Saturday, October 30, 2010

A look at look-through earnings

Warren Buffett once wrote about a concept he called “look-through earnings.” Look-through earnings reflect in the operating income of a company both its share of the earnings paid out as dividends and its share of the operating earnings retained by the companies it has a below 20% stake in. Here’s the formula for look-through earnings: the company’s operating profit + the company’s share of the operating earnings retained by the companies it has a below 20% stake in – the extra taxes it would have to pay if those retained earnings were all paid out as dividends.

Generally accepted accounting principles (GAAP) only let a company take into account the dividends it receives from the companies it owns less than 20% of but not its share of the earnings retained by those companies. GAAP does, however, allow a company to include in its income statement all the earnings (both earnings paid out as dividends and the earnings retained) accrued by its holdings that represent an above 20% ownership interest in another company. This doesn’t make much sense, as a 10% interest in a company should entitle you to 10% of that company’s earnings, just as a 20% or higher ownership interest in a company should entitle you to a 20% or more share in that company’s profit.   

If we don’t look at look-through earnings and just take reported earnings at face value, we can really undervalue some companies and miss out on identifying some really great investment opportunities. Here’s an example:

A holding company that has 2 holdings, the first holding represents a 100% ownership interest in a company that earns $1 million every year, and the second holding represents a 10% ownership interest in a company that earns $100 million every year but don’t pay out any dividends. The holding company will report the full $1 million from its first holding but report $0 from its second holding (although its share of the earnings is $10 million).

This completely disregards the fact that the holding company’s share of the earnings had been reinvested for the holding company’s benefit and can result in the holding company experiencing capital gains and better profitability from its second holding at a later date. With look-through earnings, the holding company will have an operating income of $11 million (for simplicity’s sake, we’ll assume dividend taxes is 0%. Just make sure to make adjustments for dividend taxes in real life) instead of the $1 million in operating income it will report under GAAP.

Companies that can make good use of retained earnings should retain earnings. Assuming that there are 2 investment opportunities and both cost the same and currently generate the same amount of earnings, any company that puts its shareholders first will rather own 1% of a company that reinvests all its profits at good returns (even if the investing company will not be able to report a dime on its income statement) than own 100% of a company that have to reinvest most of its earnings at subpar returns just to maintain current profitability (even if the investing company get to report all the earnings of that company on its income statement).    

At the end of the day, it is not reported profitability but true profitability that will determine the long-term performance of an investment, and to distinguish a company’s true profitability from its reported profitability we need to look at look-through earnings.        

If you have any questions, or if you have anything that you would like to share, please feel free to comment. Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

Thursday, October 28, 2010

Basic investing lessons from John D. Rockefeller

I remember watching an interesting documentary about the Rockefellers quite some time ago. From watching the documentary and from what little reading I did on the subject of John D. Rockefeller, I managed to identify a few basic investing lessons. Most of us probably already know these lessons, but they are, nonetheless, still very important. Here are the lessons I think I learned from John D. Rockefeller, one of the richest man in history:

Maintain ample liquidity

Rockefeller understood the importance of maintaining ample liquidity from a young age, as his father would sometimes just call a loan that he made out to John.

We might not have a dad that’s out to cheat us or suddenly ask us to pay back some money that he lent us, but maintaining ample liquidity is still, obviously, very important. If we have liquidity, we can make investments when the market panics (as John D. Rockefeller once said,” The way to make money is to buy when blood is running in the streets.”) and we wouldn’t be put in situations where we need to sell our investments in case something unexpected happens.

We should also look for companies that have enough cash on their balance sheets, as this will allow them to keep their operations running in economic downturns without taking on debt or issuing new shares and create shareholder value by acquiring assets on the cheap.


Rockefeller is a great believer in frugality and even recorded all of his expenses in a ledger. I think that I read at Wikipedia that Rockefeller actually took the train to work when he was already a very wealthy man.

While it’s ok if we don’t actually have a book or an excel document where we record our daily expenses, we should adopt frugality and at least have a budget and measure our spending against our budgets. The less we spend, the more money we have to invest; after you amass a certain amount of money, it becomes much easier to make more money, and the best option for a lot of people to reach their first $100,000 or whatever is to spend less and invest more. We should measure our spending against our budget as there can generally only be improvements if the thing you want to improve on is measured.    

Avoid serious risks

Instead of following the crowd and trying his luck at digging up oil wells, Rockefeller went into the oil refinery business where the risks are lower and the returns more stable.

We can avoid serious risks by not investing in companies (no matter how cheap they might be) that have been consistently racking up losses (with no end to the losses in sight), have lots of debt, and have no competitive advantage whatsoever. Serious risks can also take the form of derivatives, special purpose vehicles, and risky and potentially toxic assets, and we must be vigilant in identifying these risks when analyzing a company’s annual reports.

Buy and hold

Rockefeller became one of the richest men in history because he hardly sold the shares he owned in his company, letting a great investment just compound over many, many years.
If we find an investment that we think can sustain great returns over the long-term, we should bet big, reinvest any dividends, and never sell (as long as the fundamentals remain intact). Let the power of compounding work for you; investors can get rich just by holding average investments and letting them compound for long periods of time. So, needless to say, investors can become incredibly wealthy if they find a few above average investments to hold for the long-term.

An investment that generates a 20% return annually, and reinvests those returns at the same rate, will multiply its value by about 6 times in 10 years, and by about 38 times in 20 years. True, it’s incredibly difficult to find stocks or companies like these, but investors will still do well holding investments that generate average returns.

An investor will also most likely underperform the market over the long-term if he or she is constantly buying and selling, as the commissions the investor pays will, obviously, eat into his or her returns.

Competitive advantage

Rockefeller’s company had a great competitive advantage, a monopoly of the refined oil market. This competitive advantage obviously played a huge part in allowing him to amass one of the greatest fortunes in history.

While there might hardly be any monopolies we can invest in (at least in developed markets), we should generally only invest in companies with good competitive advantages, as a competitive advantage is probably the only thing that will enable a company to keep growing and creating value for its shareholders. Competitive advantages can come in many forms: Great management and employees, being the low-cost producer, and having a product that has become the de facto standard are just some of them.

If you have any questions, or have anything that you would like to share please feel free to comment. Thank you for reading, and may you always sustain good returns on your portfolio. Take care.     

Sunday, October 24, 2010

The customer saga part II: Talking to your customers

To be able to take care of our customers and create great products that they will really value, we first need to talk to them and understand what’s important to them. In this second part of the customer saga, I will be talking about some of the things we can do to better communicate with our customers.

Show your customers that you want to talk to them

A lot of customers don’t talk to the companies they buy products from because they think that those companies don’t really care about what they have to say in the first place, and that whatever effort those companies make at trying to talk to the customers is just for show.  To change how these customers think, and to get them to give us feedback, we have to show them that we really want to hear from them.

A few things that we can do to show our customers that we want to talk to them are:
·         Making our contact info visible at every opportunity we get and not hiding it in small prints at the bottom or in some subsection of our website, or etc.
·         Being as available as we possibly can when it comes to communicating with our customers.
·         Getting our employees to ask our customers for feedback. Asking our customers a simple question of “How can we make shopping with us a better experience for you?” after they purchase stuff from us or calling our customers just to check up on them and ask them if there’s anything they didn’t like about their experience with our company, can go a long way in letting our customers know that we value their feedback.

Zappos, one of the most customer oriented companies in the world, displays its phone number at the top of every page in its website and take calls from customers 24/7.

Make talking to you a good experience

Customers will talk to you more often and even tell their friends about how good your company’s customer service is if they have a good experience whenever they talk to you. Here are a few ways to make talking to your company a better experience for your customers:

Train your employees to be knowledgeable about your company and your products, and empower them to make decisions on their own, this will ensure that your customers don’t get transferred from one person to the next before his or her questions get answered. 

Be responsive, both in communicating with your customers, and in solving their problems.  Nobody likes waiting on the phone for 10 minutes or have their e-mail go unanswered for over a week. Customers will also stop talking to you if you don’t address the problems they tell you about.

Give them options as to how they can get in touch with your company. Some customers like to communicate through the phone; others might like to leave a comment on your company’s facebook page. What matters is that you give them enough options to satisfy most of them.

Similar to the point above, but leaning more toward us making the effort to get in touch with our customers instead of our customers making the effort to get in touch with us, we should employ the right tools to get feedback. Which tools you use should, of course, depend on your customer base. Some companies might find a focus group effective, others not so much. The important thing is that the tools you employ should be something that is well-received by your customers.

Try sweetening the deal. The feedback our customers give us are valuable to us, so why not give them something that is of value to them in return. Things like gift vouchers can really make our customers happy about talking to us.     

I personally think that the best way to talk to your customers and make them feel good about talking to you is still through your employees. Customers will feel better when giving feedback to a polite, caring employee that genuinely wants to listen to them and solve their problems. This will also give your employees the opportunity to establish a personal connection between your customers and your brand or company.

Create a culture of listening

Tony Hsieh, the CEO of Zappos said in his book “Delivering Happiness” that your culture is your brand. I believe that listening to the customer is one of the values that every brand should stand for, and every culture should represent ( I plan to write an article about taking care of your employees and creating a culture sometime soon, so check back regularly if you’re interested).

If you can really get your employees to accept your company’s culture and live your company’s culture both at work and outside of work, then not only your frontline employees, but all of your employees can play a part in listening to your customers and solving their problems wherever your employees may happen to be.  This way your company gets to talk to more of your customers (this is huge, as according to Lee Resource Inc, “For every customer who bothers to complain, 26 other customers remain silent.”), and lets them know that it values and cares about them.

To reinforce our cultures of listening to the customer, we can do things like get all of our employees regardless of their roles to call up customers and check up on them, or  get our non-frontline employees to take up frontline posts a few times every month. These things will show your employees how important listening to the customers and solving their problems are to your culture.

Dunn Hospitality Group has an excellent culture of listening to the guest and solving his or her problem. A guest staying at any of the company’s hotels can make a complaint to any employee and the employee who received the complaint will take care of the guest's problem herself or himself (found this golden nugget in the book “The Disney Way”).

If you have any questions, or if you have anything that you would like to share, please feel free to comment.Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

Thursday, October 21, 2010

Earnings quality: Identifying good earners (return on equity)

It’s a fact that the quality of earnings can differ from company to company. Two companies reporting the exact same profits can make for very different investments in terms of the long-term value they can create for shareholders. The reason that some companies have better quality earnings than others:  their return on equity.

Companies that earn high returns on equity can reinvest their earnings at attractive rates of return, while companies that earn low returns on equity can only reinvest their earnings at unattractive rates of return. Over time, the difference is huge.

Let’s assume that there are two companies, company A and company B. Both of these companies reinvest $1000 in their operations at the end of each year for 10 years; company A has a return on equity of 15% and company B has a return on equity of 5%. The future value of company A’s reinvested earnings is about    $20,300, while the future value of company B’s reinvested earnings is only about $12,580. That’s about 38% more money for shareholders of company A. You might have already guessed that I calculated the future value of the retained earnings the same way you would calculate the future value of an annuity. (Here’s a future value of an annuity calculator you can use).

Companies that earn higher returns on equity will usually be assigned a higher valuation by investors, as the investors recognize that these are good companies that can generate great, sustainable returns for shareholders. There are times when the higher valuation is warranted (sometimes the market even undervalues some of these companies), and as we all know, it’s always better to invest in a good company at a fair price than invest in a lousy company at a cheap price.

The only thing that can be done by the management of a company that earns a low return on its equity is to pay out as much of the company’s profits as it can in the form of dividends, which investors can put to work at better rates of return. The problem really comes when some of these companies have to make large, regular capital expenditures just to maintain current profitability, reducing their ability to pay out dividends.

Even if these companies can afford to pay out most of their earnings as dividends, investors will still use the dividends they get to invest in the better quality companies. Investors have to pay taxes on their dividends, and this will cause investors to still be worse off than if they were to directly invest in the better quality companies from the start and let those companies reinvest in their operations or buy back stock (side-stepping dividend income taxes). Both of these activities should, of course, result in capital gains for the investors.  

Sometimes the market can drastically undervalue some companies, and investors can make good profits buying the shares of these companies, even if these companies have a low return on equity. Investors just have to make sure that they take extreme caution when deciding on the investment appeal of these companies, especially the ones with a history of having a low dividend payout ratio, and the ones that have to make large, regular capital expenditures. While a long-term approach is required when investing in companies that can  earn only below market returns on their equity, these are not companies you should hold forever, but are companies that should be sold once they approach your estimates of intrinsic value.     

If you have any questions, or if you have anything that you would like to share, please feel free to comment. Thank you for reading and may you always sustain good returns on your portfolio. Take care.

Tuesday, October 19, 2010

Skin, ROE, Honesty: Ingredients for a great management team

A talented management team can build important, lasting competitive advantages for the company, and   create extraordinary long-term value for shareholders.  A weak management team on the other hand can destroy significant shareholder value and cause permanent damage to what may be a great organization with strong fundamentals.

We all want to invest in companies with a great management team in place. In this article, I will talk about some of the things to look for when evaluating whether or not a company’s management team is good for shareholders.

Having skin in the game

While the ownership of company’s stock might not automatically make a manager great, managers that own a lot of shares in the company or have “skin in the game” are more likely to act in the best interest of shareholders. Insider buying and insider ownership can also indicate that managers are confident in the future prospects of the company (which they should be).

I generally look for companies whose managers own shares that are worth significantly more than their annual compensation. A significant portion of the shares owned by the managers should have been bought with their own money and not acquired through stock options. Managers also shouldn’t have consistently sold their holdings or sold a large part of their holdings.   

Long-term return on equity rate

When judging if management has performed well or not, investors should look at the return on equity and not at the earnings.

Managers can increase earnings every year simply by retaining earnings and buying treasury bonds or other assets (even assets with very low returns) with the retained earnings. It obviously doesn’t take much skill to reinvest a company’s earnings in low return assets.

To see if management has managed the company’s growing assets well, investors should look at the long-term return on equity rates. A good management team should be able to generate above average return on equity rates (compare against the industry average or the long-term return of stock) without the use of significant debt. Preferably, management should help the company achieve ever increasing returns on equity.

There will, however, come a time when the company has grown too big and management can no longer identify large enough investment opportunities that can generate returns that the company is accustomed to. But investors should make sure that the company’s returns on equity are still above average, and that the return on equity rates doesn’t fall faster than the expanding capital (Shareholder equity that has grown from $100 to $150 shouldn’t make return on equity drop from 30% to 5%).

Return on equity can be increased by using debt to invest in assets. Investors should make sure that the additional debt taken on has been compensated with an acceptable increase in return on equity (It goes without saying that management that has taken on too much debt can’t be good for shareholders, regardless of the increase in return on equity they helped the company achieve).


More important than being talented, managers need to be honest. I will pick a mediocre but honest management team over a talented but greedy and deceitful management team any day of the week. Even if a talented, dishonest management team can help the company generate better returns on equity, there’s always the risk that the management team will do things like dilute shareholders’ holdings by issuing lots of stock options to themselves, and take on too much risks or engineer earnings to meet their bonus targets. These kinds of things will most likely destroy shareholder value in the long-run and undo management’s past brilliance.  

Here’s how I identify companies with honest management:

Management is open with shareholders and tells shareholders as it is. If the company is experiencing tough times, then tell shareholders that the company is in a rough patch.

The company has good accounting practices.

Managers are paid in line with the company’s performance. If the company is losing money, the CEO shouldn’t be getting a $50 million bonus.

Management does what it says. If management says that they want to increase revenue in India by 50% in 3 years, then shareholders should see a 50% increase in revenue from the company’s Indian operations in 3 years.

When we invest in a stock or company, we are entrusting our money to the management of that company. And if we want to preserve our capital, much less earn good returns, we need to make sure that management is at least mediocre, and definitely honest.    

If you have any questions, or if you have anything that you would like to share, please feel free to comment. Thank you for reading and may you always sustain good returns on your portfolio. Take care.

Friday, October 15, 2010

Making your employees happy: It isn’t just about the money

There is this really fun slideshow on titled “six cool companies to work for.” The slideshow basically lets us in on the perks offered by a few companies that seem really great to work for.

This reinforces one of the very first things we learned in our introduction to management class: There are different ways to make our employees happy, money is just one of them (a very significant way, though).

Money alone might be able to get your employees to show up to work, but it might not necessarily make your employees happy and excited about their work, and it exposes you to the risk of competitors stealing your key employees with higher paychecks. But by doing things like giving your employees perks, creating a pleasant environment for them to socialize and collaborate, and letting them make their own decisions, companies can get employees to really love their jobs.

Among the many benefits of happier more involved employees is that they are more productive, they provide your customers with better service, they come up with better ideas, and they can work better with their co-workers. To put it simply, happy employees = sustainable competitive advantage. Sustainable in a sense that it will be difficult for your competitors to poach your employees (it is harder to buy the loyalty of a happy employee by simply offering a higher pay) and that your company’s reputation for happy employees will allow you to keep attracting good talent.

By taking care of their employees needs through a diverse mix of salary, perks, flexibility, empowerment, and etc, employers stand to unlock the value of their greatest asset; their people. This competitive advantage of a talented workforce will keep a company relevant and allow it to keep growing and increasing market share.

If you have anything you would like to share, please don’t hesitate to comment. Thank you for reading, and may you always sustain good returns on your portfolio. Have a good one!    

Thursday, October 14, 2010

Valuing ETFs the Benjamin Graham way

Individual investors might be able to properly analyze a stock or even a few stocks. But while an exchange traded fund (one based on an equity index) is essentially just a basket of stocks, it might not be feasible for an individual investor to analyze an ETF as extensively as he or she would a stock, as the investor would need to value every single stock that the ETF represents. Fortunately, some valuation methods and principles that apply to stocks can also be applied efficiently to an ETF.

In this article, I will be talking about two Benjamin Graham’s investing principles that I use to help me value ETFs: Avoiding stocks (or in our case, ETFs) that have a Price/Earnings ratio that’s higher than the earnings yield of the stock + the stock’s growth rate (found this golden nugget at www.Joshua, look for stocks with price to book below 1.5, and investing with a margin of safety.    

Look for ETFs with P/E below its earnings yield + growth rate

Say, an ETF you want to value has a P/E ratio of 15 (Each ETF provider might have its own way of calculating P/E, but we will get to that a little later). We start our analysis by finding the earnings yield of the ETF. You can get the earnings yield by dividing earnings by the price or dividing 1 by the P/E ratio. For our example, 1/15 = 6.6% earnings yield. The earnings yield is the profits that the company earned in the most recent 12-month period, expressed as a percentage of its market cap or share price, depending on how you look at it.

Let’s also say that the provider of the ETF estimates that the fund will grow earnings at 15% over the next 3-5 years. The 15% growth rate + the 6.6% earnings yield would equal to 21.6. The ETF has a P/E ratio of 15, so it passes the test of having a P/E ratio below its earnings yield + growth rate. We still need to look at the other 2 principles before we make any kind of decision, though.

Identify ETFs with price to book below 1.5

Benjamin Graham said that, for defensive investors, the price to book should generally not be above 1.5, but exceptions can be made if the P/E ratio is below 15. As a rule of thumb, he said that the P/E ratio times the price to book ratio shouldn’t be higher than 22.5. For simplicity’s sake, our example ETF will have a price to book of 1.5. So, 1.5 times 15 will equal to 22.5. This principle is meant for defensive investors, but if you don’t mind taking a little bit more risk, and you know how to properly research an ETF, then it can be ok for you to buy that ETF at a higher valuation.

Margin of safety

The margin of safety principle states that investors should only invest in a stock if the stock’s price is significantly below its intrinsic value, so as to reduce the risk of losses. By applying the first principle to our example ETF, we’ve found that the ETF’s rough intrinsic value can be said to be around a P/E of 21.6 (earnings yield 6.6% + 15% growth rate). And the current price of the ETF is a P/E of 15 (of course in real life the ETF will have a share price, but we will just use the P/E ratio as a proxy for price here). So, there is a margin of safety in our example, whether the margin of safety is significant enough is, of course, up to the individual investor.

With valuation methods (at least the ones that I talked about in this article) only giving us a very rough estimate of intrinsic value, forecasted growth rates that might not materialize or cover a long enough period, and as I mentioned earlier, different ETF providers potentially calculating the P/E ratio differently, which can result in inaccurate P/E ratios, investing with a margin of safety becomes especially important in the case of ETFs.

If you have any questions, or have anything that you would like to share, please don’t hesitate to comment. Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

(Captain obvious side note: While I believe that the Benjamin Graham’s principles I talked about in this article can help us tremendously in valuing ETFs, investors also need to take into account other things like fees and etc.)   

Tuesday, October 12, 2010

Using leverage safely

Any investor who is worth his/her salt will hate excessive debt, both on the balance sheets of the companies they have invested in, and on his/her personal balance sheet. But leverage used in moderation can help investors get higher returns. Some forms of leverage can, in fact, be considered a good thing. In this article, I will talk about 2 forms of leverage (deferred taxes and debt) that we can use in our personal, financial lives.

Deferred taxes

Invest as much as you can through a retirement account where you can avoid and/or defer taxes. By avoiding taxes through tax deductible contributions, you save money that will otherwise go to the government, and you will have more money to invest, this is probably the best form of leverage as you’re getting free money (not just the cost of the money, but the money itself) to invest.  Deferred taxes is also a great form of leverage, as by putting off paying taxes on your retirement account’s returns, your pre-tax returns get to compound without interruption. The interest on your deferred taxes: 0%.


Debt, even in small amounts, should be approached with extraordinary caution. The only time investors should consider borrowing money is when they can borrow long-term and the interest rate is low and fixed. Here are a few other things that investors should look at before deciding whether or not to take on debt:

Debt level

An investor should have a low debt level in relation to his/her investment portfolio. I personally think that investors shouldn’t have debt (taken on for investment purposes) totaling more than 10% of their investment portfolio (which excludes their house, emergency fund, and investments in retirement account).


Your income should be able to very comfortably service the debt that you are planning to take on. If your income is not stable (maybe your pay is based a lot on commission), maybe taking out a loan is not the best option from you. But if you have diverse, stable sources of income, and your total income is high in relation to the loan repayments that you need to make if you were to take the loan, then you can consider taking on a little bit more debt (anything above 15% of my investment portfolio and I think I’ll start to get uncomfortable).

Keep some money in reserve

Keep aside some money that you can use to service your debt for a few months. This will buy you some time to get your finances in order in the event that you experience a drop in your income.

The type of loan

Some types of loans have lower interest than others, and some loans are tax deductible while others are not. Investors should find out which loan will require them to pay the lowest interest after taking into account tax deductions (if any) for their loan options, as the interest on the loan will, obviously, have a huge impact on the attractiveness of the loan.

If you have any questions, or have anything that you would like to add, please feel free to comment. Thank you for reading and may you always sustain good returns on your investment.

Sunday, October 10, 2010

Diversifying away your returns

You need only a few (maybe even one) stocks that perform really well for you to get really rich. I can’t tell you which stocks will turn out to be great investments, but what I can tell you is that, if you know what you’re doing, diversification will probably reduce your odds of getting really rich faster than what the returns of the average stock will permit. In fact, I think Warren Buffett said that investors should have a 20 ticket punch card or only make 20 investment decisions in their lifetimes.

If you managed to identify a few stocks that you believe will really generate great returns, you wouldn’t really want to waste all your effort researching those stocks by not betting big and buying other mediocre stocks that will almost certainly reduce the impact the returns of these great stocks might have on your portfolio, would you? True, stocks might not perform the way we might like them to, but that’s a risk of stock picking, which can be reduced by properly analyzing companies we understand.

At the risk of being labeled as captain obvious, let me just say that a 300% gain from one stock in a portfolio of 3 stocks is a 100% gain for the portfolio, but a 300% gain from one stock in a portfolio of 30 stocks is only a 10% gain for the portfolio.  

Another thing that I would like to add is that a lack of diversification and even stocks in general are not risky. I have friends that keep telling me that I should be careful because I could lose money in stocks, that stocks are risky and requires luck. I know they mean well, but I believe that can’t be further from the mark. If you really know how to evaluate stocks, and you buy into companies with good balance sheet strength, healthy earning and growth, and great lasting competitive advantages, there is actually very little risk. The short-term price drops don’t bother me; in fact, I hope that my stock holdings have significant drops in prices, as it will give me the opportunity to buy more.

Sure, there are still risks (one of the risks being my own errors in evaluation) and I might lose money, but I believe I will be tremendously better off in the long-run than if I were to leave all my money in a money market fund earning interest that’s below the long-term rate of inflation, or worst just use up all my money buying stuff that I don’t need. In his book “Beating the Street,” Peter Lynch wrote, “Buy stocks! If this is the only lesson you learn from this book, then writing it will have been worth the trouble.”  

I’m not saying that diversification is bad, and people who don’t know how to analyze stocks should always diversify via an index fund. In fact, you will, in time, become rich if you invest regularly in an index fund and let compounding do the rest of the work. It’s just that investors can get much better returns if they invested significant portions of their net worth in a few great companies at a fair price, assuming of course that they know what they’re doing.

Thank you for reading, and may you always sustain good returns on your portfolio. Take care.