I recently finished Patrick O’Shaughnessy‘s book, Millennial Money. who also has a great blog over at Millennial Invest. I really enjoyed the book. It’s good to hear an investment philosophy specifically geared toward the under 30 crowd. There wasn’t a lot of groundbreaking information, but it was a very solid primer on all the advantages that youth conveys to the average investor and how starting early and often is the real key to ending up wealthy.
I very much enjoyed the deep dive on backtesting what qualities in a business and a stock lead to real out performance of the market. I was happy to see that many of these characteristics already mirror my strong preference for investing in world dominating, capital efficient, cash machine companies such as Nestle, Coca Cola, General Electric and Brown Forman.
I’m a firm believer in finding great companies at good prices and every single way he defines a high quality company resonates with my own process. Patrick also echos repeatedly how important it is to start early and how little our generation is saving, which is a huge concern I share.
As a random tidbit, I enjoyed learning that fiat means “let it be done” in Latin.
I also can never pass up a good Buffett quote, “If past history was all there was to the game, the richest people would be librarians.”
Chapter 1 – The Millennial Edge
Time advantage of the young. Ability for a dollar to compound. Big money made by early investment dollars.
Chapter 2 -Building Good Financial Karma
Everything facing millenials. Increasing government debt, spending, taxes. Demographics are destiny. Aging US population. Low likelihood we will see social security, medicare, medicaid. A little doomsday.
Chapter 3 – Basic 3 principles.
- Go Global
- Be Different
- Get out of your own way (emotional fortitude)
Chapter 4 – Go Global
Japanese example of investing in Nikeii in 1989. Today only have 1/2 your money back. Example Germany 1900 to 1948. Hyper inflation. 92% loss. You aren’t truly diversified if you aren’t going global and it’s never been easier than now with the opening of financial markets and the creation of low cost ETF’s that provide exposure to a broad swath of a foreign market.
Chapter 5 – Be Different
3 broad categories – market indexes, smart indexes, individual stocks
Problem with index funds is that your returns will be determined by the largest stocks, not best stocks. Largest stocks underperform. Index funds are better than most options because of low fees.
Historically 30% of mutual funds have beaten market in 10 yer period. Random fact – stocks starting with letter C outperform.
- Sector Leaders – Largest stock each sector, equal weighting, underperform S&P by 1% annually, which is a total return of 8,100% versus 12,500% for S&P. This is basically all regular ETF’s
- Sector Bargains – Buy cheapest stock in each sector. This would outperform with 15.9% annualized vs 9.1% sector leaders. That turns 10k into 830k (vs S&P of 136k). If you make this the Global Sector Bargains it returns 21%/yr, an even larger outperform.
- Sector Winners (market momentum) – 14.2%. That’s 3,600% out performance.
- Sector Stewards (shareholder orientation) – 14.7%. That’s 4,400% out performance.
- Sector Stalwarts (earnings quality) – 12.1%. That’s 1,390 out performance.
- Sector Steadies (low volatility) – 11.5%. That’s 850% out performance.
All trump S&P at 10% and Sector Leaders 9.1%
A great stock is one that is most likely to do well in the future, not one that has done well in the past.
Chapter 6 – Millennial Strategy
Success = strategy + perseverance
- Shareholder friendly practices (dividends, buybacks, smart debt)
- Strong returns on their investments
- High quality earnings (strong cashflow)
- Cheap (solid P/E, cash flow)
- Improving market expectations (improving price trends)
- Empire Builders (underperform) – 10% of companies that have grown most through CAPEX, aggressively expanding.
- Reckless Acquirers (undeperform) – 10% of companies whose goodwill has increased by greatest percentage in prior year.
- Cash Fiends (underperform) – 10% of companies that have raised most cash past year.
- Stakeholder Stewards (outperform) – paying down debt, share repurchases and dividends. Annual return of 15.4% (5.4% outperform) which is 5,700 out performance over 30 years.
Rule 1 – Buy companies that are returning cash to shareholders and/or paying down debt.
Rule 2 – Buy companies that earn high returns on their investments. Companies in top 10% return on invested capital have grown 13% per yea (2,350% over 30 years).
Rule 3 – Insist on strong cash flows (prevents earnings manipulation)
Rule 4 – Valuation – Never pay too much for a stock
Easy to say, hard to do. Combine P/E, P/B, P/CF
Rule 5 – Momentum. Buy stocks the market is just starting to notice.
Best combo is cheapest 20% and fastest growing 20%.
- Stakeholder yield > 5%
- Return on invested capital > 30%
- Operating Cash Flow > profits
- Enterprise Value to FCF < 1ox
- 6 month momentum in top 3 quarters of market.
This strategy has returned more than 12 times the amount that you would have earned from overall market.
Chapter 7 Human Psychology.
For the most part this chapter discussed the well known flaws of the average investor and how detrimental they can be to long-term investing. The advice boiled down to don’t buy high/sell low, use a methodology for purchases, and follow a system. Don’t allow emotions to get in your way and cause buying/selling at the worst possible moments. SYSTEMS and RULES MATTER.
Chapter 8 The Long Game
Reorient to the long game. Delay gratification.
Redefine risk. It’s not volatility on investments, but odds that you won’t reach your long-term goal. Absolute risk is silly and should be defined as relative to each investor’s timeline. Stocks have never lost money in any 30 year period.
Your advantage over the pros is that they will sacrifice systems, discipline, and long-term thinking to prevent career risk. Average investors don’t have this worry.
Chapter 9 The Push and Pull
Explores the tendency for human beings to be much more attune to risk than reward. We are risk averse creatures. Loss aversion
Chapter 10 Opportunity Knocks
Another great Buffett quote, “someone’s sitting in the shade today because someone planted a tree long ago.” Patrick relates this to investing but I think about it with literal actual trees. People ask me why bother planting fruit trees at a house that on average you’ll live in 5 years? You’ll never make your money back.
My first answer is, because growing stuff is fun. But more importantly, because I get to enjoy trees full of hundreds of oranges and loquats because somebody put them in before me. I’m happy to do the same for the next person. If we all thought that way, our world would be a better place.