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 30year 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.

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