Chuck Akre on Judgment in Investing

Via Market Folly (visit Market Folly for more notes from the Value Investing Congress):

The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.  Akre quoted Will Rodgers: "Good judgment comes from experience and experience comes from bad experience."

He learned to ask the questions: what makes a good investment? And what makes a good investor?

Good judgment is output of neural network and pattern recognition of what you have come to know.  Ask CEOs how they measure their success of company.  Akre suggests "the success of investment is realized as the per unit increase of book value per share."

Recommends "100 to 1 in the Stock Market" written by Thomas Phelps (former WSJ writer & editor).  Phelps' qualifications are as follows:  small, relatively unknown, unique product that does something better/cheaper/faster.

Have courage. Have patience.  Thinking big and compounding capital: most investors don't think on large enough scale.  $10mm a penny doubled daily for 30 periods.  Recommends "Money Masters" by John Train.

Warren Buffett: understandable, generate cash, high asset turns, owner oriented management

Buffett's 6 Qualities of Good Investors

1. Animated by controlled greed and fascinated

2. Patience

3. Think independently

4. Have security and knowledge without hubris

5. Accept when you don't know things

6. Flexible on types of businesses

Train adds 4 more: 10-15 years of practical experience, genes, perfect intellectual honesty, and avoid distractions.

Look for low teen ROE.  Overconfidence bias is a huge risk.  Malcolm Gladwell's talk on the recent financial crisis: failure comes from competence and overconfidence.  Essence of study people overly believing marginally more information.  But this doesn't improve the accuracy of judgment but does increase the confidence of one's predictions.  "Less is more."  "Value is in simplicity."