Clever Geek Handbook
29 December 2025

Branded!

Recommendation

Bernie Brennan, former chairman and CEO of Montgomery Ward, knows practically everything about retail. Lori Schafer has 25 years’ experience as a retail technology expert and understands the Internet inside and out. Their retailer’s guide to social media and mobile technology will teach you how to use these marketing channels to move the most merchandise to the broadest online customer base. Though Brennan and Schafer’s ideas seem a little late to market, BooksInShort recommends their book for its valuable case histories showcasing prominent retail firms’ mobile-marketing campaigns and their activities in the social media world. This is a solid lesson plan for retail executives who want to harness the Internet’s retail sales and marketing channels.

Take-Aways

  • To become a successful “cross-channel retailer,” combining brick-and-mortar stores and model online outlets, emulate Best Buy, JCPenney and Macy’s.
  • In 2009, retailers sold almost $135 billion in goods online.
  • Social media and mobile devices have a notable impact on retailing because they fully engage customers.
  • Proactively pursue your customers where they spend their time: in the social media world or on their mobile devices.
  • With almost 500 million users in 2010, Facebook is a primary option for any social media marketing campaign.
  • Coupons, discounts and sales promotions are effective online marketing techniques.
  • Consumers in their 30s, 40s and 50s also depend on and heavily utilize social media.
  • Mobile devices have revamped the retail industry, with a 91% US market penetration.
  • Pizza Hut’s clients can order a pizza online without contacting any Pizza Hut employees.
  • Macy’s customers can view and purchase its entire product line on their mobile devices.

Summary

Meet Your Customers Online and on Their Mobile Devices

Don’t wait for consumers to walk into your retail establishment. Be proactive. Engage with them online through their activities on social media and their mobile devices. Almost two billion people visit the Internet annually (239 million in the United States). You need to be in touch with these millions of consumers. Your competitors already are.

“Retailers of any size can tailor a social media program to fit within their budget.”

Consider Amazon, which launched in 1994 as an online bookseller and sold nearly $25 billion worth of all sorts of merchandise – from books to DVDs to clothing to appliances to musical instruments – in 2009. Zappos, which Amazon recently purchased, is a hugely successful web-only shoe-oriented site built on dedicated online consumer service. Best Buy, JCPenney and Macy’s are now all strong “cross-channel retailers,” with brick-and-mortar stores and model online outlets. While the majority of retailers did not join the first wave of online selling, retail firms now must participate in social media. Failure to do so will deplete your “brand- and market-share growth.” Proper online brand management and customer outreach will strengthen your sales and build reliable repeat business.

“Build a relationship first, do business second.” (Jim McCann, CEO, 1-800-Flowers.com)

Everyone who uses social media or mobile devices is a potential customer. Facebook’s users – 487 million in 2010 – far outnumber the total population of the US, and 56% of online shoppers use Facebook. Almost 50% of Americans have profile pages on social networking websites such as Facebook, MySpace and LinkedIn. Twitter has more than 105 million users. The web currently hosts 200 million blogs. Mobile phones users worldwide number 4.6 billion. “Total retail industry Internet sales in the United States were just under $135 billion” in 2009. These numbers continue to rise. For example, Twitter has grown 1,000% since the summer of 2009.

“Fresh items build shopper frequency and frequency builds loyalty.”

Effective online retailers promote sales on the web, provide online discounts or coupons, or offer online social networks to develop and maintain relationships with consumers. Building relationships must always be a greater priority than selling products because those relationships create customer loyalty even before their first purchase. Some retail executives still believe that online social networks matter only to young people. Yet more than half of Americans between 35 and 44 years of age and more than one-third of Americans between 45 and 54 have online profile pages. Some of the top social media options for retailers include:

  • Facebook – Google reports that Facebook is “the world’s most popular site.”
  • Twitter – This microblogging (140 characters or less per message or “tweet”) platform is popular with “well-educated, higher income households.” Users pay close attention to brands and often communicate about products. Zappos CEO Tony Hsieh has 1.72 million subscribers following his tweets.
  • MySpace – Young people interested in music and entertainment customize their own pages on MySpace. However, the site is losing visitors and members.
  • “Social gaming” – Retailers advertise on popular gaming sites such as Mafia Wars, Café World, Birthday Cards, FarmVille, Texas HoldEm Poker and Treasure Isle.
  • YouTube – As the Internet’s most popular video-sharing site, YouTube allows retailers to establish their own channels, similar to Internet home pages.
  • Flickr – Members share photos. The site hosted four billion images as of 2009.
  • Google Buzz – Google launched this social media platform in response to Facebook and Twitter.
  • “Private social media” – Starbucks has its own online network, as does Wet Seal.
  • Blogs – Retailers Zappos, Best Buy and 1-800-Flowers.com produce online commentary on their company blogs.
  • “Location-based social media” – Users let their friends know where they are “through GPS, mobile, email or text.”

Mobile Retail

Along with social media, mobile devices have remade the retail industry. Nearly 300 million such devices are now in use in the United States, with a 91% market penetration. Mobile phones offer mobile browsers that deliver web content and two different messaging services: short message service (SMS), which delivers short text notes, and multimedia message service (MMS), which offers text messaging plus transmission of video, graphics, audio clips, photos, and so on. Additionally, mobile devices also have access to “apps,” or applications of every description and utility. By 2013, 56.2 million Americans will use mobile social networks. Retailers and other companies harness these interactive platforms to reach out to and connect with customers. New mobile phone location technology allows companies to send site- and item-specific promotions to customers when they draw near to retail outlets.

Retail Superstars

Retail merchandisers who lead the way in using social media and mobile marketing include Starbucks, Zappos, Wet Seal, Macy’s, 1-800-Flowers.com, JCPenney, Pizza Hut and Best Buy.

Starbucks

Starbucks expanded from four stores in 1982 to thousands worldwide today. Internet users mention the word “Starbucks” online more frequently than the word “coffee.” To revitalize the company when sales slowed in 2008, Starbucks’s managers began to focus more on “touching the customer.” They proved to be pioneers in this strategic arena. Part of their effort includes engaging online through the “My Starbucks Idea” online social community, where Starbucks customers offer ideas on how the company can improve their personal coffee-related experiences. Starbucks assigns “Idea Partners” to review customers’ online ideas and to pass the best ones along to management for possible implementation. Starbucks also communicates with customers through its “Ideas in Action” blog.

Zappos

This online retailer grew from less than $2 million in sales in 2000 to more than $1 billion 10 years later. Three-quarters of its sales come from customers who return and make new purchases. As an Internet retailer of shoes, clothing, handbags and other products, Zappos engages with customers through its savvy online activities, including CEO Tony Hsieh’s numerous blogs. Zappos’s website offers “Zap.me” links where customers instantly share potential or recent purchases with their friends online. The company employs the Open Graph capability from Facebook that lets consumers see what their friends think of specific Zappos products. Zappos believes strongly in “zocial media.” It has nearly two million Twitter followers, which puts it in a close race with Whole Foods for the No. 1 retailer position on Twitter. A Zappos employee said: “Internally, we don’t use the phrase ‘social media.’ We have a friendly, family environment at work, so it’s just a good way to communicate.”

Wet Seal

A junior-apparel brand, Wet Seal sells clothing to teenage girls. In addition to its online retail outlet, the company has 425 stores in the US and Puerto Rico. Wet Seal’s online application, Outfitter, enables its customers to participate in the company’s online “fashion community.” Girls can store their fashion selections in a “virtual closet” or display them on a “virtual runway” where other teenagers can vote on them, using an approach familiar to viewers of American Idol. In 2009, Wet Seal set up its own m-commerce (mobile commerce) site, enabling users to buy merchandise through mobile devices and receive “location-based store look-ups.” In 2010, Retail Information Systems (RIS) magazine gave Wet Seal its “Mobility Customer Engagement Award.” Wet Seal mines information from customers who join its online fashion community, including their names, mobile phone numbers, email addresses, style preferences, and more.

Macy’s

Macy’s, one of the world’s best-known retailers, is an effective Internet merchandiser with an avid online customer base. Macys.com earns more than $1 billion annually in retail sales. The company also launched a Material Girl fashion line with “blogger and social outreach.” Macy’s “Webisodes” featuring famous fashion designers are popular on YouTube. The firm’s “Fashion Director” application lets customers create clothing ensembles. In 2009, Macy’s introduced an application for the iPhone and the iPod Touch with the sales slogan, “Your favorite store now fits in your pocket!” From their mobile devices, customers can view and shop Macy’s entire product line. In 2010, Macy’s introduced a new mobile app to deliver “personalized, relevant offers.”

1-800-Flowers.com

This web retailer achieved global dominance through its relationships with 35 million customers. Consumer loyalty is strong, with 52% of sales from repeat purchasers. The company has a significant presence on Facebook, Twitter and YouTube. In 2010, RIS magazine recognized 1-800-Flowers.com’s mobile site as “Mobile App of the Year.”

JCPenney

This company believes so strongly in social media that its February 2010 board meeting took place at Facebook’s headquarters in Palo Alto, California. JCPenny retired its iconic paper catalog and now uses online apps, mobile phone programs and social media to engage customers. Its “‘Little Red Book’ runway” experience is highly popular online. In 2009, JCPenney introduced a “2D bar-code coupon program” that consumers access via their mobile phones, a retailing first.

Pizza Hut

Customers can create and order their “perfect pizza[s]” without any personal contact with Pizza Hut employees by using Pizza Hut’s web page, or through Facebook or iPhones. The company offers online coupons for “virtual fridge” doors. Pizza Hut has more than one million Facebook fans. In 2009, Forbes magazine named Pizza Hut’s famous “Killer App” as “the #1 Branded Mobile Application” for the year.

Best Buy

With 21% of the market, this company is America’s biggest consumer electronics specialty retailer. Best Buy offers Twelpforce, a “Twitter-based customer service organization.” Its famous “Blue Shirt Nation,” an “employee-built social network,” connects Best Buy’s 180,000 blue-shirted employees. “The Company as Wiki,” one of Best Buy’s YouTube videos, presents how the company uses social media to improve its operations. “Why Best Buy Loves Mobile,” another video, discusses Best Buy’s mobile applications and activities.

Time to Get on the Social-Media and Mobile-Device Bandwagon

Social media and mobility enable retailers to engage with consumers, transform them into customers, secure their loyalty and develop brand equity. Retailers can create effective social-media and mobile campaigns at relatively minor expense. Indeed, your primary expenditure will be hiring professionals to create and monitor your online activity and maintain your Internet presence. Organizations that can help you get started include the Food Marketing Association, the National Retail Federation’s Shop.org digital division, Internet Retailer, the Retail Advertising and Marketing Association, Retail Connections and the National Restaurant Association.

“To me, all product reviews are good. When they’re bad, you have to get it off the site, get rid of the product. We do that.” (Terry Lundgren, CEO, Macy’s)

Social media marketing multiplies your ability to learn about your customers’ wants, needs and brand preferences. Even so, nearly nine out of 10 marketing professionals do not “measure the ROI of their social-media programs.” Wet Seal is an exception. Thanks to its private social network, the company can easily obtain valuable data about its customers’ motivations and use the information for its upcoming fashions. Use specific social-media analytics to interpret the data available from social-media users. Such analytics “measure conversation, engagement, sentiment, influence” and other factors that are specific to the social media. They observe social networks, count video viewers, monitor blogs and track favorites on video-sharing networks.

About the Authors

Bernie Brennan is the former chairman and CEO of Montgomery Ward. Lori Schafer is a retail adviser at SAS Institute.

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Branded!

Book Branded!

How Retailers Engage Consumers with Social Media and Mobility

Wiley,
 


29 December 2025

The Inner Edge

Recommendation

Great leaders are take-charge, can-do, action-oriented individuals who work hard to make a difference. However, in today’s busy, nonstop work environment, many leaders, like everyone else, feel overwhelmed, frenzied and frustrated. All the hard work in the world will not alleviate such feelings. Leaders require something more. Executive leadership coach Joelle K. Jay teaches beleaguered executives to focus on their “personal leadership” strengths and capabilities as a way to integrate their personal and professional lives, and come out ahead in both areas. In her insightful book, Jay presents 10 practices leaders can pursue to achieve this vital integration. BooksInShort recommends it as a steady, useful read for leaders who want to align their work and their personal lives.

Take-Aways

  • To attain your personal and professional leadership goals, follow 10 principles. First, develop absolute clarity about yourself, and envision your future.
  • Second, bring consummate focus to your priorities and objectives.
  • Third, find a catalyst to drive your actions as you develop your achievements. Avoid tasks that sap your energy.
  • Fourth, leverage your unique talents, traits and capabilities.
  • Fifth, identify your values. Align your actions with the ideals that matter to you.Sixth, make the most of your time.
  • Sixth, make the most of your time.
  • Seventh, get a team of supporters to help you develop your unique leadership qualities.
  • Eighth, keep learning. Create a systematic, well-organized plan to educate yourself.
  • Ninth, relax sometimes to open yourself mentally to new opportunities and creativity.
  • Tenth, combine these principles to develop your intuitive leadership and your “inner edge.”

Summary

Have You Lost Your Edge?

As a leader, you have two edges: your “inner edge,” or your internal self – your thoughts, values, plans and strengths – and your “outer edge,” or the external self you present to the world through your actions and activities. Most leaders focus on their outer edge, because people judge executives based on how they act and what they do.

“You don’t become a leader because someone else says you are. You become a leader because you embrace leadership for yourself.”

However, to realize their full potential, leaders also should focus on their personal inner edge. This involves rigorous self-examination, including the answers to some personal questions: “Who are you as a leader?” “Who do you want to be?” “What do you want to achieve, why and how?” Reinforcing your inner edge can make you a better leader.

“To be a better leader and lead a better life, you need to stop worrying about who you’re not, and start benefiting from who you are.”

Today, many managers are stressed out, confused and dissatisfied. They work hard, but concentrating constantly on outer-edge activities has cost them their inner edge. If that sounds like you, the cure is to spend quality time in thoughtful reflection. This will increase your productivity and help you feel more motivated.

“Planning fuels the action.”

Follow these 10 practices to get in closer touch with your inner edge:

1. “Get Clarity: What Do You Want?”

Lucidity makes you more decisive. Use three strategies to boost your perceptions:

  1. “The inner view” – Explore yourself. Examine your aspirations, worries and desires. Focus on issues you need to clarify. Ask yourself open-ended questions to help you determine your goals. Explore what you want from life and your position as a leader.
  2. “You and improved” – Look into the future and consider where you want to go. Imagine the future in elaborate detail and colorful images.
  3. “The path” – See yourself on a path to your future. Make the image as real as possible. Mentally picture, perhaps, a trail up a mountain or through a desert. Visualize yourself traveling away on this path. This process will help you understand better what is in your heart and what matters most to you – that is, it illuminates the important issues.

2. “Find Focus: Where Will You Put Your Attention?”

Concentration can help you determine what to work on and how to prioritize.

“None of the planning tools in the world will help you achieve your vision if all you do is shuffle around the same old tasks.”

Make your vision a workable reality by prioritizing your actions according these five steps:

  1. “Survey the scene” – Adopt a “panoramic view” of your life. Describe what you see in one sentence. Write it down.
  2. “Choose your focus” – Establish “three to five priorities” and concentrate on them.
  3. “Study the subject” – Ask yourself: “Where am I now?” “Where would I like to be?” “How will I know when I get there?”
  4. “Sharpen your focus” – Now that you have an idea about the way you want to move ahead in the future, think about the specific actions you will need to take to get there.
  5. “Take a snapshot” – Write down your areas of concentration and the commitments you must make to yourself to achieve what you want to accomplish.

3. “Take Action: What Do You Need to Do?”

Once you analyze yourself and what you want to achieve, plan the actions you need to perform to attain your goals – and then carry them out.

“Just because your time is well organized doesn’t mean it’s well spent.”

Build your action plan according to the “CATA” list:

  • “Catalysts” – Catalysts speed up chemical reactions. Find the right catalyst to help you reach your vision and drive your other actions. For instance, if you want to lose weight, your catalytic action might be eliminating sugar from your diet.
  • “Achievements” – Your “daily actions, key relationships, priority projects” and “deadlines” often add up to the achievements of your life. The more time you spend daily working on your achievements, the more productive you will be.
  • “Tasks” – These activities often consume your day, eating it up with “long meetings, some networking” and “obsessive perfecting of nonessential details.” Focus more on your catalysts and achievements than on your tasks.
  • “Avoidances” – Some processes expend more of your energy than they should “with little return.” Eliminate as many of them as possible.

4. “Tap into Your Brilliance: What’s Unique About You?”

Pinpoint your primary attributes. Determine how to leverage your distinctive talents to optimize their impact on your life and to become a better leader. If you want other people to contribute to your leadership profile, conduct a 360-degree analysis, polling your peers, staffers and bosses.

“Getting clarity can move you quickly out of overwhelm, distraction and confusion into excitement, confidence and peace.”

Develop your own map of your “leadership DNA.” List your distinctive qualities and how they help you. Be aware that people’s traits sometimes work against them. For example, other people may view a strongly competitive person as being “cutthroat or vengeful.” Once you have your profile on paper, make a plan to “maximize your strengths and manage your weaknesses” by adjusting your approach depending on the circumstances. To illustrate: Perhaps ramp up your “debating and assertiveness” skills when you are involved in corporate negotiations, but soften them when you go off to visit your in-laws.

5. “Feel Fulfillment: What Motivates You and Makes You Happy?”

To make your life more rewarding, get in touch with your personal values – such as honesty, trust, excellence, authenticity, pleasure, generosity and integrity – and base your actions on them.

“Develop an approach to leadership that uses all...your attributes in the most advantageous way.”

To home in on your principal values, use this three-stage process:

  1. “Mining for values” – To find the values that count most in your life, revisit your “peak experiences.” For example, the serenity and peace you felt during a trip to the mountains may have enhanced the meaning of those values.
  2. “Defining your values” – Write a sentence describing what each of your 10 primary values means to you.
  3. “Refining your values” – Narrow your list and prioritize your values. Post your list somewhere prominent where you will always see it.
“To maintain a consistent sense of joy and satisfaction, you need to know what fulfills you and learn to make it a part of every day.”

Now, take bona fide steps to live those values. For example, if family is a primary value, then reorganize your activities to spend more time with the people you love. Bring your values front and center in your life. Tap into them when you make decisions. “Live your values now.”

6. “Maximize Your Time: How Can You Achieve More with Less?”

Achieving personal leadership takes a time commitment. To manage your time more effectively, use modeling: Imagine your perfect schedule. Put it on a calendar to create a time-planning goal.

“Busyness is a choice. Your life will be more in control when you take control. Your time is your own and your time is your life. Relaxed, successful leaders see a different reality.”

To organize your time, define it. Set up “work days,” “meeting days,” “administration days,” and so on. Protect your time by making “appointments with yourself,” from reviewing industry news from 7 a.m. to 9 a.m. on Wednesdays to setting aside one day a month for strategic planning.

To guard your time, unplug all the high-tech tools that keep you constantly buzzing. To create a daily schedule, list your appointments on a plain sheet of paper. In between the appointments, show time slots for working on essential priorities. At the bottom of the page, list three to five actions you must accomplish during the day. This is today’s time plan. Work hard to stick to it.

7. “Build Your Team: Who Can Support You?”

To achieve meaningful personal leadership, you need a support team. At work, that’s the cadre of staff members who help you attain your professional goals.

“You should only do what only you can do.” (Dr. Meggin McIntosh)

However, for inner-edge activities, you need support in these categories:

  • “The mastermind” – Meet with three to five respected peers you can turn to for help in building your leadership skills. Select people who can turn to you for the same purpose.
  • “The dream team” – Think of leaders you respect and see as role models. Unlike the mastermind group, your dream team does not meet as a collective. Look for dream team members who can work with you one-on-one to help you build your leadership skills.
  • “The imaginary advisory board” – Imagine how useful it would be to assemble the world’s greatest leaders, past and present, to advise you. You can do it – in your mind. Visualize how the people you most respect – from your grandmother to Sir Winston Churchill, for example – would advise you on personal leadership issues.

8. “Keep Learning: What Do You Most Need to Know?”

Do you learn by chance? For example, when someone recommends a book, do you read it, or when a brochure arrives announcing a new professional development conference, do you sign up? Or do you learn by command, such as when an authority figure demands it?

“There is only one corner of the universe you can be certain of improving, and that’s yourself.” (Aldous Huxley)

The best way to learn is by choice: Develop a systematic, well-organized plan to educate yourself. Undertake a course of “independent study” on topics you want to explore; map out your own personal study plan and then begin learning new information. You can also learn by working with a coach or a mentor.

“Be a first rate version of yourself, not a second rate version of someone else.” (Judy Garland)

Enhance your knowledge through serious reflection, that is, careful thought about the people, events, activities and elements in your life, and your aspirations and goals. To learn effectively, take complete ownership of your personal development.

9. “See Possibility: How Can You Invite Success to You?”

Inner-edge leadership practices call for opening yourself mentally to new opportunities. Many leaders adopt an aggressive, action-oriented “making it happen” approach that is not intuitive or “open to possibility.” A different attitude is “letting it happen,” an optimistic, insightful mind-set that lets good things happen by being open to new possibilities.

“The main thing is to keep the main thing the main thing.” (Stephen Covey, 'First Things First')

To reorient your thinking along these lines, first try simply to “let it be easy.” To use this philosophy, according to leadership mentor Dr. Heidi McKenna, adopt the attitude, “If things are going your way, go that way. If things aren’t going your way, don’t go that way.” In other words, keep doing things that work, and stop doing things that don’t work.

If your mind is constantly buzzing, you cannot be intuitive and open to new possibilities. Therefore, temporarily shut down your thinking so brilliant new intuitive insights can develop. Get in the occasional habit of “not-doing,” that is, just relax and don’t think about anything or do anything for five minutes or so.

This will help you get in touch with your intuitive side. Give your “secret senses” a chance to develop. Open yourself up to all the amazing possibilities of life.

10. “All at Once: How Do You Move from Excellent to Extraordinary?”

With some careful thought and action, you can use “integrative thinking” to combine these nine practices so that they work in tandem with each other.

To illustrate, consider “tapping into your brilliance” as a companion to “feeling fulfillment.” You will experience confidence and control when you work from a position of personal strength. With this sensation in mind, think of all you can achieve “when the thing you value most is also the thing you do best.”

Join your personal and professional lives so they fully support one another, and then keep your personal and professional goals in alignment to make your life a unified, self-sustaining whole.

In the process, share your knowledge. Help others achieve the personal leadership success you have found with these 10 inner-edge practices. Become an inspiration to the people around you.

About the Author

Joelle K. Jay is an executive leadership coach who holds a PhD in learning and leadership. She also wrote Quality Teaching: Reflection as the Heart of Practice.

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The Inner Edge

Book The Inner Edge

The 10 Practices of Personal Leadership

Praeger,
 


29 December 2025

The Most Important Thing

Recommendation

Lifetime value investor Howard Marks has distilled his approach and experience into a concise, focused text that offers seasoned investment wisdom to those looking for a way forward in today’s financial markets. The book, a compilation of Marks’s investor newsletters, contains exceptional chapters on risk management, contrarian thinking and market psychology, as well as a cogent analysis of value investing. While it is somewhat repetitive, BooksInShort recommends it to all serious investors who are interested in getting back to the “fundamentals” of investing.

Take-Aways

  • If you want your investments to beat the market, develop “second-level thinking.”
  • Second-level thinkers don’t follow the crowd; they use insight and intuition to go beyond the obvious in assessing an investment.
  • Good investors analyze a firm’s “fundamentals” to get a stock’s “intrinsic value.”
  • Value investors buy the shares only when the price drops below that value.
  • Growth investors apply similar analytics to ferret out underpriced shares with the potential for rapid appreciation.
  • Buying an overpriced stock rarely pays, regardless of how good the company is.
  • Risk is an inevitable ingredient in any investment; understanding it and managing it are crucial, so always consider the “risk-adjusted return” of your portfolio.
  • Contrarians make unconventional investments that can defy conventional analysis.
  • Patience is a virtue in investing. Don’t chase after deals; wait for the right opportunity.
  • Professionals who cite skill as the source of their investing success often neglect to acknowledge the importance of luck.

Summary

“More Art than Science”

Investing has much in common with art; both require intuitive and flexible approaches. Unlike in pure science, where practitioners can replicate results consistently, investors can never “routinize” their success. If you want returns that beat market averages, you must cultivate “superior insight,” or what legendary investor Benjamin Graham called a “trace of wisdom.”

“The upshot is simple: To achieve superior investment results, you have to hold nonconsensus views regarding value, and they have to be accurate.”

Great investors learn to reason differently from the rest of the pack. They develop “second-level thinking,” a way of acting and parsing information that deviates from the norm. Second-level thinking requires thoughtful consideration of possible outcomes, probabilities and expectations, as well as understanding how to evaluate a stock’s current price relative to future scenarios. However, most investors are “first-level thinkers” who follow the crowd and consider only obvious factors. For example, when markets are in a crisis, first-level thinkers will instinctively sell; second-level investors may very well buy on the market’s panic.

Efficient Markets?

The efficient market hypothesis would seem to preclude the ability of any investor to achieve above-average returns. The theory states that all information about any investment is publicly available to all market participants. As a result, the market attributes a fair value to a security, reflected in its price; the higher the risk of that security, the higher the return investors will expect to receive in compensation for their risk taking.

“A market characterized by mistakes and mispricings can be beaten by people with rare insight.”

Yet the market sometimes reacts in ways that bring its efficiency into question. After all, people make up the market – human emotion, fallibility and weakness affect the clinical objectivity the hypothesis demands, leading to market inefficiencies. For example, in January 2000, Yahoo’s share price was $237, but it fell to $11 in April 2001. If both prices reflect all available information on Yahoo, that means that the market was wrong at one of those points. Only an unconventional, second-level investor could have profited from that inefficiency.

“For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point.”

Investors who think differently look for new sources of information and analysis, as well as original ways of assessing the market to find mispricing opportunities. An investor’s first question when testing a novel idea or perception should be, “And who doesn’t know that?” While the efficient market debate continues, evidence proves that markets do become inefficient, but usually not for long. Widely followed asset classes are highly efficient, even when some mispricing occurs. When it does, that’s when second-level investors can beat the market.

Searching for Value

Investors tend to take two basic approaches to investing: They either analyze “fundamentals” – that is, an investment’s underlying characteristics – or they conduct “technical analysis,” which tracks a security’s prior and anticipated price movements. Technical analysis is less in vogue now than in the past; in the 1990s, day traders took advantage of computer technology to act quickly on intraday price changes to capture small upticks in value.

“Investment success doesn’t come from ‘buying good things,’ but rather from ‘buying things well’.”

“Intelligent investing” relies on studying fundamentals, which supply the basis for two investment styles: “value investing and growth investing.” Value investors seek to buy stocks at a price below those shares’ “intrinsic value,” based on evaluations of the company. Growth investors use the same analytical approach to look for stocks that will quickly appreciate. Both groups seek growth in a company’s cash flow and earnings, but value investors look for current worth and smaller, more consistent gains over time, while growth investors seek future value potential and are more willing to assume macro- and industry-specific risks.

“As John Maynard Keynes pointed out, ‘The market can remain irrational longer than you can remain solvent’.”

Timing and confidence in your assessment of a stock’s intrinsic value are both crucial to value investing, especially when prices fall below your purchase point. When this happens, dedicated value investors need the courage to buy more shares in the belief that their intrinsic value analysis is correct and that their investment will eventually turn a profit. This type of discipline provides the basis for unemotional and profitable investing.

Price, Value, Risk

Finding the link between the value and price of a security is the linchpin of successful investing. Your analysis of a share’s intrinsic value is only half the battle; you must buy that share at a price below that value so that it will eventually earn a profit. If an investor buys a company’s shares at too-high a price the purchase will never turn into a good investment, regardless of how great the firm is. Remember that market prices are subject to emotion and crowd psychology, the building blocks of bubbles and fads. It’s better to buy a stock at a large markdown, even if it’s out of favor; its price will inevitably align with its value. Be patient and wait for the price adjustment.

“Here’s the key to understanding risk: It’s largely a matter of opinion.”

Risk, an inherent part of dealing with an uncertain future, is another crucial investment variable. Most people are risk averse, but successful investors know that they must identify and manage risk, and that their “risk-adjusted return” determines if their payoff will be commensurate with the amount of risk. Accepting risk without receiving compensation for it violates a basic rule of investing.

“The risk-is-gone myth is one of the most dangerous sources of risk, and a major contributor to any bubble.”

While academics define risk as volatility, most individuals describe it as a potential loss of capital. But each investor’s take on risk may differ:

  • Failing to meet an investment objective – For instance, the pensioner who needs a 4% return to meet his expenses would be delighted with a 6% increase, while the fund manager who must generate 8% for his clients would consider that result a failure.
  • “Underperformance” – Falling short of some independent benchmark is a common risk, yet many profitable long-term investors underperform during bubbles and speculative markets, to their eventual benefit.
  • “Career risk” – Fund managers may share partially on upside earnings, but the downside could cost them their clientele.
  • “Unconventionality” – Some investment managers prefer normal returns to risking their clients’ money on unusual strategies.
  • “Illiquidity” – Being unable to turn your investment into cash when you need it is a risk many investors have to take into consideration.
“Worry and its relatives, distrust, skepticism and risk aversion, are essential ingredients in a safe financial system.”

Risk is difficult to define, measure or predict. Improbable events happen all the time, while probable ones often fail to materialize. People anticipate that the future will look like the past, and they don’t account for events unlike any they’ve already seen. Risk can emerge – and become more dangerous – when crises hit markets. Yet good times can often mask risky portfolios; investors may assume that, because they’ve sustained no losses, their portfolio managers have good risk controls in place. Be aware that risk, while present, may not necessarily manifest, making it difficult to assess a portfolio’s overall risk level.

“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.”

Good fund managers demonstrate their worth when they generate high returns at low risk. Many people don’t think about risk management in good times, because high returns subordinate their concerns. But in down markets, solid risk management can dampen losses. Most investors expect volatility and potential losses to follow historical patterns; they don’t know how to prepare for exceptionally large, statistically rare losses.

Opportunities in Cycles

The actions of human beings drive markets, so, like human behavior, markets move in cycles. Nothing lasts forever: “Trees don’t grow to the sky. Few things go to zero.” Yet people tend to extrapolate the past to construct an image of the future, and when events occur that shake that image, emotions overtake investors’ objectivity. Big mistakes happen when investors deceive themselves into thinking that cycles – either negative or positive – are a thing of the past, or that “this time it’s different.”

“I’ve recently boiled down the main risks in investing to two: the risk of losing money and the risk of missing opportunity.”

Markets operate in cycles of greed and fear, and these cycles carry simultaneously the seeds of opportunity as well as loss. During booms, people downplay risk, but during crashes, investors become overly risk averse and ignore blatant buying opportunities. In both cases, investors alter their risk tolerance levels. Such changes in investor psychology – not market fundamentals – drive short-run price changes. Good investors should remain skeptical about market consensus views; in fact, they should react in ways contrary to prevailing opinion. But being a contrarian can be difficult. It requires adopting and maintaining unconventional investment positions that might not look achievable under conventional analysis.

“I love the old adage ‘What the wise man does in the beginning, the fool does in the end’.”

Contrarians sell when others buy and vice versa, hoping to profit by going against the crowd. They seek investments whose prices are low because they are out of favor. To pick up these bargain investments, look for stocks that meet specific criteria, estimate their intrinsic values, compare their current prices to their intrinsic values and evaluate their “risk/return” potential. Then, buy securities with a low price relative to their value, and with potential returns in line with your preferred risk levels.

“There’s only one way to describe most investors: trend followers.”

Bubbles happen when an asset class becomes exceptionally attractive. At some point, the buying mania spreads and becomes completely detached from the value of the underlying asset. When people – sometimes irrationally – begin to view an investment as flawed or undesirable and thus avoid it, the asset becomes a bargain.

Being Opportunistic

Value investing is predicated on buying underpriced assets at the best possible risk-adjusted price, but such opportunities are not always available. The smart value investor is patient and waits for opportunities to present themselves. Investing is one of the few professions that rewards patience. If no opportunity exists, don’t invest.

“To boil it all down to just one sentence, I’d say the necessary condition for the existence of bargains is that perception has to be considerably worse than reality.”

Know your limitations, and avoid taking on too much risk in pursuit of potential high returns. Many investors assume they know more than they do, which is as bad as not knowing anything. People who try to predict the market often act on flawed knowledge. Instead, ascertain the present: Gauge the temperament of the market and of investors. Notice whether market commentators are optimistic or pessimistic. Look at price/earnings ratios, credit and lending policies, and the popularity of new investment products. This overview is especially important when markets undergo dramatic changes, such as during the period from 2004 to 2007. At that time, cheap leverage, rampant speculation, untested new products – especially in real estate – and the false belief that the markets had conquered risk fueled an investing frenzy. Contrarian investors who recognized those warning signs posted major gains while reducing their risk.

Luck or Skill?

Many investors make risky bets and then take credit for their positive outcomes. Often, however, the result is not due to skill, but luck. People frequently make money on a stock for the wrong reasons, making it even more important that investors find out how a manager achieves stellar performance. Were the results based on luck? Could other random events have produced those same gains, or even losses? Define success by looking for a portfolio that delivers above-average returns with low volatility; see if the same manager consistently produces good results.

“Operating a high-risk portfolio is like performing on the high wire without a net. The payoff for success may be high and bring oohs and ahhs. But those slipups will kill you.”

As an investor, you must determine whether you prefer to make money or avoid losing it. The two options are not the same, and every investor has to find the right balance between going on the offensive and on the defensive. The choice depends on your personality, confidence level and competence. Defensive investors want to avoid bad investments and losses, so they establish what Warren Buffett calls a “margin of safety.” This margin occurs when you buy an asset at a great price. If you buy a stock you’ve valued at $100 for only $70, your risk of loss decreases, while your upside expands. Preventing losses is easier than making profits: The latter relies on an unpredictable future, while the former depends on analyzing tangible events and values today.

About the Author

Howard Marks is chairman and co-founder of Oaktree Capital Management, an investment firm with $80 billion under management.

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