Investing lessons from Elkhart, Indiana

Fund manager Frank Martin is terrifically smart and his annual reports are well worth adding to your regular reading list.

Frank Martin's Martin Capital Management has trounced the market over the past 20 years. Its annual reports are filled with an abundance of investing wisdom, full reports can be found here.

Here’s a few gems from the 2012 edition:

On value: [The] purchase price is the only variable over which we have control, and it is our core discipline to wait patiently for prices to come to us rather than for us to chase after them. Maintaining that discipline is admittedly as agonizing and temporarily unfulfilling as it is essential. We have yet to understand the logic of overpaying for any long-lived asset (e.g., a house, a common stock, a bond) and thus locking in a sub-par, long-term return just because it’s a popular idea.

On Seth Klarman: [Quoting Klarman] is merely a tangible demonstration that most highly disciplined value investors are grappling with the challenges of a managed market environment.

On why the market keeps rising: Fearful of falling behind in the short term and inviting investor antipathy, institutions must pay to play, and the rising prices that result beget further rising prices—until the momentum unexpectedly changes direction.

On bull markets: Beware of bargains in bull markets.

On holding cash (1): If holding cash is the equivalent of the ostrich burying its head in the sand, no value is created and no fees should be paid. If, on the other hand, the manager’s inaction is enlightened and purposeful, if it reflects strategic thinking and self-discipline in the game of investment chess in which not everyone is a winner, it may well be of value. To the forward-thinking investor, cash is not the end, but the means.

On holding cash (2): As counter-intuitive and paradoxical as this may appear, when cash pays nothing, and seemingly everyone is going to great lengths to avoid holding it, it may be the safest and eventually the most opportunistic place for your money.

On fund managers: Is there more value in a manager helping you to find the best deck chairs on the Titanic or in one who warns you about icebergs before boarding?

On markets: One of the irrefutable certainties of investment in marketable securities is that (1) their prices will fluctuate, sometimes to extremes. Another companion, and confounding, yet equally irrefutable certainty is that (2) when those extremes occur, nearly everyone forgets (1).

On hubris: Past successes might actually mitigate the likelihood of future ones.

On consensus: A functional IQ of 120 will trump a crowd of geniuses hands down. Once one views the world through this lens, the absurdities of the consensus appear in sharp relief.

That's just a snippet. I highly recommend reading the whole report.

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