Quotes from a zebra in lion country

I’ve just finished reading A Zebra in Lion Country by Ralph Wagner. Written in 1997, the book sets out a number of the investment values and bases that Wagner followed over his extraordinarily successful investment career. Not directly applicable to venture investing, but the underlying principles relate and remain timeless. Highly recommend.

Below are the parts that particularly stood out, and that I’ve shamelessly copy and pasted as I was reading.

An Unclouded Crystal Ball

“How does one identify investment themes? As Sherlock Holmes, with his usual maddening superiority, chastised Watson, “You see but you do not observe.” The investor has to develop an observing mind-set and get in the habit of looking for trends in his reading and experience. Perhaps a newspaper account what’s going on in the job market will suggest a thriving area of the economy that can lead to an investment opportunity. Thinking about the fact that so many of the fastest-growing cities — Phoenix, Las Vegas, Palm Springs — are built in deserts, I began to wonder what they do for water, which led me to invest in Western Water, a company that had been thinking along the same lines. You might spot a trend developing in your own line of work, or pick up something from trade journals, which usually report on trends before they make the newspapers. Driving around town and seeing the number of cars parked in front of Toys “R” Us might have alerted you to watch out for the next superstores, so that you made a lot of money in Home Depot, Staples, Sports Authority, and Borders. You have to train yourself to make generalisations from random particulars, to keep asking yourself, “What does this mean?”.”

Who’s in Charge?

My favourite test for a stock I’m interested in I call my “quit test”.

I pretend that someone has called me and told me that First National Bank has just authorised a line of credit sufficient for me to buy all the stock in this company at current market value. Am I willing to leave my mutual funds and take over and run the company?

The Levity Lens

“But aside from winning recognition for the fund and keeping up the spirits of suffering shareholders — not to mention my own — humour can perform a very practical role in the investment process. As long, that is, as I keep the jokes in the copy, not in the portfolio.

It has rightly been said that all investors worth their salt must have a contrarian streak in them. If you go with the consensus, your performance will be consensus — ho-hum average. If you want to buy a stock when it is cheap, you have to go against the grain: it is cheap because most people think it should be and will stay cheap until the company is downsized, upgraded or turned inside out (even thought its recent poor earnings could be nothing more than the equivalent of a head cold). And when a stock is skyrocketing, you’ve got to question the prevailing euphoria relentlessly, too.

Humour helps, for what is humour but a way of pulling back and looking at things from a different angle, seeing the absurdities, challenging the established wisdom and skewering complacency?

If you take things (including yourself) too seriously, you will probably miss the critically important changes that are occurring around you. Doggedly serious people tend to spend their time justifying the world as it is. They have trouble with the new, because new things are hard to understand and therefore intimidating, even a bit frightening.

In the investment world, the serious, establishment people stick with the so-called blue chips, secure in the belief that what is now will remain.”

The Herd

“It’s the same today. Most professional moneymen huddle in the centre of the herd. I guess it’s to be expected. After all, those responsible for most institutional portfolios have gone to the same colleges and taken the same MBA courses. Once they become money managers at banks, mutual funds, insurance companies, and investment counselling firms, they read the same publications, get fed the same information and opinions on their PCs, talk to the same analysts and institutional salesmen, and attend the same investment conferences, put on by the ajar brokerage houses. They lunch together, compare notes, and reinforce one another’s convictions. They wear the same suspenders or Ferragamo pumps, and switch from Perrier to red wine within the same month. No wonder they end up with nearly identical portfolios, and that the results of those portfolios cluster around the average.

Most portfolio managers are intelligent, careful people who have studied their craft about as long as an airline pilot has; but in a world of instantaneous communication, when all of us hear the same news within seconds, our minds seem to leave our grey-suited bodies and well-appointed offices, and we act just like a herd of zebras who have sensed a pride of lions sneaking up on us. Wham! Off we go in an instant.

We really must be grateful that this herd mentality persists, because if it weren’t for these overreactions throwing good stocks on the bargain table, it would be a lot harder for the rest of us to make money.”

Ask the Owners

“Irving always preferred small companies like H. M. Harper over the General Motors and Exxons and AT&Ts of the world. He was an entrepreneur himself, with several business interests, and he could relate to the entrepreneurial spirit in others. When you look at small companies, you typically find one man or a couple of men who work day and night and weekends, forget about vacations, and probably have miserable home lives, because all they really care about is making their vision come true. They own a large enough chunk of stock that their personal interests are right in tune with those of the company’s outside shareholders. Irving could sit down with those people, who make all the major decisions for their companies, and see the possibilities they saw; their enthusiasm could become his own.

And Irving’s enthusiasm for small companies became mine as well. Researching a big corporation just isn’t the same. You usually end up talking to the investor relations officer, but even if you can get to some higher officials, you never know for sure who really makes the key decisions — them or an executive committee or a half-dozen division heads. And you rarely come away with the same sense of excitement. Paid hands, even with the prospect of a bonus, are not the same as the founders and drivers of small companies. at big companies you talk to executives. At small companies you talk to owners. An executive may be good at running a going concern, but it’s the owner who is the risk taker able to conceive and create something that can make him and those who invest in him rich.”

If you don’t make some misjudgements, you’re doing it wrong: you’ve not taken enough risk and you’ll never score a big one. You do best when your investments are controversial — when you stray farthest from the herd.


“All this constant checking and rechecking, this poring over financial statements and running around the country talking to company executives is demanding work. If you aren’t working hard at this terribly competitive business, you aren’t going to do very well. But at times you can fool yourself. One of the main occupational diseases of professional investors — and it can strike anyone — I call “aureodigititis” the disease of the golden finger.

The way you are stricken is by looking at The Wall Street Journal, pointing your finger at Beefsteak Mines, and thinking, “I like that stock.” You buy some and it goes up 30%. A month later, reading Barron’s, you see a write up of Amalgamated Conglomerate, and you say to yourself, “Sounds great. I love that company.” You buy some and it goes up 40%. After this has happened a couple of times, you tell yourself, “This is a marvellous finger. Whatever I point this finger at turns into gold. What’s more, with this magic finger I’ve got, I don’t have to do my research so thoroughly, I’ve become a great intuitive stock picker.” Aureodigitis has clearly reached an advanced state and, unless quickly diagnosed and treated, will bring disaster.

All this isn’t as silly as it sounds, because disease can strike anyone during a bull market. You begin to believe in your infallible genius. It’s a terrible trap. Intuition, strengthened by investment process, but there is no substitute for careful analysis. It’s why most investors are better off in mutual funds that pay analysts to spend their days putting companies under the microscope.”

5 Golden Rules

“Those are five golden rules for you. They all really do meld together, along with the other advice I’ve offered, which they should, if one has a consistent point of view about investing. Mine hasn’t changed much from my early days in money management. It has only been reinforced, and refined a bit, by years of experience.

Maintain independence of thought and a healthy degree of scepticism, so you won’t be drawn into the herd. Don’t overpay, no matter how much you like a company. Invest in themes that will give a company a long-term franchise. Invest downstream from technology. Think and invest globally. Find stocks to own, not trade.

It’s not all that complicated. Common sense and patience make a successful investor.”