tag:blogger.com,1999:blog-26528990035877530282024-03-13T10:58:02.685-05:00Clear Eyes Investing Investing Success = Good Company + Right Price + Investment + PatienceTodd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comBlogger131125tag:blogger.com,1999:blog-2652899003587753028.post-91350148821572129562023-08-16T08:24:00.000-05:002023-08-16T08:24:00.374-05:00Follow Me at Flyover Stocks<p>Hello again! </p><p>It's been a while since my last post on Clear Eyes Investing and I appreciate your continued interest in the content.</p><p>I'm starting a new writing platform on Substack called <a href="http://www.flyoverstocks.com">Flyover Stocks</a>. You can subscribe to Flyover Stocks using the link below. We'll cover similar topics as we did here at Clear Eyes Investing, in addition to finding overlooked quality companies with economic moats led by thoughtful stewards of shareholder capital. I hope you'll come along for the ride.</p><p style="text-align: center;"><iframe frameborder="0" height="320" scrolling="no" src="https://www.flyoverstocks.com/embed" style="background: white; border: 1px solid #EEE;" width="480"></iframe></p><p>I'll keep the Clear Eyes Investing site active.</p><p>Please don't hesitate to contact me with any questions or comments you might have.</p><p>Stay patient, stay focused.</p><p>Todd</p><div><br /></div>Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-41042792593262534412017-12-20T15:49:00.000-06:002017-12-20T15:49:00.530-06:00Where You Can Find MeHi everyone,<br />
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I recently <a href="https://intrinsicinvesting.com/2017/12/18/todd-wenning-cfa-joins-ensemble-capital-management/">joined Ensemble Capital</a> as a senior investment analyst and will be contributing posts to Ensemble's excellent blog, <a href="https://intrinsicinvesting.com/">Intrinsic Investing</a>.<br />
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Please bookmark Intrinsic Investing and follow us on Twitter (<a href="https://twitter.com/IntrinsicInv">here</a>) to see my future posts.<br />
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Clear Eyes Investing will remain public if you want to read the archives.<br />
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As always, thank you for following my writings both here and elsewhere!<br />
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Stay patient, stay focused.<br />
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Best,<br />
<br />
ToddTodd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-54546962351883323952017-11-08T22:31:00.002-06:002017-11-08T22:31:45.855-06:0015 Questions to Ask Management TeamsWhether or not you should meet with a company's management team is a debatable topic among fundamental investors.<br />
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Those against meeting with management believe you can get what you need from the numbers and company filings. By speaking with management, you risk getting "captured" by a charismatic executive or misled by a sly one. These are all indeed risks to be aware of before meeting management.<br />
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In my experience, speaking with business leaders across industries, company sizes, and geographies has been an education in itself. I've misread situations in the past, of course, but I've learned more than I've lost and have come to enjoy the art of crafting questions. Despite the risks, meeting with management also helps you evaluate the intangible factors that may not be priced into the stock.<br />
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Here are a few of my favorite questions to ask management teams.<br />
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<span class="im" style="-webkit-text-stroke-width: 0px; background-color: white; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><span style="font-family: inherit;"><b>What is distinctive about your company's corporate culture?</b></span></span><br />
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<span style="background-color: white; font-family: inherit;">This is the first question I ask. Not only am I genuinely interested in learning about the </span><a href="http://www.cleareyesinvesting.com/2015/01/dont-overlook-this-factor-in-your.html" style="background-color: white; font-family: inherit;">company's culture</a><span style="background-color: white; font-family: inherit;">, but it also sets the tone for the rest of the conversation. </span></div>
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<span class="im"><span style="font-family: inherit;">Most CEOs and CFOs get peppered with questions from analysts and investors about the quarter or annual guidance. </span></span><span style="font-family: inherit;">Naturally, then, most start the call on the defensive. </span></div>
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<span style="font-family: inherit;">Starting with a qualitative question that gives them the chance to discuss why their company is a great place to work has in more than one occasion dramatically shifted the conversation's temperature. </span></div>
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<b>If you had to live on a desert island for 30 years and could only invest your life savings in the stock of one of your competitors while you were gone, which one would it be? </b></div>
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This question has generated some good leads. When a company <a href="http://www.cleareyesinvesting.com/2017/11/13-investing-gems-from-anthony-bolton.html">speaks well of a competitor</a>, that's usually a sign the competitor is doing something right. </div>
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Some executives prefer to punt on this question - and, of course, it's worth asking yourself why they'd punt. When this occurs, I'll replace "competitors" with "customers or suppliers," with the idea being to find out which companies might be worth further research.</div>
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<b>What has the company done to widen its moat over the past year?</b></div>
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The phrasing of this question requires the executive to know the company's core durable competitive advantages (its "moat") - which is not always a given - and then know how the company has deliberately improved upon that advantage. </div>
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For example, if the company's moat is brand-based, you want to learn how management has made the brand more valuable. If it's a low-cost producer, how has the company improved cost controls?</div>
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<b>Could you please walk me through your M&A process?</b></div>
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What I'm looking for here are signs of a repeatable and thoughtful process. Is there a dedicated acquisition team? How are they valuing targets? When do they walk away from deals? Have they walked away from deals?</div>
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<b>What's been the biggest change in your industry over the last five years?</b></div>
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Companies don't operate in a vacuum and it's important to know how industry dynamics have impacted the business. Has there been consolidation? Did a big company go bankrupt? Did manufacturing move overseas? </div>
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<b>What are you doing that your competitors aren't doing <i>yet</i>?</b></div>
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<span style="font-family: inherit;">This is one of <a href="http://www.cleareyesinvesting.com/2013/07/philip-fishers-15-points-to-look-for-in.html">Philip Fisher</a>'s questions. It's perfect as it is and I love Fisher's emphasis on the "yet." It's a good starting question for economic moat evaluation and it can also help you determine if management is taking new competitive threats seriously or not. </span></div>
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<b>In what ways is technology an opportunity and in what ways is it a threat?</b></div>
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Software is increasingly able to replace labor- or capital-intensive operations. You want to find out which parts are most threatened by this development, but also which parts might benefit from technology (i.e. lower costs, streamlined operations, etc.).</div>
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<b>If I had sufficient capital, what would stop me from competing head-to-head with you in year one?</b></div>
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Here, what I want to find out is if there are any barriers to entry beyond capital. If returns are good enough, capital will find its way into the industry. So, in order for an economic moat to be present, the company has to do something (customer relationships, manufacturing know-how, access to a scarce asset, etc.) that money alone can't buy. </div>
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<b>What do investors underappreciate about your business?</b></div>
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This can be an effective question for mid- and small-cap firms (due to less sell-side coverage) and those that have secondary or tertiary business lines. </div>
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Here's an example. I was speaking with bank CEO whose company had a fair amount of sell-side coverage. When I asked him this question, he said (paraphrasing), "You know, the analysts that cover us are bank analysts and they don't ever ask about our (multi-billion dollar AUM) asset management business." </div>
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He then went into detail about how well the asset management business is doing. That was a signal to start digging into the asset management business to verify the CEO's claims and determine whether or not the market was taking that operation into account. </div>
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<b>What's your philosophy on buybacks and dividends? </b></div>
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<span style="font-family: inherit;">Again, what I'm looking for is <i>thoughtfulness</i> when it comes to capital allocation. </span></div>
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<span style="font-family: inherit;">Have they considered the positives and negatives of both and determined the optimal mix? Why is it the optimal mix for their shareholders? Do they properly use <a href="http://www.cleareyesinvesting.com/2012/07/why-fewer-buybacks-and-more-dividends.html">buybacks</a> or do they have an ulterior motive (i.e. boost EPS, offset dilution, etc.).</span></div>
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On dividends, I want to find out if the <a href="http://www.cleareyesinvesting.com/2012/09/should-more-companies-adopt-flexible.html">dividend policy</a> (if there is one) is appropriate for the firm. A highly cyclical company, for instance, will ideally have a small "normal" dividend followed by a <a href="http://www.cleareyesinvesting.com/2012/07/why-fewer-buybacks-and-more-dividends.html">special dividend</a> in good times. Firms with more predictable cash flows, on the other hand, can reasonably target a higher percentage of free cash flow or earnings to return each year.</div>
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<b>Who covers you well on the street?</b></div>
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There are two benefits to this question. First, if there's a sell-side analyst who has covered an industry or company for a long time, they can be valuable resources for learning the company's backstory, which managers are talented, and which competitors pose real threats. </div>
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Second, I want to find out if management only recommends analysts who currently have "buy" ratings on their stock (which tells you something) or if they care more about which analysts follow them thoroughly and honestly, even if they might disagree with the analyst's current rating. </div>
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<b>If your company didn't exist tomorrow morning, what would your customers miss about it? </b></div>
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<span style="font-family: inherit;">This question also touches on the company's economic moat sources. If the company disappeared and its customers could easily switch to a competing product and wouldn't miss doing business with it, then it's difficult to justify the existence of an economic moat today.</span></div>
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<b>What do your customers complain about the most and how are you addressing that issue?</b></div>
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<span style="font-family: inherit;">One reason I like this question is that it helps me determine whether or not management likes to own up to its mistakes and the company's flaws. If they sidestep the question, that's a problem. Every company has shortcomings. It also helps me gauge how pressing the problem is and if the company is fully engaged in the process.</span></div>
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<b>Do you have any good book recommendations?</b></div>
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<span style="font-family: inherit;">I can't tell you how many times I've heard, "I just don't have the time to read." This could suggest the executive is overworked or unorganized - and neither is an appealing trait. </span></div>
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<span style="font-family: inherit;">A CEO who likes to read, in itself, is not reason enough to invest, but it is an indication to me that he or she is intellectually curious and looking to improve themselves and the business. </span></div>
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<b>Why is that?</b></div>
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<span style="font-family: inherit;">At least once in every conversation, I aim to follow up a question with, "Why is that?" </span></div>
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It's such a simple question, but it gets closer to the heart of the matter. By understanding the governing principles of a business or management team, you can better anticipate what the next moves might be. </div>
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I hope you found these questions useful and can improve upon them when doing your own research.</div>
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<span style="font-family: inherit;">Stay patient, stay focused.</span></center>
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<span style="font-family: inherit;">Best,</span></center>
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<span style="font-family: inherit;">Todd</span></center>
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<span style="font-family: inherit;">@toddwenning</span></center>
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<span style="font-family: inherit;"><i>The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration-line: none;">click here</a>.</i><i> </i></span></center>
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-22430637722349985302017-11-05T08:00:00.000-06:002017-11-05T08:00:09.342-06:0013 Investing Gems from Anthony Bolton<div style="background-color: white;">
<span style="color: #222222;">One of the unexpected benefits of working overseas early in my career was learning about investors I probably wouldn't have come across until much later on. British investors like Nick Train, <a href="http://www.cleareyesinvesting.com/2013/10/neil-woodford-is-going-his-own-way.html">Neil Woodford</a>, and Terry Smith, for example, have influenced my <a href="http://www.cleareyesinvesting.com/2017/09/3-challenging-scenarios-for-quality.html">investment philosophy</a> in some fashion.</span><br />
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<span style="color: #222222;">The subject of today's post, Anthony Bolton, also fits into this group. Bolton ran the Fidelity Special Situations Fund in the U.K. for 28 years ending December 2007, posting incredible annualized returns near <a href="http://www.telegraph.co.uk/finance/personalfinance/investing/10726245/Anthony-Bolton-What-I-learnt-in-three-decades-of-investing.html">19.5%</a> while at the helm. </span><br />
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<a href="https://2.bp.blogspot.com/-aSFM8lcTBSk/Wf5w4mOB8NI/AAAAAAAAPdc/QHUu7eK14a8kHH57GLczy_FYobFdb_ybQCLcBGAs/s1600/03May20171352451493837565.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="563" data-original-width="800" height="448" src="https://2.bp.blogspot.com/-aSFM8lcTBSk/Wf5w4mOB8NI/AAAAAAAAPdc/QHUu7eK14a8kHH57GLczy_FYobFdb_ybQCLcBGAs/s640/03May20171352451493837565.png" width="640" /></a></div>
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<span style="color: #222222; font-size: x-small;">Source: </span><a href="https://www.amazon.com/gp/product/0857194321/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0857194321&linkCode=as2&tag=cleareyesinve-20&linkId=ca6eeb652f4f9a21e4c4b86e62d6ef53" style="font-size: small;" target="_blank">Excess Returns: A comparative study of the methods of the world's greatest investors</a><img alt="" border="0" height="1" src="//ir-na.amazon-adsystem.com/e/ir?t=cleareyesinve-20&l=am2&o=1&a=0857194321" style="border: none; color: #222222; font-size: small; margin: 0px;" width="1" /><span style="color: #222222; font-size: x-small;"> </span></div>
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<span style="color: #222222;">Suffice it to say, there's a lot we can learn from Bolton.</span><br />
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<span style="color: #222222;">His tenure coincided with another famous Fidelity fund manager, <a href="http://www.cleareyesinvesting.com/2013/07/a-closer-look-at-peter-lynchs-principles.html">Peter Lynch</a>, whose foreword to Bolton's book, <a href="https://www.amazon.com/gp/product/B00ABGT6BW/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=B00ABGT6BW&linkCode=as2&tag=cleareyesinve-20&linkId=227108df94c6758eaf5b02bcc75e57b6" target="_blank"><i>Investing Against the Tide: Lessons From a Life Running Money</i></a><img alt="" border="0" height="1" src="//ir-na.amazon-adsystem.com/e/ir?t=cleareyesinve-20&l=am2&o=1&a=B00ABGT6BW" style="border: none !important; margin: 0px !important;" width="1" /> was alone worth the price of admission. </span><br />
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<span style="color: #222222;">Here are a few lines from Lynch's foreword:</span><br />
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<li style="color: #222222;"><i>To succeed in investment you have to work at it. Watch for the importance of hard work as you turn these pages. Note how often going the extra mile on research and analysis is what accounts for sustained success. <b>Keep your eye on that theme and you'll see that what the media call investment "genius" actually springs from a base of sustained, unending research - which, in turn, yields a decisive information edge.</b> <b>That edge, plus steady nerves, flexibility, good judgement and a complete lack of bias or prejudgement is what has enabled Anthony Bolton to deliver record-setting compound returns for decades.</b> </i>(my emphasis)</li>
<li><i>I stress hard work, an information edge and flexibility because few cliches have done more damage to investors' wealth than the phrase 'play the market'. </i></li>
<li><i>What distinguishes investment winners...is the willingness to dig deeper, search more widely and keep an open mind to all ideas - including the idea that you might have made a bad call. He or she who turns over the most rocks, looks over the most investment ideas, and is unsentimental about pas choices is most likely to succeed.</i></li>
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The book's worth a read for intermediate and advanced investors. The organization is messy, unfortunately, but there's rich content inside. Bolton's recollection of company meetings serve up some great lessons. Those managing money will appreciate his thoughts on portfolio management, as well.</div>
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Here are 13 gems I double-highlighted while reading the book.<br />
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<a href="https://www.amazon.com/gp/product/B00ABGT6BW/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=B00ABGT6BW&linkCode=as2&tag=cleareyesinve-20&linkId=de0e50bde63ca81c2f97127499feb790" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" target="_blank"><img border="0" height="320" src="//ws-na.amazon-adsystem.com/widgets/q?_encoding=UTF8&MarketPlace=US&ASIN=B00ABGT6BW&ServiceVersion=20070822&ID=AsinImage&WS=1&Format=_SL250_&tag=cleareyesinve-20" width="213" /></a>
<li style="color: #222222;">Often, I ask myself a very simple question: 'How likely is this business to be around in ten years' time and to be more valuable than today?' It's surprising how many businesses fail this test.</li>
<li>Sometimes the names of the institutional shareholders (of a company) will carry information because there are some I rate more highly than others and if one or two I rate are on the list that's a positive. </li>
<li>The ultimate commendation is when a company talks positively about a competitor...In fact, as a general rule, when a company says the opposite of what you expect them to say I put a double weight on it.</li>
<li>(Good managers) tend to be fanatical about the business, working long hours and demanding high performance and excellence from their team and they are reasonably self-assured and on top of what they do without being arrogant.</li>
<li>Seeing through spin is one of the most important aspects of the job. </li>
<li>I prefer thinking in levels of conviction rather than in price targets.</li>
<li>The (stock) price itself influences behaviour - falling prices create uncertainty and concern, rising prices create confidence and conviction. Understanding this is a really important part of investing.</li>
<li>A portfolio should, as nearly as possible, reflect a 'start from scratch' portfolio...One of the things I do each month is an exercise that helps me measure my conviction. On a piece of paper I write five headings across the top: "strong buy", "buy", "hold", "reduce" and "?"</li>
<li>I don't normally make large adjustments to the size of my holdings in one go, my moves are incremental.</li>
<li>When I've analysed the biggest mistakes I've made over the years they have nearly always been in companies with poor balance sheets.</li>
<li>Thinking like a short specialist is a good discipline for most portfolio managers...If you are aware of what might go wrong in a company (knowing the counter investment thesis) one may be able to spot before others the fact that it is going wrong. </li>
<li>It's rare that you only get one chance to make a trade at a specific level.</li>
<li>I've always thought that the best environment in which a fund manager could perform well was one in which they didn't know how they were doing.</li>
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<a href="https://www.amazon.com/gp/product/0857196847/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0857196847&linkCode=as2&tag=cleareyesinve-20&linkId=357f3e7469e000739e8c5897c01ed2e8" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;" target="_blank"><img border="0" height="320" src="//ws-na.amazon-adsystem.com/widgets/q?_encoding=UTF8&MarketPlace=US&ASIN=0857196847&ServiceVersion=20070822&ID=AsinImage&WS=1&Format=_SL250_&tag=cleareyesinve-20" width="204" /></a>
Earlier this year, I was invited by Harriman House publishers to contribute a chapter to their forthcoming book, <a href="https://www.amazon.com/gp/product/0857196847/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0857196847&linkCode=as2&tag=cleareyesinve-20&linkId=57efb0e3a13d4f12fb95b4c41eb7a5cd" target="_blank">Harriman's New Book of Investing Rules: The do's and don'ts of the world's best investors</a><img alt="" border="0" height="1" src="//ir-na.amazon-adsystem.com/e/ir?t=cleareyesinve-20&l=am2&o=1&a=0857196847" style="border: none !important; margin: 0px !important;" width="1" />. </center>
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I contributed a chapter on <a href="http://www.cleareyesinvesting.com/2013/02/the-income-investors-manifesto.html">dividend investing</a> and can't wait to read the 50+ sets of rules written by some of my favorite investors including Vanguard founder Jack Bogle, Nick Train, and today's subject, Anthony Bolton. </center>
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Stay patient, stay focused.</center>
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Best,</center>
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Todd</center>
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@toddwenning</center>
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<i style="background-color: white; color: #444444;"><span style="font-family: inherit;">The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration-line: none;">click here</a>.</span></i><i style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 16px;"> </i></center>
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-41443544557028358162017-09-24T14:09:00.002-05:002017-09-24T14:16:56.466-05:003 Challenging Scenarios for Quality-Value Investors<div class="MsoNormal">
<span style="line-height: 107%;"><span style="font-family: inherit;">One night a few weeks ago, I sketched out my investment philosophy in
a “one pager” format. </span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">I found the process to be useful, so I shared it on
Twitter before heading to bed, thinking others might give it a try themselves.<o:p></o:p></span></span></div>
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Tried my hand at a one-pager of my investment philosophy. Nothing revolutionary, but an enjoyable exercise. <a href="https://t.co/gEklvqr96a">pic.twitter.com/gEklvqr96a</a></div>
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— Todd Wenning (@ToddWenning) <a href="https://twitter.com/ToddWenning/status/903438526343196673">September 1, 2017</a></div>
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<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;">In the morning, I discovered the post was going viral - at least FinTwit's version of viral. </span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;">The feedback on the post was
overwhelmingly positive, which, while appreciated, also made me a little nervous. A cheery
consensus around a company or a strategy doesn’t lend itself well to
outperformance.<o:p></o:p></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;">That said, there’s a difference between prescription and practice. Advocating regular exercise is sound and non-controversial, yet the temptation to be remain sedentary can be hard to overcome.</span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">Indeed, part of the motivation for
doing the one-pager was to hold myself accountable and <a href="http://www.cleareyesinvesting.com/2014/07/6-signs-of-good-investment-process.html">stay focused</a> during a bull market when there's pressure to relax standards.<o:p></o:p></span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">The one-pager isn't meant to be a magic formula of any sort. No company will check off all the boxes. Instead, it serves as a personal framework for evaluating businesses and investment opportunities.</span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;">Peeling back a layer<o:p></o:p></span></span></b></div>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;">Most of the questions I received
about the one-pager regarded the three highlighted sections below.<o:p></o:p></span></span></div>
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<a href="https://2.bp.blogspot.com/-4YzPupOnju0/WcVj_ePMCPI/AAAAAAAAORc/m0BKqM_O3sIq5e0_CxSlx38BVJ5bWbtrACLcBGAs/s1600/Wenning%2BInvestment%2BPhilosophy%2BEdited.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" data-original-height="720" data-original-width="1280" height="360" src="https://2.bp.blogspot.com/-4YzPupOnju0/WcVj_ePMCPI/AAAAAAAAORc/m0BKqM_O3sIq5e0_CxSlx38BVJ5bWbtrACLcBGAs/s640/Wenning%2BInvestment%2BPhilosophy%2BEdited.png" width="640" /></span></a></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">To be a “strong buy,” I want the company to have an <a href="http://www.cleareyesinvesting.com/2016/12/moats-and-knights.html">economic moat</a>, be managed by <a href="http://www.cleareyesinvesting.com/2014/11/the-difference-between-good-company-and.html">excellent stewards of shareholder capital</a>, and <a href="http://www.cleareyesinvesting.com/2013/11/use-markets-short-termism-to-your.html">trade at an attractive valuation</a>. </span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">These opportunities are rare, to be sure, but it's good to know when you might have a "<a href="http://www.cleareyesinvesting.com/2013/04/making-each-investment-count.html">fat pitch</a>" heading your way. </span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">The highlighted sections address
three challenging - and comparatively more common - scenarios that quality-value investors encounter. <o:p></o:p></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;">In each case, two of the three
requirements are present, but one is missing. Here, I’ll address the problem,
pitfall, potential, and process for analyzing companies within the three scenarios.<o:p></o:p></span></span></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b>
<b><span style="line-height: 107%;"><span style="font-family: inherit;">“Quality at any price” (Moat and Management only)<o:p></o:p></span></span></b></div>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<ul>
<li><b style="font-family: inherit;">Problem</b><span style="font-family: inherit;">: </span>Great companies don’t always make great investments.</li>
<li><b style="font-family: inherit;">Pitfall</b><span style="font-family: inherit;">: Even if the underlying
business performs well, if the company doesn’t live up to high market
expectations, you’re in for a bumpy ride. Consider an investor who bought
shares of <b>Wal-Mart</b> in September 1999 when the stock traded with a price-earnings ratio over 30
times. Though Wal-Mart as a business grew earnings and dividends per share at
an impressive rate over the next decade, the stock price didn't fully follow suit because the business performance wasn’t enough to match lofty initial expectations. Formidable competitors like <b>Costco, Target</b>, and <b>Amazon </b>were also chipping away at Wal-Mart's competitive position. Ultimately, Wal-Mart's price-earnings multiple contracted and the 10-year total return was about <a href="http://stock.walmart.com/investors/stock-information/quote-and-chart/">2.4%</a>.</span></li>
<li><b style="font-family: inherit;">Potential</b><span style="font-family: inherit;">:
Investors can underestimate optionality in a well-run business. Those that considered Amazon, <b>Facebook</b>, or <b>Google</b> wildly
overvalued early in their public market histories, for instance, didn’t foresee the new opportunities these businesses would create or discover in the subsequent years. Similarly, firms with existing moats may look expensive now, but if management can further widen the moat, today's price may look cheap in hindsight. </span></li>
<li><b style="font-family: inherit;">Process</b><span style="font-family: inherit;">:
Don’t rely solely on relative valuation and market multiples. Instead, make
explicit forecasts to determine what the market price might imply. Then,
consider whether or not you think management is capable of beating those expectations by introducing new products, entering new markets, becoming more efficient operators, or adding new lines of business.</span></li>
</ul>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b>
<b><span style="line-height: 107%;"><span style="font-family: inherit;">“Beware quality traps” (Moat and Price only)</span></span></b><br />
<br />
<ul>
<li><b style="font-family: inherit;">Problem</b><span style="font-family: inherit;">: </span>The market knows something you don’t.</li>
<li><b style="font-family: inherit;">Pitfall</b><span style="font-family: inherit;">: Though the stock's premium may have diminished, there could be good reason. The company’s legacy moat could be
under assault by new and motivated competition or a disruptive technology. If
management is incentivized to protect the old cash-flow-rich operations or if
the corporate culture is bureaucratic and stagnant, there could be further to
fall. <b>Kodak</b> is a classic example – a former blue-chip darling that had a
dominant market position, saw the coming of digital photography in plenty of
time, but its culture refused to embrace the change.</span></li>
<li><b style="font-family: inherit;">Potential</b><span style="font-family: inherit;">:
A management transition could lead to cultural change, which could reinvigorate
the business and make it more competitive. To illustrate, a positive cultural change happened at <b>Sealed
Air</b> after the board brought in a new executive team following the controversial $4.3 billion acquisition of Diversey in 2011. In the twelve months following the deal's announcement, Sealed Air's stock price dropped about 60%. Despite the poor M&A decision by
prior management, Sealed Air (makers of Bubble Wrap) and Diversey still had
some durable competitive advantages. The new management team overhauled the
corporate culture and got the company back on solid footing.</span></li>
<li><b style="font-family: inherit;">Process</b><span style="font-family: inherit;">:
Ask yourself if the company has a culture of innovation and change. Could a new
management team realistically step in or is the board too close to the CEO and
CFO? Review management’s incentives and the board structure and determine whether or not they have enough skin in
the game to want to improve operations.</span></li>
</ul>
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<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;">“Avoid turnaround traps” (Management and Price only)</span></span></b><br />
<br />
<ul>
<li><b style="font-family: inherit;">Problem</b><span style="font-family: inherit;">:
Even excellent capital allocators can struggle to fix a broken business.</span></li>
<li><b style="font-family: inherit;">Pitfall</b><span style="font-family: inherit;">: Turnarounds have low odds of success. Ultimately, management facing
such a situation needs to identify a potential moat source and attack it full
force. Then, hope for a lucky break or two. When there are massive secular
headwinds in place, this becomes a near-impossible task, even for great
management teams. Eddie Lampert at <b>Sears Holdings</b> is a good example.
Lampert has done a remarkable job playing a tough hand, but the long-rumored
turnaround has struggled as department stores face immense competitive
pressures from changing consumer tastes and from online retail.</span></li>
<li><b style="font-family: inherit;">Potential</b><span style="font-family: inherit;">:
When turnarounds happen, the rewards can be enormous. Steve Jobs' second stint at <b>Apple</b> is
one of the best – if not the best – turnaround story of our generation. Though the full story is more complex than this, what
Jobs did was make Apple (traditionally a beloved niche personal computer maker) into a premium global consumer brand, starting with the iPod
and later the iPhone and iPad. Jobs' efforts, along with the rest of Apple's
staff, spawned a brand (intangible asset) advantage that, when paired with the
switching costs created by the iTunes platform, led to a solid economic moat.</span></li>
<li><b style="font-family: inherit;">Process</b><span style="font-family: inherit;">:
Is management facing secular headwinds in their core operations? Are industry
dynamics stable and asset growth slow or is capital flooding the industry? Does
management attempting a turnaround have to reckon with a debt-laden balance sheet or an under-funded
pension plan? </span></li>
</ul>
</div>
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<b><span style="line-height: 107%;"><span style="font-family: inherit;">Bottom line<o:p></o:p></span></span></b><br />
<b><span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="line-height: 107%;"><span style="font-family: inherit;">Rarely will the stars align so
that management, moat, and price are all clear and a strong buy is evident.
Much more frequently, quality-value investors must wrestle with one of these
three scenarios where one factor is missing - or at least isn't obvious. </span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
<span style="line-height: 107%;"><span style="font-family: inherit;">As such, it's helpful to approach the scenarios with both the pitfalls and
potential in mind. Weigh the pros and cons, make a decision, and then <a href="http://www.cleareyesinvesting.com/2014/06/the-unpopularity-of-patience.html">be patient</a>!<o:p></o:p></span></span><br />
<span style="line-height: 107%;"><span style="font-family: inherit;"><br /></span></span>
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
<i style="background-color: white; color: #444444; font-size: 16px;"><span style="font-family: inherit;">The opinions expressed here are the author's and not those of his employer. Todd's family owns shares of Amazon and Costco. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration-line: none;">click here</a>. </span></i></div>
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-24376108388995599492017-07-01T00:16:00.001-05:002017-07-01T06:54:58.891-05:00Moats & Knights, Part Deux<div class="tr_bq">
In December, I wrote about the rare and powerful "<a href="http://www.cleareyesinvesting.com/2016/12/moats-and-knights.html">moat and knight</a>" combination - a company with a defensible competitive advantage led by top-notch capital allocators. </div>
<br />
Since coming across that concept a few years ago, I've wrestled with the relative importance of the two factors. What's more important: moat or knight?<br />
<br />
In a <a href="http://maynardpaton.com/2017/06/30/q2-2017-no-buys-or-sells-plus-business-moats-versus-motivated-bosses/">recent post</a>, my former office mate at Motley Fool UK, Maynard Paton (who you should <a href="http://maynardpaton.com/">follow</a>), paralleled my current thoughts on the subject quite well:<br />
<br />
<blockquote style="background-color: white; border: 0px; color: #444444; line-height: 1.71429; margin-bottom: 1.71429rem; padding: 0px; text-align: left; vertical-align: baseline;">
<span style="font-family: inherit;"><i>Years ago I used to believe that traditional business ‘moats’ — such as brands, patents, regulations, economies of scale, network effects, and so on — were the most critical feature of any investment .</i><span style="background-color: transparent;"> </span></span></blockquote>
<blockquote style="background-color: white; border: 0px; color: #444444; line-height: 1.71429; margin-bottom: 1.71429rem; padding: 0px; text-align: left; vertical-align: baseline;">
<span style="font-family: inherit;"><i></i><i>But these days, such ‘barriers to entry’ appear increasingly at risk of being challenged by intrepid startups that can use the Internet to gain customers much more quickly than ever before. <a href="http://sabercapitalmgt.com/wp-content/uploads/2013/03/Saber-Capital-2017-06-13-Investor-Note-Most-Important-Moat-1.pdf" style="border: 0px; color: #9f9f9f; margin: 0px; outline: none; padding: 0px; vertical-align: baseline;">This investment paper cites a good example of Gillette and Dollar Shave Club</a>.</i><span style="background-color: transparent;"> </span></span></blockquote>
<blockquote style="background-color: white; border: 0px; color: #444444; line-height: 1.71429; margin-bottom: 1.71429rem; padding: 0px; text-align: left; vertical-align: baseline;">
<span style="font-family: inherit;"><i></i><i>Over time then, I have become far more convinced about the importance of management to an investment.</i><span style="background-color: transparent;"> </span></span></blockquote>
<blockquote style="background-color: white; border: 0px; color: #444444; line-height: 1.71429; margin-bottom: 1.71429rem; padding: 0px; text-align: left; vertical-align: baseline;">
<span style="font-family: inherit;"><i></i><i>Put simply, I’d like to think a business is more likely to enjoy long-term success — and fend off intrepid startups — with a loyal and committed executive at the helm.</i><span style="background-color: transparent;"> </span></span></blockquote>
<blockquote style="background-color: white; border: 0px; color: #444444; line-height: 1.71429; margin-bottom: 1.71429rem; padding: 0px; text-align: left; vertical-align: baseline;">
<span style="font-family: inherit;"><i></i><i>(Indeed, a company’s positive and adaptive working culture — instigated by a loyal and committed boss — can in itself be a difficult-to-replicate ‘moat’.)</i><span style="background-color: transparent;"> </span></span></blockquote>
<blockquote style="background-color: white; border: 0px; color: #444444; line-height: 1.71429; margin-bottom: 1.71429rem; padding: 0px; text-align: left; vertical-align: baseline;">
<span style="font-family: inherit;"><i></i><i>On the other hand, I am no longer so sure about professional ‘salarymen’ executives, who may be quite happy to run things in a customary way and risk becoming complacent when it comes to fresh competition.</i></span></blockquote>
Spot on.<br />
<br />
There was likely a time when the advice to "go for a business any idiot can run" made sense. Find a wide moat business and be patient. All management had to do was look the part and not screw things up too badly.<br />
<br />
That time has passed.<br />
<br />
Today's raiders have new siege weapons and it's critical to have a knight - or ideally, a number of knights - implementing nimble defenses.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-zp9jQ_LQU6s/WVcamZAMy6I/AAAAAAAANQk/z4eer9PVrC82HQUBGK3_l3fdE_ldQ24DACLcBGAs/s1600/catapult-cow.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="353" data-original-width="640" src="https://1.bp.blogspot.com/-zp9jQ_LQU6s/WVcamZAMy6I/AAAAAAAANQk/z4eer9PVrC82HQUBGK3_l3fdE_ldQ24DACLcBGAs/s1600/catapult-cow.png" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><a href="https://www.youtube.com/watch?v=JQ8jGqdE2iw">Run away! Run away!</a></td></tr>
</tbody></table>
This isn't to diminish the importance of economic moats - a knight defending a grass hut doesn't do anyone much good - but it is worthwhile to spend more time considering who is manning the ramparts.<br />
<br />
Here are five questions you can ask about management before making your next investment.<br />
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<ol>
<li>Has management been forthcoming about competitive challenges or do they downplay the threat of new entrants?</li>
<li>Does management have the right financial incentives in place or has the board set up low hurdles to make sure large bonuses are realized, regardless of performance?</li>
<li>Does management know what the company's advantages are and have plans in place to extend and strengthen those advantages?</li>
<li>Does management have meaningful personal ownership in the business (and thus have skin in the game) or are they akin to mercenaries? </li>
<li>Does management have a track record of sacrificing short-term results for long-term results or do they seem to play the quarterly earnings game?</li>
</ol>
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
Related posts:<br />
<br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2015/05/considering-managements-capacity-to.html">Considering Management's Capacity to Suffer</a></li>
<li><a href="http://www.cleareyesinvesting.com/2015/03/5-things-to-look-for-in-good-annual.html">5 Signs of a Good Annual Report</a></li>
<li><a href="http://www.cleareyesinvesting.com/2015/01/dont-overlook-this-factor-in-your.html">Don't Overlook This Factor in Your Research Process</a></li>
</ul>
<br />
<i style="color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 16px;">The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration-line: none;">click here</a>. </i><br />
<br />
<br />Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-84991099432643701412017-05-19T22:13:00.002-05:002017-05-23T10:45:30.066-05:00Making the Leap from a Liberal Arts Major to a Finance Career<span style="background-color: white; color: #222222; font-family: inherit;">I recently heard a presentation by Paul Smith, the president of the CFA Institute. One of the data points he shared was that, among CFA Charterholders over the age of 50, about half had liberal arts undergraduate degrees. For those under 50, liberal arts degrees were just a small minority.*</span><br />
<span style="background-color: white; color: #222222;"><br /></span> <span style="color: #222222;"><span style="background-color: white;">As one of those liberal arts Charterholders, I found this statistic troubling - but not at all surprising. </span></span><br />
<br />
<span style="background-color: white; color: #222222; font-family: inherit;">There are many reasons for this shift - more majors today, more specialization, etc. - but there's a massive opportunity for liberal arts majors to make an impact in the investing field today. </span><br />
<span style="background-color: white; color: #222222; font-family: inherit;"><br /></span> <span style="background-color: white; color: #222222; font-family: inherit;">Namely, </span><span style="background-color: white; color: #222222; font-family: inherit;">the quantitative side of the business is becoming increasingly industrialized and overwhelmed by computing power. </span><span style="background-color: white; color: #222222; font-family: inherit;">What's still missing are the "softer" skills (e.g. critical thinking, reasoning, writing, etc.) that are cultivated in liberal arts courses. </span><br />
<span style="background-color: white; color: #222222; font-family: inherit;"><br /></span> <span style="color: #222222;"><span style="background-color: white;">Just as important - investing is a liberal arts major's dream job. In fact, there's a thoughtful book written on the topic: Robert Hagstrom's, <i><a href="https://www.amazon.com/Investing-Liberal-Robert-G-Hagstrom/dp/1587991381">Investing: The Last Liberal Art</a>. </i>As you develop as an investor, you'll increasingly call on a vast array of knowledge sources - drawing from the sciences, history, philosophy, etc. - in an attempt to weave them together into original ideas.</span></span><br />
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
For these reasons, I'm an advocate for more liberal arts majors in the investing field. When I speak with college students who are undecided on a major or liberal arts majors wanting to make the leap into finance, here's the advice I give.<br />
<br /></div>
<b style="background-color: white; color: #222222; font-family: inherit;">Minor in business (or audit an accounting course)</b><br />
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">If it's not too late, major in a liberal art (something that you're passionate about) and minor in business. The reason I recommend a liberal arts major is two-fold.</span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;">First, the vast majority of what you need to know about finance you'll learn on the job. Minoring in business will show companies that you're not completely clueless.</span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;">Second, once you graduate, you're unlikely to find a company that will pay you to study ancient philosophy. They will probably, however, help you pay for an MBA or a valuable industry certification. Capitalize on the precious time you have to study liberal arts as an undergrad. </span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;">If you're a senior or just out of school, at least audit an accounting course. Accounting is the one subject companies will struggle to teach you on the job, but it's absolutely critical to know if you want to work in the field.</span></div>
<div>
<span style="font-family: inherit;"><br /></span></div>
<div>
<span style="font-family: inherit;"><b>Start looking into the CFA or CFP programs</b></span><br />
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">Employers should look favorably on the fact that you've started down the path toward a professional certification. It shows that you're committed to the industry and are less likely to jump ship your second week on the job. </span></div>
<div>
<b><span style="font-family: inherit;"><br /></span></b></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><b>Take a bottom rung job and make an impression</b></span><br />
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">One of my early mentors explained that your undergraduate achievements are like a Christmas present to the company - wrapped up nicely, with a big bow, and full of promise. What <i>really </i>matters is what happens once the present is opened on day one. </span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;">If you don't have a shiny finance resume, your present might appear wrapped in old newspaper to the employer. But that's okay. The key is getting in the door, even if it means starting at the bottom. Once you're in, you can show off your qualitative skills.</span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;">For example, with the benefit of hindsight, the best thing I did at my first job (working as a registered rep at one of Vanguard's call centers) was to write a research paper on currency risk. I hadn't the slightest idea what currency risk was before I started, but I knew it was a major topic being asked by investors. It made an impression and led to more opportunities for advancement. </span></div>
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<b style="font-family: inherit;"><br /></b></div>
<div style="background-color: white; color: #222222;">
<b style="font-family: inherit;">Focus your first job search on larger financial institutions</b><br />
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">It's much easier for a liberal arts major to get an entry level job at a large financial firm. Small firms don't have the resources to let you learn the job on the fly - they'd prefer to hire someone who can hit the ground running. Large firms typically have dedicated training staff and are comfortable with developing talent for the long term.</span></div>
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<b>Bottom line</b></div>
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<b><br /></b></div>
<div style="background-color: white; color: #222222;">
Making the leap from a liberal arts major to a finance career isn't easy, but then again, nothing worthwhile in life is. The key is to not get discouraged by the fact that you have a liberal arts degree. The businesses that you'd want to work for in the first place should embrace cognitive diversity and value your background.</div>
<div style="background-color: white; color: #222222;">
<br /></div>
<div style="background-color: white; color: #222222;">
Stay patient, stay focused.</div>
<div style="background-color: white; color: #222222;">
<br /></div>
<div style="background-color: white; color: #222222;">
Best,</div>
<div style="background-color: white; color: #222222;">
<br /></div>
<div style="background-color: white; color: #222222;">
Todd</div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;">*The CFA Institute is working to get me the actual data. I'll share it if/when I receive it.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white; color: #222222;">
<span style="font-family: inherit;"><i>Some of you have asked why I haven't updated the blog in a while. I've been helping launch my employer's blog, writing a monthly column <a href="http://blog.johnsoninv.com/">here</a>, as well as doing some writing for <a href="http://monevator.com/tag/dividend-investing/">Monevator</a> and <a href="http://www.investorschronicle.co.uk/">Investors Chronicle</a>. Thank you for your interest - and my apologies for not communicating this better.</i></span></div>
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<span style="font-family: inherit;"><i><br /></i></span></div>
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<i style="color: #444444;"><span style="font-family: inherit;">The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration-line: none;">click here</a>. </span></i></div>
Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-65662965911240650292016-12-03T00:00:00.000-06:002016-12-03T00:00:19.324-06:00Moats and Knights <span style="font-family: inherit;">One of my favorite Warren Buffett quotes is a lesser-known one. It comes from a <a href="https://blogs.rhsmith.umd.edu/davidkass/uncategorized/warren-buffetts-meeting-with-university-of-maryland-mbams-students-november-15-2013/">transcribed conversation</a> he had with University of Maryland MBA students back in 2013, where he was asked about Morningstar's work on economic moats. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Here's part of what he said:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white;"><i><span style="font-family: inherit;">If you have a castle in capitalism, people are going to try to capture it. You need 2 things – a moat around the castle, and you need a knight in the castle who is trying to widen the moat around the castle. </span></i></span></blockquote>
<a href="https://2.bp.blogspot.com/-aK7qQSJ7Nzg/WEI1aAoVzLI/AAAAAAAAK18/bAd8VzA6am4Aa47VN0-I-5G1zrOhdPXzwCLcB/s1600/Digamoat.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="240" src="https://2.bp.blogspot.com/-aK7qQSJ7Nzg/WEI1aAoVzLI/AAAAAAAAK18/bAd8VzA6am4Aa47VN0-I-5G1zrOhdPXzwCLcB/s320/Digamoat.jpg" width="320" /></a>Buffett disciples should be well familiar with his economic moat philosophy, but this was the first time I heard him use the metaphor of a "knight" widening the moat.<br />
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It's a great concept, isn't it? But this ideal combination of moat + knight is rarer than you might think.<br />
<br />
First, the presence of a true economic moat is by definition an infrequent occurrence in capitalism. Right off the bat, then, we can eliminate a majority - 75%-plus - of companies from moat + knight contention.<br />
<br />
Second, let's think about what Buffett means by "widening the moat." He lays out his definition in the <a href="http://www.berkshirehathaway.com/letters/2005ltr.pdf">2005 Berkshire letter to shareholders</a>:<br />
<blockquote class="tr_bq">
<i><span style="font-family: inherit;">Every day, in countless ways, the competitive position of each of our businesses grows either
weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our
products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our
businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though,
their consequences are enormous. </span></i></blockquote>
<blockquote class="tr_bq">
<i><span style="font-family: inherit;">When our long-term competitive position improves as a result of these almost unnoticeable
actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have
the kind of business we want a decade or two from now. We always, of course, hope to earn more money
in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. </span></i></blockquote>
This is a tall order for any executive to achieve - delight customers, cut costs, all while investing in the business - particularly when that executive has to meet Wall Street's quarterly expectations. Focusing on short-term operational performance is one thing, but if a CEO or CFO is overly concerned about how investors might react to 90 days worth of performance, they aren't concurrently focused on widening the moat.<br />
<br />
Unfortunately, that eliminates even more companies from moat + knight contention.<br />
<br />
Third, management must be in it for the long haul and they must love the business. Note that in the above quote, Buffett is talking about building a stronger business <i>decades </i>from now. In stark contrast, there are far too many mercenary executives today with great resumes who are in their roles to maintain the status quo, collect big paychecks, get a car allowance and country club membership, and look the part. Executives with one eye on the door do not make good knights. Or squires for that matter. <br />
<br />
One of my favorite college basketball players growing up was Xavier University's Brian Grant, who was drafted by the Sacramento Kings in 1994. I remember reading that when Grant was asked how much he wanted to be paid, <a href="http://articles.latimes.com/1994-10-31/sports/sp-56873_1_sacramento-signs">he said</a> $2.50, "enough for a Dr. Pepper and a bag of chips." The guy just wanted to play basketball at the highest level*. If you find that kind of passion in a CEO or CFO, you might have found yourself a knight.<br />
<br />
Finally, management must have a knack for capital allocation. I've been fortunate in my career to speak with a lot of different companies and I've learned that the ones who truly "get it" regarding capital allocation are few and far between. Sure, there are plenty of teams that can keep the trains running on time (and plenty who can't!). The ones who have a clear and repeatable process, however, for reinvesting capital (internally or through M&A), returning cash to shareholders, and making their companies tougher to compete with are unusual.<br />
<br />
So what are we left with? Maybe 5% of all companies having a moat + knight combination? It might even be lower than that. Whatever the rate may be, the key takeaways are:<br />
<br />
<ol>
<li>The moat + knight combination is a powerful one.</li>
<li>Moats are rare.</li>
<li>Knights are rare.</li>
<li>Moats + knights are extremely rare. </li>
<li>When you think you've found a moat + knight combination trading at a reasonable price, be sure to capitalize on the opportunity.</li>
</ol>
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Stay patient, stay focused.</div>
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<br /></div>
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Best,</div>
<div>
<br /></div>
<div>
Todd</div>
<div>
@toddwenning </div>
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<br />
*Despite his low first offer, Grant made $808,000 in 1994. <br />
<br />
<i style="background-color: white; color: #444444;"><span style="font-family: inherit;">The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration: none;">click here</a>. </span></i><br />
<br />
<br />Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-65535808189502139742016-10-16T21:55:00.000-05:002016-10-17T18:10:34.748-05:00How to Stay Patient <blockquote class="tr_bq">
<blockquote class="tr_bq">
<br /></blockquote>
</blockquote>
After purchasing our house last year, I went onto the popular real estate site, Zillow, to register as the property's owner. Among other things, this allowed me to control and update the house's data on the site.<br />
<br />
It also provided me with weekly email updates of the house's "Zestimate" - Zillow's estimated home price forecast.<br />
<br />
<b>Adding unnecessary emotions</b><br />
<br />
The first few emails showed higher Zestimates for my home. Up $3,000, up $2,000 - "Great!" I thought, "Looks like I paid a good price for the place."<br />
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A few weeks later, I received an email telling me that the house price had gone down a few thousand dollars. "Maybe I got ripped off," I worried.<br />
<br />
Realizing the error of my ways, I turned off the weekly emails. After all, this is the home my wife and I intend to own for the next <i>30-plus</i> years. Why in the world did I care about a weekly price estimate?<br />
<br />
The fact is that I cared for same reason that so many of us religiously check our stock prices each day. After making a major financial decision in which the asset's future value is uncertain, we seek affirmation that we didn't just make a huge mistake.<br />
<br />
<b>Market price vs. intrinsic value</b><br />
<br />
Market prices provide us with this frequent feedback we desire. Whether or not like the feedback we receive is something different altogether and can lead us to impulsive decisions.<br />
<br />
It's critical to remember that an analyst upgrade or downgrade, a market plunge, or an earnings "beat" or "miss" this week will have little-to-no impact on the value of our stocks 10, 20, or 30 years from now. What <i>will</i> matter is whether or not the company continues to build intrinsic value over time.<br />
<br />
In other words:<br />
<ul>
<li>Was the company able to defend - and ideally strengthen - its competitive advantages?</li>
<li>Did management prudently reinvest capital into high-return projects?</li>
<li>Was the company able to introduce new products and continue to delight existing customers?</li>
<li>Did management reduce costs and otherwise streamline production without sacrificing product quality?</li>
</ul>
<div>
For evidence of a company's progress to these ends, we can look for growth in value-linked metrics like dividends per share, free cash flow per share, book value per share, or "owner earnings."<br />
<br />
Consider, for example, this chart of 3M's stock price and dividend per share from January 1970 to December 2015. At times, the market price implied a story at great odds with what the dividend growth suggested.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-2CbdRD5eJu8/WAPLxyq-6pI/AAAAAAAAKQA/zbLFyjMvfgQQzITArReul-82ahdN84nOgCPcB/s1600/3M.png" style="margin-left: auto; margin-right: auto;"><img border="0" height="376" src="https://1.bp.blogspot.com/-2CbdRD5eJu8/WAPLxyq-6pI/AAAAAAAAKQA/zbLFyjMvfgQQzITArReul-82ahdN84nOgCPcB/s640/3M.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: Yahoo! Finance and author calculations</td></tr>
</tbody></table>
While the stock price moved erratically at times, the board continued to express long-term confidence by consistently raising the payout. Someone focused solely on the market price and without consideration of 3M's value creation would have been far less likely to stay the course.<br />
<br />
<b>Bottom line</b><br />
<br />
The more we focus our attention on value-linked yardsticks and not on short-term market price fluctuations, the more we'll be able to maintain a patient mindset and give ourselves the best chance of realizing high rates of compounding returns.<br />
<br />
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<span style="font-family: inherit;"><br /></span> <i style="background-color: white; color: #444444; font-size: 16px;"><span style="font-family: inherit;">The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html" style="color: #4d469c; text-decoration: none;">click here</a>. </span></i></div>
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<br />Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-60742385078288260232016-05-06T19:00:00.000-05:002016-05-06T19:00:12.942-05:00Hero Worship in Investing<blockquote class="tr_bq">
<i>Men almost always walk in paths beaten by others and act by imitation. Though he cannot hold strictly to the ways of others or match the ability of those he imitates, a prudent man must always tread the path of great men and imitate those who have excelled, so that even if his ability does not match theirs, at least he will achieve some semblance of it. </i>-- Machiavelli, <u>The Prince</u></blockquote>
Every discipline has its hall of heroes. Physicists hold up Einstein, Newton, and Hawking in great esteem. Artists revere the works of Picasso, Michelangelo, and Da Vinci. And basketball players grow up imitating Jordan, Bird, and Magic on the playground.<br />
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It's only natural, then, that as investors we similarly look up to those who've been successful at our craft and seek to learn from them. Study the masters long enough, the thinking goes, and perhaps we might, as Machiavelli put it, "achieve some semblance" of their success.<br />
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On the other hand, we could be setting ourselves up for massive disappointment if our investment results fail to measure up to our heroes' returns.<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://2.bp.blogspot.com/-Glk6TA5czIs/Ul8Wsk2zbyI/AAAAAAAAAro/PmmEsRFWmRw/s1600/forrest-gump.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="165" src="https://2.bp.blogspot.com/-Glk6TA5czIs/Ul8Wsk2zbyI/AAAAAAAAAro/PmmEsRFWmRw/s1600/forrest-gump.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Shh...he's about to drop a new quote</td></tr>
</tbody></table>
<br />
<b>A fine line to walk</b><br />
<br />
Last weekend at the Berkshire Hathaway conference in Omaha, I spent a lot of time thinking about this topic, amid the hordes of my fellow Buffett and Munger devotees. What better place to do it?<br />
<br />
The first thing to recognize is that there's nothing <i>truly </i>original in investing. Warren Buffett looked up to Ben Graham, who studied John Maynard Keynes, who was influenced by Adam Smith, and so on back to the Garden of Eden.<br />
<br />
As such, there's no shame in having heroes and trying to dissect what produced their success, because it's through this process that we discover our own style.<br />
<br />
To illustrate, in a recent <i>Freakonomics </i>podcast, Malcolm Gladwell - author of <i>Outliers</i>, <i>David & Goliath</i>, <i>Blink</i>, etc. - discussed how he came to find his own voice as a writer:<br />
<blockquote class="tr_bq">
<span style="font-family: inherit;"><i><span style="background-color: white; color: #222222;">I know with my own writing, I began as a writer trying to write like William F. Buckley, my childhood hero. And if you read my early writing, it was </span><span style="background-color: white; color: #222222;"><u>insanely</u></span><span style="background-color: white; color: #222222;"> derivative. All I was doing was looking for models and copying them. And out of years of doing that emerges my own style. When I was 12, I didn’t write like I write now. I spent 10 years - 15 years – kind of absorbing the lessons of others and out of that came something reasonably creative. So I would say, to the contrary, when you absorb on a deep level the kind of lessons of your musical elders and betters, in many cases, that’s what makes the next step, the next creative step, possible. </span></i></span></blockquote>
By studying the lessons of successful investors and <u>thinking critically about those lessons</u>, we reduce the likelihood of having to re-learn their mistakes and can more quickly recognize favorable patterns. This in turn frees up our minds to integrate our own experiences and talents and develop new variations.<br />
<br />
<b>Highway to the danger zone</b><br />
<br />
Where we can get ourselves into trouble with hero worship is when we don't think critically and develop our own approach.<br />
<br />
If your aim is to be the next Graham, Buffett, Munger, Lynch, etc. you're setting yourself up for disappointment. Their respective successes are a product of their own circumstances, experiences, natural gifts, and luck that we couldn't hope to replicate even if we tried.<br />
<br />
<ul>
<li>The "net net" value opportunities that existed for Ben Graham in the 1930s, for example, are few and far between today. </li>
<li>Buffett and Munger - two of the greatest finance minds the world has ever known - not only met each other by chance through a mutual acquaintance and forged a 50 year partnership, but also combined the value lessons of Graham and the quality approach of Philip Fisher to forge a new style of investing. </li>
<li>Peter Lynch made a killing buying consumer stocks in the 1980s and 90s when the Baby Boomer generation was in its prime earnings years.</li>
</ul>
<br />
Right person, right place, right time. Impossible to replicate.<br />
<br />
<b>Take comfort</b><br />
<br />
There's a pretty good chance that the next generation of investors won't make annual pilgrimages to your hometown from across the globe as they do with Buffett in Omaha today. This is not a tragedy.<br />
<br />
By properly studying the masters of investing and reading widely, however, we can form our own styles that best suit our own interests and temperaments. This will put us in a much better position to achieve satisfactory returns than we otherwise would have. That's not a bad deal.<br />
<br />
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
<br />
<i>The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please <a href="http://www.cleareyesinvesting.com/p/disclaimer.html">click here</a>. </i><br />
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<br />Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-58187659019882496592016-03-25T06:24:00.001-05:002016-04-07T02:32:39.965-05:00My New Book: Keeping Your Dividend EdgeHi everyone,<br />
<br />
<a href="https://3.bp.blogspot.com/-E7A7TIwW14M/VvHxBzzQZoI/AAAAAAAAH4o/X6zXOACD8OgvG4Xr2vJtNPaoPDQ3sguFw/s1600/Keeping_Your_Dividen_Cover_for_Kindle.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="320" src="https://3.bp.blogspot.com/-E7A7TIwW14M/VvHxBzzQZoI/AAAAAAAAH4o/X6zXOACD8OgvG4Xr2vJtNPaoPDQ3sguFw/s320/Keeping_Your_Dividen_Cover_for_Kindle.jpg" width="213" /></a>I'm happy to announce the publication of my first book: <i>Keeping Your Dividend Edge: Strategies for Growing & Protecting Your Dividends</i>, now available on Amazon <a href="http://www.amazon.com/Keeping-Your-Dividend-Edge-Strategies/dp/1523756829/ref=sr_1_1?ie=UTF8&qid=1458904561&sr=8-1&keywords=keeping+your+dividend+edge" target="_blank">in paperback</a> and in the <a href="http://www.amazon.com/Keeping-Your-Dividend-Edge-Strategies-ebook/dp/B01DET9QOY/ref=sr_1_2?ie=UTF8&qid=1458904561&sr=8-2&keywords=keeping+your+dividend+edge" target="_blank">Kindle eBook format</a>.<br />
<br />
Writing a book on dividend investing has been on my mind for several years. This autumn, I finally put pen to paper to address the changing dividend landscape that I've observed -- e.g. the impact of share repurchases, lingering impacts from the financial crisis, increasing global competition, etc. -- and how individual investors might chart a course for long-term success despite these new challenges.<br />
<br />
I also wanted the book to be punchy and practical -- something you can read in one sitting with lessons you can immediately apply to your investment process.<br />
<br />
The main chapters address the following topics:<br />
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Chapter 1: Why Dividend Investing (Still) Works<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 2: 10 Common Mistakes Made by Dividend
Investors<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 3: Evaluating Dividend Ideas<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 4: Durable Advantages & Dividends<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 5: Management Matters<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 6: Avoiding Dividend Cuts<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 7: Where to Find Differentiated Dividend Ideas<span style="display: none;">. </span><!--[if supportFields]><span
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Chapter 8: When to Sell a Dividend Stock<span style="display: none;">. </span><!--[if supportFields]><span
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<span style="line-height: 107%;"><span style="font-family: inherit;">Chapter 9: Keys to Dividend Reinvestment</span><a href="file:///C:/Users/Owner/Documents/Dividend%20Book/Keeping%20Your%20Dividend%20Edge%20Master%20Copy%206%20x%209%20FINAL.docx#_Toc446362585" style="font-family: Calibri, sans-serif; font-size: 11pt;"><span style="color: windowtext; display: none; mso-hide: screen; mso-no-proof: yes; text-decoration: none; text-underline: none;"> </span><!--[if supportFields]><span
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<br />
I hope you enjoy the book. For compliance reasons, I've disabled comments at the bottom of this page, but I would love to hear your thoughts <a href="mailto:dividendcompass@gmail.com" target="_blank">by email</a>. I also encourage you to share your review of the book on the <a href="http://www.amazon.com/Keeping-Your-Dividend-Edge-Strategies/dp/1523756829?ie=UTF8&keywords=todd%20wenning&qid=1458883627&ref_=sr_1_1&sr=8-1" target="_blank">Amazon page</a>.<br />
<br />
Thank you for your interest!<br />
<br />
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
@toddwenning<br />
<br />
<a href="http://www.cleareyesinvesting.com/p/disclaimer.html" target="_blank">Disclaimer</a><br />
<ol>
</ol>
Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-33165443870678503652015-06-29T09:37:00.001-05:002015-06-29T09:37:35.925-05:00Thank YouHi everyone,<br />
<br />
As some of you know from <a href="https://twitter.com/ToddWenning/status/613479008198463488" target="_blank">my Twitter post</a> a few days ago, I recently accepted an exciting role as a small-mid cap analyst in my hometown of Cincinnati.<br />
<br />
Once I begin my new job, I'm not sure if I'll be able to contribute new posts to the Clear Eyes Investing blog, but I will leave the site up so that the content doesn't disappear.<br />
<br />
If this is indeed the last new post for a while, I want to thank you for reading and for regularly sharing my posts over the last three-plus years. It means a lot.<br />
<br />
One of the best (and unexpected) benefits of writing the blog has been the connections I've made with other investors across the world, so if you'd like to stay in touch, you can reach me on Twitter <a href="https://twitter.com/ToddWenning" target="_blank">@toddwenning</a> or by <a href="mailto:todd.wenning@gmail.com" target="_blank">email</a>.<br />
<br />
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
ToddTodd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-31158605241575955382015-05-24T23:22:00.002-05:002015-05-24T23:26:13.239-05:0010 Non-Investing Quotes With Great Investing LessonsAs much as I enjoy <a href="http://www.cleareyesinvesting.com/2013/02/a-list-of-good-investing-books.html">reading investing books</a>, some of the most valuable investing lessons I've learned have come from non-investing sources. Here are a few that I've written down over the years.<br />
<ul>
<li><span style="-webkit-text-size-adjust: auto; background-color: rgba(255, 255, 255, 0);"><i>What has been will be again, what has been done will be done again; there is nothing new under the sun. </i>- Ecclesiastes 1:9</span></li>
<ul>
<li>The specific circumstances change (tulips, dotcom stocks, Nifty Fifty) but investor behavior repeats itself. By studying market history, and history in general, you can get a sense of when investors are acting irrationally and invest accordingly. </li>
</ul>
</ul>
<ul>
<li><i>Of all losses, time is the most irrecuperable for it can never be redeemed. </i>- <i>The Tudors</i></li>
<ul>
<li>Time is a precious commodity in many parts of life, including investing. If we're lucky, our investing time horizon stretches a few decades. The longer you delay investing, the less time your money has to <a href="http://www.vanguard.com/us/insights/saving-investing/power-of-compounding">compound</a>. Start saving and investing now. </li>
</ul>
</ul>
<ul><ul>
</ul>
</ul>
<ul>
<li><i style="background-color: white; font-family: inherit; line-height: 20px;">Whenever you find yourself on the side of the majority, it is time to pause and reflect.</i><span style="background-color: white; font-family: inherit; line-height: 20px;"> - Mark Twain</span></li>
<ul>
<li><span style="background-color: white; font-family: inherit; line-height: 20px;">If you find that your investment thesis is shared by many investors, it's probably reflected in the stock price. It always pays to ask yourself, "And who doesn't know that?" when considering the key points of your thesis. (h/t Howard Marks)</span></li>
</ul>
</ul>
<ul>
<li><i style="background-color: white; line-height: 20px;"><span style="font-family: inherit;"><span style="line-height: 18px;">If you can't explain it to a six year old, you don't understand it yourself</span>.</span></i><span style="font-family: inherit;"><i style="background-color: white; line-height: 20px;"><span style="font-family: inherit;"> </span></i><span style="background-color: white; line-height: 20px;">- Albert Einstein</span></span></li>
<ul>
<li>Stay within your circle of competence. If you can't break down the company's business into simple terms, you shouldn't buy the stock. </li>
</ul>
</ul>
<ul>
<li><i style="font-family: inherit; line-height: 1.38; white-space: pre-wrap;">When jarred unavoidably by circumstances, revert at once to yourself, and don’t lose the rhythm more than you can help. </i><span style="font-family: inherit; line-height: 1.38; white-space: pre-wrap;">- Marcus Aurelius</span></li>
<ul>
<li>When we're stressed or anxious, we tend to act in ways that we normally wouldn't. The markets will rattle you from time to time, but it's important not to act until you're calm and collected. </li>
</ul>
</ul>
<ul>
<li><span style="background-color: white; line-height: 22.0799999237061px; white-space: pre-wrap;"><i>Patience is bitter, but its fruit is sweet</i>. - Various</span></li>
<ul>
<li>Remaining patient in periods of market turbulence isn't easy, but if we're able to keep calm and make rational decisions in irrational times, we have the opportunity to realize superior returns.</li>
</ul>
</ul>
<ul>
<li><span style="background-color: white; font-family: inherit; line-height: 18px;"><span style="line-height: 21px;"><i><span style="font-family: inherit;">It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.</span></i></span> - Arthur Conan Doyle, </span><i style="background-color: white; font-family: inherit; line-height: 18px;">Sherlock Holmes</i></li>
<ul>
<li>Buying a stock without first collecting and considering the facts and figures is pure folly. Don't buy something on story alone and always be aware of any biases you have before you start researching the company. </li>
</ul>
</ul>
<ul>
<li><i style="line-height: 18px;"><span style="font-family: inherit;"><span style="color: black; line-height: 24px;">Whoever can be trusted with very little can also be trusted with much,</span><span class="crossreference" data-cr="#cen-NIV-25631A" data-link="(<a href="#cen-NIV-25631A" title="See cross-reference A">A</a>)" style="box-sizing: border-box; color: black; line-height: 22px; position: relative; top: 0px; vertical-align: top;"></span><span style="color: black; line-height: 24px;"> and whoever is dishonest with very little will also be dishonest with much.</span><span style="color: black; font-style: normal; line-height: 24px;"> - Luke 16:10</span></span></i></li>
<ul>
<li>A good one to keep in mind when evaluating management's track record and integrity. </li>
</ul>
</ul>
<ul>
<li><i style="line-height: 18px;"><span style="color: black; line-height: 24px;"><span id="docs-internal-guid-c86736db-dd8f-5abf-282d-a6e82b32bdc8"><span style="vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: inherit;">The only thing worse than not getting what you want is someone else getting it<span style="font-style: normal;">. - Roger Sterling, </span>Mad Men</span></span></span></span></i></li>
<ul>
<li>It's one thing to miss out on a stock, but it's made a whole lot worse when others around you have capitalized on it (Apple comes to mind for me). Tip your cap to those who were successful and move onto the next idea. </li>
</ul>
</ul>
<ul>
<li><span style="font-family: inherit; line-height: 1.38; white-space: pre-wrap;"><i>Man is not a rational animal, he is a rationalizing animal.</i> </span><i style="font-family: inherit; line-height: 18px;"><span style="color: black; line-height: 24px;"><span style="vertical-align: baseline; white-space: pre-wrap;"><span id="docs-internal-guid-c86736db-dd91-c9ce-a922-c023524f9149"><span style="color: black; font-style: normal; vertical-align: baseline;">- Robert A. Heinlein</span></span></span></span></i></li>
<ul>
<li><span style="line-height: 24px; white-space: pre-wrap;">One of the key assumptions of the Efficient Market Hypothesis is that all market participants are rational, but investors' decisions are full of behavioral and cognitive biases that cloud or sway their otherwise rational judgement. If we're aware of these biases and can recognize them in ourselves and in others we can improve our results. </span></li>
</ul>
</ul>
<div>
<span style="line-height: 24px; white-space: pre-wrap;">What non-investing quotes have influenced your investing? Let me know in the comments section or on Twitter <a href="https://twitter.com/ToddWenning" target="_blank">@toddwenning</a>.</span><br />
<span style="line-height: 24px; white-space: pre-wrap;"><br /></span>
<span style="line-height: 24px; white-space: pre-wrap;"><b>Related posts:</b></span><br />
<ul>
<li><span style="line-height: 24px; white-space: pre-wrap;"><a href="http://www.cleareyesinvesting.com/2014/02/the-top-17-quotes-from-buffetts-letter.html" target="">Top quotes from the 2013 Berkshire letter</a></span></li>
<li><a href="http://www.cleareyesinvesting.com/2013/11/9-tips-for-becoming-more-patient.html" target="">Tips for becoming a more patient investor</a></li>
<li><a href="http://www.cleareyesinvesting.com/2013/11/buy-stocks-for-their-substance-not.html">Buy stocks for their substance, not their stories</a></li>
</ul>
</div>
<div>
<ul>
</ul>
</div>
<div>
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
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<span id="docs-internal-guid-c86736db-dd88-5ea3-157f-1b39854e680b"></span>Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-20509275144287134902015-05-12T22:51:00.000-05:002015-05-12T23:00:26.244-05:00Considering Management's "Capacity to Suffer"Earlier this week, Brattle St. Capital shared <a href="http://www.valuewalk.com/2011/10/exclusive-interview-famous-investor-tom-russo/99999/">an interview transcript</a> (originally posted on ValueWalk) with noted investor Tom Russo in which Russo discussed the importance of investing in companies with management teams that have the "capacity to suffer":<br>
<blockquote class="tr_bq">
<i>When management makes those investments, they must have the capacity to suffer. They have to suffer during the start-up period of those investments because they are not necessarily linked to at the hip with the Wall Street expectations of smooth and steady quarters, but they are able to withstand the burden of the investment cycle. It is inevitably certain that profits are low or non-existent during these early years. And if you do not have the capacity to suffer through that period, you will shy away from making the accurate amount of investment. Your management will under-invest at a time when they have set an advantage and will allow competitors to come into the market. </i></blockquote>
This is an important point to consider. Can management make the necessary, long-term investments in its business that support or widen its moat without taking on significant career risk in the process?<br>
<br>
Even if we're talking about an otherwise-strong business, it's not a recipe for long-term success if the CEO is overly-concerned about how a value-accretive investment will impact earnings per share in the current quarter or calendar year and how Wall Street may react to temporary weakness.<br>
<br>
Put another way, if you're a patient investor in a company that's led by an impatient management team, be prepared for an unpleasant outcome.<br>
<br>
To remedy this, Russo recommends looking for family-owned businesses that can afford to ignore the short-term obsession of the street and activist investors.<br>
<br>
When researching a new idea that isn't family-owned, I also look through the list of the company's major shareholders - these are usually mutual funds and institutions.<br>
<br>
Once you have the list of major owners, take a look at each fund's website to learn more about their philosophy and approach. Are they also long-term focused or do they have high portfolio turnover? How long have they held the stock in question?<br>
<br>
The more the company is owned by investors who "get it," the less pressure management will likely feel to deliver short-term results at the expense of long-term value creation.<br>
<br>
<b>Related posts:</b><br>
<ul>
<li><a href="http://www.cleareyesinvesting.com/2014/06/when-to-stop-researching-stock.html">When to stop researching a stock</a></li>
<li><a href="http://www.cleareyesinvesting.com/2015/03/5-things-to-look-for-in-good-annual.html">5 signs of a good annual report</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/08/book-review-of-outsiders.html">Book review of <i>The Outsiders</i></a></li>
</ul>
Stay patient, stay focused.<br>
<br>
Best,<br>
<br>
Todd<br>
<div>
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-14745729005632734902015-05-10T10:00:00.000-05:002015-05-10T10:00:08.645-05:00Weekly Reading List 5/10/2015<b>What I've been reading and listening to - May 10, 2015</b><br />
<ul>
<li>There are many ways to be an investor - <a href="http://monevator.com/there-are-many-ways-to-be-an-investor/">Monevator</a></li>
<li>Charlie Munger and the art of stock picking - John Huber, <a href="http://basehitinvesting.com/charlie-munger-comments-and-the-art-of-stock-picking/">Base Hit Investing</a></li>
<li>Buffett and Vanguard: different paths to the same destination - <a href="http://www.washingtonpost.com/business/economy/buffett-and-vanguard-different-paths-to-the-same-financial-destination/2015/05/05/7975b168-f37c-11e4-bcc4-e8141e5eb0c9_story.html?postshare=8381430920061194">Bloomberg</a></li>
<li>Every question asked at the Berkshire Hathaway conference - <a href="http://www.valuewalk.com/2015/05/berkshire-hathaway-2015-notes/">ValueWalk</a></li>
<li>Investing in "high price" stocks - Nate Tobik, <a href="http://www.oddballstocks.com/2015/05/high-priced-stocks.html">Oddball Stocks</a></li>
<li>Recap of the Markel meeting in Omaha - <a href="http://boards.fool.com/markels-silver-year-31739090.aspx">Motley Fool</a></li>
<li>Are there too many Buffett disciples? - Ben Carlson, <a href="http://awealthofcommonsense.com/are-there-too-many-buffett-disciples/">A Wealth of Common Sense</a></li>
<li>Shane Parrish interview with Michael Mauboussin - <a href="https://itunes.apple.com/ca/podcast/the-knowledge-project/id990149481">The Knowledge Projec</a>t (podcast)</li>
<li>Barry Ritholtz interviews Liz Ann Sonders - <a href="http://www.bloombergview.com/articles/2015-04-28/barry-ritholtz-s-master-in-business-liz-ann-sonders-interview">Masters in Business</a> (podcast)</li>
<li>Tiny margins for tiny companies - <a href="http://investorfieldguide.com/tiny-margins-for-tiny-companies/">Investor's Field Guide</a></li>
</ul>
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What have you been reading? Let me know in the comments section below or on Twitter @toddwenning.</div>
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Todd</div>
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-12455433313979534092015-05-09T00:30:00.000-05:002015-05-09T09:01:45.589-05:00Should Long-Term Investors Mind the Macro?One of <a href="http://www.cleareyesinvesting.com/2015/05/6-key-takeaways-from-2015-berkshire.html">my key takeaways</a> from the Berkshire Hathaway conference last weekend was that Buffett and Munger don't spend a lot of time, if any, thinking about the direction of the broader economy when they make investment decisions.<br />
<br />
At one point, Buffett and Munger joked (half-joked?) that they thought any company that employs an economist has one employee too many. Munger said it was best to declare yourself ignorant about macro forecasts and, when it comes to investing amid uncertain economic times, said that he and Buffett "keep swimming and let the tide take care of itself."<br />
<br />
Other investors I admire had similar feelings about incorporating macroeconomic forecasts into their investment process.<br />
<br />
As Philip Fisher wrote in <i>Common Stocks and Uncommon Profits</i>:<br />
<blockquote class="tr_bq">
<i>The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probably incomplete series of facts make one wonder what might have been accomplished if only a fraction of such mental effort had been applied to something with a better chance of proving useful. </i></blockquote>
Here's Peter Lynch on the subject:<br />
<blockquote class="tr_bq">
<span style="background-color: white;"><i>It's lovely to know when there's recession. I don't remember anybody predicting (that in) 1982 we're going to have 14 percent inflation, 12 percent unemployment, a 20 percent prime rate, you know, the worst recession since the Depression. I don't remember any of that being predicted. It just happened. It was there. It was ugly. And I don't remember anybody telling me about it. So I don't worry about any of that stuff. I've always said if you spend 13 minutes a year on economics, you've wasted 10 minutes</i>.</span> </blockquote>
I recall during the financial crisis spending a disproportionate amount of time thinking about macroeconomic matters - worrying about hyper-inflation, interest rates, etc. - that would have been much better spent searching for great businesses that had been beaten down.<br />
<br />
In February 2009, for example, I started a small position in a Treasury Inflation-Protected Securities (TIPS) ETF in an effort to "play" inflation. The 7% or so gain I made on that investment pales in comparison to the money I would have made simply putting that sum into a S&P 500 ETF or into one of the other stocks I bought during the market downturn. (I mourn such errors of omission more than those in which I invested but ended up losing money.)<br />
<br />
Still, it's important to keep tabs on the macroeconomy, even if we're not actively forecasting it.<br />
<br />
As Howard Marks <a href="http://www.oaktreecapital.com/MemoTree/2001_11_20%20You%20Can%27t%20Predict.pdf">put it</a>:<br />
<blockquote class="tr_bq">
<i>In my opinion, the key to dealing with the future lies in knowing where you are, even if
you can't know precisely where you're going. <b>Knowing where you are in a cycle and
what that implies for the future is very different from predicting the timing, extent
and shape of the next cyclical move</b>. </i>(his emphasis)</blockquote>
I would think that Buffett, Munger, Fisher, and Lynch would agree with this statement. Then again, maybe not, but I'm not sure how you invest in any company - especially a commodity-linked business - without having an opinion on where that business might be in its cycle.<br />
<br />
Truly great businesses run by able management teams should be able to adapt to various economic scenarios and deliver solid results across a full business cycle and beyond. However, it's much more difficult to predict when the cycle will turn, how much it will turn, and for how long it will turn. As such, our research time is much better spent analyzing things like competitive dynamics, strength of the management team, and the company's financial health. We have greater odds of being right on this than we do on forecasting macro trends.<br />
<br />
How do you use economic forecasts, if at all, in your research process? Please let me know in the comments below or on Twitter @toddwenning.<br />
<br />
<b>Related posts:</b><br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2013/07/philip-fishers-15-points-to-look-for-in.html">Philip Fisher's 15 Points to Look for in a Common Stock</a></li>
<li><a href="http://www.cleareyesinvesting.com/2013/07/a-closer-look-at-peter-lynchs-principles.html">A Closer Look at Peter Lynch's "Principles"</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/11/when-should-you-sell-good-stock.html">When Should You Sell a Good Stock?</a></li>
</ul>
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Best,</div>
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Todd</div>
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-29125804431102548052015-05-03T08:12:00.003-05:002015-05-05T20:14:55.683-05:006 Key Takeaways from the 2015 Berkshire ConferenceGreetings from Omaha!<br />
<br />
Yesterday, I attended the Berkshire Hathaway Annual Meeting and finally got to see Buffett and Munger answer questions in person. For years I've followed the conference online, but it was definitely worth the seven-hour drive from Chicago to experience it live. If you ever get the chance to make it out here for the conference, I highly recommend it. I've posted some of my pictures below.<br />
<br />
As always, there were a ton of great quotes and lessons from the Q&A session, but here are my six key takeaways.<br />
<br />
<b>1. When evaluating a company, look for reasons <i>not </i>to buy the stock.</b><br />
<b><br /></b>
One of the questions from the audience asked Buffett and Munger to list five positive characteristics to look for in an investment. They declined to list five characteristics, saying the scenarios can change with each opportunity, but that they would focus on finding reasons not to keep researching a stock. To me, that means looking for holes in management's capital allocation process, a declining competitive advantage, and negative aspects of a corporate culture.<br />
<br />
<b>2. Focus on buying good companies at good prices and let the economy take care of itself.</b><br />
<b><br /></b>
Charlie had a great quote on investing in uncertain macroeconomic times: "We're swimming all the time and let the tide take care of itself." He also said he couldn't recall turning down an acquisition or deal due to macroeconomic factors. At times, they end up being wrong of course, but they're okay with that since they might have otherwise missed out on good opportunities as well.<br />
<br />
<b>3. The key is controlling your emotions.</b><br />
<b><br /></b>
Another great quote from Charlie was, "Warren, if people weren't so often wrong, we wouldn't be so rich." A number of times, they reinforced the importance of controlling your emotions and being rational so that you can capitalize on other investors' mistakes. Warren commented that business school training was a handicap 20 years ago when all they did was teach efficient market theory. The market will be irrational and it's your job to know when to pounce on the opportunities.<br />
<b><br /></b>
<b>4. Corporate culture matters.</b><br />
<b><br /></b>
A number of audience members praised Buffett and Munger for creating a company with a sterling reputation. Buffett said that a company's culture and values come from the top (CEO, CFO, etc.), that they need to be written down, be consistently practiced, and that, with time, you'll have created a business with a great reputation. People will always follow what you do and not what you say.<br />
<b><br /></b>
<b>5. Understand the power of incentives. </b><br />
<br />
Buffett said, "Charlie and I really believe in the power of incentives." That is, understanding not just how executives are compensated and incentivized, but also how management's expectations might affect employee behavior. For example, if a CEO has set unrealistically high margin or growth targets, employees may take liberties they wouldn't otherwise to make sure the CEO looks good. These are situations you want to avoid.<br />
<br />
<b>6. Think long-term</b><br />
<b><br /></b>
Buffett commented that no one buys a farm or apartment complex based on how they think it will perform over the next month or so. They think about how it will do over the long-term. It's important that we think of our equity investments in the same way. Be a buyer of businesses, not a trader of tickers.<br />
<br />
The six hours of back and forth with Buffett and Munger left a lot for me to think about on the drive back to Chicago today. I'm sure I'll think of something else I wanted to mention somewhere near Des Moines. :)<br />
<br />
What did you think of the conference? Let me know in the comments section below or on Twitter <a href="https://twitter.com/ToddWenning">@toddwenning</a>.<br />
<br />
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<br />
<b>Related posts:</b><br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2015/01/dont-overlook-this-factor-in-your.html">Why corporate culture matters in an investment</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/02/the-top-17-quotes-from-buffetts-letter.html">Top quotes from the 2013 Berkshire letter</a></li>
<li><a href="http://www.cleareyesinvesting.com/2015/03/lessons-from-buffetts-tesco-mistake.html">Lessons from Buffett's Tesco mistake</a></li>
</ul>
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-74357477043209547932015-04-26T09:53:00.000-05:002015-04-26T09:57:57.637-05:00The Stock Market is a Giant Distraction<blockquote class="tr_bq">
<span style="background-color: white; box-sizing: border-box; line-height: 27px;"><span style="font-family: inherit;"><i>“The stock market is a giant distraction to the business of investing.” </i>- Jack Bogle</span></span></blockquote>
Earlier this week, I was thinking back on my baseball card collecting days as a kid and how each month my neighborhood friends and I would get a copy of the Beckett price guide and check the value of our favorite cards.<br />
<br />
The prices went up, went down, or stayed the same, but a monthly quote was sufficient.<br />
<div>
<br /></div>
<div>
I can only imagine how much of our childhoods we would have wasted had there been a live quote feed for card prices...<br />
<br />
"Barry Larkin went 3-for-4 with two RBIs last night; his 1987 Topps card is up five cents today in heavy trading..."<br />
<br />
As silly as that sounds, we have no problem doing something similar as adults with our stock investments, spending time on our smartphones and computers watching green and red real-time price quotes that tell us next to nothing about how the underlying business is performing.</div>
<div>
<br />
As long-term, business-focused investors, of course we want to know when the market is offering attractive prices for good companies, but there are ways to keep up without being glued to the quotes screen.<br />
<br />
My favorite way to do this is to set up price alerts on your favorite financial website. Yahoo! Finance, for example, has <a href="http://finance.yahoo.com/stock-alerts/stock-watch/add/?.done=/stock-alerts/">a tool</a> that lets you receive an email whenever a stock reaches a certain price point or rises or falls by a certain percentage.<br />
<br />
The stock market is a wonderful instrument that matches buyers with sellers in a very efficient manner, but it's important to remember that it is a means to an end and not the end itself. It's a tool for us to use to our advantage when we need it. The more time we spend researching businesses and the less time on watching the quotes screen, the better off we'll be in the long-run.<br />
<br />
<b>Related posts</b><br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2014/05/what-to-do-when-your-stock-plunges.html">What to do when your stock plunges</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/11/when-should-you-sell-good-stock.html">When should you sell a good stock?</a></li>
</ul>
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-73095221798047924852015-04-25T02:00:00.000-05:002015-04-25T11:13:13.610-05:00How to Invest for Your Kid's Education<span style="font-family: inherit;">After posting some <a href="http://www.cleareyesinvesting.com/2015/01/some-investing-advice-for-my-son.html">investing advice for my new son</a> a few months ago, a number of readers contacted me to ask how I planned on investing on his behalf - in particular, how I planned on investing for his education.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Frankly, I didn't have a great answer to give, so I contacted my buddy <a href="http://www.myprivatewealth.com/component/content/article/39-team/49-ryan-vogel.html">Ryan Vogel, CFP</a></span><b style="background-color: white; color: #252525; line-height: 22.3999996185303px;"><span style="font-family: inherit;"><a href="http://www.myprivatewealth.com/component/content/article/39-team/49-ryan-vogel.html">®</a></span></b><span style="font-family: inherit;"> at Private Wealth Management Group to get his opinion. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Ryan and I started our careers at Vanguard on the same day and we've remained good friends ever since. Not only is he one of the nicest guys in the business, he's also one of the most trustworthy - a valuable commodity in the finance world. Decent golfer, too. </span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">Rather than keep Ryan's responses* to myself, we thought it made sense to share them with you, too, as they address most of the questions I received. (This is somewhat of a U.S.-centric discussion, but non-U.S. readers should still get something out of it.)</span>
<span style="font-family: inherit;"><br /></span>
<br />
<br />
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>TW: There are a lot of education savings vehicles out there for parents to consider - 529s, Education Savings Accounts, UGMA/UTMAs. Which is the best vehicle for minimizing taxes for the parents and making sure the kids get the most out of the savings plan and financial aid?</b></span></span></div>
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<br /></div>
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<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>RV: </b>While saving money on taxes is important, it should not be the primary consideration on how to invest your money for education. The first consideration should be the goals you have for your money. What is the purpose of this investment? How much control do I want to retain? Each account has their pros and cons.</span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<br /></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">529s - I deal with these the most with my clientele.</span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><br /></span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="text-decoration: underline;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">Pros</span></span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
</div>
<ul>
<li><span style="font-family: inherit;">Tax free growth</span></li>
<li><span style="font-family: inherit;">No limitations based on earned income</span></li>
<li><span style="font-family: inherit;">Very high limits on contributions</span></li>
<li><span style="font-family: inherit;">Potential state tax deductions (depends on state, in PA you get a deduction for amount contributed regardless of what plan you choose).</span></li>
<li><span style="font-family: inherit;">5 year averaging for gift tax avoidance</span></li>
<li><span style="font-family: inherit;">Can transfer money between beneficiaries that are siblings or even cousins (ideal for grandparents)</span></li>
</ul>
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<span style="text-decoration: underline;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">Cons</span></span></span></div>
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</div>
<ul>
<li><span style="font-family: inherit;">Can only trade once per calendar year</span></li>
<li><span style="font-family: inherit;">Limited investment options</span></li>
<li><span style="font-family: inherit;">Must be used for post-secondary education costs.</span><span style="font-family: inherit;"> </span></li>
</ul>
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<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">ESAs are a better fit for saving for high school education. However, the contribution limit is only $2,000 and there are income limitations. This means that if you earn too much you can’t contribute. You have a much greater choice of investment options in this type of account and the money grows tax free.</span></span></div>
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<br /></div>
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<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">UTMAs are taxable custodial accounts. You have complete investment flexibility but you receive no tax benefits. </span></span></div>
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<br /></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">I didn’t address the financial aid part of the question because I really don’t have experience in this area. Most of the clients I work with have incomes too high to qualify for any aid. Also, colleges and universities have become much more detailed in vetting the finances of applicants. </span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<br /></div>
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<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>TW: Which states have the best 529 plans? How should parents evaluate them and their fund options? </b></span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b><br /></b></span></span></div>
<div id="yui_3_16_0_1_1429662362534_2329" style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span id="yui_3_16_0_1_1429662362534_2328" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>RV: </b>Nowadays there are plenty of good options. Ohio, Michigan, Utah, New York, Kansas, etc. Since 529’s have trading restrictions, the best thing to focus on is costs. What are the administrative fees? What are the expense ratios for the underlying funds in each plan? What funds are included in their age based option? What are the asset allocations used in the age based options? How about the options available other than age based? </span></span><br />
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">Then there are other aspects such as administration. How user friendly is their website? Is it easy to setup auto withdrawal/deposit? Personally, I chose Ohio. I like their aggressive age based asset allocation and the funds and administrative costs are low. The funds are mainly Vanguard and now DFA, which I am happy about. Their website is just OK, but I don’t go on except for when I make ad hoc contributions. Mostly I just stick with my monthly contribution and increase the amount whenever I get a raise.</span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<br /></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>TW: What about setting up trusts for the kids' education?</b></span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b><br /></b></span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>RV: </b>Setting up trusts just for education can be costly and in some cases unnecessary. If you own a 529 you still retain control and ownership of the assets regardless of age (even though the contribution is considered a completed gift for tax purposes). </span></span><br />
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">I find education trusts are used mainly as an incentive as part of someone’s estate plan. Basically, the trusts state that the student “go to school and graduate” or they don’t get access to an inheritance or other gift from their family. Another aspect to keep in mind with trusts is that if you don’t have someone to act as trustee and need a corporate trustee, the trust needs to be large enough (usually at least $750k) for a corporate trustee to want to assume liability. </span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<br /></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>TW: How should parents think about asset allocation for their kids' education funds? How should we think about making adjustments as the kids approach college?</b></span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b><br /></b></span></span></div>
<div id="yui_3_16_0_1_1429662362534_2340" style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<span id="yui_3_16_0_1_1429662362534_2341" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>RV: </b>Be aggressive. Education inflation is averaging 6%. In order to retain purchasing power you will need to take risk. Risk tolerance is important to consider, since you don’t want to get scared and sell at the wrong time, but investing in a stock heavy asset allocation makes sense. </span></span><br />
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;">As you approach college or any goal where you know the money will be needed, you will want to become more conservative. However, remember that you don’t need all of the money on the first day of college. The four years (or more) will go fast, but that doesn’t mean you need to be 100% bonds and cash on the first day of school.</span></span></div>
<div style="background: white; margin: 0in 0in 0pt; padding: 0px;">
<br /></div>
<div id="yui_3_16_0_1_1429662362534_2356" style="background: white; margin: 0in 0in 6pt; padding: 0px;">
<span id="yui_3_16_0_1_1429662362534_2358" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><span style="font-family: inherit;"><b>TW: What's the best type of account to use if I just want to buy a few stocks for my kids to teach them about investing and help them build non-education related wealth?</b></span></span></div>
<div id="yui_3_16_0_1_1429662362534_2355" style="margin: 0in 0in 8pt; padding: 0px;">
<span id="yui_3_16_0_1_1429662362534_2354"><span id="yui_3_16_0_1_1429662362534_2353" style="font-family: inherit;"><b>RV: </b>UTMAs are the best in this situation. There are no investment restrictions and the money can be used for anything. Just be careful how much income is generated so as to avoid paying any “kiddie tax.”</span></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">*Please note that Ryan's </span><span style="background-color: white;"><span style="font-family: inherit;">answers are only highlights and are not all encompassing or to be construed as specific advice.</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><i>How do you invest for your kids' education? Please let me know in the comments section below or on Twitter <a href="https://twitter.com/ToddWenning">@toddwenning</a>. (I ended up going with the Ohio 529 plan and started with the Wellington Fund option. I also plan on buying him a few stocks - the subject of a future post.)</i></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><i><br /></i></span></span>
<span style="background-color: white;"><span style="font-family: inherit;">Stay patient, stay focused.</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;">Best,</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;">Todd</span></span><br />
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-53901786859883347942015-04-21T19:25:00.000-05:002015-04-21T19:25:43.046-05:00Weekly Reading List 4/21/2015<b>What I've been reading & listening to - April 21, 2015</b><br />
<ul>
<li>Placing constraints on yourself as an investor - <a href="http://awealthofcommonsense.com/placing-constraints-on-yourself/">Ben Carlson</a> (A Wealth of Common Sense)</li>
<li>Value Matters - <a href="http://www.valuewalk.com/2015/04/wally-weitz-letter-to-investors-why-value-matters/?utm_campaign=trueAnthem:+Trending+Content&utm_content=552fceaf04d30107cd000001&utm_medium=trueAnthem&utm_source=twitter">Wally Weitz</a> via ValueWalk</li>
<li>Barry Ritholtz's recent interviews with Charley Ellis and Rick Ferri - (<a href="http://www.bloomberg.com/podcasts/masters-in-business/">Bloomberg</a> - audio)</li>
<li>Why individual investors do so poorly in the markets - <a href="http://charlessizemore.tumblr.com/post/116642297986/why-individual-investors-do-so-poorly-in-the">Charles Sizemore</a></li>
<li>Thoughts on Neil Woodford's Patient Capital Trust - <a href="http://www.iii.co.uk/news-opinion/richard-beddard/patient-capital%3A-thinking-unthinkable">Richard Beddard</a></li>
<li>It's always calmest before the crash - <a href="http://monevator.com/calmest-before-the-crash/">Monevator</a></li>
<li>What Jeff Bezos and Neil Woodford have in common - <a href="http://t.co/P66Uj4Oz3u">Total Return Investor</a></li>
<li>Activity v. inactivity in investing - Jeff Saut via <a href="http://www.marketfolly.com/2015/04/market-strategist-jeff-saut-on-activity.html">Market Folly</a></li>
<li>Similarities between Joel Greenblatt and Stanley Druckenmiller - <a href="http://basehitinvesting.com/risk-and-portfolio-management-similarities-between-joel-greenblatt-and-stanley-druckenmiller/">John Huber</a> (Basehit Investing)</li>
<li>Exceptions to the rule can make for valuable investments - <a href="http://thesovagroup.com/charlton-heston-mr-buffett/">Matt Brice</a> (Sova Group)</li>
<li>Howard Marks interviews Joel Greenblatt at Wharton (below)</li>
</ul>
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Best,<br />
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Todd<br />
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<i><br /></i>Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-6505699486652919722015-04-18T12:45:00.004-05:002015-04-18T14:30:10.083-05:00Investing in Your Best IdeasOne of the things I struggle with the most as an investor is knowing how much capital I should put behind each of my investments.<br />
<br />
Indeed, the biggest mistakes of my investing career haven't been those where I've lost a little money, it's been the ones where I haven't invested enough in my top ideas.<br />
<br />
Case in point, in the summer of 2010, I started researching TradeStation, an online brokerage company here in the U.S. that I thought was significantly undervalued. I did a lot of due diligence, spoke with the CFO, users of the product, etc. and thought the odds were favorable that I'd make money on the investment. It was the best idea I'd had in some time.<br />
<br />
Feeling confident in my thesis, I bought some shares for my portfolio.<br />
<br />
Fast-forward eight months and TradeStation gets acquired, producing a 60% gain on my investment.<br />
<br />
Good news, right?<br />
<br />
A 60% gain is nothing to sneeze at, of course, but the problem was I only put 1% of my portfolio behind my idea. While the investment had a positive impact on my returns, it also didn't have a very meaningful impact. It was akin to getting the proverbial "fat pitch" only to lay down a bunt instead of taking a full swing.<br />
<br />
What I took from this experience was that you need to invest enough in your best ideas that they can have a meaningful impact on your long-term performance, up to the point where you start to lose sleep over the size of the position.<br />
<br />
This will vary by each investor's ability to handle risk. Some investors don't mind putting 20% or 30% behind a single stock while others will blush at a 5% position. Either way, it's important to give your best ideas a chance to make a difference.<br />
<br />
How do you approach position sizing? Let me know on Twitter <a href="https://twitter.com/ToddWenning">@toddwenning</a> or in the comments section below.<br />
<br />
<i>If you're going to be in Omaha for the Berkshire Hathaway meeting on May 2 and would like to meet up, please <a href="mailto:dividendcompass@gmail.com">drop me a line</a>!</i><br />
<i><br /></i>
<b>Related posts:</b><br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2014/03/why-i-sold-this-dividend-stock-for-loss.html">Why I sold this dividend stock for a loss</a></li>
<li><a href="http://www.cleareyesinvesting.com/2013/11/learn-to-love-your-investing-mistakes.html">Make the most of your investing mistakes</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/11/when-should-you-sell-good-stock.html">When should you sell a good stock?</a></li>
</ul>
<br />
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
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<i><br /></i>Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-66071148903095268112015-04-04T21:05:00.003-05:002015-04-04T21:12:02.487-05:00Signs of a Perfect StockPeter Lynch's chapter in <i>One Up on Wall Street </i>describing the signs of a "<a href="http://monevator.com/what-peter-lynch-looke-for-in-a-share/" target="_blank">perfect stock</a>" was one of the most influential to my early investing career because it steered my attention away from the water cooler stocks I'd typically hear about and toward underfollowed, niche companies that operated in decidedly unglamorous industries.<br />
<br />
As I've developed my own style of investing, I've come up with my own list of company traits that I like to look for when researching a new stock. I have yet to find a company that checks off all ten boxes, granted, but if the company possesses at least two attributes, it makes me sit up and take notice.<br />
<br />
1. <b>Management and directors have significant skin in the game. </b>One of the first things I check into when researching a company is how much stock management and the board members own. With smaller companies, I like to see executives and directors as a group owning at least 5% of the company, as they'll will be less likely to take undue risks with shareholder capital and more likely to think like owners because they are in fact owners. With larger companies where high-percentage ownership is less realistic, insiders should still own enough where the stock's long-term performance has a material impact on their own net worth.<br />
<br />
I particularly like to see companies, like <b>Sun Hydraulics </b>(SNHY), pay their board members solely in stock grants with long-term vesting as this increases the likelihood that the board's interests will be aligned with those of long-term shareholders.<br />
<br />
2. <b>Its employee turnover is well-below industry average. </b>Having to frequently train new employees is not only negative on the income statement, but the company also loses valuable institutional memory with the departure of each employee. One of the many reasons that <b>Costco </b>(COST) has stood apart from other retailers is that its employee turnover (6% in 2014) is far below the <a href="http://blogs.wsj.com/atwork/2015/02/19/one-reason-wal-mart-is-raising-pay-turnover/" target="_blank">retail industry average</a>. <b>Diamond Hill Investment Group </b>(DHIL) has had <a href="http://ir.diamond-hill.com/Cache/1001184518.PDF?Y=&O=PDF&D=&fid=1001184518&T=&iid=112960" target="_blank">zero turnover</a> (at least as of 2013) in its equity portfolio manager and research analyst group since the firm was founded.<br />
<br />
3.<b> It's headquartered in a smaller town. </b>This may seem trivial, but I like to see companies based far outside of major financial centers as I think they're more likely to fly under <a href="http://ibd.morningstar.com/article/article.asp?id=649008&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14;frmtId=12,%20brf295" target="_blank">Wall Street's radar</a>, can afford to take a longer-term perspective, and have employees with a better work/life balance <a href="http://time.com/9912/10-things-your-commute-does-to-your-body/" target="_blank">(less traffic</a>, affordable housing, etc.).<br />
<br />
4. <b>It has a great corporate culture that reinforces its competitive advantages. </b>See: <a href="http://www.cleareyesinvesting.com/2015/01/dont-overlook-this-factor-in-your.html" target="_blank">Don't Overlook This Factor in Your Research Process</a><br />
<br />
5. <b>It makes products that can't be (easily) disrupted by technology.</b> If a start-up in Silicon Valley or a teenager in her garage is looking for ways to challenge a company's business model, eventually they'll find a way. That's why I prefer to own companies that make products that aren't likely to change or be disrupted anytime soon (knock on wood), like <b>Douglas Dynamics</b>' (PLOW) snow plows or <b>WD-40</b>'s<b> </b>(WDFC) eponymous oil-based spray.<br />
<br />
6. <b>It pays a regular dividend and pays special dividends in good years. </b>After particularly strong years, well-run companies often find themselves flush with cash. While this is a good problem to have, it can become a bad problem if management misallocates the capital by pursuing growth-for-growth's sake acquisitions and overpaying for them. Paying special dividends shrinks management's sand box and allows them to focus on only reallocating the capital that can earn high long-term returns.<br />
<br />
7. <b>It approaches buybacks opportunistically. </b>Most companies I've come across approach buybacks as a way to return excess cash to shareholders without regard to the value of the shares they're buying back. As such, I like to see a company with a cogent and disciplined buyback strategy like U.K. retailer, <b><a href="http://www.stockopedia.com/content/next-the-king-of-share-buybacks-72474/" target="_blank">Next </a></b>(NXT.L). Such companies should, over time, create value for long-term shareholders.<br />
<br />
8. <b>It prefers to grow organically rather than through aggressive acquisitions. </b>A company that's willing to start from scratch in new markets and build the business slowly and in the manner they want shows me that they're willing to take a long-term approach.<br />
<br />
9. <b>It communicates plainly with shareholders. </b>See: <a href="http://www.cleareyesinvesting.com/2015/03/5-things-to-look-for-in-good-annual.html" target="_blank">5 Signs of a Good Annual Report</a><br />
<br />
10. <b>It has a meaningful recurring revenue stream. </b>One of the best investments I've made was in a healthcare equipment company called Kinetic Concepts, also known as KCI, which was acquired in 2011. KCI makes negative-pressure wound therapy equipment for healing difficult-to-treat wounds, and the great thing about their business model was they lease or sell the equipment and sell the one-use dressing kits that needed to be changed out during treatment. The disposable product sales provided KCI with a steady recurring revenue stream that gave me added confidence to buy the stock in November 2008 at a time when the market in turmoil.<br />
<br />
What company attributes do you look for? Let me know on Twitter <a href="https://twitter.com/ToddWenning" target="_blank">@toddwenning</a> or in the comments section below.<br />
<br />
*<i>I own shares of Douglas Dynamics, Sun Hydraulics, Diamond Hill, and WD-40. A list of my current holdings can be <a href="http://www.cleareyesinvesting.com/p/disclaimer.html">found here</a>. </i><br />
<br />
<b>Related posts:</b><br />
<br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2014/08/book-review-of-outsiders.html">Book Review of "The Outsiders"</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/02/a-simple-formula-for-investing-success.html">A Simple Formula for Investing Success</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/04/stick-to-your-knitting-as-investor.html">Stick to Your Knitting as an Investor </a></li>
</ul>
<br />
Happy Easter!<br />
<br />
Stay patient, stay focused.<br />
<br />
Best,<br />
<br />
Todd<br />
<br />
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<i><br /></i>Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-57219451292837495592015-03-28T14:53:00.001-05:002015-03-29T08:41:28.955-05:00Has Long-Term Investing Become Too Popular?<blockquote class="tr_bq">
<i>Long-term investing has gotten so popular it's easier to admit you're a crack addict than to admit you're a short-term investor. - Peter Lynch in 2000</i></blockquote>
Having publicly written about investing since 2006, it's been interesting to observe changing investor opinion on long-term investing.<br />
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<a href="http://4.bp.blogspot.com/-PmUuwqLsDzo/VRb8mWfiARI/AAAAAAAABQE/I5bTT9lXE2s/s1600/S%26P.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://4.bp.blogspot.com/-PmUuwqLsDzo/VRb8mWfiARI/AAAAAAAABQE/I5bTT9lXE2s/s1600/S%26P.png" height="320" width="228" /></a>In the years following the financial crisis, for example, I would routinely receive reader comments and emails saying that long-term investing was flawed. And to be fair, they had numbers on their side, as ten-year trailing returns for the S&P 500 were unimpressive. As late as 2010, investors in the S&P 500 were looking back at a "lost decade" with negative ten-year total returns.<br />
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It was easy to see why investor patience was in short supply. Even though the starting point of that ten-year period was the beginning of the end for the tech bubble, ten years is still a long time to wait for positive returns.<br />
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What a difference a few years of steady market gains makes. Since starting this blog three years ago and writing about the benefits of long-term investing, I have yet to receive any pushback on whether or not long-term investing works.<br />
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Indeed, a recent Gallup poll (h/t Ben Carlson at <a href="http://awealthofcommonsense.com/" target="_blank">A Wealth of Common Sense</a>) shows that the majority of investors today say they'll do nothing in the face of market volatility and nearly half said they'd put more money into stocks in the event of a sell off.<br />
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<a href="http://3.bp.blogspot.com/-3b2pNzKlcUc/VRb166UV48I/AAAAAAAABP0/vk_PRQJJM6I/s1600/Retirement.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-3b2pNzKlcUc/VRb166UV48I/AAAAAAAABP0/vk_PRQJJM6I/s1600/Retirement.png" /></a></div>
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Of course, what investors say they'll do and what they'll actually do are two different things. (Everyone is a long-term investor when the market's going up, but we find out who really means it when the market falls.) However, the level of fear in the market seems to be rather low at the moment and that's not a great thing if you're looking to invest more into the market.<br />
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Does this mean you should do a 180 and become a daytrader? Absolutely not, but it does mean you should tighten rather than loosen your criteria for making a new investment. As one of Buffett's more famous sayings goes, "The less prudence with which other conduct their affairs, the greater prudence with which we should conduct our own affairs."<br />
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<b>Related posts:</b><br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2013/11/9-tips-for-becoming-more-patient.html">9 Tips for Becoming a More Patient Investor</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/11/when-should-you-sell-good-stock.html">When Should You Sell a Good Stock?</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/11/whats-your-investing-edge.html">What's Your Investing Edge?</a></li>
</ul>
Stay patient, stay focused.<br />
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Best,<br />
<br />
Todd<br />
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-4892544848270542012015-03-25T19:00:00.000-05:002015-03-25T19:00:00.579-05:00Weekly Reading List - 3/25/2015<b>What I've been reading - March 25, 2015</b><br />
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<li>The formula for excess returns - <a href="http://www.bloomberg.com/news/articles/2015-03-11/is-there-a-next-jack-bogle-not-if-you-ask-jack-bogle" target="_blank">Michael Mauboussin</a></li>
<li>Toward a taxonomy of stock market winners - <a href="http://www.stockopedia.com/content/towards-a-taxonomy-of-stock-market-winners-94939/" target="_blank">Ed Croft</a> via Stockopedia</li>
<li>Markel's 2014 shareholder letter - <a href="https://www.markelcorp.com/~/media/Investor%20Relations/Letters%20to%20Shareholders/2014.ashx" target="_blank">Markel</a></li>
<li>What's wrong with finance - <a href="http://www.fool.com/investing/general/2015/03/18/strange.aspx" target="_blank">Morgan Housel</a></li>
<li>What's right with finance - <a href="http://awealthofcommonsense.com/whats-right-with-finance/" target="_blank">Ben Carlson</a> </li>
<li>The total return EPS index - <a href="http://www.philosophicaleconomics.com/2015/03/treps/" target="_blank">Jesse Livermore</a></li>
<li>Good place to work = good place to invest? <a href="http://blogs.wsj.com/economics/2015/03/11/like-your-job-the-stock-market-will-probably-like-your-company/" target="_blank">WSJ</a></li>
<li>What might a US-focused Neil Woodford portfolio look like? - <a href="http://totalreturninvestor.blogspot.com/2015/03/cloning-woodford.html" target="_blank">Total Return Investor</a></li>
<li>Interview with valuation guru, NYU professor Aswath Damodaran - <a href="http://www.valuewalk.com/2015/03/an-exclusive-interview-with-professor-aswath-damodaran/?utm_campaign=trueAnthem:+Trending+Content&utm_content=54fa796b15bb3b394e000001&utm_medium=trueAnthem&utm_source=twitter" target="_blank">ValueWalk</a></li>
<li>Is there a "next" Jack Bogle? - <a href="http://www.bloomberg.com/news/articles/2015-03-11/is-there-a-next-jack-bogle-not-if-you-ask-jack-bogle" target="_blank">Bloomberg</a></li>
<li>Being a contrarian is easier said than done - <a href="http://www.fool.com/investing/general/2015/03/09/its-so-much-harder-than-you-think.aspx" target="_blank">Morgan Housel</a></li>
<li>A closer look at Ashmore plc - <a href="http://maynardpaton.com/2015/03/11/ashmore-66-margins-and-547m-net-cash/" target="_blank">Maynard Paton</a></li>
</ul>
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Stay patient, stay focused.</div>
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Best,</div>
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Todd</div>
Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.comtag:blogger.com,1999:blog-2652899003587753028.post-14943890317530931582015-03-15T09:46:00.000-05:002015-03-15T09:55:46.821-05:005 Signs of a Good Annual ReportAnnual report season is upon us, which presents an opportunity to better understand our current portfolio holdings and watchlist ideas, as well as management's strategy and outlook. <br />
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Here are five signs of a good annual report -- that is, one that is helpful, informative, and could signal that a smart management team is at the helm.<br />
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1. <b>They aren't afraid to admit mistakes: </b>If the company had a bad year, was management forthcoming about what went wrong or did they sweep it under the rug? Assuming it's something they can control, do they have a clear strategy for not repeating the mistake? Frank discussions of mistakes also help shareholders gain insight into management's decision-making process. This year's Berkshire Hathaway <a href="http://www.berkshirehathaway.com/letters/2014ltr.pdf" target="_blank">annual report</a> features a number of discussions about mistakes the company has made over the years.<br />
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2. <b>They spend time talking about capital allocation: </b>One of the things that William Thorndike stressed in <i><a href="http://www.cleareyesinvesting.com/2014/08/book-review-of-outsiders.html" target="_blank">The Outsiders</a> </i>was that capital allocation is a CEO's most important job, yet it's remarkable how few annual reports provide details on the company's capital allocation strategy. How do they prioritize uses of free cash flow? Does the company have a clear and appropriate buyback and dividend policy? U.K.-based retailer, Next, does a particularly good job outlining its capital allocation philosophy in its <a href="http://www.nextplc.co.uk/~/media/Files/N/Next-PLC/pdfs/reports-and-results/2014/Next%20AR2014%20web.pdf" target="_blank">annual report</a>, as does U.S. based textile firm, <a href="http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTUyODA1fENoaWxkSUQ9MjQ4MDkwfFR5cGU9MQ==&t=1" target="_blank">Culp</a>.<br />
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3. <b>They focus on returns on capital and economic profit: </b>A <a href="http://irrcinstitute.org/pdf/alignment-gap-study.pdf" target="_blank">recent study</a> by IRRCi found that 75% of companies in the S&P 1500 don't use any balance sheet/capital efficiency metrics like ROIC, ROE, or EVA in determining long-term management incentives. This opens the door to management pursuing growth-for-growth's-sake and destroying shareholder value; therefore, I see it as a positive sign when a management team is held accountable for the cost of the capital that its using to grow the business over the long-term. It's an even better sign when ROIC is ingrained in the corporate culture. Good examples of annual reports that discuss ROIC and economic profit metrics are <a href="http://www.csisoftware.com/wp-content/uploads/2011/02/PresidentLetter_2013.pdf" target="_blank">Constellation Software</a> and <a href="http://sun-hydraulics.mwnewsroom.com/getattachment/9bd769c3-ec95-4195-9440-3bac27ee3b7c/2013-Annual-Report" target="_blank">Sun Hydraulics</a>.<br />
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4. <b>They communicate plainly. </b>In my experience, too many companies assume readers of their annual reports have intimate knowledge of key industry phrases and metrics or they make the business sound more complicated than it really is. I like to see companies that take the time to explain their business in everyday language that can be understood by all stakeholders and readers. Admiral Group's <a href="http://www.admiralgroup.co.uk/pdf/annualreports/2013.pdf" target="_blank">annual report</a> is a good example of this. </div>
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5. <b>They provide helpful data points. </b>Good annual reports should contain enough data points to help investors fully evaluate the company's performance. Obviously all companies are required to disclose financial statements, but I like to see more granular data offered at the segment and product level, too. Costco does a great job of this in its <a href="http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjY0ODcxfENoaWxkSUQ9LTF8VHlwZT0z&t=1">annual report</a>. Companies that don't provide data beyond what's required makes you wonder why the data isn't being shared.<br />
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What do you look for in companies' annual reports? Let me know in the comments section below or on Twitter <a href="https://twitter.com/ToddWenning" target="_blank">@toddwenning</a>.<br />
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<b>Related posts</b><br />
<ul>
<li><a href="http://www.cleareyesinvesting.com/2015/01/dont-overlook-this-factor-in-your.html">Don't overlook culture when evaluating companies</a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/08/book-review-of-outsiders.html">Book review of <i>The Outsiders</i></a></li>
<li><a href="http://www.cleareyesinvesting.com/2014/07/6-signs-of-good-investment-process.html">6 signs of a good investment process</a></li>
</ul>
<i>Please note: Going forward, links to articles I've been reading will be found in a separate post. </i><br />
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Stay patient, stay focused.<br />
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<br />
Best,<br />
<br />
Todd<br />
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<i>*I own shares of Admiral, Berkshire, Culp and Sun Hydraulics. A list of my equity holdings can always be found <a href="http://www.cleareyesinvesting.com/p/disclaimer.html">here</a>. </i><br />
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Todd Wenninghttp://www.blogger.com/profile/01624840833961930575noreply@blogger.com