4. Exploit Mr. Market.
Market prices gyrate around business value, much as a moody manic depressive swings from euphoria to gloom when things are neither that good nor that bad. The market gives you a price, which is what you pay, while the business gives you value and that is what you own. Take advantage of these market mis-pricings, but don’t let them take advantage of you.
5. Insist on a margin of safety.
The difference between the price you pay and the value you get is the margin of safety. The thicker, the better. Berkshire’s purchases of the Washington Post Company in 1973-74 offered a very thick margin of safety (price about 1/5 of value).
6. Buy at a reasonable price.
Bargain hunting can lead to purchases that don’t give long-lasting value; buying at frenzied prices will lead to purchases that give very little value at all. It is better to buy a great business at fair price than a fair business at great price.
7. Know your limits.
Avoid investment targets that are outside your circle of competence. You don’t have to be an expert on every company or even many - only those within your circle of competence. The size of the circle is not very important; knowing its boundaries, however, is vital.
8. Invest with ‘sons-in-law’.
Invest only with people you like, trust and admire - people you’d be happy to have your daughter marry.
9. Only a few will meet these standards.
When you see one, buy a meaningful amount of its stock. Don’t worry so much about whether you end up diversified or not. If you get the one big thing, that is better than a dozen mediocre things.
10. Avoid gin rummy behavior.
This is the opposite of possibly the most foolish of all Wall Street maxims: ‘You can’t go broke taking a profit’. Imagine as a stockholder that you own the business and hold it the way you would if you owned and ran the whole thing. If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
Frank Curzio
Frank Curzio founded F.X.C. Investors Corp. in 1974 and has been a money manager since 1988. With over 25 years of experience in the financial industry, Mr. Curzio has become one of the most well-known analysts on Wall Street as well as one of the most quoted.
Books
Awareness of Indirection, Vantage Press, 1987
Safeguards and buying opportunities
1. Speculate with a small portion of your funds.
Preferably only 30% in aggressive situations. Invest a little to make a lot, and not a lot to make a little.
2. Do not buy on margin.
All securities involve risk. Some of the most prestigious and highest rated ‘A’ securities have had temporary devastating plunges. (Sears Roebuck from $61 to $15, Con Edison from $18 to $3, GM, Ford and Citicorp A rated bonds from $1,000 to $490, etc.). If a stock drops 50%, given time it may come back and may trade over your original cost.
3. The best buying opportunities usually prevail when a company reports lower earnings and when adverse economic news is widespread.
Purchase of stocks immediately after glowing earnings reports or optimistic press releases often results in buying at the top.
4. Only invest in companies audited by one of the big five accounting firms.
These accounting firms audit about 90% of the companies listed on the New York Stock Exchange (NYSE). Their clients account for most of all sales in the U.S. and approximately 90% of corporate income taxes. There are over 10,000 public corporations trading on the various stock exchanges and in the over-the-counter markets. One of the leading reasons why investors lose money is due to financial statements that are not prepared in accordance with Federal regulations (Section 13 or 15 (d) of the Securities Act of 1934). If the figures are incorrect, your investment in the stock is subjected to substantial or complete loss.
5. Watch company credit ratings.
Institutional fund managers pay close attention to credit rating from agencies such as S&P and Moody’s. Increases in credit ratings ultimately result in higher quotes due to additional monies available for investment in these stocks. Decrease in ratings usually result in lower stock quotes.
6. Exploit institutional window-dressing.
The institutional funds represent approximately 80% of all monies in the U.S. market. The managers of these funds must answer to their shareholders and superiors - mutual pension funds are required to issue quarterly reports to their respective shareholders. Near the end of the quarter, stocks which were down or close to their yearly lows, are usually sold by the institutions (so they do not show as holdings in the quarterly report), causing even lower stock quotes. And stocks near their highs are purchased, thus enforcing higher quotes.
If you choose to purchase a stock because it is low, wait until after the end of the quarter. Chances are, it will be trading lower. Of course, there is no guarantee the stock will not trade even lower in the upcoming quarter. If you are going to bottom-fish, be patient. Or, if you want to sell a stock that is trading near its high, chances are it will be higher just before the quarter ends.
Ray Dalio
Ray Dalio is President and Chief Investment Officer of Bridgewater Associates, a global investment manager with over $34 billion in assets under management. Bridgewater follows a fundamental and quantitative approach to investment decision-making. All investment criteria are thoroughly researched and systemized. Fundamental analysis is supported by advanced risk management techniques. This approach has led to Bridgewater’s top decile performance.
Systemizing fundamentals
Introduction
There are some general principles that most winners of this game employ that losers neglect. If you want to win any game, you must know what the principles of the game are, and then work to develop the required skills - e.g. counting the cards and calculating odds for poker. What I describe here is my approach to playing the game, which is a mix of these general principles and my own twists on them. For me, the following are required.
1. A deep understanding of the fundamentals so that pricing inefficiencies can be identified.
Adding value (getting a return greater than that available from passive investing) requires one to see how markets are mispriced, and this requires an understanding of how they should be priced. This is required to be a winner over time. It is the equivalent of being able to count cards and calculate the odds of a winning hand in poker - it is the fundamental assessment that allows you to discern a good bet from a bad one.
Some people say that understanding the fundamentals isn’t required and that one can play and win the game by playing it technically. If by technical they mean an approach that is devoid of understanding fundamental cause-effect relationships - like trend following - then I believe that they are wrong. Sometimes markets trend, and sometimes they chop, and they do so for reasons. So, without an understanding of these reasons, one