Just Six Stocks
It’s earnings season and I’ve been busy reading over 10-Ks, transcripts and the like. But I still find time to read other things. Below, the inspiring story of a money manager who did well owning no more than six stocks. Also, the best books on capitalism, including my take on How to Get Rich by Felix Dennis…
Norbert Lou started Punch Card Capital in June of 2004. From inception to September 30, 2011, he generated a return of 14.5% annually. That is super impressive when you consider the S&P500 over the same stretch did 2.2%.
Meanwhile… He averaged 25% in cash, had only one down year (in 2008, down 35.9%) and seldom owned more than six stocks.
All of this is from the November 2011 issue of Santangel’s Review. You can find it online. Here is one link. It will inspire you to find that next big multi-bagger.
I liked reading about how he found some of his gems, such as NVR Homes in 1997. What made him take a look was the announcement of a stock buyback: $100 million over four years. That was quite a lot for a company with a market cap of only $275 million at the time.
After that, if was just simple, old-fashioned business analysis:
“NVR had little debt, was a low-cost provider of a basic necessity, and had been around for decades—and yet was growing rapidly. Despite these advantages, and the company’s willingness to buy back its stock, NVR traded at only seven times that year’s after-tax earnings…”
Nothing too fancy in that. Yet, Lou rode this sucker from $23 per share in 1997 to $900 eight years later. That’s a 39-bagger. In a homebuilder. In eight years. Nuts.
I also found it interesting how he structured his fund. There was a two-year lock-up. I think this is important. A money manager who knows his capital won’t disappear if/when things get tough has a huge advantage over one who has to worry about assets walking out the door.
The former can invest calmly for the long-term. The latter has to worry about what he looks like on a quarterly basis and is likely to have redemptions at inconvenient times.
I’m also intrigued how he was able to do this owning no more than six stocks. As for concentration, this is something we’ve batted around here before. I think it comes down to temperament and style. Six is too few for me. I feel more comfortable in that 10 to 20 range.
Anyway, I enjoyed reading it and so I thought I’d share it with you here.
*** Best Books on Capitalism?
Robert Shiller recently gave an interview where he talked about the five best books on capitalism. You can find it here.
The idea of "best books on capitalism" is kind of interesting... and it is hard to answer because most books on the subject are just one-sided polemics, either for or against. And it is hard, too, because what is capitalism, exactly? Hyman Minsky used to argue that there were “57 varieties of capitalism.”
Nonetheless, I started to think about what books I might put on my list.
I think economists may be the worst people to learn about how capitalism works. I’d want a non-economist's perspective. I'd want a practitioner.
So maybe How to Get Rich by Felix Dennis. He writes frankly, it seems to me, about the positives and negatives of the capitalist's game. (At the end of this post, I append what I wrote about him and his book in 2014.)
I'd need an investor's perspective, of course. I'd say read the letters of Warren Buffett and the speeches of Charlie Munger (helpfully gathered in Charlie's Almanack). No surprise there.
Anyway, that’s my stab at it. If asked next week, I might have a different set of answers. As I say, it’s a tough question.
Thanks for reading. Send me mail at: info [at] woodlockhousefamilycapital.com.
Published: February 28, 2019
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Appendix: How to Get Rich? Not How You Expect
(From July 2014)
I’ve reserved this last spot to bid adieu to one of the most colorful of entrepreneurs. His name is Felix Dennis. He died on June 22, 2014, at the age of 67 from throat cancer. If you’ve never read his book, How to Get Rich, you’re missing out on the best book of its kind. But more on that in a bit.
Felix Dennis was one of the richest self-made men in Britain. He started with nothing. No capital and no college education. Dennis made his money publishing hobbyist and lifestyle magazines, beginning with Kung-Fu Monthly in 1974. He then added many more titles, including Maxim and The Week.
In the early years, he blew a lot of money on booze and women and drugs. But he eventually cleaned up his personal life. He became fond of planting trees and created a charity that planted its millionth tree last September. He was also fond of poetry and wrote his first poem in 2001. Since then, he’s written a number of well-regarded books of poetry.
I’ve read a bunch of obituaries on the man. These relate all kinds of funny anecdotes.
David Cherry, who used to work for Dennis, wrote: “When NYC banned smoking in workplaces in the late 1990s, Felix's response was simply, ‘Let me know what the fine is.’”
And in an interview with The Guardian in 2010, Dennis said that the most important lesson life had taught him was this: “Fear nothing — failing that, fake it!” Asked how he would like to be remembered, he said, “Truly, I could not care less.”
Just how rich was Felix Dennis? He said he didn’t know. He owned many businesses, houses, cars, thousands of acres of land, bronze statues, art on the walls and libraries stuffed with first editions. “Oh, and thousands of bottles of fine wine in the cellars,” he said. “Never forget the wine.”
Who knows what all that stuff was worth? He liked to quote J. Paul Getty, who once said, “If you can actually count your money, then you are not really a rich man.” Forced to guess, Dennis put his fortune somewhere between $400– 900 million. “I honestly cannot fix a number any closer than that.”
With Dennis, you can count on a refreshingly honest opinion delivered with panache. And that brings us to How to Get Rich. It is a little gem of a book.
For one thing, unlike a lot of such books, Dennis wrote it himself. There is no co-author or ghostwriter. A good thing, too, because it turns out Dennis was a pretty good writer. Second, he did get rich before he wrote the book.
More importantly, though, the tone of this book is entirely different than anything in the genre because Dennis writes a lot about the personal costs of getting rich. He tells you how hard it is. He points out how it changes your relationships with people. He never lets you forget how much time it will take out of your days and nights.
There are plenty of places in the book where he — well, I won’t say he discourages you per se, but he really forces you to be honest with yourself about what you value. Because in the quest to get rich, getting rich must be at the top of the list.
That means you can’t care about what your neighbors might think. You can’t care about worrying your loved ones. He says if you have “artistic inclinations and fear that the search for wealth will coarsen such talents,” you’ll never get rich. If you are not prepared to work more than anyone else, you won’t get rich.
You have to forget about the idea of having a “career” or working for someone else, he says. You have to forget about the idea of being part of a team. “Team spirit is for losers, financially speaking,” he writes. “It’s the glue that binds the losers together.” (The Economist obituary noted: “Somewhere in the hearts of all self-made wealthy people, said Felix Dennis, is a ‘sliver of razored ice.’”) This is just a sample.
Some might not like having their rosy portraits of getting rich smashed by the spiked mace that is Dennis’ prose. But if you shrink from it, then your odds of getting really rich may be that much less.
As he says:
“If anything, How to Get Rich is something ever-so-slightly new in the world, or at least I have tried to make it so. It is an “anti-self-improvement” book — because it admits openly that the chances of anyone reading it and then becoming rich are minuscule. The vast majority of you are far too nice. And comfortable. And sensible.”
In the course of the book, Dennis tells you how he did it. There are all kinds of tidbits in there about mistakes he made, too. And he passes on lots of advice about everything from negotiating to the joys of delegation.
Dennis says the No. 1 thing that prevents people from getting rich is fear of failure. He notes the world is full of people incessantly telling you why something won’t work and who seem to delight in spreading their outlook of doom. “How many millions upon millions of man-hours are wasted annually, I wonder, in all this doom-mongering?” Dennis asks. “Personally, I’ve had a bellyful.”
Dennis sums up:
“And looking back, I have to say that I regret the majority of times I acquiesced in shillyshallying and a retreat to safety. I would rather have tried and failed, in most cases, than have taken the safer course that so often appears wiser in the abstract.”
Lack of a fear is a good start, but there is much more. Dennis has a good chapter on ownership. He says it isn’t the most important thing — it is the only thing. “To become rich, you must be an owner.” And never give it away.
He’s talking about owning your own business. But the same idea applies generally to investing in capitalistic societies. Those who get rich tend to own things. It is to the owners of capital that go the spoils. That’s the reality of it.
Another idea is focus. Dennis says if you want to get rich, then that must be your focus. It’s not to become famous. It’s not to take on Rupert Murdoch. It’s not about a political crusade. Dennis got rich publishing magazines. Was it because he loved magazines? No. He didn’t care what the subjects of his magazines were. He was in the business because he found out that he could make a lot of money publishing them.
“And so I became a magazine publisher,” he writes. “That was OK, but I forgot to keep my eye on the ball. The ball was to get rich. Instead, I decided to become one of the world’s best magazine publishers. Not smart.”
Cynical? Probably. Admirable? I don’t think so. Effective? At least in his case, the answer seems to be yes.
The most important part of the book is found on Pages 238–242. It’s in a chapter called “A Recap for Idlers.” The key point is that the richest are those with the most time. “If you are young,” Dennis writes, “you are infinitely richer than I can ever be again.”
So think carefully if you want to spend that time getting rich, he advises. No matter how wealthy you get, you cannot reclaim the lost time. These pages of the book are the most poignant and memorable. Here is a passage:
“I have been very poor and I am now very rich. I am an optimist by nature. And I have the ability to write poetry and create the forest I am busy planting. Am I happy? No. Or, at least, only occasionally, when I am walking in the woods alone, or deeply ensconced in composing a difficult piece of verse, or sitting quietly with old friends over a bottle of wine. Or feeding a stray cat... I could do all those things without wealth.”
As should be clear by now, you to don’t have to make yourself a slave to getting rich to take some lessons from Dennis.
And so I recommend his book to you. I would also say that it makes a great book to pass on to a young person bent on getting a lot of money. He or she should know what the game is all about. I mean, what it’s really all about.