This will be our last article reposted while the Nintai team is on vacation. We hope everyone had a wonderful holidays and we wish you all a safe, happy, and healthy New Year. 

Bravado and Investing
 
In World War II at the Battle of Samar, a task force of small US escort carriers and destroyers suddenly found itself facing an enormous Japanese fleet including the world’s largest battleship the Yamato. Completely outgunned, and without enough speed to outrun the enemy, it looked like the Task Force was guaranteed to be completely destroyed. As shots from Yamato’s huge 18 inch guns started to straddle one the carriers, an Ensign said with false élan, “Don’t worry boys, we’re sucking ‘em into range. We got ‘em right where we want ‘em now[1]”.
 
Sometimes successful value investing takes a certain form of bravado like our aforementioned naval ensign. But this type of enthusiasm can easily cross the line from supreme confidence to delusional thinking. Successful investors see that line quite clearly. Many unsuccessful investors cannot distinguish between the two. 
 
How does one make a clear distinction between the two? How many of us have let our preconceived notions – or worse our emotional need – drive our investment decisions? It happens to all of us. I remember in my younger days estimating growth of X% for a company I admired. Later that afternoon I met with my partner to review my findings. His one comment was that my growth projections were double the historical rates of the corporation’s past 33 years. When eyed with a reptile-like steely gaze, my assumptions resembled Samuel Johnson’s definition of a second marriage - “a triumph of hope over experience”. Adam Smith pointed out that sometimes you provide information in a way to support your thesis (“The company growth will provide dramatic value over time”) or as a means to blame your holding for poor results (“It’s not my fault management blew the new product launch”).[2]. What is most frightening in this case was that I either simply didn’t recognize a potentially bad investment or I had fooled myself into thinking it was a great company with high growth rates. Neither of these would likely lead to a successful investment strategy.
 
My mistake is quite common in the investing world and is known as optimism bias. Investors project estimates that will fit with their investment thesis and have a tendency to disregard information contrary to their investment outlook. This type of thinking can lead to devastating results. Many individuals (and professional money managers) simply could not accept the fact that in 1999-2000 technology spending growth had to drop dramatically. Even more importantly, many were simply unable to question analysts’ estimates that were later proven wildly inaccurate - and in some cases – grossly unethical. 
 
As usual Michael Mauboussin captured the problem in a clear and concise manner. He states that insider optimism is susceptible to “anecdotal evidence and fallacious perceptions.” In this case, insider doesn’t refer to a company insider, but rather to an individual who looks inwardly for confirmation. He goes on to say that outside thinking “asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened. The outside view is an unnatural way to think, precisely because it forces people to set aside all the cherished information they have gathered.”[3]
 
The Children of Lake Wobegone
 
A 2006 study by Dresdner Kleinwort Wasserstein Macro Research[4] makes a compelling case that investment managers are not immune to optimism bias. In a survey of 700 US and foreign-based investment managers, individuals were asked whether they thought they were above average at their job.

Roughly 75% of respondents felt they were above average, 24% felt they were average, and less 1% felt they were below average. Anybody with a high-school level knowledge of statistics knows these results cannot possibly be accurate. Nearly 25% of the individuals most likely suffer from optimism bias (and an inflated ego). 
 
So what can we take away from this? The main point is professional money managers – with years of hard performance data – have convinced themselves they are mostly above average in the skill sets. Second, optimism bias can lead you far astray from the cold hard facts. Yes, you might have a genuine affinity for making successful decisions, but only if the data support you in your claim. Last, an optimism bias can lead to rejection of information (or lack of information per Smith’s theory) essential to making wise decisions. 
 
Conclusions
 
The line between reasoned optimism and optimism bias can be mighty thin sometimes. The ability to make that distinction by applying outside thinking and data means you have a leg up on most other investors. Don’t get me wrong. There’s nothing inherently bad about having a cheery disposition, but an investment manager utilizing such an outlook can cost his/her investors dearly. Like our sailors at Samar, sometimes a certain amount of bravado is required. Just not in investment management. 
 
I look forward to your thoughts and comments. 

[1] The story of the Battle of Saran and the fight of Taffy 3 is an extraordinary story. You can read more about the battle in the book “Last Stand of the Tin Can Sailors”, by James D. Hornfischer.

[2] For a wonderful and modern look at Adam Smith’s theories you should read “How Adam Smith Can Change Your Life”, Russ Roberts, 2014

[3] Think Twice: Harnessing the Power of Counterintuition, Michael J. Mauboussin,  Harvard Business School Press, 2009

[4] “Behaving Badly”, Dresdner Kleinwort Wasserstein, February 2, 2006 

“It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." 
 
                                                                                                   -     George Soros 
​
We’ve always valued the wisdom of George Soros and have a copy of the quote seen at the beginning of this article displayed in our office. But over the past five years, we’ve begun to quibble with this quote. We think there is a third option: how much money you make when markets are making even more. Over the past five years, Nintai Investments has generated solid returns for our investors. In fact, we have outperformed our proxies—the Russell Mid-Cap Growth Index and the Russell 2000. That said, we have significantly underperformed the S&P 500 over the past 1, 3, 5, and 10 years. 
 
Monolithic Power Systems: Good, But Not Good Enough
 
We have owned Monolithic Power Systems (MPWR) since 2021 in most of our portfolios. During that time, the company has been performing exceptionally well. As shown below, growth and profitability have been impressive over one-year, five-year, and ten-year periods. 

On October 30th, the company reported its third-quarter results. Third-quarter revenue came in above guidance, rising 19% year over year to $737 million. Fourth-quarter guidance was positive, implying 19% year-over-year revenue growth to a midpoint of $740 million. Here was Morningstar’s take on the quarter and the company’s 2026 outlook.
 
“MPS' strong momentum is continuing, with widely diversified growth across its served markets. We like MPWR’s' ability to win new customers, move up the value chain in key markets, and take market share. Artificial intelligence and automotive growth continue to be bright spots.

• AI revenue was a headwind in the first half of the year, with lumpy order patterns and MPS ceding some of its dominant share. We like that this business is back to growth and anticipate further expansion with the firm qualifying into custom AI accelerators at new customers like Google.
• MPS' march up the value chain in automotive is impressive. The firm won another advanced driver-assistance system design in the quarter. We expect ADAS strength to continue and for MPS to layer in battery management and electric vehicle drivetrain solutions longer-term.
• We expect another year of 20% sales growth in 2026 and see double-digit growth enduring into the long term. We expect data center revenue to grow most rapidly but expect the firm's attractive end-market diversity to prove durable behind widely strong growth across its markets.

The bottom line: We've raised our fair value estimate for wide-moat MPS to $920 per share from $840. We like the company's diverse growth opportunity and continue to see the highest growth in data centers and autos.”
 
From this review, you would consider the company’s quarterly report and 2026 outlook exemplary. Indeed, few companies in today’s market have achieved such levels of profitability, growth, and capital allocation. 
 
For all of this, the day after announcing earnings, the stock dropped by 12% by midday. What in the world would cause the markets to slash the stock price by double digits after such a report? 
 
Two words: artificial intelligence (AI). Market participants didn’t see enough discussion (and market growth) related to AI. Management reported that, in Morningstar’s words, “AI revenue was a headwind in the first half of the year, with lumpy order patterns and MPS ceding some of its dominant share.” We’ve now reached a stage in a market, driven by AI, where a company with double-digit growth foreseeable through 2035 and free cash flow estimated to grow by 18-20% over the same period sees a double-digit price decline because AI revenue was “lumpy.”
 
Conclusions
 
We are in a market that challenges many of the values we've upheld for the past few decades. We've always focused on companies that generate high returns on capital, strong free cash flow margins, little or no debt, and trustworthy management. We have always preferred to let the company and its management handle the heavy lifting over time. Eventually, the returns will follow. Over the past five years, we've seen two market segments—artificial intelligence and cryptocurrencies—drive most of the market’s outperformance. Don’t get me wrong—our portfolios have performed well, delivering roughly 10% returns over the past decade. However, these returns have simply not kept pace with assets that either lack obvious value (crypto) or haven't produced significant free cash flow yet (AI). Ultimately, we are unlikely to invest in either market category. We believe companies like Monolithic Power Systems are excellent organizations that will yield strong long-term returns. AI and crypto? We’re not so sure. But one thing we are confident about is that we will not risk our investors’ hard-earned dollars on such hollow ventures. 
 
As always, we look forward to your thoughts and comments.
 
DISCLOSURE: We hold Monolithic Power Systems in our current investment partners’ and personal portfolios. 
 

To Our Readers:

We will be on vacation from July 27th through August 10th. We are posting an article from the archives in replacement of any new writing. 

“I used to be Snow White, but I drifted.”
                                                                                 -    Mae West
One of the more interesting stories in aviation history is the example of the Gimli Glider. The incident took place in 1983 with the new Boeing 767. Halfway through the flight, the plane ran completely out of fuel and was forced to glide to a former Canadian airbase and make an emergency landing. The mistake was made by a series of human errors and the simple fact that fuel calculations were made in metric (liters) versus imperial (gallons). Having loaded less than 50% of the fuel necessary for the planned flight, the crew found itself flying a glider over Manitoba rather than a jet airliner.
The Gimli Glider story has quite a few similarities to value investing. In the final analysis, a simple mistake can turn an event, a company, anything really, into something quite different than your expectation. The journey getting from point A to point B can become quite different than first envisioned. If a company’s strategy begins to wobble in year two, it’s likely you will be investing in a very different company in year five and something not even remotely the same in 20 years.
The Gimli flight crew thought they were flying the most modern jet airliner in the world. In a matter of moments, they were flying the largest and heaviest glider over flown. Sometimes a value investor thinks they are buying a jet but get a glider. Avoiding these unexpected conversions is one of the top ways to be a successful long-term investor.
In my time at Nintai Partners, I averaged an 8.7-year holding time for each portfolio member. Each year, we would evaluate our investment case of each holding with a particular focus on what we called the “drift factor.” This evaluated how different the company was from a strategic, operational and management sense year over year. Over time, we found that those holdings with the largest “drift” factor were almost always our largest losers. We also found the quicker (or larger) the drift, the worse the loss. Essentially, we were buying a jet that drifted into a glider (no pun intended).
Andrew Carnegie once said the way to become rich is to put all your eggs in one basket and then watch that basket. As a focused investor (from both number of holdings and number of industries), my job as an investment advisor is to allocate capital in companies that minimize drift over the long term. With such focus, the smallest amount of such drift can cause dramatic changes in the quality of the portfolio in a very short time.
That’s why it’s vital to be a very different critical thinker if you want to be a long-term investor. The idea of sitting by a lake reading Barron’s as your companies compound cash is somewhat correct but mostly wrong. Watching that basket all the time is like flying that jet – it takes considerable work.
To me the importance is to track the drift within the context that your holding period will be a decade or more. It’s a difficult path to follow. Here are the important criteria I use to assist in meeting these goals.
Confidence of same industry business in 10 to 20 years
It’s very difficult to invest in a company that you are confident will be doing the same thing in a decade or two. It’s a challenging exercise, but I think can be done with some (the operative word) accuracy. Research in five areas in particular can give an investor a reasonable shot at the potential for drift.
M&A: Has the company had a history of M&A? Are acquisitions largely accretive or small snap-on purchases to enhance current offerings? Do they enhance the company’s moat, making it harder for competitors to catch up? Conversely, has management done a deal that clearly destroys shareholder value?
Regulatory: Does the company have an advantage supported by government regulations? For instance, biopharmaceuticals will have a regulatory moat for branded products that can last a decade or longer. Conversely, is there a risk that regulations may restrict the company’s strategy or operations?
Technology innovation: In 1978, the head of Encyclopedia Britannica was famously quoted to the effect that encyclopedias were the safest product line to bet on in the future. I’m not sure what happened to that executive, but I hope he didn’t bet his future retirement based on his market predictions.
Business process innovation: The phrase “to build a better mouse trap” has been around as long as there has been ... well ... mousetraps. And yet for all the amount of times you’ve heard that phrase, a mousetrap is still a mousetrap, and the model designed in 1934 still has 90% of market share. The catch (no pun intended) is that the price has dropped roughly 90% since its introduction. Almost all of the cost squeezed (OK, that might have been intended) has been in better business processes (cheaper raw materials, cheaper labor, design tweaks, and so forth). 
Competitive moat: Competition can lead your investment company quickly astray. When you think of companies with wide moats from small (WD-40) to jumbo-sized (Coke or Pepsi), you can imagine them selling the exact same product 15 to 20 years from now. Investing in a product with a deep moat managed by great capital allocators is the value investor's dream.
Length of time of the investor’s ownership
As I mentioned earlier, my experience has been that the drift factor can be exponential when it comes to owning a stock for 15 to 20 years. In the doldrums in the history of Coca-Cola (KO, Financial) in the 1980s and early '90s the company actually owned a shrimp farm and Columbia Pictures. How it got from carbonated beverages to raising future cocktail hors d'oeuvres and shooting films is a story in itself, but not the kind of story you want to hear as an investor.
Fortunately, the board and Bob Goizueta recognized the drift factor when they saw it. From 1981 until his premature death, Goizueta increased the stock price by 65 times. If you had held the stock during the '60s and '70s, you might have missed the slow drift away from Coke’s core competency. But for those who held on for the entire tenure of Goizueta, the lack of drift and return to laser-like focus on its core business made many peoples’ fortunes (just ask Warren Buffett (Trades, Portfolio)).
Conclusions
Over the course of my investing career. I’ve had quite a few holdings that fell prey to the drift factor. Several have been due to the deadly urge to acquire while being pushed by consultants’ assurances of “synergies.” Others have been simply that management and the boards didn’t keep their eye on the ball and saw competition fly by. In the case of Coke, they were saved by the fact that their CEO figured out less was more.
Which brings us back to the Gimli Glider. Passengers that day learned that gifted leaders and intense focus (with a little luck) can turn a rather dramatic drift problem into a positive solution. Quick reaction, identification of the problem and a practiced checklist can help an investor too. It can make all the difference between a safe smooth flight or a short and bumpy ride.
As always, I look forward to your thoughts and comments.

“Patience in Market, is worth Pounds in a year.”
 
                                                                   -     Benjamin Franklin, ‘Poor Richard’s Almanack’ 

Over the last four years, we have observed a clear split in the returns of Nintai portfolio holdings. Eight of our holdings (40%) have experienced losses greater than 30%. Conversely, four have returns exceeding 100%, and five more have returns over 50%. The stocks with the biggest losses have hampered the portfolio’s performance during this period. Interestingly, these same companies fueled our strong outperformance in the first four years. Frustrating times, indeed. 
 
This quarter, we decided to review the worst-performing positions and see if any raise concerns about our business case. One of our main worries is the permanent loss of our investment partners’ capital. This can occur for various reasons. The company may have lost its competitive advantages (or moat), the business model could be outdated, or management might have proven to be poor at allocating capital. The question we seek to answer is whether Mr. Franklin’s thoughts apply here - will patience be worth pounds in a year (or more)? There are currently eight stocks that have losses greater than 30% since our initial investment. 
 
Some Initial Thoughts
 
As we examine each of these companies, we try to assess underperformance in various areas. Some of our holdings have more influence over these than others. These include:
 
Regulatory Status: Because a high percentage of our holdings work in a regulated industry (healthcare), those companies in that industry are overseen or regulated by several federal agencies, such as the Food and Drug Administration (FDA) or the Centers for Medicaid and Medicare Services (CMS), which oversee patents, prices, product marketing, sales, and promotion, etc. 
 
Government Policy: Over time, as new congressional leadership and Presidential administrations come to power, there may be significant policy changes. For instance, the latest Trump Administration took an aggressive stance regarding tariffs, which had an enormous impact on nearly every industry. Our role as investment managers is to identify companies that can withstand and overcome numerous unforeseen challenges. 
 
Competitive Moat: Morningstar identifies five potential sources of a competitive moat: switching costs, intangible assets, network effects, cost advantage, and economies of scale. We mainly focus on network effects and switching costs when selecting portfolio holdings because most of our investments are in "asset-light” business models. Within that model, we appreciate companies that provide underlying platforms that enable the company’s relationship to extend deeply into the customer’s operations. 
 
Allocation of Capital: We believe that over time, companies that produce returns on invested capital (ROIC) exceeding the weighted average cost of capital (WACC) will deliver exceptional returns for their investors. To do so, management must be outstanding allocators of capital. This means they must avoid expensive acquisitions, investing in businesses where WACC exceeds ROIC, or investing in assets that generate inadequate returns. 
 
Free Cash Flow Growth: At Nintai, we believe the only real measure of value is the amount of future free cash an asset returns, discounted back to its present value. That amount is the basis for calculating our estimated intrinsic value. If our assumptions are off (and in the cases of these holdings, they most certainly are), then it’s likely our investment case is impaired. 
 
Balance Sheet Strength: Another key factor we look for in any investment is a strong balance sheet. We prefer no short- or long-term debt, ample cash or short-term investments, and only a small amount of goodwill as part of total assets. We want the company to be fully prepared financially for the worst-case scenario we can imagine moving forward. 
 
Some High-Level Thoughts
 
After spending considerable time working through each company’s numbers over the past five years, we’ve identified some common themes in their underperformance. These include the following.
 
There were no cases of decreased financial strength: None of the underperforming companies have seen a decline in their balance sheet strength. None have taken on any debt (short- or long-term) in the past five years. This reassures us that they can withstand an economic shock like the 2007-2009 Credit Crisis. 
 
We were significantly off in our cash flow estimates: While their balance sheets remain strong, we underestimated the free cash flow of some holdings. Six of the eight companies that underperformed have seen free cash flow stay flat or decline. In each case, we projected a (positive) growth rate for the next decade. We didn’t do a very good job with our prognostication. 
 
We overpaid in some cases: Due to our inaccurate estimates of free cash flow, we overpaid on several occasions. In others, we failed to maintain our margin of safety, which led to underperformance not reflected in our purchase price. Whether this was caused by environmental factors (such as tariffs or regulatory changes) or investing outside our circle of competence still needs to be addressed.  
 
We overestimated customer “must-haves”: Several times in our investment history, we have mistaken our holding company’s offerings as a “must-have,” not a “nice-to-have." Several years ago, we believed that Corporate Executive Board (now part of Gartner) was a must-have for their clients. It seems we have made the same mistake in recent years as well.  
 
We were poor policy prognosticators: Some of our underperforming assets have been influenced by changes in the regulatory environment. In these cases, we should have done a better job of identifying potential impacts and modeling the downside more accurately. Some impacts were unforeseen (such as conditional FDA approval), while others were fairly apparent (such as tariffs). 
 
All these reasons challenge some part of our investment research process. We are reviewing them to determine (a) why they occurred and (b) how we can prevent them from happening again. Some say that achieving 60% accuracy in your stock picks is quite good. But that only tells part of the story. What really matters is how much each holding outperforms or underperforms. In this case, our winners have been successful enough to beat our closest benchmarks - the Russell 2000 and the Russell Mid-Cap Growth Index. Unfortunately, they haven’t been enough to beat the S&P 500, though we rarely invest in large-cap stocks. 
 
Over the next several weeks, we will review each of our underperformers to identify what we got right, but most importantly, what we got wrong. We will discuss whether our investment case has been broken, and if so, why. Discussing your losers isn’t an easy thing to do, but it’s the right thing to do. We strive to continually improve our investment process, which is vital to achieving this goal. 
 

We utilize free cash flow as our primary valuation component because it is one of the most difficult statistics for a corporation to manipulate. Alfred Rappaport summed it up nicely: “Profit is an opinion; cash is a fact.” So why is free cash flow a better (or more realistic) measure? 
 

1. FCF accounts for changes in working capital, such as accounts receivable and payable, which can affect a company's cash position. Earnings may not fully reflect the effects of these changes on cash flow. 
2. Earnings encompass items such as depreciation and amortization, which are non-cash expenses that do not represent actual cash outflows. FCF, in contrast, emphasizes the actual cash a company generates, offering a more realistic view of its financial health. 
3. FCF considers capital spending on items such as property, plant, and equipment, which are vital for maintaining and expanding operations. Earnings may not fully capture the cash needed for these investments, while FCF does.
4. FCF helps investors assess a company's ability to reinvest in its operations, pursue strategic initiatives, and sustain long-term growth. It also offers a clearer view of a company's financial health and its ability to endure economic downturns.

 
Why Free Cash Flow and Not Earnings?
 
Earnings, also known as net income, refer to the profit a company generates after subtracting all expenses from its revenue. It is calculated on the income statement by deducting expenses such as the cost of goods sold, operating expenses, interest, and taxes from gross revenue. Earnings can encompass both cash and non-cash items. For example, depreciation, which is an expense that reduces earnings, does not involve an actual cash outflow. Earnings are reported on the income statement. It’s essential to remember that earnings focus on profitability, whereas cash flow emphasizes liquidity—the ability to access cash. So why do we use free cash flow rather than earnings in calculating value in potential or actual portfolio holdings? Here are a few areas that can help illustrate the differences between earnings and cash flow:
 
Reporting Sources
Companies primarily use three financial statements to assess their overall performance and health: balance sheets, cash flow statements, and income statements. The cash flow statement records the company's accounts payable and accounts receivable. It helps reconcile the other two statements by illustrating the company's financial activity, like a checkbook; however, it doesn't always provide a complete view of all expenses and activities. The income statement reflects earnings, displaying the company's profits over a specific period. Income statements can provide a broader perspective on a business's performance and growth potential since they show profits after deducting expenses and costs.
 
How It’s Calculated
Another key difference between earnings and cash flow is how they are calculated. To determine earnings, accounting and financial professionals subtract a company's expenses from its revenue. Expenses include costs such as labor, supplies, rent, taxes, and interest. They can use these calculations to display earnings over a specific time frame, such as a quarter or a year. For cash flow, the calculation focuses solely on the company's actual inflows and outflows of cash. Any transactions occurring on a non-cash basis will not appear in the cash flow statement. The statements serve as an ongoing ledger that reflects the company's cash balance as of the end of a period.
 
The Two Can Create Two Distinct Views
When investors and shareholders conduct business valuations, they consider the company's price in relation to its earnings, cash flow, book value, or equity value. Therefore, both earnings and cash flow represent crucial figures to comprehend, as they provide unique insights to stakeholders. To achieve long-term, sustainable success, organizations must maintain both profits and positive cash flows. However, success in one area does not always equate to success in another. For instance, a company may be profitable yet still lack sufficient available cash to cover essential expenses, such as payroll or supplies, especially if it is waiting for customer payments or has not yet sold its inventory. In this case, profitability does not necessarily mean positive cash flow, and cash flow becomes a more critical figure for stakeholders. 
 
Similarly, a company may temporarily enhance its cash flow by securing loans or selling assets. However, if its earnings are not adequate to generate profit, achieving profitability becomes increasingly crucial. Therefore, it is vital for companies to achieve profitability to ensure their ongoing operations.
 
Conclusions
 
Nintai is not entirely averse to using net income/earnings to evaluate a holding. Free cash flow is a more applicable measurement tool because cash is king. Our results in the 2007-2009 Credit Crisis have further strengthened FCF’s appeal in our research and valuation methods. We should note that this can require considerably more research time as we convert a company’s quarterly earnings report into a free cash flow quarterly report. But we think the effort is worthwhile. 
 
FCF represents excess cash generated by a company that is available for distribution to investors, debt repayment, or reinvestment in the business. Because of that, our role as a shareholder and fiduciary for our investment partners means we are acutely interested in how cash will be deployed. If a company can achieve greater returns on invested capital by deploying funds toward strategic acquisitions or expanding existing operations, then we fully support such efforts. However, this is only if those returns exceed what Nintai, or its investment partner, can achieve independently. If the latter is accurate, we would like to see the capital deployed in the form of dividends. Additionally, if the company’s shares are trading at a significant discount to our estimated intrinsic value, then share buybacks might be the best use of cash. Free cash flow can assist us in any of these calculations where net income might not provide us the insight to recommend them. 
 
For all these reasons, in addition to the previous analysis of FCF compared to earnings, we dedicate a significant amount of time to examining a holding’s FCF figures. We believe that, over the long term, a company’s share price will closely follow its free cash flow numbers. 
 
I hope this provides you with a solid overview of why our valuation spreadsheets, along with many other documents, use FCF as a fundamental measure. Please don't hesitate to contact us with any questions or comments. My best wishes. 
 
DISCLOSURE: Nintai Investments does not own shares in any company mentioned in this article. 
 
  
 
 
 
 

“I firmly believe that acquisitions are an addiction, that once companies start to grow through acquisitions, they cannot stop. Everything about the M&A process has all the hallmarks of an addiction. If you look at the collective evidence across acquisitions, this is the most value destructive action a company can take.”
 
                                                                             -      Aswath Damodaran 

Earlier this week, Dollar Tree announced it was spinning off its Family Dollar unit, which it acquired in 2015. Companies spinning off holdings aren’t uncommon. In fact, companies divesting units acquired within the past decade also aren’t unusual. But most importantly (and sadly), companies selling off former acquisitions at significant losses are incredibly common. We will get into those details later, but let's first take a look at the Dollar Tree/Family Dollar debacle. 
 
In 2015, the Dollar Tree Board of Directors issued the following statement to the management of Family Dollar. 
 
“The Board of Directors of Dollar General is pleased to submit a proposal to you and the Board of Directors of Family Dollar that offers Family Dollar shareholders $78.50 per share in cash for all outstanding shares, providing them with superior value and immediate and certain liquidity for their shares. Not only is our offer superior in price, it is 100% cash, as compared to the mix of cash and stock being offered by Dollar Tree.

Our proposal provides Family Dollar’s shareholders with approximately $466 million of additional aggregate value over Dollar Tree’s offer and represents a premium of 29.4% over the closing price of $60.66 for Family Dollar stock on the day prior to the Dollar Tree announcement.” (Emphasis is mine)
 
The concept was that by partnering with Family Dollar, Dollar General could create a low-cost giant that significantly expanded its customer base, achieved cost savings through those elusive “synergies, " and kept Dollar General in check. The latter had made an earlier bid for Family Dollar. 
 
The acquisition worked out poorly from day one. The synergies the company thought could be achieved were a mirage. Family Dollar stores were in extremely poor condition, plagued by inadequate maintenance, high refurbishment costs, and excessive overlap with Dollar General locations. How this could not be foreseen is a mystery. Too put a punctuation point on how badly the Family Dollar maintenance had fallen, the company was forced to pay $42M in fines after regulators found a supply warehouse overrun by live, dying, dead, and rotting rats. Wall Street started to lose confidence in the deal and the company’s management at the same time. Over the past three years, Dollar General’s stock has declined by 63% in value.  

After attempting to staunch the bleeding by closing hundreds of locations and investing considerable capital to upgrade the Family Dollar brand and shopping experience, Dollar General raised the white flag and announced this week that it is selling the entire Family Dollar brand to private equity groups Brigade Capital Management and Macellum Capital Management for approximately $ 1 billion. If you calculate the cost of $78.50 for every publicly traded share of Family Dollar in 2015, Dollar General paid around $9 billion for its acquisition. It should be emphasized that they paid in cash. The Dollar General Board issued the following statement earlier this week to announce the sale:
 
“The Dollar Tree leadership team and Board of Directors determined that a sale of Family Dollar to Brigade and Macellum best unlocks value for Dollar Tree shareholders and positions Family Dollar for future success.”
 
It may have been better if the Board had rephrased the statement to indicate that they had determined the sale would result in a $900M cash loss instead of unlocking value for Dollar Tree shareholders. 
 
M&A: A Destructive Addiction
 
KPMG (the consulting/accounting behemoth) examines acquisitions annually to assess their success and questions whether they have generally been effective or ineffective at creating shareholder value. The short answer is that they are not effective at all. However, that information doesn’t reach the C-suite or boardrooms. There is a significant disparity between management's perception of their success rate and the actual rate. This “perception gap” is remarkably wide - 93% of companies surveyed by KPMG believed their deals enhanced value, and over a third stated they would not approach their next deal any differently. Yet, KPMG's objective analysis of whether deals enhanced or reduced value revealed that only 31% of these deals actually enhanced value.[1] Wow. Even after all these statistics, most Boards wouldn’t change a thing regarding conducting acquisitions. 
 
Examining the history of mergers and acquisitions reveals that Dollar General’s disastrous acquisition of Family Dollar is merely typical of Wall Street’s M&A activity. Here are some interesting facts.
 

1. Dollar General’s recent announcement that it is spinning off Family Dollar only seven years after acquiring the company isn’t particularly surprising - half of all mergers are reversed within 10 years. 
2. McKinsey reports that approximately half of acquirers significantly fail in their due diligence work. In one of their latest studies (M&A Insights, February 2025), the company reveals that nearly three-quarters of recent technology M&A encounters have failed during the due diligence research. 
3. Trends pushed by large consulting firms drive much M&A activity. A case in point is the latest surge in artificial intelligence (AI) merger activity. KPMG featured the headline: “KPMG and HP make M&A integration easier by harnessing AI and automation technologies.” Gartner reports, “GenAI MActivity will lead the way.” Lastly, OutSystems states, “AI M&A: The Biggest Deals Yet?”

 
At a Columbia Business School symposium, a presenter noted that M&A completed in any given year’s “hot/fad” markets had a 2-3 times greater chance of failure than those in more stable markets.  
 
Conclusions
 
Dollar General’s acquisition of Family Dollar was typical when it was announced. The company grossly overpaid after conducting inadequate due diligence. In its press release, you can almost hear the frantic panting of management fearing it would be outdone by Dollar Tree. The spin-off of Family Dollar earlier this year marks the conclusion of a saga that severely damaged Dollar General’s financials, consumed far too much attention from the company’s C-Suite and Board, and inadvertently aided its competitor through its misstep. 
 
At Nintai Investments, we typically sell a holding if it announces a large M&A deal. We feel even more strongly when they use words like transformative, synergies, or maximizing shareholder value. A recent example is Masimo’s (MASI) acquisition of Sound United. Masimo possessed an exceptional business with a moat developed around its oximeter technology (the device you place on the tip of your finger to measure your oxygen saturation rate), generating high returns on invested capital and maintaining a balance sheet with no short- or long-term debt. Management went out and acquired a consumer electronics company with the intent of transforming (there’s that word!) their business model into an ambulatory home health company. Less than two years later, the company announced it was splitting into a consumer audio and a consumer healthcare company. It appears much like the two companies did before the acquisition. The announcement included the typical “maximizing shareholder value” language. We sold a few weeks after the acquisition announcement was made, viewing it as a method of destroying a perfectly wonderful small-cap, wide-moat company. We’re very happy we did. 
 
Whenever you hear management announce an M&A deal that promises to transform the business or achieve significant cost savings through synergies, consider carefully whether you want to partner with that management. Ultimately, they are likely to change the company, though not in the way they envisioned. As Mr. Damodaran mentioned, this kind of addiction can be very costly for the company’s and acquisition’s employees, their management, and most importantly, their shareholders. 
 
Disclosure: Nintai Investments does not own any shares in the companies mentioned in this article and does not intend to purchase them in the next 60 days since publication. 
 


[1] “The Morning After: Driving for Post-Deal Success,” KPMG Transaction Services, 2024

We thought with everything we've seen over the past several months with the Magnificent Seven stocks, we'd revisit a piece we did on why Nintai tries to avoid the fear-of-missing-out (FOMO).

"If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles, and when opportunities came along, you pounced on them with vigor."
 
                                                                                           -     Charlie Munger 

During a press conference, President John F. Kennedy was asked whether he got impatient at being unable to accomplish everything he wanted. He smiled and discussed how important it was to be ready to act when an opportunity came along to further his goals. He then told the following story. 
 
“The great French Marshal Lyautey once asked his gardener to plant a tree. The gardener objected that the tree was slow-growing and would not mature for 100 years. The marshal replied: ‘In that case, you better plant it this afternoon.’”
 
A Tale of Two Returns
 
For those who have invested in the markets over the past several years, many have noticed a trend of bifurcated returns. The so-called Magnificent Seven (Microsoft, Nvidia, Google/Alphabet, Apple, Meta, Amazon, and Tesla) accounted for roughly 92% of the total gains of the S&P 500 in 2023 alone. As shown in the graphic below, the returns of the Not-So-Magnificent 493 were not impressive. (Please excuse the rather gaudy nature of the Goldman graphic!)

​Examining the returns of the Magnificent Seven (M7) over the past several years makes it clear that investing in multiple stocks from this group is essential to outperform the S&P 500. Beating the S&P 493 would be much easier; however, that's not the index in question, whether it's a fortunate or unfortunate situation depending on your investment stance. 
 
But you don’t have to broaden your perspective too much to realize how remarkable the returns have been with the Magnificent Seven. If you examine the next 42 companies - not 493 - here’s how they compare to the M7. 

Compared to the next most extensive 42 stocks, the M7 appears inflated in terms of market value, sales, and profitability. These companies have 2.5 times the sales and twice the profitability.
 
Fear of Missing Out (FOMO) Syndrome
 
I bring this up because Nintai Investments has been one of the investment companies focusing on a much smaller market cap portfolio mix (unfortunately, in our case!). Not all of our underperformance over the past few years can be attributed to this, but it certainly hasn’t helped. Watching day after day as the M7 companies reach new price highs, year after year, hasn’t been the easiest experience. I must admit to feeling a slight tinge of Fear-of-Missing Out Syndrome (FOMO). That said, I believe that not experiencing FOMO is probably one of the top characteristics of successful investors. It is nearly impossible to maintain your investment strategy and invest for the long term when influenced by it.    
 
In this age of Bloomberg and CNBC's 24/7 business news, Reddit stock boards, and meme stocks, it seems that FOMO has become a driving force in modern 21st-century investing. It appears unlikely that an investor (are they really investors? Or would “ gambler “ be a better description?) who puts money into GameStop (GME) stock and observes its daily price fluctuate from $17.46 per share on May 1, 2024, to $30.45 on May 13, $48.75 on May 14, $39.55 on May 15, $27.67 on May 16, and finally $22.21 on May 17 (continuing down to $18.32 on May 23), will be able to outperform in the long run. 

If ever there was a case of FOMO driving a stock price, it would be MEME stocks like this. I would argue that much of the Magnificent Seven gains have been MEME stock-like writ large. 
 
Conclusions
 
As an investment manager, your primary goal is to outperform the greater markets over the long term. To meet that objective, sticking with the process that has brought you 
 
 
success is critical. Sometimes, that process will underperform. As I’ve said many times, to outperform, it is occasionally necessary to underperform (unless your name is Bernie 
Madoff). However, chasing returns driven by FOMO is an almost certain way to pursue highly volatile, short-term gains. This can lead to increased trading costs, a larger tax bill, and the loss of opportunities to let compounding work effectively. At Nintai, our first four years in business were exceptional, delivering significant outperformance nearly every year. The last three years, however, have shown a roughly mirror image. Nevertheless, we refuse to alter our methodology or start investing heavily in M7 stocks like Nvidia (NVDA) or meme stocks such as AMC Entertainment (AMC). Instead, we will heed President Kennedy’s advice from Marshal Lyautey and continue researching our long-term holdings like Veeva (VEEV) and iRadimed (IRMD). In fact, we’ll likely begin this afternoon. 
 
As always, we look forward to your thoughts and comments.
 
DISCLOSURE: Nintai Investments currently has holdings in Veeva (VEEV) and iRadimed (IRMD). We do not, nor do we intend to take a position, in Microsoft, Nvidia, Google/Alphabet, Apple, Meta, Amazon, Tesla, Berkshire Hathaway, Broadcom, JP Morgan Chase, United Health, Eli Lilly, GameStop, or AMC Entertainment. 

I've gotten quite a few requests to republish an article that I wrote roughly a decade a go about the power of inverted thinking and Abraham Wald. I republish it here in full. I hope you enjoy it.

Mutual Fund Survivorship: The Revenge of Abraham Wald
 
The story of Abraham Wald and the study of WWII bomber casualties is one of the more enlightening stories from the field of operational research. During the early days of the Allied strategic bombing campaign the amount of bombers not returning from their missions reached an unacceptable rate. In a desire to find out why, the USAAF completed a study on where the damage was taking place and where additional armor could be placed to make each bomber safer. Here Wald enters our story. Taking one look at the methodology and findings, Wald told the team they were looking at the problem the wrong way. By studying the planes that came back the researchers were seeing where the planes could withstand damage. The more interesting facts should be about the planes that didn't make it back. By analyzing where all the bullets holes and damage were on the planes that made it back, he proposed strengthening the areas where there were no bullet holes. Through his report thousands of bomber crewmembers were saved through the course of the war. Wald’s report and methodology can be found here.
 
Wald’s technique would later be summarized quite pithily by Charlie Munger when he advised, “Invert. Always invert”. The use of Wald’s methodology can be applied in the investment world in many ways. Perhaps the greatest use is the study of mutual funds. Investors spend an inordinate amount of time studying mutual funds with fantastic records (such as Bill Miller’s Legg Mason Capital Management Value Trust fund during the 1990’s). Put in Wald’s context, these are the funds that made it home. But what about all those funds that didn't survive? The funds that didn't make it home? What can be learned from these? 
 
Before we get to that, let’s take a look at the numbers of mutual funds and find out their general survivor rate. In 2013 Vanguard released a study on fund survivorship (which can be found here) studying mutual funds from 1997 through 2011. At the start of the study period there were 5,108 funds available. By the end of 2011 2,364 of these funds had been closed or merged leaving 2,744 funds (or 54% of all funds) that survived for the entire period. In that period from 1997 through the end of 2011 roughly 1 out of 2 funds didn't make it home. Of the funds that didn't make it, roughly 80% (or roughly 1900) were merged away while the remaining 20% (roughly 470) were closed entirely. 
 
It’s how the funds performed where the story gets very interesting. Let’s start with the funds that existed for the entire period (or the funds that made it home). Of the 2,744 funds roughly 1/3rd ended up outperforming. So during the period of 1997 - 2011 if you could divine which fund might actually survive, you still had roughly a 2/3rds chance at underperforming the market.  

Let’s take a look at the funds that didn’t survive the period (or the ones who didn't make it home). Here the story is far more depressing. Roughly 9 out 10 funds underperformed before they were either merged away or simply closed. A loss that would have staggered Wald himself. It’s hard to imagine that trained professionals - with a wealth of technology, analytics, and treasure behind them - couldn't exceed the batting average of an AA baseball team third stringer. In fact it’s hard to imagine that throwing darts at a list of stocks and bonds couldn't have produced better results. For the investors who received such terrible returns from their investment managers, all they received was a letter quietly delivered to their mailbox informing them of the merger of their fund with an entirely new - and no doubt exciting and outperforming - investment opportunity. 

​What Would Abraham Wald Say?
 
Wald approached the problem of aircraft losses very differently than the original assessment team. His ability to flip (or invert) the model allowed him to address the problem with an entirely fresh (and as it turns out - correct) approach. If we apply his methodology to the mutual fund industry there are several points which jump out that go far beyond the usual Wall Street talking points. 
 
It’s Not About Succeeding……. It’s About Not Failing
 
In the investment world action represents success. In reality active management (or action) represents a losing proposition. There’s an old adage that 90% of success is just showing up. It would seem the same rings true in investing - but with a twist. 90% of success is showing up, investing, and doing nothing.  Actively managed funds have demonstrated they have very little chance at beating the market indices. Indeed, if you add in the silent results of the funds that never made it, the odds of outperforming the markets are roughly 2 in 10. Active management - in general - is a loser’s bet. As personal investors this has equal import. By not making the simple mistakes - overpaying, trading too much, etc. - we can achieve remarkable returns. By not failing we can provide our investors an invaluable service. 
 
Evaluate An Investment Backwards
 
Many of us have a formalized process for evaluating investing opportunities. Some might use a DCF model while others use a dividend discount model. All too often we find comfort in using this process and we get lulled into a false confidence in our stock picking. At Nintai we frequently ask ourselves why we wouldn't invest in a certain company. By being the devil’s advocate we get a pretty good understanding of potential impairments to our investment case. Another tool is to build into your model the exact opposite assumptions and see where you end up. For instance if you project 8% FCF growth over the next 5 years, what would it look like if the company had -8% FCF growth instead. What impact would that have on EPS, balance sheet, etc.? Finally, we step away from our assumptions and become a competitor. What could I do strategically to beat the company? What new products could I develop? Do I have the financial ability to acquire them? All of these (and others) allow us to view our prospective investment from very different angles than our normal proprietary process. 
 
Conclusions
 
Abraham Wald saved tens of thousands of flight crew lives during World War II. His ability to see things from a different perspective allowed him to solve a critical failing in the Allied war effort. More importantly he demonstrated the power of survivorship bias and how it can lead us to misguided assumptions. For investors – both mutual fund and individual – we can be blinded by our successes and not take sufficient care to understand and protect against the downside. That’s a shame. Sometimes there are more learnings from a mistake than a success. I encourage everyone to take a long, hard look at his or her failed investments and find out what went wrong. Sometimes simply getting these corrected is far more powerful than looking for the next Microsoft. In the final analysis the solution can occasionally be blindingly clear with a simple move to the left or right. Just ask Abraham Wald. 
 
As always we look forward to your thoughts and comments. 

“The ideal business is one that earns high returns on capital and can keep using lots of capital at those high returns. That becomes a compounding machine. If you can put $100 million into a business that earns 20% on capital, ideally, it would be able to earn 20% on $120 million the following year, $144 million the following year, and so on. You could keep redeploying capital at these same returns over time. But there are very, very, very few businesses like that.” 
 
                                                                                                -      Warren Buffett[1] 

Our recent annual report to our investment partners began by discussing some important numbers or characteristics we look for in an investment. I wrote:
 
“At Nintai, we manage a focused portfolio of about 20 – 25 positions, which we have held for decades. Because of that, we have specific criteria that we feel are vital to outperform the markets in the long term. Before we get into the requirements, some core beliefs drive our decision-making. First, free cash flow is a far better measure than earnings when calculating valuation. We believe earnings can be manipulated in so many ways that their utilization in valuation tools is a waste of time. Second, we believe the best measure of a wide competitive moat is the sustained outperformance of return on invested capital (ROIC) over the weighted average cost of capital (WACC). When a company can generate ROIC greater than its WACC for over one or two decades, it has a wide moat. Last, we look for investment opportunities where the company’s free cash flow grows, but its price keeps dropping. We see those opportunities as a spring getting increasingly tightened that must eventually be released.”
 
This overview briefly describes some key metrics that drive our investment decisions. But more detail might help with numbers. 
 
Two key metrics we use at Nintai Investments are a company’s return on invested capital (ROIC) and its weighted average cost of capital (WACC). We look for companies whose ROIC consistently outweighs their WACC for extended periods - usually one or two decades. I stress the word consistently because we aren’t fans where it might exceed for three or four years and then drop below for a year or two. We want to see ROIC beat WACC every year for a decade. Another number we look for is free cash flow. An investment should grow free cash flow annually for at least eight of the last ten years and continue that for the next decade or two. Eventually, that growth must, by the nature of its numbers, decrease over time as the company expands. It’s much easier to grow free cash flow 10% off a base of $100 million than $10 billion. Last, we would like to see the share price grow at a rate similar to that of the free cash flow. When the former grows faster than the latter, we can begin to see the price/valuation ratio force, which can lead us to reduce (or sell outright) our position. 
 
Purchasing a company with these characteristics doesn’t guarantee a quick gain. Charlie Munger clarified that you should likely outperform over the long term. But the difficult part is hanging in for the long term. At Nintai, we are content to wait for three, four, five, or more years if the conditions we’ve discussed are being met. If they are, and the share price continues to lag or go down, we will likely add to our position over time. 
 
Let’s use a specific example before I discuss how our model portfolio has performed over the last decade. One of our holdings is Veeva Systems (VEEV). We’ve held the stock (including in our previous firm, Nintai Partners) since 2004. Here are the first numbers we look at: free cash flow versus share price. 

​Veeva’s free cash flow has grown at an annual rate of 35.5% over the last decade. Through 2020, the stock price increased even faster. But starting in 2021, the stock price declined steadily as free cash flow maintained its steady growth (as you can see on the right side of the graph). We are happy to continue holding the stock (in this case, even adding to our position) until the markets recognize that the company’s value has increased. Why has the stock price decreased over the past five years? First, the price/value ratio was stretched in 2020. There was a case of irrational exuberance, for sure. But now? We think there has been a case of irrational depression. 
 
Here is the second set of numbers we discussed previously. (I'm sorry for the sizing issue. Excel doesn’t make this easy!)

​As you can see, over the past decade, the company’s ROIC has exceeded its WACC by a substantial margin. This demonstrates a deep and wide competitive moat, and we expect it to continue over the next decade or two. If it does (and there is no assurance it will), we should end up with a respectable long-run return to Charlie Munger's point.  
 
Let’s examine the aggregate Nintai Investments portfolio. Here, we see a tale of two returns similar to Veeva's. The portfolio's share price grew faster than free cash flow at the beginning of the decade, while it lagged over the last five years. 

​This reflects the change in market performance as the Magnificent Seven and artificial intelligence began driving returns while the rest of the markets lagged. 
 
How about the portfolio’s ROIC and WACC numbers? These show that, in the aggregate, the portfolio’s competitive moat remained deep and wide over the entire decade. In other words, the portfolio’s strength has not lagged even as its share price growth has over the past five years. 

Conclusions
 
Charlie Munger’s wisdom cut across many areas of knowledge. As he stated, he utilized a latticework of worldly wisdom. One of his remarkable insights was that return on invested on capital (ROIC) was an outstanding measure of how a company should perform (price-wise) over the long term. Comparing this against the weighted average cost of capital (WACC) should tell us whether the company has a wide competitive moat that can maintain high profitability. At Nintai, we seek out companies with high ROIC, substantial free cash flow margins, rock-solid balance sheets, and great managers keeping a hawk-like eye on these numbers. To Munger’s point, we think this will lead to long-term outperformance against the general markets. That said, it doesn’t mean the portfolio will consistently outperform. In the short term, there will be periods of underperformance. The challenge is remaining focused and controlling your emotions during these times. Investors should be handsomely rewarded over their investment career if they can do this. 
 
Disclosure: Veeva is a portfolio holding in Nintai Investment portfolios as well as Mr. Macpherson’s personal portfolio. 

​[1] “Buffett and Munger Unscripted,” Alex W. Morris, page 15, 2003 Berkshire Annual Meeting

“To be able to write, one must be able to read. Every hour of reading makes you a better writer.”

                                                                                                -    Robert Macfarlane 

Robert Macfarlane is an excellent writer who thinks a lot about words and places and how the interaction between them tells us about our or someone else’s culture. His quote above greatly impacted me when I sat down to write my first book “Seeking Wisdom: Thoughts on Value Investing.” Constant reading (or, as Charlie Munger’s family referred to him - “a book with legs.”) is essential not only to be able to write but also to continually develop and improve your investment process. 
 
At the beginning of each new year, I frequently write about one of the top questions I receive in my daily mail call. This year, I received quite a few questions about my daily reading.
 
Before I discuss what books I highly recommend for individual or institutional investors, I thought I’d discuss what makes a book compelling (at least to me.)  Before anything else, I find a book where the writing and use of words are precise and exceptionally lyric, a rare find. Beautiful writing is a craft and something to be sought out every day. As much as Warren Buffett’s writings seem to ring of folksy wisdom (which they are), his writing is crystal clear in its messages. It cuts through any confusion and brings immediate light to traditionally stuffy topics. Such writing is the foundation of brilliant thinking. 
 
In addition to writing of such a nature, there are four additional ways a writer can provide the reader with long-standing – and applied – wisdom. These include the following:
 

• A clear articulation of evidence 
• Bringing new evidence to light
• It uses a latticework model
• Changes the reader’s process of thinking

 
The first category is essential to making a strong case for your thesis. Jack Bogle’s books were outstanding in proving, time and again, that high fees were absolute killers when it comes to investor returns. The founding father of indexing used books such as “Common Sense on Mutual Funds” and “The Battle for the Soul of Capitalism” to provide irrefutable evidence that not only was it hard to beat the markets in general, but it was nigh impossible to beat them when you paid high management fees. His discussion of costs related to high portfolio turnover was an eye-opener on how managers see the long term as a disadvantage in their business model.   
 
Another characteristic of a great investment book is how the writer brings new information to light. Benjamin Graham’s classic “Security Analysis” was brilliant in bringing forth an entirely new concept of understanding the value of an investment versus its price, which was critical to achieving excellent long-term results. His later book, “The Intelligent Investor,” was just as crucial in bringing the concept of margin of safety and Mr. Market to individual investors. The former became a handbook for professional investment managers, while the latter was written for private individual investors. Graham’s ability to bring forth new ideas in a simplified and easy-to-understand manner changed the dynamic entirely regarding investment management. 
 
Combining multiple subject matters, some with no seeming connection with investing, is another form of outstanding investment writing. Classically referred to as consilience, Charlie Munger created the term “latticework of mental models.” There have been quite a few great books covering this, including the works of Michael Mauboussin (“More Than You Know” and “Think Twice”) and Robert Hagstrom (“Investing: The Last Liberal Art”). I would be remiss not to mention Shane Parrish’s “The Great Mental Models, v. 1-4, along with his outstanding website, Farnam Street. 
 
Last but not least are books that can change the very process by which an investor looks at investing. I refer to it as how to invest rather than what to invest in. These books can have the most significant impact on your investment approach. The classics from Graham, Bogle, and Buffett are great examples. Switching from active investing to indexing and creating a value-based approach can completely change how investors allocate their capital.  However, there are other examples by lesser-known authors that are equally important. These include “Excess Returns” by Frederik Vanhaverbeke, “Investing for Growth” by Terry Smith, and “The Manual of Ideas” by John Mihaljevic. All of these are excellent editions by which to learn all new strategies and measures to improve your investment returns. 
 
While I’ve listed the criteria necessary for a great investment book, there are also some personal characteristics a successful value investor needs that complement whatever you might be reading. 
 
Always Keep Learning
A good investor has a mind that constantly thirsts for new theories and facts. I read at least two hours daily and could use two more each day. A great investor is open to all kinds of content, no matter how far away it might seem from investing. The great thing about learning is that it never gets old and, over time, can give you a significant advantage over other investors. What other fields have such opportunities? 
 
Always Question Your Hypothesis and Facts
At Nintai, we often use a process we refer to as breaking the case. In this process, we keep knocking down our assumptions (growth, free cash flow, competitive strength, etc.) until we reach a valuation that is wholly impaired. It is vital that investors be able to accept information and data that, no matter how unappealing, changes their business case or valuation. 
 
What Didn’t Work Before Might Be Great in the Future
Just because something worked in the past doesn’t mean it will work forever. It’s equally important to understand the inversion of that is equally valid. Just because a business model wasn’t a great investment opportunity in the past, things like technology innovation or regulatory changes might make the business model a better investment in the future. A great case of this is Warren Buffett’s investment in railroads. It has become an outstanding investment with changes in regulations, modal transportation transformation, and operational improvements.  
 
Keep Your Emotions in Check
Last, but most important, is the ability to keep your emotions under control. No matter what reading you do or the evolution of your investment approach, letting your emotions drive your decision-making will lead to truly awful results. 

Conclusions
 
It’s surprising how often I get questioned about what I read. As a writer, it’s a surprising amount. There is so much to learn in this world of the internet, e-books, and online learning. For those starting on their investment journey, developing a daily reading regimen is an outstanding way to understand better how to achieve better results. You will be surprised how a “latticework of mental models” will help you better understand the financial world and also help you understand the world in its entirety. Very little knowledge that you acquire will go to waste. If nothing else, you’ll be the life of the cocktail circuit, and there are worse things than that. 
 
DISCLOSURES: None