Value investing, plainly
On value, price, risk, holding periods, and the honest arithmetic of returns — written for my partners while running a value fund.
Cheap out-of-the-money puts as crash insurance
Staying invested in good times while keeping dry powder for crashes is the perennial squeeze of portfolio management, and both shorting and holding cash exact a steep toll. The alternative here is buying deeply out-of-the-money puts for pennies, dead weight in most years but capable of returning many multiples when volatility spikes and prices fall, handing you cash at the exact moment bargains appear.
How many years until price catches value
Value investing rests on the gap between what a business is worth and what it costs, yet almost no one asks how long that gap takes to close. Rolling-period data on the S&P 500, Berkshire, and Coca-Cola gives an uncomfortable answer: true convergence of price and value can take twenty-five years or more, though buying cheaply, sticking to quality, and holding a portfolio can meaningfully shorten the wait.
Why big U.S. banks still had room to run
The 2011 thesis on big American banks, that they were under-earning, cheap on tangible book, and destined to normalize, had largely played out by 2018, yet the case for holding wasn't finished. Overcapitalized and returning nearly all their earnings through buybacks and dividends, with rising rates and flat costs at their backs, the banks could still deliver double-digit returns, provided the credit cycle didn't intervene.
Rolling returns beat the trap of trailing numbers
Trailing one-, three-, five-, and ten-year returns hang on two arbitrary dates and can flatter or condemn a manager on the strength of a single lucky stretch. Rolling-period statistics fix this by asking how often a manager beat the benchmark across every possible holding window, and running the numbers on Buffett, Schloss, Munger and a dozen other value greats reveals who was genuinely consistent.
Why your real return differs from the reported one
The return your manager reports and the return you actually earned can diverge sharply, and the reason hides in which formula gets used. Time-weighted return flatters the manager by ignoring your cash-flow timing, while the internal rate of return captures what really happened to your dollars, rewarding the investor who added money into a downturn and punishing the one who fled it.
Comparing leverage vehicles, and the warrant trap
A margin loan and a call option both buy you leverage, but their costs look nothing alike until you convert them to a common, apples-to-apples measure. Doing so for the post-crisis TARP warrants exposes a trap the author fell into himself: a warrant's cost of leverage climbs as the stock falls and shrinks as it rises, so warrants meant to amplify Bank of America's recovery barely outran the common stock.
Price, growth, and holding period set your return
Every investment return comes down to three things: the price paid, the value ultimately realized, and how long you wait for it. Working through high-, low-, no-, and negative-growth companies shows each has a natural 'sweet spot' holding period, with compounders rewarding patience and a willingness to slightly overpay, while melting ice cubes punish anyone who lingers no matter how cheap the entry.
Waiting in cash for the crash usually loses
Holding cash to pounce on the next crash feels prudent, but a century of backtests says it usually costs you, even granting perfect timing on when to deploy, and worse still once taxes on the extra turnover are counted. Cash earns its keep only in a narrow case: an active investor volatile enough to suffer thirty-five-percent drawdowns who can reliably put that cash to work at the bottom.
The after-tax bar active investors must actually clear
Beating the index before taxes isn't enough to justify picking stocks in a taxable account, because the active investor's higher turnover triggers taxes the index holder gets to defer. Modeling that gap across returns, turnover, and holding periods yields the precise extra outperformance an active manager must clear just to tie a passive fund after tax.
How short holding periods quietly tax away returns
Trading frequently doesn't just rack up brokerage fees; every sale is a taxable event, and each one quietly erodes your compounding. Because the government defers capital-gains tax until you sell, a long holding period acts as an interest-free loan working on your behalf, which is why the trader must earn several points more per year, pre-tax, just to match the patient investor's after-tax result.
Risk is the whole distribution, not the outcome
A realized return is only one draw from the full distribution of outcomes an investment could have produced, which is why a stellar year can hide reckless risk and a mediocre one can reflect real discipline. Picturing every possible result as a 'graph' reframes risk as the probability of permanent capital loss, and argues for the manager whose curve almost never touches ruin.