In fact, John D. Rockefeller Sr. and Andrew Carnegie were the richest men in the United States, and in 1900 even they couldn’t buy penicillin, x-rays, insulin, central heat and air conditioning, cell phones, televisions, computers, or fly in commercial airplanes, because these things weren’t available. In many ways the middle class today has a much higher living standard than the richest people in the world who lived a hundred years ago. (Location 63)
Our Founding Fathers created a brilliant political system that promoted free enterprise, property rights, and little regulation, which allowed entrepreneurs to thrive. Our government also benefits from this system by collecting the highest tax revenues of any country in the world, roughly $6.5 trillion annually. (Location 72)
important it is to have investors and liquidity in credit markets. (Location 79)
If you get one thing from this book, it is that if you find a once-in-a-decade opportunity like Chipotle, buy a lot of it and don’t sell just because the stock went up quickly. (Location 140)
Ted’s target holding period is forever. (Location 180)
Ted had a very concentrated portfolio of 10–12 stocks, with a top position sometimes making up 25 percent of his fund. (Location 184)
In investing, how you earn your returns matters just as much as what returns you earn. Taking huge risks and getting lucky is not a viable and repeatable investment approach. (Location 286)
Talented investors not only earn above-average returns, they are above average at risk management. (Location 294)
Risk is defined as (1) the probability of losing money and (2) the amount of money you can lose. (Location 295)
Buffett is the most recognized practitioner of GARP, even though I’ve never heard him mention the acronym (perhaps because GARP sounds more like a fish than an investment philosophy). There are both short-term investors and forever investors who use GARP, but it is most consistent with forever investing. (Location 322)
The most attractive characteristic of investing into the stock market is that the odds are in your favor. If you simply perform in-line with the market, the odds of losing money over a twenty-year period are essentially zero. (Location 338)
In the short-term there are numerous variables that impact a stock price: market sentiment, earnings expectations, sales expectations, interest rates, the global economy, and so on. Over a twenty-year period there are two things that predominantly determine the price movement of a stock: (1) the growth of intrinsic value and (2) the change in the multiples. (Location 343)
The key takeaways to always keep in mind about the stock market are that (1) in the long-term the S&P 500 returns are likely to equal S&P 500 earnings growth plus dividends, (2) the timing of your investment into the market and your exit from the market have an impact on your investment returns, and (3) in the short-term anything can happen. (Location 394)
A common mistake among investors is the pursuit of growth industries, rather than growth businesses. (Location 414)
In recent years, 3-D printing and solar energy were “hot” industries with tremendous potential, but the products have failed to bring in adequate levels of free cash flow and attract enough demand. (Location 416)
The most durable businesses and industries are those that have sustainable demand, require low-capital expenditures, earn high returns on invested capital, and generate the high levels of free cash flow. Understanding long-term industry (Location 434)
fundamentals are important for entrepreneurs, employees, creditors, and equity investors. Businesses Are Not Static (Location 436)
Once you hold ownership of a business, you must continuously examine the industry conditions and the operations of the business. (Location 442)
Peter Lynch aptly described the practice of companies diversifying by acquiring businesses outside their circle of competence as “diworseification.” (Location 534)
As an investor you should strive for strong long-term “absolute returns” and “relative returns.” Absolute returns are important because that is what makes your net worth go up. However, relative returns are also important because if you can’t beat an index, such as the S&P 500, over long periods of time, you should invest into an index fund. In that respect, the index fund is your opportunity cost. (Location 560)
One is the increase in intrinsic value of the company, as measured by earnings, free cash flow, or tangible book value. (Location 566)
Forever investors think of their investment portfolio as a holding company or conglomerate, with stocks being pieces of businesses they own. They are the purest definition of investors, with day traders being the most impure. Forever investors strictly adhere to the famous line from Benjamin Graham: “Investing is most intelligent when it is most businesslike.” (Location 580)
There are three investment strategies that forever investors favor: the Four Filters, platform companies, and start-ups. (Location 585)
(1) one that we can understand, (Location 595)
(2) with favorable long-term prospects, (Location 596)
(3) operated by honest and competent people, and (Location 596)
(4) available at a very attractive price. (Location 596)
A platform company is a business an investor acquires with the intention of using the cash flow to make future acquisitions in that same industry. (Location 614)
Andrew Carnegie and the Mellon brothers have two of the best track records in United States as early-stage investors. (Location 629)
Warren Buffett is one of the most recognized and vocal of the forever investors. (Location 635)
Your success as an investor will be determined by your execution of the strategy, not the strategy itself. (Location 650)
While it may appear reckless or risky for Carnegie to buy into businesses with loans, these were joint ventures (perhaps conflicts of interest) with executives of railroads and the businesses relied heavily on railroads for growth and expansion. (Location 731)
The lesson from Benjamin Graham is that you shouldn’t be inflexible. If an once-in-a-lifetime opportunity comes along, invest heavily and hold on to it forever. (Location 818)
The oil refinery was later described as a cash cow that provided capital for acquisitions. (Location 838)
However, he also made acquisitions into unrelated businesses such as highway and tennis court surfaces, animal feed and agriculture, and telecommunications. (Location 840)
it shows the Koch brothers’ focus on purchasing durable businesses that they want to own forever. As mentioned earlier, (Location 843)
For example, you might be willing to buy a business that doesn’t make any profits if it provides six-figure incomes for you, your spouse, your kids, and grandkids. There is value in the employment, not just the free cash flow. (Location 1067)
One reason is that it is easier to raise capital as a public company. If your company is publicly traded it means you have met strict regulations and compliance standards, which may give investors a greater sense of ease. (Location 1089)
Investors want to own companies that are increasing in intrinsic value over time, therefore growth of sales, profit, and free cash flow are important measures of a business. (Location 1130)
The best business to own is one that earns high returns on invested capital and can reinvest all of its free cash flow back into the business. (Location 1142)
flow back into the business. The second-best business to own is one that earns high returns on invested capital and can’t reinvest its cash flow back into the business, but management uses the cash wisely for acquisitions and opportune share repurchases. (Location 1145)
If the debt is building up over time and management is issuing dividends, (Location 1162)
There are two common areas of competitive advantage: (1) Demand: switching costs, product differentiation, brand loyalty and (2) Supply: low-cost provider, niche products, and economies of scale. (Location 1203)
The most important quality when looking at management (Location 1249)
The best business is one that can retain all of its free cash flow and reinvest it into operations at a high return on invested capital. (Location 1312)
The ideal use of cash flow is to reinvest it back into the business at a high return on capital invested; however, many businesses don’t earn high returns on invested capital and the ones that do earn high returns usually have trouble finding ways to reinvest the money. (Location 1416)
If the money is being used to maintain the company’s competitive position and it isn’t resulting in an increase in sales and cash flow, then it is not a great business, but it still might be necessary to combat a further decrease in its operations. (Location 1420)
Another reason to reduce debt is if the debt load is so high that interest expense is consuming a large percentage of the cash flow the company generates. (Location 1433)
reducing debt gives you a guaranteed rate of return, while projects and acquisitions give you a potential return. (Location 1435)
If you do not have control of management, the best way to mitigate risk is by investing your money into companies that have management with integrity and exceptional talent. (Location 1442)
Your goal as an investor should be to simply purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now. (Location 1460)
One of the most important things for an investor to do is be willing to be inactive if there are not attractive opportunities. (Location 1476)
Forever investors do not buy a stock just because it “should” go up 25 percent in the near term; they buy because they foresee an increase in intrinsic value that will make today’s price look very cheap in ten years. (Location 1523)
Cash flow and free cash flow are what really matter. (Location 1526)
While there is no one source for all ideas, drudging endlessly at every source may produce one or two ideas a year. (Location 1543)
If you want those types of returns you should look for companies below the $30 billion price range. (Location 1571)
Forever investors buy stocks as if the market were going to be closed for the next ten years. If the timing is unlucky, the forever investor will still make out OK over ten years if the company and management are great. (Location 1590)
investor because most top investors require large investments. Putting money with mediocre investors in any asset class is likely to produce disappointing results. (Location 1614)
An investor with a fixed amount of capital must sell something if he or she wants to buy something new. (Location 1625)
The forever investor has the goal of purchasing outstanding businesses and never selling them. (Location 1626)
An investor into these types of companies might be comfortable with three to ten holdings. (Location 1644)
The great risk of a concentrated portfolio is overconfidence in one’s abilities. (Location 1650)
The higher the certainty and expected returns, the more money should be allocated to it. In other words, only you know the proper amount of diversification for yourself. (Location 1656)
A “margin of safety” is required no matter how great the company. (Location 1672)
Liquidity is an area of focus for money managers concerned about meeting investor redemptions, but for the typical investor liquidity should not be much of a concern. (Location 1684)
Billionaire hedge-fund manager David Tepper has a saying around his office: “There are times to make money—and times to avoid losing money.” (Location 1702)
Forever investors must be the most disciplined of any investors because they don’t plan to sell the businesses they acquire. (Location 1745)
Forever investors wait for rare opportunities to buy when the price is very attractive and there is an obvious “margin-of-safety.” Bargain hunters want to “buy low and sell high,” while forever investors want to “buy well and never (Location 1750)
Here are reasons to sell a privately owned business. If you control management, the quality of management is not a reason to sell because it can be replaced: (Location 1767)
John D. Rockefeller Sr. advised, “Study diligently your capital requirements, and fortify yourself fully to cover possible set-backs, because you can absolutely count on set-backs.” (Location 1839)
Stalwarts are the primary target of a forever investor. These are typically midcap companies with strong competitive advantages and consistently grow organic revenue and earnings at a healthy rate. (Location 1847)
Another characteristic of stalwarts is that they often have a talent for strategic acquisitions to maintain a healthy growth rate and not become a slow grower. A stalwart business combined with management that is talented at capital allocation is the most any investor can ever ask. (Location 1853)
Slow growers are companies whose organic revenue and earnings growth are in the low single digits. These companies often use free cash flow for dividends and share buybacks because the reinvestment of cash flow back into operations doesn’t yield attractive returns. (Location 1868)
quality of management should be given careful attention. Management eager to show growth may overpay for an acquisition and destroy shareholder value, while patient and astute management will make acquisitions that add substantial shareholder value. (Location 1870)
The greatest investors are cerebral, while the worst are often the ones calling his or her advisor every two weeks to discuss the portfolio movements. (Location 1930)
Andrew Carnegie is undoubtedly one of the greatest investors in US history, yet even he avoided publicly traded stocks. (Location 1933)
If you do buy publicly traded stocks, there are important psychological advantages of investing into outstanding (Location 1951)
At a dinner hosted by Bill Gates’s father, Warren Buffett said the most important thing in getting to where (Location 2025)
One of the hardest things in investing, especially when managing money, is to do nothing. However, there are times when it is the wisest thing to do. (Location 2032)
Avoiding mistakes and failure should be the first goal of any investor; however, people are not infallible and mistakes happen. The difference between success and failure is often how we respond to adversity. When you inevitably suffer setbacks, faith and fortitude will help you overcome those obstacles. (Location 2046)
Due to illiquid investments in golf courses that were loaded with debt, Ackman had to wind down his fund in 2002. (Location 2056)
Carl Icahn has had one of the most fascinating careers in investing. When he was twenty-six years old he was already making great money. (Location 2064)
however, he was highly leveraged and in 1962 there was a crash that wiped him out in one day. (Location 2066)
but Carl Icahn knew that he was not done—he just had to start over. He thought it best to develop a niche, so Icahn became one of the leading experts on options. He built a large commission base and bought a seat on the NYSE in 1968. He also engaged in arbitrage on convertible securities. (Location 2068)
While Icahn is an activist investor, he is not inflexible in his approach. He has also taken non-activist positions in companies with strong management, such as Apple and Netflix. (Location 2074)
suffered several setbacks, including oil spills in the 1990s; however, once the adversity is over, it makes you more prepared for the future. (Location 2091)
However, not everyone handles stress and anxiety in the same way. Chronic and severe stress can cause a normally optimistic person to become depressed or develop an anxiety disorder. (Location 2100)
Major business setbacks are more difficult to deal with once you are older and have a family. (Location 2133)
The business never took off, and at the age of twenty-one Disney declared bankruptcy and moved to Hollywood to start over. (Location 2144)
1953, Charlie Munger was twenty-nine years old when he and his wife of eight years got divorced. Munger lost the little he had in the divorce and his wife kept the family home. Shortly after the split, he learned that his son had leukemia. (Location 2153)
As the saying goes, those who understand compound interest, earn it; those who don’t understand it, pay it. And inflation is a compounding expense that we all must pay. (Location 2200)
Entrepreneurs and businesses take big risks and often fail. They are willing to take the risks because if they succeed, they are well rewarded. An increase in taxes results in the rewards becoming lower, but the risks remain just as high. In other words, the expected returns from starting a new business are lower as taxes rise. (Location 2252)
hardworking middle-class family that saves and invests, your greatest expense is not research, investment advisory services, or losing money from mistakes—it is taxes. (Location 2266)
Taxes were not always this high in the United States. Proponents of “big-government” might try to find a correlation between US economic growth and tax rates and declare that high taxes don’t impact US economic growth and technology growth. (Location 2280)
Businesses provide enormous economic and societal benefits, but entrepreneurs and business owners are not driven by altruism; they work grueling hours, undertake substantial financial risks, spend more time than most away from their families, and cope with the heavy stress because they want to make profits. (Location 2349)
Investors also contribute to economic prosperity by providing capital to entrepreneurs and businesses. (Location 2352)
One method is by investing into people they want to help: family members, friends, or acquaintances. Another way of using excess capital to help others, which is becoming increasingly popular, is purposeful investing (Location 2357)
There are also growing numbers of angel investors and venture capital funds that look to invest in areas with specific societal benefits. These investors want profits, but they are willing to give up some profits, or take on more risks, in order to help society. (Location 2367)
. The (Location 2374)
Howard Schultz didn’t go through this humbling experience to create jobs, he did it to create a successful business and make profits (Forbes magazine estimates his net worth at $3 billion). (Location 2376)