Investment Consulting

Wednesday, August 13, 2014

What I learned losing a million dollars

What I learned losing a million dollars 

I recently read an article in Rankia from Gfierro with the title, "What I learned losing a million dollars." Luckily, the title of the post was not based on a lived history about Gfierro, but referred to a book by Jim Paul about their experience. The book's title is quite explicit and makes it quite clear what the issue goes, but the article did Gfierro even more appealing to me. I actually liked the article so much that I bought the book and now I'm finishing it. 
This is looking like a really interesting book, therefore, I have also decided to dedicate an article, only that in my case, the item is simply the translation of a portion of prologue.

What I learned losing a million dollars, Jim Paul 

The moral of the story you are about to read (What I Learned Losing a Million Dollars) is: success can be built on repeated failures when failures do not take it personally; similarly, you can build failure when repeated successes are taken personally. Thomas Edison failed 10,000 times before discovering the need to create a light bulb filament. The day his laboratory in Menlo Park burned to the ground, a reporter asked what he would do. "Starting tomorrow reconstruction" Edison said. In part, Edison succeeded because the failures and losses was not taken personally. Moreover we have Henry Ford, who admired Edison and worked with him. In 1905 Ford started from scratch and in only 15 years, built what was the largest and most profitable manufacturing company in the world. However, some years later, which seemed the most solid company that might exist was in trouble and lose money almost every year for two decades. Ford was known to hold fast to their opinions. Is it possible that the company lost so much money because they take their success personally and thought he could do no wrong? 

Customize success prepares people for a tremendous failure. It happens when you start to consider success as something entirely personal, a reflection of his skills instead of taking advantage of an opportunity, being in the right place at the right time or just get lucky. Those who take success personally think its only contribution on a project guarantee success. 

This phenomenon has received a lot of names: overweening pride, about confidence, arrogance ... but the way that success becomes personal and the process that precipitated the subsequent failure have never been clearly explained. That's what we have to do. This book is a case study of the classic story of entrepreneurs: the risk taker and he sees an opportunity, the bulb that lights up with an idea, the great growth almost toxic, mistakes and collapse. Our case is that of a trader, but as in all case studies and parables, the lessons learned can be applied in many other areas and situations. These lessons will help you, either dedicate yourself to markets or business. Both areas have more in common than first appears. In fact, the cover of Forbes magazine 1993 about 400 richest people in America had a quote from Warren Buffett says: "I'm a better investor because I am a businessman, and I am a better businessman because I am investor." If the elements for success can be transferred between markets and businesses, can also be transferred failure. 

We could study different success stories to demonstrate how success is customized as then comes the fall, but surely remember and learn best when the lesson is presented through anecdotes and is about a real person and his great loss. How big? The downfall of a 15-year career and the loss of over a million dollars in just 75 days. 


The conclusion I leave to those who want to read the book. In my case, is a book that has surprised me for good, but turns out that despite being written to a trader, it is equally valid and interesting for fundamental long-term investor.

Saturday, July 12, 2014

Assertions I learned from Bruce Berkowitz

Assertions I learned from Bruce Berkowitz

Bruce Berkowitz is an American success manager. Since late 1999 manages investment funds with FairHolme that has managed to beat the market by much difference since its inception. $10,000 invested in FairHolme at the time of its launching have now become 60,000 while of replicating the index, it would have been 17,000.

1. "We do not predict, we value. The predictions are terrible."

Investors who follow the value investing considered predictions, especially macroeconomic, as too difficult. Benjamin Graham and his students have developed a system to avoid doing things that are too difficult. Looking at the information we have today, instead of making a prediction of the future, the value investor may value an asset and make an investment decision. The key is simple: how a private buyer would pay for the asset, after knowing this, see if this price is a sufficient margin.

2. "Almost by definition of value investing, run to the actions of the majority of people flee because how else you will not get a cheap action of a good, safe company that the market believes that something is incredibly wrong?."

Most likely to find a stock at a discount to the rest of the market is when Mr. Market is afraid her. Therefore, an Value Investor must have patience (because the market can be irrational too long) and bravery (they say you have to buy when blood runs in the streets).

3. "Business the bookmakers is very old and is based on the concept of deciphering what you give and what you get. Closely resembles the investment business ... you have to find a kind of bet or chance and if you are smart and know what you do, you build a large margin of safety for that the odds are on your side."

Investors who do not understand the basics of probability and statistics are like a snake in a basketball slam dunk contest.

4. "Markets are made to be taken advantage, not to persuade us about what we should do."

For an value investor the market is not smart, but is someone generous. When a value investor hears the efficient market theories of Professor Fama at least smile, if not burst of laughter.

5. "All you can spend is cash (cash). We want companies that generate cash almost every time. That's how we started. We do not care much what you do, but we have to understand. The balance has to be strong; want to ensure that no traps in accounting. After that, try to kill the company. We think all ways that the company could die either by address stupid or for balance with too much debt. If you do not find a way to kill the company, and generate a lot of cash even in difficult times, then this is the beginning of a good investment."

Berkowitz is like Jeff Bezos in regard to attention to cash flow.

6. "When the things get tough, everything is correlated. People have to sell whatever they have. And sell what is more liquid. So until the baby goes with the your bath water "(which means that when things get bad, the error of the good things that come out along with the bad is committed. A similar phrase would be "throwing champagne with the cork")."

Assertions I learned from Bruce Berkowitz

A financial advisor can tell you are well diversified because, in their opinion, the covariance between your assets is low. Unfortunately, as many people discovered during the last financial crisis, the correlation between the price of different assets can go quickly to the point #1.

7. "That's the secret ingredient: hold capital permanently. It is essential. I think that's the reason Buffett left his partnership. You need it because when things get ugly people get nervous ... So keep much cash ... cash is the equivalent of financial Valium. Keeps you cool, calm and in full power."

8. "When something low price, I know that in business schools tell you if low or rises fast, is volatile, which is more risky. But I do not see how a stock that is down 50% means a greater risk than when it cost double. It's like when you go shopping and your favorite food is on offer. Here's your favorite company on sale. Auditors that generates cash and rarely can find a company with double digit growth in free cash flow. And of course, when panic is established, you have spectacular deals."

9. "Genetically I'm not done for short. If you are long, you're wrong, the worst that can happen is that you go to zero. If you're short and you're wrong, you can face death. The irrationality of markets can last a long time."

The short (bet that something will go down) is something that many people talk and few do. It is potentially dangerous. When I operate short, which I rarely do, I buy options, then all you can lose is what you paid for the option.

10. "Concentrated investment (not diversified) involves less risk because you have a superior knowledge of the companies you own."

The risk comes from what you do not know.

11. "The Over-Diversification will take you to a similar average return ... the price for a higher return is some volatility in the short term ... I want to give people a higher average return and have to pay that with short volatility term."

Berkowitz background is never confused with a fund that replicates the index.

12. "We have beaten the market over a significant period. We had a bad 2011 that is misleading, but that's business. Businesses suffer bumps, and those companies and fund managers have said that their processes are gentle on your business at the end have ended badly."

The decisions of an intelligent value investor are premeditated and above average rationality. For example, be brave when loss aversion is pressuring you to sell, is not something easy to do.


Bruce Berkowitz is one of the best managers in the world of value investing, or at least that's what they say their numbers so far. There are some key ideas in which Berkowitz says, which is partly related: Value Investing, Contrarian and Concentration.

Assertions I learned from Bruce Berkowitz

Thursday, July 10, 2014

The Intelligent Investor

The Intelligent Investor

The smart investor is one of the most important books in the world of investment and one of the basic for a long-term investor who wants to train in value investing.

Benjamin Graham

Benjamin Graham (1894-1976) was, although British economist and U.S. investor of birth, specializing in long-term investment. He is considered the creator of value investing.

In his first book, Security Analysis (Classics Deusto Investment and Finance), laid the foundation stone in the philosophy of value investing, but it was The Intelligent Investor book that changed the way of thinking and investing for many people and the book which remains a reference for value investors.

Knowledge and ideas of Benjamin Graham were so attractive to investors until the legendary Warren Buffett offered to work for free for him just to learn their way of investment. No doubt that Buffett took a right at the time of taking a teacher Graham decision.

The Intelligent Investor Book

Throughout the book, Benjamin Graham reels off all key concepts and necessary for long-term investing in the stock market following a value investing style.

Graham explains that the "smart" in the title does not refer to a rogue but merely prudent investor or an investor who is not seeking a quick profit but have a vision of long-term investment whose main objective is to preserve capital and is safe and secure with their investment principles as opposed to a market that is carried away by their emotions. At all times Graham focuses on long-term investment. When investing in value is necessary for long-term investment, as discussed throughout the book, this investment style is to buy shares below their true value. A short-term action may underestimate Stock Exchange, but Graham believes that over the long term will be the price that corresponds to its value and therefore the form of investment of Graham requires patience.

Benjamin Graham was always very clear about the difference between a speculator and investor. An investor is a person who is considered a business owner and looking for it mainly benefits. Meanwhile, the speculator seeks quick profit for yourself no matter what kind of company puts their money. In addition, Graham believes that while the speculator has a chance to make money speculating in the case of wrong results can be disastrous.

The intelligent speculator can not exist according to Graham and he warns of the danger of believing an investor and, in practice, be a speculator. The purchase of a quick action to avoid missing a great opportunity is, according to Graham, one speculative attitude.

Throughout the book you can see that many of the ideas we hear in Warren Buffett are the same, at the time, explained Benjamin Graham in The Intelligent Investor. It could not be otherwise because the Buffett considers himself 85% Graham and 15% Fisher.

The Intelligent Investor

Another very idea of ​​Benjamin Graham and Buffett repeats much is not trying to hit market movements. According to Graham, track market movements and speculators makes us the only reason an investor would do is to try to buy a stock that interests a discounted price in the case of being in a downward cycle.

Graham refers to Stock Exchange as Mr. Market manic depressive person changing mood and goes from one extreme to another unexpectedly. Due to the nature of Mr. Market, Graham thinks is best to take advantage of the mistakes it commits instead of trying to guess the moves it will.

Value Investing vs Growth

If the prospects for long-term growth are clear, Benjamin Graham thinks the price of the company and deducted these prospects, making it very expensive quote. Therefore, often dismiss these businesses precisely because the investment value of buying at low prices that do not reflect the real value of the company.

Investing in companies in which the expectations and predictions are very bad or are bored or ignored by the market business is one of the keys to value investing. When the market leave stock prices of companies that are not fashionable at knockdown prices is the time when a smart investor should pay attention.

For Benjamin Graham, due to market pressure either up or down, the key to making money in the on the stock exchange is not the time to buy or sell, but be disciplined enough to withstand this pressure, keep our actions, dividends receivable and wait for the market to discover the real value of the company to which it is undervalued.

Margin of Safety

Benjamin Graham in his book leaves us many concepts that remain today in key investment. One is the safety margin is basic in value investing.

The safety margin is the difference between the intrinsic value of a stock and the price of it. Sometimes, the market over-reacts and action values ​​far below their real value; is the moment when the opportunity arises for a investor value.

A simpler example can be to understand the story. If a floor is capable of generating a rent of € 1,000 per month will have an intrinsic value for its ability to make profits. Surely, if the housing market is not fashionable because investors prefer to invest in shares of technology companies, we can find very cheap floor. If the floor has an intrinsic value of 150,000 euros thanks to its ability to generate rents and sells for 75,000 euros, it is clear that there is a margin of safety and would be a good investment value. In the case of shares, the concept is similar.

Throughout The Intelligent Investor Benjamin Graham details how to find undervalued safety margin and gives examples of companies of its time companies. In addition, the updated version can read Jason Zweig comparisons and examples closest in time, especially the dotcom bubble of 2000.


Benjamin Graham's book is full of concepts and ideas essential to understand the value investing. It is perhaps a somewhat dense and difficult book to read for those who have never read anything about the stock market or investment.

To Warren Buffett, buy The Intelligent Investor is the best investment you've made in your life and at all times has a flashback to Benjamin Graham. It is common to find quotes this in his letters to investors or in his talks and speeches.

The Intelligent Investor

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