EVI Report Owners

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Extreme Value

The Extreme Value Owners Manual

June 2011


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Contents

Welcome to The Owners Manual ................................................................................1

The One Investment Idea That Always Makes Money ................................................5

The No. 1 All-Time, Greatest Secret of Investing ........................................................8

How to Participate in One of the Worlds Best Income Invetment Strategy ..............11

Jim Rogers and Warren Buffett on How to Manage Your Money..............................13

The Old Man and the Dog..........................................................................................16

Find the Few Stocks That Will Make You Rich, and Forget About the Rest ..............20

Getting Rich in Stocks Means Doing Nothing at All for Years ..................................23

Make 10 Times Your Money without Taking Big Risks ..............................................25

The Three Things Rich People Do All Day ................................................................27

What No One Ever Tells You About Selling Stocks....................................................30

Why Its So Easy to Get Rich in Stocks, And Why So Few People Do It ..................32

Steak Tastes Better When Its on Sale, and Other Thoughts About Risk ..................35

The Secret to Getting Rich in Stocks ........................................................................38

Use This Simple Secret to Find the Best Socks ........................................................40

The Best Foreign Stocks Are Right Here at Home ....................................................42

Its When You Get Paid That Counts..........................................................................45

What Youve Got Wrong About Value Investing ........................................................47

The Secret to Horse Racing... and Stock Investing ..................................................49

The Greatest Mutual Fund in the World ....................................................................51

The Secret of World-Dominating Dividend Stocks ....................................................54

Where to Find Extraordinary Income Streams That Always Go Up ..........................57

Know This and Youll Never Have to Worry About the Markets Next Move..............60

New Study Reveals Worlds Greatest InvestmentStrategy ........................................62

Four Must-Reads That Will Radically Change Your View of Stocks ..........................64


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Welcome toThe Owners Manual

Im Dan Ferris, the editor ofExtreme Value. The first thing youshould know about me is, unlike many newsletter writers, I dont writeExtreme Valueon the side. Doing financial research for each monthlyissue ofExtreme Valueis how I spend the majority of my time each andevery day. It is the singular focus of my career.

I graduated from college in 1987. I had a brief stint as a juniorexecutive with the Electronic Data Interchange Association in

Alexandria, Virginia. It was a boring, stifling, bureaucratic place for ayoung guy to be. I quickly realized I wanted to figure out how to getrich by making my money work at least as hard as I was working.

So I spent much of the 1990s trying to find what really worked ininvesting. Over about 12 years, I read every investment book I could getmy hands on, took a mail-order course on commodities trading, askedquestions of every professional investor I met, subscribed to half a dozennewsletters, lost some money trading commodity futures, and finallymade some money in gold stocks in mid-1995.

In 1997, I wrote a letter to Bill Bonner, the founder of Stansberry

& Associates parent company. I told him exactly what I just told youand that I believed I could write effectively about investing. His secre-tary normally throws away such letters, but on a hunch, she forwardedmine to Bill. He normally doesnt give such letters the time of day, butsomehow, my words got through to him.

Bill Bonner and I met in November 1997. We talked for 15 minutesand he hired me on December 8, to serve as the editor of a publicationthen called Real Asset Investor.

The two best things I ever did as the editor ofReal Asset Investor


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value stocks, and the most important secret there is to investing.

As a subscriber to Extreme Value, youll receive my specific recom-mendations about when to buy and sell particular stocks. But thismanual offers a more general understanding of how I see the marketsand the best ways to invest. If you use it with the monthly newsletters,

I guarantee your investment returns will improve.

Good investing,

Dan Ferris

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were: 1) recommending Waste Management shares in December 1999,after theyd been decimated by an accounting scandal that summer, and2) recommending shares of Consol Energy in July 2000, just before coalprices went up. Both stocks looked like questionable investments when Ifound them. But they both doubled in a year or so.

Both experiences, as well as many others I had while researchingstocks for Real Asset Investor, taught me you cant throw stock picksaround like playing cards at a blackjack table. You have to be carefuland thorough. And if you cant find anything to buy, then you have to

write to your readers and tell them you cant find anything to buy.

In the fall of 2002, my current publisher, Porter Stansberry, decid-ed to create a newsletter focused on the cheapest, safest stocks in themarket. He wanted thorough reporting and careful investment selec-tions. He asked me to be the editor, and Ive been researching, picking

stocks, and writingExtreme Valuesince September 2002. Im carefuland thorough, and I only recommend a stock when it is safe and cheapenough to be called an Extreme Value.

In the following pages, Ive collected a series of essays that Ivewritten on my investment philosophy and other important ideas aboutputting your money into the stock market. If youre a serious investor,this is a great resource to keep on hand to consult any time you comeacross a stock and wonder if its a good investment or not.

The One Investment Idea That Always Makes Money, for exam-

ple, on page 5, explains the basic guidelines for value investing. I alsodiscuss in more depth the kind of cheap and unappealing (but valuable)stocks I look for in Extreme Value. I tell you what the perfect investment

would be like if it existed, how to use this information to select stocksthat do exist, and how important it is to treat investing just like you

would your own business. Youll find out about the most importantqualities to look for when evaluating stocks.

Youll learn how to use Warren Buffetts methods for findingundervalued stocks, how to earn money while you sleep, when to sell


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The One Investment Idea ThatAlways Makes Money

If you look up a group of top money managers with 20-year records,youll find a disproportionate number of those managers are value guys.

~ Christopher Browne, CEO of Tweedy, Browne Company.

Chris Browne had just finished his junior year at the University ofPennsylvania in the summer of 1968.

One day, after a few weeks of training with an Army reserve unit,Browne rode the subway to his fathers office, the offices of Tweedy,Browne Company. He wanted to hit up the old man for the $5 trainfare so he could head back home to New Jersey.

Ed Anderson, a former student of value-investing legend BenjaminGraham, was also a partner at Tweedy, Browne. He cornered youngChris and talked to him about investing for two hours straight. Chrishad no idea what he was planning to do for the summer or the rest ofhis life, for that matter. So, it was relatively easy for Anderson to con-vince the young man to work at his fathers firm until he went back toschool in the fall.

At the age of 21, having lived with a father who never discussed hiswork as an investor at home, Chris summer job was to pick Tweedy,Brownes next winning stocks.

Chris sat with the big, blue Standard & Poors book, which con-tained financial data for all the publicly traded companies at that time.Browne made one simple calculation for each stock listed in the giantbook. He subtracted all liabilities (long- and short-term debt, preferredstock) from each companys current assets (cash, short-term invest-ments, inventory, receivables). The number he arrived at was called thenet current asset value.

Chris then looked at the price of each company. If a stock was sell-

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ing for two-thirds of its net current asset value or less, hed fill out anIBM punch card, complete with the firms bid price, and send it to theNational Quotation Bureau.

Chris Browne was also appointed as the companys bank analystthat summer. He calculated book value for each banking company.

Then he looked to see which companies traded at two-thirds or less ofbook value. Again, he filled out the cards and sent them in.

Describing the atmosphere at Tweedy, Browne Company in hisearly days with the firm, Browne remarked, No one worked reallyhard in this organization. It was strictly a 9-to-5 job. But they hadplenty of business.

Over the next 15 years, the firm made a phenomenal 20% a year,multiplying investors money 15 times. Every $10,000 invested in 1968became $154,000 by 1983.

Chris Browne still uses the same techniques he learned at hisfathers firm back in 1968. Today, he runs the firm.

Browne says he looks for 10 things in an investment, all of whichhe learned from his fathers firm as a young man.

1. Buy stocks with price-to-earnings or price-to-book ratios cheaperthan 80%-90% of all stocks.

2. Buy stocks of all sizes, never segmenting them by market cap.

3. Carefully research each company, including interviews withmanagement.4. Dont try to mimic the indexes (i.e., S&P 500 or Nasdaq).5. Stay as fully vested as possible, since 80% of investment returns

occur during 2%-7% of total holding time.6. Keep turnover (trading) to a minimum, which keeps commission

costs low.7. Keep all transaction costs as low as possible.8. Think of yourself as a business owner and act l ike one.9. Invest all of your money using a value approach.

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10. Become an avid student of investing, and constantly work toimprove.

What Ben Graham was doing from the 1920s to the 1950s, whatWarren Buffett has been doing since 1956, what Tweedy, Browne hasbeen doing since 1920, and what were doing in the pages ofExtreme

Valuetoday, are all based on the same principles.

We all buy stocks for less than their real value, just like ChrisBrowne learned to do in the 1960s.

Value investing is the one investment idea that never changes andalways works. If you want a great, easy-to-read book on Chris Brownesideas, pick up a copy ofThe Little Book of Value Investing. Itll take youtwo hours to read, and itll serve you well for a lifetime.


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The No. 1 All-Time, GreatestSecret of Investing

I dont know if I should tell you this.

I should be afraid you might use what Im about to tell you. Youlluse it against me in the market.

What Im about to tell you is the only real edge I possess as an ana-lyst and as an investor.

But Ive pledged to serve you, dear reader, and serve you I must, tothe utmost of my ability. So it is that I must reveal the greatest singlesecret of investing as I have learned it.

Before I tell you what the greatest single secret of investing is,

though, I want to tell you why Im going to give it to you. Im going totell you this secret because its hiding in plain sight. I bet going public

with it wont hurt me any, because knowing it doesnt change the fact thatyou still have to do lots of work to take advantage of it.

So here it is, the No. 1 secret of investing.

The secret is thatfear is the dominant emotion in the market at alltimes.

I know of several famous investors whose actions reflect a clearunderstanding of it.

But even Warren Buffett the most successful investor in theworld has misconstrued the secret. He once said something like, Tomake money, you have to be greedy when everyone else is fearful andfearful when everyone else is greedy.

I think Buffett is wrong about that one, and I bet if I called him upand told him why, hed agree with me.

If people were really greedy, theyd wait until stocks were in their

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darkest hour and therefore at their lowest prices to buy them. Butmost people dont do that.

They wait to buy. Nobody wanted stocks in 1982, the perfectmoment to be greedy. There was no reason to be afraid, no reason to

wait. You dont wait to buy something thats priced right unless youre

fearful. Period. Thats why I say fear is the dominant emotion in themarket at all times.

Instead of doing their own work and relying on the conclusions oftheir own thinking, most investors including most of Wall Street letthe price action of the entire market, or even of a single stock, pinch hitfor their own intellects.

Maybe its not great insight to say everyone is afraid at market bot-toms. But what about tops? Everyone is greedy at tops, right?

Wrong.

The reason so many people become involved in stocks at markettops is because everyone else is buying. Thats what everyone is waitingfor. When youre filled with fear, you wait for some sign that its safe tobuy again. The sign investors choose most often is the actions of others.

Crazy as it sounds, otherwise sensible people, though blessed with aperfectly good brain, often choose to substitute the product of someoneelses brain for the product of their own brain. Somehow, if someone else

is doing something, it makes it more legitimate than if they thought of iton their own. This serves various types of animals in the wild, who sur-vive by moving in herds (though it doesnt seem to do the lemmingsmuch good). But humans are different. They dont need to travel in herds,because each one has the ability to take care of himself.

Here we are, the paragon of animals, and most of us dont get pastthe behavior of lemmings when it comes to investing.

In order to make money, you have to stand on your own. You haveto do your own thinking. You have to do your own research.


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How to Participate in the Worlds BestIncome Investment Strategy

Today, Ill share with you what I believe is the worlds greatestincome investing secret.

While you can take advantage of this secret at any time, certaintimes are better to begin than others.

The traditional ways of income investing like owning real estatestocks (REITs), oil trusts, or government bonds are worthless com-pared to this wealth-compounding strategy.

The secret is buying shares of World Dominating stocks with largeand growing dividends.

World Dominators are the No. 1 companies in their industries.Theyre consistently profitable, year after year. They gush free cash flow.

And they pay a lot of that cash out to their shareholders. Think Wal-Mart, ExxonMobil, and Procter & Gamble.

World Dominators dont have the highest current yields. The stocksabove pay between 2.5% and 3.5%. But the best income stocks arentthe ones with the highest current yields. Thats a common mistakeamong income investors. High yields come with high risk. Investors getsucked into risky REITs and energy trusts because they want to earn a

high yield right away. But too often, the extra risk produces losses.

Especially now, you need to keep your money safe.

Thats why the best income strategy is to buy the safest stocks, theWorld Dominators. And they are perfect for long-term income investorsbecause they pay dividends that go up every year. ExxonMobil has raisedits dividend every year for nearly three decades. Wal-Mart has raised itsdividend every year for more than three decades. And Procter & Gamblehas raised its dividend every single year for nearly six decades.

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You have to make your own decisions, and handle the conse-quences every step of the way. Thats how you should invest yourmoney.

Thats what Extreme Valueis about at its core.


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Jim Rogers and Warren Buffett onHow to Manage Your Money

Managing your own money is much simpler than most peoplethink it is.

The reason people think its complicated is Wall Street wants it thatway. If managing your own money werent complicated, Wall Streetfirms would go out of business.

It would be hard to imagine your broker, for example, calling youup and saying, Hey, listen. You dont need to do all this buying and sell-ing all the time. All you need to do is let your money sit in cash most ofthe time. Then, when you find something really great, something thatyou know is a good, safe bet to make plenty of money whether its 10

days or 10 years from now call me up and Ill buy it for you.

Likewise, youre not going to see anyone on TV saying, You reallydont need our mutual funds. Most of them arent that great and never

will be. You really just need to sit around and wait for something thatsso good, itll make you rich without taking unnecessary risks.

OK, so dont ask mutual fund managers or brokers about managingmoney. Ask millionaires and billionaires who made their money buyingand selling stocks, bonds, and real estate. Theyll tell you what to do. Anditll actually work.

This is what Warren Buffett says about managing money:

Your default position should always be short-term instruments.And whenever you see anything intelligent to do, you should do it.Buffett also said that asset allocation, a Wall Street obsession, is purenonsense. Asset allocation is Wall Street BS, but people actually pay a lotof money for that kind of advice. Educated people. People who wouldotherwise impress us with their connections and money and power. Godonly knows why they cant see that asset allocation is a total scam. Its

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Thats over half a century of dividend raises.

Best of all, you can count on these companies to raise their divi-dends year after year because they dominate their industries. Wal-Martis the worlds biggest retailer. ExxonMobil is the No. 1 oil and gas com-pany. And Procter & Gamble is the largest consumer-products company

in the world (selling to half the worlds population).

Heres what it means for long-term income investors: In 10 years,that 2.5%-and-growing yield can give you a 10% return on your origi-nal investment. Imagine owning a business like Wal-Mart and getting a10% yield. Its an income investors dream come true.

Being the No. 1 company in the industry is how these companiesare able to crank out huge amounts of cash flow year after year and payhigher and higher dividends. They dont have to grow in order to keeppaying out big dividends, year after year.

Obviously, everyone knows about these companies. But what mostpeople dont realize is how important it is to buy them when they getcheap. World Dominators are the most valuable companies in the

world. Most of them are easily worth anywhere from 20 times earningsto as much as 30 times earnings.

Ive been writing newsletters for almost 14 years and Ive neverfound as sure a thing in the stock market as buying cheap WorldDominators. These stocks are like bonds with interest payments that

grow. Theyre ideal for income investors, because over time, theyll payyou more and more income as each year passes. Bonds cant do that.

World Dominators can.


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completely and totally unnecessary.

If you want to know what to do instead of worrying about assetallocation, remember this: The best way to minimize risk, saysBuffett, is to think.

As usual, he cuts through all the crap, and gives advice that makessense.

Jim Rogers is somebody else you ought to listen to on the subjectof managing your own money. He used to work with George Soros.Rogers drove around the world twice, once on a motorcycle and once ina car, and wrote a book about each trip.

Rogers told author John Train in 1989 that you should take yourmoney, put it in Treasury bills or a money-market fund. Just sit back, goto the beach, go to the movies, play checkers, do whatever you want to.

Then something will come along where you know its right. Take allyour money out of the money-market fund, put it in whatever it hap-pens to be, and stay with it for three or four or five or 10 years, whatev-er it is. Youll know when to sell again, because youll know more aboutit than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does,youll make a whole lot of money.

The only problem with this simple strategy of sitting in cash andinvesting only when circumstances are ideal is human nature. Nobody

wants to do it. Nobody wants to be patient. Everybody wants to buyand sell quickly and make a fortune overnight. Judging from the resultsmost people get, they really just want to buy and sell quickly, whetherthey make a fortune or not!

Of course, the average investors impatience is just another easy wayfor us Extreme Valuetypes to get an advantage. We can sit in cash, waitfor something that is too good to pass up, then buy it and hold on.

What could be simpler than that?


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Taken aback, the new man motioned to his torn coat and said,Well?

The old man stopped whittling again, looked up, motioned to thedog with his knife, and said, That aint my dog.

The moral of the story: Ask the right questions. If you want tomake money in stocks, you should get satisfactory answers to the rightquestions, or refrain from investing.

The Extreme Valuelist of the right questions to ask before invest-ing is identical to that of Marty Whitman, founder of Third AvenueValue Funds.

1. Is the stock cheap?2. Is the stock safe?

Warren Buffett and Charlie Munger of Berkshire Hathaway havedecided on their list of the right questions to ask before investing. Thefollowing is from a Buffett interview I discovered.

Interviewer: Could you please explain the filterprocess you go through in making an investment?

Buffett: Look, it is just this simple there are fourthings we look for. Can we understand it? Does ithave a sustainable long-term competitive advan-tage? Are the management people we admire andtrust? And do we think its selling at an attractiveprice? It is as simple as that. If it gets through allfour filters, then I sign my name to the check.

Phil Fisher is the man who did the most to change WarrenBuffett and Charlie Munger from hard-core devotees of Ben Grahamto investors who are obsessed with owning only the best businessesrun by the best people. Fisher wrote a list of 15 questions to askbefore investing. Theyre in his landmark book, Common Stocks andUncommon Profits.

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The Old Man and the Dog

Dont ask me no questions, and I wont tell you no lies.

~ Lynyrd Skynyrd

Once there was a man.

The man found himself in a new town and wanted to get to knowthe people.

So he went to the town square to see what he could see. He sooncame upon an old man. The old man was whittling, turning a stick intoa smaller stick.

On the ground near the old mans feet sat a German shepherd. Thedog bared his teeth and made a low noise from deep inside his solidframe as the new man approached.

The new man stopped and looked down at the dog with some trep-idation. He asked the old man, Does your dog bite?

The old man kept whittling, and never looking up, replied,Nope.

The new man in town was relieved. He reached down to pet theanimal. The dog lunged at him and would have taken a chunk of flesh

out of the arm of a slower man. As it was, the new man recoiled quicklyenough that his coat sleeve was the only casualty.

Examining the shredded coat, the new man said with emphasis oneach word, I thought you said your dog doesnt bite.

The old man stopped his whittling. He looked up for the first time,wearing a toothless, wizened grin.

The old man said with just as much emphasis on each word,Thats what I said. My dog doesnt bite, and returned to his whittling.


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holders benefit from this anticipated growth?

14. Does the management talk freely to investors about its affairswhen things are going well but clam up when troubles anddisappointments occur?

15. Does the company have a management of unquestionableintegrity?

If all you do from this day forward is demand a good answer toWhitmans, Buffetts, and Fishers questions for every stock youre con-sidering, odds are three things will happen to you: Youll buy far fewerstocks, lose far less money, and make far more money on the ones youdo buy. If you stick with me here at Extreme Value, I can promise you I

wont ever recommend a stock unless we get the right answers to theright questions.

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1. Does the company have products or services with sufficient mar-ket potential to make possible a sizeable increase in sales for atleast several years?

2. Does the management have a determination to continue todevelop products or processes that will still further increase total

sales potentials when the growth potentials of currently attractiveproduct lines have largely been exploited?

3. How effective are the companys research and developmentefforts in relation to size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit

margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the companys cost analysis and accountingcontrols?

11. Are there other aspects of the business, somewhat peculiar tothe industry involved, which will give the investor importantclues as to how outstanding the company may be in relation toits competition?

12. Does the company have a short-range or long-range outlook inregard to its profits?

13. In the foreseeable future will the growth of the companyrequire sufficient equity financing so that the larger number ofshares then outstanding will largely cancel the existing stock-


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Berra might say, if you dont know what youre looking for, youre nevergoing to find it. In our monthlyExtreme Valueservice, were looking forcompanies trading at a discount to their intrinsic value, as measured bynet assets and/or earnings power. Simple as that.

Whatever your criteria are, you need to know them cold. Thats the

only way youll be able to make really big money in stocks. You cant,for example, expect to own 50 different stocks and manage your ownportfolio as a part-time endeavor. Like Buffett said, I cant be involvedin 50 or 75 things. Thats a Noahs Ark way of investing you end up

with a zoo that way.

In Janet Lowes book, Warren Buffett Speaks, she quotes a key pas-sage describing Buffetts advice on how to find and focus on those fewgems that will make you rich:

Draw a circle around the businesses you understand, and theneliminate those that qualify on the basis of value, good management,and limited exposure to hard times.

The circle Buffett mentions is the circle of competence hes spokenof many times. He can only get rich on those few stocks whose busi-nesses he understands. Period. If a stock is outside that zone, it mightgo up, but itll go up without Buffett on board.

Here are a few words from Buffett on how to work within your circleof competence to find great investments:

I would take one industry at a time and develop some expertise inhalf a dozen [companies]. I would not take the conventional wisdomnow about any industries as meaning a damn thing. I would try to thinkit through.

If I were looking at an insurance company or a paper company, Iwould put myself in the frame of mind that I had just inherited thatcompany, and it was the only asset my family was ever going to own.

What would I do with it? What am I thinking about? What am I

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Find the Few Stocks That Will MakeYou Rich and Forget About the Rest

There are two requirements for success in Wall Street. One, you haveto think correctly; and secondly, you have to think independently.

~ Ben Graham

Fifteen stocks.

According to a columnist in Forbesmagazine, thats what it took tomake Warren Buffett one of the richest men in the world.

Forbescolumnist Mark Hulbert did a study a few years back. Helooked at all of Warren Buffetts investment decisions over the years.Hulbert concluded 15 stocks made Buffett rich beyond anyones wildest

dreams, turning him into a modern investment legend. Without those15, Hulbert says, Buffetts returns would have been mediocre.

Im not sure exactly which 15 stocks they were, but you and I bothknow some of them: Coca-Cola, Gillette, GEICO, Washington Post,

Wells Fargo, and American Express, to name the most famous exam-ples. When Buffett decided to get into those stocks, he bought as muchas he could, knowing he was planning to hold them indefinitely.

Buffett has done that since the beginning of his investment career,no matter how much money he had. He put half his net worth into

GEICO at age 20.

How did Buffett find those 15 stocks that were worthy of bigchunks of his investment capital? Good question. Simple answer, too.He focused only on companies 1) whose businesses he understood, 2)with good management teams, 3) with a competitive advantage suffi-cient to produce high returns on capital for many years to come, and4) priced to make him rich.

Thats what Buffett is looking for in an investment. And, as Yogi


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Getting Rich in Stocks Means DoingNothing at All for Years

A fair amount of my wealth is the product of boredom and illiq-uidity.

A wealthy friend told me that once.

Hes in the securities business. Hes made a fortune buying littlestocks no ones ever heard of. And he also happens to be a reader ofExtreme Value.

My wealthy friends comment points out something most investorshave a great deal of difficulty doing with their money: nothing.

People hate doing nothing with their money.

Most investors are way too active. They want to buy and sell con-stantly. They want the latest, hottest idea. They want it to be 1999again, so they can buy Amazon at $300 and watch it go to $400 (pre-split prices).

And yet, absolutely everyone Ive ever met who has actually gottenrich in stocks, bonds, or real estate (including the traders!) they allsay the same thing. They all say getting rich investing is a long-termproposition, period. Every now and then you buy. You rarely sell. And

you spend most of your time just waiting: doing nothing.But thats not what most people expect. They expect to get rich

quick. What they dont understand is the very desire to get rich quickwill bankrupt them.

If you want to make real money in stocks, bonds, real estate, orany other investment vehicle, find a way to do it long term. Even if itscommodity futures, find a way to be a long-term trader, not a get-rich-quick scheme.

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worried about? Who are my competitors? Who are my customers? Goout and talk to them. Find out the strengths and weaknesses of thisparticular company versus other ones.

If youve done that, you may understand the business better thanthe management.

If you think your circle of competence is small, and would never fityour 15 stocks, Buffett has some advice for you about that, too: If wecant find things within our circle of competence, we wont expand ourcircle. Well wait.

I wonder what your own stock portfolio would look like if youlooked at each stock and asked, Is this company within my circle ofcompetence? If you cant answer with an emphatic yes, it would be bet-ter for the stock to go up without you than to keep your money in some-thing you dont understand. If you dont understand the business, thenyoull have to admit that either event (going up or down) will come toyou as a surprise.

And when it comes to your money, surprises are something youdont need. Avoid them by knowing your circle of competence andstaying inside it.


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Make 10 Times Your Money withoutTaking Big Risks

Investing is like tennis. Its a losers game.

Think of the difference between professional and amateur tennisplayers. Professionals win points. Amateurs lose them. When weekend

warriors play tennis, the losers determine who wins. They hit the ballinto the net. They whack it out of bounds. And they routinely double-fault on their serves. That doesnt happen nearly as much in pro tennis,

with its long rallies and pinpoint shots.

Most investors are like amateur tennis players. They lose money instocks because of their own behavior. Theres no opponent outplayingthem. They beat themselves.

DALBAR, a Boston-based research firm, compared the returnsfrom market index funds with returns real investors earned in equitymutual funds...

From 1989 to 2009, market index funds returned 8.3% per year. Ifyou compound $10,000 at that rate for 20 years, youll wind up with

just under $50,000 five times your money. For buying an index fundand doing nothing else, thats a great return. No research necessary. Nothinking required. Just buy and wait. It couldnt be easier, and you getfive times your money, pretax.

The only problem with that 20-year, five-times-your-money returnis that almost nobody earned it.

Real, flesh-and-blood investors investing their own real, hard-earned money made significantly less than 8.3% per year over that time.On average, individual investors in U.S. equity funds earned just 3.3%per year. At that rate, $10,000 grew to just $19,150 in 20 years. Theydidnt even double their money in 20 years! Most investors just cant hitthe ball back over the net.

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Besides giving your money time to grow, youll also keep the nega-tive effects of taxes and commissions to a minimum.

Tweedy, Browne Company has a great little paper about taxes, andthe advantages of holding long-term versus holding short-term. Due tothe effect of taxes alone, long-term holding is far superior to short-term

holding. The difference between the long term and the short term canmean the difference between making eight times your money or 16times your money. Thats the difference between making 15% a year for20 years and selling at the end of every year, versus making 15% a yearfor 20 years and not selling until the end of the 20th year.

If you want to get rich in stocks, its doable, but you have to bewilling to buy cheap, play it safe, and hold for the long term.

As Warren Buffett once put it, Inactivity strikes us as intelligentbehavior.

Its intelligent because thats how you really get rich in stocks. Youbuy, then you do nothing for a good, long time.


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The Three ThingsRich People Do All Day

Johann Sebastian Bach (1685-1750) taught me something aboutpicking stocks.

I studied music in college. I was a classical guitarist. When I firststarted studying, I was familiar with Bachs work, but I thought it wasterribly boring. For me, listening to Bach was like taking an infalliblesleeping pill. When they played Bach in my music classes, I would beginto nod off in a few short minutes, almost without fail.

But one day I remember it vividly I was in the hallway of themusic building. That day in the hall, I decided that, if all these expertsand music teachers thought Bach was great, Id just keep listening to the

music and try to stay awake. Id try to hear what they heard. I con-sciously decided to expand my horizons.

And it worked.

Today, I am a huge fan of Bachs music. When I hear it, it doesntput me to sleep. On the contrary, it actually energizes me. I have recom-mended Bachs works as energizing background music to several people.

Its hard to say what caused me to go from bored student to pas-sionate advocate on the subject of Bach. All I know for sure is that I

willingly suspended judgment and immersed myself in the music. I justplayed it day after day after day. One day, I realized I loved it. I wasbored at first. But then I just couldnt get enough of it. The music didall the work. It got me.

Ive done something similar with investing.

There is possibly no piece of writing more sleep-inducing than aform 10-K, the financial report every public company must file with theSEC once a year. There are no stories. No pictures (except the oddgraph here and there). Nothing visually stimulating in the least and

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Most real investors investing their own real money perform evenworserelative to the overall market in bull markets. During the greatbull market to end all bull markets from 1984 to 2000, DALBARfound equity mutual fund investors made 2.57% per year, with marketindex funds compounding at 12.22% per year.

The age of the daytrader treated investors worse than most periods.Investors ran around the court faster than ever, swinging like mad, onlyto hit more balls out of bounds and into the net than ever, turning a$10,000 investment into just $15,000 during the biggest bull market inhistory. Had they simply failed to lose, theyd have turned $10,000 into

just over $100,000.

Investors could have made 10 times their money in 16 years byrefusing to overmanage their own money by letting stocks do thework for them.

A large dose of humility would help most investors make moremoney in stocks. For starters, most investors just shouldnt buy individ-ual stocks. They should buy index funds and plan to hold for decades.

Almost everyone else should build a diversified portfolio of only thehighest-quality names and plan to hold them for at least 10 years.

If you cant hold on for a long time, be prepared to take losses.

World Dominators and stocks like them are an excellent start on adiversified portfolio that could earn you 10 times your money remem-

ber, thats 12.22% per year for 16 years. Most stocks like this will com-pound your money at single-digit rates. But one or two could produceenormous returns.

You dont need to take on big risks to earn that kind of return. Allyou need to do is wait. To master the losers game, you must be patient.

You must master time itself.


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ture is the somewhat esoteric world of insurance, with a focus on theeven more esoteric world of reinsurance. Again, nothing to watch. Justone side of a boring conversation about statistics and money.

After reading and talking on the phone, then the activity levelreally kicks into overdrive. and then the rest of the time, says

Buffett, I think.

Reading, conversing with people who know what youd like toknow, and thinking. Those are the three things rich people do all day.

If you think theres a secret out there, one thats going to help youhit the jackpot, I wish you luck finding it. As for me, Im just going toget back to reading, conversing with people who know more than I do,and thinking.

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everything reads like it was written by lawyers and accountants.

When I started reading these documents about 10 years ago, Icouldnt make it through them. Id fall dead asleep, with my head on mydesk. But I decided there must be something to reading them, sincethats how investors with real money spent their time. So Id wake up

and keep reading. Sometimes, Id fall asleep again. Then Id wake upagain and keep reading. No kidding. That really happened.

Part of the reason I persisted is because I had read somewhere thatpeople who are going through something emotionally frustrating or diffi-cult will often say, Im tired, as a kind of defense mechanism, an excusefor not being up to the task at hand. I took my boredom with SEC filingsas a sign of my ignorance. I didnt want to be ignorant, so I pressed on.

With Bach, I submitted to the apparent wisdom of my teachers,and I learned to love that which I had previously disliked. With invest-

ing, I have submitted to the proven wisdom of the great investors,especially Warren Buffett.

As usual, Id suggest you dont take it from me, but from someonewith more money and brains than I may ever have. On page 217 of J.Pardoes collection of quotations, Warren Buffett Has Spoken, Buffettsays, I spend an inordinate amount of time reading. I probably read atleast six hours a day, maybe more.

Next time anyone criticizes you for having your nose stuck in a

book, just tell him youll never get rich if he doesnt stop talking.

So what does Buffett do besides read? The quote from thePardoe book continues, I spend an hour or two on the telephone

If Buffett were talking to Elvis, perhaps you could broadcast theconversation over TV, radio, and Internet, and most people would beinterested in listening in. But its probably just the CEOs of the compa-nies he owns, maybe his partner Charlie Munger, and a bunch of folksin the financial world. I doubt most people would understand as muchas half the conversation, given that Buffetts largest money-making ven-


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the vast majority of investors. The average holding period for a stock trad-ed on the New York Stock Exchange peaked at about eight years in the1960s, down to about 6 months today. How hard is it to figure out that,if you can hold on for a year, youre going to do better than most of thepeople who are presently holding NYSE stocks?

And if you hold on to stocks for three years, youre really flying up inthe thin air. Its been much harder to lose money than to make it over anythree-year period since 1952. Thats true of stocks, as represented by theS&P 500 and also of long-term government bonds. I found out thatinvesting legend and Buffett confidant Phil Fisher used a three-year rulefor his performance. He told his clients that, if he hadnt produced a goodresult in three years, he should be fired. Phil Fisher knew that long-termperformance kicks in by the third year.

So when do you sell? I dont know. Ive been wrong about how todo it about half the time. Please try not to hold it against me, because noone else seems to know either.

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What No One Ever Tells YouAbout Selling Stocks

Nobody knows anything about selling stocks.

Nobody.

If you wonder what Warren Buffett himself has to say on this subject,you need only read his 2003 annual letter, in which he admitted, I madea big mistake in not selling several of our larger holdings during TheGreat Bubble. If these stocks are fully priced now, you may wonder what I

was thinking four years ago when their intrinsic value was lower and theirprices far higher. So do I.

No matter what Buffett says, I think his ignorance about sellinghas been one of the true secrets of his success. Since he knows its an

extremely difficult subject, he simply avoids it. He holds stocks for thelongest possible term and he buys whole companies, which he intendsnever to sell.

Buffett isnt the only great, rich investor who admits that selling is athorny issue. Marty Whitman told Grants Interest Rate Observer, Ivebeen in this business 50 years. I have had a lot of experience holdingstocks for three years, [doubling them], and [selling them] to somebodyelse for whom it tripled in six months. You make more money sitting onyour ass. Whitman also admitted, Were just not that smart on the sell

side. Never have been.

Of course, Buffett and Whitman are both rich, and continue tomake plenty of money for themselves and their shareholders. Not know-ing anything about selling hasnt hurt them any.

As for me, for every 20 stocks I recommend in the pages ofExtremeValue, I recommended selling about six of them. Half the time, I selltoo early.

Holding on longer, then, is the easiest way to get an advantage over


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YEAR 20 $964,629

The numbers above show what 40 years of compounding at 12%looks like. In year one, you make $12,000. In year 22, you make about$130,000 more than 10 times what you made in year one.

Of course, theres one little problem here. Nobody but nobody wants to hold on and wait for 40 years. (I know I dont!) Everybodywants fast action. Everybody wants to buy a 50-cent stock on Mondayand sell it for $5 on Friday. Unfortunately, most people are mathemati-cally illiterate, so they dont understand that the odds are way againstbig, fast gains in stocks. That ignorance, in turn, makes it easy to beovercome by our natural tendency toward impatience. And that is whyan understanding of the great power of compounding the single great-est tool an investor can possess remains, and is likely to remain, unex-ploited by the vast majority of investors.

Proof that impatience is why nobody exploits the power of com-pounding is easy to come by. In the early 1960s, the average holdingperiod for an NYSE stock was at its peak, about eight years.

Today, the average holding period for an NYSE stock is about 6months. Less than 12 months. That means the average company couldhold two shareholder meetings a year, and the CEO would never see thesame people twice.

These people arent investing. Theyre looking to hit the lottery. By the

way, the mathematics of the lottery dictate youll lose about 50 cents ofevery $1 invested over the long haul. If you dont overcome odds of morethan 1 million-to-one very quickly, youre virtually guaranteed to lose halfyour money playing the lottery over many years.

For the insightful and patient investors, the short average holdingperiod for NYSE stocks is wonderful news. Once you know nobody

wants to hold stocks for 12 months, its incredibly easy to gain anadvantage over nearly every other player in the market. All you have todo is find an undervalued stock and hold it for at least one year, andyou instantly put the odds of success in your favor.

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Why Its So Easy to Get Rich in Stocks,And Why So Few People Do It

Albert Einstein called it the greatest mathematical discovery of alltime, and, the greatest creator of wealth known to mankind.

Baron Nathan Rothschild called it the eighth wonder of the world.

Both men were talking about the power of compounding. Its easy tounderstand how compounding works. Just look at this simple example.

Say you invest $100,000 for 40 years. During that time, you make12% per year. At 12%, itll take you until year 22 before you have $1 mil-lion, but only another six years until you cross the $2 million mark. Ifyou can hold on until year 40, youll wind up with more than $9 million.

YEAR 0 $100,000 YEAR 21 $1,080,385YEAR 1 $112,000 YEAR 22 $1,210,031YEAR 2 $125,440 YEAR 23 $1,355,235YEAR 3 $140,493 YEAR 24 $1,517,863YEAR 4 $157,352 YEAR 25 $1,700,006YEAR 5 $176,234 YEAR 26 $1,904,007YEAR 6 $197,382 YEAR 27 $2,132,488YEAR 7 $221,068 YEAR 28 $2,388,387YEAR 8 $247,596 YEAR 29 $2,674,993YEAR 9 $277,308 YEAR 30 $2,995,992

YEAR 10 $310,585 YEAR 31 $3,355,511YEAR 11 $347,855 YEAR 32 $3,758,173YEAR 12 $389,598 YEAR 33 $4,209,153YEAR 13 $436,349 YEAR 34 $4,714,252YEAR 14 $488,711 YEAR 35 $5,279,962YEAR 15 $547,357 YEAR 36 $5,913,557YEAR 16 $613,039 YEAR 37 $6,623,184YEAR 17 $686,604 YEAR 38 $7,417,966YEAR 18 $768,997 YEAR 39 $8,308,122YEAR 19 $861,276 YEAR 40 $9,305,097


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Steak Tastes Better When Its on Sale,and Other Thoughts About Risk

Lets think about beta today.

Not the fish.

The number.

Beta is a number enshrined by Wall Street. What it tells you is verysimple. The S&P 500 has a beta of 1. If a stock has a beta of 0.5, itmeans that, historically, its price has gone up and down half as much asthe S&P 500.

Beta, then, measures the volatility of stock price movements relativeto some broader universe of stocks, usually an index thats recognized as

a proxy for the entire market. According to modern financial theory,and the Wall Street analysts whove swallowed it whole, if you know thebeta, you know how much risk there is in owning a particular stock, ora particular portfolio, or a particular index fund. Stocks whose priceshave moved up and down more than the S&P 500 are seen as contain-ing more risk for investors. Stocks that move up and down less than theS&P 500 are seen as containing less risk.

The modern theory of beta says, in effect, if a stock is worth $40,and its trading at $35, a fall to $30 means theres more risk in owning

the stock than before it fell, provided the index didnt fall, or fall asmuch. So, if the business is still worth $40, getting it at a much biggerdiscount means absolutely nothing to the followers of beta.

In his 1993 shareholder letter, Warren Buffett asked, Would thatdescription [of risk] have then made any sense to someone who wasoffered the entire company at a vastly reduced price? Two paragraphslater, Buffett asks, We dont need a daily quote on our 100% positionin Sees [Candies] or H.H. Brown to validate our well-being. Why thenshould we need a quote on our 7% interest in Coke?

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I imagine this insight doesnt get you very excited. After all, excite-ment is usually accompanied by a sense of urgency, some impendingperil or reward. And this reward is decades away.

Im the one whos telling you about time and compounding andeven I have to admit that, while Im happy to know about it, it cant

hold my attention for very long. I have to constantly remind myself, forexample, not to sell a stock thats gone up 70% in a few months andtheres the rub.

Its human nature to want results right away. Its human nature towant to put your hands on something and affect it immediately. Its nothuman nature to delay gratification. Nor is it human nature to want tospend time studying material so impenetrably boring that it puts you tosleep, like SEC filings, generally accepted accounting principles, incometax rules, and securities laws.

I remember when I was in my 20s, looking for the meaning of lifein every nook and cranny of existence, reading all of kinds of stuff,including all of Nathaniel Brandens self-help books. Branden said some-thing to the effect that human beings are the only creatures that can per-severe in their quest to discover the right thing to do, succeed in thatquest to find the right thing, believe its the right thing, tell everyone itsthe right thing and then go and do the opposite.

Well, once you know what weve learned today about compoundingand time, you can use Brandens insight to get rich. Once you realize that

doing your own research on accounting, securities laws, and incometaxes, combined with a bias toward holding good stocks for the longerterm, wont give you the instant gratification of lottery tickets and slotmachines you can still decide to go ahead and do the right thing.


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4. The purchase price of the business5. The levels of taxation and inflation that will be experienced

It sounds like more work than just looking up the beta. But thenagain, it tells you something useful, and that usually requires effort. Itsnot impossible to minimize risk, but you cant rely on a single number

to get the job done. Ignore beta and think about every investment youmake in light of the five criteria above, and your money will be a lotsafer.

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To a serious investor, the flaw in beta is obvious. The value of thebusiness is absolutely nowhere. Whether the company was Coca-Cola oran XYZ commodity producer wouldnt matter to the followers (truebelievers!) of beta. I cant imagine such an important considerationbeing meaningless to anyone with real money to invest. (Well I canimagine it, but I cant make sense of it.)

Accepting beta as an accurate measure of risk is like saying steakdoesnt taste as good when its on sale. Au contraire. The cheaper it gets,the better it tastes, as far as Im concerned.

The basic mistake that beta followers make is thinking the marketis there to make decisions for them. Thats wrong. Stock prices dontreally contain all the special information that analysts maintain they do.They just tell you what price somebodys paying right now (and whatsomebody else is receiving). The stock market is there to serve you, nottell you what to do.

Most serious value-oriented investors do nothing to mitigate mar-ket risk. In fact, they openly acknowledge that they welcome volatilityas a source of opportunity. Marty Whitman of Third Avenue, BillNygren of Oakmark, and Mason Hawkins of Longleaf have all madecomments to that effect. I asked Staley Cates, Mason Hawkins co-man-ager at Longleaf, about this once, and he said the only thing he does tomitigate market risk is buy 50-cent dollars, i.e., stocks selling for 50%of fair value.

Buffett says investment risk cant be calculated with the feigned pre-cision of the beta purist, but that you can achieve a useful degree ofaccuracy. As he told aWall Street Journalreporter, I deplore false preci-sion in math. He names five criteria by which one might evaluate risk:

1. The certainty with which the long-term economic characteristicsof the business can be evaluated

2. The certainty with which management can be evaluated3. The certainty with which management can be counted on to

channel rewards from the business to the shareholders


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When the markets behave badly, I bet most people think not gettingscared out of stocks feels about as natural as proposing to your daughter.

And, well, theres a small problem with the secret.

Lynch made his bones managing the Fidelity Magellan Fund to a29% annual return over 13 years. The fund owned as many as 1,400stocks at any given time. Lynch would buy practically a whole sector,sell the laggards, and keep the ones that went up.

You and I cant do that. Nor can we afford to give too much moneyaway in mutual fund fees, commissions, and trading friction.

To truly exploit the secret, you need to know that the stocks youbuy are worth hanging on to worth not getting scared out of.

Thats the business were in. Were looking for investments that

make it possible to use the secret without losing sleep (or needing aclean pair of shorts every hour). An Extreme Valuestock ought to be onethats safe enough not to get scared out of.

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The Secret to GettingRich in Stocks

Its simple to say but hard to do.

Im talking about the secret. The secret to getting rich in stocks.

The secret isnt any of the things most people think it is. For exam-ple, its not value investing, or even Extreme Value-style investing.

I know a smart guy who has been trading stocks and stock optionsfor decades. He rarely holds on for more than a few days. Hes made him-self and his clients quite wealthy. I know another fellow who becameextraordinarily wealthy speculating on commodity prices

But I dont trade options or speculate on commodity prices. Not in

Extreme Value, and not with real money. Ive tried those strategies. Theydidnt work for me. So now I buy safe, I buy cheap, and I hang on forthe long term.

Well, if buying cheap, safe investments isnt the secret to buildingwealth in stocks, then what is?

The problem with just blurting out the secret is it might not havethe impact on you that it had on me when I discovered it. Secrets arefunny like that. They sit in front of you for years, like that little girl

with pigtails and braces back in grade school. Then one day, the pigtailsare let down, the braces come off, and its Wow, never saw that coming.

The secret to getting rich in stocks is not to get scared out of them.

Not exactly a flowering debutante, but its true. The secret mighteven sound familiar to you. Its a close paraphrase of the Peter Lynchquote: The key to making money in stocks is not getting scared out ofthem in dieting, as in stocks, it is the gut and not the head that deter-mines the results.


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it becomes incredibly difficult to compete with. Imagine trying to build ahome-improvement business today. Youd have to compete with HomeDepot and Lowes. Imagine trying to build the worlds most popularretailer. Youd have to try to compete with Wal-Mart. Wal-Mart has putdozens of grocery chains and mom-and-pop shops out of business.Imagine trying to make better french fries and sell more of them than

McDonalds. Never gonna happen. Theres no substitute for being No. 1.

Think about Amazon. It used the Internet to sell more books tomore customers than any bricks-and-mortar bookstore chain ever could.Borders and Barnes & Noble are in terrible shape today because theyfailed to do that. They cant compete with Amazon, because Amazon

will always be able to sell more books than them.

If youd bought Amazon shares in 2006, when they were less than$30 each, youd have made nearly five times your money during a time

when most stock market investors lost money. Even during the lowestpoint of the financial crisis, in March 2009, youd never have lost money.Buying the company that sells the most was all you needed to know.

If you sell a product people like and want and figure out how tosell it to more customers than any other company, you will rule yourindustry. If investors are smart enough to know what youre doing, theycan make a fortune owning your stock.

Whether its burgers, bandages, or books, investors owe it to them-selves to know about the company that sells the most. In most cases, if

the stock is cheap enough, the top seller is the best investment you canmake in that industry.

Not all the worlds best businesses sell more products than theircompetitors, but many of them do. And these companies should be onyour investment radar screen if theyre not already in your portfolio.

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Use this Simple Secret toFind the Best Stocks

One of the secrets to finding the very best investments is so simpleand so obvious, most people dont pay attention to it...

If youd known about this secret back in 1994, you could havebought Colgate-Palmolive for less than $10 a share and made more thanseven times your money.

If youd known about this secret back in early 1995, you could havebought Microsoft for $4 and made more than six t imes your money.

If youd known about this secret back in 2003, you could havebought McDonalds for $13 a share and made more than six timesyour money, including a growing stream of dividends.

When you take into account the crashes of 2000-2002 and 2008-2009, its especially amazing investors are up this much. Whats theirsecret?

They look for companies with the highest sales in their industry.

I realize this sounds so obvious its almost laughable. Thats justbecause the real secrets to successful investing arent complex, like theyare in science. Theyre so simple, anyone can understand them. Forexample, Buy low, sell high is laughably obvious. Its just that almostnobody has the discipline to actually do it.

Selling the most is the definition of success in business. MicrosoftWindows runs about 90% of the worlds personal computers. Intel sellsabout 80% of the worlds microprocessors. Campbells sells more than70% of the worlds packaged soup. More than 60% of the worlds creditand debit cards say Visa on them. Colgate-Palmolive sells more than40% of the worlds toothpaste. These are all excellent businesses withhuge, consistent profits.

Once a business sells more than any other company in its industry,


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Some of the worlds biggest, safest, most profitable businessesget more than half their sales from outside the United States.

Theyre the easiest and best foreign investments you can make.Here are five companies from a list of elite companies I follow...

Company % of sales outside the U.S.Colgate-Palmolive (CL) 75%Coca-Cola (KO) 74%McDonalds (MCD) 65%Procter & Gamble (PG) 62%3M (MMM) 63%

You can invest in foreign markets and still get the peace of mind ofbuying safe blue-chip stocks. When the market crashed in 2008,investors in stocks like these had nothing to worry about. They made asafe 6% return on McDonalds... even though the stock market fell

almost 40% by the end of the year.

Now that you know McDonalds gets 65% of its sales outside theU.S., wont you sleep better as a McDonalds shareholder, even if theU.S. dollar gets worse? Foreigners will be able to buy more McDonaldsproducts, and McDonalds loyal customers and strong brand name willallow it to raise prices in the U.S. to adjust for a weaker currency.

When you buy great companies with high foreign sales, you oftenget a growing stream of dividends, too. Procter & Gamble has raised its

dividend every year for nearly six decades in a row. Colgate-Palmolivesdividend has increased more than 11% per year from 2001 to 2011.

It can be complicated and difficult to buy stocks in foreign mar-kets. You and I arent allowed to invest in stocks in India, for example.

We have to go through complicated and expensive legal procedures todo it. Other countries have all kinds of taxes. A subscriber told metheres a 25% withholding tax on some of his foreign stocks, even in hisIRA. His broker says theres nothing he can do about it.

Theres little need to invest in foreign stocks. Its much easier to

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The Best Foreign Stocks AreRight Here at Home

China, India, and Brazil were poor, Third World countries notlong ago.

Today, theyre making investors rich.

Indias Sensex index has risen 20%, just since last November. Andthe iShares MSCI Brazil fund is up more than 100% since early 2009.The China Shanghai index rose from 1,100 to 5,900 in just two years,2005 to 2007. Thats more than five times your money.

Theres definitely money to be made in growing foreign markets.

But you should be very, very careful about betting on a whole

countrys stock market. In this essay, Ill show you a much safer wayto profit over the long term from these hyper-growth situations,rather than blindly buying hot foreign story stocks, like most folks do.

Stock markets that shoot up quickly can, and usually do, fall just asquickly. Buying a whole stock market isnt really investing, anyway.Youre just betting on the direction of a whole countrys stocks andtheres no way one person can know enough to invest in every one ofthose stocks. Its not really investing. Its more like gambling.

But its still a good idea to invest in foreign stocks.

You dont want all your investments in one country. If the U.S.economy continues to suffer, all of your investments could suffer, too.Its better to spread your money around, so you can take advantage ofgood things happening in other countries.

Fortunately, its easy to make safe, liquid investments in foreigncountries. Its just as easy as investing in the U.S. You dont have to opena special account or deal with a foreign broker. You dont have to worryabout foreign laws or taxes. Heres why...


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Its When You Get Paid That Counts

Imagine investing in a friends business.

You invest $10,000. Since its not a charitable contribution, youwant to know two things: when youre going to get your money back,

and how much youll make in profit.

Your friend answers: I dont really know when youll get paid. Itmight be some time in the next six months, but it could be as long asfive or 10 years As to how much, I dont really know that, either. Ithink theres a chance Ill pay you about $10,000 over and above yourinitial investment. I hope itll be more like $1 million, though! But ifthings dont work out, Ill probably just give you back your $10,000,minus a few thousand to cover my losses. If things really go poorly, youllnever get any of your money back.

Youd laugh in his face. You would never go into business undersuch terms. No serious or semiserious businessman would offer yousuch vague terms.

Yet, every day, millions of investors are offered such terms, and takethem. They buy stocks not knowing when or if theyre ever going to getpaid or how much. As if they were buying lottery tickets.

I think people buy stocks this way because they dont know how tofigure out when and how much theyre going to get paid from their

investments. But its not really that complicated.

If youre a bondholder, you know exactly when youre going to getpaid: Four quarterly interest payments for some specified length of time,at the end of which you get back your principal.

In stocks, its hard to predict when youll get paid. But theres aneasy way to calculate how much youll earn.

If you buy a stock for 50% of what its worth, you can expect to

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stick to the best-quality U.S.-traded stocks and find the ones that havemore than half their sales outside the U.S.

If you know nothing else about investing in foreign stocks exceptthis simple, powerful idea, youll outperform 99% of investors whospend their time trying to find the next hot foreign stocks.


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What Youve Got WrongAbout Value Investing

Over the course of my career, Ive received letters from investorscriticizing the art of value investing.

Many people think value investing is simply trying to time themarket trying to pick the bottom in a stock. Thats not true. Everyfinancial advisor or broker worth knowing will tell you nobody can timethe market. Nobody can pick bottoms.

Given the enormous opportunity that exists right now for investorswho understand value how much a great business is worth to a privateinvestor I need to take this opportunity to clear up the difference.

Value investing is not an attempt to pick bottoms.

Picking bottoms isnt a skill. Its like buying lottery tickets, anothergood way to lose money. I cant time the market. You cant time themarket. No one can. You can only buy terrific values when you findthem. I dont buy stocks because the market is down. The markets canalways go lower. I buy when stocks are cheap.

Most investors are mesmerized by that irresistible shiny object themodern, real-time price quote. Theyre members of the Q culture, asLawrence Cunningham calls it in the introduction to his book, How to

Think Like Benjamin Graham and Invest Like Warren Buffett.

Cunningham writes, Quotes of prices command instant attentionin the mad, modern market where buyers and sellers of stocks have noidea of the business behind the paper they swap but precisely what theprice is.

Its easy to know the price, which is why so many people areobsessed with it. Its much harder to know the value, which is whyalmost no one has any idea what value is or what it means.

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make double your initial investment some day. If you buy at a 75%discount, you can expect to make four times your money. At a 33% dis-count, youll make about 50%, and so on.

The idea is always the same. Once you know the value of a stock, theprice you pay determines roughly how much you can expect to make.

An obvious question is, What if youre wrong about your estimat-ed value? Bill Nygren at the Oakmark fund once provided me with agood answer. He insists on paying 40% less than his estimate of a com-panys value so that hell have a sizeable enough margin for error.

When a stock reaches your estimate of its value, thats when you sell.

Few brokers or other investment advisers will ever tell you to sell.Many of them are content to take advantage of their clients ignorance.If you sell at a profit and the stock goes higher, theyre afraid theyll

look dumb. If you sell at a loss and the stock comes back, your brokeror adviser is probably afraid youll be furious. As long as youre holding,your hope is alive. The incentive of brokers and advisers is to keep youholding and hoping at all times.

Obviously, youre never going to make any money holding andhoping. You have to know when to sell. To know when to sell reallyknow, and not just guess you have to determine value.

Thats what we do in the pages ofExtreme Valueeach month.

If you were in any other business, youd demand at least that much.Investing should be no different.


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The Secret to Horse Racing...and Stock Investing

One night in 1994, Berkshire Hathaway Vice Chairman CharlieMunger found himself at dinner with the president of Santa Anita, a

horse racing track in southern California.

Mungers dinner companion told him about bettors who wageredso much that they had lines of credit with the racetrack. Naturally, thegreat majority of those bettors were just like the hordes of smaller bet-tors: net losers over time.

The few times when they managed to win, they never won enoughto take care of their losses, plus pay for the racetracks cut. These are the

whales, the high rollers, the people who gamble big, lose big, and pro-vide a good living for the gambling industry.

But a tiny few bettors, over the long term, really did manage tomake a little money gambling on the horse races at Santa Anita.Munger was impressed that these few were shrewd about something

with as much unpredictability as horse racing.

Munger wanted to get to the bottom of the bettors success. Thatnight, he learned the one thing that all those winning bettors in the

whole history of people whove beaten the pari-mutuel system have isquite simple. They bet very seldom.

Munger reasoned, Its not given to human beings to have such tal-ent that they can just know everything about everything all the time.But it is given to human beings who work hard at it who look and siftthe world for a mispriced bet that they can occasionally find one. Andthe wise ones bet heavily when the world offers them that opportunity.They bet big when they have the odds. And the rest of the time, theydont. Its just that simple.

First, bet seldom. Then, when you bet, bet big. Replace the word

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But since value investing has absolutely nothing whatsoever to dowith market price quotations, it cant possibly have anything to do withchoosing the perfect price quotation.

Imagine paying two times earnings for a stock worth 20 times earn-ings. If it rose 200%, it would still be a great bargain and you should

still buy it. If the same stock traded for four times earnings and fell50%, it was still a great bargain back at four times earnings. Its merely abetter bargain at two times earnings.

If the same stock sells for 60 times earnings, then falls 50% to 30times earnings, its not a bargain at all, even though it has fallen sub-stantially.

Thats how value works. It starts with business value, and only thendoes it make sense to check the price quote.

Before worrying about the price quote, investors need to learn theassets, earnings, dividend history, expenses, profit margins, interestexpense, management, the overall size of the industry, and who thecompetitors are.

So I dont try to time the market. I buy stocks and recommend myreaders buy stocks when stocks are very cheap in relation to their intrin-sic values, no matter what happens tomorrow.

Value isnt about hoping share prices go up, and it certainly isntabout attempting to predict the lowest share price. Its about knowing

what a business is worth and paying a substantially lower amount thanthat.


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The Greatest Mutual Fundin the World

If you want to make big returns on your investments year after yearfor many years, listen to David Swensen.

Swensen is the widely respected chief investment officer of the YaleEndowment Fund. He made Yale more than 16% per year for twodecades. That kind of compounding gives you 20 times your money inabout 21 years. Imagine retiring with 20 times what you have right now.

Making that kind of money as an investor is a rare achievement.Mutual fund investors know this better than anyone...

On the subject of mutual funds, Swensen says, A miniscule 4 per-cent of funds produce market-beating after-tax results with a scant 0.6

percent (annual) margin of gain. The 96 percent of funds that fail tomeet or beat the Vanguard 500 Index Fund lose by a wealth-destroyingmargin of 4.8 percent per annum.

Wow. Ninety-six percent of all mutual fund managers make lessmoney than a simple index fund... and charge you fees for doing so.The obvious lesson from all this is to be very picky about whos manag-ing your money. You only get one shot at compounding your wealthover decades... so every single percentage point you can earn is worthmillions.

In this essay, Im going to show you how to avoid garbage funds.And Im going to tell you how to find the perfect mutual fund. If youknow what to look for, you can save yourself a lot of money andheadaches over the coming years.

The perfect mutual fund has five key attributes that tell you its safeenough for your retirement savings and will earn enough money onyour investment. Take a look at the funds you own this weekend. Ifthey dont meet the following high standards, consider selling them and

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bet, with the word buy, and theres your formula for investing instocks.

Most people just dont have the patience for it. They dont want tobet seldom. They want to trade, to bet often, taking many small lossesand small profits. They dont want to bet big, either. They want to

diversify, to make many small bets.

Once youve placed your bet, you must then do something else noone wants to do. As Joel Greenblatt put it at the Value InvestingCongress in New York City in 2006, Nobody wants to wait threeyears. And because nobody wants to wait three years, an enormousopportunity exists for those who will.


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ager whose interests werent exactly the same as your own?

Do yourself a favor next week. Print off this list. Call your mutualfund managers and go over it with them. If they dont meet theserequirements, they should have a good explanation for why not. Ifyoure not happy with the explanation, dump them.

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switching to the small handful of funds that do.

First of all, management should act in the shareholders bestinterest at all times, even if it means closing the fund. One of myfavorite funds stayed closed for more than two decades, during whichtime it could have grown many times its current size.

That would have earned more fees for the funds management. Butit also would have made it much harder for management to produce thekind of returns that multiply your investment by a factor of 200. Itsalmost impossible to produce outstanding gains when youre trying toput a huge amount of money to work.

Second, management should not be in business to soakinvestors by charging high fees. Some of the best mutual funds in the

world charge just 1% of assets under management. If youre paying over1.5% in expenses to your fund manager, youre overpaying.

Third, the best mutual funds only buy the very best companieson Earth. There arent 200 truly exceptional companies in the world

worth buying. Probably less than 100. The best mutual funds focustheir attention (and your money) on their very best ideas. The idealmutual fund holds 15-30 stocks. Somewhere in that range is the perfectbalance of diversification and focus.

Fourth, the perfect mutual fund holds stocks for the long term .When you buy the best companies and hold large positions, it makes

no sense to trade in and out quickly. The average large-cap blendmutual fund holds stocks for an average of about 17 months. Not eventwo years.

Many mutual funds hold hundreds of stocks, and turn over theirentire portfolios every year. They dont know what to buy, and theydont know what to sell, so theyre constantly buying and selling.

Finally, you want to invest in a mutual fund whose managers investtheir own money right alongside yours. This is a no-brainer. Its alsohard to find. But why would you ever give your money to a fund man-


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through good times and bad.

Microsoft has so much money, it doesnt know what to do with itall. So its paying it out to shareholders. Its buying back shares and pay-ing the fastest-growing dividend Ive seen among World Dominators.

Wal-Marts growth has slowed, but its still bringing in plenty ofcash. So instead of using it to grow the business, its using cash to growthe dividend.

Procter & Gamble has raised its dividend every year for more than50 years in a row. A recent annual report was crystal clear: Our firstdiscretionary use of cash is dividend payments. Dividend paymentscome out of free cash flow. Free cash flow determines bonuses for P&Gexecutives, giving them a great incentive to treat shareholders to a grow-ing stream of income.

With World Dominators like these, a low but rapidly growing cur-rent yield eventually becomes a large and growing yield. Let me showyou an example...

You could have bought Wal-Mart in 1997 for less than $18 a share(split-adjusted). Back then, the quarterly dividend was $0.034. The cur-rent yield was tiny, below 1%. But if you bought Wal-Mart at that timeand simply held on for a dozen years, you were earning $1.80 a year individends for a yield of 10% or more over your original cost. Imagineowning a business like Wal-Mart and getting a 10% yield. Its an

income investors dream come true. (A stock price 200% higher doesnthurt, either.)

Most income-focused investors lust after stocks with high currentyields. Big mistake. High current yields usually indicate high risk...leveraged balance sheets and commodity-oriented businesses.

MLPs, REITs, and other stocks with high current yields must payout a large portion of earnings in dividends or theyll lose their tax-advantaged status. Theyre not allowed to retain earnings for futuregrowth. If they want to grow, they have to go to the capital markets and

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The Secret of World-DominatingDividend Stocks

Investors who know what theyre doing will recognize this secret assoon as they hear it. But I bet if you try to tell your friends about this

secret, they wont get it (and theyll continue to get killed in the stockmarket).

The thing is, its not really a secret.

Ive seen it in Forbes, the Wall Street Journal, and Barrons. Cohen &Steers fund manager Rick Helm has repeated the simple secret on howto avoid risky income stocks and earn a steady stream of high and grow-ing dividends:

The best income stocks are the ones that consistently raise their

dividends, even though these stocks tend to have low current yields.

Helm has spent his entire career looking for the very best dividend-paying stocks, and his fund owns Procter & Gamble, Microsoft, and

Wal-Mart (all of which yield under 3%).

But just look at how their dividends have grown in the last severalyears:

Annual DividendCompany Growth Rate Since...Microsoft 11% 2003

Wal-Mart 19% 1998Procter & Gamble 12% 1998

These stocks all are World Dominators. A World Dominator isgenerally the largest, most powerful company in its industry. It canraise prices to stay ahead of inflation and use its enormous size to keepcosts low. Raising prices or being the lowest-cost provider means these

World Dominators tend to crush the competition. So they often gener-ate enormous amounts of cash. That cash can support dividends


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Where to Find Extraordinary IncomeStreams That Always Go Up

For years now, Ive been pounding the table on World Dominators.

These companies are at the tops of their industries. They gush freecash flow and pay out ever-increasing dividends like clockwork. Some ofthese companies have grown their dividends for 40 years in a row.

But I realize many of you doubt the wisdom of owning thesestocks. So today, Im going to show you why dividend growth stocks arethe closest to a sure thing that exists in the stock market. Theyre theonly source of return you can count on to rise every year. Theyreunbeatable investments.

Ive told you about this many times. But now Id like to show you...

Lets start with retail dominator Wal-Mart (WMT). Take a look atWal-Marts dividend growth from 2001 to 2011...

Its relentless. Wal-Marts dividend has grown every year, year after

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issue new debt and equity securities.

World Dominators tend to be the most creditworthy institutions onEarth, so unlike high-yield REITs, theyre immune to capital-marketproblems. Even when times get tough, theyre not cutting their dividends.

If a growing stream of income thats impervious to economic disas-ter is what you seek, World Dominators are what you need to own.


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Mart continued to raise its dividend by double digits every year.

The bottom line is, the market cant promise you growing income. Itcant even promise you steady income. Only the World Dominators can.

Theyre the best investments around. And if youre investing forincome, theyll beat the stock market, year after year.

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year, through the biggest housing boom and bust in history... the worstfinancial disaster in American history... Federal Reserve inflation... high-er food prices... terrorist attacks... two recessions... $150 oil... and$1,500 gold.

Through all of it, Wal-Mart has continued to grow its business and

dividend payment by 18% per year. At that rate, if you buy today, youllearn a double-digit yield over your original cost within eight years.

Now lets compare that to the performance of the S&P 500 as awhole. The chart below tracks the average dividend paid out by S&P500 stocks over the same 10-year period...

Its not bad. The average dividend payment is up overall during theperiod. But when things got tough in 2008 and 2009, many companiesslashed their dividends. The S&P 500 paid the same amount in 2011 aspaid in 2006.

Five years of dividend growth was wiped out of existence. If youwere depending on dividends from the average stock as a source ofincome, you took a heavy pay cut.

But while most companies cut or eliminated their dividends, Wal-


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I look for an earnings yield of 9%-14% before I say stocks as agroup are cheap.

3) Dividend yields for the big indexes

Dividends are probably the most important thing most stock mar-ket participants completely ignore. In his excellent book, BehaviouralInvesting, James Montier showed that over the long term, dividendshave provided more than half the returns from equities. A knowledge-able, rich investor only gets excited about the broad market when cashdividend yields are up around 5%-7%.

In general, I dont worry what the market is up to. You dont have toeither if youre just very careful what you buy and sell or avoid garbage.

But if you must keep an eye on the market, these three numbers arethe only ones that matter.

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Know This and Youll Never Have toWorry About the Markets Next Move

Everybody wants to know what the overall stock market will donext. Will it rise more? Will it fall? If it falls, will it be a small dip... or a

giant crash?

Investors who think about questions like these too much arentinvestors at all. You dont get to know what the stock market will donext. No one does, at least not often enough to profit consistently fromit. Over the short term, the stock market is a random walk. You neverknow which direction its next step will be.

The antidote for the universal obsession with the markets ups anddowns is learning how to think about its valuation. Here are the threenumbers to watch...

1) Total stock market value as a percentage of GDP

[If total stock market capitalization divided byGDP] falls to the 70% or 80% area, buyingstocks is likely to work very well for you. If theratio approaches 200% as it did in 1999 and apart of 2000 you are playing with fire. Warren Buffett, in a 2001 Fortunearticle

Buffett should have noted slam dunk buy territory on this ratiodoesnt really kick in until you get down around 50% or 60%... Greaterthan 100% is once-an-eon, slam dunk sell territory. It rarely getsabove 90% and has spent decades under 75%.

2) Earnings yields and price-to-earnings ratios for the bigindexes

To calculate earnings yield, divide 100 by the price-to-earningslevel. At 20 times earnings, stocks have an earnings yield of 5%. Aprice-to-earnings ratio of 10 = 10% earnings yield.


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Granthams lessons are powerful and easy to understand. Avoidwhats expensive. Buy whats cheap.

Stocks were incredibly popular in 1999, when Grantham made hisprediction. They crashed three months later. Emerging markets werevery cheap. They produced excellent returns. In both cases, extremes of

valuation trumped all else.If youre buying and selling businesses without knowing how to

value them, and how to spot extremes of valuation in them, you cantpossibly hope to make a dime in the stock market. If you fancy yourselfa trend follower, be careful you dont follow your beloved trendstraight off a cliff.

Granthams forecasting success proves waiting for extremes of value toarrive makes long-term investing success much, much easier to achieve.

And while I normally dont pay a bit of attention to predictions, itsgreat to see such a common-sense forecast prove the case for valueinvesting once again.

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New Study Reveals Worlds GreatestInvestment Strategy

Its official: Buying the cheapest assets you can find is where youmake the biggest, safest, easiest money as an investor.

What made it official to me was a study by one of the greatestliving investors. The investor is Jeremy Grantham. His firm Grantham,Mayo, Van Otterloo, manages over $100 billion.

Grantham published the results of a 10-year forecast he made forthe period from December 31, 1999, to December 31, 2009. In 1999,Grantham predicted the rank and return for 11 different asset classes.The actual rankings wound up correlating 93% with Granthams fore-cast. The probability of equaling or besting such a performance is aboutone in 550,000.

How did he do it? As he wrote in his investor letter, We forecast[back in 1999] that the egregiously overpriced S&P would underper-form cash and everything else what should you expect starting at 33times earnings? and we assumed that emerging equities would doextremely well despite a 0.7 correlation with the S&P, because they werecheap. (Italics added.)

Granthams forecasting feat confirms a thesis Ive believed for a longtime: If you wait for asset prices to reach extremes of valuation, you

have an excellent chance of outperforming most investors. Its difficultto wait for the

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