Munger made the investment in 2001 and it likely returned to him somewhere between 4 1/2 to 7 times his money and an annualized return over three years of 65% to 93%.

This is the story.

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Casually discussing an $80 million profit

At the 2017 annual meeting of the Daily Journal Corp., Charlie Munger spoke to visitors for almost two hours, answering any of their questions. At one point, he mentioned an investment that made him $80 million in profit.

The exchange between Munger and the off-camera crowd of onlookers is very funny. Munger mentions the $80 million, and you can feel the people around him restraining themselves but wanting to ask him about every detail.

Munger never mentioned the company name, but I’ve come to find out that the company he invested in was Tenneco Automotive Inc. (which we will refer to as Tenneco).

Let’s break down what Munger saw at the time and what we can learn from it.

Below, I have transcribed the relevant part of Munger’s comments:

I read Barron’s for 50 years. In 50 years, I found one investment opportunity in Barron’s out of which I made about $80 million with almost no risk. I took the $80 million and gave it to Li Lu, who turned it into 4 or 5 hundred million dollars. So I have made 4 or 5 hundred million dollars from reading Barons for 50 years and following one idea... I didn’t find them that easily but I did pounce on one.

It was a little automotive supply company... It was a cigar butt... It was [the maker of the] Monroe shock absorber... The stock was a dollar and the junk bonds which paid 11 3/8% were [priced at] 35. And when I bought the junk bonds, they paid me the 35% and they went right to 107 and were called. And the stock went from 1 to 40, but of course I sold my stock at 15.

Audience member: How long [did it take] you to make the 15x on the stock?

Maybe a couple years.

Audience member: How long did it take you to make the decision to buy it once you read the article?

Oh, about an hour and a half.

I kind of knew based on experience how sticky some of that auto secondary market was, and how many old cars needed Monroe shock absorbers, and I just knew it was too cheap. I didn’t know it would work for sure but I knew [it was cheap].

When did Munger make his investment?

Determining the identity of the company Munger was talking about was the easiest part of this case study. A quick internet search revealed that Tenneco Inc. is the manufacturer of the Monroe shock absorber today, and the company’s financial filings show that it has been doing that business since acquiring the Monroe Auto Equipment Company in 1977.

Based on Charlie’s comments above, I believe he made his investment in Tenneco late in 2001. How do I know this?

Charlie mentions the stock price being “a dollar” and the bonds with a coupon of 11 3/8% being priced at 35. I created a list of the historical issuance of Tenneco bonds using Bloomberg, and the list did not show any bonds with an 11 3/8% coupon, but it did have one bond with an 11-handle coupon, the 11 5/8% bonds issued in October 1999. Prices for that bond indeed show a sharp decline during 2000 and 2001, bottoming right around 35 in March and October 2001. I think these were the bonds Munger bought, and he simply misremembered the coupon.

Also, while Tenneco’s stock price never actually reached the price of $1, it was trading in late 2001 in a range from as low as $1.35 to around $2 per share.

Based on that pricing, I think this is the period when Munger read the article that he mentioned and made his purchase in Tenneco’s bonds and stock. As I’ll show later, I think he did so in December 2001 specifically.

What was the mystery article that Munger read?

Munger mentions that he read an article in Barron’s about Tenneco, and that’s what made him investigate the opportunity to invest. I was intrigued by the idea of finding the exact article he read, so I made a thorough search of the Barron’s archives from June 2000 through 2002 using the ProQuest research database. However, I could find no articles that substantially discussed the company.1

Perhaps Munger misremembered the publication he was reading that contained the Tenneco article. After all, he was telling this story in 2017, fifteen or sixteen years after it happened.

With that in mind, I conducted a more thorough search of news archives using ProQuest. And I came across an article that seemed to fit the scant details provided by Munger. The article is titled “Tenneco Struggles to Pare Down Debt”, and it appeared in the December 3, 2001 issue of Crain’s Business Chicago. I’ve reproduced the article here.

I believe this is the article that Munger actually read, despite him remembering it as being in Barron’s.

Why do I think so?

First, the article was published around the right time, when the stock and bonds were trading at prices close to those mentioned by Munger. And the article specifically mentions Tenneco’s bonds as suffering, not just the stock price:

Second, the tone of the article is pretty well balanced. It describes the troubles Tenneco was having, but it also quotes the CFO discussing how Tenneco might survive. That may have served to stir Munger’s thoughts about the company getting through the downturn and emerging in good shape.

As far as I can tell, this is the first time anyone has found a candidate for the article Munger may have been talking about.2 The article isn’t critical to understanding the Tenneco investment, but it is useful and intriguing to see the actual material that may have spurred Munger’s thinking.

With that itch scratched, let’s now dig into the research that Munger might have done at the time, what he would have seen in the company’s fundamentals, and what compelled him to think that a purchase of Tenneco’s bonds and stock would be profitable.

Assuming Munger read the Crain’s article in the month of December 2001, he would have had access to the 10Q filing from Q3 of 2001 (filed on November 14, 2001) and the annual report from 2000 (filed on March 30, 2001). Naturally, we will restrict ourselves to financial information from those reports and earlier, nothing later.

The Fundamentals of Tenneco’s Business

It’s always amazing to me how much can be learned from simply reading company reports and disclosures. For Tenneco, there are a few relevant points or challenges that jump out of the 2000 annual report.

Challenge #1: Massive company change

In the years prior to 2000, the company underwent several major spinoff transactions of other businesses, completely changing the company.

In 1993, “Old Tenneco” was a large conglomerate in six businesses: automotive, packaging, farm equipment, shipbuilding, energy, and chemicals. In 1994 and 1995, each of the chemicals and farm equipment businesses had been spun out in IPO’s. In 1996, the company spun off its shipbuilding business and sold its energy business. The automotive and packaging businesses were transferred to the “New Tenneco” company. Then, in a series of three transactions in 1999, New Tenneco spun off its packaging business, first forming and retaining 43% of a joint venture, then selling a part of the business, then ultimately spinning off all of its packaging businesses in a new company called Pactiv Corp.

What remained at the end was Tenneco’s automotive business, which sold emissions products (exhaust systems) and ride control products (like shocks and struts). It was this business, Tenneco Automotive Inc., that Munger was considering in 2001.

To say the above series of transactions dramatically changed the nature of Tenneco’s business is an understatement. The company went from being a large, diversified conglomerate with $13.2 billion in revenue in 1993 to a smaller single-line automotive businesses with just $3.5 billion in revenue in 2000.

The substantial changes to the company may have contributed to the decline in the company’s securities prices at the time Munger was looking at the company. I am reminded of Joel Greenblatt’s book You Can Be A Stock Market Genius, in which he discusses the merits of investing in spinoffs:

In the case of Tenneco, something similar may have been happening to the parent company. There were likely a bunch of shareholders who first owned shares in a diversified conglomerate (as recently as 1998 or 1999) and, by 2001, found themselves owning an undiversified automotive business in an industry suffering from a recession. That could have been a recipe for indiscriminate selling.

Challenge #2: Tenneco’s debt load

Tenneco was saddled with a lot of debt as a result of the spinoff transactions.

After all these spinoff transactions were finished, Tenneco was left with approximately $1.5 billion of long-term debt. After reading the history of Tenneco above, I suspect the automotive business was a victim of circumstance with respect to its debt load, being the last business standing after management spun off or sold five others.

When management spins off or sells a business, the natural inclination is to support that business in order to make the spinoff successful or the business attractive to a buyer. Often, this means allowing the spinoff or sale to leave some of its debt behind at the parent.

This was the case for Tenneco’s automotive business, the last of six businesses remaining.

The prior spinoff and sale transactions, each in small steps, left a little too much debt behind at the parent company in order to ensure their successes. Tenneco’s automotive business, by virtue of being the last business remaining, was the entity that was forced to deal with the excess debt at the end of the day.

Tenneco’s long-term debt profile, per its annual report from the year 2000, is shown below.

Pactiv Corp. was spun out in November 1999, and after that, it was almost immediately clear that $1.5 billion of debt was a dangerously large amount for Tenneco’s remaining automotive business to bear. The table below shows the company’s financials for the years 1997 and 1998 (with both the packaging and automotive businesses) and 1999 and 2000 (with only the automotive business, plus a lot of debt).

Focus for a moment on the company’s Operating Income (EBIT) and Interest Expense. Prior to the spinoff of Pactiv, the company was doing well, earning $633mn in EBIT in 1998 and spending $240mn in interest payments, but after the spinoff, the company was earning only $115mn in EBIT and spending $186mn in interest payments. Clearly, the company had too much debt at too high an interest rate.

Challenge #3: The 2001 recession

Tenneco was burdened with too much debt, and it was obvious from looking at their financial reports.

To add insult to injury, Tenneco’s revenues were also suffering from the 2001 recession.

Tenneco served two broad sets of customers, original equipment manufacturers (auto makers) and the aftermarket (auto repair shops). Both were suffering lower sales. The 10Q report from 2001 Q3:

The recession and auto industry weakness can be seen in this 10Q report, the latest financial report that Munger would have had access to at the time. Sales were down in Q3 2001 by -5.5% year over year.

Finally, let’s also not forget that, if Munger was looking at the company in December 2001, the public and the stock market would still have been reeling and worried about the effects of the September 11th attacks.

Challenge #4: Principal payments were coming due

Not only were the interest payments on Tenneco’s debt too much for the company to handle in the years after completing its spinoff, but, on top of that, principal payments were starting to come due in 2001. The annual report from 2000 lists those upcoming maturities as $54 million, $109 million, and $99 million for 2001, 2002, and 2003, respectively. From the perspective of a casual analyst or observer, it was not clear at all how Tenneco could make those payments or how likely they were to work with their lenders on renegotiating terms.

Tenneco’s situation, viewed from the outside in late 2001, looked pretty grim. A company drowning in debt, revenues shrinking, and principal payments coming due. Was there anything worthwhile that an enterprising investor could see? Next week, in Part 2, we’ll look at what Charlie Munger saw beneath the surface, and how it made him $80 million.

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This real-life cartoon has served as a caricatured reminder to me over the years that saying “I don’t know” is not a sign of weakness, as I’m sure my colleague thought. For great investors, in fact, it is a critical skill to practice.

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In a rare interview for Columbia Business School’s Graham & Dodd newsletter (Spring 2013), Li Lu expressed this sentiment well. The interviewer asks Li about real estate prices in China, which was a hot topic at the time given many new stories about the development (and overdevelopment) of some Chinese cities. Li’s response is refreshing.

G&D: Do you think real estate has gotten a little ahead of itself where there would be a need for a correction, or do you think that demand will just catch up?

LL: I put that in the “too hard” basket. I also put in the basket of “I know I don’t have to know.” It certainly is “I don’t know”, but I also know that I don’t have to know! I don’t want those things to worry me.

Missing the lesson, the interviewer issues a similar follow-up question, and Li responds in the same way:

G&D: How do you view the overall attractiveness of equities today?

LL: I also put that into “too hard” and “I know I don’t have to know.” I only think about it when things go to an extreme. I don’t foresee that as going to the extreme, either way. In that case, I know I don’t have to know.

I also ran across this interview of Mohnish Pabrai in which he expresses the same idea. The interviewer, Stig Brodersen, asks about companies for which legal regulations, which are often nebulous, might be important. Stig explains that he would like to expand his circle of competence to better understand certain regulatory laws, but he finds it difficult. Mohnish responds by talking about humility and discipline:

One has to approach circle of competence with a lot of humility... it may be that that question [about regulations] leads to putting that business in the too hard pile... A lot of humans have difficulty with giving up. They don’t want to give up... And I think Buffett and Munger’s answer would be that 99% of businesses need to go in the too hard pile.

Why is it so important to say “I don’t know”? One reason is that truly great investment opportunities come along somewhat rarely and involve sorting through a ton of mediocre opportunities to find the great no-brainers for which “I don’t know” doesn’t even come into play.

These are investments like Microsoft in 2010 when the P/E was around 8x, which I wrote about last week, or one of my favorite no-brainer investments of all time, buying Apple around 12x in 2013 and 2014, when Carl Icahn went on CNBC to shout it from the rooftop and later wrote a public letter using the term “no-brainer” four times.

But there is a second, more subtle reason why “I don’t know” is important. Failing to practice humility as an investor, failure to say “I don’t know” for most questions you come across, is effectively practicing a bad habit, and every time we practice a bad habit, we weaken ourselves and become more comfortable practicing the bad habit.

The book Lessons for Living by psychiatrist Phil Stutz makes this point several times throughout it.

The impulses for all of our bad habits travel along the same path – a straight shot to immediate gratification through what I call the lower channel... Lower channel functioning is a disaster. When the pleasure is over, we’re left with nothing.

Failing to say “I don’t know” is a warped kind of pleasure seeking: it is our attempt to convince others (and ourselves) that we are competent, that we know more than we do. Failing to say “I don’t know” is failing to conquer our insecurity.

Stutz goes on to say that, on the other hand, every time we practice restraint and discipline over our bad habits, we reward ourselves with a kind of energy.

Every time you restrain your impulses, you close off the lower channel... And in this higher channel, the energy accrues. Every act of restraint puts more in the piggy bank.

The more we practice bad habits, the more we become comfortable with these bad habits and keep our brain stuck in a feedback loop: bad habit - quick, but hollow reward - bad habit.

But the more we resist our bad habits, the stronger our psyche becomes, the more energy and creativity we receive, and the easier it becomes to continue to practice good habits.

With that in mind, it becomes a little clearer why investors who practice discipline in investing are better off: they are reinforcing the discipline to act only when the great, big opportunities come in and to refrain from meaningless, compulsive action otherwise.

This psychology plays out with particular consequences in investing.

Most professional investors do not practice enough restraint. In fact, they are incentivized to do the opposite. The practice of charging a management fee, for example, incentivizes them to raise more money. And in order to raise money, they will be inclined to appear as experts to their clients, whose questions will be myriad and which the professional will feel compelled to have an opinion on.

“What will the effect of a ceasefire (or a prolonged war) in Iran be on your investment in XYZ Corp.?”

“Where are interest rates headed?”

“Isn’t the S&P 500 too richly valued at 28 times earnings?”

“Isn’t software company X going to thrive in the Age of AI because of their particular niche?”

There may be unique times when an investor has a very specific reason to have an opinion on questions like these, but most of the time, his answer should be something like “I don’t know. I’m looking for great investments where things like that won’t have a long-term impact”.

But how many professional investors do you think would have the wherewithal or courage to answer their limited partners in such a way? Instead, a smart-sounding opinion is easier to produce and seems like the safer bet. A confident and direct answer is the surest shot at attracting money from new clients or convincing existing clients to stay put.

But falling into the habit of producing opinions when we shouldn’t hurts us.

Perhaps worst of all, it reinforces to our brains that it is ok, even necessary, to have an opinion on everything, when a good investor should be practicing the exact opposite. When he finds something too hard to understand, he should move on. When he finds something he can grasp, he should restrain his opinion until he has done enough research. His job is to work continuously to find the great investments that do not require an opinion on stuff that’s too hard to understand.

“I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another. And that is I say ‘I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people do who are supporting it.’ I think only when I reach that stage am I qualified to speak.”

- Charlie Munger, USC Commencement Speech, 2007

In the end, Li held the stock for about two years and made roughly seven times his money.

A little more to learn from Li Lu

After publishing the article, a friend of mine told me how much he enjoyed reading it and that he wanted to know a little more. Eddie runs a successful hedge fund, so he knows a thing or two about what constitutes a great investment. He wanted to see what it was exactly that helped Li Lu earn that 7x return in Timberland.

Breaking down returns with John Bogle

The return on a common stock can be decomposed, after the fact, into three sources:

1. The investor receives dividends along the way.

2. The earnings of the business grow or shrink.

3. The multiple the market is willing to pay for those earnings expands or contracts.

Put the three together and you have the stock’s total return over the time it was held.

That framework is most often associated with John Bogle, the famous investor and founder of Vanguard, who set it out in the Journal of Portfolio Management in 1991 and refined it with Michael Nolan in a 2015 paper titled Occam’s Razor Redux. Although the purpose of the work was forecasting stock market returns, the same logic works perfectly well as a backward-looking attribution. It is the cleanest way to ask whether a given return came from the business or from the mood of the market.

In the case of an individual stock, the earnings-growth piece can be dissected further. Earnings per share are simply revenue per share multiplied by the net margin of the company, so growth in earnings per share comes from (1) selling more stuff, (2) keeping more of each dollar sold, and/or (3) shrinking the share count through buybacks.

That gives us five neat drivers for the price performance of a stock:

1. The dividends received.

2. The earnings per share, broken down into

   1. Revenue per share

   2. Net profit margin, and

   3. Share repurchases.

3. The multiple the market is willing to pay.

Timberland in 1998 makes for an very interesting case of this exercise. In some ways, Timberland was an ideal investment.

Li Lu’s Timberland returns broken down

Although I don’t know the exact prices that Li bought and sold his position for, I can make some rough estimates. In Part Two of the case study, I show the rough times and prices for Li’s purchases and sales based on statements he made in his talk.

For the purposes of this exercise, I’ll assume:

1. Li made all his purchases at the real-time closing price of $29.00 per share on October 14, 1998, and

2. Li sold all his shares at the closing price of $181.00 per share on October 24, 20001.

These prices imply that Li made 6.2 times his money, in line with his stated “6 to 7 times”. It equates to a stunning 147% annualized return over the 2+ years.

With those two dates and prices in mind, let’s break down the above five factors. Like any good case study, it will be important to only use information available at the time of Li’s purchases and sales, so we will use the trailing twelve months of financial data available as of the two dates.

Dividends

First off, Timberland did not pay any dividends over the period of time Li held the stock, so we can dispense with that factor. What about the rest?

Earnings per share

In October of 1998, Li would have had financial information on Timberland from the company’s Q2 1998 10-Q (filed on August 7), and in October of 2000, he would have had the Q2 2000 10-Q (filed on August 11). The table below shows the trailing twelve months of revenue, net income, share count, and net income per share.

Price-to-earnings multiple

Based on the trailing twelve months of financial information Li would have known at the time and the prices he would have seen in the market, he would have been buying Timberland at a P/E ratio of 6.6 and he would have been selling it at 22.3.

The columns above require a moment of explanation.

• The columns labeled “as of October” show each metric either at the time Li made his purchase or for the trailing twelve months, as he would have known them to be2.

• “Growth multiple” shows how much each driver increased as a multiple, which we can think about, in turn, as driving the stock price. For example, revenue rose by 1.18x (an increase of 18%)3.

• “Contribution to return” shows the relative magnitude of each driver of Timberland’s total return4.

Ok, so what?

The results paint an interesting deeper picture for what happened as Li made 6.2x his money on Timberland in just two years.

Entries #2 and #3 in the table above show the big takeaway:

• Two-thirds of Li’s return came from the price-to-earnings multiple on the stock expanding from 6.6 to 22.3.

• One-third of his returns came from improvements in the business leading to higher earnings.

  • Of this 33%, 20 points of it was due to improvements in net margin, that is, Timberland running a better business.

  • 9 points was due to revenue increasing, Timberland selling more merchandise.

  • 4 points was due to the company buying back shares.

This may be surprising at first; Li made most of his money just because the market was willing to pay a higher multiple for the stock! But it makes some sense if you think it through.

Three kinds of good investments: A framework

Bogle and Nolan’s 2015 paper, Occam’s Razor Redux, which talks about return attributions like the one above for the broad equity market, has an interesting chart in it.

The chart shows returns for the S&P 500 broken into “Investment Return” and “Speculative Return”.

1. Investment Return (blue line) is equivalent to what we showed above in entries #1 and #2. It is those returns that an investor can earn by (1) receiving dividends and (2) from earnings at the company going up.

2. Speculative Return (red line), on the other hand, is equivalent to #3: the return that might come from the market paying a higher multiple.

The chart’s message is simple: over very long periods of time, investors cannot count much on earning their returns from expanding multiples. Rather, virtually all the returns earned by equity investors have come from underlying businesses doing better and better.

1) The great business at a great price

Now, Li’s return, as we mentioned, came 2/3 from multiple expansion and 1/3 from earnings increasing. Finding investments like this is very hard, but, when they can be found, they can be incredible. To paraphrase Buffett, those are the pitches I should be waiting to swing at.

By buying a good company at a low valuation, whose earnings Li felt comfortable would continue to improve, he was able to generate 6.2 times his money over only two years, for a stratospheric annualized return of 147%.

Note, too, however, that Li’s investment did not last very long. Often, the companies that can be found at low P/E ratios are not the very best companies that can be owned for 20 years or more. Instead, they are typically either outright bad businesses or merely good businesses being misunderstood. (Timberland, being a good company, albeit in the challenging clothing and fashion industry, was in the latter bucket.)

So, investments like Li’s can be excellent, but once in a blue moon, the market hands you a similar investment opportunity that can be even better: those truly great businesses that are temporarily trading at a low multiple.

Microsoft

The example that jumps to my mind here is Microsoft back around the year 2010. The stock was trading at a P/E multiple of 8.2 (a earnings yield of 12.2%), and revenues and earnings had grown by 57% and 53% respectively over the past five years. Microsoft’s competitive position, with Windows and Office, was still very strong, but investors were tired of the stock underperforming for years after it peaked in the dot-com boom and crash and had yet to eclipse those price levels. At the time, there were also questions about how the company could grow in the future.

Over the subsequent 15 years through 2025, Microsoft’s earnings per share increased from $2.10 to $13.64, and its P/E multiple increased from 8.2 to 36.3.

Running the same return analysis as we did for Timberland shows a very even split for Microsoft’s returns: 56% of the returns were due to earnings per share having risen and 44% due to the P/E multiple having risen. Microsoft is similar to Timberland in that regard, but with one big difference: the quality of Microsoft’s business is and was much better than Timberland’s, as evidenced by its earnings rising for a very long period of time.

Over the course of 15 years, and as a result of both tailwinds, Microsoft returned 25.7% per year and its stock rose by 28.5 times. (Microsoft also paid its shareholders a dividend over that time, which contributed 0.7 percentage points to the 25.7%.)

Investments like this are rare, but when they can be found, they can represent once- (or few-) in-a-lifetime opportunities.

2) The great business at a fair price

What about those investments for which earnings increases alone are the driver? These investments, too, can be very good, albeit not at the stratospheric levels of the investments mentioned above. On the other hand, they can often persist for very long periods.

These investments are the purchases of “great businesses at fair prices” as Buffett likes to say.

AutoZone is one such investment. The auto parts retailer has produced fantastic returns across virtually its entire history as a public company.

For example, from fiscal year-end 1996 to 2025, the company increased earnings per share from $1.11 to $144.87 and its stock increased in price from $27.25 to $4,198, a return of 154 times, or 19.0% per year.

At the start of that run, the P/E multiple for AutoZone was 24.1 and at the end, it was nearly the same, at 28.2.

It’s easy to see that a return analysis for AutoZone shows just about all of the returns on the stock, 97% of them in fact, were due to earnings per share marching up over time (the blue bars in the chart above). The tiny remainder were due to a slightly higher multiple.

There are two things to say about this.

1. First, although investments in this category can be great if the business is great, they do not rise to the highest heights like those rare purchases of great business at great prices, like Microsoft.

2. Second, maybe I’m nitpicking a bit with that statement. An investment in AutoZone over the past 29 years could have made anyone very rich simply by buying it and holding on for the ride. Finding a great business, buying it, and holding on, is a great way for an investor to compound his or her money and sleep well at night, even if the purchase was made at what seems to be a high P/E ratio.

3) The fair business at a great price

This category is the most difficult to navigate. There are occasionally some really great bargains that can be had in companies that are not generally increasing their earnings but which the market has punished to an unfair degree.

Take the company Dillard’s, for example. Dillard’s is an apparel and home furnishing retailer with stores in 30 US states. Texas and Florida are their biggest markets.

In fiscal 2021, Dillard’s sold about $6.6 billion worth of merchandise, an amount lower than the $8.6 billion it had sold way back in the year 2000. To say the company was viewed as stagnating would be an understatement.

As a result, and in part due to large disruptions during the COVID-19 pandemic, the stock was trading at a price of just 253.72 at the end of fiscal 2021 and had earned $41.87 per share for the year, for a P/E ratio of 6.1. That’s an earnings yield of 16.4% for a company that, while it wasn’t growing, was in fact doing steady business.

By the end of fiscal 2025 (January 2026), the stock was trading at a price of $607.56 on earnings for the year of $36.42, an amount less than it made four years ago. The P/E ratio of the stock had risen to 16.7.

During the period, Dillard’s stock price rose by 2.4 times, and it generated a large annualized return of 29.8%5.

The result is great, but the numbers need to be caveated with the following warning: Returns like these come with much more work than buying businesses like AutoZone or Microsoft that are more difficult to disrupt.

It’s not enough to simply buy Dillard’s because the P/E ratio was low. I would need to become as comfortable as possible that Dillard’s position wasn’t getting materially worse. And that’s easier said than done. I’d read everything I could on the company, including not just the company’s financial reports but also industry trade journals, listen to earnings calls, and even visit some stores to get a sense for whether things were changing on the ground.

But assuming I could get comfortable with it, then a low P/E is a good thing, especially when combined with the catalysts of share buybacks and dividend payments, both of which Dillard’s management team was doing. Catalysts, including the return of capital to shareholders, can be very reassuring when a stock is priced as cheaply as Dillard’s was.

Over the four years from January 2022 to January 2026, the Dillard’s management team bought back 24% of their outstanding stock, taking the share count from 20.6 million to 15.7 million, and returned an additional $93 per share to shareholders in the form of dividends.

When capital is flowing back to shareholders in such volume, allowing shareholders to realize their 16.4% earnings yield in the form of cash or a larger ownership position in the company, it’s easier to get comfortable that the price will rise as new shareholder see the attraction and bid up the stock.

One final thing to note about these types of investments (P/E multiple expansion in a stagnant business) is that the investments typically don’t last longer than a few years. Recall the chart I showed at the beginning of the article from Bogle and Nolan: “Speculative returns”, that is, multiple expansions, don’t tend to persist for the long term. Once the multiple rises enough, I need to remember not to fall in love with the business.

Part 1 of this story was published in The Owner’s Memo #3.

Yesterday, we discussed how Li Lu first discovered Timberland in the fall of 1998 when it was trading at a P/E ratio of 6.6. Some thorough research revealed that the company had a beloved brand and growing revenues, and yet the stock had fallen -55% in three months.

Why was it so cheap?

Today, we’ll discuss the four concerns that were an overhang for the stock, what Li’s research made of each, and the remarkable scuttlebutt that gave him the conviction to act.

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The concerns about Timberland

Despite the good reputation that Timberland had among its customers, there were a few big issues that seemed to be dragging down the company and its stock in 1998.

A thorough search of company filings and news articles from the 1990’s revealed four major concerns. Understanding whether or not Timberland was a bargain at the time would have hinged on deeply understanding these issues and whether or not they were harbingers of poor performance to come.

Let’s discuss each of them.

Concern #1: The Asian Financial Crisis

In his talk, Li Lu cites one reason for the drop in price, the Asian Financial Crisis, but he also goes on to say how ridiculous such a reason was. Timberland only had 4.3% of its sales from markets outside the US and Europe according to its 1998 second quarter 10-Q, so a weaker Asian consumer would not have a meaningful impact.

Now, a thorough reading of company reports does show more exposure to Asia than simply a low sales number. In the early 90’s, the company began outsourcing its manufacturing to foreign manufacturers. By the end of 1997, Timberland had 37% of product manufacturing in Asia, up from 21% for all international manufacturing in 1993:

The Company also continued to shift production of its footwear products to third party manufacturers... Approximately 27% [and] 10%... of the Company’s 1997 footwear unit volume was produced by [two] independent manufacturers located in China [and] Thailand. Source: Timberland 1997 10-K.

So, the Asian Financial Crisis could have affected the company’s manufacturers, but that reasoning alone doesn’t seem plausible enough to justify such a low valuation. After all, the speed with which the company shifted manufacturing over four years from in-house to third-parties suggests that a similar shift away from certain third-parties, if necessary, could be undertaken again with more ease.

But a more thorough investigation of the market at the time shows that the Asian Financial Crisis was likely not the reason for the stock’s precipitous decline. The bigger reasons appear to have been three other large concerns.

Some of these were discussed by Li and some were not.

Concern #2: A struggling retail shoe industry

Li does not mention in his talk one of the issues that seemed to be depressing shoe company stocks at the time, an industry facing lower-than-expected sales. Indeed, the commentary from the August 21st Value Line sheet says as much:

Timberland shares have fallen by over 25% in price since our May report. We believe that the primary reasons for the decline are that the second-quarter sales increase was lower than expected (though earnings exceeded Wall Street’s estimate), and that shoe companies’ stocks, as a whole, are being pummeled in response to sluggish demand in the industry.

And the following is from a Wall Street Journal article from 1999 describing the sentiment in the 1998 period:

Last year was indeed a struggle for the shoe industry, as the market was flooded with cheap close-outs from the shutdown of Kinney Shoes by Venator Group, the successor to Woolworth that has reorganized its shoe-retailing businesses.

There were several other public stocks at the time that could be classified as “retail shoe” companies, among them Brown Group, Deckers, Foot Locker, Nike, Nine West, Payless, Reebok, RG Barry, Stride Rite, and Wolverine World Wide. I created an equal-weighted index of these stocks using historical prices, and that index would have been down -41.7% from July 17, 1998 to October 14, 1998, in contrast with the S&P 500 which was down -15.3%. Timberland, as I mentioned earlier, was down -55% over that time.

But digging deeper into the concerns at the time shows that much of the anxiety was centered around athletic shoes. Another article from the New York Times highlights the distress among makers in that subsector:

For the quarter ended March 31, Fila’s parent company lost $8.7 million. When Nike posted a $67.7 million loss last month, its first quarterly loss in 13 years, Phil Knight, the company’s chairman, said, ‘’It was not a good year by Nike standards, but then our futures aren’t very good either.’‘ Nike’s Asian business is in turmoil, and it is laying off 1,600 workers. Reebok lost $3.4 million in its first quarter ended March 31. Converse reported that sales of its basketball line tumbled 50 percent in its first quarter, which also ended March 31.

But Timberland, on the other hand, is cited as a bright spot in the struggling shoe industry:

Some companies and analysts say they believe consumers are shifting their tastes to the so-called brown shoes, footwear made by outfits like Doc Martens and Timberland.

In fact, the trends we saw earlier in company revenues reinforce that Timberland was doing relatively well in this period of stress. Timberland’s Q2 1998 revenue was up 9.5% from the year prior, compared to Nike’s which was down -2.8%.

Yet, despite this relative (and outright) strength, Timberland’s stock was down -55% over the period mentioned above, while Nike was down only -22%.

Concerns about a “struggling shoe industry”, in fact, seemed overextended to Timberland, whose fundamentals stood in contrast to other companies that saw revenues and earnings actually falling.

Concern #3: The shareholder lawsuit

In his talk, Li discusses that there were “a whole bunch of lawsuits” against the company that could have caused concern for investors at the time. He also mentions how important it is to do the legwork and “download every single... document from the court cases“ and read them.

A search of legal filings against Timberland from 1992 through 1998 revealed just one major lawsuit against the company (and two minor ones related to a distributor-manufacturer disagreement and the selling of counterfeit Timberland products). That major lawsuit, Schaffer v. Timberland Co., was a consolidation of two separate suits and was not hard to find, as it is mentioned directly in the company’s 1997 annual report:

The Company and two of its officers and directors were named as defendants in two actions filed in the United States District Court for the District of New Hampshire, one filed by Jerrold Schaffer on December 12, 1994 and the other filed by Gershon Kreuser on January 4, 1995. On April 24, 1995, the District Court granted plaintiffs’ motion, assented to by defendants, to consolidate the two actions.

In the lawsuit, two investors in Timberland stock sought to charge the management team with a violation of SEC Rule 10b-5 due to the severe drop in Timberland’s stock price from May 12, 1994 to December 9, 1994, when the stock dropped roughly -36%.

What does this mean? SEC Rule 10b-5 is very brief, and it can be found here. It is a broad rule preventing anyone engaged in securities practices from committing fraud, making untrue material statements, or omitting material facts.

While the lawsuit seems concerning on its face, the 10-K also reveals a simple and critical piece of information: the lawsuit had been settled as of December 1997 / January 1998, ten months before Li was considering an investment. The docket for the case also reinforces that fact.

On December 29, 1997, the District Court entered an order granting final approval of the Stipulation. Under the terms of the Stipulation, the settlement of this litigation was final and effective on January 29, 1998. The settlement of this litigation did not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Source: Timberland 1997 10-K

This is a critical piece of information for an investor in Timberland at the time, and it’s one that Li neglected to mention in his talk. Li would have known in October 1998 that the case would not have significant financial impact on the company.

However, although the case was settled, Li was still concerned about the lawsuit. Specifically, because of the nature of the case, he wanted to be sure that the management team was not a group of corporate fraudsters. We’ll discuss below the novel way in which he tackled that issue, with a personal visit to the management team’s home town.

Concern #4: The earnings decline in 1995 and the charge of incompetent management

During the talk, Professor Bruce Greenwald of Columbia Business School asks Li if he had any concern about “what happened between 1994 and 1996”, apparently referring to the company’s reporting negative income in 1995. Li mentions that the decline was due to poor marketing at the company around waterproofed versus non-waterproofed shoes and a hit to reputation and margins that resulted, but he doesn’t address the concern further.

The company’s disclosures from the period don’t say much about the marketing mishap, except for a brief line in the 1995 10-K about expanding its creative staff to better manage its brand.1 But I discovered that there were more issues in the 1995 period than the waterproofing issue alone.

1995 issue #1: A big restructuring at the company

In the 1995 period and earlier, Timberland suffered from the critique that their net margins were too low for a retailer of high-quality, desirable apparel. From a scathing article in CNN Money in May 1995 titled Will Timberland Grow Up?:

For all the brand’s strength and to-the-moon growth, the company has barely enough profit to fill a mukluk... a net margin of 3.9% - terrific for an A&P, but terrible for a worldwide superbrand. Nike, for instance, nets 8%.

With that concern squarely in mind, CEO Sidney Swartz embarked on a plan to stop manufacturing most of the company’s products and begin the outsourcing of their production in order to save on costs and raise gross margins. During 1995, the company took its biggest step in that direction, shutting down two manufacturing facilities in the US and reducing operations in the Dominican Republic. The actions resulted in a one-time restructuring charge of $16.0mn for 1995. In the 1995 10-K, the company also reported that it expected to realize annual savings of $7mn as a result of the restructuring.

The company reported a -$11.6mn net loss for 1995, so adding back the restructuring charge and adding on the anticipated $7mn of net savings brings the pro forma net income for 1995 to $11.4mn. While it’s true that only represents a 1.7% net margin on $655mn of revenue, it is a much better picture than the headline net income figure suggests.

Perhaps most importantly, the restructuring charge demonstrates that management did not have its head buried in the sand when it comes to making difficult choices to better manage its business and implement good, modern, high-margin business practices. By 1997, the company had outsourced 72% of its footwear products manufacturing, compared to only 21% in 1992.

1995 issue #2: Lower gross margins after product pricing cuts

Starting in 1993 and into early 1994, Timberland lowered prices on some of its boots to help increase volumes and in an attempt to bifurcate or better appeal to its different customers. Those changes helped dramatically drive revenues up 52% from $419mn in 1993 to $638mn in 1994. But in 1995, when revenue only increased 2.7% to $655mn (and footwear volume actually declined by 6.0%), the pricing strategy was criticized.2 From the same CNN Money article:

The inexperienced Jeffrey [Swartz, then COO of Timberland] compounded the problem by lowering prices on some products in an inexplicable effort to bring the premium-priced brand down to a less lofty level. As often happens, the price cuts didn’t spark offsetting higher volume. Result: margin squeeze.

Such a strategic move might have been hard to analyze in 1995, however, any potential questions about the company’s strategy were quickly rectified as revenue growth picked up again in 1996 and 1997 and, most importantly, gross margins were not just exceeding the poor 1995 levels, but were near or above record levels. All of this would have been apparent to Li considering an investment in October 1998.

1995 issue #3: More company debt, more interest expense, and more SG&A than in prior years

Timberland’s 1995 income statement can be broken down to show another concern not mentioned by Li: both SG&A expenses and interest expenses had risen sizably as a percent of revenue. The 1995 income statement is shown below versus the 1993 statement for comparison.

The company’s 1995 10-K does not give much commentary around why this was the case, except to say that increased debt levels are being used to prepare the company for more growth:

Interest expense increased to $22.9 million in 1995 from $15.1 million in 1994 and $6.3 million in 1993. The increases primarily reflect higher debt levels attributable to business growth and to support higher than anticipated inventory levels. The increase in 1994 also reflects higher interest rates.

I think the lack of disclosure here is stark, and lack of disclosure is perhaps the main reason why Timberland’s stock price was down so much in 1998. It is clear from reading Timberland’s company reports that management had no interest in making more disclosures than it absolutely needed to and, as a result, had a reputation among investors and the media as being nebulous at best and incompetent at worst.

The lawsuit mentioned above seems to have been a big part of that. Also, as Li mentions in his talk, and as cited in the company’s 1997 proxy statement, the founding family owned 51% of the company’s stock, and the company tended to generate more cash than it needed to run the business. As a result, it did not have much need for the equity brokerage services of Wall Street (and didn’t need to cooperate with or cater to Wall Street equity analysts either). Without the need for Wall Street, and, worse, having been punished with a lawsuit for stating too much, company management now kept its mouth shut. And if the stock suffered because of it, who cares? The Swartz family owned 51% of the stock and the company generated enough cash flow to sustain itself.

To the owner/managers of Timberland, no one or nothing would bully them, not lawsuit plaintiffs, not media commentators accusing them of incompetence, not equity analysts pining for more information, and not swoons in the stock price.

This was another important understanding that Li gained in his research. The company had its own reasons for ignoring public commentary and ignoring its stock price, all while consistently improving the company’s fundamentals. Timberland’s management followed the Mr. Market parable, and Li would as well.

In addition, it would become further evident how wrong the popular narrative was around management when Li met them himself, as we’ll soon see.

Most importantly, the issues around SG&A and interest expense had abated by the time of the investment in October 1998. By then, the company’s investments in SG&A had become apparent, with revenues increasing and gross margins at or above all-time highs. And the company had used some of its cash to pay down over $100mn of the $225mn in debt it incurred in the 1993-1994 period (and, as a result, its interest expense came down too).

Timberland had a lot going for it

Throughout the talk, Li describes the extensive work he did to assuage himself that concerns around Timberland were not serious. In fact, as mentioned, many of the criticisms of the company were outright resolved by October 1998.

But the lawsuit, in particular, made Li curious. Maybe he missed something, and the suit was indicative of a management team that was irresponsible or even committing fraud. In the most entertaining and engaging part of his discussion, Li describes visiting the community where the Swartz family lived and even going to their synagogue. He got to know their friends and community members. From start to finish, Li reports that his entire investment research took him “a couple of weeks”, so it seems like this boots-on-the-ground scuttlebutt may have taken him only several days in the Boston, Massachusetts area.

During that time, Li discovered not only that the family wasn’t a bunch of crooks, but actually that they were admirable and well-respected. Li would have been 32 years old in October of 1998.

The Chairman and CEO of Timberland for many years was Sidney Swartz, son of the company’s founder, and he would have been about 63 years old at this time. In June of 1998, his son Jeffrey took over as CEO. Jeffrey would have been 38 years old and Li’s contemporary. In a clever and original move, Li realized that Jeffrey was on the board of a company with one of Li’s friends, and Li managed to have himself placed on that board, just to get to know Jeffrey better. Li says that the insights he gained painted a very different picture than the media’s image of Jeffrey as a young and inexperienced CEO:

He took over as CEO and he had entirely different ideas about how to run a company. It was very articulate. He was one of the most articulate [people I] ever met. Still is.

This hands-on visit to Jeffrey’s home town is the most striking and eye-opening part of Li’s talk. It demonstrates the kind of dedication it takes to invest well and also the kind of novel thinking that helps unearth insights that others may not have.

By going the extra mile (literally), Li was able to gain a critical and novel insight about the family that the media and other investors were missing. The family and the company’s young CEO were very competent, in contrast to the prevailing narrative. Also, and importantly, the new CEO was about to change the company’s stance on Wall Street and begin communicating more, increasing the likelihood that investors would begin to see what Li was already seeing. In fact, Li mentions that the company began holding analyst meetings shortly after Jeffrey took over as CEO and Li began investing:

He initiates... analyst meetings and the first meeting... how many people showed up? It was him, me, and another analyst, three people. And the last analyst [meeting I went to some time in the year 2000] the room is just absolutely filled with nearly 50, 60 people. [Half-joking] So, that’s how I know when I have to sell.3

Li’s investment

In the end, Li made an investment in Timberland some time in October of 1998. He cites a price of around $28 per share; such a purchase would have been remarkable timing. Timberland’s shares closed as low as $28.94 on October 15th and only closed below $30 per share for three days around that time.

We don’t know exactly when Li sold his shares, but he describes a stock that subsequently went up seven times. Timberland closed as high as $293.00 per share (unadjusted for stock splits) in January 2001 which would have resulted in a 10.1x return trough to peak in just over two years. (The real-time price peak would have been $73.25 after two 2-for-1 stock splits.)

Summary: A very good company at a very low (and temporary) price

Li Lu’s purchase of Timberland is a particular type of great investment. Timberland was a very good company (though not an all-time great one) that had a lot going for it, like a great product and increasing customer demand. Revenues were consistently increasing, and the company had invested a lot of money in prior years anticipating even more revenue growth. Earnings were increasing along with revenues too. And with that backdrop came a stock that had irrationally been beaten down to a P/E ratio of 6-7x, or an earnings yield around 15%, on industry concerns that felt more like a hiccup for the company.

After unearthing all the potential concerns he could and doing a boatload of research and live scuttlebutt too, he realized that those concerns were not valid enough to hurt the company’s long-term prospects (and, to state it more strongly, they arguably weren’t even meaningful to the company at all).

Timberland wasn’t a once-in-a-lifetime great company or investment that could be owned forever. (It is very difficult for retail clothing manufacturers or fashion companies to rise to that level.) But it was one example of a good investment: a very good company that makes a great, beloved product, whose revenues and earnings have been rising and that is suffering a decline in stock price due to extraneous factors that didn’t threaten the business long-term.

In addition, the study of Timberland also highlights the power of using Value Line as a source for new investment ideas. The manuals are still printed today, and a diligent and tireless review of the tables and companies listed still offers the chance at a great investment opportunity like the one in Timberland.

In 2006, Li gave a well-known talk to Columbia Business School students. The talk is perhaps the best source for learning more about Li’s investment style and some of his early investment ideas.

At one point in the talk, Li discusses his investment from the late 1990’s in Timberland Co., the US manufacturer and retailer of boots, apparel, and other footwear. According to Li, he became aware of the stock in the fall of 1998 when it was battered due to the Asian Financial Crisis and appeared to be cheap. Li describes some of the work he did over the course of just a few weeks, the investment he made, and the result: a stunning 6-7 times return in just two years.

Let’s find out more.

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How Li discovered the opportunity in Timberland

Li first discusses one of the ways he gets ideas: by reading manuals. He mentions Value Line specifically and, later in the talk, manuals from S&P. He tells the class how he loved to read every issue of Value Line front to back, page after page, how it was a great way for him to learn about many different businesses. He also specifically mentions checking the “new low” lists, those stocks with the lowest price-to-earnings and price-to-book ratios.

Every weekly issue of Value Line comes with a “Summary & Index” that lists all the stocks profiled by the publication and a variety of valuation tables, like “Lowest P/E’s” and “Widest Discounts from Book Value”.

I went back and checked all the Value Line issues from the summer of 1998 through the spring of 1999, and here is what I found.

Timberland first appeared on the Lowest P/E list on September 25th, 1998, and it remained on the list until February 5, 1999. It also first appeared on the “Bargain Basement Stocks” list in the October 2nd issue and remained on that list through January 8th, 1999. It may be that Li first discovered the opportunity in Timberland reading either of these lists or one just like them from another issue in the fall of 1998.

Let’s go back to October 1998

A good case study must put the analyst back at the moment in time of the investment, as much as possible, without the benefit of information from after that time. Li recalls that he made the investment in Timberland around $28 per share. According to Value Line, the stock traded as low as $28.1 in October of 1998, so it may be that Li first discovered the stock before that time. He may have seen it in the September 25th issue or an October issue and made his investment in the brief period in late October when the stock was just above $28. We’ll take Li at his word and assume he made his investment some time in October.

Establishing the exact time frame here is important, so that we can understand what company filings and other news articles Li would have had access to.

Li proceeds to discuss with the class his investment in Timberland by using the following page from Value Line from its November 20, 1998 issue. Note, however, that if Li was working in October, he would have only had access to the August 21, 1998 issue. Both are shown below.

Li also would have had access to the company’s annual report for 1997, which was filed on March 26, 1998, and the two most recent 10Q’s: Q1 1998 was filed on May 7th and Q2 1998 on August 7th.

If Li was looking into the stock in October when the stock price was in the low $30’s or $29 per share range, he would have done some quick calculations to assess how cheap or rich the stock was.

First, at a share price of $29, and with 11,470,423 shares outstanding, Timberland would have had a market cap of $333mn. According to the latest 10Q, the stock had a book value of $229mn. On that basis, the company wasn’t screamingly cheap.

However, the income statement (or the information in the Value Line sheet) tells another story. The Value Line sheet from August 21st shows the company made $4.37 per share in earnings over the trailing twelve months, which, at a stock price of $29, equates to a P/E ratio of 6.6, or an earnings yield of 15%.

And a further look at the history of the income statement from the K’s and Q’s available at the time shows that the company was doing very well. It was consistently growing revenues from much lower levels during the 1990’s, and earnings were growing throughout the period as well. (Note that there was one major exception in 1995, which we will discuss).

The Timberland brand

In the 1990’s, just as today, Timberland boots had a great reputation for quality among tradesmen, like construction workers, carpenters, and factory workers. Although well-known and even iconic today, Timberland’s flagship product of a waterproof, leather boot was somewhat unique at the time of its creation in 1973 and was still leading its niche in 1998.

Moreover, through many years of prior trial-and-error in the shoe industry by its founder, Nathan Swartz, and later by his two sons, Sidney and Herman, the company had captured an even rarer niche starting in the 1970’s and 1980’s, that of a high-quality product loved by craftsmen but also sought after by the affluent layperson. A 1982 article in Inc magazine contains some entertaining evidence that Timberland boots were a status symbol even in the 1970’s:

Kravetz [Timberland’s EVP] was hired early in the summer of 1976. By July, he was tramping up and down Fifth Avenue in New York with a green plaid suitcase stuffed with samples. One day he marched into the shoe department at Bergdorf Goodman and found the manager in his office sipping tea. Kravetz sold him eight pairs of women’s boots and, with that sale, he uncorked a gusher. In the next two years, Kravetz and his remodeled sales team signed up 2,000 new accounts, including a crowd of fancy department stores and an assortment of smaller, upscale retailers.

In addition, in the 1990’s, the company was also in the enviable position of seeing their product becoming adopted by even more markets. That period saw the start of a new fashion trend that still continues today. Along with other “outdoor” brands like North Face and Carhartt, hip-hop performers (and their fans) began sporting the company’s boots.

The trend was so prevalent that it even prompted a New York Times article that speculated the company did not realize how popular their boots were becoming.1

And yet, [then-COO Jeffrey Swartz] contended, the urban market constitutes less than 5 percent of the company’s domestic sales... Not so, say some outdoor-wear-for-style devotees, like Julia Chance, the fashion editor for The Source, a national magazine that monthly chronicles hip-hop culture. They say spokesmen for concerns like Carhartt and the C. C. Filson Company are grossly underestimating their sales to young black and Hispanic consumers.

Despite all these positives going for the company, Timberland’s stock was down -55% in just three months, from July 17, 1998 to October 14, 1998. Why the precipitous drop in stock price?

The company had strong revenue growth and good earnings growth over the longer-term and the company’s brand and product continued to be strong. Wasn’t a trailing twelve-month P/E ratio of 6-7 a bit too cheap? Were there any valid reasons for such a dramatic decline?

In tomorrow’s memo, we’ll conclude the story with the four concerns that were dragging Timberland’s stock down, why Li concluded none of them were fatal, and the unconventional research that gave him the confidence to bet big.

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It reminds me of something I have heard Buffett say many times. There is an interview by Miguel Barbosa of Alice Schroeder, the author of The Snowball, from back in 2010, and it is well worth reading. I’ve included a copy of it below1.

Miguel Barbosa interview of Alice Schroeder

In it, Schroeder was asked about Buffett’s intellect and investment decision making. She said:

Typically, and this is not well understood, his way of thinking is that there are disqualifying features to an investment. So he rifles through and as soon as you hit one of those it’s done. Doesn’t like the CEO, forget it. Too much tail risk, forget it. Low-margin business, forget it. Many people would try to see whether a balance of other factors made up for these things. He doesn’t analyze from A to Z; it’s a time-waster.

Here, we have insight into one of the greatest investors in the world and the message is clear: wait for the perfect pitch. Buffett has said this many times of course, but the quote above really hits home. Being patient doesn’t mean buying just because prices are down five or ten percent. It means objectively assessing what you would like to see in a business and the price you would like to pay for it. Recall also Buffett’s advice to invest like you have a punch card with room for only twenty investments in it for your whole life. Being patient means walking away without regret if your terms aren’t met. There is always another opportunity around the corner.

Charlie Munger said something similar many times. Here is a quote from his great speech, “A Lesson on Elementary Worldly Wisdom As It Relates To Investment Management & Business”:

And the 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, they don’t. It’s just that simple.2

Charlie Munger - A Lesson on Elementary Worldly Wisdom 1995-1998

Many times I’ll find potential investments that are good but not great. The price may feel just a bit too high, the management is not as shareholder-friendly as I would like, or maybe the company trends or industry trends could be a little better.

When I find myself in those spots, I try to remind myself of the sheer amount of opportunity out there. The equity of 60,261 companies is listed on major exchanges throughout the world as of January 2026. And this doesn’t count the amount that trades over-the-counter or opportunities that might arise in the huge fixed income market, comprised of corporate debt, municipals, sovereign debt, and mortgage- and asset-backed securities. There are potential investments in commodities and real estate. There are derivatives off of all of those! And there are private equity, venture capital, and angel investing opportunities that might arise for the enterprising investor. There are esoteric alternative investments. There are also completely new business ideas one could develop on their own, like developing or purchasing and running a small business.

I try to remember that my money doesn’t care how it’s made, and the limits should only be defined by my own circle of competence. My job as an investor is to make the best returns possible. Strictly speaking, that means sorting through all of those tens or hundreds of thousands of investment opportunities in order to find the ones that will deliver superhuman returns. It won’t be possible to look through all of them, of course, but keeping this perspective is a good way to counteract any fear of missing out that might surface.

Good investing is as much about maintaining discipline as it is finding opportunities. Search continuously, but wait for the fat pitch down the middle of the plate.

The Owner’s Memo is a newsletter about investing, written for myself, so I have a place to record my thoughts, make sure they’re good and coherent, and to keep myself working constantly to become a better investor. If others find value in it, all the better. There’s nothing like writing to show me whether or not I understand something. I once had a physics professor who told our class, “If you cannot explain the concepts you learn to your grandmother, then you don’t really know them.” I hope this newsletter strikes that spirit and is a place to explore the craft of investing in a way free of pretension, with a goal of getting better and better, finding the best possible investment ideas out there, and continually learning how to manage myself in the course of buying, selling, and holding investments.

My focus will mainly be equity investing, and I’ll draw heavily on the teachings of Warren Buffett, Charlie Munger, and others. Most of all, I hope the writing and analysis I discuss here is grounded in ideas that make sense to me and you, rather than relying on accepted “wisdom” that doesn’t.

On keeping it simple

I’m fond of the idea, expressed by Buffett and others that often the reason for buying and owning an investment is simple enough to be written on a napkin. Professional investors often create extensive investment presentations that serve a secondary purpose: they seek to assure partners or others that the analyst has done a lot of work. Typically, much of the work is ancillary to the core investment thesis. I’ll seek to deliver analyses that both get to the point and examine risks to a balanced degree.

”If you cannot explain the concepts you learn to your grandmother, then you don’t really know them.”

- my former physics professor

On temperament

Controlling or understanding my emotions is critical for good investing. Buffett often likes to say that, for investing, temperament is more important than IQ. From the 2009 Berkshire Hathaway annual meeting:

The market is there to serve you rather than instruct you and to a great extent, that is not a matter of IQ. If you’re in the investment business and you have a IQ of 150, sell 30 points to somebody else, ’cause you don’t need it. I mean, it. You need to be reasonably intelligent. But you do not need to be a genius.

But you do have to have an emotional stability. You have to have sort of an inner peace about your decisions. Because it is a game where you get subjected to minute-by-minute stimuli, where people are offering opinions all the time. You have to be able to think for yourself.

I agree wholeheartedly with this idea, and I have a lot of experience with the notion myself. It seems to me that IQ and temperament are almost completely unrelated. We need enough smarts to understand financial statements, understand the difference between good analysis and bad, and to be able to pick up on positive and negative qualities of an investment, like how “good” the management team might be, but none of that requires a genius-level IQ.

Instead, I’ve found that the way I respond to market prices bears as much weight as good analysis:

• Can I buy a cheap security without worrying about how much cheaper it was a month ago?

• Can I hold it if the price declines but the prospects still look good?

• Can I hold it for extended periods without being tempted by the latest hot stock?

• Can I sell it when things go poorly without berating myself, when often, failures are only obvious in hindsight?

• Can I sell it, if warranted, without berating myself for missing the top?

I plan to write quite a bit about the psychological aspects of investing, about my own temperament, my quest to know myself, and the neverending battle of forming my own theses and assessing them regularly, taking in outside information while avoiding outside noise.

On the rarity of great investments

Great investments come along very rarely in life. Here is Buffett again in a speech to the Terry College of Business at the University of Georgia from 2001:

You would be better off if, when you got out of school here, you got a punch card with twenty punches on it and every [investment] decision you made, you used up a punch. You’d get very rich because you’d think through very hard each one.

There’s a temptation to dabble, particularly during bull markets… you can’t make any money doing that, but if you had a punch card with only twenty punches, and you weren’t going to get another one in your life, you would think a long time before every investment decision, and you would make good ones, and you’d make big ones, and you probably wouldn’t even use all twenty punches in your lifetime, but you wouldn’t need to.

I think the punch card idea is one investing idea that is impossible to overstate. Both professional and non-professional investors have a natural tendency to be hyperactive and to overinvest. Professionals often overinvest with diversification in mind. Diversification is a path to producing less volatile but more ordinary results, allowing the pro a better chance to accrue assets through the things they can control, marketing and salesmanship. For lay investors, ideas are often surfaced in ways that make them seem like great opportunities, for instance, reading an article about how fast a company is growing or getting a stock tip from a friend. However, the layman doesn’t have the experience to understand what separates good ideas like those that are all around from great investments. These ideas and tips don’t come along every day, but they do occur frequently enough to confuse the individual and severely impair results if the hyperactivity is not contained.

I seek to live the punch card philosophy in my own investing, and I’ll explore it and express it in my writing.

What you’ll find here

In The Owner’s Memo, you’ll find a few kinds of articles:

• Case studies of great investments from the past. Great case studies can be the best way to learn great investing, but it is often difficult to find good ones. Case studies can be hard to reconstitute because past documents or data sources may not be around or may be tough to find. Since they’re often about success stories, sometimes they don’t give enough weight to just how hard it would have been to pull the trigger. But when they are written well, there is nothing like them. In learning about the features of great investments from the past, we can analogize to investments of today and understand what to avoid, the pitfalls or those potential investments that don’t rise to the level of top-notch.

• Reviews of investment research, books, writings, and other discussions. Understanding the wide variety of investment work out there is vital to becoming a great investor. I review research articles and other sources to inform my own investment philosophy, both providing interesting ideas to examine and also bad ideas to avoid.

• Current investment ideas or candidates. I may also write about businesses I find compelling and potential investment ideas, but I don’t plan to do this right away. First, I’ll see how readers respond to some of the above articles. I want to avoid any sense that this newsletter provides a drip feed of regular “hot stock” tips, which would contradict the idea that great investments are rare and that the goal is to own just a few of the very best investments one can find.

• Profiles of great investors. In the same way that case studies can help learn about great investing features and habits, studying great investors can provide almost as much in the way of good lessons. They also have the benefit of providing inspiration. I’ll review what I can glean from the life and work of some of the greats, particularly focusing on how they started out, to gain some insight on what personality traits or behaviors might be important.

• Reviews of other interesting work in adjacent areas. From time to time, I will be writing about topics that might not seem immediately to be relevant to investing. For example, I am likely to write about psychology and advances in artificial intelligence. Both of those can aid dramatically (and may even be necessary) in being the best investor I can be. I’ll always be expanding my circle of competence, too, and this will be a place to share that work. Charlie Munger felt that having a well-rounded intellect and a desire for lifelong learning was essential to being a great investor.

• Current events. I do not intend to write much about current events, unless the events are applicable to becoming a better investor. I’ll seek to create a set of writing that is focused on the long term. I want this to be a place where I can put down my own theses, grow and thrive as an investor, and, hopefully, allow others to do the same in reading my work.