Investing is Most Intelligent When it is Most Businesslike

November 29, 2012 By Theodor Tonca Simon Fraser University - Harbour Centre Campus

The Basics

What is In-vest-ing?
Building a latticework of multidisciplinary mental models

Specialized Knowledge

What is In-vest-ing?

"The act of expending money with the expectation of achieving a profit or material result by putting it into financial schemes" - Said a great investor NEVER!

"The action or process of investing money for profit"

Not quite, but at least we are grammatically correct :\

"The act of purchasing a business for less than it is intrinsically worth"

Rule of 72

Kepner Tregoe Decision Making Model

Law of Scale

Building multi-disciplinary mental models

Newton's Laws of Motion Pavlovian Conditioning

The Law of Compound Interest

Principal + Interest Reinvested = Compound Interest

The Law of Compound Interest in Action

Initial Amount $10,000 $50,000 $100,000 $250,000 $500,000 $1,000,000 Years 30 30 30 30 30 30 Rate of Return 8% 8% 8% 8% 8% 8% Final Amount $100,626 $1,620,000 $3,240,000 $8,100,000 $16,200,000 $32,400,000

Initial Amount

Years

Rate of Return

Final Amount

$10,000
$50,000 $100,000 $250,000 $500,000 $1,000,000

30
30 30 30 30 30

12%
12% 12% 12% 12% 12%

$299,600
$1,680,000 $3,360,000 $8,400,000 $16,800,000 $33,600,000

Law of Incentives
Self-interest makes the world go round

"It is very hard to get a man to believe non-X when his way of making a living requires him to beleive X." - Upton Sinclair

Specialized Knowledge

What do they do & How do they make money?

What do they do & How do they make money?

What do they do & How do they make money?

The Main Tenets

Safety of Principal & Satisfactory Return Margin of Safety

Intrinsic Value

Safety of Principal & Satisfactory Return

Psst, this is subjective!

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. - Benjamin Graham

First rule of investing: Don't Lose Money! = Safety of principal

Satisfactory return?
(This is the subjective part, both contextually and relatively)

What the #$*! is a Margin of Safety?

Only the most important concept of investing. Gosh!

Market Price

Intrinsic Value

Intrinsic Value
Always approximate, never precise, therein lies the rub.

"Intrinsic, long-term worth is the present value of future net cash flows - under conditions of certainty." - John Burr Williams

The Main Stupidities

Efficient Market/Random Walk Theory Capital Asset Pricing Model Beta

GAAP/IFRS Accounting Framework

"Efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a riskadjusted basis, given the information available at the time the investment is made."

The Superinvestors of Graham - and Doddsville

By Warren E. Buffett

The Superinvestors
Investors
Benjamin Graham* Warren Buffett William J. Ruane Charles T. Munger

Return
Total: 6% (1925-1935) Total: 29.5% (1957-1969) Total: 18.2% (1970-1984) Total: 19.8% (1962-1975)

DJIA Return
Total: 3.8% (1925-1935) Total: 7.4% (1957-1969) Total: 10% (1970-1984) Total: 5% (1962-1975)

Walter J. Schloss
Rick Guerin Peter Lynch Tom Knapp

Total: 21.1% (1956-1984)

Total: 32.9% (1965-1983) Total: 29.2% (1977-1990) Total: 20% (1968-1983)

Total: 8.4% (1956-1984)

Total: 7.8% (1965-1983) Total: 8.3% (1977-1990) Total: 7% (1968-1983)

Year 2007 2008 2009

Return 11.2% 8.6% 58.6%

S&P 500 Return 5.49% -37.0% 26.46%

S&P TSX Return 9.83% -35.0% 26.03%

2010
2011 2012+

46.2%
14.5% 35.6%

15.06%
2.05% 12.0%

14.5%
-12.43% 2.18%

* Returns prior to 2010 are for Theodor Tonca Joint Account which predates the inception of Graham Theodor & Co. Ltd. + Returns for FY 2012 are calculated through Nov. 29, 2012

E (Ri) - Rf = E(Rm) - Rf ________ Bi

E (Ri): Expected Return, Rf: Risk Free Rate, Bi: Beta, E (Rm): Expected Market Return, E (Rm) - Rf: Market (Risk) Premium

"Risk of possible impairment of one's principal."

GAAP/IFRS Accounting Framework

Ideas, anyone?

Stock Options
Not an expense according to GAAP/IFRS, AAAARRRGGGHHH!

GAAP/IFRS Accounting Different From Tax Accounting

Uh, what?

**Bonus**
A bit about me: What i do: Invest (Only because i never learnt how to do anything else well) My ideal day: Quite, undisturbed, all day to read and think Favorite 5 star meal: Hamburgers & Fries (with a milkshake for refreshment) Favorite "Hotspot": Nearest library Proudest Moment: Once scooped $20 worth of coins out of a shopping mall wish fountain without falling in when 7 years old.