“He should be studied by every investor….If there ever was a hall of fame for investment advisers, he’d be among the first ten in it” – Warren Buffet on Carret.
As I started developing an interest in the world of stock markets, one of the first things I did was to study the successful investors. Initially, the more I read, the more I was intrigued. There seem to be no one unique approach and found each of the successful investors had something unique in their approach. It quickly dawned that I needed to choose my investing heroes and strategies wisely.
Philip Carret had an investing career spanning 79 years experiencing 31 bull markets, 30 bear markets, 20 recessions as well as the Great depression. This Harvard alumni started his career as a bond salesman before switching to writing for the Barron’s.
In 1928, with a seed capital from friends and family members he started Pioneer funds, one of the oldest mutual fund in the world. He delivered sterling returns over a long investment horizon and continued to be an active investor until he died aged 101 in the year 1998.
Carret’s 12 principles of investing
Carret in his 1930 seminal book The Art of Speculation outlines his 12 investing principles:
- Never hold fewer than 10 different securities covering five different fields of business;
- At least once every six months, reappraise every security held;
- Keep at least half the total fund in income producing securities;
- Consider (dividend) yield the least important factor in analyzing any stock;
- Be quick to take losses and reluctant to take profits;
- Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available;
- Avoid inside information as you would the plague;
- Seek facts diligently, advice never;
- Ignore mechanical formulas for value in securities;
- When stocks are high, money rates rising and business prosperous, at least half a given fund should be placed in short-term bonds;
- Borrow money sparingly and only when stocks are low, money rates low and falling and business depressed;
- Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.
Carret preferred stocks of companies which had a strong balance sheet, low leverage, current ratio of at least 2 to 1 as well as a strong management team which owned a significant amount of the stock.
For more on Carret and his investing legacy one can check out Valuewalk.com which has an excellent resource page containing reading material and video content.
My 3 Key takeaways
1. Power of “Patience”
“Patience can produce uncommon profits”—Patient Investor, 1995
He was once asked in a television interview: “What is the single most important thing that you have learned about investing over the past three quarters of a century?” His reply: “Patience.”
Carret strongly believed in the need for patience for every investor and he himself was willing to hold on for the “long: term:
- Bought shares of Greif Bros Cooperage Corporation at 68 cents per share in 1946 and held on to it for 48 years. The stock currently trades at 61.23 $ (3rd June 3, 2017)
- Bought shares of Neutrogena after he sampled a soap in a hotel room for 85 cents a share. The company was taken over by Johnson & Johnson 22 years later at $35 a share.
There are many more examples of his investing patience which have yielded fabulous returns. In today’s world where there is a craving for instant gratification and immediate results, “patience” seem to be a rare commodity.
One profitable approach to investing would be to buy a steadily growing company at a reasonable price and then sit tight on them to enable compound interest do its magic over the long term.
2. Being right two-thirds of the time
“ ..In investing its fine to be right two-thirds of the time”– Carret (source: Money masters of our time by John Train page 224).
Investing is more an art than a science. Surprisingly I find lots of mathematical formulae and calculations used extensively to calculate “precise” values in this field. If performing advanced calculations was the only requirement then all mathematicians would have been rich. As an investor or a money manager one needs to remind ourselves of this crucial point that we will not get it right 100% of the time.
There will be investments where the results don’t work out as originally planned even after putting in best efforts. Technology may become obsolete, regulations may change, promoters may lose interest etc…. There are multiple variables that are not in our direct control impacting our returns. Getting 6 or 7 picks out of 10 right is indeed getting the job well done.
3. Liking the off-beat stuff
“I have always been in the offbeat stuff. They are less subject to manipulation than New York Stock exchange companies, and are less affected by crowd psychology… I avoid fads like the plague” – Carret (source: Money masters of our time by John Train page 224).
Buy what analysts have taken off their buy lists. ”I don’t give a damn what they say,” says Carret. “They’re frequently wrong.”-Jason Zweig
Large caps which are tracked by hundreds of analyst may not be most fertile place while searching for multi-baggers. Small cap / Micro cap stocks which are having a steady growth in a niche market and backed by a sound management may provide good bargain hunting opportunities.
Carret loved the off-beat stocks:
- On his drive to office he started noticing lots of North American Van Line trucks on the motorway. He researched the company and picked up a stake when he liked what he researched. Shortly afterwards the truck company was in the radar of PepsiCo too and was promptly snapped up for a premium giving Carret a decent profit
- On another occasion he observed the bottle on the water cooler in his office and found it interesting. Carret researched the manufacturer, Liqui-box and bought shares at 10.50$. He eventually sold the stock at around 120$ per share
The learning is that what is in vogue today and recommended by every analyst may be a poor investment choice for the long term investors. An investor can pursue a conservative stock selection criteria in an offbeat areas & stocks where there is minimal institutional interest and still be massively successful.
Charlie Munger famously quipped “I believe in the discipline of mastering the best that the other people have ever figured out. I don’t believe in just sitting down and trying to dream it up all yourself. Nobody is that smart.”
The decision to follow Buffet’s advice and study Carret was indeed an enriching experience personally.
I sincerely hope you too found at least something worthwhile to think about. If there are any other key insights you have picked up from investing Guru Philip Carret then please do call out in the comments.