Booth Laird Q2 2015 Letter

+1 (225) 767-1439 [email protected] www.boothlaird.com

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July 11, 2015

Q2 2015 Newsletter

All mens miseries derive from not being able to sit in a quiet room alone. Blaise Pascal

This quarters newsletter is a departure from what we have typically written. There is no individual stock

analysis or update, no thoughts on the expensiveness of the market as a whole, and very little discussion

on the major current events. Instead, I decided to write about a topic I have thought a great deal about

over the past year and which seems timely given the fears over the uncertainty surrounding Greek debt

or the federal funds rate. In this newsletter, I will discuss the proper mindset I believe is necessary for

successful long-term investing and why most investors have trouble attaining it (including us from time to

time). The above quote was sent to me recently by my uncle, who began teaching me about investing

when I was only 11. He knew the quote did not apply to me (most of the time). It seemed fitting for the

topics discussed in this newsletter.

Sit in a Quiet Room Alone

Little did my dad know he was preparing me for a future career as an investor. Beginning in high school,

I was not allowed to watch TV after 6 pm on school nights. The idea was to force me to focus on my

schoolwork without rushing through it to watch TV or play video games. Unfortunately, I usually finished

my schoolwork fairly quickly even without rushing, but there was no bending this rule except on rare

occasions. It took me about a month of re-reading the same two or three Garfield comic strip books out

of boredom to decide to embrace this new lifestyle. This was the late 90s. We had one computer, which

was actually kept in the room above the garage, detached from the main house. That computer did not

even have Windows 95. As far as I ever knew, it only had a dos version of Word Perfect that I used to

complete essays for school. I think my parents finally got the internet about a decade later, well after I

was gone.

My options for entertainment were limited, so I became an avid reader. Being the future researcher I was

destined to be, I kept track of every single book I read one year, how long it took me to read it, and how

many pages it was. My junior year of high school I read 62 books, each an average of 300 pages - over

18,000 pages over the course of the year not including the textbook chapters, study notes, math

problems, etc.

I had a very comfortable arm chair in my room and a reading light that curved over my shoulder. I would

sit in that chair and read for hours on end, night after night. That chair was my security blanket. I looked

forward to closing the door to my room, turning on the reading light, and sitting down to read a great

book. I have had a version of that set-up in every bedroom since then.

In July of last year the same uncle mentioned previously sent me an article discussing the merits of a quiet

room. The idea struck a chord with me instantly, as my uncle knew it would. So I finally decided to give

that chair its own room. I converted one of my bedrooms into a study where no TV was allowed. The

room has a reading chair, a reading light over the shoulder, a bookshelf I built with my dad, a small couch,


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and various decorations on the wall mostly of the great general Napoleon Bonaparte, first in war and in

administration but defeated by his own hubris (a great lesson to be reminded of constantly). Because of

the Napoleon decorations, I have dubbed the room the Napoleon Room.

Instead of books, I most often have my iPad in hand, reading annual reports, articles, interviews, studies,

etc. I only bring my laptop in that room for one purpose to write these quarterly newsletters and our

annual letter.

I sit in a room alone, and it is my happiest time of the day. I get the vast majority of my stock analysis

done sitting in this room. While in this room, I dont peruse the internet, I dont check financial headlines,

and I certainly dont watch CNBC. I focus on those few items I bring into the room. I escape the noise

that seems to drive the market minute by minute.

Most importantly, I often simply sit and think. Alone with my thoughts, I try to understand my biases, put

things into proper perspective, work through the dynamics of a companys strategy and competition, work

out different filters through which to view a company, etc. I do not always come to the right answer, and

sometimes my mental biases get the best of me despite my best efforts. Regardless, the benefits of being

content to sit in a quiet room alone are clear.

Think Week

Similar to a quiet room is the concept of a think week. Here is an excerpt from the book Bill Gates Speaks:

Insight from the Worlds Greatest Entrepreneur:

Gates knows that time pressures prevent him from contemplating matters in depth and putting

them in perspective. Thats why he schedules time away from his office.

A couple of times a year I go away for a think week, during which I read books and other materials

my colleagues believe I should see to stay up-to-date. These materials often include Ph.D. theses

exploring the frontiers of computer science.

A think week is an exceptional idea. Get away for a week, read everything youve been putting aside

because you did not have time and it was not pressing, and think about broader topics. Most people

spend every day amidst the trees. A think week is taking a step back to view the entire forest.

I recently did my own version of a think week, though I did not go anywhere. Near the end of May, I spent

ten days catching up on articles, papers, newsletters, annual reports, and interviews that I had been

putting aside. For roughly twelve hours a day for ten straight days, I did nothing but sit in the Napoleon

Room and read. It was wonderful.

My think week allowed me to take a refresher course on the basic tenets of value investing while also

taking a Ph.D. class on new ways of thinking about value, portfolio construction, business strategies, and

various industries. It was a great experience I plan to repeat at least annually. I have already begun saving

up papers, articles, and letters for my next think week.


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Patience and Perspective Are Hard to Come By

In the quote that leads off this newsletter, the 17th century mathematician Blaise Pascal could have been

referring to modern day investors. You can see it every day in the headlines and the comments from both

professionals and retail investors. Investors of all types feel a need to take action in some way. It is almost

as if they are not comfortable unless they are buying or selling. Do nothing is almost always the right

choice, but investors rarely opt for that choice. It comes down to making decisions based on emotions

rather than on facts, perspective, and appropriate analysis. We too have fallen prey to this do

something emotional decision-making in the past, usually when deciding to sell, and it has cost us money

nearly every time.

The panic and emotional decision-making is fed by the too easy access to information, spread by

pundits, friends, colleagues, etc. We are a communal species, which makes it hard for an individual to go

against the crowd. As a result, when your friends or trusted experts panic, it is hard not to follow suit.

The media has also realized that bad news is a lot easier to sell than good news, further feeding the frenzy.

You may have heard of the study done recently by Fidelity on which accounts were most successful. The

company found that the most successful accounts were owned by dead clients and the second best

performing were owned by people who forgot they had an account with Fidelity. In other words, the

accounts that had the least activity were the most successful.

The flip side is the performance of the average investor vs the market as a whole. Per a Forbes article

dated April 24, 2014, titled Why the Average Investors Return is So Low, the average investor

significantly underperforms the market. From the article:

According to the latest 2014 release of Dalbars Quantitative Analysis of

Investor Behavior (QAIB), the average investor in a blend of equities and

fixed-income mutual funds has garnered only a 2.6% net annualized rate

of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasnt fared any better over longer time

frames. The 20-year annualized return comes in at 2.5%, while the 30-

year annualized rate is just 1.9%. Wow!

The average investor exclusively investing in just fixed-income funds has

had an even worse experience. The annualized return is 0.6% over 10

years, 0.7% over 20 years, and 0.7% over 30 years.


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Mutual funds focused on stocks and on bonds had performed considerably better over that time on

average. So it comes down to individual investors poor timing investing in mutual funds, selling after a

down period and investing more after a period of positive performance. In essence, buying high and

selling low.

Most investors would benefit from forcing themselves to sit in a quiet room alone or allow themselves a

think week and realize the market has gone through countless oscillations in the past. The economy has

had stretches of severe underperformance, the world has been at war, entire industries have collapsed,

leaders have been assassinated, and yet the world has not ended. You can walk outside and see that the

sun is still there. And the market has never remained permanently down after a drop. It has recovered

every single time, and usually fairly quickly.

Staying Calm amidst the Panic

The Napoleon Room and the think week allow us the peace of mind and patience to stay calm while many

investors panic. Last week was a great example. The U.S. market dropped a few percentage points over

fears of Greece defaulting, something that will have little impact on the U.S. economy and will very likely

not have a large impact on the European economy in the long run. In fact, Greece appears to be a tumor

to the Euro Zone at this point that should be excised rather than be enabled by the other Euro Zone

countries. Regardless of the outcome, the companies we have invested in will be fine in the long run. So

we took the opportunity to add to some existing holdings that dropped while others were selling in a

panic.

Another laughable example is the fear over whether the Federal Reserve will raise interest rates in

September or wait until early 2016. The likely rate increase is about 0.25 percentage points, which will

have no noticeable impact on the economy at all. It would take a year of steady rate increases just to get

to a full percentage point increase. We are a very long way from the 5% to 6% in force during the two

most recent stock market crashes in 2001 and in 2008. Despite this and counterintuitively, every time an

economic growth update or jobs report comes out that is too good, the market drops over fear of this tiny

rate increase happening three months sooner. Conversely, a poor report results in an increase in U.S.

stock prices. We are happy to take advantage of the dips.

Divorcing yourself from the noise of financial headlines and pundits is one of the greatest benefits of

having a quiet room to read and to think. If you ever want to see how insignificant todays news usually

is, here is a great exercise. Go a week without reading any news at all. Then read all of the headlines from

the previous week that you missed. It is amazing how little you missed and how insignificant most of the

news is even after just one weeks time.

Our average holding period for an investment is over a year. Our preferred type of investment is what we

call a pillar stock. A pillar stock is a company with high returns on invested capital that easily exceed the

companys weighted average cost of capital, has a durable competitive advantage, operates in an industry

we understand with favorable characteristics, and has trustworthy management. Our expected holding

period for these stocks is forever in the absence of a change in fundamentals, an insanely high price, or


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the need to put the capital toward an ever better opportunity. So what happens in Greece today or how

the economy performs next quarter or how soon the Federal Reserve raises interest rates is of little

consequence to us regarding these investments.

Our other type of investment is a workout, which is a company in an industry we understand, has

trustworthy management, has near worst case scenarios priced into the stock, and has some catalyst we

expect to occur in the near future to unlock the value we see in the company. These types of investments

might be sold first in a broader market sell-off, but that simply gives us more opportunity to buy at better

prices, assuming the fundamentals of the thesis are unchanged. Once again, what happens in Greece or

to interest rates is not hugely critical to us. We try to avoid investments that rely on outcomes we cannot

predict or appropriately price in. We have stayed far away from investing in Greece, for example. We

also avoid companies without pricing power, such as oil & gas or mining companies. We do not like the

idea of waking up to a 50% drop in the price of the commodity one of our investments sells, which is more

influenced by geopolitical events and outside our powers of prediction and analysis.

We certainly are not always right in our analysis or margin of safety and occasionally lose money on an

investment, a couple of times a lot of money. We have had a couple of periods of severe

underperformance, which might be considered our own version of Greek debt uncertainty. However, we

do not panic. We sit alone with our thoughts, think through the lessons to be gleaned, adjust accordingly,

and continue to focus on long-term capital growth.

Highlights

In case anyone is skipping to the end to see how long this newsletter is, here are the key takeaways if you

read nothing else:

Successful investing requires patience, perspective, and not panicking

Be comfortable sitting alone in a quiet room to put things in proper perspective

Have a think week to focus on broader ideas, away from the daily grind

Ignore the noise so prevalent in financial headlines, meant to sell newspapers or elicit clicks


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This newsletter has been distributed for informational purposes only. Neither the information nor any

opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to

invest in any investment product or strategy related to such securities or assets. It is not intended to

provide personal investment advice, and it does not take into account the specific investment objectives,

financial situation or particular needs of any person or entity that may receive this newsletter. Persons

reading this newsletter should seek professional financial advice regarding the appropriateness of

investing in any securities or assets discussed in this newsletter. The authors opinions are subject to

change without notice. Forecasts, estimates, and certain information contained herein are based upon

proprietary research, and the information used in such process was obtained from publicly available

resources. Information contained herein has been obtained from sources believed to be reliable, but such

reliability is not guaranteed. Investment accounts managed by Booth-Laird Capital Management, LLC may

have a position in the securities or assets discussed in this article. Booth-Laird Capital Management, LLC

may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part

of this newsletter may be reproduced in any form, or referred to in any other publication, without express

written permission of Booth-Laird Capital Management, LLC.

Booth Laird Q2 2015 Letter

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