Invested: A 12-Month Plan to Financial Freedom

Text in black are quotes; text in green are my notes. I sometimes write in Spanish.

• it may seem counterintuitive, a crash is our best chance to leapfrog into financial freedom by buying wonderful companies on sale at bargain-basement prices. It’s the investment equivalent of getting designer clothes for half of what they would have cost at the department store. #

  • Un inversionista en valor (value investor) hace lo mismo que nosotros con compras grandes: esperar a que haya descuentos. Yo, por mi cuenta, usualmente tengo en mente lo que necesito comprar, y si encuentro una buena oferta por ese producto o servicio, lo tomo sin pensar. Es diferente a encontrar algo con descuento cuando lo necesitas, eso no es una oferta.

• We keep running on the treadmill because the challenge feeds our ambition, and if we stop, there sometimes aren’t any other treadmills to get on that will pay student loans. #

• Rule #1 is Don’t Lose Money. Rule #2? Don’t Forget Rule #1. #

• To a man with a hammer, everything looks like a nail. To my dad, investing on your own was the solution to everything. #

  • Algunas personas podrían decir que invertir por cuenta propia es la solución a todo, como Phil Town. Y aunque no lo es, y él también lo sabe, es una buena filosofía a seguir porque de todos modos invertir por cuenta propia ayuda bastante a cumplir el resto de los objetivos que podemos tener.

• My dad calls this the Emotional Rule of Investing: as soon as you buy a stock expecting it to go up, it will go down—entirely because you bought the stock. It’s like deciding which line to wait in. I always pick the line that looks the fastest, and as soon as I step in, it immediately slows to a halt. Buying stock seems pretty much the same as line-choosing, only with much higher consequences. But here’s the difference: You have to pick a line. You don’t have to pick a stock. #

  • Comprar una acción es como hacer fila en el súper: cuando te cambias de fila porque crees que irá más rápido, sucede justo lo contrario. Así pasa con las acciones. Cuando decidas comprar una, de seguro la acción bajará por el solo hecho de que la compraste. Claro, que para pagar en el súper a huevo tienes que estar en una fila, pero no necesariamente tienes que comprar una acción.

• In sum, inflation hurts savings but helps stocks. #

• Brainstorm and write down what you would do if you had financial freedom, whatever that means to you. Would you stay in your job, work less, volunteer, find a different job, pay off student loans or medical bills, support a family member, travel, donate to charity, or sleep more soundly? Be brave enough to write down how doing that would make you feel. #

  • ¿Qué es la libertad financiera para ti? ¿Qué harías si la tuvieras? ¿Seguirías trabajando, viajarías, donarías a caridad, ayudarías a tu familia? Es importante imaginar esa vida, esa libertad, antes de empezar a invertir.

• “No matter how many books are written about failure being good, failing is usually a personal disaster. You see the successful entrepreneurs, the serial entrepreneurs, the successful venture capitalists. You don’t see the people who have done seven different failures and have no career or savings to show for it. The people who are fifty years old and haven’t had a success. #

  • He leído infinidad de personas motivadoras que insisten en que uno aprende de los errores. Yo creo que aunque es inevitable fallar, no son los errores los que nos enseñan más, sino los éxitos. Un error lo único que te enseña es qué no funciona. ¿Y? Un éxito te enseña lo que sí funciona, y eso es más valioso porque ahora puedes repetirlo y mejorarlo; iterar sobre el éxito.

• “Basically, there are four pretty straightforward mathematical components to achieving financial freedom: 1. Minimum annual spending; 2. Years remaining to invest; 3. Money to invest; 4. Required rate of return on the investments #

• The first level is Unconscious Incompetence, when you’re completely incompetent at that skill and don’t even worry about it because you don’t know anything about it. #

  • Escribí sobre esto en mi newsletter. #

• The second level is Conscious Incompetence, when you know what you need to know but you can’t do it very well. #

• The third level of mastery is Conscious Competence. That’s when you know what you need to know, and if you stay focused and conscious about what you’re doing, you can do it well. #

• The fourth level of mastery, Unconscious Competence, is the experience of doing something well without thinking about it. #

• I wanted to vote for companies that had a Mission to change the world for the better just as much as the founders of the startups I loved did. The more I thought about it, the more I felt that these companies, with a strong Mission I supported, would be better custodians of my money than anyone else. #

• Treat employees decently and pay a living wage: a company that isn’t ethical is not putting good vibes out into the world; it’s creating employees who don’t like it. It’ll eventually go down. #

• Treat products decently: if animals, humanely; if products, be environmentally friendly; if food, use sustainable farming practices. #

• Prefer local and small: support the community and use local information about the company’s environment, local reputation, and employees. #

• I follow a kind of simple outline to create a Story about a business: meaning, management, Moat, Margin of Safety. #

• I needed to see an argument written in black and white. I write it. Writing it down forces me to be precise. The choice of words matters. It’s not casual. #

• We’re different, and that’s the point: I’d vote for my values, he’d vote for his, and we’d see what happened—but at least we didn’t pretend our money was voting for nothing. #

• What are the values you’re supporting? Do you want to keep supporting them? From that, make a list of the Missions you choose to vote for with your investing money. #

  • A la hora de invertir es muy, pero muy importante que sea en una compañía que vaya de acuerdo a tus valores. Si inviertes solo porque los números son buenos, probablemente no comprenderás o simpatizarás con las decisiones que la compañía tome en un futuro. Y eso facilitará que vendas, y es algo que no quieres como value investor.

• Efficient Market Hypothesis (EMH). EMH says that if people are rational actors who buy and sell based on what a stock is worth, then a stock’s price is completely rational and—here’s the key—fully reflects all available information at any given moment in time. All of the possibilities of a stock going up or down are immediately factored into the price by thousands of smart people who have all the information and are bidding on the stock, all at the same time. The theory says that the pricing of stock based on information available at every given moment makes the market efficient. Therefore, the price of the stock at any given moment is exactly the same as its underlying value. #

• But there is a counterexample to EMH: $10,000 put into the first Buffett Partnership in 1956 would have grown to $2.5 million by 1973, while the same money in the stock market index would have only grown to $50,000. If EMH is true and nobody can beat the market, then how do you explain Buffett’s success? #

• Warren Buffett and Charlie Munger saw that emotion often drives decisions, and they exploited it. They bought when the herd was selling out of fear, and sold when the herd was buying out of greed. Clearly, by their track record of high annual returns, it worked. #

• “But here’s the thing,” Dad went on. “The CEO also told us the cotton shortage was temporary. They’d seen it all before and knew it was a one- to two-year issue. With the cotton price that high, farmers in Georgia would plant cotton from one end of the state to the other, and when that bumper crop came in a year later, prices would fall back to normal.” “Which is too long of a time horizon for the big investors,” I realized. The practical realities of a fund manager’s job proscribe riding it out. #

• By waiting to find discrepancies between price and value, a fund manager risks being beaten by the market month after month. If his performance does not keep up with his peers’ quarter by quarter, within a year or two his clients will move their money to a different fund manager and he will get fired. Fund managers live in a world of competition that makes the NFL look like kindergarten. #

• “They are acting rationally within the rules of their world that you just described. If an Event happens that raises uncertainty, fund managers are forced by the nature of the industry to sell. Long-term to them is ninety days. And the recovery for this Event was much longer than that. #

  • El largo plazo para un gerente puede ser de 90 días, mientras que el tuyo puede ser hasta decadas. Su trabajo es obtener rendimientos en corto plazo, porque si no es así, serán comparados con otros fondos y despedidos si no alcanzan los números. Básicamente es más probable que te despidan por no hacer nada (muchas veces la mejor decisión) que por intentar hacer algo aunque te vaya mal.
  • Ellos están jugando con las reglas de su mundo, y tú no tienes porque hacer lo mismo.

• That’s incredibly good news for me because that means I don’t have to be smarter than the pros on Wall Street; I just have to play by a different set of rules. Buffett’s rules. #

  • La mayor diferencia entre un gerente de un fondo de inversión y tú, como inversionista individual, es que están jugando al mismo juego, pero con diferentes reglas; y las reglas van a tu favor.

• “If you watch the Shiller P/E and the Buffett Indicator, you’ll have a good sense of where we are in the economic cycle. And where we are now is at the top.” #

• Munger added to Buffett’s strategy that “it’s better to buy a wonderful business at a fair price than a fair business at a wonderful price.” #

• For Charlie Munger to put money into a company: 1.      it must be a business he is capable of understanding 2.      it must be a business with some intrinsic characteristics that give it a durable competitive advantage 3.      he would like it to be a business that has management with integrity and talent and 4.      it must be a business that he can buy for a price that makes sense and gives a Margin of Safety. #

• “Think of this business like buying your condo,” my dad suggested. “Just like with buying a condo, you’ve got to know the neighborhood and the long-term implications of that location. For public companies, the neighborhood is the industry. That’s all. Understand it the way you would understand a neighborhood. What has it been through, what are its cycles, what are its good spots and bad spots, and where do you think it’s going over the next ten to twenty years? Are the schools getting better or worse, stores opening or closing, incomes going up or down, prices going up or #

  • Invertir en una compañía es muy similar a comprar una casa. Para tomar la mejor decisión al comprar una casa no solo tienes que mirar a la casa como tal, sino a toda la colonia. Para las compañías, la colonia es la industria.
  • ¿Cómo es la vida en la colonia, cuáles son lugares seguros y no seguros, cómo crees que estará en unos 10 o 20 años, qué escuelas hay cerca, están mejorando las escuelas, hay nuevos negocios, qué tal los precios?

• But always remember that while it’s a really cool shortcut to finding something you might want to buy, the 13F filings paint an incomplete picture of any Guru’s holdings. #

• This, my dad believes, is the key to successful personal investing: learning how to use predictably irrational and emotional short-term decisions of others to my advantage. #

• A Moat is exactly what we all think of—the body of water surrounding a castle to prevent attacks. In investing, the castle is the business and the Moat is the competitive advantage the business intrinsically has that makes it near-untouchable by competitors for long-term cash flow. If a business has a good Moat, it’s going to be hard for competitors to breach the Moat and take the castle. Not impossible, but difficult. So difficult that they won’t try. So difficult that if they had all the money it would cost to buy the whole company, they still couldn’t compete with it. #

  • En inversiones, un castillo rodeado por agua es una compañía. El agua que rodea al castillo como defensa es el Moat. Algo que sería muy difícil para otros vencer. Sería casi imposible tomar el castillo.
  • Tienes que invertir en castillos que tengan una buena defensa.

• With a great Brand Moat, customers think in terms of the brand name rather than the generic name of the product: Coke, not cola; Harley, not motorcycle; iPhone, not smartphone; Kleenex, not facial tissue. #

• The intercontinental railroad is my dad’s favorite example of a Toll Bridge Moat. Burlington Northern Railroad controls the railroad tracks. It’s not that another company can’t build a railroad, but the government regulations, the expense, and the right-of-way it would have to procure make doing so, for all practical purposes, impossible. #

• “I’d like to see each of the Big Four Numbers growing at 10 percent or better each year,” Dad said. Those are called the Big Four Growth Rates. #

• Look for a reliable pattern and look for how the company responded to breaks in that pattern. “Now,” Dad explained, “take the Big Four Growth Rates and choose one overall growth rate to use for the company.” “You mean, use the average growth rate?” I asked. “No,” he said emphatically. “Definitely not the average. This is a judgment call you’re going to have to make based on your research. You have to choose what you think is the most likely growth rate going into the future. Remember, all the numbers you have are in the past and there’s no guarantee they will continue. #

• Management Numbers: (1) Return on Equity, (2) Return on Invested Capital, and (3) Debt #

• “Return on equity, or ROE, tells us the return the company is getting on our shareholder investment. It calculates how many dollars of profit a company generates with each dollar of shareholder equity, which tells us if the management is doing a good job with our money. Now, a high ROE can be financially engineered just by the company borrowing a lot of money.” I groaned. “Return on invested capital is the other number we’re going to use to look at management. Return on invested capital tells us the same thing as return on equity, but in addition to the money put in, it also includes the company’s debt.” #

• “Look for a company with an ROE and ROIC at 15 percent or better, each year, for the last ten years or so. Ten years probably means they’ve been through a down economic cycle, or they’ve outgrown their startup phase, or they’ve been through a change of executive team. If they still have a strong ROE, this is a company to look at. Charlie wants us to look at durability, and shorter than ten years is not enough to prove that a company is durable.” #

• When you live weekend to weekend—and most of us do—a month gets shortened to four sets of two days that are useful, and those eight days have to fit in the errands, the laundry, the household fixer-upper tasks, the spillover work from the week, family time, and friend time. #

• Find the price that is reasonable, and then, still don’t buy it—in other words, wait till the price is even lower than reasonable. #

• Three Methods of Pricing/Valuation 1.      Ten Cap price (based on Owner Earnings) 2.      Payback Time price (based on free cash flow) 3.      Margin of Safety valuation (based on earnings) #

• The formula for the Ten Cap then, I reiterated to make sure I had it right, is: Owner Earnings times ten. It tells me the price I can pay that will get me a 10 percent return from my first year of owning it. #

• “Yeah,” my dad answered wryly, “that is the catch. You could literally wait thirty years to have a Ten Cap rental building in New York or a farm-buying opportunity like Buffett got in Nebraska.” #

• Dad summarized: “It’s the nature of the market itself that makes it possible for us to find Ten Cap deals regularly, instead of once in a lifetime.” #

• Formula for Owner Earnings Net Income* + Depreciation & Amortization + Net Change: Accounts Receivable* + Net Change: Accounts Payable* + Income Tax + Maintenance Capital Expenditures** = Owner Earnings #

• I remembered the Emotional Rule of Investing—everything goes down once you buy it, and it’s because you bought it. #

• “Cross-examine my own argument by proving the opposite.” #

• “The easiest way to get to a decent Inverted Story is to take each of the three reasons you want to buy this company and invert it,” Dad explained. “Then rebut each inversion.” #

• Never mess around with something that’s Too Hard. #

• It doesn’t matter what minor price variations are happening if you want to own that company. If you know you have a Margin of Safety and you want to buy it, that’s all you need to know. As long as it’s on sale, the actual moment-to-moment price doesn’t matter. #

• “Buying because you feel pressure is not investing. It’s what all those typical mutual fund managers are doing in the market every day—speculating on the direction of the crowd in this industry or that stock. They are not investors.” #

• “Patience and knowing what you’re buying are what separate investors from speculators. #

• get why you don’t get too worked up when the market is moving around. If it moves downward, you know you’re going to benefit because you’re a buyer. And if it moves upward, you also benefit from the prices of your portfolio going to the moon.” #

  • Para los inversores de valor no importa si el mercado va de subida o bajada; se benefician de ambos.
  • Cuando está de bajada porque quizá es buen momento para comprar. Cuando está de subida porque sus acciones incrementarán su valor.

• Wishlist tells me what to buy. And the buy price tells me when?” #

• If you’re nervous because you don’t like the idea of the stock price going down after you bought the company, your intuition might be telling you that you don’t understand the business well enough to own it. #

• “Another thing I do to keep my emotions steady in times when the market is rocketing around and I’m being left behind is to keep my eye on two important pieces of information about what the overall market is doing: the Shiller P/E and the Buffett Indicator.” #

• “Buffett’s statement never to sell really means ‘Never sell as long as the Story stays the same.’ ” #

• Always go for the company that is the best company and let them decide where the cash goes. #

• “Because knowing when to sell is really about a change to the Story that says you should buy. We sell when the Story changes. That means inverting the story tells us what the business will start to look like when it’s time to sell.” #

• As Warren says, ‘A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.’ #