Buffett and Munger speak: Berkshire Hathaway 2021 oddities and highlights

Posted: May 4, 2021 | Author: helytimes | Filed under: America Since 1945, business | Leave a comment

I always feel like I’m getting both nutrition and entertainment when I read the Berkshire Hathaway annual meeting transcript, found here at Rev.com

Asked about the morality of owning an oil and gas company like Chevron, Charlie Munger poses and then answers a strange hypothetical:

You can imagine two things. A young man marries into your family, he’s an English professor at, say, Swarthmore, or he works for Chevron. Which would you pick? Sight unseen? I want to admit, I’d take the guy from Chevron. Yeah.

Did not know this about the origin of the rear view mirror:

Warren Buffett: (01:35:54)
Maybe that’s why they called it Marmon. And that we’re proud of the fact that the company in 1911 named one of the first Indianapolis 500. It also was the company that invented the rear view mirror. I’m not sure whether that was a big contribution to society. And certainly around your household rear view mirror, you don’t want to emphasize too much. But they, the car that was entered in Indianapolis 500, the guy who normally sat next to the driver and looked backwards to tell what the competitors were doing, he was sick. So they invented the rear view mirror. So let’s just assume that you had decided that autos were this incredible thing. And someday there’d be an Indianapolis 500 and someday they’d have rearview mirrors on cars. And someday 290 million cars would be buzzing around the United States or autos or trucks there.

On BNSF railroad:

15% of the interstate goods move on our railroad

Competition for BNSF, and for Geico:

This question comes from Glen Greenberg, it’s on the profitability of GEICO and BNSF. He said, “Why do these companies operate at meaningfully lower profit margins than their main competitors, Progressive and Union Pacific? Can we expect current managements to at least achieve parity?

Warren Buffett: (02:33:25)
Was it GEICO and-

Becky: (02:33:27)
BNSF.

Warren Buffett: (02:33:28)
Oh, actually, if you look at the first quarter figures, you’ll see that the Berkshire Hathaway/Union Pacific comparisons has gotten quite better. Katie Farmer’s doing an incredible job at BNSF, and it’d be an interesting question whether five years from now or 10 years from now, BNSF or Union Pacific has the higher earnings. We’ve had higher earnings in the past, Union Pacific passed us. The first quarter, you can look at and they think they’ve got a slightly better franchise. We think we’ve got a slightly better franchise. We know we’re larger than Union Pacific, we will do more business than they do. And we should make a little more money than they do, but we haven’t in the last few years. But it’s quite a railroad, I feel very good about that.

…

 And it’s a very interesting business, both Progressive and GEICO were started in the ’30s. I believe I’m right about Progressive on that, and we were started in ’36. We have had the better product for a long, long time, I mean, in terms of cost. And here we are 80, 85 years later, in our case, and we have about 13% or so of the market, whatever it may be, and Progressive as just a slight bit less. So the two of us have 25% of the market, roughly, in this huge market, after 80 something years of having a better product. So it’s a very slow changing, competitive situation, but Progressive has done a very, very good job recently. We’ve done a very, very good job over the years, and we’re doing a good job now, but we have made some very significant improvements.

Is Flo just more appealing than the Geico Gecko? Ajit Jain doesn’t think so:

Progressive has certainly done better, but when it comes to branding, GEICO is, I think, miles, excuse me, ahead of Progressive. And in terms of managing expenses as well, I think GEICO does a much better job than anyone else in the industry.

On interest rates:

I mean, interest rates, basically, are to the value of assets, what gravity is to matter, essentially. …

I mean, if I could reduce gravity, it’s pull by about 80%, I mean, I’d be in the Tokyo Olympics jumping. And essentially, if interest rates were 10%, valuations are much higher. So you’ve had this incredible change in the valuation of everything that produces money, because the risk-free rate produces, really short enough right now, nothing. It’s very interesting. I brought this book along, because for 25 or more years, Paul Samuelson’s book was the definitive book on economics. It was taught in every school and Paul was… he was the first Nobel a prize winner. It’s sort of a cousin to the Nobel prize, they started giving it in economics, I think, in the late ’60s, he was the first winner from the United States, Paul Samuelson. Amazingly enough, the second winner was Ken Arrow, and both of them are the uncles of Larry Summers. Larry Summers had the first two winners as uncles.

Weird, did not know that. Buffett goes on:

But if present rates were destined to be appropriate, if the 10 years should really be at the price it is, those companies that the fellow mentioned in this question, they’re a bargain. I mean, they have the ability to deliver cash at a rate that’s, if you discounted back and you’re discounting at present interest rates, stocks are very, very cheap. Now, the question is what interest rates do over time. But there’s a view of what interest rates will be based in the yield curve out to 30 years and so on.

It’s a fascinating time. We’ve never really seen what shoveling money in on the basis that we’re doing it on a fiscal basis, while following a monetary policy of something close to zero interest rates, and it is enormously pleasant. But in economics, there’s one thing always to remember, you can never do one thing, you always have to say, “And then what?”

Buffett goes on to invoke the St. Peterburg paradox.

On, basically, what’s cool about the stock market:

we’ve got the greatest markets the world could ever imagine. I mean, imagine being able to own parts of the biggest businesses in the world and putting billions of dollars in them and take it out two days later. I mean, compared to farms or apartment houses or office buildings, where it takes months to close a deal, the markets offer a chance to participate in earning assets on a basis that’s very, very low cost and instantaneous, huge, all kinds of good things, but it makes its real money if they can get the gamblers to come in because they provide more action and they’re willing to pay silly or fees and all kinds of things.

On the market as a casino:

Well, the stock market, we’ve had a lot of people in the casino in the last year. You have millions and billions of people who’ve set up accounts where they day trade, where they’re selling… Put some calls, where they, I would say that you had the greatest increase in the number of gamblers essentially. And there’s nothing wrong with gambling and they got better odds than they’ve got if they play the state lottery, but they have cash in their pocket. They’ve had action. And they actually don’t have a lot of good results. And if they just bought stocks, they do fine and held them.

But the gambling impulse is very strong in people worldwide, and occasionally it gets an enormous shove and conditions lead this place where more people are entering the casino than are leaving every day, and that creates its own reality for a while. And nobody tells you when the clock is going to strike 12:00, and it all turns to pumpkins and mice. But when the competition is playing with other people’s money, or if they’re playing foolishly with their own money, but the big stuff is done with other people’s money, they’re going to beat us. I mean, we’re not… that’s a different game and they’ve got a lot of money, so we’re not going to have much luck on acquisitions while this sort of a period continues.

Charlie Munger saying Bernie Sanders “has won,” but he didn’t mean it in a complimentary way:

MUNGER: And I think one consequence of the present situation is that Bernie Sanders has basically won. And that’s because with the, everything boomed up so high and interest rates, so low what’s going to happen is the millennial generation is going to have a hell of a time getting rich compared to our generation. And so the difference between the rich and the poor and the generation that’s rising is going to be a lot less. So Bernie has won. He did it by accident, but he won.

Charlie is asked, given high tax rates, what keeps him in California?

MUNGER: Well, that’s a very interesting question. I frequently say that I wouldn’t move across the street to save my children 500 million in taxes and stuff. So I have that, that’s my personal view of the subject, but I do think it is stupid for states to drive out their wealthiest citizens, the old people that don’t commit any crimes, they donate to the local charity. Who in the hell in their right mind would drive out the rich people? I mean, Florida and places like that are very shrewd and places like California are being very stupid. It’s contrary to the interest of the state.

I love the dodge here on a question about Bitcoin:

Yeah, I knew there’d be a question on Bitcoin. I thought to myself, “Well, I’ve watched these politicians dodge questions all the time.” I always find it kind of disgusting when they do it. But the truth is, I’m going to dodge that question because we’ve probably got hundreds of thousands of people watching this that own Bitcoin, and we’ve got two people that are short. We’ve got a choice of making 400,000 people mad at us and unhappy and/or making two people happy. That’s just a dumb equation. I thought about it. We had a governor one time in Nebraska, a long time ago. He would get a tough question, what do you think about property taxes or what should we do about schools? He’d look right at the person, and he’d say, “I’m all right on that one,” and he’d just walk off. Well, I’m all right on that one and maybe we’ll see how Charlie is.

A quality of a great business:

Well, we’ve always known that the green business is the one that takes very little capital and grows a lot, and Apple and Google and Microsoft and Facebook are terrific examples of that. I mean, Apple has $ 37 billion in property, plant, equipment. Berkshire has 170 billion or something like that, and they’re going to make a lot more money than we do. They’re in better business. It’s a much better business than we have, and Microsoft’s business is a way better business than we have. Google’s business is a way better business.

I thought this was funny. The question was re: Robinhood.

But they have attracted, maybe set out to attract, but they have attracted, I think I read where 12 or 13% of their casino participants were dealing in puts and calls. I looked up on Apple, the number of seven day calls and 14 day calls outstanding. I’m sure a lot of that is coming through Robinhood and that’s a bunch of people writing… They’re gambling on the price of Apple over the next seven days or 14 days. There’s nothing illegal about it. There’s nothing immoral. But I don’t think you would build a society around people doing it. If a group of us landed on a desert island, we knew that we’d never be rescued, and I was one of the group and I said, “Well, I’ll set up the exchange over and I’ll trade our corn futures and everything around it.” I think the degree to which a very rich society can reward people who know how to take advantage essentially of the gambling instincts of, not only American public, worldwide public, it’s not the most admirable part of the accomplishment. But I think what America has accomplished is pretty admirable overall. And I think actually, American corporations have turned out to be a wonderful place for people to put their money and save, but they also make terrific gambling chips.

Odd anecdote from Warren, Munger is talking about state lotteries (he doesn’t approve):

Charlie Munger: (04:40:03)
The states in America, replaced the mafia as the proprietor of the numbers game. That’s what happened.

Warren Buffett: (04:40:03)
Yep.

Charlie Munger: (04:40:03)
They pushed the mafia aside and said, “That’s our business, not yours.” Doesn’t make me proud of my government.

Warren Buffett: (04:40:03)
When I was a kid, my dad was in Congress, they had a numbers runner in the house office building, actually.

On the potential CP/KSU railway merger, which would strengthen a rival to Berkshire’s own BNSF:

In terms of the price that’s being paid, like I say, if you can borrow all the money for nothing, it doesn’t make much difference to people. This would not be being paid under a different interest rate environment. I mean, it’s very simple. There’s no magic to the Kansas City Southern. I think their deal with Mexico ends in 2047. It’s the number of carloads carried. I mean, it’s not going to change that much, but it is kind of interesting. There’s only two major Canadian, what they call Class I railroads, and there’s five in the United States. This will result in, essentially, three of the units being Canadian, four being U.S., which is not the way you normally think of the way the development of the railroad system would work in the United States.

…

We looked at buying CP. Everybody looks at everything. We would not pay this price. It implies a price for BNSF that’s even higher than what the UP is selling for. But it’s kind of play money to some degree, I mean, when interest rates are this low. I’m sure from the standpoint of both CP and CN, there’s only one K.C. Southern. They’re not going to get a chance to expand. They’re not going to buy us. They’re not going to buy the UP. The juices flow, and the prices go up.

Charlie Munger: (03:37:15)
They’re buying with somebody else’s money.

Warren Buffett: (03:37:18)
Yeah. It’s somebody else’s money, and you’re going to retire in five or 10 years. People are not going to remember what you paid, but they’re going to remember whether you built a larger system. The investment bankers are cheering you on at every move. They’re just saying, “You could pay more.” They’re moving the figures around. The spreadsheets are out, and the fees are flowing.

The juices flow, indeed.

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Buffett bits (and Munger)

Posted: May 5, 2020 | Author: helytimes | Filed under: America Since 1945, business | Leave a comment

Did not watch, but read a transcript of this year’s Berkshire Annual Meeting. Even though he tends to repeat himself, especially once you’ve gone over a few of his letters, there’s something comforting and eternal about going over the wisdom again, like reading The Bible.

 

Is there simpler investment advice?

I would love to talk to Ajit Jain for a few minutes:

I didn’t know about this event:

from the National Archives:

The morning after was an archivist’s nightmare, with ankle-deep water covering records in many areas. Although the basement vault was considered fireproof and watertight, water seeped through a broken wired-glass panel in the door and under the floor, damaging some earlier and later census schedules on the lower tiers. The 1890 census, however, was stacked outside the vault and was, according to one source, “first in the path of the firemen.”(11)

Could be a good clue in a National Treasure style mystery.

Speculation and rumors about the cause of the blaze ran rampant. Some newspapers claimed, and many suspected, it was caused by a cigarette or a lighted match. Employees were keenly questioned about their smoking habits. Others believed the fire started among shavings in the carpenter shop or was the result of spontaneous combustion. At least one woman from Ohio felt certain the fire was part of a conspiracy to defraud her family of their rightful estate by destroying every vestige of evidence proving heirship.(15) Most seemed to agree that the fire could not have been burning long and had made quick and intense headway; shavings and debris in the carpenter shop, wooden shelving, and the paper records would have made for a fierce blaze. After all, a watchman and engineers had been in the basement as late as 4:35 and not detected any smoke.(16) Others, however, believed the fire had been burning for hours, considering its stubbornness. Although, once the firemen were finished, it was difficult to tell if one spot in the files had burned longer than any other, the fire’s point of origin was determined to have been in the northeastern portion of the file room (also known as the storage room) under the stock and mail room.(17) Despite every investigative effort, Chief Census Clerk E. M. Libbey reported, no conclusion as to the cause was reached.

previous coverage of Buffett and Charlie Munger.

Charlie Munger unfortunately couldn’t be in Omaha, but looks like he had interesting things to say as always at the Daily Journal annual meeting in February:

Question 28: You talk frequently about having the moral imperative to be rational. And yet as humans, we’re constantly carrying this evolutionary baggage which gets in the way of us thinking rationally. Are there any tools or behaviors you embrace to facilitate your rational thinking?

Charlie: The answer is, of course. I hardly do anything else. One of my favorite tricks is the inversion process. I’ll give you an example. When I was a meteorologist in World War II. They told me how to draw weather maps and predict the weather. But what I was actually doing is clearing pilots to take flights.

I just reverse the problem. I inverted. I said, “Suppose I wanted to kill a lot of pilots, what would be the easy way to do it?” And I soon concluded that the only easy way to do it, would be to get the planes into icing the planes couldn’t handle. Or to get the pilot to a place where he’d run out of fuel before he could safely land. So I made up my mind that I was going to stay miles away from killing pilots. By either icing or getting him into (inaudible) conditions when they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.

And if somebody hired me to fix India, I would immediately say, “What could I do if I really want to hurt India?” And I’d figure out all the things that could most easily hurt India and then I’d figure out how to avoid them. Now you’d say it’s the same thing, it’s just in reverse. But it works better to frequently invert the problem. If you’re a meteorologist, it really helps if you really know how to avoid something which is the only thing that’s going to kill your pilot. And you can help India best, if you understand what will really hurt India the easiest and worst.

Algebra works the same way. Every great algebraist inverts all the time because the problems are solved easier. Human beings should do the same thing in the ordinary walks of life. Just constantly invert. You don’t think of what you want. You think what you want to avoid. Or when you’re thinking what you want to avoid, you also think about what you want. And you just go back and forth all the time.

How about this:

Question 30: My question is about electric vehicles and BYD. Why are electric vehicles sales at BYD down 50 to 70 percent while Tesla is growing 50 percent? And what’s the future hold for BYD?

Charlie: Well, I’m not sure I’m the world’s greatest expert on the future of electric vehicles, except I think they’re coming generally and somebody’s going to make them. BYD’s vehicle sales went down because the Chinese reduce the incentives they were giving to the buyers of electric cars. And Telsa’s sales went up because Elon has convinced people that he can cure cancer. (laughter)

And then by Question 33 he really gets going.

 Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. (laughter)

Buffett is like beer, Munger is like whiskey.

(via latticeworkinvesting)

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Warren Buffett on why Coke is so good

Posted: July 2, 2018 | Author: helytimes | Filed under: America Since 1945, business | 2 Comments

jump to 6:42:

(h/t Naval Ravikant.  )

Ended up watching this whole Buffett Q&A.  If you watch other Buffett talks he does tend to repeat himself.  This one is good.

Interesting to me how much Buffett talks about two companies, See’s and Coca-Cola, that have an emotional connection to the consumer.  The results of that might be in the balance sheet, but the reason is beyond numbers.  A genius of Buffett to combine cold technical investment analysis with being, like, the ultimate late 20th century American consumer.

As for Coke, the only new drink I know of that people drink five or six of a day is:

 

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Free samples

Posted: May 22, 2023 | Author: helytimes | Filed under: America Since 1945, business | 1 Comment

I was in See’s Candy the other day, as I am on many a weekend, and it dawned on me that two of the classic Buffett/Munger businesses, Costco and See’s Candy, are places that offer delicious free samples.

Go to a Costco and you’ll likely get a tasty snack or two, go to See’s and you’ll get whatever the day’s sample is (yesterday it was salted dark chocolate caramel).

Buffett and Munger are all about urging people to be rational, and managing their own emotions (“I can’t recall any time in the history of Berkshire that we made an emotional decision”) but a huge part of their success and what makes them interesting is their awareness that some businesses are sort of magical. They’ve got a grip on customers that’s beyond rational, that exists in the worlds of love and nostalgia and strong emotion. Buffett raving about the iphone, for instance:

If you’re an Apple user and somebody offers you $10,000, with the the only proviso [that] they’ll take away your iPhone and you’ll never be able to buy another, you’re not going to take it

If they tell you [that] if you buy another Ford motor car, they’ll give you $10,000 not to do that, [you’ll] take the $10,000 and buy a Chevy instead.

I mean, it’s a wonderful business. We can’t develop a business like that, and so we own a lot of it. And our ownership goes up over time.

Or See’s:

People had “taken a box on Valentine’s Day to some girl and she had kissed him … See’s Candies means getting kissed,” he told business-school students at the University of Florida in 1998. “If we can get that in the minds of people, we can raise prices.”

“If you give a box of See’s chocolates to your girlfriend on a first date and she kisses you … we own you,” the investor said in “Becoming Warren Buffett,” an HBO documentary.

(That U Florida interview is one of my favorite Buffett texts, you can see not just the sunny old grandpa but the rapacious capitalist).

There is an accounting term that attempts to quantify some of this, goodwill, but this quality is not measurable in any exact way. In Munger’s famous talk on The Psychology of Human Misjudgment, he talks about how he didn’t learn about any of this at Caltech or Harvard Law School. Being rational is wise, even a moral duty as Munger often says, but you’ll miss out on human decisionmaking if you don’t look for and acknowledge the power of essentially magical forces at work.

The gap between rationality and the way people actually behave due to romantic attachments, sentimentality, brand loyalty, etc is a source of humor, as well as an opportunity for price increases. Buffett and Munger seem to see both.

One example I can think of where free samples didn’t work: the teriyaki place at the mall. Did you have these? At the mall food court the kid at the teriyaki place would often have a plate of free samples. Yet the one time I tried a full plate it was kind of repulsive. I didn’t finish. Too sweet or something, or just not good at scale.

Coke has no taste memory. You can drink one of these at 9 o’clock, 11 o’clock, 3 o’clock in the afternoon, 5 o’clock. The one at 5 o’clock will taste just as good to you as the one you drank early in the morning. You can’t do that with cream soda, root beer, orange, grape, you name it. All of those things accumulate on you. Most foods and beverages accumulate on you — you get sick of them after a while. There is no taste memory to cola.

So says Buffett, perhaps related to “the teriyaki problem.”

Maybe the free sample method only works with a quality product. Sometimes the samples at Costco are bad. Remember when they used to give a sample at Trader Joe’s? Covid has killed that I guess. It worked on me.

Giving out free samples, in both See’s and Costco’s case, represents a strong investment on serving customers. Giving out free samples is a pain in the butt. A business that has the abundance to consistently deliver is probably confident and well-managed. Is this blog a form of free samples?

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I’m all right on that one

Posted: May 11, 2023 | Author: helytimes | Filed under: America Since 1945, business | Leave a comment

And there used to be a politician in Nebraska, and if you asked him some really tough question like, you know, how do you stand on abortion, he would look you right in the eye and he’d say, “I’m all right on that one.” And then he’d move next.

very Warren Buffett joke from Warren Buffett.

You know, Tom Murphy, the first time I met him, said two things to me. He said, “You can always tell someone to go to hell tomorrow.” Well, that was great advice then. And think of what great advice it is when you can sit down at a computer and screw your life up forever by telling somebody to go to hell, or something else, in 30 seconds. And you can’t erase it. …

And then the other general piece of advice, I’ve never known anybody that was basically kind that died without friends. And I’ve known plenty of people with money that have died without friends, including their family. But I’ve never known anybody, and you know, I’ve seen a few people, including Tom Murphy Sr. and maybe Jr., who’s here, (LAUGH) but certainly his dad, I never saw him, I watched him for 50 years, I never saw him do an unkind act.

on fun:

And we had as much fun out of deals that didn’t work in a certain sense as the ones that did work. I mean, if you knew you were going to play golf and you were going to hit a hole in one on every hole, you just hit the ball, and it went in the hole that was 300 yards away, or 400 yards away, nobody would play golf.

I mean, part of the fun of the game is the fact that you hit them to the woods. And sometimes you get them out, and sometimes you don’t.

So, we are in the perfect sort of game. And we both enjoy it. And we have a lot of fun together. And we don’t have to do anything we don’t really believe in doing.

On See’s:

And it has limited magic in sort of the adjacent West. It’s gravitational, almost. And then you get to the East. And incidentally, in the East, people prefer dark chocolate to milk chocolate. In the West, people prefer milk chocolate to dark. In the East, you can sell miniatures, and dark — in the West —

I mean, there’s all kinds of crazy things in the world that consumers do. 

Talking about Netjets:

CHARLIE MUNGER: I used to come to the Berkshire annual meetings on coach from Los Angeles. And it was full of rich stockholders. And they would clap when I came into the coach section. I really liked that. (LAUGHTER) (APPLAUSE)

(he doesn’t fly that way anymore)

from this CNBC transcript of the afternoon session of the annual meeting. I couldn’t find a transcript of the morning session.

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Value investing, growth investing, and vibes investing

Posted: January 23, 2021 | Author: helytimes | Filed under: America Since 1945, business | Leave a comment

or

The Vibes Speculator

You hear about two schools of investing. Value investing, and growth investing. First, value investing.

Value investing involves generating a number for what a company’s intrinsic worth might be, comparing that number to the price the company’s shares are trading for on the stock market, and buying when there’s a discount (plus a margin of safety to account for the risk). You want to buy stocks that are cheap, on sale, and wait for their prices to return to what they should be.

Howard Marks, in his new memo “Something of Value” for Oaktree Capital, has a great definition of value investing, and we’re taking that as our text today. We would quote it extensively, but there’s a stern disclaimer on it. After an email correspondence with Oaktree Capital, I appreciate their denial of my request for permission to use lots of quotes in this piece.

We encourage third parties that are interested in sharing Howard’s memos with an audience to write their own summary/article about the memo and then link to the memo in its entirety on our website. Howard’s memos are meant to be read/viewed in their entirety and removing specific quotes can lead to them being taken out of Howard’s intended context. Also, as we operate in a highly regulated business, we are required to include our legal disclosures to Howard’s writings, and removing portions of his writing without the disclosures attached goes against our internal policies.

as Leia Vincent of Oaktree put it to me in an email. I see their point.

Check out Marks summary of value investing, paragraph four.

investing was pioneered by Benjamin Graham, whose teachings were transcribed by David Dodd, Graham taught Warren Buffett. There’s a lot to love about value investing. It’s bargain hunting. It almost feels virtuous. You must be rational to be a value investor. You must have emotional discipline as the market goes up and down.

Value investing is widely preached. Aswath Damodaran of NYU, who wrote a little book on the topic, will teach you on YouTube. Shawn Badlani spoke about his training as a value investor on episode 8 of my podcast, Stocks: Let’s Talk.

Value investing thinking has served Shawn pretty well. Every investor would be wise to study valuation.

As Marks acknowledges though, value investing has significant downsides. You’ve got to do a lot of calculating of discounted cash flow for one thing. Math, which is maybe not that hard, but tedious. There are computers, which can help you with the math. I like Guru Focus (you gotta pay to be a member) which can do shorthand estimates for you, like this one for Tesla:

but that can only get you so far, and it also reveals another problem. Value investing has imbedded in it both an attraction for the rational and a torture for them: stocks aren’t always trading for what they should be worth.

That is, their price isn’t always what it “should” be. That’s supposed to be an advantage, if you buy them when they’re cheap, and wait for the equilibrium that must come, when their true value will be revealed.

But what if that never happens? Consider the angst of Value Stock Geek, a smart writer on this subject. How long do you wait for the stock to achieve the correct price?

Not only that, but for all that math, you’re still just guessing! All your calculations are only as good as your inputs, some of which are guesses!

Plus, you’re competing against Warren Buffett, Munger, Aswath Damodaran, Shawn, Value Stock Geek, and literally one million other people. Wall Street has been sucking off physicists, computer scientists, “quants” of all kinds, taking them away from useful work and putting them into complex valuation shops. Their computers are faster, more powerful, and more expensive than yours, I guarantee. Their computers blow your puny computer out of the water. They’ve got an Alienware Aurora R11 with Intel Core i9 10900KF and an Nvidia GTX 1650 Super – RTX 3090, with 2TB M.2 PCIe SSD + 2TB SATA HDD and you’ve got an Epson 512K with 5.25 inch floppy disc. Who’s gonna kill if you’re playing Red Baron?

So much for value investing.

Then there’s growth investing.

The story of Marks’ memo is of how spending time during the pandemic with his son Andrew has opened his eyes to the second major school: growth investing. Marks memo describes how now he has his son Andrew living with him, and Andrew is opening his eyes to the thinking of a growth investor.

Growth investing is about assigning a valuation to a company that may not yet have shown its value, but whose growth, as measured by one metric or another, has a potential to grow into cash flows of great value.

Recently, growth chasing has worked out very well. The one quote I’ll lift from Marks:

the performance of value investing lagged that of growth investing over the past decade-plus (and massively so in 2020)

It’s easy to understand why that might be. The speed at which the fast growing companies grow is almost incomprehensible. In 2002 the so-called facebook at Harvard was a physical book the college handed out with pictures of faces in it. In 2020, eighteen years later, one young person’s lifetime, $FB has two point five billion people using it every month. Facebook has swallowed up billions of dollars in advertising, helped wipe out at least two thousand local newspapers, and influences world events, from elections in the USA to ethno-religious violence in Burma.

Scary stuff, if you’re an innocent citizen. Groovy if you’re a shareholder of Facebook (I am not).

Or take Amazon:

For a sense of scale, it took Amazon more than 14 years—58 quarters after its May 1997 initial public offering—to make, cumulatively, as much profit as it produced in the latest quarter alone. Keep in mind that Amazon consistently lost money for its first several years as a public company.

(first article when I Google “when did Amazon finally make a profit?” ) From Wikipedia:

The company finally turned its first profit in the fourth quarter of 2001: $0.01 (i.e., 1¢ per share), on revenues of more than $1 billion. 

A traditional value investor would not have been into Amazon in 2001.

The endgame for growth investing is you grow so big you’re the biggest animal in the pond and you have no competitors, only, in this pond example, small frogs to amuse you, and minnows to tickle your feet, and perhaps birds, and someone (local villagers? customers?) just keeps bringing you food because they have to. Or even want to? Or because of a curse? The example fails at this point but you get the idea.

Picking those winners can be hard. You need to choose what metrics of growth to focus on. The important metric may not be how much money you’re making. This seems to defy logic and economics and years of Wall Street lore, but that is how the market has reacted. The word is out that even if a company is not only not making money but is losing more and more money, that can in some cases be fine, that can still be fine, as long as they’re swallowing market share.

(This has created some funny wins for the consumer, like MoviePass).

So: value and growth. Marks’ memo is lucid well-expressed thinking on how his thinking is evolving about the blend of these two schools.

i just read the memo and agree, it is really good.  love the idea that value investing just means buying something for less than it’s worth, even if that thing you’re buying is a fast growing company with a high current p/e multiple.

Now, there’s also technical investing, which seems to be people studying candlestick charts, and then trying to reverse-divine the algorithms that make automated trading decisions in Flash Boys style scenarios. I admire these folks, and there’s probably something to it, but it’s not for me.

There’s also momentum investing, where you chase where you think the herd is going, based on anything from complex systems of pattern recognition to just what people seem to be talking about and what’s in the headlines. I used to study this school, and it’s very fun.

What I’d like to propose is a new school.

Vibes Investing.

Vibes Investing we discussed on episode 7 of Stocks: Let’s Talk, with the legend Liz Hall.

We believe Vibes Investing has a bright future.

Is vibes investing even investing? Is growth investing investing? Most definitions of investing say something about “an expectation of achieving a profit,” or “a reasonable expectation.” What we’re talking about here may be something more like speculating. A different and perhaps equally noble pursuit.

The vibes speculator would not compete against the quants and the computers. The vibes speculator would look for signals the computer couldn’t see, invisible, unquantifiable signals. The vibes speculator would look for growth, but not according to any metric that might be spotted by a million growth investors. The vibes speculator would feel the growth.

I’ll have more to say on the topic of vibes speculating. I’ve considered launching a prestigious and expensive newsletter, The Vibes Speculator. Or perhaps a small book on the topic. I’m not sure if the book would be in the category “business” or “humor.”

If you control a budget at a well-funded company I’d consider giving a talk on vibes speculating for an extravagent fee.

If you have thoughts on vibes speculating, get in touch. It’s an exciting conversation.

(Disclaimer: none of what I say is investment advice of any kind. These are the musings of an enthusiastic amateur. If anything the sign that amateurs are talking about the stock market is a classic signal of a market top.)

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