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“Playing the stock market is easy.”

I kept bumping into such boastful statements until Barstool Sports founder, Dave Portnoy, took this foolishness to the highest possible level by saying he was a better investor than Warren Buffett and that day trading was “the easiest game.”

Look, no one is supposed to “play the market.” Stock investing is a profession, period.

The stats undeniably show that the overwhelming majority of traders and investors fail. Based on brokers’ available data, 87% of all retail traders lost money trading forex in 2022. Stock investors/traders fare somewhat better: 80% lose, 10% break even, and 10% make money consistently.

Being in the last 10% of consistent money-makers, I know what separates me from the rest of the pack. I already had more than 10,000 hours of investment-related reading and thinking under my belt by the time I turned 35. Not to mention the firsthand experience of costly and painful lessons (along with success stories). As per Malcolm Gladwell’s principle, popularized in his Outliers: The Story of Success book, I easily qualified as a stock investing expert, although I’d never label myself as such. (A healthy dose of humbleness comes in handy if you are to survive and thrive in the markets.)

I share this because I seemingly had all the reasons to feel satisfied and retire as soon as I achieved financial freedom with my proven investment approach. And that’s what I did! Resting on my laurels and celebrating my achievement felt right… for about two weeks.

I knew all too well that entropy would kick in. If something’s not growing, it is slowly dying. If you’re not learning and getting better, only the painful downward slope remains. Fortunately, one of my friends convinced me to start teaching “this financial independence investing thing.” Being bored in my (way too early) retirement, jumping into this worthwhile project felt energizing.

I completed all of Columbia Business School’s Value Investing courses (the place is considered the cradle of value investing) and read hundreds of books… so why not pass on my knowledge for others to use and benefit from? After writing a best-seller on dividend investing and publishing top-selling online courses, the real milestone was launching the FALCON Method newsletter.

Looking back, I most certainly didn’t foresee how operating a newsletter service with 1,000+ subscribers (from 33 countries at last count) could impact my learning curve over the years. The incoming questions and feedback made me delve deeper, pushing me to explain complicated concepts in a digestible, easy-to-understand manner. Both my investing style and writing skills markedly evolved throughout this journey.

My mantra is, “There’s always something to learn.” I was reading the not-so-enjoyable-but-useful Best-Practice EVA book while finishing up my preparations for Ironman Barcelona (a long-distance triathlon race). Right there, before the event, I got in touch with the author’s team and asked tons of questions. Long story short, I managed to gain access to an institutional-level data service that helped remedy accounting distortions, thus paving the way for my further evolution.

The reason for sharing this is to emphasize that learning never stops; it is never supposed to stop. Warren Buffett’s business partner, Charlie Munger, summed it up perfectly:

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”

I know absolutely no successful people who do not read a lot. My story and evolution as an investor are shared in the Beyond Dividends book, which is a compilation of the FALCON Method newsletter’s writings.

You can learn how I transformed from a pure dividend investor into a more versatile stock picker who understands when real value resides in growth but can differentiate between harmful and value-creating growth. (Hint: financial statements are not too helpful in and of themselves.)

Beyond Dividends may open new horizons for even those who think they already know everything. (I fell into this trap before reaching a whole new level, remember?) I bet that Beyond Dividends will make you contemplate and maybe even question some of your long-held beliefs. That’s exactly what makes a book useful, and that’s why I keep devouring them long after passing the financial freedom milestone. How about you?

If you’re like me, reading your first investment book must have made you super excited.

“I can do this! It sounds totally reasonable. And getting rich is a nice byproduct.” Thoughts like these arose as I was eager to grab the next book.

Fast forward, and I’m sure you’ll agree that after reading the first 5-10 investment books, the messages start to become repetitive or controversial.

Either way, it only takes a few months for the typical person to convince themselves that they know enough to strike it rich in the stock market.

Too bad those books lie to you. They overpromise and underdeliver.

Most serious investors have read many of the investing classics, yet the data indicates they still don’t materially outperform. (At least they don’t even come close to the level of outperformance of people like Warren Buffett and Peter Lynch.) Have you ever thought about this?

The reasons may be twofold: (1) investing is a profession, so while reading is a good start and essential, it alone won’t make you successful, and (2) there’s no incentive for Buffett or any other professional to educate the masses on how to compete with them.

Let me add a third, thought-provoking point: the stock market keeps evolving (changing), as it is a complex adaptive system built on many investors’ personal views and transactions (and their behavioral biases). There’s always money to be made in the market, but winning strategies do not stay constant! You need to keep learning and adapting.

The biggest investors are the best examples of this! After all, Warren Buffett’s current investment approach has absolutely nothing to do with his initial strategy. The hardwired value investor Howard Marks has just recently made the leap to recognize the value residing in profitable growth. And last but not least, a telling example from Morgan Housel:

“The Intelligent Investor is one of the greatest investing books of all time. But I don’t know a single investor who has done well implementing Graham’s published formulas. In each revised edition, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that ‘those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.’ Graham died in 1976. If the formulas he advocated were discarded and updated five times between 1934 and 1972, how relevant do you think they are in 2020? Or will be in 2050?”

On a positive note, while ancient formulas may not work today, and no strategy produces outstanding returns forever, there IS an attitude that has more than stood the test of time! That’s the love of reading, learning, and discovering.

For my part, I keep devouring 50-70 books per year, and half are still investment related (almost a decade after reaching financial freedom). It may be embarrassing to admit, but nearly all of what I read pertained to investments when I was starting out.

After hundreds of titles, I certainly know a thing or two about them being repetitive and controversial. That said, whenever an experienced investor releases a new book, I regard it as a gift, a wonderful gesture. After all, no such publication can be priced too high compared to the experience and lessons delivered.

I usually read 4–5 books per month, and although not all of them are investment-related, I often find striking parallels between the actual topic and the way I invest. The title “Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won” serves as an excellent example.

Following conventional wisdom leads to suboptimal choices most of the time, both in the field of sports and investing. David Romer, a prominent Berkeley economist, says that the play-calling of NFL teams shows “systematic and clear-cut” departures from the decisions that would maximize their chances of winning.

Based on data from more than 700 NFL games, Romer identified 1,068 fourth-down situations in which, statistically speaking, the right call would have been to go for it. The NFL teams punted 959 times. In other words, nearly 90 percent of the time, NFL coaches made the suboptimal choice. Of course, that suboptimal choice was the conventional one. After all, as a manager, it is harder to lose your job by making a typical decision than by doing something unusual, even if the latter had a higher expected value.

Scorecasting highlights several examples like the above. “We found that NHL teams pull their goalies too late (on average, with only 1:08 left in the game when down by one goal and with 1:30 left when down by two goals). By our calculations, pulling the goalie one minute or even two minutes earlier would increase the chances of tying the game from 11.6 percent to 17.6 percent. Over the course of a season, that would mean almost an extra win per year. Why do teams wait so long to pull the goalie? Coaches are so averse to the potential loss of an empty-net goal—and the ridicule and potential job loss that accompany it—that they wait until the last possible moment, which actually reduces their chances of winning.”

What does this have to do with investing? Well, the evidence cited above has just killed the notion of full rationality (had you ever signed up for the rational person hypothesis in the first place). If you lose the ordinary way—by doing what you are expected to do—everyone will gladly commiserate with you, and you can simply blame that loss on bad luck. Imagine, in contrast, what would happen if you dared to do something extraordinary that didn’t turn out so well. Lose in a “stupid way,” and you are left alone to draw conclusions and get back to the herd as soon as you are ready to follow the conventional wisdom again.

Of course, this is just hindsight bias. If you did the right thing but failed because of bad luck, you’re labeled stupid. If you did the wrong thing but succeeded because of good fortune, you’re hailed as a genius. In reality, it’s often the opposite, but the psychological burden of going against the crowd is enormous.

Are you familiar with the process-outcome matrix? Focus on the process you can control, and don’t let the short-term outcome divert you from the winning strategy! This message is so important to keep in mind that I have the matrix on my fridge door.

As long as you are buying the overhyped and overvalued darlings of the market, you are doing everything right from the herd’s point of view. Underlying probabilities say that your performance will not be that great, but hey, you’ll have a lot of people to commiserate with! What if you bought an out-of-favor stock instead? As investing is probabilistic and never deterministic—although the base rate may support you—there is absolutely no guarantee that your particular pick would perform well. If, for some reason, it turns out to be a subpar investment, you will get the rotten tomatoes for purchasing the stock of a company that was “so apparently a dud.”

Can you handle the pressure of going against the crowd and being wrong sometimes? This brings us to the next psychological issue of the not-so-rational person, the question of broad vs. narrow framing. Narrow framing means that every stock matters to you individually, and you want to win with all of them. Coupled with the standard loss aversion, this narrow framing leads to disastrous performance and a lot of misery. Closely following daily fluctuations is a losing proposition because the pain of frequent small losses exceeds the pleasure of equally frequent small gains.

In contrast, broad framing means that you want your stock portfolio as a whole to perform well, and you are not that focused on individual stock positions within that portfolio. This latter frame of mind can hugely increase the willingness to invest in stocks (the proven best asset class for wealth building). For my part, I would never take one single bet even with the odds in my favor, but I gladly take that same bet if I am allowed to do it many times so that probabilities can play out and my advantage can materialize. Call me risk-averse, but this is exactly what broad framing is about!

It is easier said than done, I know. Scorecasting highlights that professional golfers are also risk-averse and plagued by narrow framing. In golf, the idea is to maneuver the ball into the hole in as few strokes as possible on every hole, no matter what. Even Tiger Woods—so unflappable, so mentally impregnable—changes his behavior based on the situation and putts appreciably better for par than he does for a birdie, evaluating decisions in the short term rather than in the aggregate. He should optimize for the total number of strokes, yet he is deviating from that strategy. Analogize this to your retirement portfolio. You simply want the most favorable total at the end. It shouldn’t matter how you got there. The soundness of the underlying process is decisive. However, a single year’s or position’s performance is of minor importance in the grand scheme of things and should thus never be taken too seriously.

As we are aiming for above-average returns, the FALCON Method goes against the crowd most of the time. However, simply being contrarian—doing the opposite of what others are doing—would be just as foolish as following the herd; this is why we pick our spots carefully and employ an evidence-based investment method that is “selective contrarian” in style. Some subscribers emailed me their concerns that they had read negative articles and analyses about the companies in our FALCON Portfolio. As long as the factually proven underlying factors of our stock selection process are pointing toward a buy decision, you should be happy to bump into all those negative articles since they create and keep up the sentiment that diverts the stock’s price from its intrinsic value. By the time positive articles start to surface, your portfolio will be loaded with quality stuff purchased at bargain basement prices. E.g., I bought McDonald’s at $92.59 when positive opinions and analyst recommendations were nearly impossible to come by. The same with Microsoft at $41.05. I encourage you to take a look at the current prices of these two stocks and the positivity of the most recent articles and analyses on them. By the time the cheerleaders appear on stage, you should be done with your buying.

As an individual investor, you can have the enormous advantage of long-term focus. Unlike the NFL manager (not daring to go for it on fourth-down) or the wealth manager on Wall Street (sticking to the current darlings of the market), you will not be fired if you make unconventional evidence-based choices instead of the typical, often suboptimal ones.

Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!

With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers show that Novo Nordisk, the leading producer of diabetes-care products, exhibits EVA Monster characteristics and is thus worthy of your attention. The company’s shares are available directly on Nasdaq Copenhagen under the ISIN code DK0060534915. On American OTC markets, the ADR uses the ticker symbol NVO.

One of the companies in our FALCON Portfolio announced in 2019 that it would discontinue the practice of giving quarterly guidance. That was Illinois Tool Works, and here’s the brief comment that I added to the news:

“I welcome this decision as quarterly guidance breeds short-termism that is the enemy of long-term shareholder value creation.”

In fact, you could read headlines in 2018 that Warren Buffett and Jamie Dimon (the chairman of the Business Roundtable and the chairman and CEO of JPMorgan Chase) joined forces to convince CEOs to end quarterly profit forecasts. They even wrote about the issue in an opinion column in The Wall Street Journal.

What do you think is wrong with the practice of quarterly guidance? Put simply, it shifts management’s focus from thinking about the long term to thinking about the next quarter. Companies forecast sales and profit numbers to Wall Street analysts, who use the data to produce research and stock recommendations for investors.

Missing “the number” can often result in huge and sudden stock moves. Think about Apple’s missed revenue forecast for its fiscal first quarter period that ended on December 29, 2018. CEO Tim Cook kicked off 2019 with a letter to investors describing various difficulties the company experienced during the holiday quarter. The number that analysts immediately focused on was the revised revenue guidance, which was lowered to $84 billion from a range of $89 to $93 billion given during the last earnings call on November 1. The market’s reaction was swift and severe, with the stock price falling nearly 10 percent on January 3.

On the other hand, making a forecast and then hitting the target are seen as a way to manage expectations and eliminate volatility.

While those in favor of guidance say that it improves communications with Wall Street, reduces share price volatility, and boosts a stock’s value, McKinsey & Co. found in a 2006 study that quarterly guidance had no effect on valuation multiples and didn’t reduce share price volatility. Instead, McKinsey found that the practice of giving quarterly guidance took up valuable time from management and made them focus too much on the short term.

Think about this last point! Earnings calls typically take place a month into the subsequent quarter, so analysts expect the management to not only talk about the prior period but to give a sense of how things are going during the current quarter. This essentially means that a month into a quarter, analysts ask executives to look at the first third of the quarter and make projections for the next ~60 days. Because investors pay so much attention to guidance, managers spend significant time thinking about these estimates, and this is time that they are not using to run the actual business!

Executives often feel pressure to make quarterly forecasts because the market appears to demand this, but “it can often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” Dimon said in an interview on CNBC. “Quarterly earnings: they’re a function of the weather, commodity prices, volumes, competitor pricing. And you don’t really control that as CEO,” he added. “Sometimes you’re just like the cork in the ocean, but do the right thing anyway, and you’re going to be fine in the long run.” (Here is where the primary mission of long-term shareholder value creation comes into direct conflict with meeting and beating the short-term guidance.)

“When companies get where they’re sort of living by ‘making the numbers,’ they do a lot of things that really are counter to the long-term interests of the business.” (Warren Buffett)

Besides diverting management’s focus from long-term shareholder value creation, the widespread practice of quarterly guidance has another negative effect. When managers provide guidance, this effectively causes Wall Street analysts to crowd around the mid-point of the guided range in their own models. As a result, the variation of estimates is narrower than would be the case if analysts had to do their work. This kind of spoon-feeding does have serious consequences. I came across a well-written piece of opinion on Marketwatch that was titled “Why you can’t trust Wall Street analysts.” Here’s the essence of that writing:

“Many companies provide earnings guidance, which analysts incorporate in their estimates. For companies, guidance is designed to ‘under-promise and over-deliver’ in order to set up earnings beats, which propel the stock higher. Analysts are much more likely to rate stocks buy than sell, and if the beats help push stock prices higher, their track records as stock pickers look better. The conclusion: If you invest in stocks, you had better take analysts’ ratings and earnings estimates with a grain of salt.”

As to the uselessness of analysts’ recommendations, in 2000, Merrill Lynch analysts said there were 940 stocks to buy and only 7 to sell. Salomon said you should buy 856 and only sell 4. First Boston analysts were more negative; they only found 791 stocks to buy and 9 to sell. And Morgan Stanley said there were 780 wonderful businesses to buy and none to sell. This, right before the market plunged as much as 90 percent in some of these recommended stocks. The week that Enron went bankrupt, nine of the fourteen investment banking companies covering the stock had a “buy” rating on it. None said to sell it.

Here’s another eye-opening statistic from S&P Global Market Intelligence: in a typical quarterly earnings season in the U.S., two-thirds of S&P 500 member companies tend to publish earnings per share that are higher than the consensus estimate among analysts. This is hard evidence of the “under-promise and over-deliver” practice in action as well as the spoon-fed nature of the analyst community who fail to come up with their own forecasts but use the company’s guidance instead. After all, if each analyst had good information to formulate reasonable estimates, the average beat rate would be expected to be somewhere around 50%.

Let me summarize your takeaway. Most managers feel pressure to provide quarterly guidance. Once analysts get these numbers, they are quick to incorporate them into their models, and they most certainly do not want to look stupid by publishing estimates that are meaningfully different from the corporate guidance. Now that the spoon-feeding is done, both the executives and analysts know that it makes tremendous sense to under-promise and beat the heavily influenced Wall Street consensus quarter after quarter since this seems to drive stock prices higher (in the short run).

If you were an analyst familiar with the rules of this game, you would be biased toward issuing buy recommendations since (the highly probable) quarterly earnings beats can propel stock prices higher, thus proving your stock-picking ability and your worth to your employer. As a long-term investor, however, you should realize that short-termism is written all over Wall Street and is part and parcel of the above-detailed quarterly earnings game. Knowing this, you may still read the analysts’ research reports on companies, entire market sectors, or industries to obtain valuable information, but you should never let their recommendations influence your independent decision-making. You either have your own process for stock selection (like that of the FALCON Method), or you can easily fall prey to the predators of Wall Street who are much more eager to push up trading volumes than to boost your investment returns. (In fact, the McKinsey study of 2006 found that the only significant effect of quarterly guidance was increased trading volumes.)

Don’t get me wrong, guidance and disclosure are two different things! While making quarterly forecasts makes no sense, publishing quarterly reports is useful. Truth be told, there is not much that could happen in any single three-month period that could alter the long-term investment thesis of a sensible investor, but it is still good to get some update on how the execution of the announced strategy is progressing. By the way, even a whole year is meaningless for us both in terms of our investment performance and the operating performance of the companies in our portfolio. As Buffett put it in 1966:

“Our investments are simply not aware that it takes 365-1/4 days for the earth to make it around the sun. Even worse, they are not aware that your celestial orientation (and that of the IRS) requires that I report to you upon the conclusion of each orbit (the Earth’s – not ours).”

Now you understand the rules of the game and hopefully accept that by playing the long-term game, we are rather the exception than the rule.

Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!

With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers show that ASML Holding N.V., an essential monopoly in extreme ultraviolet (EUV) technology (used for producing advanced chips for applications such as fighter jets, AI supercomputers, and smartphones), exhibits EVA Monster characteristics and is thus worthy of your attention. The company’s shares trade under the ticker symbol ASML on both the Euronext and NASDAQ.

Do you know how Ben Graham, the father of value investing, used to open his famous course at Columbia? According to one of his students, Marshall Weinberg, this is what Graham said at the very beginning: “If you want to make money on Wall Street, you must have the proper psychological attitude. No one expresses it better than Spinoza, the philosopher. Spinoza said you must look at things in the aspect of eternity.” Before elaborating on the importance of these lines, let me invite you to take a quick test.

Vishal Khandelwal teaches value investing in India, and he has some thought-provoking slides, two of which we are about to use here. First, look at these charts and write down which of the three stocks seems to be the best in terms of performance.

The obvious answer is the third, which looks like a one-way ride up. At this point, Vishal reveals to his students that the first two charts are just short periods in the third stock’s long journey. See it for yourself!

What does this have to teach us? In the long journey of the stock of a high-quality business, the short-term price fluctuations that make people nervous are non-events. In the larger scheme of things, most of what worries us is of relative insignificance, and this holds true for all areas of our lives.

After having reached thousands of people with my books, courses, and newsletters on investing, I’m widely aware that most people hate short-term underperformance, so they tend to zoom in on the charts and focus on the short periods instead of the long journey. If investment managers (or newsletter providers) underperform for six months, they start to get questions about the efficacy of their strategy. If the underperformance continues longer, those questions get louder, and by the time the bad period reaches five years, there won’t be many clients left. The problem is that investors try to match long-term strategies with a short-term time horizon and assume that if a strategy doesn’t work over three years, it doesn’t work long term. (Factually incorrect!)

Let me clear this up for you with an example, as this is the single most important reason why most people have difficulty following evidence-based investment approaches like the FALCON Method. Value stocks (those that are priced cheap based on various valuation metrics) tend to outperform the market in the long run. This is a fact that is not to be disputed by anyone who has studied the historical data. Having read this proven statement on long-term performance, would you be upset if your carefully constructed value portfolio underperformed the market in any single year? You shouldn’t be, as this tends to happen 37% of the time, according to the data compiled by author and investor Larry E. Swedroe. In fact, we are currently in a period where the value approach has underperformed for a long time, and statistics show that even this is perfectly normal. The longer the horizon, the lower the odds of underperformance, but it can still happen at horizons of 20 years! According to Swedroe, the value factor underperforms in 14% of ten-year periods, so staying the course during that type of extended underperformance is required to benefit from the long-term outperformance of the approach. Most people can’t do that, and that is why factor investing is much harder than many think. After all, when it comes to judging the performance of an investment strategy, most people believe that three years is a long time, five years is a very long time, and ten years is an eternity. When Ben Graham used the word eternity, he must have had something different in mind.

Investors get paid for experiencing pain. If a certain approach worked all the time, everyone would follow it, and it would eventually stop working. The pain you experience in pursuing a strategy is the price of admission to get its long-term outperformance. Periods of underperformance are part and parcel of the game. Adopting this mindset would most certainly help investors maximize their long-term returns, although I’m not too optimistic about the possibility of this ever happening on a large scale.

Now it’s Mark Hulbert’s turn to draw your attention to another important issue. He has been tracking the advice of more than 160 financial newsletters since 1980, so he does know a thing or two about this industry and its subscribers. Here’s his question: Which of the following two advisers would you more likely follow? (A) An adviser with a decent but unspectacular track record who merely matches the market’s return when it’s going up but loses less when it is declining? (B) Another adviser at the top of the performance sweepstakes, but who suffers big losses in a bear market? Hulbert says, “If you’re like the typical investor, you’d jump for the second one. Yet the first is more likely to help you reach your long-term financial goals. That’s because the key to long-term financial success is sticking with an adviser or strategy through thick and thin. And most investors who follow high-flying advisers end up discovering that they don’t have the level of commitment and intestinal fortitude that are required. As a result, most investors who start following such advisers get rid of them at or near the end of the next bear market. As a result, they suffer almost all of those advisers’ bear market losses yet benefit from only a fraction of their bull market potential. That’s why the first, less glamorous, adviser is to be preferred. Even though his track record appears to be inferior, you most likely will make more money following him over the long term than by going with the one whose track record appears to be superior. To put this another way: Slow and steady wins the race. Most investors know all this already. And yet, they continue to prefer advisers who are like the second one above. Why? Because they’re addicted to excitement.”

Short-termism and excitement addiction undermine your investment performance. You can subscribe to an evidence-based approach, the factors of which have been proven to work for decades (if not centuries), yet, you will most likely abandon it if you keep asking questions about the short-term performance. This is by no means an excuse in disguise to defend the FALCON Method since the last time I looked at the data, our results were respectable.

Do you know what conclusion I draw from these stats? Absolutely nothing! This is a meaningless snapshot, just like looking at the score of a football match in the fifth minute. The odds are on our side, and you don’t need these interim results to be confident of this. (Still, getting to know our underlying stock selection process is a great first step to build up your conviction.)

The best advice I can give you is to zoom out: forget your portfolio’s daily, monthly, and even annual performance! Focus instead on the process and its underlying factors.

Nothing spectacular will happen with the FALCON Method in the coming years, so seek entertainment and excitement elsewhere. “Investing shouldn’t be about glamour,” as Howard Marks puts it, and when he speaks, we all should listen. Buffett states, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.”

“Thoughtful investors can toil in obscurity, achieving solid gains in the good years and losing less than others in the bad. They avoid sharing in the riskiest behavior because they’re aware of how much they don’t know and have their egos in check. This, in my opinion, is the greatest formula for long-term wealth creation—but it doesn’t provide much ego gratification in the short run. It’s just not that glamorous to follow a path that emphasizes humility, prudence, and risk control. Of course, investing shouldn’t be about glamour, but often it is.” These thoughts from Howard Marks highlight how I aim to manage my investing operations along with the FALCON Method.

Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!

With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers show that Kering, the French-based multinational corporation specializing in luxury goods, exhibits EVA Monster characteristics and is thus worthy of your attention. (Shares are available directly on the Paris Stock Exchange under the ticker symbol KER, or as an ADR with the ticker symbol PPRUY on American OTC markets.)

Kering is the world’s second-largest personal luxury goods holding company after LVMH. Its flagship brand is Gucci, followed by other high-end fashion houses such as Saint Laurent (YSL), Bottega Veneta, Alexander McQueen, and Balenciaga. Its range of products includes handbags, shoes, and ready-to-wear clothing items designed and manufactured by the company. Besides its core offerings, the firm also markets sunglasses and optical glasses under its Kering Eyewear division. Kering SA (formerly called PPR or Pinault-Printemps-Redoute) was founded in 1963, and is based in Paris, France.

Kering has evolved into the second-largest luxury powerhouse following the acquisition of the Gucci Group in the early 2000s. Besides the namesake brand, the acquired portfolio included Saint Laurent, Bottega Veneta, and Balenciaga, among others. After a few strategic missteps (such as seizing a controlling stake in sportswear manufacturer Puma in 2007, which was almost entirely spun off in 2018), Kering has fully dedicated itself to developing its luxury houses.

A quick glance at the EVA metrics reveals that the firm’s EVA trajectory has been on a steep ascent in the second half of the past decade. This clearly reflects the strengthened focus on its luxury houses, and we believe that the current double-digit EVA Margin and ROC levels are telltale signs of a moaty business.

Kering’s largest brand, Gucci is responsible for 55% of the top line, Saint Laurent makes up 14%, and its third biggest house is Bottega Veneta, with a 9% contribution. In economic profit terms, Gucci’s contribution comes in at ~70% of the company’s overall EVA generation. When we add YSL and Bottega Veneta, the three biggest brands make up ~90% of economic profits.

Kering’s overreliance on Gucci is one of the key risks associated with the company. The brand’s history is not without creative and operational hiccups, and the rapid growth of the recent past implies the risk of overexpansion and customer fatigue, the standard culprits of luxury brands.

Within the personal luxury goods segment, a few traits are required for a brand to carve out lasting pricing power and warrant a price tag often 10x higher than that of comparable items from premium brands. The handful of fashion houses that succeed in doing so possess a respectable heritage, often dating back more than a century. Besides that, it is quintessential to maintain the brand image by controlling the distribution network, while exclusivity must be ensured by a limited supply where price discounts are unthinkable.

As for the supporting megatrend, the personal luxury goods market is expected to grow in line with the seemingly unstoppable trend of the rising number of high-net-worth individuals (HNWIs) globally. While we view the company’s earlier forays into the commodity sportswear segment as a dead end, the strategic focus on building a pure-play luxury empire is bearing fruit.

Since 2005, the business has been led by François-Henri Pinault, the son of the empire’s founder. Overall, Kering has remained a family-controlled holding. While this structure could be a double-edged sword in general, we tend to believe that it is preferable for luxury companies. It is important to prioritize the sustainable, long-term growth of the fashion houses, thereby curbing supply and omitting price discounts at any cost. As a counterexample, a short-sighted management team could double sales in a matter of years, inflicting immense reputational damage.

The firm pays a semi-annual dividend, which tends to fluctuate with earnings, rendering the stock a rather hectic income source. That said, the dividend is not the main attraction here since Kering comfortably qualifies as a longevity moat type of EVA Monster with its seemingly unending EVA growth trajectory. (This is a rare breed!)

When it comes to the stock’s valuation, it is important to note that the firm’s profitability has markedly expanded in the second half of the past decade (as a result of tightening its luxury focus and revamping its major fashion houses). We believe this structural change to be permanent and hence view the current EVA Margin levels as sustainable.

Please see below the valuation metrics of the EVA framework that remedy accounting distortions to give us a clearer picture on where the stock stands in a historical context.

While Kering’s business appears superior to the market from both a quality and growth angle, the valuation component may act as a slight headwind from today’s price level. The “Key Data” table and the 5-year total return potential chart speak for themselves.

Overall, the FALCON Method can identify much better opportunities in the current market, so we are passing up on Kering for now.

The verdict

We love that the company’s target consumer segment is not particularly sensitive to economic cycles. The underlying HNWI growth megatrend is also a powerful tailwind.

Based on Kering’s recent reports, monitoring the Gucci brand’s trajectory in China remains the most important aspect for those interested in the stock. (China is crucially important to the overall growth thesis.)

While we really like the luxury segment, LVMH is our preferred conglomerate in the industry (because of its superior brand portfolio, operational track record, and product diversification). That said, we would also take a smaller (2-3%) position in Kering at the right price.

The company ranked 19th of our 60 EVA Monsters at the time of writing, based on its 5-year total return potential. (Businesses from 12 countries are represented on our EVA Monster list.)

It is safe to say that there are far more attractive EVA Monster stocks to buy in the current market, with the highest-ranking five boasting total return potentials above 16% over our modeled 5-year timeframe. (You can always find the monthly Top 10 in the FALCON Method newsletter along with our entry price recommendations.)

Want to learn more about our ranking methodology? Start with this blog post!

How on earth are we supposed to outsmart professional investors? Mutual fund managers control over 85 percent of the money in the stock market; they live and breathe stocks, so we don’t seem to have a realistic chance. Isn’t it better to simply invest in a low-cost index fund? I get this question in various forms every single month, so I want to put this issue to bed once and for all with this writing.

Historical data unquestionably shows that something is seriously wrong with the fund management business. The overwhelming majority of mutual funds fail to beat the market with any consistency over time. That said, most actively managed funds are collecting enormous fees for a job they do not deliver.

This is common knowledge, yet most people draw wrong conclusions from the factual data.

They think that even the full-time pros are not good enough to produce investment returns that exceed the market average consistently. This is not true. The reasons for failure are twofold, with high fees that drag down the investment performance being the first and short-termism of the entire industry the second. Active investing does work! But not the way most fund managers are forced to do it.

“In fact, the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.” (Peter Lynch)

Peter Lynch was one of the most successful fund managers of all time, so he does know a thing or two about that business. When he talks, we all should listen!

Recently, I’ve had lunch with two European fund managers, and quoting some parts of our conversation may highlight the advantages we, as small investors, clearly have over the pros. It shocked me when one of these guys said:

“Whenever I get in the office, my colleagues tease me about the most recent price movements of the stocks in my fund’s portfolio. Short-term performance is everything. My bonus and, basically, my survival depends on it. This job involves extreme pressure.”

Both know the logic behind the FALCON Method, and the other guy added:

“You are lucky that you can invest the way you do. I would do that with my own money as well. You have the luxury to ignore the short-term noise or even profit from it while we cannot afford to make sensible long-term decisions without the risk of getting fired before those decisions could bear fruit.”

These fund managers do have the proper knowledge to achieve superior investment performance, but the system is not built to suit them. (Or any thoughtful long-term investor, for that matter.)

The fund management industry is all about making you believe that you cannot manage your money on your own. They earn billions from commissions and fees as long as they can do this. The one thing to understand, though, is that you don’t have to be smarter than the pros on Wall Street; you just have to play by a different set of rules!

Have you ever thought about how different meanings a steep price drop could have depending on your timeframe? Fund managers follow the crowd. They have to. They cannot hold something that’s going down in price. It will make them look bad to their investors, and then they will eventually lose those investors along with their jobs. These guys are very bright, but have a different drummer to dance to. They are in the business of keeping their clients and gathering more assets to manage while you are in the business of making money for yourself. These two businesses can dictate very different responses to the exact same market situation!

Let me make this perfectly clear with a striking example. What if I offered you a $100 bill for $50? I hope you’d grab the chance. Then would you be upset about your decision to buy that first bill if I offered you another $100 for $25 the very next day? And would you freak out if I offered you a third $100 for $10 later? In fact, you should be excited to buy the first one, more excited to grab the second, and absolutely thrilled to get the third one. This is common sense as long as you are not judged on short-term performance. (Most fund managers, on the other hand, would sell out in such a situation by the time the third offer arrives, regardless of the value of the underlying $100 bills. They wouldn’t want this panic-stricken asset to show up in their quarterly statements causing investors to lose trust. After all, everyone knows that the price of “that thing” is falling like a rock; who in his right mind would hold it in their portfolio? And with this, even the most apparent value considerations get thrown out as managing career risk prevails. Take some time to think about this!)

As an amateur investor, would you be nervous about the price of your asset dropping that steeply? Not with the $100 bill in our example, but somewhat more with a stock, I guess. The reason is simple: while you are totally sure about the value of the $100 bill (and are happy to get that value for a lower price), on some level, you still feel that the price has something to do with the value of the stock. Well, it doesn’t! Price is what you pay; value is what you get. As a do-it-yourself investor, you can play the difference between the wildly fluctuating stock price and the more stable intrinsic value of the underlying business. This is the luxury that fund managers crave as they live and die by the unpredictable price movements of the short term.

The real question is whether you can chill out when the fund managers controlling more than 85 percent of the market are freaking out. Knowledge and experience can give you the peace of mind to feel excited and not nervous when stock prices drop. In fact, I am grateful for every meaningful sell-off since I expect to be a net saver during the next 5-10 years. Many investors get this wrong. Even though they will be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.

The point I wanted to drive home is that active investing does work as long as you are doing it yourself and don’t overpay for actively managed funds plagued by short-termism. As factual data proves, some of them might outperform but not by a wide enough margin to justify their fees.

However, the biggest advantage of the active approach is that you can tailor your investment strategy to your needs. For me, that means a healthy blend of income-producing dividend stocks and quality-growth beasts (we label EVA Monsters in the FALCON Method newsletter.)

Get to know more about our EVA Monster vs. Fallen Angel categorization from these insightful case studies.

Once you let short-term stock price fluctuations affect your mood and direct your decisions, you are playing the big guys’ game where they will crush you. As Warren Buffett said, Mr. Market should be your servant, not your guide. Play by different rules! Make the most of your built-in advantages (e.g., lack of career risk), keep buying those $100 bills for less than their true value, and wait patiently for the bipolar Mr. Market to take his medicine and recheck the price labels on your assets. You cannot go wrong with this strategy as long as you are patient and focus on the value of the underlying businesses instead of the stock market’s wild ride.

One final reality check. Could you go on a device-free holiday for a week without checking the market every day?

As for the stocks in our FALCON Portfolio, I could even go on a five-year trip around the world without internet access since I didn’t buy lottery tickets but partial ownership stakes in wonderful businesses that don’t require any activity on my part to produce more cash (and pay more dividends) by the end of my imaginary trip. You’ll need the same kind of conviction about your portfolio to stick with it when times get tough.

Take the first step today by learning more about our evidence-based stock selection process with this free report.

With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers show that Intuit (INTU) exhibits EVA Monster characteristics and is thus worthy of your attention.

Intuit is a diversified software company providing various services to small and medium-sized enterprises and individual customers. Its core offerings include the QuickBooks accounting suite and the TurboTax tax filing toolset. In addition to migrating its legacy desktop solutions to a cloud-based software-as-a-service (SaaS) model, the company has recently broadened its portfolio through major acquisitions. The Credit Karma personal finance platform and the Mailchimp email marketing solution are its most significant additions. The company was founded in 1983 and is headquartered in Mountain View, California.

A quick glance at the EVA metrics reveals that Intuit boasts strong double-digit EVA Margin and ROC figures, which are telltale signs of a high-quality business.

We believe the firm’s flagship specialized software solutions, QuickBooks and TurboTax warrant a wide-moat rating. These make up over 70% of its top line and the overwhelming majority of the EVA generation.

QuickBooks, the bookkeeping tool, is the undisputed leader in the U.S., ruling with an 80% share of the small business accounting software market and a total subscriber base of almost 6 million accounts. Intuit is also the undisputed leader of the online DIY tax preparation market, commanding a 60%+ share. On top of that, the firm’s TurboTax Live, an assisted solution, serves as a further differentiator compared to its peers, where customers can access a tax professional to guide them through the filing process. Growing rapidly, this has become a billion-dollar business within Intuit in just a few years.

As for growth prospects, TurboTax operates in a mature market (with the number of U.S. tax filings staying roughly flat over the past decade), while QuickBooks is still in the early innings of growth (serving a little shy of 6M accounts with a total addressable market of 75M small business customers).

There’s nothing wrong with Intuit’s core business, as the capital-light operations gush out lots of cash at great ROC levels. Between 2006 and 2020, the reinvestment rate stood at 15%. However, the new CEO’s tenure brought a swift change in capital allocation policy, and this is where the picture becomes murky. Before that, Intuit had completed only a single billion-dollar deal since its founding nearly 40 years ago. Then, Goodarzi went on an all-out acquisition bonanza in the last few years, scooping up Mailchimp for a hefty ~$12 billion, only nine months after the firm closed the ~$8 billion deal to acquire Credit Karma.

Our judgment regarding these purchases is mixed. Although we understand that there might be some cross-selling opportunities and strategic advantages by combining these businesses, like providing a one-stop-shop solution for SMBs, we don’t think Intuit needed these deals to prosper. Furthermore, the price tags are tough to justify (for instance, Mailchimp was bought at 15 times revenues), and the related share issuances to fund these deals resulted in meaningful dilution to shareholders. Within the EVA framework, the huge added capital charge associated with these transactions causes the EVA Margin outlook to be very blurry going forward.

Regarding repurchases, the firm spent more than $12 billion on buybacks over the past decade, yet the share count has basically stayed the same. We cannot come to grips with Intuit’s share-based compensation expense, as it seems way out of touch. (Buybacks are also far from opportunistic, with management repurchasing $2.5 billion worth of stock in fiscal 2022 at nosebleed valuation levels.)

As for the stock’s valuation, although Intuit loves to tout non-GAAP financial measures, those might be hugely misleading because of excluding the expense of the egregious share-based compensation. The EVA framework remedies this distortion, along with many others.

Despite the core business appearing to be superior to the market from both a quality and growth angle, even after assuming an EVA Margin rebound over the next five years, the valuation component acts as a meaningful headwind from today’s price level. The chart of 5-year total return potential speaks for itself.

All in all, the stock is too expensive for our taste at the moment.

The verdict

TurboTax and QuickBooks appear to be resilient, wide-moat businesses, with the latter enjoying healthy long-term growth opportunities thanks to a large total addressable market. If only these two units made up Intuit, with a laser-focused management team and meaningful capital distributions thanks to the capital-light model, we would surely be up for the ride at the right price. However, the current management team must prove first that the two “mega” deals were not a mistake at those price tags.

To be clear: there is a sizeable capital allocation risk associated with the current leadership team. Integrating the Credit Karma and Mailchimp deals will require significant time, energy, and resources. Ultimately, the expected synergies and cross-selling opportunities might never materialize or not to the extent that would justify the lofty price tags. If value-destroying acquisitions were to continue, that could put further pressure on Intuit’s EVA Margin (although fancy presentations about deals being “accretive to non-GAAP EPS” may be enough to sell any story on Wall Street).

Intuit’s stock is a comfortable pass for us at the current valuation.

The company ranked 33rd of our 60 EVA Monsters at the time of writing, based on its 5-year total return potential. (Businesses from 12 countries are represented on our EVA Monster list.)

It is safe to say that there are far more attractive EVA Monster stocks to buy in the current market, with the highest-ranking five boasting total return potentials above 16% over our modeled 5-year timeframe. (You can always find the monthly Top 10 in the FALCON Method newsletter along with our entry price recommendations.)

Want to learn more about our ranking methodology? Start with this blog post!