Category Archives: Who’s Who

Who is Ray DeVoe?

The name Ray DeVoe was mentioned by Warren Buffett in his FY2010 letter to Berkshire Hathaway shareholders.

Warren Buffett said: “We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few more basis points, a policy we adhered to long before the frailties of commercial paper and money market funds became apparent in September 2008.”

Then touching on a Ray DeVoe view, he said: ” We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.” At Berkshire, we don’t rely on bank lines, and we don’t enter into contracts that could require postings of collateral except for amounts that are tiny in relation to our liquid assets.””

So who is investment writer Ray DeVoe ?

According to an obituary, Ray DeVoe was Raymond F. DeVoe Jr (1929-2014). He died on Sept 27, 2014, at the age of 85.

A Sept 30, 2014, Bloomberg report (Raymond DeVoe Jr, Newsletter Writer for 35 Years, Dies) said: “In a Wall Street career dating to 1955, DeVoe was a voice for investors looking for long-term stakes in undervalued companies. He said in a 2011 interview with Bloomberg News that David Dodd, co-author with Benjamin Graham of the value investing classic “Securities Analysis” (1934),  “was my finance professor and guidance counselor” at Columbia University’s business school.”

The investment writer wrote the DeVoe Report, a financial newsletter, for 35 years.

Warning investors to beware “the dead cat bounce”, Roy DeVoe once said: “If  you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk. But don’t confuse that bounce with renewed life. It is still a dead cat.”

Investopedia describes the dead cat bounce as “a temporary recovery from a prolonged decline or a bear market that is followed by the continuation of the downtrend”. 

Philip Fisher’s scuttlebutt method

For a man like Berkshire Hathaway chairman Warren Buffett who doesn’t personally own an iPhone, one wonders why he more than doubled Berkshire Hathaway’s holdings in Apple to about 2.5 per cent in January 2017. At that point, Mr Buffett owned US$17 billion worth of the tech giant’s stock

In a CNBC report on 27 February 2017 titled “Billionaire Warren Buffett more than doubled his holdings in Apple in 2017”, Mr Buffett, when asked why he raised the stake in Apple, was quoted as saying “because I liked it”. The legendary investor cited Apple’s
consumer-retaining power and CEO Tim Cook’s smart capital deployment strategy.

“Apple strikes me as having quite a sticky product, and an enormously useful product to people that use it,” Buffett said.

What was interesting is that Mr Buffett went on to say that the late investor Philip Fisher’s 1958 book “Common Stocks and Uncommon Profits” had inspired him to research how consumers felt about Apple products.
Mr Fisher talked about something called the “scuttlebutt method“, Mr Buffett said, adding that this method “made a big impression on me at the time, and I used it a lot”.

The “scuttlebutt method”, said Mr Buffett, is essentially going out and finding out as much as you can about how people feel about the products that they use.

Let’s look further into who Philip Fisher was and what his “scuttlebutt method” was all about.

American stock investor Philip Arthur Fisher (September 8, 1907 – March 11, 2004) was best known as the author of the investment guide book known as  Common Stocks and Uncommon Profits. The book has the reputation of staying in print since it  first published in 1958.

Phillip Fisher was referred to by Mr Buffett as “a respected investor and author” in a  letter to Berkshire Hathaway shareholders. Among his best-known  followers is Mr Buffett  who reportedly has said on some occasions that “he is 85% (Benjamin) Graham and 15% (Philip) Fisher”. Benjamin Graham (May 8, 1894 – September 21, 1976) is the father of value investing and Mr Buffett is his best known student.

Back to the “scuttlebutt method”, which provides clues that are needed to find really outstanding investments. Philip Fished said he called it “scuttlebutt method” for lack of a better term.

“The business ‘grapevine’ is a remarkable thing,” said Philip Fisher. “It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company.”

“Most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged and will talk rather freely about their competitors. Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge,” said Mr Fisher.

According to Philip Fisher, competitors are only one and not necessarily the best source of informed opinion. Much also can be learned from both vendors and customers about the real nature of the people with whom they deal. Research scientists in universities, in government and in competitive companies are another fertile source of worthwhile data. So are executives of trade associations, according to Philip Fisher.

“The next step is to contact the officers of the company to try and fill out some of the gaps still existing in the investor’s picture of the situation being studied,” said Mr Fisher.

A game of Snap, of Old Maid, of Musical Chairs – John Maynard Keynes

keynes
John Maynard Keynes (5 June 1883 – 21 April 1946) – Wikipedia

“For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a  pastime in which he is victor who says Snap neither too soon nor too late, who passed the  Old Maid to his neighbour before the game is over, who secures a chair for himself when  the music stops. These games can be played with zest and enjoyment, though all the
players know that it is the Old Maid which is circulating, or that when the music stops  some of the players will find themselves unseated.”

This quote is from  The General Theory Of Employment, Interest, And Money
– Chapter 12 “The State of Long-term Expectation” (John Maynard Keynes, 1936).

Legendary investor Warren Buffett has also made reference to John Maynard Keynes’ General Theory of Employment, Interest, and Money Chapter 12 (“The State of Long-term Expectation”). In a November 2011 interview with Business Wire CEO Cathy Baron Tamraz, Warren Buffett said: “If you understand chapters 8 and 20 of The Intelligent Investor (Benjamin Graham, 1949) and chapter 12 of the General Theory (John Maynard Keynes, 1936), you don’t need to read anything else and you can turn off your TV.” This advice from Warren Buffett involves two milestone books on investing and economics

John Maynard Keynes made this  “game of Snap, of Old Maid, of Musical Chairs” remark in the context of saying that most professional investors and speculators were “largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the
conventional basis of valuation a short time ahead of the general public.”

Keynes went on to say: “They are concerned, not with what an investment is really worth to a man who buys it ‘for keeps’,
but with what the market will value it at, under the influence of mass psychology, three  months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed  propensity. It is an inevitable result of an investment market organised along the lines
described. For it is not sensible to pay 25 for an investment of which you believe the  prospective yield to justify a value of 30, if you also believe that the market will value it  at 20 three months hence.

“Thus the professional investor is forced to concern himself with the anticipation of  impending changes, in the news or in the atmosphere, of the kind by which experience  shows that the mass psychology of the market is most influenced. This is the inevitable
result of investment markets organised with a view to so-called ‘liquidity’. Of the maxims  of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the  doctrine that it is a positive virtue on the part of investment institutions to concentrate
their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing  as liquidity of investment for the community as a whole.”

Keynes then added: “The social object of skilled  investment should be to defeat the dark forces of time and ignorance which envelop our  future. The actual, private object of the most skilled investment to-day is ‘to beat the gun’,  as the Americans so well express it, to outwit the crowd, and to pass the bad, or  depreciating, half-crown to the other fellow.

“This battle of wits to anticipate the basis of conventional valuation a few months hence,  rather than the prospective yield of an investment over a long term of years, does not  even require gulls amongst the public to feed the maws of the professional; — it can be
played by professionals amongst themselves. Nor is it necessary that anyone should keep  his simple faith in the conventional basis of valuation having any genuine long-term  validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a
pastime in which he is victor who says Snap neither too soon nor too late, who passed the Old Maid to his neighbour before the game is over, who secures a chair for himself when  the music stops. These games can be played with zest and enjoyment, though all the
players know that it is the Old Maid which is circulating, or that when the music stops  some of the players will find themselves unseated.”

Keynes then put it another way: “Or, to change the metaphor slightly, professional investment may be likened to those
newspaper competitions in which the competitors have to pick out the six prettiest faces  from a hundred photographs, the prize being awarded to the competitor whose choice  most nearly corresponds to the average preferences of the competitors as a whole; so that
each competitor has to pick, not those faces which he himself finds prettiest, but those  which he thinks likeliest to catch the fancy of the other competitors, all of whom are  looking at the problem from the same point of view. It is not a case of choosing those  which, to the best of one’s judgment, are really the prettiest, nor even those which  average opinion genuinely thinks the prettiest. We have reached the third degree where  we devote our intelligences to anticipating what average opinion expects the average
opinion to be. And there are some, I believe, who practise the fourth, fifth and higher  degrees.”

Benjamin Graham’s The Intelligent Investor Chapter 8 (The Investor and Market Fluctuations)

Benjamin Graham’s The Intellingent Investor Chapter 20 (Margin of Safety As The Central Concept Of Investment)

 

 

The Little Book of Common Sense Investing by John C. Bogle

In his letter dated February 27, 2015 (for FY2014) to Berkshire Hathaway shareholders, Warren Buffett says: “Rather than listen to their (advisors’) siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.

“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray,” said legendary investor Warren Buffett.

“It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.

“For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities,” said Warren Buffett.

Who is “Jack Bogle”, the author of  The Little Book of Common Sense Investing, the book which Warren Buffett was talking about?

Wikipedia says “John CliftonJackBogle is the founder and retired CEO of The Vanguard Group”.  So Jack Bogle, as referred to by Warren Buffett, is John C. Bogle as seen in the cover of The Little Book of Common Sense Investing.

“Bogle founded The Vanguard Group in 1974. Under his leadership, the company grew to be the second-largest mutual fund company in the world. Influenced by the works of Eugene Fama, Burton Malkiel, and Paul Samuelson, Bogle founded the Vanguard 500 Index Fund in 1975 as the first index mutual fund available to the general public. He continues to be active in The Vanguard Group,” says Wikipedia.

An account of  The Little Book of Common Sense Investing by John C. Bogle says: “Common sense tells us – and history confirms  – that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns. To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C. Bogle.”

For reviews of the book, here is the link: The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle.

Irving Kahn – passing of a great value investor


(https://www.youtube.com/watch?v=P4CPj6aiD7g)

The value investing world  has lost a great member  –  American businessman and investor  Irving Kahn (December 19, 1905 – February 24, 2015),  who was the oldest living active investment professional.  Wikipedia says he was an early disciple of Benjamin Graham, the creator of the value investing methodology. Kahn began his career in 1928 and continued to work until his death. He was chairman of Kahn Brothers Group, Inc., the privately owned investment advisory and broker-dealer firm that he founded with his sons, Thomas and Alan, in 1978.

Irving Kahn was the oldest active money manager on Wall Street.  He made his first trade—a short sale of a copper mining company—in the summer of 1929, months before the infamous market crash in October of that year.

Educated at the City College of New York, Irving Kahn served as the second teaching assistant to Benjamin Graham at Columbia Business School. At the time, other notable students and/or teaching assistants to Graham included future Berkshire Hathaway chairman Warren Buffett and future value investors William J. Ruane, Walter J. Schloss, and Charles Brandes, among others. Graham had such an enormous influence on his students that both Irving Kahn and Warren Buffett named their sons after him. Kahn named his third son, born in 1942, Thomas Graham, and Buffett, his first son, born in 1954, Howard Graham.

Kahn was a Chartered Financial Analyst and among the first round of applicants to take the CFA exam. He was a founding member of the New York Society of Security Analysts and the Financial Analysts’ Journal.

A February 28, 2015,  post (Irving Kahn’s Legacy To Investors: Style Is Everything) in Forbes by contributor John S. Tobey says:

“Irving Kahn’s particular value approach was to identify stocks that were selling at a deep discount (i.e., an attractive “value”) and that were generally ignored or disliked by others (i.e., “contrarian”). On the positive side, he required strong financials (i.e., little or no debt), management commitment (i.e., a stake in the business), and the potential for growth (i.e., a fundamental driver that could push the stock price up and create investor interest).

“From this approach, he sought to produce superior long-term returns while avoiding risk of significant loss. He often described the key ingredient necessary for success as “patience” – the ability to wait for the tide to turn.”

A Bloobberg report dated February 26, 2015  ( Irving Kahn, Investor Who Profited in ’29 Crash, Dies at 109) said:  “Among the memories he filed away was his work with Benjamin Graham, the stock picker and Columbia Business School professor whose belief in value investing influenced a generation of traders including Warren Buffett. Graham, who died in 1976, distinguished between investors, to whom he addressed his advice, with mere “speculators.”

“Kahn assisted Graham and his co-author, David Dodd, in the research for “Security Analysis,” their seminal work on finding undervalued stocks and bonds, which was first published in 1934. In the book’s second edition, published in 1940, the authors credited Kahn for guiding a study on the significance of a stock’s relative price and earnings.”

 

Charlie Munger’s “lollapalooza effect” concept

Lollapalooza_2015
Lollapalooza 2015

In stock markets, we hear of this term called “lollapalooza effect”. In mid-2014, for example, when the stock of Apple plummeted at one stage by  40 per cent from a high of $700 to just below  $400, the cause was attributed in some quarters to the “lollapalooza effect”.

In a June 2014  article , “Apple Stock Still Suffering From The ‘Lollapalooza Effect'”,  the unusual circumstances surrounding Apple were described as follows: the death of Steve Jobs, the rapid decline of BlackBerry, and the rapid advance of Android OS and handset maker Samsung in particular. These unusual circumstances have been woven together into a popular narrative …This narrative sparked a mob mentality and drove Apple’s share price from its high of $700 down to just below $400 (a decline of over 40%).”

So the “lollapalooza effect” was the weaving together of the unusual circumstances to cause a stampede on the stock price of Apple.

The term “lollapalooza  effect” was propounded by Charles Munger,  the partner of legendary investor Warren Buffett at Berkshire Hathaway.

The word “lollapalooza” itself means  “a person or thing that is particularly impressive or attractive”; its origin is said to be in the late 19th Century.

But as an event,  lollapalooza   is an annual music festival featuring popular alternative rock, heavy metal, punk rock and hip hop bands, dance and comedy performances and craft booths. It has also provided a platform for non-profit and political groups and various visual artists. (Wikipedia)

Charlie Munger uses the term “lollapalooza effect” for multiple biases, tendencies or mental models acting at the same time in the same direction. With the lollapalooza effect, itself a mental model, the result is often extreme, due to the confluence of the mental models, biases or tendencies acting together. (Wikipedia)

This concept of lollapalooza effect,  which the intelligent investor needs to understand, was touched upon by Charlie Munger in a 1995 speech entitled Psychology of Human Misjudgement.  The latter was about his intriguing thoughts on the 25 tendencies that lead people  to make really bad decisions.  The ideas can be found in the  book “Poor Charlie’s  Almanack”, a collection of speeches and talks by Charlie Munger.