So when should you sell?

– Did you make a mistake?
– Have the fundamentals deteriorated?
– Has the stock risen too far above its intrinsic value?
– Is there something better you can do with the money?
– Do you have too much money in one stock?

Pat Dorsey – Five Rules for Successful Stock Investing.


Knut Haanaes: Two reasons companies fail — and how to avoid them

Why companies fails? This is a hard question to answer. In this TED video Knut Haanaes explain two critical concepts, exploration and explotation, to avoid companies to fail.

Exploration: coming up with what’s new, search, discover, new products, changing our frontiers. Exploration is risky. Long term perspective for companies.

On the other hand, Explotation: taking the knowledge we have and making good, better. Explotation /= risky. Short term perspective.

Only around 2% of firm mix exploitation and exploration.



Captura de pantalla 2016-04-03 a las 18.18.41.png

How to applied these two concepts? Follow:

Captura de pantalla 2016-04-03 a las 18.24.15.png

Mr. Haanaes has write a book about strategy. Amazon – Your Strategy Needs a Strategy: How to Choose and Execute the Right Approach.


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.

Notes Chapter 2: Margin of Safety


  • What is good for Wall Street is not necessarily good for investors, and vice versa.
  • Wall Street firms perform important functions for our economy: they raise capital for expanding businesses and (sometimes) provide liquidty to markets.
  • Up-front fees clearly create a bias toward frequent, and not necessarily profitable, transactions.
  • Investors even remotely tempted to buy new issues must ask themselves how they could possibly fare well when a savvy issuer and greedy underwriter are on the opposite side of every underwriting.
  • Investors must never forget that Wall Street has a strong bullish bias, which coincides with its self-interest. Wall Street firms can complete more security underwritings in good markets than in bad.
  • Some people work on Wall Street solely to earn high incomes, expecting to depart after a few years.
  • A few Wall Street partnerships have done a particularly good job of motivating their employees to think past the current transaction.
  • The bullish bias of Wall Street manifests itself in many ways. Wall Street research is strongly oriented toward buy rather than sell recommendations.
  • Although high stock prices cannot be legislated, regulation can cause overvaluation to persist by making it easier to occur and more difficult to correct.
  • Many of the same factors that contribute to a bullish bias can cause the financial markets, especially the stock market, to become and remain overvalued.
  • [Talking about new type of securities] There is something – lower risk, higher return, greater liquidity, an imbedded put or call option to the holder or issuer, or some other wrinkle – that makes it appear superior (new and improved, if you will) to anything that came before.
  • The value of a company selling a trendy product, such as television shopping, depends on the profitability of the product, the product life cycle, competitive barriers, and the ability of the company to replicate its current success.
  • All market fads come to an end. Security prices eventually become too high, supply catches up with and then exceeds demand, the top is reached, and the down ward slide ensues.

Factors needed to make money in the stock markets

Walter Schloss was, together with Warren Buffett, Benjamin Graham’s students at Columbia University. Sometimes forgotten value investor with an amazing performance (see tables below). Today I discover a Walter Schloss called “Factors needed to make money in the stock markets” that he wrote in 1994, I believe these are his principles for make money. Must read for all who want to invest money.

Captura de pantalla 2016-02-28 a las 23.01.58Captura de pantalla 2016-02-28 a las 23.02.17

Lynch Law

Common Sense Investing

i. Know what you own.
ii. It is futile to predict the economy, interest rates, and the stock market.
iii. You have plenty of time.
iv. The ten most dangerous things people say about stock prices:

  • If it has gone down this much already, it can’t go much lower.
  • If it has gone this high already, how can it possibly go higher?
  • Eventually, they always come back.
  • It’s $3, what can I lose?
  • It’s always darkest before the dawn.
  • When it rebounds to $10 I’ll sell.
  • What, me worry? Conservative stocks don’t fluctuate much.
  • Look at all the money I’ve lost, I didn’t buy it.
  • I missed that one. I’ll catch the next one.
  • The stock has gone up, so I must be right. The stock has gone down, so I must be wrong.

v. Other general rules

  • Avoid long shots
  • Avoid high growth, easy entry industries.
  • Look at the balance sheet.
  • Great stocks are always a surprise.
  • The individual has several advantages versus the professional investor.
  • There is always something to worry about.

Source: Lynch Law

Reading Warren Buffett’s Letters

We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

Warren Buffett – 1992 Letter.

Notes: Margin of Safety

Seth Klarman is one of the best-known value investor. He run a company called The Baupost Group for 33 years. In this list published last January the assets under management are $27 bn.

screen shot 2016-01-26 at 12.18.08 pm.png

I started his book, “Margin of Safety”, and I wanna to share my notes here, just to re-read it in the future.

Chapter 1: Speculators and Unseccessful Investors.

  • Stocks represent fractional ownership of underlying business and bonds are loans to those businesses.
  • Investors in a stock thus expect to profit in at least one of three possible ways:
    • From FCF generated by the underlying business, reflected in a higher share price or distributed as dividends.
    • From an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share prices.
    • By a narrowing of the gap between share price and underlying business value.
  • Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price. Many speculatores attempt to predict the market direction by using technical analysis as a guide.
  • Market participants do not wear badges that identify them as investors or specculators.
  • Value investors pay attention to financial reality in making their investment decisions. Speculators have no such thether.
  • Assets and securities can often be characterized as either investments or speculations. Difference: investments throw off cash flow for the benefit of the owners.
  • Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judment, they respond to market forces not with blind emotion but with calculated reason.
  • Two markets view: efficient markets and inefficient priced. The last one, create opportunities for investors to profit with low risk. Mr. Market by Benjamin Graham.
  • Sometimes Mr. Market sets prices at levels where you would neither want to buy nor sell. Frequently, however, he becomes irrational.
  • Value investors, who buy at discount from underlying value, are in a position to take advantege of Mr. Market´s irrationality.
  • The fact that a stock price rises does not ensure that the underlying business is doing well or that the price increase is justified by a corresponding increase in underlying value.
  • You cannot ignore the market but you must think for yourself and not allow the market to direct you.we
  • Unsuccessful investors: dominated by emotion.
  • There are countless examples of investor greed in recent financial history.
  • Given the complexitities of the investment process, it is perhaps natural for people to feel that only a formula could lead to investment success.