[00:03:17] Kyle Grieve: Ed’s common sense approach resonates with me very, very much since I have learned investing through hard work and determination. I connect with simple concepts that are both easy to learn and understand, but also very easy to use in real life. This book has no mention of things like beta discounted cash flows, modern portfolio theory, efficient market, hypothesis, capital, asset pricing model, market timing, or even technical analysis.

[00:03:42] Kyle Grieve: Now I have no idea if Ed actually uses any of that, but in the spirit of common sense, he mentions it zero times in his book, which I very much appreciated. This episode will be structured so that I share some of the common sense approaches that Ed uses for his investing and then discuss some of his investments in light specifically of some of these common sense points.

[00:04:00] Kyle Grieve: Now let’s dig into some of Ed’s investing principles. The first one is simple. It’s that investing is common sense. The stock market, for instance, averages returns of approximately 10%. This means that owning common stocks is a just a simple way to generate wealth while offering liquidity. The key challenge to this assumption is avoiding behavioral mistakes like selling when the market goes down.

[00:04:24] Kyle Grieve: The next is volatility like Buffett and other investing legends. Ed doesn’t believe that risk is found in a stock’s volatility. However, since there is a divergence between what he thinks and what the market does value, investors have some major advantages. When the market attributes volatility as risk, price often comes down, and those are the times to back up the truck on investment and not be panic selling.

[00:04:45] Kyle Grieve: Ed mentions a great story during the panic of October 19th, 1987 when the market declined by 21%. In one day, he saw a friend on the subway who looked dejected while heading home from work. His friend was depressed and said that he’d sold a lot of stock. He also mentioned that he would continue selling stock because the event would likely precipitate more selling pressure over the next few days, weeks, months.

[00:05:08] Kyle Grieve: However, Ed points out that his thinking was wrong as the market ended up appreciating 50% over the next two years. Now, investors make the common mistake of attributing the present and forecasting that out into the future for way too long. It happens in bear and bull markets, and it’s a mistake in each instance.

[00:05:25] Kyle Grieve: So in bear markets, investors believe that markets will never return to previous levels, or it’s gonna just take forever to do so. They end up selling out and then they end up buying back in when the stock market’s gone up and it’s more expensive. Now in bull markets, investors attribute the best possible scenarios for the best performing stocks for multiple years into the future.

[00:05:43] Kyle Grieve: Once a degree of normalcy returns to a business’s operations, the market is usually quick to sell stocks when previous expectations can no longer be met. Now, this is a very difficult bias to combat. The best way I know how to do it is to pay attention to a business’s fundamentals and not its stock price.

[00:05:59] Kyle Grieve: Pretend that you are a private investor and your only performance benchmark is whether your business is growing and making a decent profit. If you look at investing in this light holding businesses that the market doesn’t like becomes much easier. Now, this brings us to an essential aspect of long-term investing.

[00:06:14] Kyle Grieve: The ability to think differently from the crowd and embrace a contrarian mindset. Most people are not genetic. Contrarians learning to be a contrarian is a very, very tough task. It’s much easier just to be a contrarian if that’s your natural tendency. If you tend not to care about what others think, then you’re on the right path.

[00:06:31] Kyle Grieve: Ed questioned popular opinions at a young age, so I think it was part of his DNA, but even if you aren’t a contrarian by nature, you likely have an opinion on certain things that others don’t necessarily agree with. Now, you can utilize that part of your life to help you identify as a contrarian through the lens of investing.

[00:06:46] Kyle Grieve: Nearly all of Ed’s investments interested him because they were out of favor and he saw something in the prospects of these businesses that the market just didn’t see. Once you have this variant perception, the trick is to keep it when the market is going to tell you very, very specifically that you are wrong.

[00:07:00] Kyle Grieve: So if you could do that, and you’re right, you’re gonna do very, very well in investing. Ed wrote to earn outsize returns. We need to hold opinions about the future that are different and more accurate than those of the majority of other investors. In fact, it can be said that successful investing is all about predicting the future more accurately than the majority of other investors.

[00:07:21] Kyle Grieve: To have a non-consensus view, you must be confident that your conclusions are correct. Investing is a game of uncertainty, and we can never be 100% certain that we’re gonna be right. So the key that Ed highlights is the use of probabilistic thinking. Now, he doesn’t discuss this too much in the examples that he’s gonna give in the book, but the fact that he mentions it in the first chapter of his book means that he probably uses it and just takes it for granted.

[00:07:43] Kyle Grieve: Now, another key insight to piggyback on the topic of emotional control is to understand when you need to change your assumptions. Ed mentions a few questions to ask to help us make sense of positive or negative events. What has really changed? How has the changes affected the value of the investment under consideration?

[00:08:00] Kyle Grieve: And lastly, is my appraisal of the changes rational? And am I not being overly influenced by the immediacy and severity of the news? Now, I like this framework because it’s simple and should reveal that many things can happen in the market and don’t necessarily affect my business. One business that I own and that was severely punished in 2024, and that many listeners will be familiar with, is a business that me and Clay have gone over, which is called Dino Polska.

[00:08:25] Kyle Grieve: Now, I’ve held this business since about mid 2023. Only over the past few weeks as a price rebounded to around the level when I first started buying it. Now let’s run this analysis specifically on Dino Polska. In 2024, Dino’s growth slowed. Revenue grew in low double digits, earnings per share in low single digits.

[00:08:44] Kyle Grieve: Your store openings declined and sales dropped from the high twenties to low single digits due to deflation. Margins were also pressured by price competition from a few of its competitors. Now, despite these short term headwinds, my thesis remained intact. Like for like sales rebounded. Prior high comp, comparative periods were inflation driven and new store openings were beginning to accelerate investments into distribution centers, had temporarily diverted capital, but definitely would support long-term growth.

[00:09:12] Kyle Grieve: I feel the market was kind of getting that wrong. Now, additionally, I mentioned that competitive price cutting, and this is just an unsustainable business model. It’s just not gonna happen forever. So the store economics for Dino remained quite strong with very, very good customer demand and good returns on new locations.

[00:09:30] Kyle Grieve: Market reaction to what happened with Dino reflected myopic loss aversion. The business was being punished for investing in future growth, which, you know, as a long-term investor obviously doesn’t really make sense. I mean, I’m perfectly fine with the business investing in itself now, taking short term losses so that it’s gonna be greater a couple years from now.

[00:09:49] Kyle Grieve: That’s exactly what Dino was doing, and I took this advantage to get more shares and I think Dino Polska’s outlook even for 2025, looks incredible and I think it looks great going forward as well. Now, this is a great exercise that I think helps me think rationally about my investing decisions. Now, transitioning here to a couple of other investing principles that Ed holds in high regard.

[00:10:09] Kyle Grieve: So there’s a couple here. Just having good analytical skills and confidence. Confidence is very important. So we’re gonna weave these principles into the stock ideas as we proceed through the episode. So he goes through, in his book about 15, we’re gonna go through most of them, not all of them, but now that we know some of these foundational principles, let’s analyze how they apply to real world investments.

[00:10:28] Kyle Grieve: And we’re also gonna be adding tons of other lessons along the way here. Now, I mentioned Contrarianism as one of Ed’s core principles, and this is a very, very good segue into discussing the first company that I want to go over, which is IBM, which was a true contrarian play. Now, IBM was an interesting investment for Ed because it showed a major attribute that he looks for in businesses, and that’s that if a business can remove bloat, it can improve profits without the need for massive increases in revenue.

[00:10:57] Kyle Grieve: Now, at the time that Ed was looking at it, IBM had about 400,000 employees. This was in 1985 before a new management team took over. As part of the new management’s initiative, Ed found out that there would be cost cutting going around by removing personnel that weren’t delivering value to the business.

[00:11:13] Kyle Grieve: I felt that IBM had gotten to a point where it was just an employer of people and not necessarily a business trying to maximize efficiency. So, you know, ed started learning more about the business once he realized that he was very, very interested in it. He bought a small position because he knows that ownership incentivizes an increased research intensity.

[00:11:34] Kyle Grieve: And this is a thought that I share as well. Now as he learned more about the business, he purchased shares in 94 at about $11 50 cents, and actually just ended up selling just a few months later because sentiment shifted positively and he made a pretty good gain. He ended up selling for about $16. But Ed actually kind of deemed this mistake because of IBM’s capital allocation strategy.

[00:11:55] Kyle Grieve: So they decided to open up a share repurchase program, and because of that, IBM’s EPS grew much faster than its, you know, net income. At the end of 1995, it actually ended up reentering the position at $24 and 50 cents. Ended up holding for another two years or so, and sold out at about 48. Now, I find this interesting because I personally know I have a huge problem doing this.

[00:12:18] Kyle Grieve: You know, once I sell a business that I thought was high quality, it generally means that I won’t ever own it again. I, I can’t just sell out and then end up getting back in. But Ed showed here that that perhaps is a mistake. You know, suppose you have a view on a business in that case, you know, even if it’s only a few years out, you already understand the business at a very high level.

[00:12:38] Kyle Grieve: And if the opportunity comes again because you understand the business, you understand it’s a valuation, you understand its cash flows, then perhaps putting the business into purgatory like I do, isn’t such a good idea. You could also take a different view on this exact case study. So you could say that Ed should have done nothing.

[00:12:54] Kyle Grieve: You know, in that case, he would’ve bought at 1150, maybe he would’ve averaged up, but not sold out and added more at $24 50 cents, and his cost basis would be, you know, somewhere in between. I don’t know how many shares he bought at each of these price points, and then he could have held it until it reached 48 and made even more profits for his partners and himself.

[00:13:12] Kyle Grieve: There’s a lot of nuance here, so I won’t pretend to know the exact scenario, but it’s worth mentioning, and I prefer doing this route. I realized that I might hold a stock that might go through a couple years where the price doesn’t move, but if I think the destination in two to three years looks good, I don’t have an issue watching the business and making sure the destination is becoming more and more certain.

[00:13:33] Kyle Grieve: In that case, there’s just no reason for me to sell despite what the stock price does. Ed wrote about a disagreement that he had with one of Warren Buffett’s most popular quotes. Warren Buffett wrote in Berkshire Hathaway’s 1998 annual report that when Berkshire owns shares of a wonderful business, our holding period is forever.

[00:13:51] Kyle Grieve: I greatly admire Warren Buffett. He’s one of the greatest investors of all time. But I strongly disagree that the shares of most wonderful businesses can be held forever because most wonderful businesses become less wonderful over time, and many eventually run into difficulties. Now, I resonate deeply with what Ed said here.

[00:14:09] Kyle Grieve: I’ve spoken before on the podcast about how I felt that having a never sell mentality is probably actually done more harm than good to me because it’s biased me to towards keeping mediocre businesses that I labeled as high quality businesses. Now, if the writing is on the wall that you made a mistake on the quality of a business, you must be willing to part ways, probably quicker than you think, and admit that you were wrong and admit defeat.

[00:14:31] Kyle Grieve: Now, Buffett’s quote is excellent. If you can be correct on 100% of your stock picks. The fact is nobody can do that, or nobody has done that for a long period. Not even Buffett, not Munger, nobody. You know, Ed gives the example of Coca-Cola, where from 2003 to 2013, it was just a mediocre investment. He notes that his revenue and earnings per share increased at about 8% and 7% during this period, and at share price increased by meager 5% annually.

[00:14:57] Kyle Grieve: So while Buffett’s investment into Coca-Cola worked incredibly well for the first 10 plus years, one could easily argue that it’s been a pretty big dud since 2003. So I looked it up and since 2003, it’s compounded at about 8.6% versus 9.8% for the S&P 500. Now, obviously Coca-Cola does pay dividends, so that plays into it.

[00:15:17] Kyle Grieve: But you know, the share price, obviously appreciation just hasn’t been there. Now the next lesson I wanna cover here is based on the power of management to lead a successful turnaround. The example here is gonna be in another business that Ed invested in, which was interstate bakeries. This was a business that owned several red brands.

[00:15:33] Kyle Grieve: Super boring. It was not a good business by any means. Now, what sparked Ed’s interest in the business was a large investment by another investor that he highly respected. A gentleman named Howard Berkowitz. Howard ended up purchasing about 12% of the shares of the business. Once Howard had this large share position, he helped install a new CEO.

[00:15:52] Kyle Grieve: This gentleman named Bob Hatch. Now, Bob’s goals were simple, reduce interstate’s debt, improve its profitability by divesting its inefficient plants, optimize the routing of deliveries and instituting just general cost cutting and increasing efficiencies of the business. In other words, there obviously was a lot of work to be done in this business, but if it was managed well, Ed saw a lot of upside for the business.

[00:16:14] Kyle Grieve: So here’s the very simple way that Ed analyzed the share price. So first thing off, he wanted to know the revenue growth. It was about 5% growth annually. That’s what he modeled going forward. He looked at their pre-tax profit margins, which were low at 3.5%. He found out that their defective tax rate was about 30%.

[00:16:31] Kyle Grieve: The diluted shares outstanding would be about 8.2 million shares. And with those numbers, he input it and he found that earnings per share in two years would be about $2 and 30 cents. Now, from that EPS number, you obviously have to evaluate it by applying some sort of multiple. Ed thought that interstate was a below average business, and so he felt that the shares deserved an earnings multiple that was probably below the market multiple.

[00:16:53] Kyle Grieve: So he thought 11 seemed appropriate. Therefore, he felt the shares were worth about $25 in a two year period. The shares were then trading at 50%, so he saw about a 66% upside. He ended up purchasing about 12% of interstates bakeries, shares outstanding in 1986. Now, this was a very good investment ’cause the investment actually went better than he could have imagined.

[00:17:13] Kyle Grieve: After just a few years, the business was taken private for $40, but Ed had some critical lessons from this investment. So the first one here is that a highly incentivized and skillful chairman can help deliver a lot of value to a business, even if it’s of a lower quality. It ended up partnering here with Howard Berkowitz on this investment because specifically Howard owned a large block of shares.

[00:17:34] Kyle Grieve: Because of this large ownership, it was more likely that owners would cash in when there were short-term tailwinds. And the short-term tailwind ended up happening because wheat and gasoline prices created, which created this short-term tailwind that management could take advantage of by selling the business.

[00:17:50] Kyle Grieve: So this business is a good example of how a low quality business can still make a high quality investment. While this investing strategy doesn’t interest me very much personally, I know there are a number of value investors who make a living off of these types of investments. Unlike Ed, I don’t like investing too much in turnarounds.

[00:18:08] Kyle Grieve: I prefer good businesses that are just, you know, floating around and picking up shares opportunistically. This allows me to hold shares for a lot longer rather than have to continue finding new places to put capital. Once the price and intrinsic value meet. I do enjoy my micro cast, but I don’t think there are necessarily turnarounds.

[00:18:26] Kyle Grieve: Often these businesses develop brand new products or are in these very, very small niche industries, and because of that, it can completely transform a business from being in one industry to actually being in a completely different industry and allow it to scale a lot. So I like those types of businesses.

[00:18:42] Kyle Grieve: And then even probably more so I just like businesses that are of a passable amount of quality that are experiencing maybe some temporary headwinds that are depressing their share price. I found a few of these in a variety of market cap arenas, but from my experiences, the smaller I go, the greater the inefficiencies.

[00:19:00] Kyle Grieve: Now inefficiencies lead to our next set of businesses that I wanna discuss, which are underpriced industries that have trouble becoming fairly priced. Now he has a short chapter on a business called US Home where Ed ends up discussing how the business was a home builder that ended up coming outta bankruptcy and he thought it was trading incredibly cheap, specifically because of this bankruptcy stigma.

[00:19:21] Kyle Grieve: As well as just natural home builder discount. So when he found us home, it was cheap. The shares were about $17. They were priced at 0.6 times book value and about seven times earnings. This was in 1991. Now, this immediately caught his eye because Ed believed this business had some latent growth potential and could end up rerating.

[00:19:39] Kyle Grieve: Its multiple. So his model had the earnings per share climb from about $2 50 cents to about three to $4 by 1996. Then he slapped on about a 10 times earnings multiple, and he thought the shares were very attractive, but the business turned out to be a bit of a dog for ed. Unfortunately, fundamentally speaking, the business actually did better than Ed had envisioned.

[00:20:00] Kyle Grieve: Earnings per share ended up going past his predictions and went all the way up to about $5 and 30 cents. The problem here was that the market just refused to rerate the shares and the business continued to trade at about six to seven times earnings. US Home eventually was bought out by Lennar at about only 6.6 times earnings.

[00:20:17] Kyle Grieve: It ended up making about a 12% annual return on this investment. But since his goal is 15 to 20%, he was a little bit disappointed. Now, this is an interesting case study because I think it shows how important earnings growth can be for a business. If you buy a business that has no ability to have multiple expansion, your entire return will come from earnings growth.

[00:20:35] Kyle Grieve: Now, this case study is a good warning to investors who rely on multiple expansion to generate returns, like pretty much other, any value investor. I also rely on this in some of my investments to generate some of my returns growing earnings matter even more, especially when you are buying high quality and expensive businesses.

[00:20:56] Kyle Grieve: So a business that I own, that I think many of the listeners are gonna be familiar with is Topicus. This is a business that trades at a massive premium to the market pretty much 100% of the time. And yet I’ve actually done very well on this investment. And I think that’s because the business is just so good that it deserves this premium evaluation due to the quality of the business.

[00:21:14] Kyle Grieve: And simply because the business continues to grow fast and just doesn’t really stumble, it ends up just having this high multiple all the time. So if you could find a business trading and achieve multiple, you need as much conviction as possible that the multiple can rerate, if that’s gonna be a driver of the returns in your thesis.

[00:21:31] Kyle Grieve: If the market doesn’t like your business or the industry, the business can just end up floundering with mediocre multiple for many years, which could obviously SAP returns. And obviously you have to look at the opportunity cost of making an investment. Now, the great thing about investing is that even when you have a bad or mediocre experience, it often helps lead to other opportunities.

[00:21:50] Kyle Grieve: And in Wachenheim’s case, his knowledge of home builders, which he learned from us home, led him to a new business in the home building industry that was called Centex. Due to Ed’s knowledge of the home building industry and just his general curiosity, he discovered that public home builders were building new homes at very, very high rates, much faster than the private home builders.

[00:22:08] Kyle Grieve: This was because private home builders had largely gone outta business or rapidly declined because of the savings and loan crisis. So the market share they used to own was now being distributed from the private businesses to the public companies. And Centex to Ed looked to be the leader of this public cohort of businesses.

[00:22:26] Kyle Grieve: Centex ended up building about 27% more homes in 1999 compared to 1998, which was higher than some of its competitors. So he decided to continue looking at Centex. Now, his breakdown of Centex was very simple. He assumed that they would continue to sell about 12% more homes each year. The average price per home would continue increasing at about a 2% annual rate.

[00:22:47] Kyle Grieve: And if you put these things together, this would create a revenue growth of about 14% per annum. Operating profit margins would go up from about 8% in 1999 to about 10% by 2003 due to just basic operating leverage. And from there, he simply applied the operating margins to his future revenue growth, deducted taxes divided it by share count, and got his earnings per share of $5 and 25 cents.

[00:23:09] Kyle Grieve: The business was trading at that time for about $12 or 2.2 times 2003. Earnings. This definitely caught Ed’s eye. He felt a business at Centex’s quality could trade at around 12 times earnings because the renewed growth to the industry would rise tides for the entire industry and other home builders would realize and increase multiple.

[00:23:28] Kyle Grieve: So he thought 12 times was pretty fair and Centex ended up being a major success and Ed ended up selling at about $70. After holding it for just six years, ed noticed that land prices were continuing to rise and he felt that Centex should be hoarding cash, waiting for land prices to come back down before buying up more land.

[00:23:46] Kyle Grieve: But management went ahead and bought more and more land that elevated prices, and this ended up spooking Ed, and this is why he sold in 2006, which was great timing because this was right before the great financial crisis. So he made a very, very good decision on that one. Now I think this business, he held it for six years, which to some people might seem long.

[00:24:03] Kyle Grieve: So some people that might seem short, but to me, I think this seems like a pretty long holding period. And I think the key here is, you know, hold on to your winners. I mean, in three years, Centex was already a triple bagger for Greenhaven, which is Ed’s fund. However, even after this triple bagger, ed kept his shares because he felt the business still had further upside into the future.

[00:24:24] Kyle Grieve: And another thing that helped him stay in was that the multiple was not as high as he’d hoped it would be. So it was sticking around 10 and you know, he wanted it to get to around 12 to increase his rates of return. Now, at this time, he discovered that there was still a major shorting of housing. So we concluded that Centex would probably continue to do very well, which obviously it ended up doing.

[00:24:44] Kyle Grieve: So I think this is just a really good lesson to focus on a business as fundamentals and also to use destination analysis if you’re using destination analysis. Kind of how I do, I like to track how earnings per share is moving. And I like to make sure that it’s moving towards a goal that I have in the future.

[00:25:02] Kyle Grieve: So if a business is doing that, then it doesn’t really matter too much to me what the share price is doing unless it gets pulled forward, you know, five or 10 years. Now back to Centex, if we were to go back in time and maybe Centex was trading at 12 times earnings, would Ed have sold it? I have no idea.

[00:25:18] Kyle Grieve: You know, I can’t ask him here, but it was quite clear that he was focusing on the fundamentals of home building and I think that he had high conviction that CX would continue doing very, very well into the future. So, you know, even if it had gotten to that 12 times multiple, if he felt that EPS would, you know, double or triple from that point, maybe he would’ve just kept it anyways.

[00:25:36] Kyle Grieve: The lesson here for all investors is focus on the long term. If a business can double its earnings in the next three years, why are you selling it when the share price goes up 20%? The final lesson here for the Centex investment is that if you understand a cyclical industry very, very well, you can be very successful when you buy it.

[00:25:53] Kyle Grieve: When the cycles about to turn positive, obviously there’s not really a general framework for the strategy. It just comes down to how well you know an industry and how much time you spent studying it, what kind of contacts you have inside of it, and your ability to sift through noise to come to a contrarian opinion.

[00:26:08] Kyle Grieve: And you know, your ability to understand cyclicality doesn’t even it necessarily need to be on an industry. It can be on an individual business. If you know a business is gonna do very, very well over say the next five years, but there’s a chance that it may stumble for a few quarters, well that’s great because that just means that you’re gonna have ample buying opportunities.

[00:26:27] Kyle Grieve: So it’s important not to make the mistake of getting shaken out of a really, really good business in a position that you already own just because the market is punishing the business for short-term headwinds. Selling a business due to short-term headwinds is a blunder in my books. Now on the topic of blunders, let’s discuss one of Ed’s biggest ones, which was American International Group, or AIG.

[00:26:46] Kyle Grieve: Ed saw AIG as a misunderstood business with some very, very quality business lines. They also had a good CEO. This gentleman named Hank Greenberg, but he unfortunately was on the way out before Ed started investing in the business. So Hank was forced to resign because AIG had taken part in some sham reinsurance transactions.

[00:27:03] Kyle Grieve: His replacement was Martin Sullivan. So Ed thought the scandals had been bad for the business in the short term, but definitely were not something that would break the business. And it was an event that he thought the market could get passed once they realized that AIG was actually a pretty good business.

[00:27:18] Kyle Grieve: Now, AIG at its core is an insurance business. When Ed read their 10 k, he realized something interesting. The reported earnings and balance sheets of any insurance company are no more than estimates because management actuarial firms and independent accountants must estimate the magnitude of recent and future losses and such estimates often are no more than educated guesses.

[00:27:39] Kyle Grieve: So in 2005, AIG had taken about a 1.82 billion pre-tax loss in order to increase its reserves. Now, while this clearly doesn’t look great in terms of earnings, Ed actually saw this as a positive. So he concluded that new management was right in taking this charge for a few reasons.

[00:27:56] Kyle Grieve: The first reason was that new management could just blame the old management team for the charge. And the second one was because the reserves would eventually be released back into the business’ income statement, it would actually end up causing a significant spike in earnings against even weaker comparative periods.

[00:28:12] Kyle Grieve: So Ed used a projected EPS number into the future with an assigned price earnings ratio, and came to a conclusion that he thought the shares could approximately double in the next two years. And at first, the business moved in the right direction. So in 2006, the business’s earnings per share rose and reported that they were overcapitalized by about 15 to 20 billion.

[00:28:33] Kyle Grieve: As a result, they authorized the repurchase of about $8 billion of shares and increase the dividend by 20%. Two outcomes that were obviously very, very positive for shareholders. But then the Lehman Brothers filed for bankruptcy, which set off a self-reinforcing financial crisis. So large amounts of illiquidity in the markets drove down asset values, triggering credit ratings, downgrades that forced financial institutions to raise more and more cash.

[00:28:58] Kyle Grieve: And unfortunately, that’s something that is nearly impossible in frozen markets. So AIG was hit particularly hard, needing cash to cover collateral on some of its derivative contracts, but they were unable to raise it. So the next day, unfortunately, the US government stepped in with a bailout in exchange for significant ownership of AIG.

[00:29:16] Kyle Grieve: And this effectively locked in major losses for all of AIG’s shareholders. Now, ed didn’t specify what his losses were during this event. He only said that he experienced a large permanent loss. Now, one lesson that I found interesting from this chapter was about reflecting on your mistakes. Sometimes a stock can go down in price and owning the stock still might not be considered a mistake.

[00:29:38] Kyle Grieve: You may be scratching your head over the statement, but let’s dig in a little bit deeper. So investing is a game of odds. In the case of AIG, if we ran a simulation on ED’S investment and the outcome that ended up happening was, let’s say only one in 100, then chances are the bet was still a very good one.

[00:29:53] Kyle Grieve: Despite the outcome that occurred a few months after the failure of his AIG investment. Ed reflected on the investment and actually came to similar conclusions. So he said that given the information that he knew at the time, he still would’ve made the AIG investment. The collapse of Lehman Brothers was an unlikely development, and unfortunately, these unlikely developments can completely derail on investment.

[00:30:15] Kyle Grieve: But risk bearing is part of an investing, and if you invest thinking that the next 100 year storm is right around the corner, then you’re unlikely to invest in anything. So this point is interesting because it can work both ways. You can make investments where the hypothesis may have been wrong, but you make money anyway.

[00:30:32] Kyle Grieve: Now, this happens pretty often in investing, let’s say a newer investor. Puts money into a position, they get a multibagger from this position, but does very little, if any research into the business. So in this sense, an investor essentially is just playing the lottery because if you don’t know why the business appreciated, you haven’t created a system to reproduce those results, and you unfortunately run the risk of similar investments just going to zero.

[00:30:55] Kyle Grieve: The final takeaway from this chapter concerns frequency and magnitude. So Guggenheim wrote, I find that investing is not about earning a favorable return on every holding. It is about developing a favorable batting average. So he knew that he wouldn’t make money on all of his investments, but he also knew that if he made enough on the ones where he was right and didn’t lose too much on the bets that didn’t work out, his returns would still be very solid.

[00:31:16] Kyle Grieve: Now I track the frequency of how often I’m correct on my bets. I just filled the numbers in in preparation for this episode, and I’m currently at around a 52% hit rate. So this means that about 52% of my decisions have yielded positive returns. Now, last quarter, this actually sat up 65%. So the lower number right now I think is because a few of the positions that I’ve been building just haven’t gone up yet in price.

[00:31:37] Kyle Grieve: And obviously we’re experiencing general market weakness, but my conviction in these positions remain strong, and I’m still adding, I have a pretty high degree of conviction that this number will go back up. At some point, we’ll go back up to 65%. No idea, but we’ll find out. I’ll update you. So when I factor in magnitude, which is, you know, how much I make when I’m right versus how much I lose when I’m wrong, there’s some very interesting insights.

[00:31:57] Kyle Grieve: So the average return of my misses is about negative 13%. And this is actually pretty good because I’ve had some pretty big misses, but it’s good to know that, you know when I’m missing, I’m actually not losing that much. I’ve yet to have any investment go to zero. So knock on wood now on my hits, the average total return is about 35%.

[00:32:16] Kyle Grieve: Now I look forward to seeing how this plays out over decades. If I continue to win more than I lose, and my returns are higher on my winners and low on my losers, then I’ll continue to make a good return. It’s just that simple. While we’re discussing returns, let’s look at another one of Ed’s winners, which was Lowe’s.

[00:32:30] Kyle Grieve: You’ll probably see a trend in many of Ed’s investments. He buys stocks when they’re unloved, meaning they have some uncertainty that’s embedded in them in the stock price. Ed then learns about the business and its industry and attempts to take his own view on the business. So in the book, he mainly discusses variant perceptions, but I’m sure he often agrees with the market sentiments on businesses, and in those cases, he probably just doesn’t invest, and Lowe’s was no different.

[00:32:52] Kyle Grieve: So Lowe’s is another business inside of the building industry, obviously, and this is an industry in which Ed clearly has immense knowledge and experience, which shows how he’s able to play inside of his circle of competence. Lowe’s was also a duopoly inside of the home building supplies and hardware industry.

[00:33:08] Kyle Grieve: The smaller competitors had a lot of difficulty competing with Lowe’s and Home Depot because they just didn’t have the purchasing power distribution, efficiencies, merchandise variety, efficiencies of scale and low cost of real estate compared to these two behemoths. So Ed started investing in Lowe’s in 2011 after the great financial crisis.

[00:33:27] Kyle Grieve: He noted that the general sentiment of Wall Street was that the housing market would be weak for an extended period of time. They came to this conclusion because there was a growing number of shadow inventory houses, which were homes that were near foreclosure, but would end up adding to unsold home inventory.

[00:33:44] Kyle Grieve: Ed decided to learn more about the industry on his own because he thought there was a chance that the housing market could turn strong in the next few years. His methodology was no surprise, very common sense. So the first thing he did was he estimated the demand for New House in the United States. So he said normal demand is equal to the net increase in the number of families in the United States, plus the number of houses torn down each year, plus the increase in the number of vacation and other secondary homes.

[00:34:09] Kyle Grieve: Between 2000 and 2010, the US population increased at about a 1% compound annual growth rate, and if you use the same number, the number of new homes built in 2011 would be approximately 1.2 million. Other resources that he found generally supported this number as well. Now, on top of this 1.2 million, you have to also factor in demolished buildings, and in this case, he factored in about 300,000 demolished buildings that would need replacement.

[00:34:33] Kyle Grieve: So in total, he estimated a need for about 1.5 million new homes. Then he did something interesting, which I think is very important, which is to sense check your numbers versus historical data. So between 1980 and 1999, there was an average of about 1.43 million new builds per year. Adjusting that number for the change in population ended up bringing that all the way back up to 1.78 million.

[00:34:53] Kyle Grieve: For the most recent periods between 2000 and 2003, the average number of new builds was about 1.62 million. So he felt that his numbers checked out for normalized demand and was even on the conservative side. And here’s where things got interesting. So in 2010, due to the great financial crisis, new builds were only at 650,000.

[00:35:12] Kyle Grieve: The forecast for 2011 were that the number would continue declining. However, given the normalized numbers that Ed came up with, there was a lot of opportunity for a big rebound towards these normalized numbers. Ed settled on Lowe’s for two reasons. The first one, the business had tailwinds due to the upcoming turn in the housing market, and second, Lowe’s had further upside due to improved merchandising.

[00:35:33] Kyle Grieve: Now we already covered number one for two, the great financial crisis for some degree of complacency in its merchandising mix. I believe they could improve margins by eliminating poorly selling products, introducing new products, obtaining lower price points from suppliers, optimizing prices, optimizing selling space, reducing markdowns via inventory management, and just modernizing his signage and advertising.

[00:35:56] Kyle Grieve: Ed then studied Lowe’s financials to come up with an earnings model for the year 2014. He then estimated forward revenue based on the square footage growth that he thought Lowe’s was capable of doing, and then from there he simply applied an operating margin to the number using one that they’d hit pre GFC, which is pretty conservative.

[00:36:12] Kyle Grieve: Then from there, he just subtracted interest, payments and taxes, divided it by the shares outstanding and generated his forward earnings per share number, and the number he arrived at was $3. He valued shares at about 16 times earnings, giving the shares a price of about $48. The shares were currently trading at $24, so this was a double in three years, which is obviously a very attractive return.

[00:36:34] Kyle Grieve: So he decided to start a position. Then a wonderful capital allocation surprise came his way. So Lowe’s announced that they would be buying about half of their outstanding shares, and they also gave 2015 guidance that was lower than Ed’s initial numbers. Because of the guidance, he adjusted his own numbers down a little bit, but not as much as management, because he thought that their numbers were overly conservative.

[00:36:54] Kyle Grieve: However, because of the major buybacks, he thought that 2015 EPS would get to about $4 and 10 cents. The shares of the same earning multiple, were now worth $66. And from there he just watched the narrative of his thesis unfold. The numbers of new builds went up, and by 2014 the shares reached $68. So he was pretty spot on there.

[00:37:12] Kyle Grieve: The story makes the entire lows investment seem pretty simple, and I think that’s how good investing should be, you know? But investors tend to shoot themselves in the foot by trying to mess around with a good thing. Ed mentioned a run in with an investor who liked Ed’s Lowe’s thesis, but the investor chose to take the route that most investors take, which is to wait on the sidelines while unpredictable macro events take place.

[00:37:34] Kyle Grieve: So in this case, it was in relation to a potential government shutdown, Ed’s response that he had no idea what the market would do in the near term. He also wrote, I strongly believe in Warren Buffett’s dictum that he never has an opinion on the stock market because if he did, it wouldn’t be any good and it might interfere with opinions that are good.

[00:37:50] Kyle Grieve: I have monitored the short term market predictions of many intelligent and knowledgeable investors, and I have found they were correct about half the time. Thus, one would do just as well by flipping a coin. Now using this kind of rationale shows how pointless market predictions are. You’re best off finding great businesses that can weather economic storms.

[00:38:06] Kyle Grieve: Then you just hold them while the market panics or even add shares during this time, and you’re gonna do very well. However, the mistake that most investors make is to take the exact opposite approach. They end up selling their shares once the market goes down out of fear of further losses. Now, at the same time that Ed owned Lowe’s, he was looking at other businesses that would also benefit from his housing narrative.

[00:38:25] Kyle Grieve: One such opportunity was Whirlpool. So Whirlpool wasn’t the type of business that he would traditionally go for because its growth rates were not very high. But there was a unique opportunity that happened in 2011. For the previous few years, Whirlpool’s margins were being compressed due to elevated input price costs.

[00:38:41] Kyle Grieve: So things like, you know, steel, copper, and plastics all had increased sharply in price. And during this time, Whirlpool was a good enough business, luckily to turn a profit, albeit at lower margins than in the past. So Ed ran the numbers and came to an earnings per share of around $20 by 2016. As an added benefit, this number included the increased commodity pricing for steel and copper.

[00:39:03] Kyle Grieve: But there was a good chance that these commodities would actually end up going down at some point into the future, and this would provide a nice tailwind for the business if the price of their input costs went down. An interesting wrench that Ed throws into the story about Whirlpool is the event evaluation part of the equation.

[00:39:16] Kyle Grieve: So Ed actually ended up having trouble finding the right multiple to apply to this business. He felt the competitive position of Whirlpool was really hard for Ed to make a conclusion on. So Whirlpool killed off one of its competitors when it ended up buying Maytag, which was great, but also LG and Samsung were trying to steal market share in the same geography.

[00:39:36] Kyle Grieve: So Ed flipped between, you know, 12 and 15 times their earnings and thought that even 10 might be the appropriate multiple. But here’s the thing, you know, Ed saw Warren Buffett’s fat cow, and therefore it didn’t matter how fat the cow really was. So here’s how he broke it down. The shares for Whirlpool were trading at about $80, and he thought the business would likely earn about $20 in earnings per share over the next few years.

[00:39:58] Kyle Grieve: Now the business at 10 times earning multiple was still $120. And if the multiple was higher, then of course that would make it an even better investment. So Ed used an excellent baseball analogy here. He said, when you’re hitting home runs, it doesn’t matter whether the ball ends up in the lower deck, the upper deck, or outside the park.

[00:40:14] Kyle Grieve: And Ed ended up making a decent return on Whirlpool and still ended up holding the shares after the book was published. I have no idea if he still holds ’em today. He had an update in the book in early 2022 that he held the shares and made about 11.4% returns, including dividends on the investment. He also mentioned that since Whirlpool intended to buy back his shares, he was happy to continue holding onto it.

[00:40:33] Kyle Grieve: Now, while Whirlpool didn’t end up beating his return benchmark of 15%, he was still okay with the investment as he realizes that not all investments will exceed his benchmark. Ed mentions that the bulk of Greenhaven’s success has come from a very small percentage of his holdings. Yes, the goal is 15 to 20% returns, but you only need one multibagger over a short period to achieve those returns.

[00:40:54] Kyle Grieve: For instance, if one in five of his holdings triples in three years, the other four only have to achieve about a 12% per annum for the entire portfolio to reach that 20% threshold. I think he mentioned that specifically because even though Whirlpool didn’t make 15%, the return was still sufficient. Now, as you can tell from Lowe’s and the Whirlpool examples, Ed would employ the strategy of making somewhat basket type bets on industries that he felt very comfortable with, where he had high conviction of knowing who the winners would be.

[00:41:23] Kyle Grieve: So it’s no surprise that he would do something similar, but in an industry that is just plain ugly, which is the airline industry. So in the airline industry, he made two bets. One was in Boeing, which obviously manufactures planes, and another on Southwest Airlines, which is one of the very few value creating airlines that has ever existed.

[00:41:39] Kyle Grieve: So let’s start here with Boeing. So in 2012, Boeing was surrounded by negativity. All of its seven 80 sevens were grounded by the FAA due to engine failure warnings. Ed felt that the over pessimism of the market was hiding a pretty decent business that could provide him with a pretty good return. So he dove into the business and as he dove in, he started realizing that the business was very, very modi.

[00:42:01] Kyle Grieve: Boeing has two business units, it’s commercial aviation unit and its defense unit. According to Ed, the commercial aviation segment was the better business, and he specifically mentions Porter’s five forces this year. So let’s just go over them really quickly here. So the first one is a threat of new entrant.

[00:42:18] Kyle Grieve: The second is threat of substitution. The third is power over suppliers. The fourth is power over customers, and the fifth is the degree of rivalry. Now, Ed believed that Boeing excelled in all five of these areas and that it was nearly impossible to compete with. It had only one competitor, which was Airbus.

[00:42:34] Kyle Grieve: Now, the two businesses made up a duopoly in aircraft manufacturing, and because of this, suppliers and customers just didn’t have that many options if they wanted to buy a new plane. Boeing had some very, very good products that customers obviously wanted. So you know, even these seven 80 sevens, which had been grounded and shrouded uncertainty still had 799 outstanding orders that were worth about a hundred billion dollars.

[00:42:57] Kyle Grieve: Like many of Ed’s investments, he thought Boeing shares were undervalued. Of course, in Boeing’s case, the shares looked to him to be worth about double the current price in three years time. In a great example of conviction, Ed discusses how an investment manager he knew called him, telling them that he had to actually sell his Boeing shares due to criticism for owning the business.

[00:43:14] Kyle Grieve: After Boeing had the multiple battery incidents on its 787s, Ed writes, I tried to convince the manager that even if the 787 did develop serious lasting problems, Boeing still had a thriving business producing other models, and therefore there was a large margin of safety in the shares. My analysis fell on deaf ears and the other manager sold all of his holdings.

[00:43:35] Kyle Grieve: Now this is a great point that I think highlights some of the institutional investors’ weaknesses. Many times these investors have to sell for non-inverting reasons, such as this one where he had to appease his partners. He mentions that most managers have two goals, which are firstly to earn a good return and second to keep their clients happy.

[00:43:53] Kyle Grieve: But Ed says that he has one advantage and that’s that he only has one goal, which is to earn high returns. And he knows that if he earns good returns, the happiness part of the equation will end up taking care of itself. And if a client is unhappy with good returns, then he realizes that the client and Ed probably aren’t a good fit and he lets them go somewhere else.

[00:44:13] Kyle Grieve: Now, the Boeing investment worked out beautifully for Ed as he sold out at about $136 on an original price of 75. There’s a great point made in this chapter that sometimes the best defense is actually a good offense. So let me explain this. So going back to that example where the other fund manager he knew sold Boeing Ed thought that the fact that he was selling was a major mistake and the reason for that mistake was that the risk reward for the investment was just so good at $75. So the risk of not owning Boeing at that price was in opportunity cost. So had the investment manager simply done nothing, he would’ve turned his investment of 75 into 122 and this function to de-risk the portfolio from further losses as he could absorb $47 of future losses for being underwater on this investment.

[00:44:59] Kyle Grieve: Now, I think that’s really, really important. Investing requires us to think about opportunity cost. And if we’re selling a bet that has asymmetric upside, that means we’re foregoing that ability to maintain that asymmetric bet. And we’re going into something else where theoretically you could find something that had even more asymmetry, but asymmetric bets are really hard to find.

[00:45:20] Kyle Grieve: Now, moving on here to Southwest Airlines. I think Southwest, and I think Ed would probably agree with me, is in an even worse industry than Boeing. So I mentioned Porter’s five forces when discussing Boeing, but you’re not gonna find any mention of these forces when analyzing a business like Southwest Airlines, although if you dug in deeply, maybe you would find something.

[00:45:39] Kyle Grieve: So the primary reason that airlines are such a bad business are due to the excessive amounts of fixed costs. So let’s take an example here. A flight from say LAX to JFK will have similar expenses, whether the plane is at 50% capacity or 100% capacity. And due to this, airlines are incentivized to offer the lowest possible prices on their flights to ensure that they optimize capacity.

[00:46:00] Kyle Grieve: But this has resulted in long-term value destruction as airlines must lower prices to sell seats, even if it’s uneconomical. But Southwest did a few things differently to generate their rapid growth. So they had low cost and low fares. They focused on simplicity. They owned and flew only one model of aircraft, which was the Boeing 737.

[00:46:19] Kyle Grieve: They utilize smaller airports. So for instance, in Dallas, they preferred love field to DFW. And in Chicago they preferred midway to O’Hare to save on booking costs. They allowed tickets to be bought on the internet, and they issued ticketless tickets as well. They had no reservations for assigned seats yet to do it on a first come for serve basis, and they built this computerized reservation system to help once passengers arrived at the terminal.

[00:46:43] Kyle Grieve: Now, these seemingly insignificant adjustments just did wonders for Southwest fundamentals. So between 1980 and 2000, the company increased revenues at a 17% kegger while compounding profits at a similar rate. Now, one of my favorite stories in this entire book was a publicity stunt that Southwest took part on.

[00:46:58] Kyle Grieve: So in 1992, Southwest started using a motto, which was just plain smart. At the same time, another aircraft maintenance company called Stevens Aviation had been using the exact same motto for multiple years prior. So Stevens threatened to sue Southwest for violating its trademark. Instead of a lawsuit, Southwest, CEO, who was Herb Kelleher and Steven’s, CEO, Kurt Herwald, decided to have an arm wrestle for the use of the frizz.

[00:47:22] Kyle Grieve: So they ended up making a promotional video, which I watched, which was very humorous. And so it showed Herb Kelleher training for his match. And in, in the training, he’s smoking his cigarette while doing bicep curls with bottles of hard liquor. So the match ended up taking place in the Dallas Sport Auditorium wrestling arena, and the loser of each round had to pay $5,000 to charity, and the winner of the two rounds won the use of the just plain Smart trademark.

[00:47:45] Kyle Grieve: So Kurt Herwald actually ended up winning two of the three rounds, but he allowed the use of the term to Southwest. So I think this is a pretty funny promo video, not the type of video that you’d see any CEO doing today, but I think it just goes to show how innovative Herb was and how far he was willing to go to do things differently.

[00:48:03] Kyle Grieve: So from 2000 to 2011, Southwest’s earnings dropped. So it went down from an EPSO, about 79 cents down to 40 cents. So the cause. Increased fuel costs and just a soft economy. But as we know from most of the examples we’ve already outlined, Ed loves businesses that are going through headwinds. Since the earnings per share had dropped, the market understandably wasn’t crazy about the business.

[00:48:25] Kyle Grieve: By 2012, it looked like things were beginning to improve. Analysts all thought the business would see a bump in earnings per share projecting anywhere from 99 cents to a dollar 35 over the next two years. So Ed and I assume his analyst that he refers to in his book, whose name Josh, thought that Wall Street’s estimates were overly conservative here.

[00:48:43] Kyle Grieve: Their narrative was that Southwest had untapped pricing power as demand for flights normalized. Southwest could simply increase ticket pricing by about four to 5% per year and recognize much of the incremental increase in revenue as profits. Now on top of the pricing power, Southwest had just acquired another regional carrier air trance, and there was significant cost cutting and synergies that they believe would be highly accretive to Southwest’s bottom line.

[00:49:06] Kyle Grieve: And lastly, Southwest was flush with cash, so much cash that it could distribute it back to shareholders via share repurchases. Now taken together. Josh believed that EPS could go from about 60 cents in 2012 to $2 and 75 cents to $3 by 2016. Interestingly, neither Josh nor Ed felt they could properly value the business, but like Whirlpool, Ed knew that the opportunity here was so good that he didn’t need to have a set number or target because chances were that if the EPS numbers were achieved, he would make an excellent return on the investment.

[00:49:35] Kyle Grieve: In 2012, Ed started buying their shares at about $9 and at $9 the business was trading at about a 2016 Ford PE of say, three times. So if earnings per share were to compound at about 50%, which was in line with his projections, he knew that the shares would be worth a lot more than $9. As part of maintenance due diligence, Ed checked up on Southwest Ticket Price to make sure that they were increasing ticket prices, and by late 2013 Southwest ticket prices had increased by about 6.4% and would continue to increase into 2014.

[00:50:05] Kyle Grieve: Part of this ticket increase was due to increased jet fuel pricing, and therefore it was unlikely that ticket prices would continue going up forever. So in 2014, ed began selling half of their holdings as they were having difficulty valuing shares in a more normalized environment. They sold their first half of shares around $25, and the second half was sold later in 2014 for 35.

[00:50:25] Kyle Grieve: And this was a great investment. And the biggest lesson I took from this story is to really keep an open mind, you know, Ed defaulting to wanting to stay as far away from investing in airlines as possible. So when Josh ended up bringing this idea to him, he was very apprehensive. But since he was willing to admit that he might be wrong on an industry or a business, he was able to dig in, learn more, and find a very impressive multibagger stock in an admittedly awful industry.

[00:50:49] Kyle Grieve: Now, this reminds me of a lot of Peter Lynch’s points in one up on Wall Street, which I covered on TIP658. He stated that some of the biggest winners can be found in low or no growth industries, and I think Southwest Airlines was a prime example of this. The trick in finding winners in these types of industries is that you have to be willing to look in the first place.

[00:51:08] Kyle Grieve: Most investors will gloss over a business in a ban industry and quickly take a pass. I know I’ve done this more times than I can count, and I’ll continue doing it more times into the future, but you definitely have to kind of pick your battles and where you wanna spend your time, and there’s no point beating yourself up over missing something, so you’re always gonna miss something.

[00:51:25] Kyle Grieve: The final investment I wanna discuss was Ed’s investment into General Motors. So General Motors was interesting because Ed felt that the business was very misunderstood, which seems odd given that GM is a very well-known business that nearly everybody probably sees their products on a nearly daily basis.

[00:51:40] Kyle Grieve: But where Ed’s view was different was on the classification of GM. While the market viewed General Motors as a car company, Ed viewed GM as more of a truck company, and as he wrote in the book, cars are a very poor business. Trucks are a very good business. So when Ed valued GM shares, he looked very closely at the truck company and thought it deserved a premium multiple compared to the car business.

[00:52:01] Kyle Grieve: Ed believed that the catalyst for GM share price growth would come from other investors, recognizing the truck business inside of GM deserving a higher multiple and would therefore rerate the company higher. Now, this didn’t end up happening at first, so Ed became concerned with GM’s liquidity due to covid.

[00:52:17] Kyle Grieve: The vehicle business has high amounts of accounts payable that must be paid regularly to their suppliers to ensure that they get the parts needed for their vehicles. But accounts receivable tends to be low as the dealer pays for vehicles upon delivery. So if vehicles weren’t being delivered, there was a chance that they could have pretty severe working capital issues.

[00:52:36] Kyle Grieve: Now, Ed reason since GM might not be able to get its cars to its dealers for a time, they could run into severe problems if they were forced to close their plants for 9 to 12 months, which was a potential issue at the onset of Covid. So after buying it, he ended up selling most of his position once Covid happened, and he didn’t specify whether this was a loss or a gain.

[00:52:56] Kyle Grieve: So at the peak, GM had about a 59% drawdown once the US declared a national state of emergency during the covid lockdown. So I can only assume that he lost money on this investment at that time. Now, from his experience investing during the great financial crisis, Ed knew that undervalued stocks had a lot of upside once a liquidity crisis ended.

[00:53:14] Kyle Grieve: So if we look at the great financial crisis, Ed saw that he could monitor credit spreads and that would help prompt him to take action. So for covid, instead of credit spreads, he was looking more for a stimulus package in late March. That is exactly what happened with the CARES Act, which provided about $2 trillion for the economy.

[00:53:34] Kyle Grieve: So once this care package, for lack of a better word, ended up happening, he ended up buying back at a GM because he knew that the factories would also reopen. So they announced that factories would reopen in about April, 2020. At this time, the shares were selling for about three times his estimated earnings.

[00:53:50] Kyle Grieve: Now from the sound of it, he held onto this business, and I don’t know if he still owns it today or not. As of March 12th, 2025, the shares are trading at about $48. So if he’d held from April, 2020 until today, he would’ve made about a 22% compound annual return, not including dividends, which is very impressive.

[00:54:06] Kyle Grieve: Now, the big lesson from this chapter is that a business can make you incredible returns when bought just cheap enough. You know, GM in my view, is just not a very good business. Sure, it has the truck angle, which is something, but then it also has this EV angle, which just seems to be another massive commodity, and I have no idea who the winner is.

[00:54:24] Kyle Grieve: Maybe Ed does. However, what is shown from this case study is that you can make a lot of money when you deploy capital at the right time. Howard Marks has said something along the lines of, any investment is good if you buy it cheap enough. And I think this is a prime example. The key to doing this successfully is having courage.

[00:54:40] Kyle Grieve: You know, Ed pointed out that he made a lot of returns from businesses that he bought between March 26th and April 30th, 2020. He writes to take advantage of situations where individual stocks, groups of stocks, or the entire market are selling at deeply undervalued prices based on normal metrics. An investor cannot wait for the cause of the undervaluation to cease, but rather must act when he believes there is a high probability that the cause will cease in the near future.

[00:55:04] Kyle Grieve: It is said that successful investing is all about predicting the future more accurately than others. Now this is an interesting point worth going into a little bit here. So investors can make incredible returns deploying large amounts of capital during secular market panics. I think I’m personally a great example of this.

[00:55:21] Kyle Grieve: Some of my top investments I ever made, even though I’m a fraction of the in investor in 2020 that I am today, were in a very similar time period. The reason was that stocks were cheap and all I had to do in 2020 was try and determine what could survive or do well over the next few years. So names like InMode did really well.

[00:55:38] Kyle Grieve: Another one that I still own is Artzia, which ended up doing very well from that low point. And another lower quality business I owned at that time was Air Canada. Even though that business isn’t any good and there’s no chance I would ever buy it at this point, I still made a decent return on it simply because it was just cheap.

[00:55:52] Kyle Grieve: Now, my favorite case study in deploying capital at very opportune times is Pulak Prasad. So he wrote the wonderful book, What I Learned About Investing from Darwin, which I discuss in TIP 597. In that book, Pulak writes that he deploys capital only during times when stocks are abandoned by their former owners.

[00:56:09] Kyle Grieve: So he points out large events, which were the great financial crisis, the Euro crisis, and Covid 19, which were three times where nearly 46% of his funds capital was deployed. Now all this capital is deployed over only 26 months out of the 169 months of Nolan’s existence at the time of writing the book.

[00:56:28] Kyle Grieve: So in the book, he had this great chart showing the drawdowns of each event. So the great financial crisis had about a 73% market decline. The Euro crisis had a 28% market decline, and COVID-19 had about a 26% market decline. Now, I think Pulak runs his strategy because he knows that it’s probably the only time that he can get a decent price on some of the super high quality businesses that he wants in the portfolio.

[00:56:51] Kyle Grieve: So whether you seek out high quality names or even low quality, cheap names, investing during severe market turmoil is a very intelligent strategy. But you must have the courage to do it, and you have to be able to fight the human instinct to flee along with other investors. And right now, as I write this, on March 12th, 2025, the S&P 500 has fallen about 7% since the inauguration of Donald Trump.

[00:57:13] Kyle Grieve: So we aren’t even in a correction territory of negative 10% yet. But if you look at your portfolio today, you’ll probably notice a lot of your names are down pretty significantly. While many investors are choosing the path of exiting, the investors who are most likely to do well over the next few years are the ones who are buying cheap shares in the businesses that they like.

[00:57:31] Kyle Grieve: I’m buying more shares of companies that I own already because I know a few of these are trading at just very, very cheap valuations. And I think their forward returns look very attractive. Now the final chapter of common stocks and common sense is a letter that Ed wrote to a younger investment manager in 2008, and I think it does a pretty good job of summarizing a lot of Ed’s advice and strategy.

[00:57:50] Kyle Grieve: So I wanna go over some of the points that I thought were very impactful. So the first one here is that Ed’s core strategy is based around basic value investing principles. You know, he’s looking for deeply undervalued businesses that can appreciate sharply due to some sort of catalyst. He prefers cheaper stocks to more expensive ones because they have less downside risk if growth stalls.

[00:58:11] Kyle Grieve: Two, don’t bother putting time into analyzing business if you think the investment just has too high of a chance of going down significantly. Three, A creative mind is a highly undervalued concept necessary for investing success. This aligns well with what Albert Einstein said, which is the true sign of intelligence is not knowledge but imagination.

[00:58:30] Kyle Grieve: It adds that you should allow your mind to wander, be open to new ideas and free yourself from being chained to preconceived ideas. Ed thinks that you should be uncomfortable when buying a stock. You should welcome the feeling rather than welcome comfort. This plays well into the contrarian mindset where your stance defers from the majority.

[00:58:46] Kyle Grieve: Investing can be lonely, so you must be comfortable with discomfort. Five, don’t get complacent. It’s easy to hold a thesis true in your head. Then block yourself off from gaining new perspective. That might just break your thesis. And this has been a problem for me as it’s been a problem for probably every single investor, and I try to combat it as best as possible.

[00:59:06] Kyle Grieve: The way that I’ve done this is to constantly look for chinks in the armor of my thesis, and this allows me to actively search for where I could be wrong and hopefully exit a business that is unlikely to go anywhere or worse go down. Six, along the same lines as the previous point, beware of confirmation bias.

[00:59:21] Kyle Grieve: Actively seek dissenting opinions to widen your perspective. Try to avoid the echo chamber of your positive biases. While you probably will disagree with assenting opinions, there might be a kernel of truth in what others think about your idea and if they uncover something that you’ve overlooked, that’s highly valuable information.

[00:59:38] Kyle Grieve: Seven, continuing with a theme of information, do not delay a good investment due to delays caused by over researching an idea. Ed writes, you do not have to drink a whole bowl of soup, to know how it tastes. You can see how he puts us in action with a few of his investments he made where getting to an evaluation was tough, but he knew that it was absurdly cheap and therefore would make good enough return for his fund.

[00:59:59] Kyle Grieve: Eight, when assessing management teams pay more attention to what they do than what they say. Now, this is one of Stig’s favorite sayings, so it’s been cemented into my brain, but management, you know, tend to be very good salespeople, but if they say they’re a superstar and yet they’ve wasted money on low return investments haven’t contributed to intrinsic value, and yet are making a higher and higher salary or bonuses, then that’s a powerful signal.

[01:00:23] Kyle Grieve: You want managers who under promise and over deliver the results should stand out that they’re doing a very, very good job. Nine, since investing is inherently uncertain, we must look at specific strategies to improve our odds of success. One such way is to seek simplicity where the outcomes of our investments are based on fewer rather than more moving parts.

[01:00:42] Kyle Grieve: Simplicity is a great way of solving this problem. Overly complex investments carry additional risk if the thesis can break down in multiple ways. Ten, if you aren’t losing on a few of your investments, you are being too risk averse. Losing doesn’t mean going to zero, but it means you are taking calculated risks.

[01:00:59] Kyle Grieve: Anybody who invests for a few years will have their share. Losers, you should expect that. This means that in your modeling, weigh the chances of a loss and don’t always focus on the upside and when you lose, don’t beat yourself up. Just learn from it and move on. Eleven, invest for the long term. Ed mentions having a minimum two year view.

[01:01:16] Kyle Grieve: Once you have your long term view, you can de-emphasize the short term. Most hedge funds employ the opposite strategy. They try to optimize just, you know, for the next quarter. And for this reason, there is a lot of competition for very intelligent people to find very short-term ideas that are gonna do well over the next 90 days.

[01:01:33] Kyle Grieve: And because of this, a lot of capital will flow to these ideas, which takes capital away from long-term ideas that can outperform. So focus your efforts here. There will be a lot less competition. Twelve, lastly, try to stay positive and optimistic. This is a tough one because I believe some people are wired to be optimistic or pessimistic, but when you think deeply about financial markets, they just tend to go up over time.

[01:01:55] Kyle Grieve: So when pessimism enters your mind, just remember that the next bull market is right around the corner. That’s all I have for you today. If you want to interact with me on Twitter, please follow me at IrrationalMRKTS or on LinkedIn under Kyle Grieve. And if you enjoy my episodes, please feel free to let me know how I can make your listening experience even better.

[01:02:12] Kyle Grieve: Thanks again for tuning in. Bye-bye.

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