April 10, 2014
Dear Client,
“Plus ça change, plus c'est la même chose”
Although it was French Novelist Alphonse Karr who wrote this phrase, it was in one of my Benjamin
Graham readings where I came across the phrase. These words, in English mean, “The more things
change, the more they are the same.” These simple words ring so true, and to me, are very powerful.
Thinking about Karr’s words brings to mind several important lessons that I have learned from both great
teachers and mentors and its applicability to investing. Yes, things change, but in many ways, not really.
So many investment advisors try to make their investing so mysterious. They make it more complicated
than it needs to be, or in some cases, they come up with some gimmick to wow prospective clients.
When I was studying at the Doctoral Level, as a Visiting Scholar at UCLA, under Professors Moshe
Rubinstein and Robert Andrews, I wrote Warren Buffett a letter, asking him if I could come to Omaha
and see him to discuss investing methods, but specifically, Graham’s methods. He wrote a polite letter
back, telling me “no” and that “Graham’s methods are clear and lucid.” Later, I did meet with the Oracle
through the courtesy of John Anderson, the benefactor of the Anderson Graduate School of Management
at UCLA, and we had a nice talk about Graham.
What I learned from Mr. Buffett is this: investors, especially investment advisors, like to complicate
things. He went on to tell me that it might be because of the intellectual challenge in trying to reinvent the
wheel. There is a great Buffett story about him and his three pals going out to lunch in New York. They
find a diner, and in Buffett style, he orders a ham sandwich and a Coke. The next day, the same three go
out to lunch and try to decide where they want to go. Buffett says, “Let’s go to the diner where we ate
yesterday.” One of his friends asked him, “Don’t you want to try something different?” Buffett replies,
“Why take the risk? We already know this place.”
Buffett applies this same idea to stocks and investments. If you analyze a company and you have spent
some time learning about it and then owning it, why should you sell it? Do you sell because you think the
stock price has topped out? Do you sell it because you think you like something else better? Do you sell it
because some talking head on CNBC said so, or you read some newsletter that advocates selling it?
Graham said, “You sell a stock when the operations of a company is severely impacted and that it is not
temporary, or if the stock is grossly overvalued.” Phillip Fisher, another investment great, said “The time
to sell a stock, if correctly chosen, is almost never.”
Lately, the talking heads have asked the question, has Buffett lost his touch? Jim Cramer said, “Don’t bet
against the Oracle.” I’m no big fan of Cramer, but the guy is super smart, and in my eyes, when he
defended Buffett’s track record, I began to change my tune about him. Cramer, who is a trader, says that
between the lines, Buffett’s simplistic approach has merit, even if it is in contrast to his approach. In the
past, when Buffett faltered, people wrote him off as a has-been. Of course, that was in 1998, right before
the tech crash of 2000. Buffett’s track record and reputation were restored shortly thereafter. Now, with
Buffett being trashed again and the high-flying stocks such as LinkedIn, Facebook, and Twitter being
thrashed, is this a sign of a major correction?
Graham advocated a simple division of stocks and bonds in a diversified portfolio – a portfolio that stands
the test of time. We don’t know with certainty what lies around the corner. We can’t see with a crystal
ball. Professor Rubinstein taught me that concept and went on to explain to me that the only thing that is
certain is uncertainty. Otherwise, everyone would be rich. That’s where diversification pays off. This is
the major reason why we still have bonds in our portfolios and why we don’t have 100% stocks. Yes, at
the current time, there is more risk in bonds than in stocks, but we don’t know with certainty that some
event will reverse those odds. Bonds have a place in our portfolios, and I am willing to sacrifice some
performance for a margin of safety. Over the long term, our track record speaks for itself.
Sue Dopson, the Rhodes Trust Professor at Saïd Business School and my home college, Green-Templeton
at Oxford University, told me to simplify the research methodology for my dissertation on Forest
Investments. She said that the dissertation was too complicated and would be much better and
understandable if I could put it in a simple manner. I thought that was a bit odd when a professor from
one of the greatest universities in the world asked me to simplify my dissertation written at the doctoral
level. Only later when I was in front of the examining board to defend my dissertation and one of the
members told me that “we are here to have simple conversation with you so we can understand your
important work” was I able to understand what she meant.
The late professor, Marty Marshall of the Harvard Business School, also believed in simplicity. I loved
him with all of my heart and soul because behind that gruff exterior, he preached the gospel of simplicity.
He was a marketing professor and was also well paid as a consultant to companies like Coca Cola,
AT&T, and other big corporations. Yet, instead of inventing the newest strategic model, he believed in
simple research, which he coined “mother-in-law research.” What Marty meant by that term was instead
of relying on fancy market research or complex goobly-gook, go and see for yourself what is going on.
Marty was another advocate of simplicity.
Now, does that mean you can buy a security without understanding the company and its financial data?
No, you can’t skip these steps. Understanding this is critical and I spend the majority of my time doing
just this. Benjamin Graham was a big advocate of fundamental analysis, which examines in detail a
company’s operation, and that’s what we practice. For example, Coca Cola and Pepsi sales in the U.S. are
declining. That affects operations, doesn’t it? However, in the case of Coca Cola, their international sales
are growing, and in Pepsi’s case, it is Frito-Lay that is the crown jewel. No, we shouldn’t sell either one.
Should we take into consideration some economic fundamentals? Yes, we should, but the proportion
between fundamental analysis and economics should be approximately at what Peter Lynch advocated:
85% stock picking and 15% economics.
We do engage in reading and understanding macroeconomics through our research collaborations with
BCA Research of Montreal and the University of Oxford. We need to understand the global dynamics
that affect our portfolios, but we are not obsessed with it.
We do sell stocks from time to time, but our portfolio turnover is considered to be low. I feel if I have
chosen the stock for the right reasons and the operations of the company have not changed, then why
trigger capital gains and have to search for another one. Sort of like Buffett’s ham sandwich.
So when I hear my colleagues tell their prospective clients they are all-knowing because they uncover socalled anomalies or discrepancies, or they are experts in forensic accounting, I shudder and think why
they don’t keep it simple. We know of an investment advisor who defrauded his clients after telling them
he was a forensic accountant. That didn’t keep him from wiping them out with poor stock selections.
Last week, as many of you have heard, Michael Lewis was on 60 Minutes, and he stated that he thought
the market was rigged because of flash trading. Of course, this was good publicity for his newly released
book. I suppose in the very short run that flash trading is not good, but if you are long-term investor such
as Buffett or myself, then it shouldn’t matter. Flash trading affects only day traders, large institutions, and
other traders. As Alphonse Karr famously stated, “the more that things change, the more they are the
same” is so true because flash trading is nothing more than an updated version of program trading that has
been around for more 25 years. I do think it should be banned for the sake of market stability, but in the
long run, it doesn’t affect me and you.
Since I had told you we would be moving to Charles Schwab sometime this spring, I have had a change
of mind. I have been in discussions with Fidelity about our move and they provided me with everything I
need to make an intelligent decision about their stability and safety. They have also agreed to provide us
support in terms of paying for part of our research and underwriting some of our client events. More
importantly, they have agreed to lower the commissions that you pay directly to them. Therefore, you
won’t be receiving any paperwork in the mail as I mentioned previously, because we are staying at
Fidelity.
Thank you for your confidence in me. I enjoy working with each and every one of you. You have given
me the opportunity to do what I enjoy most, pick stocks and work with my clients.
With kind regards,
Steve Yamshon
Investment Counsel