Book Review: Invested

2018-09-01

Book: Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money

Invested is not just a how-to guide on investing. Danielle Town focus on the emotional turmoil we go through when first grappling with our financials. These are scary things! This is a scary, dog-eat-dog world! If it doesn’t feel natural, the feeling that this isn’t for us will reside inside and prevent us from unlocking the growth potential of the financial world. Town comes through as authentic as she taps into the family aspect of thinking about money. Money is inherently tied to our upbringing: how our parents talked (or didn’t talk) about money, how our family views those with more or less money than our own (are rich people evil?), how comfortable we are within our families when discussing money (is it a taboo subject, or more of a subject for bragging rights?). Even for Danielle Town, the daughter of the well-known hedge fund manager Phil Town, discussions revolving around money bring up some painful feelings stemming from her childhood about how money was used as a weapon during her parents divorce. This is where the book shines. You can buy one of the numerous value investing books that will give you the basics as if you were taking a college class. Town approaches the problem from an emotional perspective - not succumbing to the emotion of overwhelming fear of being in control of your own financial life, but realizing it, understanding it and ultimately using tools to minimize the fear to a quantifiable value.

I’m always a bit cynical about books like this - a book written by a personality with personal financial success or connections to financial success, that has the word “rules”, “X-step plan”, “path to success”, etc. on the cover. Pretty much any “financial guru” book. Usually there’s a headshot of said guru (not this one). It often feels like one long advert for a more expensive product or that guru’s media offerings. It’s jammed with fluffy anecdotes without much true content that reeks of survivorship bias, or attributing success to the wrong factors. While a bit of this leaks through in the book (Danielle and Phil host the podcast InvestED which they reference a few times), I think this is a good faith effort by Danielle to share her story with the world - my dad was a successful hedge fund manager, and even I still feel scared and need help being in control of my own financial future!

The book includes a bunch of practical tools and doesn’t dive too deep into theory beyond what you need to know to understand the basic concepts. It’s a great start for someone who’s been contemplating getting more involved with their financial future, but feels overwhelmed by the resources out there and isn’t sure how to start. I’ll probably subscribe to the podcast and give a few episodes a listen.

Some notes:

Four levels of Mastery
- Unconscious Incompetence - don’t know what you need to know
- Conscious Incompetence - known what you need to know, but you can’t do it very well
- Conscious Competence - know what you need to know, and can do with focus
- Unconscious Competence - doing something well without thinking about it
Have a “practice box”, or a specific container for all the various items you need to get yourself ready to perform a task. Could be decor to help put you in the right mindset, photos and quotes for inspiration, etc.
Why can retail investors win in the stock market, even with professionals playing? The timelines are different. Retail is much longer, professional is much shorter
Rule of Obviousness. “We want to jump over six-inch vars, not six-foot bars.”
Annual Public Company Report is the 10-k. Can use InvestSnips to source different industries. 10-Q are the quarterly reports. SEC’s website, EDGAR, has all the information.
“In yoga, a multiday focused practice is called an intensive. I planned my two-week Investing Intensive to ground the information I had learned over the last few months into skills. Water the root to enjoy the fruit.”
Munger’s principles of Investing
- Do we have the capacity to understand the business?
- Intrinsic and Durable Competitve Advantage
  - Is there a Moat? Can be Brand, Switching / Network Effects, Toll Bridge (monopoly), Secrets, Price
  - Big 4 Numbers (should grow at 10% a year)
    - Net Income
      - Income Statement
      - Profit after all costs of making that profit have been deducted
    - Book Value + Dividends
      - Book Value on Balance Sheet
      - Dividends on Cash Flow Statement
      - Value of the business if it were closed down and all its assets were sold (assets minus liabilities), before any dividends were paid out
    - Sales
      - Income Statement
      - Amount earned from selling (revenue)
    - Operating cash
      - Cash Flow Statement
      - Actual cash received from business operations
- Good Management?
  - Vocabulary in public statements may tip off how they think
  - Management Numbers
    - Return on Equity
      - Net Income / Equity
    - Return on Invested Capital
      - Net Income / (Equity + |Debt|)
    - Debt
      - Can it be paid off in two years with the cash on hand?
- Good Price
  - #1: Ten Cap
    - Ten x capitalization rate
    - Does the pre-tax Owner Earnings replace the investment in ten years?
    - Owner Earnings - the amount of cash that can go into the business or real estate owner’s pocket every year without affecting business operation
    - Owner Earnings - reported earnings + depreciation, depletion, amortization - average amount of capitalized expenditures
    - Owner Earnings - Net Income + Deprication and Amortization - |Accounts Receivable| + Accounts Payable + Income Tax - |Maintenance Capital Expenditures|
  - #2: Payback Time
    - The number of years to get your investment back
    - Free cash flow grown by compounded “Growth Rate” for eight years
    - Find rate by lowest in previous 5 years or analyst projections
    - Net Operating Cash - |Property / Equipment Purchase| - |Capital Expenditures of Maintenance and Growth| = Free Cash Flow
  - #3: Margin of Safety
    - Rate of Return to make the risk worthwhile. Let’s say 15%
    - MARR - Minimum Acceptable Return Rate
    - Windage PE Ratio - lowest of two times the Growth Rate OR highest P/E of company over past 10 years
    - Steps
      - Future 10-Year Earnings-Per-Share = EPS x (1 + Window Growth Rate), done 10 times
      - Future 10-Year Share Price = Future 10-Year Earnings-Per-Share x Window PE Ratio
      - Sticker Price = Future 10-Year Share Price / (1.15)^years
      - Margin of Safety (Buy Price) = Sticker Price / 2
Keep checklists for your process, and for failures / mistakes!
- Expensive Errors checklist
Keep a Too Boring, Too Hard and Wishlist pile
“Price is just what you paid. That’s all. It has nothing to do with the value.”
Tranches. Split your purchases into 4 separate tranches.
- “I can see the value of tranching as a psychological comfort”
- “This system of tranches is set up to help us handle the emotions of investing and to take advantage of not having perfect timing.”
Shiller P/E and Buffet Indicator for market overall overpricing
“Never sell as long as the Story is the same”
Reducing basis
- Lowering the dollar amount of capital invested in the stock. Lowering risk and raising overall return
- Achieved via dividends and buybacks
- “I am more concerned with the return of my money than the return on my money” - Mark Twain
- “Don’t buy a company based on whether or not they pay a dividend unless for some reason you need to live on that cash. If you focus o the dividend, you might pass up a much better company for one that pays a dividend, and that is not a great idea.”