1. Establishing the Vanguard Fund

Philip Carret was born in 1896 as the only son in his family. At 21, he graduated from Harvard University with a degree in chemistry, and later briefly served in the military, working in various roles such as a Bonds broker, journalist, and researcher.

In May 1928, Carret established the Vanguard Fund with an initial size of only 25,000 dollars, and the Shareholders were all family or friends. For the next half-century, Carret personally managed the Fund, and even as it grew to over 0.225 billion dollars, his staff consisted only of his two sons, one granddaughter, and a few employees.

Carret's Vanguard Fund started off somewhat 'out of time.' The stock market crash of 1929 struck a heavy blow to the Capital Markets and the economy, with the Dow Jones Industrial Average not returning to pre-crash levels until 25 years later.

The stock market crash severely impacted Carret's Fund in its early days; however, from the mid-1930s until Carret's retirement, he maintained a long-term investment performance of over 10%. During the 55 years he managed the Fund, his annual compound return reached 13%.

Summarizing Carret's investment characteristics, many similarities with Buffett can be noted: he liked to concentrate his holdings, never owning more than ten different Stocks at the same time, covering no more than five Sectors, and he favored long-term holding.

He once stated, "A high turnover often indicates a poor judgment. Understanding when to Sell a particular Stock is extremely difficult." He advocated that no single stock should exceed one-fourth of the total investment amount, and it is best for half of the investment to be in short-term Bonds to reduce liquidity risk.

In terms of a preference for obscure stocks, Caret and Buffett indeed have astonishing similarities. Their friendship has lasted for half a century, and when Buffett once dissolved his own Fund, he recommended Caret as his successor to the Shareholders.

In 1963, Caret sold most of his shares in the Vanguard Fund, retaining only a small portion. He founded his own investment company, Carret & Company, which specialized in managing Assets for large Institutions and individuals until he retired at the age of 87.

II. 55 Years of Compound Returns

Caret established the Vanguard Fund in May 1928. At that time, there were about 25 Shareholders, all of whom were his family and friends. He managed this Fund for nearly half a century until his retirement. Over those 55 years, the annual Compound Return Rate of the Vanguard Fund was 13% (15% if calculated from the low point of the Great Depression).

This means that if someone invested $10,000 at the foundation of the Fund and reinvested the investment income received each year back into the Fund, by the time Caret retired, they would have received over $8 million (of course, this investment would have endured a 50% loss in the early 1930s).

Today, a 13% ROI is not an extraordinary number, but it remains quite significant when inflation is low. Regardless, maintaining even a very low Compound Rate over the long term can create miracles.

Now, Vanguard Management Company is a publicly traded company, and Caret holds only a small portion of its shares. Initially, the Vanguard Fund was operated independently by him; later, he merged with this management company and sold most of its shares.

In the Board of Directors of the Vanguard Fund, there were once three octogenarians: Caret himself, Jerome Preston, and Phil Cooley. Sometimes shareholders doubted whether these three elderly men were already outdated. Caret has always been confident in dispelling such doubts: he firmly believes that age can bring wisdom.

Three, Investment Preferences

"I like to trade Stocks in the OTC market. However, I am more conservative than most people. Many believe 'conservative' refers to companies like General Electric and IBM. But the Stocks I choose are generally not very popular. Stocks traded in the OTC market are not as easily manipulated as those traded on the New York Stock Exchange, and are less affected by mass psychology."

In this respect, Caret can to some extent be seen as an 'old-school' Warren Buffett. Indeed, they also bear a resemblance: round heads and a penchant for broad smiles.

Both have a rebellious character: they seek out what no one else wants. They both prefer obscure Stocks like water utility companies or bridge companies, and do not mind these Stocks being long neglected by the market. Particularly, both possess the patience expected of successful value investors. For many years, they have maintained regular communication.

Caret likes Stocks with consistently growing profits, but adds, "If a company's profits have increased for 15 consecutive years, the situation for the next year is likely to be worse."

"I like to read good balance sheets. I receive numerous annual reports. I go through all of them, at least giving them a quick glance. If the equity ratio is very low, or if the current ratio is very low, I won't look further. I don't want to see the word 'liabilities', and the current ratio must be at least greater than 2. If this is a utility company, I want to see reasonable financial ratios, favorable market Sectors, and a good regulatory environment."

Four, Owner Management

Another important criterion is that management must Hold a considerable proportion of the company's Stocks. I once corresponded with the Chairman of National Gypsum through letters. He owned 0.02 million shares of the company, but he sold them all at a price of 20 dollars. Today, so many shares are worth a lot of money, but back then they were only sold for 0.4 million dollars. I noticed that the company's president only owned 500 shares of the company, so I wrote a letter to the chairman.

However, the reply I received shocked me: 'How many shares Mr. Brown owns is his own business, and others have no say in it.' I completely disagree with this viewpoint. A Company Executive should at least invest his annual salary in the company's Stocks.

If he doesn't even have that level of loyalty to the company, he shouldn't be a key manager of the company. If they themselves don't want the Stocks, why should I buy them?” Caret retorted, adding that he always takes advantage of shareholder-signed proxies to look for companies with high insider ownership.

The principle of business is principle, and deviating from these principles is very dangerous. Some people are shrewd enough to do this, such as getting in and out quickly, but such people are rare. I have seen a report on the average lifespan of securities trading margin accounts. The average lifespan of these accounts is only two to three years. There was once a client who lasted 13 years before losing all his money, and his starting capital was several million dollars.

Regarding investment principles, Caret has 12 maxims:

1. Hold more than 10 Stocks, and these Stocks must cover 5 different Sectors.

2. Reassess each security held at least once every 6 months.

3. Securities that account for more than half of total Assets must show a profit.

4. When analyzing any stocks, profits should be considered as the last factor.

5. Be decisive in handling losing positions, but do not rush to close profitable positions.

6. Do not invest more than 25% of your funds in securities that you do not understand in detail.

7. Avoid 'inside information' like the plague.

8. Look for facts, not opinions from others.

9. Do not rely too heavily on rigid formulas when valuing securities.

10. When the stock market is running high, interest rates are rising, and the economy is prosperous, at least half of your funds should be invested in short-term Bonds.

11. Try to borrow little money or only borrow when the stock market is depressed, interest rates are very low or declining, and the economy is in recession.

12. Invest an appropriate proportion of funds to purchase long-term Call Options on companies with very optimistic prospects.

Editor/lambor