RMA Presents: “Learning from Luminary Investors: The Wisdom of Warren Buffett, Ben Graham and Peter Lynch”
By Frank Scarpa
At the February 22 meeting of the Retired Men’s Association, Hollister Sturges introduced the speaker, John Reese, an RMA member and founder and CEO of the financial website Validea and Validea Capital Management. An alumnus of MIT, he also has an MBA from Harvard Business School. He is the author of two books on quantitative investing.
Reese has been “curious” about the stock market since age 11. While at MIT, he developed an interest in artificial intelligence, and subsequently developed proprietary algorithms and went on to found two companies which grew over nine years. An avid reader of books and journals about investing, John was further stimulated by reading books such One Up on Wall Street by Peter Lynch.
Reese began his presentation with thumbnail sketches of luminary Wall Street author/investor gurus. The list was long, including Benjamin Graham, Ken Fisher, Joel Greenblatt, John Neff, William O’Neill, James O’Shaughnessy, Joseph Piotrowski, Martin Zweig, Tom and David Gardner, as well as Buffett and Lynch, among others. Each of these men had made significant contributions to the field of investment strategy. But John chose to give us a more in-depth insight to the lessons imparted by the three men in the title of his talk.
Warren Buffett has had a track record of 20% annual gains (as opposed to 10% for the S&P), one of the best in the field. Notably, 99% of Buffett’s wealth had been earned after he reached age 50. He still lives in his 1958 house in Omaha, and he has pledged to donate 99% of his wealth outside of his family. Buffett’s firm, Berkshire Hathaway, employs 317,000 people, but he relies heavily on a small number of hand-picked managers. Reese delineated Buffet’s criteria for choosing investments: quality of management, an “economic moat” which protects the company’s strength, valuation, a long-term orientation, a business that is “simple and understandable,” a good track record, a focus on core competencies, allied interests (between management and shareholders), and the avoidance of mistakes and fads.
Once it is decided that a company is a “Buffett company,” the focus shifts to the attractiveness of the price and the consistency of earnings over 10 years. Low debt and the company’s confidence in itself, manifested by its buying back of stock, both factor into Buffett’s acquisition decision. Reese used Apple as an example of a stock that appealed to Buffett for many of these reasons. He then graced us with some pithy comments from Buffett: “The most important quality in an investor is temperament,” “A long-term orientation is critical,” “Forecasts are virtually worthless,” and “I like buying quality merchandise when it is marked down.”
Peter Lynch headed the Magellan Fund from 1977 to 1990, with 29% annual returns over a 14-year period. He had a firm belief in diversification. He invested in companies he knew (remember L’Eggs and Au Bon Pain?). His research had to reveal a high-quality company with a long-term perspective. He advised avoiding “over-hyped” stocks and Wall Street analysts. His categories were “slow growers,” “fast growers” and “stalwarts.” The valuation to growth rate ratio was important and should ideally be less than 0.5. Debt, cash flow and net cash factored into the definition of quality. Reese used Conoco Phillips as an example of a Lynch pick.
Some quotes from Peter Lynch: “In this business, if you are good, you are right six out of 10 times” and “What the market is going to do in one or two years, you don’t know.”
Ben Graham was a deep value investor, called “the father of value investing.” He was a rules-based quantitative investor. Reese used Winnebago as an example of a Graham stock pick. Quotes from Graham include “The market is a voting machine” and “Best to be a realist who sells to optimists and buys from pessimists.”
John Reese’s summary advice was to take a long-term view. Short term investing is like a casino. Take a deep dive into investing, and have a disciplined process. Finally, be contrarian.
A brief but lively Q&A followed, covering such topics as index funds (which are also subject to ups and downs), the ultimate use of AI as a stock-picking tool (“not just yet”), high-frequency trading, cryptocurrency (not so enthusiastic) and monopolies.
To see the full presentation, go to https://greenwichrma.org/, cursor to “Speakers” and click on “Speaker Videos.”
The RMA’s upcoming presentation, “America: Underwater and Sinking, Time to Surface with Lessons Learned” by Jim Lockhart is scheduled for 11 AM on Wednesday, March 8. How solvent is the US government? Jim Lockhart will discuss the financial challenges facing our nation as presented in his just published book. Lockhart, a former nuclear submarine officer, will speak about managing government agencies that are deeply underwater and how to help them and the government “surface.”
His account opens with a quote from Ben Bernanke, observing that the U.S. Government is “an insurance company with an army.” There are over 150 government insurance entities accounting for two-thirds of the government’s expenditures. Few are based on sound insurance principles and are “underwater,” meaning their future costs are more than their future income. The unsustainable finances of the US government are underwater.
The next part of Bernanke’s quote was that the costs of healthcare and an aging society will be “a huge fiscal burden.” Drawing on his experiences running four major government insurance companies, Lockhart suggests ways to lessen the “huge fiscal burden,” to better manage the government, and to better serve the American people.
Lockhart has had a long, distinguished career in the government and private sector. From 1989 to 2003, he was executive director of the Pension Benefit Guaranty Corporation, (PBGC). From 2002 to 2006 he was the principal deputy commissioner/COO at Social Security. From 2006 to 2009, he was the director of the Federal Housing Finance Agency (FHFA), regulator of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and its predecessor agency, OFHEO. He was also a member of the TARP Oversight Board with the Fed and SEC chairs and secretaries of Treasury and HUD which addressed the financial crisis of 2008-9. His private sector experience includes serving on four public companies’ boards including Virgin Money in the UK. He co-founded a risk management firm and served in senior positions at a reinsurance company, an insurance broker, an investment bank and a major oil company. From 2009 to 2018 he was vice chair of WL Ross & Co., leading their financial services investments.
He is currently chair of the Bruce Museum and a senior fellow at the Bipartisan Policy Center where he co-chaired a Commission on Retirement Security with former Senator Conrad (D-ND).
Jim graduated from Yale University (BA) and Harvard Business School (MBA)
To stream the presentation by Mr. Lockhart at 11 AM on Wednesday, March 8, click on https://bit.ly/30IBj21. This presentation will also be available on local public access TV Channels, Verizon FIOS channel 24 and Optimum (Cablevision) channel 79.
Note: The views expressed in these presentations are those of the speakers. They are not intended to represent the views of the RMA or its members.
RMA speaker presentations are presented as a community service at no cost to in-person or Zoom attendees, regardless of gender. The RMA urges all eligible individuals to consider becoming a member of our great organization, and thereby enjoy all the available fellowship, volunteer, and community service opportunities which the RMA offers to its members. For further information, go to https://greenwichrma.org/, or contact our membership chairman (mailto:email@example.com).