Saturday, April 10, 2010

Price To Value - Chapter Seven: Phil Carret’s Ideas

Price To Value - Chapter Seven: Phil Carret’s Ideas

CHAPTER SEVEN: Phil Carret’s Ideas
from the new book Price To Value (Acalmix)

Philip Carret founded Pioneer Fund in 1928, six years before Ben Graham wrote the 1st edition of Security Analysis. Carret also wrote a useful and enlightening book called “The Art of Speculation.” And, Warren Buffett stated that Philip Carret “had the best truly longterm investment record of anyone I know."

What made Carret so successful in investing? I asked Frank Betz, of Carret Zane Capital Management, a similar question. Frank shared a partner's desk with Phil Carret as his personal assistant from the mid-eighties until Phil's death in 1998. Carret was then over age 101, and he was still commuting most days from his Scarsdale home to the mid-town NYC office of Carret and Company that he founded in 1962. There he was still functioning fully in the management of client portfolios. Betz recalled that Phil was a voracious reader not only of dozens of corporate annual reports and daily newspapers, but of an eclectic variety of books ranging from philosophy, history, biography and economic subjects. Phil Carret always claimed the most useful information he gleaned from this was from his concentration on the detailed footnotes appended to annual reports.

While Frank was already a long experienced money center banker, analyst, and investor when he was recruited to work for Carret by Phil's son Donald, I wanted to know how this interaction affected his own approach to investing. Frank believes that “working with Phil Carret, significantly sharpened my senses.”

Frank Betz also remembers that Carret would warn others against following fads in investing, and he often cited one of the most important characteristics of successful investors is patience. In the preface of his book, Phil Carret wrote, “The man who looks upon speculation as a possible means of avoiding work will get little benefit from this book. It is written rather for the man who is fascinated by the complexity of the forces which produce the ceaseless ebb and flow of security prices, who wishes to get a better understanding of them.”

“Successful speculation requires capital, courage and judgment. The speculator himself must supply all three. Natural good judgment is not enough. The speculator’s judgment must be trained to understand the multitudinous facts of finance.” Like mine, it was Carret’s hope that his book would assist his readers.

At the 1996 Berkshire Hathaway Annual Meeting, Warren Buffett said: "The main thing is to find wonderful businesses, like Phil Carret, who's here today, always did. He's one of my heroes, and that's an approach he's used. If you've never met Phil, don't miss the opportunity. You'll learn more talking with him for fifteen minutes than by listening to me here all day."

Let us take a brief look at Carret’s somewhat contrarian view on oil. “Oil is produced in thousands of oil fields on every continent in the world. The temporary absence from the market of a single country - even a country as important to oil as Iraq or Kuwait - will have only a temporary effect. Other oil producers can boost their output quickly. And in the United States, we have abundant supplies of natural gas, which can serve as a substitute for oil to a considerable extent.”

More importantly, take a look at Phil Carret's "12 Commandments of Investing":

1. Never hold fewer than 10 different securities covering five different fields of business;

2. At least once every six months, reappraise every security held;

3. Keep at least half the total fund in income producing securities;

4. Consider (dividend) yield the least important factor in analyzing any stock;

5. Be quick to take losses and reluctant to take profits;

6. Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available;

7. Avoid inside information as you would the plague;

8. Seek facts diligently, advice never;

9. Ignore mechanical formulas for value in securities;

10. When stocks are high, money rates rising and business prosperous, at least half a given fund should be placed in short-term bonds;

11. Borrow money sparingly and only when stocks are low, money rates low and falling and business depressed;

12. Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.

We see that Phil Carret exercised safety-based commandments. And, the last one appears to be targeted towards “intelligent speculation.” There, he advised setting aside a proportion of available funds for long-term options on stocks in promising companies whenever available. With careful study and patience, Carret knew he could predict good outcomes. Philip Carret died on May 28, 1998, at age 101.

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“Price To Value” is about Intelligent Speculation and Decision Framing. Readers will benefit from this book if it stimulates better thinking into the most important factors crucial to decision making. These decision framing ideas can be applied across different asset classes. First, the book presents the four investing decision filters in simplified terms. Then, it extends these ideas by looking into the intelligent speculation ideal described by Benjamin Graham in his tenth lecture of 1946.

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