your holdings becomes materially overvalued thereby discounting years of the most

optimistic expectations for progress in the underlying business sell it to restock your cash position.

2. Maintain a meaningful portion of your portfolio in liquid form so you have buying power when

opportunity presents itself. This is not to say that you should never be fully invested, but the bar should be

set pretty high for you to part with that last 20% of your portfolio held in cash. The prospective investment

should be screaming at you, and you should be fully cognizant of the opportunity costs of committing

these funds.

3. As a complement to point 2, consider a meaningful investment in companies such as Berkshire

Hathaway (BRK.A)(BRK.B) that have the ability to buy opportunistically on your behalf. For example,

Berkshire has a huge cash stock pile of around $40 billion, annual earnings power of approximately $12

billion, ready access to funding, and most importantly the skills and attitude to put it to work when

opportunity presents itself.

Read more: http://www.valuewalk.com/2011/12/greg-speicher-100-ways-beat-market-7-8-9/#ixzz1g30HgrUz


By Greg Speicher

1

By: Greg Speicher

#7: Avoid Hot Industries with No Barriers to Entry


9/17


A Lex column in yesterdays FinancialTimes, Solar: the sun also sets, is yet another stark reminder that

a growing industry does not necessarily make a good investment.

The solar panel industry is expanding rapidly as measured by worldwide megawatts of solar panel

shipments. By that measure, business is up approximately sixteen fold in the past five years.

In stark contrast, solar energy stocks, as measured by the Mac Solar Energy Index, are badly trailing the

S&P 500. The problem is overcapacity and cheap products coming out of China. One casualty,

Evergreen Solar, just filed for bankruptcy protection.

Investors are easily enamored with hot industries with seemingly unlimited growth opportunities.

However, in many cases, the businesses in these industries do not have any durable competitive

advantages. Competitors pile in and drive margins into the ground.

Society may be the ultimate beneficiary if competition drives down prices far enough for solar power to

compete with fossil fuels, particularly if it can be done without subsidies. Investors in this sector may not

be so lucky.

Steer clear of hot industries with no barriers to entry. Dont invest in a business without a moat. Pay

attention to whether managers gets this and what steps they are taking to strengthen their hand. This

may be the single most important factor if you are a long-term investor.

#8: Have the Right Psychological Framework Regarding LossesIt is common in market downturns

to hear and read about mounting investor losses. Pundits talk about the hundreds of billions or even

trillions of dollars of wealth that have been wiped out. Of course, some real wealth is wiped out in market

downturns as overvalued stocks come back to earth and when investors lock in losses by selling as a

result of fear or a liquidity crunch.

Ben Graham taught us a better way in The Intelligent Investor. The true investor scarcely ever is forced

to sell his shares, and at all other times he is free to disregard the current price speculation.

To be a true investor has some requirements:

1) That you can reasonably value a prospective business before making an investment.

2) That you dont overpay.

3) That you consider yourself a part owner in that business.

4) That you have enough cash from income or savings to not be forced to sell.

5) That you avoid leverage.

Perhaps most importantly, you need the right emotional framework to not panic when everyone around

you is losing their head. There is no shame in feeling the pangs of fear when facing stiff quotational

losses. We cant undo the way we are wired. We can, however, choose our response to a given

emotional reaction. As Steven Covey teaches, Between stimulus and response there is a space. In that

space lies our freedom and power to choose our response. In those choices lie our growth and our

happiness.


10/17


#9: Cash is King!One of the realities that makes value investing possible and profitable is that market

prices vary more sometimes much more than underlying business values. Joel Greenblatt is fond of

illustrating this point by getting out the newspaper and showing his students the huge variances in prices

between 52 week highs and lows. This, of course, is also the lesson of Grahams famous Mr. Market

parable.

To take advantage of these opportunities requires cash.

You not only need to have cash on hand to provide reasonable buying power when the market goes into

a funk, but also you need to have enough cash on hand to never be in a position of needing to raise cash

in a down market by selling your undervalued holdings. If you dont have any cash, you wont be able to

profit from Mr. Markets gifts. If you need to sell your holdings in a severe market decline, you turn your

primary advantage as a value investor on its head and make it work against you.

There is no precise formula on how to do this but a few common sense principles should go a long way.

1. Have sufficient liquidity from income and savings that you can go three to five years without needing to

tap into your equity holdings.

2. If one of your holdings becomes materially overvalued thereby discounting years of the most

optimistic expectations for progress in the underlying business sell it to restock your cash position.

2. Maintain a meaningful portion of your portfolio in liquid form so you have buying power when

opportunity presents itself. This is not to say that you should never be fully invested, but the bar should be

set pretty high for you to part with that last 20% of your portfolio held in cash. The prospective investment

should be screaming at you, and you should be fully cognizant of the opportunity costs of committing

these funds.

3. As a complement to point 2, consider a meaningful investment in companies such as Berkshire

Hathaway (BRK.A)(BRK.B) that have the ability to buy opportunistically on your behalf. For example,

Berkshire has a huge cash stock pile of around $40 billion, annual earnings power of approximately $12

billion, ready access to funding, and most importantly the skills and attitude to put it to work when

opportunity presents itself.

Read more: http://www.valuewalk.com/2011/12/greg-speicher-100-ways-beat-market-7-8-9/#ixzz1g30HgrUz


By Greg Speicher

2


11/17


By Greg Speicher

#13: Use a good filter with your search strategy

When Bill Ackman was recently interviewed on Bloomberg Television, he was asked if he was interested

in Hewlett Packard given its recent large sell-off. Ackman commented, One of the things I learned a lot

earlier in my career is to do a calculation which I call return on invested brain damage, which is before I

make an investment which requires brain damage, or a lot of work and energy, I figure out howmuch money I can make. The higher the brain damage, the higher the profit has to be to justify it.

Ackman does not want to spend time on an idea if the payoff isnt large, particularly if it is a complex idea

requiring extensive analysis. Ackman also said, I have the fairly quaint notion that the value of anything is

the present value of the cash you can take out of the business over its life. So, if a business is not

predictable, he will take a pass and look for something that is.

Buffett has similar filters before he will get interested in an idea.

First, hes looking for seven footers. Making an analogy toputting together a basketball team, Buffett

wants ideas with obvious big upside potential. Only after finding a seven footer would he invest the time

to check his skills, character, grades, etc. He also wants ideas where, if he could, he would put his entire

net worth in the idea. He is not interested in taking a flyer on something.

The lesson here is obvious. Time is short. Dont squander it on ideas that dont offer large asymmetrical

payoffs, especially if its something you could literally spend a year on and end up with a lot of superficial

knowledge but no real insights into its future prospects.

#14: Dont dabble

When an average person goes to an accountant, they expect, and usually receive, value in exchange for

payment. Likewise, when hiring a plumber, electrician, attorney or any number of other specialists, the

average layperson receives reasonable value in the exchange.

When it comes to money managers, though, this may not be the case. There is a lot of data that shows

that, as a group, money managers performance equals that of the general market minus the frictional

costs they incur in the form of fees, commissions, slippage, and taxes. How could it be otherwise? Many

savvy investors such Bogel, Buffett and Greenblatt advise that average investors simply invest in an

index fund and pocket these frictional costs. This is certainly a rational approach, and, as long as

expectations are kept in check, it is likely to generate a reasonable return over the long term. Also, it has

the added benefit of minimizing, if not eliminating, self inflicted wounds.

What about going it alone as an active investor? I think Buffett is correct that a person who spends an

hour or two a week on investing has the potential to get a significantly worse result than simply buying

and holding an index fund, particularly if he is doing focused value investing. Being able to value a

company is sine quanon for successful value investing and this requires time and experience. Without

good valuations grounded in independent work, you will lack the necessary conviction to buy meaningful

positions and hold them through the inevitable ups and downs of the market . You could also get

seriously burned if you buy something that looks cheap that really is a lousy, deteriorating business.

So why do many investors even those who call themselves value investors continue to dabble?


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First, speculating can be very exciting and enticing. People can go to great lengths to speculate, even if it

means dressing it up as value investing. Second, because investing outcomes are a result of both luck

and skill, it is easy to draw the wrong lessons from one time successes or bull markets that generate

good results for everyone, even know-nothings. These misguided lessons can lead to the conclusion that

it is easy to make money in the markets. This is closely related to over-confidence bias which continues to

draw patsies into the markets even when they bring nothing to the table and can offer no sound reasonwhy they should generate a sound return when trading against well informed, sophisticated counter-

parties.

Therefore, if you want to beat the market, dont dabble. Dedicate yourself to it in a serious fashion or find

a professional with the right investing framework and psychological makeup who will. Short of that, youre

better off investing in an index fund.

#15: Become a masterSome years ago, George Leonard wrote a wonderful book calledMasterywhich

gives wise advise on how to become highly skilled at something. The book has helped many people in

numerous endeavors and continues to be widely read today. I contend that consistently beating the

market requires a high level of skill and that one would be well served by paying attention to whatLeonard has to say on the subject of mastery.

Leonard teaches that true mastery requires an understanding that learning a new skill comprises brief

periods of progress punctuated by long, successively higher plateaus, and even this does not always

happen in regular clockwork fashion. During these plateaus further progress seems elusive. Yet, even

without being conscious of it, learning continues. Lessons are being assimilated and the mind and body

are preparing for the progress necessary for reaching the next plateau.

The key is recognizing and accepting that this is the nature of pursuing mastery. And that learning to love

the plateau is an essential requisite for getting where you want to go.

Leonard further explains that there are three opposing and deficient character types which thwart thepursuit of mastery and short-circuit its attainment: the dabbler, the obsessive and the hacker. The dabbler

begins the pursuit of mastery and initially makes good progress. However, once the dabbler hits the first

inevitable plateau, he loses interest and moves on to something else. The obsessive thrives on getting

better and settles for nothing less than continual progress. To fuel this progress, he throws himself into

the task at hand and presses hard too hard. Eventually he becomes burnt out and moves on to

something else. Finally, there is the hacker. After some initial progress, the hacker hits a plateau where

he is content to stay, never spending the time or effort to grow and move on to greater levels of skill.

To beat the markets requires mastery. Learn to love the plateau by finding joy in doing the necessary

work, confident that real progress will follow and true skill will develop in time.

Read more: http://www.valuewalk.com/2011/12/greg-speichers-100-ways-beat-market-13-14-15/#ixzz1g30XMP1k


13/17



By Greg Speicher

#17: Select securities with a higher expected return than the market

If you want to beat the market, you need to have a clear understanding of what drives market returns.

Generally speaking, you can expect the returns of the the S&P 500 to be closely correlated with the

growth of corporate earnings. Corporate earnings in turn are closely tied to GDP growth. After all, per

Buffett, you cant expect a component part corporate earnings to indefinitely grow at a faster rate than

the aggregate to which they belong the overall economy.

You can provide your own estimates, but assuming that real GDP growth averages 3% and that inflation

is at 3%, your would get a 6% return. Add in 1.5% for dividends and you are 7.5%. If you are expecting

more than this, then you need to provide and defend your assumptions.

Is the markets return on equity closer to the high end or the low end of its historic average? Are multiples

of earnings high of low? What are your expectations for interest rates going forward? These all play a roll

in setting expectations.

What is the point of this exercise if you are trying to best the market?

In sports, top athletes carefully study their opponents so they can get an edge. If you clearly understand

what drives overall stock market performance, you can make a rule for yourself that you will only buy

securities that offer superior expected returns both as a function of the businesses underlying economics

and also the price you are paying for their securities.

If you buy better businesses at better prices, you will beat the market.

#18: Handle the basics well

In his 1994 shareholder letter, Warren Buffett extols the phenomenal performance of Scott Fetzer: it

earned an extraordinary return on equity without the benefit of a monopolistic position, leverage or strong

cyclical tail winds. Scott Fetzers return on equity had it been included in the 1993 Fortune 500 would

have earned it a number 4 ranking. Buffett attributes the companys success to the managerial

performance of Ralph Schey, Scott Fetzers CEO.

But heres the somewhat surprising point. Its not because of any managerial gymnastics on Scheys

point. Its because as Buffett points out Schey handles the basics extraordinarily well and doesnt

allow himselfto getdiverted.

Schey, Establishes the right goals and doesnt allow himself to get diverted.

Buffett explicitly points out that this approach applies not only to the management of a business, but also

to investing. Extraordinary things are not necessary to get extraordinary results. Yet, the temptation


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remains to complicate things. We allow ourselves to be pulled in a million directions, even more so today

because of the unlimited potential distractions that the Internet provides.

If you want to beat the market, keep it simple. Decide what your goals are. Put in place a rational process

to achieve them and then work hard.

Before the gates of excellence, the high gods have placedsweat. Hesiod

#19: Avoid businesses subject to disruption

The value of a business is the present value of all future cash flows that it will produce. Determining these

future cash flows is the serious work of a securities analyst. Ratios that look at past and present

performance often reveal little about a businesss future prospects. Thinkingis required, andthat cant be

automated or delegated.

Frequently, these future cash flows simply cannot be determined with precision. One risk that you must

be on guard against is whether a business is subject to disruption. You need to consider what could kill

the business? This is a foundational question, perhaps the most important.

If the business is generating a good return on capital and these are the types of businesses you shouldbe looking at you can be certain that there are those who would love to storm the castle and steal the

gold.

One of the biggest disruptors is the Internet. We all know that its a game changer for many businesses.

Before making any investment, you need to think long and hard about whether your prospective

investment is subject to Internet disruption and, if so, to what degree. Its the difference between investing

in businesses like Borders or Circuit City that were massively affected by the Internet and BNSF that is

largely impervious to Internet disruption.

So how do you think about Internet disruption? A checklist is a good tool here. Make a list of the issues

and factors you need to think about and then run it down when contemplating a purchase.

I just came across a good one in Bill Ackmans analysis of Lowes (LOW). Ackman is considering the

impact of online shopping on home centers such as Lowes and Home Depot (HD).

Heres Ackmans checklist of conditions that render on-line shopping most appealing:

1. Product is relatively high-priced (i.e., sales tax savings are more material)

2. Product is not needed immediately

3. Shipping cost is low

4. Shipping is unlikely to damage the product

5. Professional installation is not needed

6. Item is not purchased as part of a larger project7. End-user of the product is making the purchasing decision

If you want to beat the market, carefully and systematically think about how your investments could be

disrupted. Use a checklist to capture the issues and then have the discipline to put your checklist into

practice. Youll be richer for it.


15/17


Read more: http://www.valuewalk.com/2011/12/greg-speichers-100-ways-beat-market-17-18-19/#ixzz1g30dPuWs

#19, #20 And #21

December 9, 2011By Greg Speicher

By Greg Speicher

100 Ways to Beat the Market #19: Avoid businesses subject to disruption

The value of a business is the present value of all future cash flows that it will produce. Determining these

future cash flows is the serious work of a securities analyst. Ratios that look at past and present

performance often reveal little about a businesss future prospects. Thinkingis required, andthat cant be

automated or delegated.

Frequently, these future cash flows simply cannot be determined with precision. One risk that you mustbe on guard against is whether a business is subject to disruption. You need to consider what could kill

the business? This is a foundational question, perhaps the most important.

If the business is generating a good return on capital and these are the types of businesses you should

be looking at you can be certain that there are those who would love to storm the castle and steal the

gold.

One of the biggest disruptors is the Internet. We all know that its a game changer for many businesses.

Before making any investment, you need to think long and hard about whether your prospective

investment is subject to Internet disruption and, if so, to what degree. Its the difference between investing

in businesses like Borders or Circuit City that were massively affected by the Internet and BNSF that is

largely impervious to Internet disruption.

So how do you think about Internet disruption? A checklist is a good tool here. Make a list of the issues

and factors you need to think about and then run it down when contemplating a purchase.

I just came across a good one in Bill Ackmans analysis of Lowes (LOW). Ackman is considering the

impact of online shopping on home centers such as Lowes and Home Depot (HD).

Heres Ackmans checklist of conditions that render on-line shopping most appealing:

1. Product is relatively high-priced (i.e., sales tax savings are more material)

2. Product is not needed immediately3. Shipping cost is low

4. Shipping is unlikely to damage the product

5. Professional installation is not needed

6. Item is not purchased as part of a larger project

7. End-user of the product is making the purchasing decision


16/17


If you want to beat the market, carefully and systematically think about how your investments could be

disrupted. Use a checklist to capture the issues and then have the discipline to put your checklist into

practice. Youll be richer for it.

100 Ways to Beat the Market #20: Buy Berkshire Hathaway at 1.1x book value or less

One simple way to beat the market is to buy and hold Berkshire Hathaway (BRK.A)(BRK.B) stock at agood price. Buffett acknowledges that it is challenging to find intelligent ways to invest Berkshires

massive and growing cash holdings. Nevertheless, he is clear that his goal is still to beat the S&P 500

which he believes he can do, albeit at a diminished level of outperformance vis-a-vis Berkshires earlier

halcyon days. It is worth noting that Buffett is famously conservative in his missives about his ability to

continue to outperform.

Berkshires recent performance compared to the S&P 500 is noteworthy. Berkshire has outperformed the

S&P 500 in each of the ten most recent five-year periods by an average margin of just over 7%. For the

record, Berkshire has never had a five-year period where it underperformed the market.

Buffett believes that Berkshires stock is undervalued at 1.1x book value (or approximately $109,000 per

A share). Hes right. If you net out the equity investments ($67 billion as of Q3, 2011) and use Buffetts

estimate of normalized after-tax earnings ($12 billion), Berkshire has an earnings yield of about 10%.

These earnings are being generated by a diversified portfolio of high-quality businesses that includes a

number of bullet-proof, growing world-class franchises such as GEICO and BNSF.

Berkshire enjoys a number of advantages which should continue to increase its intrinsic value.

1. Berkshire has outstanding veteran managers who are unencumbered by bureaucracy or quarterly

earnings numbers. They focus solely on building long-term value.

2. Berkshire can not only purchase operating businesses, but also marketable securities. This gives it a

much higher likelihood of finding attractive investments compared to the typical S&P 500 corporation

which is constrained to allocate capital within its own industry. Moreover, Berkshire has advantagedaccess to many deals based on Berkshires reputation, deep pockets, and ability to act quickly.

3. Berkshire has a shareholder-oriented culture. Board members (excluding Buffett) own over $3 billion in

stock, and compensation is completely aligned with shareholder interests. Moreover, Berkshire is imbued

with a culture of frugality. This means that Berkshires wealth will increase the value of shares rather than

line the pockets of management.

4. Berkshire enjoys cheap leverage in the form of insurance float. Although it is impossible to predict with

any amount of precision, it seems likely based on Berkshires track record that float will continue to

grow. Berkshire can also borrow at low rates given its strength.

5. Buffett is still at the top of his game and getting better. The IBM purchase shows his savvy and growing

circle of competence and, in my humble opinion, has a reasonable likelihood of adding $10 billion in value

over the next 10 to 15 years. Todd Combs and Ted Weschler are warming up in the bull-pen and were

hand picked by the same guy who spotted Lou Simpson.

Of course, not losing money should be top of mind when considering an investment. Berkshire has a

fortress balance sheet with massive cash holdings as a hedge against economic disruption that puts

Buffett in a position of strength to take advantage of opportunities when others are scrambling. Also,

Berkshires commitment to repurchase shares below 1.1x book puts a floor under the stock.


17/17


100 Ways to Beat the Market #21: Be prepared

A couple weeks ago, my favorite college football team was playing in their big rivalry game. It was a close

game that went back and forth. At the two minute mark, my team had the ball, trailing by three, with an

opportunity to win the game, if they could execute their two-minute drill and score a touchdown.

Unfortunately, they fell short, not just because they did not make plays, but also because they seemed

confused and poorly prepared.

Knowledgeable football fans know that the key to an effective two-minute drill happens long before the

actual game. It is all about preparation. There is little or no t ime to figure it out in real time when you have

the pressure of trying to come from behind and win the game.

For me, this was yet another reminder that you need to be prepared ahead oftime in the markets. You

cannot wake up on the morning of a big down day in the market and expect to make good decisions on

what to buy if you have not already done your homework.

These are the days when opportunity presents himself. Buffett recently said he was buying heavily on the

big down days in August. Templeton would do his valuation work when the markets were calm and then

put in his standing purchase orders at deeply discounted prices. Then he would wait.

You need a well conceived watchlist if you want to beat the market. Your watchlist does not need to be

long. It needs to be thoughtful. Start with a short list of high conviction ideas that you truly understand.

Determine an appropriate buy price by valuing the businesses on the list and selecting a reasonably

discounted entry point.

These optimal opportunities do not come along everyday, but they do happen. If you are honest, you can

probably recognize many sub-optimal purchases that you have made because you missed these types of

opportunities and were willing to pay too high a price for at least some of your securities.

Resolve to correct these poor tendencies. Read my eBook on the investment process for more advise onimproving your process. There are no short cuts or magic valuation algorithms. It is about sweating the

details day in and day out. That is how consistent market-beating performance is earned.

Read more: http://www.valuewalk.com/2011/12/greg-speichers-100-ways-beat-market-19-20-21/#ixzz1g30kjpq6

Documents

Greg Speichers _100 Ways to Beat the Market