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Big Money Thinks Small: Biases, Blind Spots, and Smarter Investing (Columbia Business School Publishing) Hardcover – August 15, 2017
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Tillinghast has built an outstanding investment record over three decades by being smart and disciplined. Now, all of us can benefit from his hard-won wisdom and perceptive insights, which are found on literally every page of this fine book. (Seth A. Klarman, Portfolio Manager and CEO, The Baupost Group, LLC)
For decades I have admired and learned from Joel Tillinghast’s extraordinary investment prowess. Whether you are a professional or an individual investor, you will be a better investor after reading and absorbing the wisdom in this book. (Bill Miller, founder and CIO, Miller Value Partners)
Tillinghast provides a very useful checklist of the required due diligence of investments, the tenets of value investing, the need to more carefully understand the culture and rule of law of foreign countries before investing in them, and how to stay within your circle of competence. (David Kass, University of Maryland)
Written for investors at all levels, this practical, no-nonsense guide . . . empower[s] readers to generate their own informed decisions. (Publishers Weekly)
About the Author
Joel Tillinghast is a Chartered Financial Analyst (CFA) charterholder and thirty-six-year veteran of the investments industry. He has been the manager of the Fidelity® Low-Priced Stock Fund since 1989.
Top customer reviews
The author gives you a recipe for how to pick good stocks, but he doesn’t give you a machine that produces them. In a style that is clever and discursive, he summarizes his main ideas at the beginning and end of the book, and explains the ideas in the middle of the book. The ideas are simple, but learning to apply them will take a lifetime.
Here are the five ideas as written in the beginning (page 3):
1) Make decisions rationally
2) Invest in what we know (did I mention Peter Lynch wrote the foreword to the book?)
3) Worth with honest and trustworthy managers
4) Avoid businesses prone to obsolescence and financial ruin, and
5) Value stocks properly
At this point, some will say “You haven’t really given us anything! These ideas are too big to be useful!” I was surprised, though, to see that the same five points at the end of the book said more (page 276). Ready?
1) Be clear about your motives, and don’t allow emotions to guide your financial decisions
2) Recognize that some things can’t be understood and that you don’t understand others. Focus on those that you understand best.
3) Invest with people who are honest and trustworthy, and are doing something unique and valuable.
4) Favor businesses that will not be destroyed by changing times, commoditization, or excessive debt.
5) Above all, always look for investments that are worth a great deal more than you are paying for them.
That says more, and I think the reason they are different is that when you read through the five sections of the book, he unpacks his initial statements and becomes more definite.
Much of the book can be summarized under the idea of “margin of safety.” This is a type of value investing. When he analyzes value, it is like a simplified version of reverse discounted cash flows. He tries to figure out in a broad way what an investment might return in terms price paid for the investment and what “owner earnings,” that is, free cash flow, it will generate on a conservative basis.
One aspect of the conservatism that I found insightful is that he assumes that the terminal value of an investment is zero. (page 150) In my opinion, that is very smart, because that is the area where most discounted cash flow analyses go wrong. When the difference between the weighted average growth rate of free cash flow and the discount rate is small, the terminal value gets really big relative to the value of the cash lows prior to the terminal value. In short, assumptions like that say that the distant future is all that matters. That’s a tough assumption in a world where companies and industries can become obsolete.
Even though I described aspects of a mathematical calculation here, what I did was very much like the book. There are no equations; everything is described verbally, even the math. Note: that is a good exercise to see whether you understand what the math really means. (If more people on Wall Street did that, we might not have had the financial crisis. Just sayin’.)
One more fun thing about the book is that he goes trough his own experiences with a wide variety of controversial stocks from the past and his experiences with them. His conservatism kept him a great number of errors that tripped up other celebrated managers.
I learned a lot from this book, and I enjoyed the writing style as well. He clearly put a lot of effort into it; many people will benefit from his insights.
His methods are a lot like mine, and he clearly put a lot of thought into this book. That said, he doesn’t understand insurance companies as well as he thinks (I’m an actuary by training). There are a number of small errors there, but not enough to ruin a really good book.
Summary / Who Would Benefit from this Book
I highly recommend this book. This is a book that will benefit investors with moderate to high experience most. For those with less experience, it may help you, but some of the concepts require background knowledge.
Overly levered companies, especially ones that made too large and irrational acquisitions, are more likely to cause permanent impairment of capital. It is critical to dig into the competitive landscape, peers trends, who is losing or gaining market share and the capital allocation track record of the management team. Joel authored a great book and well deserves the reputation as an early pioneer of small and neglected companies research. I ding him one star because I wanted to read more about downside analysis. Landmines that investors constantly step on could have been more thoroughly covered. A win by not losing mentality is warranted more in this book. I spend a third of my research time on downside risks to get a better grip on the risk/reward ratio with rough outcome probabilities. To think as much about what can go wrong and its likelihood, instead of getting too seduced by the upside or apparent business model niche.
Nonetheless, I am grateful for this book and it makes my top ten books list. It is a little sad that he seemed forced to go up the market cap size spectrum so much as assets flowed in. From less than $1 billion to $7 billion median and $23 billion weighted average lately. The turning over rocks and unlocking inefficiencies remain more abundant under $7 billion. My favorite and most fertile hunting ground!
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This is - first and foremost - a book about investing, not a book about...Read more