“We have gotten to the point where everything the government does is counterproductive; the conclusion, of course, is that the government should do nothing at all, that is, should retire quickly from the monetary and economic scene and allow freedom and free markets to work.”
Get your Free
financial review
This correspondent’s first professional betrayal came, inevitably, by way of government. During the European Exchange Rate Mechanism (ERM) crisis of 1992 and barely a year into our first job in the City (as a bond salesman) we watched, largely on the sidelines, as Europe’s shambolic currency union began to disintegrate. Not knowing any better, we took our politicians at face value when they said they would do whatever it takes to keep the pound sterling in the ERM. An important lesson: never believe anything from politicians until it’s been officially denied.
We still remember an account of Black Wednesday from a publication that might even have been called ‘Central Banker’. In a desperate attempt to keep the pound hitched to an unsustainable exchange rate against the Deutschmark, the British chancellor, Norman Lamont, in conjunction with the Bank of England, managed to burn through something like £3 billion – which was a lot of money at the time. The publication in question made a memorable comparison. It was as if the chancellor had spent that afternoon casually lobbing schools and hospitals into the North Sea.
Not that monetary betrayals are anything new. Last week we came upon this X thread by user Tomas Greif (@TomasGreif):
“In 1953, the Czechoslovak government legally stole the life savings of its citizens overnight. My grandfather was 20 when it happened and it impacted him so much that he would still talk to me about it 50 years later. Here’s how it all went down:
“The Czechoslovak government faced tough economic challenges after World War II. High inflation and an imbalance between consumer demand and supply, caused by the continuation of the rationing system from WWII, were creating major economic problems.
“Their “solution” was a “currency reform.” The goal was to reduce the currency’s value to combat inflation and align the money supply with the scarce availability of goods. The government hoped it would give them more control over the economy through centralized planning.
“But the government initially lied to citizens. Just 14 days before the reform, President Zápotocký publicly denied any plans for currency changes.
“Then on May 31, 1953, they dropped the bomb: effective immediately, all currency would be devalued. The first 300 Kčs per person were exchanged at a rate of 5:1 (old:new). For larger savings, the government applied a crushing 50:1 ratio.
“Imagine waking up to find your 5,000 Kčs in savings suddenly worth just 100. A lifetime of work evaporated overnight by government decree.
“My grandfather didn’t have a lot of savings as a 20-year-old. So, for him, it wasn’t so much about the money lost; it was the betrayal he and so many others felt that stuck with him.
“The Czech people were outraged. Workers – the very people the communist regime claimed to champion – took to the streets. Protests broke out in Plzeň and elsewhere. The government cracked down hard on any form of dissent further deepening public distrust.
“The currency reform did manage to bring inflation down, but at the cost of significantly lowering the standard of living for Czech citizens. It was also essentially a state bankruptcy, as it nullified state obligations to its citizens.
“The 1953 reform is remembered as one of the most invasive economic policies in Czechoslovak history. It symbolizes the harsh realities of communist economic planning and is still often cited in economic discussions..
“Retweet this to help others learn about how governments can use currency to steal from their citizens.”
With the passing of time, of course, you start to see the world not in terms of black and white, but in varying degrees of grey, shading into infinite permutations of nuance. Dogmatism gives way to pragmatism. Less experienced investors and market analysts may crave certainty, but most market participants ultimately come to terms with a degree of doubt.
Or perhaps they don’t.
It would be difficult to say for sure, but our strong suspicion is that most investors have no hard and fast approach – no over-arching philosophy as such – to the practice of investing. If this is true, it’s also an uncomfortable truth, in that the state is in no position to look after us and our lifetime savings and pension wealth in perpetuity, so we will have to do so ourselves, and shepherd our individual wealth pots as best we can – or do so in the company of hired help. But the principles of investing aren’t taught in our schools or universities. Unless we have well-meaning relatives with practical financial and investment experience, we all have to struggle along as best we can, under our own steam.
This correspondent began his City career in the bond market – in part because none of the media sectors that he applied to would employ him. The beauty of the bond market is that it’s a good, fast teacher of all things macro. Those who work in the stock market are essentially telling tales to each other all day. But the bond market is moved by slower, denser, more profound and measurable forces – like inflation, interest rates, debt ratios and GDP growth.
But our financial education (experience, really) properly began when we left the bond market to work as a private client wealth manager at Merrill Lynch in the late 1990s. To help plug some of the gaps in our experience of the financial markets, we fell upon any reading material that looked like it might help make us a more rounded investor.
Two books in particular launched us up that learning curve.
Against the Gods by Peter L. Bernstein gave us a sense of the full history of risk – what it means, and how the human mind co-opted it into business. It also introduced us to Daniel Bernoulli, the Renaissance Man who managed to convince us, centuries after his death, that absolute return investing (the objective of striving for constant, positive real returns allied with ongoing capital preservation) was the only sort of investing that made intellectual sense.
The Origin of Wealth by Eric Beinhocker then gave us a brief but eminently readable summary of the various principles of economic theory.
But books can only get you so far. Raw experience is a better teacher. And we were happy to seek counsel from any number of sensible and well-intentioned friends, relatives and colleagues.
We then had the good fortune to be already moving in Austrian School economic circles by the time the Global Financial Crisis hit, in 2007/8. So while, like everybody else, we sought answers to how we’d all managed to become trapped in such a gigantic financial mess, we at least had people on hand who could help provide those answers.
To this end, we highly recommend this recent discussion with the celebrated Austrian School author and professor Jörg Guido Hülsmann.
So much for economic history. What arguably matters at least as much, is a framework by which we can invest.
First things first. Despite what conventional investment theory says, there is no such thing as homo economicus, a cool, dispassionate calculation engine that walks through the financial markets calmly assessing the risks and returns of all potential investments through a prism of cold logic. Instead, there is a swarm of hot, irrational human beings, many of whom are desperate to make a fast buck.
Jim O’Shaughnessy is the author of a superb analysis of long run returns from the US stock market – What Works on Wall Street. It is another classic to add to the list above of recommended reading. Some time ago, Jim tweeted the following thread:
1) I believe that the highest probability bet you can make in your investment strategy is that human nature will remain a constant for the foreseeable future. For my book “Predicting the Markets of Tomorrow”, I analyzed nearly 200 years of data
2) and found that the rolling 20-year real rate of return to financial markets ebbs and flows with a remarkable degree of consistency. I believe this is so primarily because human beings are responsible for the economic and stock market cycles.
3) While the types of companies and industries that get us excited have and will continue to change over time, our reactions to them will remain the same—we’ll get unusually excited about the new and over-price it and be blasé about the old and under-price it.
4) Be it steamboats, railroads, telegraph and telephones, automobiles, motion pictures, radio, TV, aluminium, “space-age” technology, the first computer makers, internet stocks, nanotechnology or quantum computers, our human reactions to innovation are sure to persist.
5) Just as in the past, we will more than likely drive their valuations to unsustainable levels. Our basic human nature is probably more responsible for the long-term ebbs and flows in the market than any single economic event or innovation.
6) And since they are unlikely to change, we can confidently presume that we will make the same mistakes and errors again, again and again. We will panic in bear markets and often sell near the bottom.
7) We will become elated during bull markets and become more and more confident near the top. We pay the highest price for a widely agreed upon consensus. Yet I’ve also learned that it’s virtually impossible to forecast the ups and downs of markets.
8) The good news is, if you are investing for the long-term, you don’t have to—I’m 58 years old, but my time horizon is infinite because I want to leave money to the people I love and the charities I care about.
9) Often in investing, the best thing to do is nothing. It’s boring. It’s incredibly dull. You won’t have any great stories about your market savvy at dinner parties. But if you can simply remain dispassionate about all the emotionally charged things happening
10) around you day-to-day, you will come out ahead of virtually everyone else in the long-term. Want proof? I wrote most of this in 2006, and it is as relevant today as it was then. And will probably be equally relevant in 2026.
11) Much of life is filled with uncertainty which causes stress and worry. Remind yourself that most of these stomach-churning events are things that you have NO control over. Focus only on what you DO have control over.
12) 10% of the impact of events are due to the event itself and 90% is due to how we react to it. That’s something that, if you work on it, you CAN control. Successful investing is simple to think about, but incredibly hard to actually do.
13) Finally, remember that the best investment you can make is in yourself. If you can turn these simple actions into habits, your future returns will allow you to, as @alphaarchitect puts it, compound your face off. Get after it.
Amen to that.
The reason we were drawn to so-called Austrian economic theory is quite simple. It’s the only economic theory we’ve come across that makes any sense. More to the point, the Austrian school teaches us that a) value is subjective, and – just as importantly – that b) all wealth is ultimately created by entrepreneurial activity. Without the entrepreneur, we have no functioning economy. All forms of governments are effectively just redistribution engines – and some are clearly worse for the public good than others.
So we get to the conclusion that wealth is created by the entrepreneur. Which entrepreneur should we then back with our money ?
Another book that is required reading for any investor is William Thorndike’s The Outsiders, which essentially identifies the ‘secret sauce’ that makes world-beating companies and world-beating investments.
Thorndike cites Henry Singleton of Teledyne as his role model:
“Known today only to a small group of investors and cognoscenti, Henry Singleton was a remarkable man with an unusual background for a CEO. A world-class mathematician who enjoyed playing chess blindfolded, he had programmed MIT’s first computer while earning a doctorate in electrical engineering. During World War II, he developed a “degaussing” technology that allowed Allied ships to avoid radar detection, and in the 1950s, he created an inertial guidance system that is still in use in most military and commercial aircraft. All that before he founded a conglomerate, Teledyne, in the early 1960s and became one of history’s great CEOs.
“Conglomerates were the Internet stocks of the 1960s, when large numbers of them went public. Singleton, however, ran a very unusual conglomerate. Long before it became popular, he aggressively repurchased his stock, eventually buying in over 90 percent of Teledyne’s shares; he avoided dividends, emphasized cash flow over reported earnings, ran a famously decentralized organization, and never split the company’s stock, which for much of the 1970s and 1980s was the highest priced on the New York Stock Exchange (NYSE). He was known as “the Sphinx” for his reluctance to speak with either analysts or journalists, and he never once appeared on the cover of Fortune magazine. [Nota bene, Elon Musk.]
“Singleton was an iconoclast, and the idiosyncratic path he chose to follow caused much comment and consternation on Wall Street and in the business press. It turned out that he was right to ignore the skeptics. The long-term returns of his better-known peers were generally mediocre—averaging only 11 percent per annum, a small improvement over the S&P 500.
“Singleton, in contrast, ran Teledyne for almost thirty years, and the annual compound return to his investors was an extraordinary 20.4 percent. If you had invested a dollar with Singleton in 1963, by 1990, when he retired as chairman in the teeth of a severe bear market, it would have been worth $180. That same dollar invested in a broad group of conglomerates would have been worth only $27, and $15 if invested in the S&P 500. Remarkably, Singleton outperformed the index by over twelve times.
“Using our definition of success, Singleton was a greater CEO than Jack Welch. His numbers are simply better: not only were his per share returns higher relative to the market and his peers, but he sustained them over a longer period of time (twenty-eight years versus Welch’s twenty) and in a market environment that featured several protracted bear markets.
“His success did not stem from Teledyne’s owning any unique, rapidly growing businesses. Rather, much of what distinguished Singleton from his peers lay in his mastery of the critical but somewhat mysterious field of capital allocation— the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders..
“CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations. Most CEOs (and the management books they write or read) focus on managing operations, which is undeniably important. Singleton, in contrast, gave most of his attention to the latter task.
“Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options. Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders.
“Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools..”
So it turns out that two of the most important words in all investing are ‘Capital Allocation’. Those CEOs – and fund managers, for that matter – who can put successful capital allocation into practice will simply beat everybody else.
So seek out the very best capital allocators that you can find. Then what ?
The last ingredient in the dish of investment success is valuation. Ensure that you never consciously overpay for the shares of any high quality business.
There are clearly times when a great company’s share price gets ahead of itself. By the same token, there are clearly times when the share price trades at a discount to the company’s inherent value. So try and only buy the shares of quality businesses when they’re on sale. This requires discipline, admittedly, but the market is never entirely rational, and that provides the rest of us with opportunity. As the US fund manager Cullen Roche has nicely put it,
The stock market is the only market where things go on sale and all the customers run out of the store.
So this is the personal journey we’ve been on, for over three decades now. Of entering the City somewhat by accident, of getting a sense of how the markets work through practical exposure to those markets, and then by having the good fortune to be working with some of the brighter minds in finance and economics when the markets soured. Helped by some very useful books, and by some very bright – and principled – people that we’re lucky enough to still be in touch with today. You can listen to some of them here.
From Wikipedia:
“Trust, but verify (Russian: доверяй, но проверяй, romanized: doveryay, no proveryay, IPA: [dəvʲɪˈrʲæj no prəvʲɪˈrʲæj]) is a Russian proverb, which rhymes in Russian. The phrase became internationally known in English after Suzanne Massie, a scholar of Russian history, taught it to Ronald Reagan, then president of the United States, who used it on several occasions in the context of nuclear disarmament discussions with the Soviet Union.”
In the light of the events of the last five years, given the behaviour of governments and legacy media alike, and in the context of a global monetary system that shows every sign of being replaced even as you read these words, the admonition “distrust, and verify” seems like altogether sounder advice.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“We have gotten to the point where everything the government does is counterproductive; the conclusion, of course, is that the government should do nothing at all, that is, should retire quickly from the monetary and economic scene and allow freedom and free markets to work.”
Get your Free
financial review
This correspondent’s first professional betrayal came, inevitably, by way of government. During the European Exchange Rate Mechanism (ERM) crisis of 1992 and barely a year into our first job in the City (as a bond salesman) we watched, largely on the sidelines, as Europe’s shambolic currency union began to disintegrate. Not knowing any better, we took our politicians at face value when they said they would do whatever it takes to keep the pound sterling in the ERM. An important lesson: never believe anything from politicians until it’s been officially denied.
We still remember an account of Black Wednesday from a publication that might even have been called ‘Central Banker’. In a desperate attempt to keep the pound hitched to an unsustainable exchange rate against the Deutschmark, the British chancellor, Norman Lamont, in conjunction with the Bank of England, managed to burn through something like £3 billion – which was a lot of money at the time. The publication in question made a memorable comparison. It was as if the chancellor had spent that afternoon casually lobbing schools and hospitals into the North Sea.
Not that monetary betrayals are anything new. Last week we came upon this X thread by user Tomas Greif (@TomasGreif):
“In 1953, the Czechoslovak government legally stole the life savings of its citizens overnight. My grandfather was 20 when it happened and it impacted him so much that he would still talk to me about it 50 years later. Here’s how it all went down:
“The Czechoslovak government faced tough economic challenges after World War II. High inflation and an imbalance between consumer demand and supply, caused by the continuation of the rationing system from WWII, were creating major economic problems.
“Their “solution” was a “currency reform.” The goal was to reduce the currency’s value to combat inflation and align the money supply with the scarce availability of goods. The government hoped it would give them more control over the economy through centralized planning.
“But the government initially lied to citizens. Just 14 days before the reform, President Zápotocký publicly denied any plans for currency changes.
“Then on May 31, 1953, they dropped the bomb: effective immediately, all currency would be devalued. The first 300 Kčs per person were exchanged at a rate of 5:1 (old:new). For larger savings, the government applied a crushing 50:1 ratio.
“Imagine waking up to find your 5,000 Kčs in savings suddenly worth just 100. A lifetime of work evaporated overnight by government decree.
“My grandfather didn’t have a lot of savings as a 20-year-old. So, for him, it wasn’t so much about the money lost; it was the betrayal he and so many others felt that stuck with him.
“The Czech people were outraged. Workers – the very people the communist regime claimed to champion – took to the streets. Protests broke out in Plzeň and elsewhere. The government cracked down hard on any form of dissent further deepening public distrust.
“The currency reform did manage to bring inflation down, but at the cost of significantly lowering the standard of living for Czech citizens. It was also essentially a state bankruptcy, as it nullified state obligations to its citizens.
“The 1953 reform is remembered as one of the most invasive economic policies in Czechoslovak history. It symbolizes the harsh realities of communist economic planning and is still often cited in economic discussions..
“Retweet this to help others learn about how governments can use currency to steal from their citizens.”
With the passing of time, of course, you start to see the world not in terms of black and white, but in varying degrees of grey, shading into infinite permutations of nuance. Dogmatism gives way to pragmatism. Less experienced investors and market analysts may crave certainty, but most market participants ultimately come to terms with a degree of doubt.
Or perhaps they don’t.
It would be difficult to say for sure, but our strong suspicion is that most investors have no hard and fast approach – no over-arching philosophy as such – to the practice of investing. If this is true, it’s also an uncomfortable truth, in that the state is in no position to look after us and our lifetime savings and pension wealth in perpetuity, so we will have to do so ourselves, and shepherd our individual wealth pots as best we can – or do so in the company of hired help. But the principles of investing aren’t taught in our schools or universities. Unless we have well-meaning relatives with practical financial and investment experience, we all have to struggle along as best we can, under our own steam.
This correspondent began his City career in the bond market – in part because none of the media sectors that he applied to would employ him. The beauty of the bond market is that it’s a good, fast teacher of all things macro. Those who work in the stock market are essentially telling tales to each other all day. But the bond market is moved by slower, denser, more profound and measurable forces – like inflation, interest rates, debt ratios and GDP growth.
But our financial education (experience, really) properly began when we left the bond market to work as a private client wealth manager at Merrill Lynch in the late 1990s. To help plug some of the gaps in our experience of the financial markets, we fell upon any reading material that looked like it might help make us a more rounded investor.
Two books in particular launched us up that learning curve.
Against the Gods by Peter L. Bernstein gave us a sense of the full history of risk – what it means, and how the human mind co-opted it into business. It also introduced us to Daniel Bernoulli, the Renaissance Man who managed to convince us, centuries after his death, that absolute return investing (the objective of striving for constant, positive real returns allied with ongoing capital preservation) was the only sort of investing that made intellectual sense.
The Origin of Wealth by Eric Beinhocker then gave us a brief but eminently readable summary of the various principles of economic theory.
But books can only get you so far. Raw experience is a better teacher. And we were happy to seek counsel from any number of sensible and well-intentioned friends, relatives and colleagues.
We then had the good fortune to be already moving in Austrian School economic circles by the time the Global Financial Crisis hit, in 2007/8. So while, like everybody else, we sought answers to how we’d all managed to become trapped in such a gigantic financial mess, we at least had people on hand who could help provide those answers.
To this end, we highly recommend this recent discussion with the celebrated Austrian School author and professor Jörg Guido Hülsmann.
So much for economic history. What arguably matters at least as much, is a framework by which we can invest.
First things first. Despite what conventional investment theory says, there is no such thing as homo economicus, a cool, dispassionate calculation engine that walks through the financial markets calmly assessing the risks and returns of all potential investments through a prism of cold logic. Instead, there is a swarm of hot, irrational human beings, many of whom are desperate to make a fast buck.
Jim O’Shaughnessy is the author of a superb analysis of long run returns from the US stock market – What Works on Wall Street. It is another classic to add to the list above of recommended reading. Some time ago, Jim tweeted the following thread:
1) I believe that the highest probability bet you can make in your investment strategy is that human nature will remain a constant for the foreseeable future. For my book “Predicting the Markets of Tomorrow”, I analyzed nearly 200 years of data
2) and found that the rolling 20-year real rate of return to financial markets ebbs and flows with a remarkable degree of consistency. I believe this is so primarily because human beings are responsible for the economic and stock market cycles.
3) While the types of companies and industries that get us excited have and will continue to change over time, our reactions to them will remain the same—we’ll get unusually excited about the new and over-price it and be blasé about the old and under-price it.
4) Be it steamboats, railroads, telegraph and telephones, automobiles, motion pictures, radio, TV, aluminium, “space-age” technology, the first computer makers, internet stocks, nanotechnology or quantum computers, our human reactions to innovation are sure to persist.
5) Just as in the past, we will more than likely drive their valuations to unsustainable levels. Our basic human nature is probably more responsible for the long-term ebbs and flows in the market than any single economic event or innovation.
6) And since they are unlikely to change, we can confidently presume that we will make the same mistakes and errors again, again and again. We will panic in bear markets and often sell near the bottom.
7) We will become elated during bull markets and become more and more confident near the top. We pay the highest price for a widely agreed upon consensus. Yet I’ve also learned that it’s virtually impossible to forecast the ups and downs of markets.
8) The good news is, if you are investing for the long-term, you don’t have to—I’m 58 years old, but my time horizon is infinite because I want to leave money to the people I love and the charities I care about.
9) Often in investing, the best thing to do is nothing. It’s boring. It’s incredibly dull. You won’t have any great stories about your market savvy at dinner parties. But if you can simply remain dispassionate about all the emotionally charged things happening
10) around you day-to-day, you will come out ahead of virtually everyone else in the long-term. Want proof? I wrote most of this in 2006, and it is as relevant today as it was then. And will probably be equally relevant in 2026.
11) Much of life is filled with uncertainty which causes stress and worry. Remind yourself that most of these stomach-churning events are things that you have NO control over. Focus only on what you DO have control over.
12) 10% of the impact of events are due to the event itself and 90% is due to how we react to it. That’s something that, if you work on it, you CAN control. Successful investing is simple to think about, but incredibly hard to actually do.
13) Finally, remember that the best investment you can make is in yourself. If you can turn these simple actions into habits, your future returns will allow you to, as @alphaarchitect puts it, compound your face off. Get after it.
Amen to that.
The reason we were drawn to so-called Austrian economic theory is quite simple. It’s the only economic theory we’ve come across that makes any sense. More to the point, the Austrian school teaches us that a) value is subjective, and – just as importantly – that b) all wealth is ultimately created by entrepreneurial activity. Without the entrepreneur, we have no functioning economy. All forms of governments are effectively just redistribution engines – and some are clearly worse for the public good than others.
So we get to the conclusion that wealth is created by the entrepreneur. Which entrepreneur should we then back with our money ?
Another book that is required reading for any investor is William Thorndike’s The Outsiders, which essentially identifies the ‘secret sauce’ that makes world-beating companies and world-beating investments.
Thorndike cites Henry Singleton of Teledyne as his role model:
“Known today only to a small group of investors and cognoscenti, Henry Singleton was a remarkable man with an unusual background for a CEO. A world-class mathematician who enjoyed playing chess blindfolded, he had programmed MIT’s first computer while earning a doctorate in electrical engineering. During World War II, he developed a “degaussing” technology that allowed Allied ships to avoid radar detection, and in the 1950s, he created an inertial guidance system that is still in use in most military and commercial aircraft. All that before he founded a conglomerate, Teledyne, in the early 1960s and became one of history’s great CEOs.
“Conglomerates were the Internet stocks of the 1960s, when large numbers of them went public. Singleton, however, ran a very unusual conglomerate. Long before it became popular, he aggressively repurchased his stock, eventually buying in over 90 percent of Teledyne’s shares; he avoided dividends, emphasized cash flow over reported earnings, ran a famously decentralized organization, and never split the company’s stock, which for much of the 1970s and 1980s was the highest priced on the New York Stock Exchange (NYSE). He was known as “the Sphinx” for his reluctance to speak with either analysts or journalists, and he never once appeared on the cover of Fortune magazine. [Nota bene, Elon Musk.]
“Singleton was an iconoclast, and the idiosyncratic path he chose to follow caused much comment and consternation on Wall Street and in the business press. It turned out that he was right to ignore the skeptics. The long-term returns of his better-known peers were generally mediocre—averaging only 11 percent per annum, a small improvement over the S&P 500.
“Singleton, in contrast, ran Teledyne for almost thirty years, and the annual compound return to his investors was an extraordinary 20.4 percent. If you had invested a dollar with Singleton in 1963, by 1990, when he retired as chairman in the teeth of a severe bear market, it would have been worth $180. That same dollar invested in a broad group of conglomerates would have been worth only $27, and $15 if invested in the S&P 500. Remarkably, Singleton outperformed the index by over twelve times.
“Using our definition of success, Singleton was a greater CEO than Jack Welch. His numbers are simply better: not only were his per share returns higher relative to the market and his peers, but he sustained them over a longer period of time (twenty-eight years versus Welch’s twenty) and in a market environment that featured several protracted bear markets.
“His success did not stem from Teledyne’s owning any unique, rapidly growing businesses. Rather, much of what distinguished Singleton from his peers lay in his mastery of the critical but somewhat mysterious field of capital allocation— the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders..
“CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations. Most CEOs (and the management books they write or read) focus on managing operations, which is undeniably important. Singleton, in contrast, gave most of his attention to the latter task.
“Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options. Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders.
“Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools..”
So it turns out that two of the most important words in all investing are ‘Capital Allocation’. Those CEOs – and fund managers, for that matter – who can put successful capital allocation into practice will simply beat everybody else.
So seek out the very best capital allocators that you can find. Then what ?
The last ingredient in the dish of investment success is valuation. Ensure that you never consciously overpay for the shares of any high quality business.
There are clearly times when a great company’s share price gets ahead of itself. By the same token, there are clearly times when the share price trades at a discount to the company’s inherent value. So try and only buy the shares of quality businesses when they’re on sale. This requires discipline, admittedly, but the market is never entirely rational, and that provides the rest of us with opportunity. As the US fund manager Cullen Roche has nicely put it,
The stock market is the only market where things go on sale and all the customers run out of the store.
So this is the personal journey we’ve been on, for over three decades now. Of entering the City somewhat by accident, of getting a sense of how the markets work through practical exposure to those markets, and then by having the good fortune to be working with some of the brighter minds in finance and economics when the markets soured. Helped by some very useful books, and by some very bright – and principled – people that we’re lucky enough to still be in touch with today. You can listen to some of them here.
From Wikipedia:
“Trust, but verify (Russian: доверяй, но проверяй, romanized: doveryay, no proveryay, IPA: [dəvʲɪˈrʲæj no prəvʲɪˈrʲæj]) is a Russian proverb, which rhymes in Russian. The phrase became internationally known in English after Suzanne Massie, a scholar of Russian history, taught it to Ronald Reagan, then president of the United States, who used it on several occasions in the context of nuclear disarmament discussions with the Soviet Union.”
In the light of the events of the last five years, given the behaviour of governments and legacy media alike, and in the context of a global monetary system that shows every sign of being replaced even as you read these words, the admonition “distrust, and verify” seems like altogether sounder advice.
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As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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