Notes Chapter 3: Margin of Safety

  • The great majority of institutional investors are plagued with a short-term, relative-performance orientation and lack the long-term perspective that retirement and endowment funds deserve.
  • [Taking about institutional investors] Hundreds of billions of other people’s hard-earned dollars are routinely whipped from investment to investment based on little or no in-deph research or analysis.
  • You probably would not choose to dine at a restaurant whose chef always ate elsewhere. You should be no more satisfied with a money manager who does not eat his or her own cooking.
  • Selling is difficult for money managers for three additional reasons:
    • 1) Many investments are illiquid, and disposing of institutional-sixed positions depends on more than simply the desire todo so.
    • 2) Selling creates additional work as sale proceeds must be reinvested in a subsequent purchase. Retaining current holdings is much easier.
    • 3) SEC, the governmental agency with regulatory responsibility for mutual funds, regards portfolio turnover unfavorably. Mutual fund managers thus have yet another reason to avoid selling
  • Institutional investors are caught in a vicious circle. The more money they manage, the more they earn. However, there are diseconomies of scale in the returns earned on increasingly large sums of money under management.
  • Allocating money into rigid categories simplifies investment decision making but only at the potential cost of lower returns.
  • Window dressing is the practice of making a portfolio look good for quarterly reporting purposes.
  • As depressed issues drop further in price, attractive opportunities may be created for value investors.
  • Unfortunately the appropriate relationship between bond yields and stock prices cannot be incorporated into a computer program. There are simply too many variables to allow investors to determine a relationship today that will apply under every future scenario.
  • Value investors believe that stock prices depart from underlying value and that investors can achieve above-market returns by buying undervalued securities.
  • Investing without understanding the behavior of institutional investors is like driving in a foreign land without a map.

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