Wednesday, October 17, 2012

US Energy Independence



Welcome to the shale revolution.  The US is definitely moving toward energy independence with the dramatic rise in shale oil and shale gas. 

Don't be fooled, this is a paradigm shift.


Sunday, October 7, 2012

The Enterprising Investor

In my last post we looked at defensive or passive investing.  Defensive investing is for those with limited time and knowledge yet still want satisfactory results.  On the flip side, if you are willing to put in the time and pick individual stocks you would be considered an enterprising investor. 

So, what exactly is an enterprising investor?  Here is a definition.

The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.

Benjamin Graham - The Intelligent Investor

What are the characteristics of the enterprising investor? 

1.  Willingness to devote time
2.  Careful selection of sound and attractive securities
3.  Committed to the effort over a long period of time 

So if you want to be a value investor and your just starting out it is going to take a lot of time.  If your are passionate about the journey it will be a joy, if your are not it will be a huge burden.  Reading financial reports are not for the faint of heart.  As the quote says, the rewarded for your extra skill and effort may be realized by a higher than average return compared to the passive or defensive investor.  

That said, you should also have some realistic expectations.  A few percentage points over an index is reasonable.  If you think you are going to do much better you are self-deceived.  Keep in mind that gains for the entire stock market is a zero sum game.  By this I mean that if the entire market increases by 6% this year and you gain 8%,  another investor of similar size will have a return of 4%.  If you think you can consistently outperform, it will require a number of characteristics. 

Below are three characteristics that I personally believe are helpful in becoming a successful enterprising investor.

1.  Time & Patience

The first key to the success of any enterprising investor is the willingness to spend a lot of time.  Good investment ideas don't just drop from the sky and nobody is going to tell you where the bargains are.  You will have to search them out. 

This involves the second and third points below, namely reading and thinking respectively. 

If you are starting out I would recommend starting with a printed annual report of a company that you are interested in.  Start reading and when you get to some terminology or accounting information you don't understand stop.  Then go on the internet or look in a textbook and find out what it means.  I purchased a good textbook called The Analysis and Use of Financial Statements by Gerald White for this purpose. 

Once you have figured out your missing "gap" go back to the annual report and continue.  I know at the start this will seem like a painstaking process, but unless you want to back for further education you it's not a bad option.  The difference between going back to school and learning on your own is you willingness to persevere.  If you need someone to hold your hand through the process perhaps school is the best option. 

Secondly, you will need patience.  Just because you have money to invest doesn't mean you should invest it right away.  I waited almost two years before I purchased my first stock.  Don't get in a rush, in fact, the more patient you can be the higher your returns will be.  Markets go up, markets go down.  If you ever feel like chasing a stock because you missed the low prices and it's now running up, stop yourself.  The ability to say no and stick to your buying price will be the key. 

A good way to be patient is by using a checklist.  Good thinking requires good questioning ability.  Using a checklist you will bring items to your mind that you otherwise wouldn't have thought of.  You will not miss part of the analysis, will keep things more rational and less emotional.  Remember, the easiest person to fool is yourself.  Our egocentric nature is perhaps the most formidable barrier to clear thinking.  No matter how biased our thinking is it will appear rational to ourselves. 

Perhaps you think you are cool and always rational.  We'll lets test that idea.  Try thinking of a recent disagreement where you were closed-minded while listening to the views of someone else.  Can you think of one?  Perhaps you can only think of examples where the other person was closed-minded, but not yourself?  If you cannot think of any closed-minded examples in yourself, ask you self why? 

(If after some reflection you still cannot think of any closed-mindedness in yourself , you may have moved to a higher level of self-deception.)

2.  Reading

Reading is essential if you want to be a successful investor.  You will want to read widely but also read selectively.  Reading is a time consuming process so you will want to focus your efforts to get the maximum results.  Sell your TV if you don't feel you have any time. 

What kind of reading do I do? 

First off I do not spend hardly any time reading about investing on the internet.  You will not find any good information or sound investment advice there.  I have said before that if you think you are going to find good stock tips on the internet you are only fooling yourself.  Honestly, reading this blog can be a waste of your time.  My online reading consists of a few national newspapers and a few financial reporting websites.

I regularly get my reading material off SEDAR or the U.S. equivalent. SEDAR is an essential source for individual investors in Canada.  There you can get all the documents that companies file with the regulators, so it can help filter some of the nonsense found on company websites.  I particularly enjoy reading what are called Annual Information Form (AIF) found there.  It gives a much better overview of the company, it's history and other important information (ie. Oil & Gas reserve reports). 

Often the most useless pieces of information found on company websites are investor presentations.  While they may give a quick snapshot of the operations, you should always questions the information given there.  All of them have an entire page of legal disclosure at the beginning that tells you that you shouldn't bother reading any further. 

I also read at least two books per month.  Often related to investing but at other times related to the sciences.  I don't read fiction.  I am particularly interested in the soft sciences, such as economics and psychology.  I read to understand human nature and what makes people behave the way they do. 

I just finished an excellent book called The Worldly Philosophers by Robert L. Heilbroner.  It begins by discussing human nature and how we are naturally self centered.  He then walks you through economic thought starting with Adam Smith, David Ricardo, Karl Marx, Thorstein Veblen, John Maynard Keynes, and Joseph Schumpeter.

I enjoy reading, and learning.  It is definitely a passion of mine.  I find it amazing how much the world opens up with the more you learn. 

3.  Independent Thinker

This point has become more clear to me after I read the book called The Snowball by Alice Schroeder.  It is a biography of Warren Buffett, the world most successful investor.  In that book she describes an inner and outer scorecard and how Warren is 100% inner scorecard when it comes to investing.  He doesn't care what others think, if others are buying or selling, or if every wall street analyst has a sell recommendation on a stock he likes. 

I have discussed this along with the topic of self-esteem on my blog before.  Most people derive there self-esteem and self worth based on what other people think and what they think specifically of them.  That would be 100% outer scorecard.  That is why I have written on my blog that the success of Facebook is not hard to understand.  Facebook users are obsessed with impressing others and influencing their friends opinions.  Sadly, too often, they have the opposite result than intended. 

Now if you derive your self-esteem from others you will struggle as an investor.  Once you buy a stock you will mindless watch to see if everyone else agrees with you or not.  Emotions are a huge obstacle to sound reasoning.  Those who have studied the human brain understand this works.

Don't ever forget, the stock market is a collection of irrational individuals.  This would include myself at times.  The key is to understanding and thinking clearly about the irrationality and fears of other market participants.  That is where you will gain an edge over time. 

This blog post is getting long so I'll end this point with two book recommendations.  The first is The Six Pillars of Self-Esteem by Nathaniel Brandon and the other is Critical Thinking by Richard W. Paul & Linda Elder.  Both are excellent books on their respective topics. 

I should also add that you cannot simply learn about critical thinking from a book.  Critical thinking involves objective self examination and comes through increased self awareness.  It is a journey where you build your self awareness and as a result you begin to think more rationally. 


Becoming a enterprising investor involves a large commitment for those who what to be successful.  It involves Time & Patience, Reading, and Independent Thinking.  It isn't easy but the results are rewarding.  You will gain and develop new skills.  You will increase your thinking ability and self-esteem.  Looking back at what I have written above, it appears to be quite a tall order.  While it does appear to be quite an undertaking, start by taking one step at a time. 

One final caveat is in order.  If you want to be an enterprising investor and are solely focused on the money or getting rich, the whole process is doomed to failure.  You will be too emotional and will end up making risky bets.  On the other hand, if you focus on the process of finding a bargain you will be much more successful.  So focused on the process, enjoy the process, and the results will come. 

Best Regards,

Kevin Graham


Disclosure: Long BRK.b (Warren Buffet's company)