ad astra per alia porci

A Zebra in Lion Country
July 18, 2007, 1:49 pm
Filed under: investments/finance/economics

Personal notes from A Zebra in Lion Country by Ralph Wanger

The cover of the book makes it look like a children’s book, with a zebra and two hungry-looking lions gracing the cover. The title of the book also doesn’t help. However, the content of the book is anything but children book material.

A brief introduction to the author. Ralph Wanger is the legendary manager of the Acorn Fund, a fund that has grown $10,000 in 1970 to $618,000 in 1996. USA Today asked a group of portfolio managers whom they would choose to manage their personal wealth and Wanger came in first, with Warren Buffett coming in second.

Wanger is essentially a small-cap global investor. He has no biases towards any market. He formulates investment themes and chooses small-cap stocks to invest in based upon his evaluation of the future prospects of countries and industries. He straddles the value and growth divide and refuses to follow strictly to either; he believes in growth at a reasonable price and invests whenever it is profitable to do so.

What’s really interesting is that this book is written in 1997 and Wanger’s predictions are prescient. Amongst other accurate predictions, he forecasted the rise of China and India, the outsourcing phenomenon and the current account problems of the US. He formulates strategy around larger economic trends and patterns that he feels will be played out in the next few years, than identifying stocks that reflect the themes. He concentrates on areas that will benefit from strong economic, social or technological trends that will last four years or longer.

The book doesn’t teach quantitative methods of investment; rather, given Wanger’s propensity to use metaphors and analogies while making investment decisions, it is peppered with stand-out phrases and nuggets of investing wisdom. I shall list the interesting and relevant ones below:

  • Look for stocks that have basic value but are out of fashion.
  • If you want to stand out from the pack, you have to stand outside the pack.
  • At big companies you talk to executives. At small companies you talk to owners.
  • Dumbo could fly because he was a baby elephant. Adult elephants are aerodynamically unsound. Hence small-caps are better.
  • Small companies aren’t blanketed by research coverage.
  • Small is good, micro is not. For the littlest companies, one misstep and you’re out.
  • Look out for a company that has carved out a niche for itself.
  • A portfolio of well-researched small companies should be no riskier than a portfolio of large, well-known companies.
  • It is hard to sell an illiquid stock in a down market. The one sure antidote to the liquidity problem is to buy stocks you don’t have to sell for a good long time.
  • The market overreacts to all kinds of news.
  • There is a great difference between a great company and a great stock.
  • The fact that a stock has already moved up sharply doesn’t mean there isn’t more room for it to climb.
  • There is a steady flow of wealth from hopeful gamblers to the men who know what the odds really are.
  • Most people ignore probabilities and exaggerate risks.
  • Investors assess information emotionally, creating price distortions that the astute and nimble can exploit.
  • The further you stray from stocks you really understand, the more likely you are gambling rather than investing.
  • The growth of a middle class in developing countries is a very simple and powerful way to think about the future.
  • Unless you look at companies with a fresh perspective, you can’t hope to find stocks that are priced below their true value.
  • The best company in a marginal industry is worth much more than the third best company in a major industry.
  • A dull business run by good businessmen is far better than a glamorous business with mediocre management.
  • If you judge management solely by a company’s numbers and then pay more for the stock because of “good management”, you are guilty of what bridge players call the double-counting of face cards.
  • If a company’s inventories normally run 25% of sales and suddenly inventories rise to 50% of sales, you’d better start asking questions.
  • Try to invest in companies that you’d be happy to buy lock, stock and barrel at their current price.
  • Have a reason for buying every stock. As soon as the reason comes into doubt, ask yourself if it isn’t time for a change.
  • Most of what happens in the stockmarket in the short term is mostly noise.
  • The stock market is a reliable indicator of where the economy is headed, but you’ll get no help looking at events the other way round.
  • When the market’s going down, it’s not because you are stupid. And when it’s going up, it’s not because you are smart.
  • World market rules are catching up with the US- slowly.
  • Don’t keep all your assets in one currency.
  • Locals always have an edge. When investing overseas, you need a long-term reason to hold a stock, because you can’t outtrade the locals.
  • Too many people assume their money will be safe in a country where they wouldn’t drink the water.
  • Common sense and patience makes a good investor.

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