Source: Kigaku Club

1.

Let me start by saying a few things. I started my fund in 1955, the year Graham, whom I really admired, said he was retiring. Someone said to me at the time, “Walt, if you set up a fund, I'll invest in it.” I think that's a great idea. I've found 19 partners, most of whom have invested $5,000. Just like that, my investment started with 19 partners, with a total capital of $100,000.

I don't want to say I've never worked with Goldman Sachs. I mostly work for Loeb Roads, a company I'd like to have some connection with Lehman Brothers. Anyway, I just wanted you to know that I started my career in 1955. After that, I stayed in this field until 2003, maybe 2001. I wasn't sure about the exact year. My son came over to me and said, “Dad, I can't find cheap stocks anymore.”

I said, “Let's quit when we get to my age.” I'm just aware of the positive bubble in the market because tech companies are playing a crazy role. When these things happen, you discover that you have to work for three years to make up for everything that happened when the last three years got out of control. Life is short, and it's hard to bear this burden, even though I enjoy the investment. In fact, this review is what Forbes magazine describes me, probably the February 11th issue, and you'll find that interesting.

Now I'm ready to answer your questions. If you see that I haven't answered correctly, please let me know.

II.

Question 1: Can you describe your relationship with Graham? How did you guys meet?

A: When I started working, I went to Carl M. Loeb as an “errand” agent, then the company changed its name to LoeBroades. A year later, Armander PF, the head of the data department, recommended Graham's “Securities Analysis” to me. He said to me, “That book has everything about securities, and after reading that book, you don't need anything else. So I bought one and found “Securities Analysis” to be a great book. The author of this book, Graham, happens to be a Loeb customer, and I can see what stock he holds.

After that, I was sent to the New York Stock Exchange by Loeb for training, and the company wanted to teach us how to trade stocks. There, Graham taught a data analysis course. I took two of these courses: securities analysis and advanced securities analysis. I think Graham is amazing. Buffett once said that if you haven't met Graham, you won't understand his position.

Coincidentally, I worked for Graham for a few years. Once, Graham received a phone call from his lawyer in his office telling him that the $1.7 million acquisition of a government employee insurance company had been successful. He said to me, “Walt, if this investment fails, we will liquidate this company and get our money back. This shows that when you make a purchase, sometimes you don't know for yourself how great this purchase was.

I don't know if I answered the first question. But please feel free to ask questions; if I don't know, I'll tell you directly.

Question 2: What is your procedure for selecting stocks?

Answer: I like to choose stocks that are record low. For me, the Value Line (an American stock research report) is very useful because I can easily get data from it, and I don't have a computer. Once I have the data, I can make judgments about the business. I hardly really talk to the management of the company.

When I was just starting out, after the Pearl Harbor incident during World War II, my troops were sent overseas. After World War II, I was still in the military and worked at the Pentagon in Washington. Graham asked me when I would leave the military at the time, and I said I would be leaving soon. He said he lost one of his securities analysts, would I like to come and work? I answered, “Yes, I'm very eager. I've been working for him since 1946. Graham retired in 1955, and I decided to start investing on my own.

Question 3: Are there any ways you can minimize mistakes? I know that mistakes are inevitable, such as in corporate valuations, in selecting securities.

Answer: I don't like losing money. So I'm trying to buy defensive, underrated stocks. When the stock rose, I let go and let the stock take care of itself. So the main thing is to look for companies that don't have a lot of debt. I don't like this idea; let me say that, for example. I like to get the company's annual report. Through proxy letters and annual reports, I can learn how many shares the directors hold, who holds a large number of shares of this company, and the company's history.

The idea of not buying large-scale debt companies may not work in the end due to leverage. So I like to choose stocks with record low stock prices. When stocks reach new lows, it often means that the company is in trouble. I don't like debt; debt always causes a lot of trouble.

As you know, if you read MBIA (US Stock Exchange Service) and some other companies that lend money abroad, you'll find that they are in trouble. I like to buy companies with simple assets, they don't have many liabilities, and the management holds a large amount of company stock.

You should also pay attention to the company's history, how long the company has been in business, and what industry they are in. I myself am not very good at discerning people's personalities. If you go and chat with the management, the management is probably very charming and very friendly. But you don't really know them.

For me, I prefer looking at numbers rather than people themselves. If they don't have much debt, they're much safer. Occasionally, when a company wants to buy another company, it is also burdened with debt.

But if you look at the company's history, through ValueLine you can check the company's history over the past 10 to 15 years to see where they were and where they are now. I don't know if I answered your question; the most important idea is that I don't like losing money.

Question 4: When the price of buying stocks starts to decline, do you continue to buy or reconsider whether you made the right choice? Because you said you like to buy when the stock price falls, do you prefer when it's 10 yuan, or do you prefer when it's 5 yuan?

Answer: The truth is that if you bought a stock the last time you had a problem and the stock price went down, you should be very satisfied to be able to buy it at a lower price. You check how much debt the company has, the company's history. The stock price may rise from 12 to 100 and fall from 100 to 70.

This is a great opportunity, but don't forget that a few years ago, the company's stock price used to be $10. So, when you invest, do your best to protect your assets. Of course, different people have different protection methods. Some people have more information than you. I just don't want to lose money, so I try to protect my money. My approach is if I like a company and think it's good, I'll buy more.

If you're a stock broker, most brokers don't like to recommend stocks whose prices are falling. Because, psychologically, their customers don't like these kinds of stocks. If they buy 30 yuan per share, when the stock price drops to 25 yuan per share, they won't call their customers and say we'll buy some more for 25 yuan, then the stock price continues to drop to 20.

So, in most cases, the broker won't suggest you buy more when it falls. Although this is psychologically good, for people who don't specialize in investing, when the stock price falls from 30 to 20, they are nervous and uneasy because of losses. And if the stock price rises back from 20 to 30, the broker will call the customer to say that the stock price has risen again, and you can consider selling.

I don't like to sell stocks like this, simply because the price has gone up again to the price I bought it. Normally, the stock price was falling when I bought it because the company was in trouble. If possible, I'll try to hold it to a 50% profit. Let's say I buy 30 and the stock price rises to 50, then I sell. I have experienced a situation where the stock price continues to rise to 200. So you might be happy to make mistakes. Because I don't like losing money, I've mentioned before that I don't like debt.

III.

Question 5: When the stock price falls, how can you determine that the intrinsic value has not changed and the stock price cannot rise back up?

A: I tend to buy stocks whose share price is less than the company's book value. I also love stocks of companies with little debt. Debt can get a lot of people into trouble. You just need to take a look at ATM machines. Many people are unable to repay their debts and have gone bankrupt... I'm very uneasy about borrowing money. I think most people have forgotten that debt causes a lot of trouble, so we can do our best to avoid debt.

If you buy a company, in addition to reading ValueLine, you have to find the company's annual report and check their financial statements and company history. You'll find out there might be a problem with this company, then you won't want to own this company. However, I did find that the company's stock price is far below its book value, and the historical performance over the past 20 years has been excellent. In this situation, you will be very confident, especially when the company's debts are still minimal and the company's management holds a large amount of the company's shares.

Question 6: Regarding the margin of safety, is this a concept that has evolved over time. What was the margin of safety approved by Graham back then? Are you still following the same views, or have you developed your own?

Answer: I think if the book value of the company is significantly higher than the market transaction price, then there is a margin of safety. But that doesn't guarantee you'll get it right. But if the price continues to drop, someone might want to buy the entire company. The company's management is committed to making the company prosperous and successful. So you don't need to be in conflict with management, because management also wants the company to succeed. So you and management are on the same page, but for some reason, management will run into trouble. Their product, for example, is an unfortunate product. As a result, the company will run into a lot of trouble in the near future. So you need to avoid companies whose products don't work.

QUESTION 7: My question is, are you making mistakes because of your emotions? Graham has talked many times about managing emotions when investing. I'm wondering if at some point in the past you made a bad decision because of a bad mood. If so, can you share it with us? If not, can you explain what is the best way to control your emotions?

Answer: First, I try not to influence my emotions because of stocks, and Graham emphasized this. One reason I'm not emotional is that I don't actually go and chat with management. Management has methods for you to see, and they want you to see certain aspects. And I'm not really good at getting to know people myself. Warren Buffett is very good at identifying people, and he's very good at distinguishing between good people and bad people.

I think you should try your best to keep your emotions out of investing. You have to look at things rationally, not emotionally. I think some things, like electric cars, are a great idea. Someday, someone will make major inventions and breakthroughs in this area. However, if I were to sell a car company for a better invention in the future, I wouldn't feel comfortable. I want to buy based on current facts, not on future possibilities.

QUESTION 8: Does that mean you'd rather invest in a company with an established good history than making speculative decisions?

Answer: Yes. I try to avoid being emotional. Buffett once told me an interesting story about how he managed his emotions. He did such a test. The National Broadcasting Corporation, now called ABC. At the time, its stock price was $30 per share; I can't remember the exact figure. Buffett told his agent that he wanted to buy 100,000 shares at a price of $29. If 29 yuan doesn't work, he will only be willing to pay 28 dollars the next day. As a result, the next day, the agent called him and said that the deal could be completed at $29. Buffett answered, “No, I'm only willing to pay $28 today.” I don't think I can do this myself; my ability to control my emotions isn't as good as Buffett. Buffett told me that in the end he sold it for $26.

This example shows us how important it is to control your emotions and how expensive you are willing to pay. If you decide to buy at a certain price, that decision remains the same. There is no need to look at where this price is anymore; it may be reduced by one or a half percentage points. You have the price you want; you set a certain price. If they can't cut the price, maybe you leave and abandon it; it's OK to give up. I'm not sure if you know the term GTC (Goodtill cancel). You told the broker that you wanted to buy 100,000 shares, GTC. The same company will lower its stock price because of stock dividends, unless you tell your broker not to cut the price. I don't know if this answer will help you.

4.

Q9: I'm wondering if you'd rather buy a great company at a reasonable price or a great company at a particularly good price?

Answer: That's a great question. I don't think I'd spend what it's worth for a good company. I'm willing to buy a good company, but I need a discount on the price. I'm looking for profit and hate losing money.

If you pay attention, sometimes when people are uneasy, you have a chance to buy a good company at a reasonable price. I can't sum up a single general rule because every company is different. But if you want to make a profit, of course you want to buy a stock, and its price can rise 50% over the next few years. You need to be patient at this time.

I remember one day in 1952, an analysis company A discovered company B, which invented the copier, and thought that company B had no future. Company B's stock price was $20 per share at the time. B then went through a period of economic depression. I found Graham and said that Company B has a new copier product.

Graham said we wouldn't buy this type of company. After that, the company's stock reached 1,000 to 2,000 US dollars after the stock split. But Graham is right, you're not sure this product will be a huge success. All we knew at the time was that analysis company A thought company B was great. Therefore, I try my best to avoid losing money when investing. If I don't want to lose money, I often buy companies that are in trouble. These troubled companies often get help. If the company had no debts at the time, you wouldn't need to worry about it being liquidated.

The stock market often reacts emotionally. Weakness poses problems. So you have to avoid being emotional yourself. If you manage other people's money, you have to take responsibility. We never tell our limited partners about their current positions. If you tell them that first, they'll buy the same shares themselves, you have one more competitor. I once told a friend who was interested in joining the investment. He said to me what if you take my money and go to Brazil.

I said, “I have no interest in going to Brazil, so if you feel uneasy, don't invest in my fund. People are always emotional; they don't want to lose money. Someone once said to me, “Walt, I can't stand not knowing what stocks we hold”. I said “we own shares in loss-making railway companies.” If people know about your positions, they'll find some stocks they don't like, and they'll call me to ask questions. I don't like people like this; I like to trust my investors. Therefore, many hedge funds do not publicize their holdings.

Question 10: What three traits do you think successful value investors need?

Answer: Calm, unaffected by emotions, rational. Emotions influence your judgment on stocks. Graham believes that emotions can even influence your previous judgments and impressions. Different people have different abilities. If you have rational abilities, and you've met the owner of a company, you like this person, and it's very comfortable to stay with him. Then, emotionally, you might be tempted to buy this company. So I only buy when the price is cheaper.

Once upon a time, there was a Canadian chef who was very famous and rich. People bought his stock, and as a result, he lost a lot. I don't think I'll get involved in a similar deal myself because I only buy the cheap ones. If you see someone, it's important to get and read the annual report at the same time. You have to decide whether the information reflected in the annual report is consistent with what you think. Take a look at the results from previous years' annual reports.

If you see a company in a trough, people like to make money; they don't like the stock of such a company. But on the other hand, maybe the company's problems were only short-lived. A lot of people are very emotional, and the think tank behind them doesn't like trouble. So they will stay away from companies like this, which are probably good investment targets.

Again, you have to control your emotions and observe the facts. Different people handle things differently. Some people see that the stock price is very low. After buying, they liquidate the company and profit themselves. I can't do that because of the differences in personality. I love the company's success. Many of the stocks I sold in the past have gone up a lot since then. Some people think, “Oh my God, I could have made more money, but unfortunately I sold it”. Forget these, choose the others after you sell them. Emotions have an important impact on success.

Question 11: You have experienced 17 Great Recessions. Do you think we are entering a new recession, and do you think the next recession will be different from the last one?

Answer: I don't try to predict the future; on the contrary, I try not to predict it. As for the future, your level of speculation is the same as mine. I don't know if there will be a Great Depression. Politicians don't like recessions. They will try to stop a recession from happening. I buy shares based on the company's current value, not future prospects. It's much safer for me.

Question 11 Q: Is the recession period a good time to buy stocks and find cheap stocks?

Answer: You may find opportunities during recessions. My own feeling is that if the company's debt situation is good, the historical background is good, and the stock price is cheap due to some reason, such as public sentiment, I feel more at ease. This will give me a chance to buy, and you can take advantage of this opportunity.

But I must emphasize once again that it is impossible to predict market trends and what may happen in the future. When the stock price is cheap, you might want to wait a little longer, but for me that means a lot of trouble. Don't try to predict economic conditions and stock market movements. In 1932 and 1929, we had a serious crash.

But you can't predict until then; the stock price was still rising in 1926. You won't buy it in 28 years because the stock price is too high. Then it suddenly crashed, and many people were damaged. Keep this in mind, the most important thing is that I don't like losing money.

Question 12: Have the positive changes in the market been effective in recent years? Is it hard to find a good price now?

Answer: I think the so-called effective market theory is a great question. This theory argues that the market price of a stock is what it should be. And your job, or the job of an analyst, is to determine why one company's share price is higher than another. I think I'd be more happy to buy a troubled business in an industry. This may be an opportunity; this company may be a good company, or it may not be that good.

Review this company and maybe you can find great trading opportunities. There are a lot of securities analysts now, so the industry is more competitive than ever. But most analysts aren't happy to buy stocks that are falling in price.

The best approach is that we used to do that; we buy when we fall and sell when we rise. But buying and selling points are hard to grasp. Analysts control others' investment funds and take responsibility. I must state that I have never had any relationships with illegal persons. These people always want to take advantage of others. If the person you're dealing with has issues, don't get involved with them. Wall Street has plenty of portraits that take advantage of you. I'm not sure if this is a good suggestion, but I like it myself.

5.

Q13: What do you personally think about diversification, in terms of industry, in terms of stocks and bonds?

Answer: The industrial side is interesting. I'm away from the computer industry because I don't know computers. I'm a bit old for this industry. This industry probably has a big future, and I just don't know how to observe it. So I'll stay away from it; I don't have any investment in the computer industry.

If you know computers, you probably know which company in this industry is more attractive in terms of price. But it's an area that's always changing. My personal preference, such as a certain soup company. I'm not recommending you buy this company. It's just that this kind of company lasts longer. I feel more at ease when dealing with this kind of old company. Of course, this varies from person to person. Excuse me, what was the second question just now?

Question added: Regarding stocks and bonds, do you buy all stocks or allocate both?

Answer: On a time scale of several years, the inflation factor must be taken into account. The government and ordinary people want more, so they issue debt, which further generates inflation. The interest on bonds is very high, and you can earn a good income, but you can't make a fortune. Canada, for example, has a high income tax rate.

I'm more comfortable holding stocks because it will grow. This is true in the US, and so is Canada, although the situation is not the same. Canada is a great place, and there are opportunities for growth. I don't know much about Canada, but you're Canadian, and you know more than me. I think growth is very important.

If taxes are high, it will hurt growth. I prefer stocks because inflation erodes income from bonds. You'll notice that few people can become millionaires by buying bonds. But stocks can, if you pick the right field. Stocks are more suitable for young people like you, and concentrating on investing in bonds is more suitable for the elderly.

Question 14: Can you describe the situation in the 50s, as a young fund manager, raising funds for personal funds? Are there any mistakes or ideas that you would like to change if you did it now?

Answer: I'm not a very aggressive and lobbyist. I'll tell you a lovely story about Buffett. After Graham retired, he walked across the street to meet a very friendly gentleman who had a wife and four children. Buffett said to this gentleman I can help you invest.

Mr.'s wife said, “Oh, you can't give money to a young man in his 20s who is sunburned by the sun.” So the couple didn't invest. This gentleman later became the president of Coca Cola. And his wife, we have meetings together sometimes, and she always thinks that since Buffett wanted to invest at a young age, she didn't think it was a good idea.

When you start your own business, it's important to gain experience for someone's actual work. Then if you have money yourself, or if your family is rich, they may take care of it for you. I was lucky that people had a terrible experience during the Great Recession of the 50s. This memory will last for many years.

I remember someone asking me how can you start a fund now; the Dow Jones index is only 400. I said, there are always people who have to invest, and that was a good time. But people will have a deep memory. So if you want to do it, if you want to have customers, you first have to verify the value. If your family has some money, they'll take care of it for you for a while.

You have slowly come to terms with what you have mastered. Setting up a fund is tough, especially if you don't want to lose friends or lose their money. If you love math and are interested in investing, I think you can get started, and at the same time, you have to control your emotions.

Question 15: What's the biggest mistake you've ever made?

Answer: I can't seem to remember the mistakes I've made. I don't mean to offend, but I can't remember. Of course there will be a few different errors. For example, if you invest a lot of money in a stock, the stock price falls. We don't lose money very often, so I can't remember the mistakes I made. We buy lots of stocks all the time because I get nervous if I hold too many positions on one stock. So we never invest too much in one stock; we hold over 100 stocks most of the time. In this way, our investments are more diversified. I'm not going to focus on my mistakes.

Including that I sometimes sell too early, and the stock rose sharply after selling, so I don't mind it. The mistake I think I'll avoid is getting involved with unscrupulous people. I remember an Australian gentleman who sold a company and did so without getting registered with the Securities and Exchange Commission (SEC).

As a result, he endured a prison sentence. This kind of person may make a lot of money in the stock market, but I don't want to deal with this kind of person. You have to stay with nice people as much as possible. Sorry, I wasn't able to tell you my biggest mistake.

6.

Q16: What do you think of the investment climate in industrializing Asia, and China in particular?

A: In this regard, I have some thoughts of my own. I did spend a while, a year or two, in the Chinese market. I don't buy foreign companies. Excluding Canada, I have made some investments in Canada. But basically I need guarantees, and most countries in the world don't have a Securities and Exchange Commission (SEC).

This is not easy to judge; it is easier for domestic insiders to judge what is happening and decide whether to buy. I bought an American company because I understood them. I don't understand foreign companies, one of them is China, I don't understand, if I hold shares in a Chinese company, I would be uncomfortable. In Brazil, for example, an individual bought the oil company Chevron (Chevron), and later they said they wanted to take it back.

China falls into this category for me. If you own a company, suddenly the Chinese government will make an offer and force a deal. When I own a company and have certain guarantees, I feel at ease. I don't go to European companies I don't understand; their annual reports are in French, German, or other languages. When I buy an American company, that doesn't necessarily mean I'm right. It's just that I feel comfortable on my own because I understand what's going on around me. I don't know about other companies.

Question 17: Sometimes we sell a successful investment too early. As a successful investor, can you talk about when to sell, do you sell everything at once, or slowly in parts?

Answer: This is a great question, I'd say I don't know when it will be sold. When stock prices rise, the situation basically becomes fragile and sensitive. For example, if your purchase price is 50 yuan and now it's 100 yuan, I'm likely to sell it because I've already made a 100% profit. I don't want to worry about this anymore.

When I worked for Graham, we had a scale. He doesn't sell everything at once; he usually sells around 85%, depending on how long he holds it. Normally we hold stocks for about 3 years. You've held it for a while and got some reports, and you have to watch the company's performance during this time. I like to profit when you're already profiting, but I don't have a formula for selling. There is no such formula; it is stipulated that if it rises by 50 or 100 yuan, it is automatically sold.

You have to keep an eye on it. There is a possibility that the stock price will decline, and it will become vulnerable when the stock price rises. When it goes up from $50 to $100 and then falls back to $50, you feel foolish and haven't taken advantage of fluctuations, so I usually tend to sell as it rises. The problem is how to choose when to sell.

There's a comment on this question that might be of interest to you. Graham said in his third edition of “Securities Analysis” (published in 1951) that price and value were discussed on page 536, and on page 726, he discussed some special situation investing (special situation investing).

I gave this example when I was speaking at Columbia University. I told them there about the example of the fast food chain McDonald's. McDonald's stock price had dropped a lot, to $14 per share, and the company had some trouble at the time. I used Graham's formula at this point. In this example, I think McDonald's is worth $22, and the current price is only $14.

If you buy it at the time, wait until the stock price rises to 22 and sell. The difference between the two is 8 yuan, and you make a profit of 8 points. I think the chance of success is 75%. It is estimated that it will take 2 years to rise to 22. The compound interest calculated in this way is 19% per annum.

The appeal of this formula is that you make your own judgement, choose, and estimate the value of the stock to see if it's worth investing in.

You can find it in the third edition of “Securities Analysis”. The reason I'm giving this example is because when Graham wrote this book, he said to me that I have a lot of things to decide, and you told me what to write in the book. I chose this formula which I thought was very interesting. Because you can decide for yourself what the company's value is and how long it will take to reach that value.

Q18: Regarding asset allocation, you said that you prefer stocks over bonds. How many positions do you have in one stock? What is the maximum position of a stock in the portfolio?

Answer: It depends on how much money you have and how much you are willing to invest in the stock market. My investments are very diverse. I own more than 100 stocks, so each stock doesn't take up too much position. If you really think a stock is good, and you are very optimistic, then you can invest 20% of the position. 20% is my limit. (Moderate diversification can reduce risk) Assuming you have $1 million, how do you allocate your investment? If you are optimistic about a certain stock and have invested 200,000 US dollars, that's already a lot. But if you invest $500,000, you're putting half of your total investment position at risk.

So you have to control your investment limits, and if you manage other people's money, you won't make them uneasy. So you might have a lower limit for a single stock, such as 10% of the total position. So, it depends on how optimistic you are about your own judgment.

Question 19: When you review a company, do you just read financial history and annual reports, do you do any other research?

A: I like to buy companies whose market capitalization is less than book value. That gave me a certain level of protection. I also like companies that don't have a lot of debt. It also gave me a degree of protection. Then you analyze the company itself, which may not be a great company, but has significant book assets and is well-managed.

You look back at the past 20 years of history. There is an article about me. In the article, I used six stocks as examples of recommended stocks. You may not agree with my recommendation, but the article was published in Forbes magazine on February 11th. This might help you understand what I did in the past; I don't know what I'll become in the future.

Question 20: You said you would avoid industries that make you uneasy, so which specific industry are you comfortable with?

Answer: I'm not sure I understood your question. I love businesses that make products. I haven't bought shares in airline companies because I don't know these companies very well. The airline company has experienced very good growth, but the stock performance is average.

The rapid growth of a business isn't necessarily good for you, if you can't make a profit on the corresponding stock investment. I would buy a company with a relatively simple asset structure and very little debt. Then trace the company's operating performance over the past 20 years and read the annual report.

What I don't like the most is the misconduct of the company's management. I'll stay away from people like this; they'll take advantage of you. If you manage other people's money, you have to take responsibility, so you have to be careful. I like to hold stocks, and even when they fall, they have some room to protect. Normally, the outlook for such stocks is not very good. For example, through ValueLine, you can understand the stock situation ten years ago, current book value, and debt structure.

There are many securities analysts who use computers to understand. But computers don't think. So I like people as terminals for thought rather than numbers. The important thing is not to lose money; you have customers and you have to take responsibility. Graham is a very thoughtful person, and his “Smart Investor” is worth reading. If you lose money, you and your customers will feel uneasy. So the way you can avoid losing money is to buy undervalued stocks that won't go bankrupt. For example, when an industry is in trouble, you need to compare and balance current difficulties with future opportunities.

QUESTION 21: I'd like to ask you one last question. What's the most important thing you've learned in your investing career over the past 50 years?

Answer: Honesty is the best thing you can have and can solve many problems. You have good morals. I think I was basically inspired by your family, and I would stay away from trouble.

Editor/jayden