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Key Takeaways
- Looking at cycles in terms of valuations is one of the keys to Bull’s Eye Investing
- Valuations at the time you invest determine the returns you will get over the next 10 to 20 years.
- Return = dividend yield + dividend growth + change in valuation as measured by P/E
- Buying a company that is valued below its Graham Number and holding for 2 years was found to return 24% compounded - more than Buffett
- Target investments to where market is going, not where it has been
- Always buy value!
- Screens and Graham Number are only the beginning - you must then learn everything you can about the company
- Look at Edgar and see who has filed a 13-G or 13-G/A. These companies have someone who passively owns 5% or more of the company
- Set stop loss orders and stick to them - sell losers and let winners ride
- Set price targets for your stock and when to and how much to sell
- Be patient, don't time the stock and don't fall in love
- Do not invest more than you can bare to lose
- Ideal stock is undervalued with a good dividend and good dividend growth rate
- The most important part to understand about an investment is why it will make money. Then the how, strategies, risk, managers, structure, etc
What I got out of it
- Great read on investing which argues more for looking at historical trends and patterns in order to be able to use them to our advantage today. Spot the trend, get ahead of it and you can do very well for yourself. Be aware, there is of course much deeper knowledge required than what can be found in this book so do not take it (or anything else for that matter) as the be all, end all to your investing questions and fears.
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The Little Book on Bull's Eye Investing
Intro
- In secular bull markets, an investor should search for assets that offer relative returns
- In secular bear markets, the essence of Bull’s Eye Investing is to focus on absolute returns. Your benchmark is a money market fund. Success is measured by how much you make above Treasury bills.
- Bull and bear cycles should be seen in terms of valuations, not price.
Chapter 1 - It's Good to be King
- For the last century in the United States, the length has been remarkably consistent—about 17 years from the beginning of a secular bear to the beginning of the next true secular bull.
- Written in 2012 - If the recent pattern holds, the bear market will continue for another five to six years (2017-2018) in terms of valuations, if not in price.
- The key to successful investing, will be to hold the types of stocks, funds, and other investments that do well in a secular bear market (when valuations are contracting) while avoiding the types that history has shown have less chance for success in such an environment.
- Using past market cycles to predict the future is about as helpful as flipping a coin but very important to note where in the stock cycle you are
- Stocks have returned about 6.8% per year in real returns (adjusted for inflation) over the last 200 years, but 2/3 of that came from dividends
- The stock market does not grow faster than the economy over the long term. If it goes too high or too low, it always comes back to trend.
- Price to Resources (P/R) peaks at bull market tops and begins to rebound at bear market bottoms (as indicated by price)
- Long Waves - Greatly simplifying, the theory says that there are two sets of stock market cycles in each Long Wave. There are a bull market and bear market that are influenced primarily by monetary events. Those price movements are followed by a bull market and bear market that are influenced primarily by “real” events such as earnings and economic performance.
- The innovation cycle is extremely important for the underlying economy
Chapter 2 - Rules of Engagement
- Modern Portfolio Theory requires decades to work, correlations between assets can change over time
- Shiller clearly demonstrates that when broad market indices go above P/E ratios of 23 or so, investors essentially get no return over the 10 years that follow. And when P/E ratios drop into single digits, it is clearly a time to stop worrying and start investing.
- The long-term trend that is always in play, the trend that produces secular bull markets and secular bear markets, is a movement of P/E ratios from one extreme to another. The key is to stay aligned with that trend.
- Earnings are not causal of prices, emotions tend to drive stock prices
- When investors become more worried about future losses than hopeful for future profits, the bull market is over
Chapter 3 - Faith vs. History
- Corporate profits grow roughly in line with real GDP + inflation. The rate averages about 6% per year.
- Rising age of population will become a huge burden for developed countries whereas developing countries have a booming young population which will feed these countries growth engines
Chapter 4 - The Trend is Your Friend (Until it Isn't)
- Long term market P/E is slightly under 15
- When valuations are significantly below this level, over a 10 year period can expect around 11% return per year and when significantly above can expect about 0% return over 10 years
- Earnings for corporate America do not grow as quickly as GDP
- There have been several paradigms (trains, planes, autos, computers...) and the growth rate always reverts to the mean (~3.7% annual GDP growth)
Chapter 5 - Investors Behaving Badly
- Analysts tend to overestimate earnings growth by a factor of 2 - take the average earnings estimate and divide by half to be more conservative (and 90% more accurate!)
- Past performance pretty much useless when trying to figure out future results
- The best use of past performance is to see how managers acted in particular situations
- Many of the spectacular blowups occurred because the managers did not understand the limits of their styles
- Avoiding short-term underperformance is the key to long-term over performance
Chapter 6 - Dancing with the Bear
- P/E of 5-7 offers real value
- The psychology of owning a stock automatically makes it worth more to the owner although nothing has changed
- Top performing funds of last decade have been shown to under perform lagging next 5 years
Chapter 7 - The Essence of Bull's Eye Investing
- Return = dividend yield + dividend growth + change in valuation as measured by P/E
- Buying a company that is valued below its graham number and holding for 2 years will return 24% compounded - more than Buffett
- Be patient, don't time the stock and don't fall in love
- Do not inset more than you can bare to lose
- Ideal stock is undervalued with a good dividend and good dividend growth rate
- Bond prices fall as interest rates rise
Chapter 9 - Spreading the Pain Around
- Mauldin is very bullish on gold and buys insurance gold every month - gold you never expect to sell or profit from and means world economy is doing very well
- Gold is a neutral currency which maintains its buying power over the long term
- Until the debt situation is corrected, gold will be an excellent investment
- Rising inflation may hurt real estate at first put if you consistently have tenants it will eventually help
Chapter 10 - Leading the Duck
- Muddle through economy for some time, trade imbalance, debt, low interest rates
- Faces secular bear market with stock valuations trending lower. Just because secular bear does not mean there are select year(s) with very good returns
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