One Sentence To Describe (Successful) Art Investing

“It is a masterpiece by a very important artist in a sector of the market especially popular today with active collectors in great condition and trading in a liquid market“.

This is a quote from Doug Woodham’s  book Art Collecting Today

In later posts I’ll go through each phrase in bold.

People buy art for two reasons:

  1. They like it
  2. They believe it is a good investment

It’s usually more of 1 than 2 which means they usually buy utter rubbish and is a waste of money.

People pay too much for crap art that they buy on holiday and display the works at home to show off how worldly cultured and cosmopolitan they are.

Each work completely contradicts each other (why wouldn’t it? It was made in different countries by different artists belonging to different categories) – making the whole house look confused, pretentious and ironically, uncultured.

They buy from overpriced tourist traps who make all kinds of semi-believable claims about the work up for grabs. People believe them for whatever reason.

As a result, as I go through many people’s houses I’m increasingly aware that there are no themes and no specialty in the art that they are displaying. You need to have these not just for aesthetics but to know how much you should (or shouldn’t) pay for art.

I’m too scared usually to ask them to tell me about a work. Their “narrative” is pretty weak.

Art investing is like any other investing. You need to specialise in specific areas where you have an advantage over other people. Otherwise you’ll not be able to know (and exploit) the underlying facet of successful investing: the difference between price and value.

You need a “narrative” – that is a story of why the art is valuable. Just like buying shares.

The above quote serves as a checklist before you should buy anything – especially if you treat it as an investment (which you should).

 

 

 

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Don’t Believe the Hype vs. Being a Contrarian

Peter Lynch’s One Up On Wall Street stresses to not follow “trendy”new industries.

Why? If it’s trendy, it’s being analysed and over-analysed by investment firms. One analyst at least from each firm is covering the industry.

This is bad – the price is therefore distorted (inefficient if you dare say!) and it’s probably way too expensive to even consider buying. If you compare the earnings vs. share price (Earnings Per Share), a ratio continually uses throughout his book, you’ll find it’s probably not worth buying.

So Lynch’s solution: Find companies that do something dull, ridiculous, disagreeable, a toxic waste, and depressing. Analysts don’t follow it. Institutions don’t follow it.

But before you go out and buyout a commercial carpet tiling business remember one thing: it needs what Warren Buffett describes as a “moat”

The company must have a sustainable advantage over its rivals. What is to stop a carpet tile flooring business to not get undercut by cheaper rivals? What do you know about their industry / landscape / product?

Sometimes companies aren’t followed – and for good reason.

Note:

Preston Pysh and Stig Brodersen in their fantastic book: Warren Buffett Accounting Book lay out all the principles of value investing.

Principle 3: A company must be stable and understanble Rule 2: It must have a Sustainable Competitive Advantage (Moat)

This is the best book I’ve read on understanding financial statements. I hold and MBA and have not understood it so easily until I read this book.

 

 

 

 

 

Do you REALLY KNOW what your goal is?

I’m reading The Goal by the late Eliyahu Goldratt. The book for me is about measures. Having the right measures.

It’s great to have a new piece of technology, machine or process. But what is it improving? Is that relevant to your goal?

Better question – What IS your goal?

“The Goal”, as the protagonist discovers, is:

“To reduce operational expense and reduce inventory while simultaneously increasing throughput.

Operational expense = What it costs (e.g. labour) to make the product

Inventory = Work in progress (WIP)

Throughput = Sales

Three dynamics. They’re pretty simple – and in his role he can affect these. Only these are worth worrying about as only they will lead to the plant’s success.

If a company was doing an activity based on the above metrics, it was working towards the goal. If it wasn’t, then it was wasting time.

Beforehand he thought it was “increase market share” or “increase efficiencies” or “ROI” or “net profit”. Problem was – there was no goal.

What are the three goals of your life? Are you always working towards them?

These are the questions I now ask myself.

 

What do Warren Buffett and Peter Thiel NOT have in common?

Below is a summary of Warren Buffett’s Principles and Rules from Warren Buffett Accounting Book. This book is the best book I’ve read on reading / understanding financial statements.

I finally think I understand the three statements –  and I’ve done an MBA. The book provides the perfect balance of simplicity without being condescending – a difficult feat, especially in finance literature.

Buffett’s Principles of Valuing Companies:

Principle 1: Vigilant Leaders
Rule 1 Low Debt
Rule 2 High Current Ratio
Rule 3 Strong & Consistent Return on Equity
Rule 4 Management based on Long Term Goals
Principle 2: Long Term Prospects
Rule 1 Company Must Have Persistent Products
Rule 2 Minimise Taxes
Principle 3: A Company Must Be Stable & Understandable
Rule 1 Stable Book Value Growth from Owner’s Earnings
Rule 2 Sustainable Competitive Advantage (“Moat”)
Principle 4: Buy at Attractive Prices
Rule 1 High Margin of Safety
Rule 2 Low Price to Earnings Ratio
Rule 3 Low Price to Book Ratio
Rule 4 Set a Safe Discount Rate
Rule 5 Buy Undervalued Stocks

Contrast these rules to Peter Thiel’s Zero To One, a book which covers tech investments – something that until recently Buffett wouldn’t touch.

Thiel’s summary quote on tech investments: “Most of a tech company’s value will come at least 10 to 15 years in the future. Thiel’s valuation rests on his “11 Key Questions to ask” one of which is “Durability” i.e. Will your market position be defensible 10 and 20 years into the future?

So using the model above, could you successfully value a tech company?

No. Why? Two major metric cannot be determined – Revenue and Free Cash Flow.

To place Thiel’s theories over Buffett’s Principles above, here’s where it falls over:

Principle 1 Rule 3 : Strong & Consistent Return on Equity (ROE)

  • No historical data available!

Principle 3 Rule 1 : Stable Book Value Growth from Owner’s Earnings

  • No historical data available!

You also can’t calculate:

Principle 4 Rule 5: Buy Undervalued Stock

This Rule is based on a Discounted Cash Flow Model. Determining this rests on working out the historical free cash flow (FCF) rate.

The best that Thiel’s model provides is a good assessment of the “Discount Perpetuity Cash Flow”

An understanding of past earnings and future earnings is so critical in investing.

Peter Lynch, one of my favourite investor’s says in One Up On Wall Street “If you can follow only one bit of data, follow the earnings – assuming the company in question has earnings…. sooner or later earnings make or break an investment in equities.”

Happy hunting.

Why Markets Are Efficient

Here’s why I’m learning towards efficient markets.

Following Tim Ferriss’s recommendations, I’ve read, in this order

1. Buffett – The Making of an American Capitalist
2. More Money Than God
3. The Smartest Investment Book You’ll Ever Read

I’ve just finished the third. This book falls under the “efficient market” hypothesis whereas the first two were strong advocates of the “inefficient marts” hypothesis. I have to admit I was pretty convinced by inefficient market theory, but Solin’s book has kind of blown it out of the water.

Anyway – this book is great. Its aggressive tone against what Solin calls “hyperactive” investing and the complete lies of the financial industry make this book mandatory reading for anyone interested in investing, regardless of whether you’re an efficient or inefficient market guy.

If more people read this book, it would make lives harder for unethical brokers pushing unsuitable products with no fiduciary responsibility. And that’s good in my book.

A lot of people don’t really consider critical things such as fees when they’re buying actively managed funds – this book explains in black and white what the dangers are.

Best of all there’s a very simple and clear approach in the final section – the book is not just a rant!

Great stuff.

The Market is Inefficient – at first

“People form opinions at their own pace and in their own way – the notion that information could be instantly processed is one of the ivory tower assumptions that has little to do with reality.” Sebastian Mallaby, More Money Than God

So this is one of the many cases for Inefficient Markets Theory. It’s in stark contrast to Dan Solin’s opinion laid out in The Smartest Investment Book You’ll Ever Read

Where am I with these opinions? Still undecided. But I do have a few opinions.

  1. You may be able to ‘beat the market’ but only temporarily. Soon enough whatever amazing strategy you’ve come up with will be replicated, and the market will become ‘efficient’.
  2. If markets were efficient, there would be no such thing as hedge funds – they couldn’t exit. No investing ‘edge’ would ever work
  3. It’s a very small minority who can continually ‘beat the market’ meaning that even if markets are inefficient, there are very few who can be relied upon to do it for long periods of time. This obviously has ramifications for who you should invest your money with.

I’ll be exploring Efficient vs. Inefficient – will be interesting to see where this lands.

First step is to see what people say online.