Review – Nonviolent Communication

Nonviolent Communication: A Language of Life

by Marshall B. Rosenberg, Ph.D., published 2003

What is all this hippie nonsense?

A common question, this is the best introduction I’ve found so far, via a lecture given by the author.

 

The NVC Process

To practice the Nonviolent Communication (NVC) process involves four components, which are:

1. observations – the concrete actions that affect our well-being
2. feelings – the emotions we experience in relation to what we observe
3. needs – values, desires, etc., that generate our feelings
4. requests – the concrete actions we’d like to see others take in order to enrich our lives

The NVC process is not a new way to manipulate other people; it involves giving and receiving a level of respect and empathy common to ourselves and others which entails:

• expressing honestly through the 4 components
• receiving empathetically through the 4 components

Obstacles to needs-based communication

There are many pitfalls that trap us in our efforts to communicate our unique needs. One common communication style which serves to hinder compassionate communication is moralistic judgment, an impersonal way of communicating the focuses on the “wrongness” of the actions of others rather than on revealing what a person thinks and feels inside of themselves. In truth, analyzing and judging the behavior of others is actually a reflection of our own needs and values. For example, “The rich are so selfish!” might be an attempt to communicate something closer to, “When I witness poverty, I feel sad; I value living in a community where everyone seems to have enough to take care of themselves.” The danger of moralistic judgments is that the act of classifying can promote violence by creating adversarial, us-them attitudes toward others– people become obstacles to satisfying our needs and values rather than potential partners.

Another problematic approach to communication involves making comparisons, which are simply another form of judgment. When we make comparisons, we block compassion– for ourselves and for others. It is another way to build walls and separateness.

Compassion is similarly difficult to achieve when we engage in denial of responsibility by using language which obscures the connection between our own thoughts, feelings and actions. In Nazi Germany, officers responsible for the Holocaust and other atrocities relied on Amtssprache, or “office talk/bureaucratese”, to deny responsibility for their actions because everything they did, they did because of “superiors’ orders” or “company policy” or “just following the law/doing my job.”

There are many ways in which we can deny responsibility for our actions by attributing their cause to factors external to the self:

• vague, impersonal forces; “I did X because I had to”
• condition, diagnosis or personal history; “I do X because I am Y”
• actions of others; “I did X because Y did Z”
• dictates of authority; “I did X because Y told me to” (Amtssprache)
• group pressure; “I did X because everyone in group T does X”
• institutional policies, regulations or rules; “I did X because those are the rules around here when people do Y”
• gender, social or age roles; “I hate X, but I do it because I am a good Y”
• uncontrollable impulses; “I was overcome by my urge to do X”

History is rife with examples,

We are dangerous when we are not conscious of our responsibility for how we behave, think and feel

Two other ways we create obstacles to life-enriching communication are by stating our desires as demands, and speaking in terms of “who deserves what”.

A demand explicitly or implicitly threatens listeners with blame or punishment if they fail to comply

Similarly, speaking in terms of “deserving” creates the impression of “badness” or “wrongness” and promotes behavior based upon fear and punishment-avoidance (a negative philosophy) rather than goal-seeking and personal benefit (a positive philosophy). In other words,

it’s in everyone’s interest that people change, not in order to avoid punishment, but because they see the change as benefitting themselves

Implementing NVC: nuances and complexities

At this point you might be thinking, “NVC sounds interesting, but how do I actually use it?” Even the first element, observation, can hang people up.

The reason that the NVC process stresses observing without evaluating is that when people hear evaluation, they are less likely to hear our intended message and instead hear criticism which puts them on the defensive rather than being receptive to what we have to say. However, the NVC process doesn’t require complete objectivity and detachment from emotional realities, only that when evaluations are made they are based on observations specific to time and context. In other words, evaluations must be about specific actions taken within specific time periods. For example, “John is a great guy” is a generalized evaluation whereas, “John helped the little old lady cross the street yesterday afternoon” is an observation without evaluation.

Another element of NVC that new adoptees struggle with is separating feelings from non-feelings (thoughts). It is a common construct of the modern English language (and many others) to use “feel” in place of “think”. Red flags for feel/think confusion are the use of the following after the word “feel” when making a statement:

• words such as “that,” “like,” and “as if”; “I feel like a failure” or “I feel that you shouldn’t do that”
• the pronouns “I,” “you,” “he,” “she,” “they,” and “it”; “I feel it is useless”, “I feel I am always running around”
• names or nouns referring to people; “I feel my boss doesn’t like me” or “I feel Jeff is doing a great job”

In NVC, there is a difference between expressing how we feel, and expressing what we think we are (self-evaluation):

• feeling; “I feel disappointed/sad/frustrated with myself as an X”
• evaluation; “I feel pathetic as an X”, which is better stated, “I am a pathetic X”

Part of developing our ability to accurately express feelings entails developing our feelings vocabulary, and learning which words connote states of being or evaluations of capability, and which words can authentically convey an emotional response to such values or needs.

The other critical component involved in accurately expressing out feelings is taking responsibility for their cause. The common misconception is that external factors cause internal emotional reactions. The reality that, while external factors may provide a stimulus, the direct cause is our internal values, beliefs, expectations and needs; when they are satisfied, we have one set of feelings (positive) and when they are violated or negated, we experience a different set of feelings (negative).

When we receive a negative message from another person, we have four options for choosing how to react to it:

1. blame ourselves
2. blame others
3. sense our own feelings and needs
4. sense others’ feelings and needs

Accepting responsibility for our feelings involves acknowledging our needs, desires, expectations, values or thoughts. We commonly mask these things by using unaccountable language such as:

• use of impersonal pronouns such as “it” or “that”; “It makes me so X when Y” or “That makes me feel Z”
• use of the expression “I feel X because…” followed by a person or personal pronoun other than “I”; “I feel X because you…” or “I feel X when Z…”
• statements which only mention the actions of others; “When Y does X, I feel Z”

The simplest remedy is to adopt use of the phrase “I feel… because I need…” which connects our own feelings to our own needs. This can improve our communication with others, as well, because when people hear things that sound like criticism they invest their energy in self-defense, whereas when we directly connect our feelings to our needs we give people an opportunity to behave compassionately toward us.

If we express our needs, we have a better chance of getting them met

The liberation cometh

Emotional liberation is the state of being achievable through disciplined and consistent practice of the NVC process wherein an individual is able to freely and safely express his authentic feelings and needs to others, and to similarly be free and secure in receiving these authentic feelings and needs from others. The movement from emotional slavery to emotional freedom typically involves three transformational stages:

1. emotional slavery; we see ourselves as responsible for others’ feelings
2. obnoxious observation; we feel reluctant as we realize we no longer want to be responsible for others’ feelings
3. emotional liberation; we take responsibility for our intentions and actions

Implementing NVC: the final step, making requests

The fourth component of NVC, making requests, is in some ways the most challenging of all. To practice effective request-making it is important to be in the habit of utilizing positive language as it is hard to “do a don’t.” Thinking of a way to express your request in the form of “Would you be willing to do X?” instead of “Please stop Y” serves to remove incentives for resistance and fighting and gives the other person an opportunity to make a positive contribution to your well being.

Similarly, the focus should be on making specific, concrete, actionable requests rather than something general, ambiguous, vague or abstract.

We often use vague and abstract language to indicate how we want other people to feel or be without naming a concrete action they could take to reach that state

Being clear about what you’re requesting from another person makes it more likely they’ll be willing and able to comply with your request– how can a person satisfy your needs if they don’t know what they are and don’t know what they could do to help you with them? Don’t make people guess!

Additionally, expressing feelings without providing a request can confuse people and lead them to believe you are trying to pin guilt for your emotions on them, rather than prompting them to take some corrective action. For example, “It bothers me that you forgot to do X” is not a clear request for a person to do X and may be interpreted as “You make me feel bad!” which is antagonistic and inspires self-defensive reactions.

Whenever we say something to another person, we are requesting something in return

Another guideline for making requests is to ask for a reflection– ask the person you just made a request of to reflect the request back to you to confirm you have been understood.

After we’ve communicated a request, we’re often interested in knowing how our the other person has reacted. We can get a better understanding of this by soliciting honest feedback through one of three ways:

1. inquiring about what the listener is feeling
2. inquiring about what the listener is thinking
3. inquiring as to whether the listener is willing to take a particular action

A key here is to specify which thoughts or feelings we’d have to have shared; without specificity, the other person may reply at length with thoughts and feelings that are not the ones we’re seeking. Particularly challenging situations arise when making requests of a group.

When we address a group without being clear what we are wanting back, unproductive discussions will often follow

Keep in mind that there is a difference between making a request and making a demand. The difference is that when a person hears a demand, they believe they will be punished or blamed if they don’t comply. This leaves them with two options:

• submit
• rebel

Notice how “respond with compassion and seek resolution” is not one of the options. If the speaker criticizes or judges the listener’s response, it is a demand, not a request. A request implies that a person is free to disregard it if they don’t want to comply; that’s their right as a free individual with their own needs and wants.

Making a request implies we are prepared to show empathetic understanding of another when they are unwilling to comply with our request. However, if someone doesn’t comply with our request, we don’t have to give up. We do have an obligation, though, to empathize with their reasons for not complying before attempting to persuade.

Conclusion

This is a powerful and transformative framework for not only communicating with others but better understanding one’s self and one’s own needs. The world would be a much different place if it were more widely understood.

 

Notes – The Intelligent Investor Commentary By Jason Zweig

The Intelligent Investor: A Book of Practical Counsel

by Benjamin Graham, Jason Zweig, published 1949, 2003

The Modern Day Intelligent Investor

The following note outline was rescued from my personal document archive. The outline consists of a summary of the end-chapter commentary written by Jason Zweig. Zweig did such a good job of reviewing Graham’s lessons in each chapter and practically applying them that I find you can get most of the major principles of The Intelligent Investor by reading the combined commentary chapters as if they were a standalone investment book.

Of course, Graham’s original work is a classic in the value investing tradition and it should be read and savored on its own, as well.

Chapter 1, JZ commentary

1. What is investing?
   1. You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock
   2. You must deliberately protect yourself against serious losses
   3. You must aspire to “adequate”, not extraordinary, performance
2. How to invest
   1. An investor calculates what a stock is worth, based on the value of the underlying business
   2. A speculator gambles that a stock will go up in price because somebody will pay even more for it
   3. You should be comfortable owning the underlying business even if you couldn’t get timely, regular quotes of its market price
   4. Price is what the business is selling for, not what it’s worth. Value is what the business is worth. Money is sometimes made in the arbitraging of the two, but price does not dictate value; in the long-term, value dictates price
3. Limit your risk
   1. Never mingle speculative accounts and investment accounts
   2. Never allow your speculative thinking to spill over into your investing activities
   3. Never put more than 10% of your assets into your “mad money” account

Chapter 2, JZ commentary

1. Stocks have not had a perfect record of keeping up with inflation, as measured by the CPI
2. 20% of the 5year periods from 50s today in which inflation dominated saw falling stocks
3. Two strategies for branching out beyond stocks during inflation:
   1. REITs (Real Estate Investment Trusts)
   2. TIPS (Treasury Inflation Protected Securities)
      1. IRS considers an increase in TIPS value to be taxable income

Chapter 3, JZ commentary

1. “By the rule of opposites, the more enthusiastic investors become about the stock market in the long run, the more certain they are to be proved wrong in the short run.”
2. The stock market’s performance depends on three factors:
   1. real growth in earnings and dividends
   2. inflation(-expectations) within the general economy
   3. speculative appetite for stocks/risk (increase/decrease)
3. In the long run, you can reasonably expect stocks to average a 6% nominal return, 4% real return (with inflation calculated at 2% historical rate)
4. Be humble about your ability to forecast future stock returns– don’t risk too much on a forecast that could turn out to be wrong.

Chapter 4, JZ commentary

1. Two kinds of intelligent investors:
   1. active/enterprising – continual research, selection and monitoring of a dynamic mix of stocks, bonds or mutual funds (intellectually/physically demanding)
   2. passive/defensive – create a permanent portfolio that runs on autopilot and requires no further effort but generates very little excitement (emotionally demanding)
2. How to allocate amongst stocks and bonds for defensive investors?
   1. “Age” is arbitrary and pointless
   2. Instead, consider the fundamental circumstances of your life and the financial needs you’ll have for the foreseeable future
   3. For the aggressive investor, 25% in bonds and cash, 75% in stocks
   4. For the defensive investor, 25% in stocks and 75% in bonds and cash
   5. Rebalancing should be done on a predictable, disciplined basis– not when the market dictates, but when the “calendar” or schedule does
3. Income investing (bond choices)
   1. Taxable or tax free? Choose tax free (municipal) unless you are in the lowest income bracket
   2. Short-term or long-term? Intermediate term bonds of 5-10yrs allow you to avoid the guessing game and see-saw risks of short and long-term bonds
   3. Bonds or bond funds? Unless you have a lot of capital to make minimum purchases, probably more cost effective to buy a bond fund
   4. Watch out for preferred stock, the worst of both worlds
      1. Secondary claim on assets in bankruptcies (junior to bonds)
      2. Offer less potential profit than common equity because they are often forcibly called by businesses when interest rates drop or credit ratings improve
      3. Companies can not deduct the interest payments like they can with bond issuance, ask yourself, “Why would a company that is healthy issue preferred rather than bonds?” Answer is, probably because they aren’t healthy
   5. Sometimes, stocks can offer competitive yields with Treasuries, which can increase income yield while raising potential return (as well as increasing potential risk of loss)

Chapter 5, JZ commentary

1. Markets are least risky after a crash, most risky at the top
2. Should you buy what you know? Psychological studies say that we tend to discount risk inappropriately when we feel we are experts on something due to familiarity
3. Dollar-cost averaging can be a disciplined way to force oneself to invest through bear and bull markets

Chapter 6, JZ commentary

1. Junk bonds
   1. Graham warned against them because they were difficult to diversify away the risks of default; today, many junk bond funds exist which allow an investor to diversify
   2. While junk bonds have outperformed 10yr UST even with historical default rates factored in, many junk bond funds charge high fees which reduces their appeal
2. Emerging market bonds
   1. Typically not correlated with US equity markets
   2. Restrict holdings in bond portfolio to 10% (published 2003)
3. Day trading
   1. The increased transaction costs of day trading is a surefire way to bomb a portfolio
   2. Day trading raises transaction costs to the point where returns must be beyond what one could reasonably expect to make with a conservative estimation of returns, just to break even
4. IPOs
   1. Most people who have bought-and-held IPOs have been decimated over time
   2. Hard to find value in the mania buying of an IPO
   3. The public excitement of an IPO often leads investors to forget about valuing the underlying business; many investors have paid ridiculous sums for businesses that were not profitable and never had a chance of being profitable
   4. “It’s Probably Overpriced”

Chapter 7, JZ commentary

1. Market timing is essentially a fools errand: Life can only be understood looking backwards, but it is lived forwards.
2. Growth stocks– the faster the companies grow, the higher goes their stock multiples
   1. A $1B company can double its business fairly easily, but how will a $50B company double itself?
   2. A great company is not a great investment if you pay too much for it
   3. When growth companies expand beyond 25-30 times earnings, they’re expensive and should not be bought
   4. One way growth companies could become temporarily attractive is when they suffer a setback or disclosure of upsetting information, creating “the relatively unpopular large company.”
3. Most great fortunes in the world are made through concentration into one industry or business idea; similarly, most great fortunes are lost this way as well
   1. Because markets are sometimes cyclical, people who got rich in one industry as it boomed will likely lose their fortunes in that same industry when it busts
4. Bargain hunting for stocks can be a winning strategy; consider stocks that are selling at or for less than their net working capital (Current Assets – Total Liabilities, including preferred stock and long-term debt)
   1. One way to quickly find these stocks can be to search for companies that have recently hit new lows for the past 52 weeks
5. Diversifying outside the US (or home market) is adviseable because national economies suffer booms and busts as well as specific industries do
   1. If you had been Japanese in 1989, you would probably think it foolish to invest in America; however, you would lose 2/3 of your equity value over the ensuing decade as a result
   2. The country that you live and work in is already a multilayered bet on the economic prospects of that country’s economy; buying foreign stocks (including emerging markets) provides insurance against the possibility that your home market might be a laggard

Chapter 8, JZ commentary

1. Do not let the movement of Mr. Market, up or down, affect your decision on whether to buy or sell a particular company or stock at a particular time
   1. Don’t buy just because the market is going up
   2. Don’t sell just because the market is going down
2. Graham: “The primary cause of failure is that they pay too much attention to what the stock market is doing currently.”
3. Investing intelligently is about controlling the uncontrollable
   1. your brokerage costs
   2. your ownership costs (mutual fund fees)
   3. your expectations (keep them reasonable)
   4. your risk (how much of your total assets do you put into each investment)
   5. your tax bills (short vs. long term cap gains)
   6. your own behavior
4. “To be an intelligent investor, you must also refuse to judge your financial success by how a bunch of total strangers are doing”
   1. You haven’t lost if everyone else has won
   2. You haven’t won if everyone else has lost
   3. Focus on your own absolute performance
5. Remember: market quotations are what other people think the value of a stock is– not what the true value of the stock is in relation to underlying intrinsic value
6. Selling into a bear market can occasionally make sense in relation to taking a realized loss for tax purposes; consult a tax professional before doing so

Chapter 9, JZ commentary

1. The pitfalls of mutual funds:
   1. avg fund does not pick stocks well enough to overcome the costs of researching and trading them
   2. the higher a fund’s expenses, the lower its returns
   3. the more frequently a fund trades, the less it tends to earn
   4. highly volatile funds tends to stay volatile
   5. funds with high past returns are unlikely to remain winners for long
2. Why don’t more winning funds stay winners?
   1. migrating managers; top mgrs get picked off by higher paying companies or go on to start their own funds
   2. asset elephantitis; when a fund is too large, it reduces the types and size of investments it can possibly make, reducing its nimbleness
   3. no more fancy footwork; many fund “incubate” before going public and whatever advantages they had during incubation are generally lost afterward, yet they use the incubation period performance to promote the fund
   4. rising expenses; it often costs more to trade in size than to trade smaller because markets become illiquid when trading in size
   5. sheepishness/herding; fund mgrs who have been successful and attract higher fees grow accustomed to these fees and their reputation and don’t want to take any risks that might jeopardize either one, so they trade like other fund mgrs
3. The solution for the individual investor is boring, low cost index funds– they won’t beat the market, but they won’t get beaten by it either
4. How to pick good mutual funds?
   1. managers should be the biggest shareholders
   2. they should be cheap/low fee; high returns are temporary, high fees are permanent
   3. they should be run creatively and “dare to be different”
   4. they shut the door before they get too big
   5. they don’t advertise much if at all
5. Expense fee guidelines:
   1. taxable and muni bonds, .75%
   2. US equities, 1%
   3. high-yield bonds, 1%
   4. US equities (small stocks), 1.25%
   5. foreign equities, 1.5%
6. When to sell a mutual fund?
   1. a sharp and unexpected change in strategy
   2. an increase in expenses
   3. large and frequent tax bills (caused by excessive trading)
   4. suddenly erratic returns (big gains or big losses)

Chapter 11, JZ commentary

1. Five decisive elements for determining price multiples
   1. the company’s “general long-term prospects”
      1. Warning flags
         1. the company is a serial acquirer, gaining revenues and profit growth through the acquisition of other businesses
         2. the company is addicted to OPM and is continually floating debt or issuing new stock
            1. cash from operating activities negative, while cash from financing activities positive, on a general or recurring basis, means the company is not profitable in its own line of industry
         3. the company relies on one or only a handful of important customers to generate a significant share of its revenues and profits
      2. Positives in company analysis
         1. the company has a wide “moat” to competition
            1. brand identity
            2. monopoly or near-monopoly
            3. economies of scale
            4. unique intangible asset
            5. resistance to substitution
         2. the company is a marathoner, not sprinter
            1. revenues and income should grow steadily, not in spurts
            2. less likely to attract and then offend “hot stock” money
         3. the company sows and reaps
            1. the company should be spending on R&D to develop new lines of growth in the future
            2. 3-6% of revenues by industry is a typical measure
   2. the quality of its management
      1. is it looking out for #1?
         1. executives should not be paid too much
         2. company should not be reissuing or repricing stock options constantly
         3. use fully-diluted share totals when calculating EPS
         4. insiders should not be selling the company
      2. are they managers or promoters?
         1. mgrs should spend most of their time managing, not being in the media promoting the company’s stock
         2. watch out for accounting opaqueness, recurring non-recurring charges, ordinary extraordinary items and the focus on EBITDA rather than net income, etc.
   3. the financial strength and capital structure
      1. it should generate more cash than it consumes
      2. cash from operations should grow steadily over time
         1. use “owner earnings” (Net Income + Amortization + Depreciation – Cost of Stock Options – Unusual/Nonrecurring Charges – Company Pension Fund “Income”)
      3. capital structure considerations
         1. total debt ( + preferred stock) should be under 50% of total capital
         2. is debt fixed-rate or variable, exposing the company to interest rate risk (check footnotes)?
         3. check annual reports for “ratio of earnings to fixed costs” which can demonstrate if the company is able to make interest payments
   4. its dividend record
      1. the burden of proof is on the company to prove they shouldn’t issue you a dividend because they can grow the company better with the retained earnings
      2. the stock should not be split constantly
      3. stock buybacks should occur when the company’s shares are cheap, not at record highs
   5. its current dividend rate

Chapter 12, JZ commentary

1. Accounting gimmickery
   1. make sure capitalized expenses really ought to be capitalized
   2. watch out for firms realizing revenues on their accounting statements that they have not actually earned
   3. inventory write-downs should not be occurring regularly if the company is using proper inventory accounting methods
   4. “net pension benefit” should not be more than 5% of the company’s net income
2. How to avoid accounting fraud
   1. read backwards; the dirty secrets are buried at the end
   2. read the notes; never buy a stock without reading the footnotes in the annual report
      1. look for terms like “capitalized”, “deferred” and “restructuring”
   3. read more; check out Financial Statement Analysis (Fridson and Alvarez), The Financial Number’s Game (Comiskey), Financial Shenanigans (Schilit)

Chapter 14, JZ commentary

1. Investing for the defensive investor
   1. Substantially all of ones stock picks should be limited to a total stock market index fund; or, 90% total stock market index fund and 10% individual stock picks
2. Graham’s criteria for stock selection:
   1. adequate size; market cap > $2B, unless owned through a “small cap mutual fund” that allows for diversification
   2. strong financial condition; 2:1 current assets:current liabilities ratio
   3. earnings stability; some earnings for the common stock in each of the past ten years
   4. dividend record; the company should pay a dividend, even better if it increases over time
   5. earnings growth; 33% cumulative EPS growth over ten years, or essentially, 3% annual EPS growth
   6. moderate p/e ratio; current price should be no more than 15x avg earnings over past 3 yrs
   7. moderate price-to-book ratio; price-to-assets/price-to-book-value ratio of no more than 1.5
   8. alternatively, multiply p/e ratio by price-to-book and the number should be below 22.5
3. Do the due diligence
   1. do your homework; read at least 5 yrs worth of annual and qtrly reports and proxy statements disclosing managers’ compensation, ownership, and potential conflicts of interest
   2. check out the neighborhood; check for institutional ownership ratios, over 60% probably means the company is overowned and overpriced
      1. if one sells, they’ll all sell; could be a time to find bargains in that stock
      2. check who the biggest holders are, if they’re money mgrs that invest like you, you could be in good hands

Chapter 15, JZ commentary

1. You can practice stock-picking for a year, without investing any real money, and see how you do
   1. if you beat the S&P500, maybe you are good enough to pick stocks
   2. if you don’t, stick to index funds
2. How to pick stocks for the enterprising investor
   1. Start with stocks that have recently hit 52 week lows
   2. use the ROIC method of analysis; ROIC = Owner Earnings / Invested Capital, where Owner Earnings is:
      1. Operating Profit + Depreciation + Amortization of Goodwill – Federal Income Tax – Cost of Stock Options – Maintenance (Essential CapEx) – Income Generated By Pension Funds
      2. Invested Capital = Total Assets – Cash and ST Investments + Past Accounting Charges That Reduced Invested Capital
      3. ROIC can demonstrate, after legitimate expenses, what the company earns from its operating businesses and how efficiently it has used shareholders’ money to generate that return
      4. ROIC of 10% is attractive, 6-7% in special occasions with strong brand name, focused management or the company being temporarily unpopular
   3. you can also look for comparable companies that have been acquired recently for valuations for the company you are looking at
      1. check the “Business Segments” (or “Management Discussion and Analysis”) section of the company’s annual report for industrial sector, revenues and earnings of each subsidiary
      2. then, check Factiva, ProQuest or LexisNexis for examples of other firms in the same industry that have been acquired
      3. then, look at past ARs for these companies for information about purchase price to earnings for those companies before acquisition
      4. this might reveal a “60-cent dollar”, a company whose assets and earnings are selling for 60% or less than the businesses might be worth to an acquirer

Chapter 20, JZ commentary

1. The first objective of investing: “Don’t lose.”; this is Graham’s “margin of safety” concept in a nutshell
2. Consider a market that is returning 5% a year, while you have found a stock that you think can grow at 10%; if you overpay for it and suffer a capital loss of 50% in the first year, it will take you 16 years to overtake the market, and nearly 10 years just to break even again
3. The biggest financial risk we face is ourselves; ask yourself the following questions:
   1. How much experience do I have? What is my track record with similar decisions in the past?
   2. What is the typical track record of other people who have tried this in the past?
   3. If I am buying, someone is selling. How likely is it that I know something they don’t know?
   4. If I am selling, someone else is buying. How likely is it that I know something they don’t know?
   5. Have I calculated how much this investment needs to go up to cover my taxes and trading expenses?
4. Then, make sure you have considered the consequences of being wrong by asking yourself:
   1. How much could I lose if I am wrong?
   2. Do I have other investments that will tide me over if this decision turns out to be wrong? Am I putting too much capital at risk?
   3. Have I demonstrated a high tolerance for risk by continuing to invest after large losses in the past?
   4. Am I relying on willpower alone to prevent me from panicking or have I made preparations in advance by diversifying and dollar-cost averaging?
5. “In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future.”
6. Never make the mistake of following investment crazes or putting all your eggs in one basket; if you make one error, you will have wiped yourself out
7. Instead, diversify, and always protect yourself from the consequences of being wrong just as much as you hope and plan to enjoy the benefits of being right

[amazon asin=0060555661&template=iframe image2]