An investor lauded by Warren Buffet as possessing “the best
truly long-term investment record of anyone I know” deserves more attention
than he’s hitherto received.
Philip Carret’s under-appreciated classic The Art
of Speculation – published in 1930 - was a welcome serendipitous discovery on
a recent visit to one of the university libraries I occasionally frequent.
Who was Philip Carret?
Born in 1896 and living to the age of 101, Carret founded what
became the Pioneer Fund, one of the first mutual funds in the USA. Under Carret’s
55 year management of the fund an initial investment of $10000 became $8m. The
firm he established in 1963, Carret Asset Management, still trades today.
What I’ve learnt from The Art of Speculation
Firstly, and fundamentally, Carret questions the sharp
distinction Benjamin Graham went on to make in The Intelligent Investor between
investment and speculation. As Carret rightly points out, as we face an
uncertain future all investment decisions involve an element of speculation.
The difference between the two is a function of temperament and time horizon.
Secondly, Carret sprinkles The Art of Speculation with many
illuminating remarks about how financial markets work:
“Limitless horizons stretch before the would-be speculator”.
“Successful speculation requires capital, courage and
judgement”.
“Like the ocean, the stock market is never still”.
“Fashions play their part in the stock market as in other
affairs of life”.
“Finance has its anatomy and its physiology. The former is
studied through the medium of balance sheets, the latter through income
statements”.
“One of the essential qualifications of the successful
speculator is patience”.
“The most important factor affecting the value of any single
security at any given moment is the unknown factor”.
Thirdly, the very title “The Art of Speculation” embodies
Carret’s view of investment as a thoroughly human activity which should not be
reduced to the dogmatic and mechanistic application of formulae and rules:
“The speculator will never be a success if he attempts to
follow any set of rules blindly. There will always be exceptions, he must apply
his intelligence keenly in any given situation”.
Fourth, although not all of Carret’s Twelve Commandments (listed
below) are either applicable today or beyond question, each is as stimulating
as I found The Art of Speculation as a whole. Available for about £7 online Carret’s book is at the least the equal of Graham’s better-known text.
Carret’s Twelve Commandments for Speculators
(1) Never hold fewer than ten different securities covering
five different fields of business.
(2) At least once in six months reappraise every security
held.
(3) Keep at least half the total fund in income-producing
securities.
(4) Consider yield the least important factor in analyzing
any stock.
(5) Be quick to take losses, reluctant to take profits.
(6) Never put more than 25% of a given fund into securities
about which detailed information is not readily and regularly available.
(7) Avoid "inside information" as you would the
plague.
(8) Seek facts diligently, advice never.
(9) Ignore mechanical formulas [such as price-earnings
ratios] for valuing securities.
(10) When stocks are high, money rates rising, business
prosperous, at least half a given fund should be placed in short-term bonds.
(11) Borrow money sparingly and only when stocks are low,
money rates low or falling, and business depressed.
(12) Set aside a moderate proportion of available funds for
the purchase of long-term options on stocks of promising companies whenever
available.
More on Philip Carret
Interview with Jason Zweig, Forbes Magazine, June 20th 1994.
Value Walk Carret Resource Page.
New York Times Obituary.
Extract from 1995 TV interview on Wall Street Walk.
