Big Money Thinks Small, by Joel Tillinghast (foreword)

J oel T illinghasT

Biases, Blind Spots, and Smarter Investing

Foreword Peter Lynch

I have been an active stock picker for virtually my entire life, so it pains me when critics conveniently lump everyone into the same bucket and say “active managers cannot beat their benchmarks.” Well, I am here to tell you that is simply not true. Investors need to know that not all active managers are created equal. There are many skilled investment professionals whose funds have beaten their benchmarks over time—and Joel Tillinghast is right up there with any of them. Joel has now successfully managed the Fidelity Low-Priced Stock Fund more than twice as long as I had managed Fidelity Magellan.

There are a lot of books out there that purport to help you become a better investor. But few mesh the human aspects of investing and business with the numbers side, and even fewer do that by drawing on the experiences of arguably one of the most successful stock pickers and active mutual fund portfolio managers over the past three decades. Whether you are a professional investor or a beginner, Big Money Thinks Small can help you better understand how to avoid common investing tricks, traps, and mistakes.

I have been investing for over fifty years and have had the pleasure of working with and meeting some of the greatest minds in investing, from Mario Gabelli and Sir John Templeton to Warren Buffett and Will Danoff.

Simply put, Joel is up there with all of them. I can say this with a great ix

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deal of confidence, not only because I’ve known Joel for over thirty years but also because I hired him at Fidelity. Since then, I have witnessed Joel’s growth as an investment professional, and I continue to be amazed by his almost unworldly ability to consume mountains of information about hundreds of companies at a time, analyze it, distill it, and use it to find long-term winners while avoiding many of the losers.

It is this analytical ability, combined with his customer-first mindset, that got me to take Joel’s cold call more than thirty years ago when he was looking for a new professional challenge. I remember he got through to my assistant Paula Sullivan, who told me, “You have to talk to this guy.

He keeps calling and is so sweet. He is from the Midwest and I think he might be a farmer.” I told Paula, “I can give him five minutes.” So Joel got on the phone and I was immediately impressed by him. He was a stock hound and had so many great ideas, like Puerto Rican Cement.

Then he started talking about a savings and loan I had never heard about that got me excited. We talked about more companies, like Chrysler and Armstrong Rubber. I ended up talking with him for well over an hour.

Once we hung up, I immediately called the head of Fidelity’s investment division and said, “We’ve got to hire this guy. He is unbelievable. He is as strong as anyone I have ever met.” This was September 1986, and the rest is history. While past performance is no guarantee of future results, Joel has delivered impressive results for the shareholders of his fund over his nearly twenty-eight-year tenure.

In my book (not literally, of course), Joel is one of the greatest, most successful stock pickers of all time. He is truly a shining example of an active manager who has been able to beat the street. If you were to look up “alpha” in the dictionary, I would argue there should be a picture of Joel. He is a unique, one-of-a-kind investor, so there is no recipe for replicating his success. That said, Joel clearly embodies the qualities and characteristics that I believe are critical to being a great investor. He is patient, open-minded, and flexible. He also has the ability to ignore the worries of the world long enough to allow his investments to succeed, and he has a willingness to do independent research and an equal willingness to admit when he is wrong and exit. He is persistent, but not stubborn. While good investors have some of these qualities, great investors like Joel have all of them. x

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Another quality that truly separates Joel from the rest of the professional investing pack is his ability to find value where no one else, or at least very few, might be looking. In his book, Joel talks about water utility stocks. Water stocks are boring. And when you add in strange names like Dwr Cymru (Welsh Water), Severn Trent, and Northumbrian Water, it is almost a given that very few people are looking at them . . . certainly not to the degree of analysts covering companies like Google or Apple.

Those who do look usually do not have the patience and commitment to doing the deep fundamental research needed to understand the stories and find opportunities. I remember talking with Joel about these water utilities, and the fundamental story was really compelling. Who else but Joel would look at these?

Joel also has shown a consistent ability to find long-term growth stocks before they experience their big run-ups. After all, it is the ones you miss on the way up that hurt the most. In this book, Joel highlights a few of the companies he found early in their growth cycle that ended up being big contributors to past performance of the Fidelity Low-Priced Stock Fund—names such as Ross Stores, AutoZone, Monster Beverage, Ansys, and numerous others. The tendency of most investors is to cash out after a stock moves up 10 or 15 percent and move on to something else. But just because a stock goes up 10 or 15 percent doesn’t mean there isn’t room for significantly more growth. A successful investor is one who holds on for the long term and continues to monitor the fundamental story, and if it remains in place you stay, and if not you move on. It is that and his other skills that made Joel such an incredibly successful investor over his career.

In Big Money Thinks Small, Joel draws on his experience as a seasoned active equity mutual fund manager to illustrate how certain investment theories can succeed . . . and fail. While he has proven a keen ability to succeed over his career, Joel, like all investors, is not infallible. Stock picking is hard work, and over nearly three decades, even the best investors, like Joel, are going to make mistakes. It is what you do over your complete body of work that matters. In this book, Joel does an exceptional job of examining some of his major sources of investment regrets and suggests ways readers can potentially avoid the same mistakes. xi

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Joel argues that while you cannot learn to be a great investor, you can learn to shy away from mistakes and be a successful one. Persuasive stock promoters and others can lead the average investor into overconfidence and rash decisions. Joel writes that acting cautiously, avoiding mistakes, and being patient are far more likely to pay off than a few bold investments.

In his book, Joel introduces five key principles for avoiding investment mishaps. Depending on whether your glass is half-full or half-empty, these principles can be seen as things to avoid or things to do. For example: 1. Do not invest emotionally, using gut feel / Do invest patiently and rationally 2. Do not invest in things you don’t understand, using knowledge you don’t have / Do invest in what you know 3. Do not invest with crooks or idiots / Do invest with capable, honest managers 4. Do not invest in faddish or fast-changing, commoditized businesses with a lot of debt / Do invest in resilient businesses with a niche and strong balance sheet 5. Do not invest in red-hot “story” stocks / Do invest in bargainpriced stocks.

Big Money Thinks Small is not another book about how to “play the market,” a phrase that has always bothered me. The verb “play” is very dangerous in the context of investing. Investing in stocks is not easy, but it should not be painful. Plain and simple, it requires work and an understanding that stock prices tend to follow company earnings over time.

There is an incredible correlation here. For example, Ross Stores’ corporate earnings are up seventy-one-fold over the past twenty-four years, and not surprisingly, its stock price is up ninety-six-fold over that same period. And Monster Beverage’s corporate earnings are up 119-fold over the past fifteen years; not surprisingly, its stock price is up 495-fold over that same period. It is important to note that the same correlation exists when earnings go down. History is littered with them.

The vast majority of stocks are fairly priced. I have always said that if you look at ten stocks, you will find one worth the investment. If you xii

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look at twenty you will find two; look at one hundred and you will find ten . . . and so on. It is the person who turns over the most rocks who wins. To further torture this metaphor, Joel not only turns over the most rocks, he is also a great geologist!

Joel has proven his commitment to doing the work. He does not try to time the market. He puts in the time and effort to research each and every stock, and not just before he buys them, just as importantly, while he owns them. I would argue that Joel works as hard as any of the best professional investors, and the success he has delivered on behalf of his fund shareholders shows this.

Lots of people have the brainpower to make money in stocks. Not everyone has the stomach. Joel has both, and through sensible instruction, he masterfully guides readers through each step of his investment process, showing how to ask the right questions and to think objectively about the condition of your portfolio.

There is so much great information in this book that I am going to stop here and simply tell you to read it. Big Money Thinks Small is a must read . . . it is a ten-bagger!

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Praise for

joel tillinghast is a Chartered

Financial Analyst (CFA) charterholder and thirtysix-year veteran of the investments industry.

He has been the manager of the Fidelity® LowPriced Stock Fund since 1989.

$29.95

J oel T illinghast

“Lots of people have the brainpower to make money in stocks. Not everyone has the stomach. Joel [Tillinghast] has both, and through sensible instruction, he masterfully guides readers through each step of his investment process, showing how to ask the right questions and to think objectively about the condition of your portfolio. . . .Big Money Thinks Small is a must read . . . it is a ten-bagger!”

— from t he fore word by Pe t er Ly nch

or incomplete information. They may make a lucky bet, realize a sizable profit, and find themselves full of confidence. Their next high-stakes gamble might backfire, not only hitting them in the balance sheet but also taking a mental and emotional toll. Even veteran investors can be caught off guard: a news item may suddenly cause havoc for an industry they’ve invested in; crowd mentality among fellow investors may skew the market; a CEO may turn out to be unprepared to effectively guide a company.

How can one stay focused in such a volatile profession? If you can’t trust your past successes to plan and predict, how can you avoid risky situations in the future?

“Joel Tillinghast has built an outstanding investment record over three decades by being smart and disciplined. Now, all of us can benefit from his hard-won wisdom and perceptive insights, which are found on literally every page of this fine book.”

— Se t h A . K l a r m a n, por t folio m a n ager a nd CEO, T he B aupo s t Group, LLC

In Big Money Thinks Small, veteran fund manager Joel Tillinghast shows investors how to avoid making these mistakes. He offers a set of simple but crucial steps to successful investing, including: • Know yourself, how you arrive at decisions, and how you might be susceptible to self-deception.

“Tillinghast provides a very useful checklist of the required due diligence of investments, the tenets of value investing, and how to stay within your circle of competence.”

— Dav id K a s s , Uni v ersi t y of M a ry l a nd

• Make decisions based on your own expertise, and don’t invest in what you don’t understand.

“For decades I have admired and learned from Tillinghast’s extraordinary investment prowess. Whether you are a professional or an individual investor, you will be a better investor after reading and absorbing the wisdom in this book.”

— Bil l Mil l er , founder a nd CIO, Mil l er Va l ue Pa r t ners

• Select only trustworthy and capable colleagues and collaborators.

• Learn how to identify and avoid investments with inherent flaws.

“Written for investors at all levels, this practical, no-nonsense guide . . . empower[s] readers to generate their own informed decisions.”

— Publishers Weekly

$29.95

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Jacket design: Noah Arlow Author photo: © David Salafia/Getty Images Global Assignment

Investors are tempted daily by misleading

Printed in the U.S.A.

• Always search for bargains, and never forget that the first responsibility of an investor is to identify mispriced stocks.

Biases, Blind Spots, and Smarter Investing

Patience and methodical planning will pay far greater dividends than flashy investments. Tillinghast teaches readers how to learn from their mistakes— and his own, giving investors the tools to ask the right questions in any situation and to think objectively and generatively about portfolio management.