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.
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.
These dudes started a fake Warren Buffett account on a bet, and within a few days it was retweeted by Peggy Noonan, Kanye, etc.
Impressed with how generic and bland the advice was.
The worship of Buffett as an oracle is not just a US phenomenon. If anything it may be stronger in Asia. In Korea in 2007, I saw subway vending machines selling biographies of Warren Buffett. In this video, being interviewed by a Chinese magazine, you can see Warren Buffett’s partner, Charlie Munger, attempt to explain why he thinks he and Buffett are so popular in China. He suggests that it’s because much of their advice is very Confucian:
Actual Warren Buffett’s advice is free and very available. You can read all of Berkshire Hathaway’s letters to shareholders, which are funny and interesting at times (the better you are at skimming the boring parts, the more enjoyment you will get out of them). You can see everything he invests in — he legally has to tell you!
Investing is simple, but not easy
is a quote often attributed to Buffett, though I myself cannot find the original source for it.
Buffett himself was asked about the fake account on CNBC:
QUICK: BUT THERE WAS A FAKE TWITTER ACCOUNT, A FAKE WARREN BUFFETT TWITTER ACCOUNT THAT WENT FROM 20,000 FOLLOWERS TO 200,000 FOLLOWERS IN 24 HOURS BY TWEETING OUT ALL KINDS OF PITHY SORT OF SOUND ADVICE, THINGS THAT FOLKSY SAYINGS THAT SOUNDED LIKE IT COULD HAVE COME FROM YOU. WHY DON’T YOU TWEET MORE OFTEN?
BUFFETT: WELL I JUST DON’T SEE A REASON TO. I PUT OUT AN ANNUAL REPORT, AND I DO NOT HAVE A DAILY VIEW ON ALL KINDS OF THINGS. AND, AND MAYBE I’VE GOT A GUY IN THIS COPYCAT OR IMITATOR, MAYBE HE’S PUTTING OUT BETTER STUFF THAN I WOULD. SO IF HE PUTS OUT GOOD ADVICE, I’LL TAKE CREDIT FOR IT.
QUICK: WE HAVE SEEN SOME CEOs WHO LIKE TO TWEET VERY FREQUENTLY, INCLUDING ELON MUSK.
QUICK: HE’S CERTAINLY SOMEBODY WHO TWEETED A LOT. WHAT DO YOU THINK ABOUT PEOPLE WHO TWEET A LOT?
BUFFETT: I DON’T THINK IT’S HELPED HIM A LOT. NO, I THINK IT’S — WELL, IT’D BE PARTICULARLY DANGEROUS TO START COMMENTING ON BERKSHIRE DAILY, WHICH I NEVER WOULD DO. I WON’T DO IT WITH YOU. BUT I THINK THERE’S OTHER THINGS IN LIFE I WANT TO DO THAN TWEET. I MEAN, I’M NOT THAT DESPERATE FOR SOMEBODY TO HEAR MY OPINION ON THIS.
This aspect of Buffett is much celebrated:
It’s sometimes forgotten or overlooked that he also owns a $7.9 million house in Laguna Beach.
Though in fairness he bought it in 1971 for $150,000.
If you read anything at all about investing, pretty soon you will hear about Ben Graham, father of value investing and teacher of Warren Buffett.
Young Warren Buffett got an A+ in Graham’s class at Columbia Business School, and would later work for Graham. But when he first asked Graham for a job, in fact offered to work for free, Graham (born Grossbaum) wouldn’t hire Buffett. Why? The story in Buffett’s own words:
I’d never heard that one before. It’s in:
Later, Graham would hire Buffett, and he got to wear the signature gray jacket that absorbed ink stains from writing down rows of figures.
I found this book more compelling than I expected. By the time Buffett was in tenth grade he owned a forty acre farm in Nebraska he’d bought with paper route money. You can read an interesting interview with author Alice Schroeder here:
Miguel: Give us advice to becoming better communicators.
Alice: Well…this is not anything profound. But you see that he uses very short parables, stories, and analogies. He chooses key words that resonate with people —that will stick in their heads, like Aesop’s fables, and fairytale imagery. He’s good at conjuring up pictures in people’s minds that trigger archetypal thinking. It enables him to very quickly make a point … without having to expend a lot of verbiage.
He’s also conscientious about weaving humor into his material. He’s naturally witty, but he’s aware that humor is enjoyable and disarming if you’re trying to teach something.
And here’s Michael Lewis reviewing the book.
Ben Graham by the way ultimately got kinda bored of investing and retired to California where he had a relationship with his late son’s girlfriend.
A great detail:
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:
Another good one drops from Warren Buffett and the Berkshire Hathaway team.
In America, equity investors have the wind at their back.
A highlight from this year, worth noting:
The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code.
Did not know about the stake in Pilot Flying J:
How did Warren Buffett get so rich? Some answers he will tell you.
- By gathering money, eventually including the enormous pools of money (“float”) collected by insurance companies like GEICO
- Using the money to buy shares of businesses with a durable competitive advantage (here’s a critical take on what that can mean)
- Never selling anything so that he’s never taxed on the gains and the results compound and compound.
For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic.
(Also he just seems to have an intuitive and unusually focused mind for business:
As a teenager, he took odd jobs, from washing cars to delivering newspapers, using his savings to purchase several pinball machines that he placed in local businesses.
Also he did some arbitrage things I don’t understand.)
In this letter, he discusses the result of a bet he made that an unmanaged index fund would beat selected hedge funds over a ten year period:
I made the bet for two reasons: (1) to leverage my outlay of $318,250 into a disproportionately larger sum that – if things turned out as I expected – would be distributed in early 2018 to Girls Inc. of Omaha; and (2) to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be.
Addressing this question is of enormous importance. American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays?
A final lesson from our bet: Stick with big, “easy” decisions and eschew activity. During the ten-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would prove advantageous. In the process of investing, they studied 10-Ks, interviewed managements, read trade journals and conferred with Wall Street analysts. 13 Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings (95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years. We made the sale in order to move our money into a single security – Berkshire – that, in turn, owned a diversified group of solid businesses. Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less than 8% annually, even if we were to experience a so-so economy.
Fewer good jokes this year, in our opinion, but also fewer dire warnings.
New Berkshire Hathaway letter is out. Free insight and humor for capitalism’s cheery uncle, a great read every year, even if I understand at most 1/12 of it.
Sunny American optimism:
The infectious, enthusiastic amateur style of writing reminds me of Bill James:
Some of the companies Berkshire owns:
An unlikely hero:
Jack Bogle founded Vanguard, and created a simple, low cost index fund for everyday investors.
found that at JL Collins impressive website.
Buffett tells you, in simple terms, how to get rich:
Why people don’t do that:
On the other hand here’s the S&P 500 chart since 1980:
Doesn’t look like a washtubs moment to me.
Over at marketplace.org, Allan Sloan points out some of the things Buffett leaves out:
Allan Sloan: Two things are missing. One was how wonderful the management of Wells Fargo was, which he wrote the previous year. The second thing is he lavished praise on this company called 3G, what’s known as a private equity company, from Brazil, which manages a company called Kraft Heinz, which is Berkshire Hathaway’s biggest investment. And what it does is it goes around, it buys companies — now with the help of a lot of financing from Berkshire Hathaway — it fires zillions of people, the profits go up, and then after a while, it goes out and buys another company and does the same thing.
Buffett makes me think of Andrew Carnegie, a zillionaire of a hundred years ago who also had some kind of public conscience. If some percentage billionaires weren’t also lovable characters like Buffett, would capitalism collapse? Does his dad humor, like Carnegie’s library building, plug a dyke that holds back revolution?
At the Berkshire Hathaway shareholders conference, you can challenge table tennis champ Ariel Hsing:
Warren Buffett’s advice always sounds simple, which isn’t the same as easy to follow.
Loved the doc about him on HBO. The first scene is him advising high school kids to take care of their minds and bodies. The second scene is him in the drive-through line at McDonald’s.
From this old Fast Company article (worth reading). Bezos is talking about getting investors who understand Amazon is playing a long-term strategy. But of course it goes beyond:
“With respect to investors, there’s a great Warren Buffettism,” he says. “You can hold a rock concert and that can be successful, and you can hold a ballet and that can be successful, but don’t hold a rock concert and advertise it as a ballet.”
Charlie Munger, age 97, recently held forth at the annual meeting for Daily Journal Company. Blunt and entertaining as ever. “Amateurs talk about Buffett, professionals talk about Munger” as the old saying goes.
Our long fascination with Munger has been a frequent topic on this site, resulting in some wonderful communication and connection with the secret world of Mungerists out there.
Munger was asked a question that got me thinking. It was about the founder of modern Singapore, long time prime minister, Lee Kuan Yew:
Question: Charlie, you have been a long-time admirer of Singapore and Lee Kuan Yew. You once said to study the life and work of Lee Kuan Yew. You are going to be flabbergasted. I would be curious to know how you started your interest in Singapore and Lee Kuan Yew. Have you met Lee Kuan Yew in person? And if there is one thing the world could learn from Singapore, what would that be?
Charlie Munger: Well, Lee Kuan Yew had the best record as a nation builder. If you’re willing to count small nations in the group, he had probably the best record that ever existed in the history of the world. He took over a malarial swamp with no army, no nothing. And, pretty soon, he turned that into this gloriously prosperous place.
His method for doing it was so simple. The mantra he said over and over again is very simple. He said, figure out what works and do it. Now, it sounds like anybody would know that made sense. But you know, most people don’t do that. They don’t work that hard at figuring out what works and what doesn’t. And they don’t just keep everlastingly at it the way he did.
He was a very smart man and he had a lot of good ideas. He absolutely took over a malarial swamp and turned it into modern Singapore—in his own lifetime. It was absolutely incredible.
He was a one party system but he could always be removed by the electorate. He was not a dictator. And he was just so good. He was death on corruption which was a very good idea. There’s hardly anything he touched he didn’t improve.
When I look at the modern Singapore health system, it costs 20% of what the American system costs. And, of course, it works way better than our medical system. That’s entirely due to the practical talent of Lee Kuan Yew. Just time after time, he would choose the right system.
In Singapore, you get a savings account the day you’re born. If you don’t spend the money, you and your heirs get to spend it eventually. In other words, it’s your money. So, to some extent, everybody buying medical services in Singapore is paying for it themselves. Of course, people behave more sensibly when they’re spending their own money.
Just time after time he would do something like that. That recognized reality and worked way better than what other people were doing. There aren’t that many people like Lee Kuan Yew that have ever lived. So, of course, I admire him. I have a bust of Lee Kuan Yew in my house. I admire him that much.
Sometimes Munger’s harsh rationality has an edge that makes me a little uncomfortable. The unabashed admiration of Singagore’s Lee Kuan Yew is an aspect of that. I’ve never visited Singapore. I’d like to, and see these weird tree buildings and eat the street food. In my travels I’ve met several people from Singapore. What discussion we had of Lee Kuan Yew was pretty ginger, because I’m too ignorant to have much of an opinion, because it’s polite to be sensitive when discussing another country’s main founding guy, and because, well, I get the sense in Singapore you don’t really criticize Lee Kuan Yew. Though LKY is dead, his eldest son is still in charge. That sense that we’re dealing with a bit of an authoritarian is what makes me uncomfortable.
Thomas Meaney has a review of Michael Barr’s history of Singapore in the LRB which gives me just the kind of context I need.
Lee Kuan Yew, by contrast, made no such attempt. ‘That’s the end of the British Empire,’ he told one of his classmates at Raffles College when the first blasts were felt over the city. Lee, then in his late teens, not only learned Mandarin and Japanese during the occupation, but worked as a translator of Allied news reports for the main Japanese propaganda bureau in the Cathay Building. A few floors down, Yasujirō Ozu, freshly arrived in Singapore, produced propaganda about the Indian National Army’s fight against the British Empire. ‘The three and a half years of Japanese occupation were the most important of my life,’ Lee wrote in his memoirs. He admired the ruthlessness of the Japanese, and believed it had toughened up his generation. The efficiency of their brothels impressed him. Spotting the head of a Chinese looter hanging from the marquee of a movie theatre, he thought: ‘What a marvellous photograph this would make for Life magazine.’
how about this?:
The key was to make Singapore appealing to US investment by ensuring laws favourable to corporate capital, and prioritising economic prerogatives over political freedom. With no local capitalist class to discipline the workforce, independent Singapore resorted to what Christopher Tremewan calls ‘forced proletarianisation’. The city-state’s notorious public order laws – lashes and prison for spitting, graffiti and public urination; swift execution for drug possession – were part of a breakneck effort to make Singapore’s citizens the most cowed and reliable semi-skilled workforce in Asia. ‘Disneyland with the death penalty’ was the way William Gibson described it. Free hospital care – which scandalised Milton Friedman when he learned of it – was ended. Lee consolidated all the trade unions into a single union under his control. With the Central Provident Fund, he could force workers to save part of their salaries for retirement, adjusting amounts at will, which allowed him to raise and lower wages in co-ordination with the needs of foreign industry. American corporate elites marvelled at such a partner. Lee personally escorted visiting CEOs around the island. The result was a boom of massive proportions, with Singapore leading the region in electronics assembly, ship repair and food processing. Full employment was achieved within a decade.
I don’t want anyone making me cowed, even if I am at best semi-skilled.
Here is Balaji Srinivasan on the Tim Ferriss podcast, articulating why CEO types seem to like LKY so much:
What Lee Kuan Yew did, really, the reason I think he’s so important, is I think he’s a piece of the 21st century that fell into the 20th, to paraphrase. Basically, I think he was the first startup CEO of a country, of a city state. And I think we’ll see a thousand more like him.
So he’s a very important person to study, his life and history, because here’s the thing: he did what he did with minimal coercion. He’s not famous for winning some giant violent conflict. He’s not famous for some activist movement. He stands for delivering results. That’s actually really, really interesting. He’s famous for boosting prosperity and zero-to-one-ing a society. He was really a lion, really a great guy.
But what about the collaborating with the Japanese?
In any case, I am trying to figure out what works in my own life, and do it. Munger’s right, it’s not that easy! Of course, there’s a question of how we’re measuring what works.” Posting thought-provoking stuff here on Helytimes works, that’s for sure, so I’ll keep doing it. Let us know what you think! We’re working to keep the posts “medium length.”
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 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.)
We’re pleased with our small, distinguished, growing audience. These were our most popular posts of the year.
about how JFK spent the night before the 1960 Wisconsin primary. Somebody wrote in to correct me that the movie in question was more like “sexploitation” than porn, but “porno” is the word Bradley used.
grateful this year that we got a chance to see Chaco Canyon, walking the site only increased the fascination
The book has been released here as 150 Glimpses of the Beatles. What’s great about Craig Brown is that he goes to the sources, the primary sources, and tells you not just the details of the incident, but the historiography, the story of the story.
always a popular top.
another inspiration. Got a beautiful note from Vickers’ daughter which was really touching, glad we could add to the information available about this remarkable man.
Glad to be introduced to this stunning work in a readable translation. Why not let the Norse gods advise you on how to conduct yourself when you travel?
This is just an image we found somewhere else, it’s illuminating.
We had a nice guest post this year, Founding Documents by Billy Ouska. We’d love to have more of those in 2021.
Hope you’re all keeping well and safe.
This is a book about a scene, and the scene was Key West in the late ’60s-’70s, centered on Thomas McGuane, Jim Harrison, Hunter Thompson, Jimmy Buffett, and some lesser known but memorable characters. I tried to think of other books about scenes, and came up with Easy Riders, Raging Bulls by Peter Biskind, and maybe Astral Weeks: A Secret History of 1968 by Ryan H. Walsh, about Van Morrison’s Boston. Then of course there’s Hemingway’s A Moveable Feast, referenced here in the subtitle, a mean-spirited but often beautiful book about 1920s Paris.
I was drawn to this book after I heard Walter Kirn talking about it on Bret Easton Ellis podcast (McGuane is Kirn’s ex-father-in-law, which must be one of life’s more interesting relationships). I’ve been drawn lately to books about the actual practicalities of the writing life. How do other writers do it? How do they organize their day? What time do they get to work? What do they eat and drink? How do they avoid distraction?
From this book we learn that Jim Harrison worked until 5pm, not 4:59 but 5pm, after which he cut loose. McGuane was more disciplined, even hermitish for a time (while still getting plenty of fishing done) but eventually temptation took over, he started partying with the boys, eventually was given the chance to direct the movie from his novel 92 In The Shade. That’s when things got really crazy. The movie was not a big success.
“The Sixties” (the craziest excesses bled well into the ’70s) musta really been something.
On page one of this book I felt there was an error:
That’s not the line. The line (from the Poetry Foundation) is:
The best laid schemes o’ Mice an’ MenGang aft agley,
Part of what these writers found special about Key West, beyond the Hemingway and Tennessee Williams legends, was it just wasn’t a regular, straight and narrow place. Being a writer is a queer job, someone’s liable to wonder what it is you do all day. In Key West, that wasn’t a problem.
Key West was so irregular and libertine that you could get away with the apparent layaboutism of the writer’s life.
Some years ago I was writing a TV pilot I’d pitched called Florida Courthouse. I went down to Florida to do some research, and people kept telling me about Key West, making it sound like Florida’s Florida. Down I went on that fantastic drive where you feel like you’re flying, over Pigeon Key, surely one of the cooler drives in the USA if not the world.
The town I found at the end of the road was truly different. Louche, kind of disgusting, and there was an element of tourists chasing a Buffett fantasy. Some of the people I encountered seemed like untrustworthy semi-pirates, and some put themselves way out to help a stranger. You’re literally and figuratively way out there, halfway to Havana. The old houses, the chickens wandering, the cemetery, the heat and the shore and the breeze and the old fort and the general sense of license and liberty has an intoxicating quality. There was a slight element of forced fun, and trying to capture some spirit that may have existed mostly in legend. McKeen captures that aspect in his book:
Like McGuane, I found the mornings in Key West to be the best attraction. Quiet, promising, unbothered, potentially productive. Then in the afternoon you could go out and see what trouble was to be found. Somebody introduced me to a former sheriff of Key West, who helped me understand his philosophy of law enforcement: “look, you can’t put that much law on people if it’s not in their hearts.”
I enjoyed my time there in this salty beachside min-New Orleans and hope to return some day, although I don’t really think I’m a Key West person in my heart. I went looking for photos from that trip, and one I found was of the Audubon House.
After finishing this book I was recounting some of the stories to my wife and we put on Jimmy Buffett radio, and that led of course to drinking a bunch of margaritas and I woke up hungover.
I rate this book: four and a half margaritas.
Wired: Sir John Templeton
(Inspired: Charlie Munger)
The US unemployment rate is 14.7%, the worst since the Depression. Here in LA County it’s 24%. We’re not supposed to leave our houses for non-essential purposes or go to the beach. Every bar is closed, almost every store is closed.
And yet the “stock market” is not really down that much. Here is a one year chart of the S&P 500, which The Wall Street Journal often uses as a standard benchmark for “the stock market.”
Actually a little higher than it was same time last year.
How can this be?
Both point out:
- the belief in a v-shaped or “Nike swoosh”* recovery
- the Federal Reserve keeping interest rates at close to zero
- the Federal Reserve buying $2.4 trillion in government debt, and indicating it would buy more, making it clear that the government can inject essentially infinite money into the economy, “backstopping” everything.
As an amateur enthusiast on this topic, I’d like to offer some additional explanations.
- The stock market is rigged to go up. This is just a sort of understood but rarely stated fact. The stock market is one of the few measures the President cares about. Every tool at the disposal of the administration and at the supposedly independent Fed is used to keep the stock market up.
- The stock market by definition is big, public companies. These are the S&P 500 companies. Big companies are benefitting from the demise of their various small competitors. Big companies can survive by taking on debt in ways small businesses can’t. They did a great job getting a chunk of the federal money made available. Consider if I have Steve’s Burger Stand. I just don’t have the bureaucratic ability, relationships, time, to get a loan the way Shake Shack did. If anything, are huge companies are seeing their small scale competitors destroyed?
- Kind of an addendum to the last one: the federal government gave out the free money via big banks like Wells Fargo, Bank of America, BlackRock which themselves are part of the S&P 500! Big boys feed first!
- Money has nowhere else to go. The Fed’s actions reduce the benefits of alternative investments like bonds or just putting your money in the bank.
- Trading has become free! I feel crazy that this never gets mentioned. Starting with Schwab (I think?) last fall, and then flowing on to competitors, trading stocks became free. Instead of $8 or $4 to trade stocks, it’s free! You might think this might’ve just created more volatility, maybe it did, but once the barrier to entry for the retail investor is zero, it’s as easy to flow your extra money into the stock market as it is into the bank. This is, in my opinion, a dangerous or at least explosive change that hasn’t really been reckoned with. See what Robin Hood is up to. It might be as easy to bet your money on Tesla or Amazon as it is to tuck it away in the bank. It’s frictionless, it can be done on your phone. That might be dangerous!
- There’s nowhere else to gamble. Again, I feel crazy that this is never acknowledged as a factor. Consider that Americans spend something like $100 billion on gambling a year. At the moment, there’s nowhere to do that! Casinos are closed. Sports are stopped. I do not think it’s unreasonable to imagine there are billions of dollars in gambling money going into the stock market as simply a place to gamble and trade. See Dave Portnoy of Barstool Sports, who personally injected half a million dollars.
I’m not here to make predictions. It’s probably a cognitive bias to believe the stock market “deserves” to go down, but that’s what I believe. Then again, when you think about the stock market, it’s not just rich assholes, it’s like the pensions of firefighters and teachers.
Is it possible that the stock market is not calculating the biggest risk, some kind of massive social upheaval coming from disgust at this system? The stock market is not built to calculate “what if we ruin society, make things so unequal and so unfair and grotesque that this system no longer functions?”
Maybe that’s “baked in” as they say.
So said Warren Buffett at the annual meeting. Happened to be reading this speech by Stanley Druckenmiller from 2015 which I found on Valuewalk:
Remember your competition:
This chart is illuminating:
It’s good for me to write about the stock market, because I’m guaranteed to get an email saying something like you stupid clown you don’t understand anything. But the more I study the stock market, the more convinced I am that sometimes the experts, overwhelmed by information, become blind to the obvious. Consider this case reported by Bloomberg as a representative example. Do you really need to use a machine-reading program to determine that things are looking a bit grim?
There’s the famous story about Joe Kennedy knowing it was time to sell when the shoeshine boy gave him stock tips (bullshit, he was insider trading). What if you’re the shoeshine boy?
* I don’t understand the Nike swoosh recovery idea. Isn’t the long part of the swoosh roughly equal to the short part? So in a swoosh recovery, wouldn’t we just take a very long time to get back to where we were? and that’s the optimistic take!
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first in a new market. Quality is a well-known trusted brand for a high-profit-margin consumer product.
The hunt for quality. That’s what’s cool about investing. Hidden quality.
It can’t be all Warren Buffett all the time. Sir John Templeton has been getting my attention.
The hunt for points of maximum pessimism. Templeton worked above a grocery store in the Bahamas. His grand-niece keeping the flame. An interview from circa 1985. Later in life he devoted himself to spiritual searching.
Remember, in most cases, you are buying either earnings or assets.
The only reason to sell stocks now is to buy others, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
August is often a contemplative month over here. A leisurely month sometimes, and thus a fruitful time at Helytimes.
Here’s a gathering notes and thoughts from previous Augusts.
We hope all Helytimes readers and enthusiasts are having a relaxing and refreshing August. We appreciate you.
Once I was told a story about a world famous celebrity. This celebrity, the story went, was in a new-ish religion. This celebrity had some sexual desires and proclivities that he was ashamed of. Maybe the religion made him feel bad about it. But in the theology of this religion, what you did at say 30,000 feet of altitude wasn’t technically on Earth or something and thus was bound by different rules, or maybe no rules at all. So the celebrity would fly up in a plane and fulfill these desires up there between here and space.
Whether that story is true I dunno. It wasn’t told to me very reliably. Pure gossip and alleged. But doesn’t it ring kind of true? Mythologically if not actually?
There’s something evil about private planes.
What plane did Jeffrey Epstein even have? I went looking for a photo of it, and couldn’t find one I felt came from a reliable source. Christopher Maag, writing in the North Jersey Record (is that a good newspaper? I don’t know!):
His planes, which ranged from a Cessna to a Gulf Stream jet to a Boeing 727, recorded at least 730 flights to and from Teterboro between 1995 and 2013, according to flight logs contained in documents unsealed last week by a federal court in a lawsuit brought by one of Epstein’s alleged victims against one of his close associates.
Look for a photo of Epstein’s plane, if you have idle Internet time. See if you find one that you’re pretty confident is a confirmed, legit photo of his plane.
Making sense of his flight logs is beyond my expertise.
Did Epstein own these planes outright? Did he pay the bills on the gas and stuff? The hanger? He had a 727?
Gladwell, Malcolm: Writer.
“I was invited to the TED conference in maybe 2000 (I can’t remember), and they promised to buy me a plane ticket to California,” Gladwell says now. “Then at the last minute they said, ‘We found you a ride on a private plane instead.’ As I recall, there were maybe two dozen TED conferencegoers onboard. I don’t remember much else, except being slightly baffled as to who this Epstein guy was and why we were all on his plane.”
You and me both, buddy! From NY Mag’s roundup of everyone who knew this guy.
When John Kennedy was running for President his father Joe Kennedy bought a plane. Other candidates had chartered planes, but unless I’m mistaken he was the first candidate to own his own plane.
The President has use of a plane, Air Force One. Supposedly JFK helped pick the colors.
But it’s not his (her) plane. It’s our plane, the people’s plane. Once you leave office, it’s not yours any more.
For eight years Bill Clinton had Air Force One. But then he left office, and he wasn’t rich enough to buy his own plane. What was he supposed to do, fly commercial? Of course not! He called his friends who were rich enough to have private planes, and got rides from them.
Some of these guys were bad guys.
That level where you have a private plane. Where you can fly anywhere you want, any time you want.
You can be kinda rich, where you’re not really worried about money, you can eat fancy dinners and live somewhere you like*. Then let’s say you get twenty million more dollars. Might feel very nice, maybe you buy a fancier house, or worry even less about money, or start a small foundation or take care of more people around you or something. But have you really jumped a level?
I don’t know, I don’t have $20 million dollars, but I don’t think so. What if after the twenty million you get ten million more? Is anything improved?
But then there’s the private plane.
That plane isn’t just comfort, it’s power. It’s access, it’s freedom, it’s being on another level. Above it all.
What will people do to get to that level? To stay there?
Who is that important that they need a private plane? No one. Richard Branson loves it, Warren Buffett admits he likes his (he doesn’t own it, I believe Berkshire does). No doubt it saves them time and hassle, no doubt they can get to deals quicker and the power compounds. And if you believe in capitalism don’t you believe you should be able to buy what you can afford, the market has determined efficiency, and what’s better than freedom, etc.
But isn’t there something a little obscene about private planes? Everyone wants to fly in them, but everyone knows there’s something a little wrong about it.
“I’m not shocked that while thousands of volunteers braved the heat and cold to knock on doors until their fingers bled in a desperate effort to stop Donald Trump, his Royal Majesty King Bernie Sanders would only deign to leave his plush D.C. office or his brand new second home on the lake if he was flown around on a cushy private jet like a billionaire master of the universe,” said Zac Petkanas, who was the director of rapid response for the Clinton campaign.
Radical proposal: in the wake of the Epstein case, the FAA and Congress should look into banning private planes. Everyone can fly commercial for awhile. (Exception if you are yourself at the controls as pilot.)
From Bloomberg, today. What are these four contradicting claims meant to mean? Whoever composed them and put them together doesn’t know which narrative thread to follow (or invent?)
The game of trying to translate “news” into predictions about stock price movement seems fun and confusing. Maybe the best investors come close to ignoring headlines. But even Warren Buffett turns CNBC on when he arrives at his office after going to McDonald’s. (Or so he says — be careful with Buffett, he didn’t become a millionaire by not being crafty.)
Sometimes I wonder whether stock market forecasting is any improvement on the ancient Mesopotamians divining the future from sheep livers.
(image from Larry Gonick’s incredible Cartoon History of the Universe series, hope you don’t mind that I used that Larry!)
To continue my amateur studies of this topic – stock market understanding, not sheep liver reading – I started a podcast, Stocks Let’s Talk:
click to listen, six episodes so far, we are very much still in beta and trying to find what it is we are, exactly, figure ten episodes at least to get there, but each of these six has a fabulously interesting guest. Try it, let us know what you think!
Everybody wants one of a few things in this country. They’re willing to pay to lose weight. They’re willing to pay to grow hair. They’re willing to pay to have sex. And they’re willing to pay to learn how to get rich.
If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.
– Charlie Munger.
When I was a kid I played this Nintendo game. It was kind of just a bells-and-whistles version of Dopewars.
One significant flaw in the game as a practice tool for the individual investor is it does not account for the effect of capital gains taxes, which would make the rapid fire buying and selling of this game pure madness.
In 2018, my New Year’s Resolution this will be the Year of Business.
Hope and greed vs sound business reasoning
On the speculative side are the individual investors and many mutual funds buying not on the basis of sound business reasoning but on the basis of hope and greed.
So says Mary Buffett and David Clark in Buffetology: The Previously Unexplained Techniques That Have Made Warren Buffett The World’s Most Famous Investor.
By nature I’m a real speculative, hope and greed kinda guy. My mind is speculative, what can I say? Most people’s are, I’d wager. I don’t even really know what “sound business reasoning” means.
The year of business was about teaching myself a new mental model of reasoning and thinking.
Where to begin?
Finally, when young people who “want to help mankind” come to me, asking: “What should I do? I want to reduce poverty, save the world” and similar noble aspirations at the macro-level. My suggestion is:
1) never engage in virtue signaling;
2) never engage in rent seeking;
3) you must start a business. Take risks, start a business.
Yes, take risk, and if you get rich (what is optional) spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move these kids away from the macro, away from abstract universal aims, that social engineering that bring tail risks to society. Doing business will always help; institutions may help but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming).
so says Taleb in Skin In The Game.
Taleb’s books hit my sweet spot this year, I was entertained and stimulated by them. They raised intriguing ideas not just about probability, prediction and hazard, but also about how to live your life, what is noble and honorable in a world of risk.
Do you agree with the statement “starting a business is a good way to help the world”? It’s a proposition that might divide people along interesting lines. For example, Mitt Romney would probably agree, while Barack Obama I’m guessing would agree only with some qualifications.
I doubt most of my friends, colleagues and family would agree, or at least it’s not the first answer they might come up with. Among younger people, I sense a discomfort with business, an assumption that capitalism is itself kind of bad, somehow.
But could most of those who disagree come up with a clearer answer for how to help mankind?
As an experiment I started thinking about businesses I could start.
My best idea for a business
Selling supplements online seems like a business to start, I remembered Tim Ferriss laying out the steps in Four Hour Work Week, but it wasn’t really calling my name.
My best idea for a business was to buy a 1955 Spartan trailer and set it up by the south side of the 62 Highway heading into Joshua Tree. There’s some vacant land there, and many people arrive there (as I have often myself) needing a break, food, a sandwich, beer, firewood and other essentials for a desert trip.
The point itself – arrival marker of the town of Joshua Tree – is already a point of pilgrimage for many and a natural place to stop, while also being a place to get supplies.
Setting up a small, simple business like that would have reasonable startup cost, aside from my time, and maybe I could employ some people in an economically underdeveloped area.
However, selling sandwiches is not my passion. It’s not why I get out of bed in the morning.
Starting a business is so hard is requires absolute passion. I had a lack of passion.
Further, there was at least one big obstacle I could predict: regulatory hurdles.
Setting up a business that sold food in San Bernadino County would involve forms, permits, regulations.
What’s more, there’d probably be all kinds of rules about what sort of bathrooms I’d need.
This seemed like a time and bureaucracy challenge beyond my capacity.
Work, in other words. I wanted to get rich sitting on my ass, you see, not working.
Plus, I have a small business, supplying stories and jokes, and for most of the Year of Business my business was sub-contracted to HBO (AT&T).
That was more lucrative than selling PB&Js in the Mojave so I suspended this plan pending further review.
Time to pause, since I had to pause anyway.
What can you learn about “business” from books and the Internet?
No way you can learn more from reading than from starting a business, far from it. But in the spare minutes I had that’s what I could do: learn from the business experience of others.
You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.
What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine.
It’s like the old saying, “To the man with only a hammer, every problem looks like a nail.” And of course, that’s the way the chiropractor goes about practicing medicine. But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models.
And the models have to come from multiple disciplines—because all the wisdom of the world is not to be found in one little academic department.
Fantastic book, it was recommended to me by an MBA grad. Reviewed at length over here, a great cheat sheet and friendly intro to basic concepts of sound business reasoning.
The most important concept it got be thinking about was discounted cash flow analysis. How to calculate the present and future values of money. How much you should pay for a machine that will last eight years and print 60 ten dollar bills a day and cost $20 a day to maintain?
That’s a key question underlying sound business reasoning. How do you value an investment, a purchase, a property, a plant, a factory, or an entire business using sound business reasoning? The prevailing and seemingly best answer is discounted cash flow analysis.
However, the more one learns these concepts, the clearer it becomes that there’s an element of art to all these calculations.
A discounted cash flow analysis depends on assumptions and predictions and estimates that require an element of guessing. Intuition and a feel for things enter into these calculations. They’re not perfect.
A few more things I took away from this book:
- I’d do best in marketing
- Ethics is by far the shortest chapter
- A lot of MBA learning is just knowing code words and signifiers, how to throw around terms like EBITDA, that don’t actually make you wiser and smarter. Consider that George W. Bush and Steve Bannon are both graduates of Harvard Business School.
- To really understand business, you have to understand the language of accounting.
Accounting is an ancient science and a difficult one. You must be rigorous and ethical. Many a business catastrophe could’ve been prevented by more careful or ethical accounting. Accounting is almost sacred, I can see why DFW became obsessed with it.
The Reckoning: Financial Accountability and the Rise and Fall of Nations by MacArthur winner Jacob Soll was full of interesting stuff about the early days of double entry accounting. The image of a dreary Florentine looking forward to his kale and bread soup stood out. There are somewhat dark implications for the American nation-state, I fear, if we take the conclusions of this book — that financial accountability keeps nations alive.
However I got very busy at the time I picked up this book and lost my way with it.
Perhaps a more practical focus could draw my attention?
Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffett and David Clark was real good, and way over my level, which is how I like them.
The key concept here is how to find, by scouring the balance sheets, income statements, and so on, which public companies have to tell you and are available for free, which companies have a durable competitive advantage.
The Most Important Thing: Uncommon Sense For The Thoughtful Investor by Howard Marks.
are the two that my friend Anonymous Investor recommended, and they pick up the durable competitive advantage idea. Both books have a central understanding the fact that capitalism is brutal competition, don’t think otherwise. To prosper, you need a “moat,” a barrier competitors can’t cross. A patent, a powerful brand, a known degree of quality people will pay more for, some kind of regulatory capture, a monopoly or at least and part of an oligarchy, these can be moats.
What we’re talking about now is not starting a business, but buying into a business.
There are about 4,000 publicly traded companies on the major exchanges in the US, and another 15,000 you can buy shares of OTC (over the counter, basically by calling up a broker). You can buy into any of these businesses.
Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family.
so says Buffett. Oft repeated by him in many forms, I find it here on a post called “Buy The Business Not The Stock.”
But how do you determine what price to pay for a share of a business?
Aswath Damodaran has a website with a lot of great information. Mostly it convinced me that deep valuation is not for me.
Extremely Basic Valuation
Always remember that investing is simply price calculations. Your job is to calculate accurate prices for a bevy of assets. When the prices you’ve calculated are sufficiently far from market prices, you take action. There is no “good stock” or “bad stock” or “good company”. There’s just delta from your price and their price. Read this over and over again if you have to and never forget it. Your job is to calculate the price of things and then buy those things for the best price you can. Your calculations should model the real world as thoroughly as possible and be conservative in nature.
Martin Shkreli on his blog (from prison), 8/1/18
The simplest way to determine whether the price of a company is worth it might be to divide the price of a share of a company by the company’s earnings, P/E.
Today, on December 29, 2018:
Apple’s P/E is 13.16.
Google’s (GOOGL): 39.42.
Netflix (NFLX): 91.43.
Union Pacific Railroad (UNP): 8.99.
This suggests UNP is the cheapest of these companies (you get the most earnings per share) while NFLX is the most “expensive” – you get the least earnings).
But: we’re also betting on or estimating future earnings. These numbers change as companies report their earnings, and the stock price goes up and down. Two variables that are often connected and often not connected.
Now you are making predictions.
The most intriguing and enormous field in the world on which to play predictions is the stock market.
What is the stock market?
The stock market is a set of predictions.
Buying into businesses on the stock market can be a form of gambling. Or, if you use sound business reasoning, it can be investing.
What is investing?
Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.
More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.
Warren B., in Berkshire’s 2011 Letter To Shareholders.
A great thing about investing is you can learn all about it for the price of an Internet connection. All of Buffett’s letters are free.
How to assess a public company as an investment with sound business reasoning
In researching a specific company, Buffett gathers these resources:
- most recent 10-Ks and 10-Qs
- The annual reports
- News and financial information from many sources
The authors said he wants to see the most recent news stories and at least a decade’s worth of financial data. This allows him to build up a picture of
The companies historical annual return on capital and equity
Management’s record in allocating capital
(from The New Buffetology, Mary Buffett and David Clark).
Cheap stocks (using simple ratios like price-to-book or price-to-sales) tend to outperform expensive stocks. But they also tend to be “worse” companies – companies with less exciting prospects and more problems. Portfolio managers who own the expensive subset of stocks can be perceived as prudent while those who own the cheap ones seem rash. Nope, the data say otherwise.
(from “Pulling The Goalie: Hockey and Investment Implications” by Clifford Asness and Aaron Brown.
This sounds too hard
Correct. Most people shouldn’t bother. You should just buy a low cost index fund that tracks “the market.”
What can we we expect “the stock market” to return?
The VTSAX, the Vanguard Total Stock Market Index, has had an average annual return of 7.01% since inception in 1992. (Source)
10% is the average, says Nerd Wallet.
9.8% is the average annual return of the S&P 500, says Investopedia.
Now, whether the S&P 500 is “the market” is a good question. We’ll return to that.
O’Shaughnessy has thought a lot about the question, it’s pretty much the main thing he’s thought about for the last twenty years or so as far as I can tell, and comes in at around 9%.
Some interesting data from here.
Munger cautions against assuming history repeats itself, in 2005:
Why Bother Trying To Beat The Market?
A good thing about the Buffettology book is they give you little problems for a specific calculator:
The Texas Instruments BA-35, which it looks like they don’t even really make anymore,. You can get one for $100 over on Amazon.
This calculator is just nifty for working out future values of compounding principal over time.
One concept that must be mashed hard into your head if you’re trying to learn business is the power of compounding.
Let’s say you have $10,000. A good amount of money. How much money can it be in the future?
9% interest, compounded annually, $10,000 principal, 20 years = $61,621
15% interest, compounded annually, $10,000 principal, 20 years= $175,447
9% interest, compounded annually, $1,000 principal, 30 years= $13,731
15% interest, compounded annually, $1,000 principal, 30 years= $86,541
9% interest, $10,000 principal, 40 years= $314,094.2
A significant difference.
Any edge over time adds up.
Let’s say the stock market’s gonna earn 7% over the next years and you have $10,000 to invest. In twenty years you’ll have $38,696.
But if you can get that up to just 8%, you’ll have $46,609.57.
A difference of $8,000.
Is it worth it? Eh, it’s a lotta work to beat the market, maybe not.
Still, you can see why people try it once we’re talking about $1,000,000, and the difference is $80,000, or the edge is 2%, and so on.
Plus there’s something fun just about beating the system.
Lessons from the race track
This book appeals to the same instinct — how to beat the house, what’s the system?
Both Buffett and Munger are interested in race tracks. Here is Munger:
This might be the single most important lesson of the Year of Business. Buffett and Munger repeat it in their speeches and letters. You wait for the right opportunity and you load up.
“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘swing, you bum!'”
“Ted Williams described in his book, ‘The Science of Hitting,’ that the most important thing – for a hitter – is to wait for the right pitch. And that’s exactly the philosophy I have about investing – wait for the right pitch, and wait for the right deal. And it will come… It’s the key to investing.”
“If you find three wonderful businesses in your life, you’ll get very rich. And if you understand them — bad things aren’t going to happen to those three. I mean, that’s the characteristic of it.”
OK but don’t you need money in the first place to make money buying into businesses?
Yes, this is kind of the trick of capitalism. Even Munger acknowledges that the hard part is getting some money in the first place.
“The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”
The Unknown and Unknowable
One of the best papers I read all year was “Investing in the Unknown and Unknowable,” by Richard Zeckhauser.
David Ricardo made a fortune buying bonds from the British government four days in advance of the Battle of Waterloo. He was not a military analyst, and even if he were, he had no basis to compute the odds of Napoleon’s defeat or victory, or hard-to-identify ambiguous outcomes. Thus, he was investing in the unknown and the unknowable. Still, he knew that competition was thin, that the seller was eager, and that his windfall pounds should Napoleon lose would be worth much more than the pounds he’d lose should Napoleon win. Ricardo knew a good bet when he saw it.1
This essay discusses how to identify good investments when the level of uncertainty is well beyond that considered in traditional models of finance.
Zeckhauser, in talking about how we make predictions about the Unknown and Unknowable, gets to an almost Zen level. There’s a suggestion that in making predictions about something truly Unknowable, the amateur might almost have an edge over the professional. This is deep stuff.
“Beating the market”
When we talk about “beating the market,” what’re we talking about?
If you’re talking about outperforming a total stock market index like VTSAX over a long time period, that seems to be a lot of work to pull off something nearly impossible.
Yes, people do it, but it’s so hard to do we, like, know the names of the people who’ve consistently done it.
There’s something cool about Peter Lynch’s idea that the average consumer can have an edge, but even he says you gotta follow that up with a lot of homework.
Lynch, O’Shaughnessy – it’s like a Boston law firm around here. I really enjoyed Jim O’Shaughnessy’s Twitter and his Google talk.
Sometimes when there’s talk of “beating the market,” the S&P 500 is used interchangeably with “the market.” As O’Shaughnessy points out though, the S&P 500 is itself a strategy. Couldn’t there be a better strategy?
is full of backtesting and research, much of it summarized in this article. Small caps, low P/S, is my four word takeaway.
Jim: Sure. So when I was a teenager, I was fascinated because my parents and some of my uncles were very involved in investing in the stock market, and they used to argue about it all the time. And generally speaking, the argument went, which CEO did they feel was better, or which company had better prospects. And I kind of felt that that wasn’t the right question, or questions to ask. I felt it was far more useful, or, I believed at the time that it would be far more useful to look at the underlying numbers and valuations of companies that you were considering buying, and find if there was a way to sort of systematically identify companies that would go on to do well, and identify those that would go on to do poorly. And so I did a lot of research, and ultimately came up…
says O’Shaughnessy in an interview with GuruFocus. I’m not sure I agree.
Narrative can be a powerful tool in business. If you can see where a story is going, there could be an edge.
I like assessing companies based on a Google image search of the CEO, for instance.
O’Shaughnessy suggests cutting all that out, getting down to just the numbers. But do you want to invest in, I dunno, RCI Hospitality Holdings ($RICK) (a company that runs a bunch of Hooters-type places called Bombshells) or PetMed Express ($PETS) just because they’re small caps with low p/s ratios and other solid indicators?
Actually those both might be great investments.
I will concede that narrative investing is not systematic. I will continue to ruminate on it.
Charlie Tian’s book is dense but I found it a great compression of a lot of investing principles. It’s also just like a cool immigrant story.
The service that Charlie Tian built, GuruFocus, is a fantastic resource.
Premium membership costs $449 for a year, which is a lot, but I’d say I got way more than that in value and education from it.
J. R. Collins
His book is great, his Google talk is great.
Investing doesn’t have to be all Munger and Buffett. Towards the end of the Year of Business I got into Sir John Templeton.
His thing was finding the point of maximum pessimism. Australian real estate is down? South American mining companies are getting crushed? Look for an opportunity there.
This guy worked above a grocery store in the Bahamas.
Great-niece Lauren carrying on the legacy.
Thought this was a cool chart from her talk demonstrating irrational Mr. Market at work even while long term trends may be “rational.”
Why bother, again?
At some point if you study this stuff it’s like, if you’re not indexing, shouldn’t you just buy Berkshire and have Buffett handle your money for you? You can have the greatest investor who ever lived making money for you just as easily as buying any other stock.
It seems to me that there are 3 qualities of great investors that are rarely discussed:
1. They have a strong memory;
2. They are extremely numerate;
3. They have what Warren calls a “money mind,” an instinctive commercial sense.
Alice Schroeder, his biographer, talking about Warren Buffett. I don’t have any of these.
Even Munger says all his family’s money is in Costco, Berkshire, Li Lu’s (private) fund and that’s it.
In the United States, a person or institution with almost all wealth invested, long term, in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse. And particularly so when he rationally believes, like Berkshire, that his long-term results will be superior by reason of his lower costs, required emphasis on long-term effects, and concentration in his most preferred choices.
I go even further. I think it can be a rational choice, in some situations, for a family or a foundation to remain 90% concentrated in one equity. Indeed, I hope the Mungers follow roughly this course.
The answer is it’s fun and stimulates the mind.
A thing to remember about Buffett:
More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful.
But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.
The writings of Morgan Housel are incredible.
You can read about Buffett all day, and it’s fun because Buffett is an amazing writer and storyteller and character as well as businessman. But studying geniuses isn’t necessarily that helpful for the average apprentice. Again, it’s like studying LeBron to learn how to dribble and hit a layup.
Can Capitalism Survive Itself?
The title of this book is vaguely embarrassing imo but Yvon Chouinard is a hero and his book is fantastic. Starting with blacksmithing rock climbing pitons he built Patagonia.
They make salmon now?
Towards the end of his book Chouinard wonders whether our economy, which depends on growth, is sustainable. He suggests it might destroy us all, which he doesn’t seem all that upset about (he mentions Zen a lot).
The last liberal art
Have yet to finish this book but I love the premise. Investing combines so many disciplines and models, that’s what makes it such a rich subject. So far I’m interested in Hagstrom’s connections to physics. Stocks are subject to some kind of law of gravity. Netflix will not have a P/E of 95 for forever.
Compare perception to results:
Dominos, Amazon, Berkshire, and VTSAX since 2005.
Stocks Let’s Talk
The stock market is interesting and absurd. The stock market is not “business,” but it’s made of business, you know?
The truth is the most I’ve learned about business has come from conversation.
To continue the conversation, I started a podcast, Stocks Let’s Talk. You can find all six episodes here, each with an interesting guest bringing intriguing perspective.
I intend to continue it and would appreciate it if you rate us on iTunes.
- you can get rich sitting on your ass
- business is hard and brutal and competitive
- you need a durable competitive advantage
- if you are unethical it will catch up to you
- we’re gonna need to get sustainable
- the works of Tian, Lynch, O’Shaughnessy, Templeton, Chouinard, and Munger are worth study
- accounting is crucial and must be done right, even then you can be fooled
- I’m too whimsical for business really but it’s good to learn different models
In 2011 Warren Buffett and Charlie Munger came to visit The Office to film a video for the Berkshire Hathaway annual meeting. I hadn’t heard of Charlie Munger. From the Internet I learned that he was a brilliant dude in his own right, as well as a guy Warren Buffett trusted, learned from, and considered his closest partner.
At lunchtime, everyone was huddled around the more famous Buffett, while Charlie Munger was sitting by himself. In this way I ended up having lunch with Charlie Munger.
From his Wikipedia page I knew he’d been a meteorologist in World War II, so I asked him about that. His job was hand drawing weather maps to make predictions as the US was sending planes over the Bering Strait to our then-ally the Soviet Union.
Ever since this encounter I’ve read everything I can find by Charlie Munger.
This is a good place to start.
In my hunt for Munger deep cuts, came across this speech he gave in October 1998 at the Santa Monica Miramar Hotel to a group of institutional investors. Stunningly blunt and direct advice on how to invest:
In the United States, a person or institution with almost all wealth invested, long term, in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse. And particularly so when he rationally believes, like Berkshire, that his long-term results will be superior by reason of his lower costs, required emphasis on long-term effects, and concentration in his most preferred choices.
I go even further. I think it can be a rational choice, in some situations, for a family or a foundation to remain 90% concentrated in one equity. Indeed, I hope the Mungers follow roughly this course. And I note that the Woodruff foundations have, so far, proven extremely wise to retain an approximately 90% concentration in the founder’s Coca-Cola stock. It would be interesting to calculate just how all American foundations would have fared if they had never sold a share of founder’s stock. Very many, I think, would now be much better off. But, you may say, the diversifiers simply took out insurance against a catastrophe that didn’t occur. And I reply: there are worse things than some foundation’s losing relative clout in the world, and rich institutions, like rich individuals, should do a lot of self insurance if they want to maximize long-term results.
If only stupid Harvard had listened!
My controversial argument is an additional consideration weighing against the complex, high-cost investment modalities becoming ever more popular at foundations. Even if, contrary to my suspicions, such modalities should turn out to work pretty well, most of the money-making activity would contain profoundly antisocial effects. This would be so because the activity would exacerbate the current, harmful trend in which ever more of the nation’s ethical young brainpower is attracted into lucrative money-management and its attendant modern frictions, as distinguished from work providing much more value to others. Money management does not create the right examples. Early Charlie Munger is a horrible career model for the young, because not enough was delivered to civilization in return for what was wrested from capitalism. And other similar career models are even worse.
More Munger deep cuts from the 2017 Shareholders Meeting of Daily Journal Co., (I found here on the wonderful Mine Safety Disclosures website but it’s in a couple places). Daily Journal Co is a business that, as I understand it, exists on the fact that companies have to publish legal notices somewhere, and this company more or less has a monopoly on the business.
Munger gets real:
the Mungers have three stocks: we have a block of Berkshire, we have a block of Costco, we have a block of Li Lu’s Fund, and the rest is dribs and drabs. So am I comfortable? Am I securely rich? You’re damn right I am.
Could other people be just as comfortable as I who didn’t have a vast portfolio with a lot of names in it, many of whom neither they nor their advisors understand? Of course they’d be better off if they did what I did. And are three stocks enough? What are the chances that Costco’s going to fail? What are the chances that Berkshire Hathaway’s going to fail? What are the chances that Li Lu’s portfolio in China is going to fail? The chances that any one of those things happening is almost zero, the chances that all three of them are going to fail.
That’s one of the good ideas I had when I was young. When I started investing my little piddly savings as a lawyer, I tried to figure out how much diversification I would need if I had a 10 percentage advantage every year over stocks generally. I just worked it out. I didn’t have any formula. I just worked it out with my high school algebra, and I realized that if I was going to be there for 30 or 40 years, I’d be about 99% sure that it would be just fine if I never owned more than three stocks and my average holding period is three or four years.
Once I had done that with my little pencil, I just…I never for a moment believed this balderdash they teach about. Why diversification? Diversification is a rule for those who don’t know anything. Warren calls them “know-nothing investors”. If you’re a know-nothing investor, of course you’re going to own the average. But if you’re not a know-nothing —if you’re actually capable of figuring out something that will work better—you’re just hurting yourselves looking for 50 when three will suffice. Hell, one will suffice if you do it right. One. If you have one cinch, what else do you need in life?
Li Lu is himself a super interesting character.
A student leader in the Tiananmen Square protests, escapes China (with the help of Western intelligence?) ends up penniless at Columbia, hears about a lecture by Warren Buffett and misunderstands that this has something to do with a “buffet” and becomes of the most successful investors in the world?
More from Munger on a range of topics:
on Lee Kuan Yew and the history of Singapore:
Lee Kuan Yew may have been the best nation builder that ever lived. He took over a malarial swamp with no assets, no natural resources, nothing, surrounded by a bunch of Muslims who hated him, hated him. In fact, he was being spat out by the Muslim country. They didn’t want a bunch of damn Chinese in their country. That’s how Singapore was formed as a country—the Muslims spat it out. And so here he is, no assets, no money, no nothing. People were dying of malaria, lots of corruption—and he creates in a very short time, by historical standards, modern Singapore. It was a huge, huge, huge success. It was such a success, there is no other precedent in the history of the world that is any stronger.
Now China’s more important because there are more Chinese, but you can give Lee Kuan
Yew a lot of the credit for creating modern China because a lot of those pragmatic communist leaders—they saw a bunch of Chinese that were rich when they were poor and they said, “to hell with this”. Remember the old communist said, “I don’t care whether the cat is black or white, I care whether he catches mice”. He wanted some of the success that Singapore got and he copied the playbook. So I think the communist leadership that copied Lee Kuan Yew was right. I think Lee Kuan Yew was right. And of course, I have two busts of somebody else in my house. One is Benjamin Franklin, and the other is Lee Kuan Yew. So, that’s what I think of him.
on real estate:
MUNGER: Real estate?
Q: Yeah, real estate.
MUNGER: The trouble with real estate is that everybody else understands it and the people who you are dealing with and the competing with, they specialized in a little 12 blocks in a little industry. They know more about the industry than you do. And you got a lot of bullshitters and liars and brokers. So it’s not that easy. It’s not a bit easy.
Your trouble is if it’s easy—all these people, a whole bunch of ethnics that love real estate,. You know, Asians, Hasidic Jews, Indians from India, they all love real estate; they’re smart people and they know everybody and they know the tricks. And the thing is you don’t even see the good offers in real estate. They show the big investors and dealers. It’s not an easy game to play from a beginners point of view; whereas with stocks, you’re equal with everybody if you’re smart. In real estate, you don’t even see the opportunities when you’re a young person starting out. They go to others. The stock market’s always open, except venture capital. Sequoia sees the good stuff. You can open an office—Joe Shmo Venture Capitalist—startups come to me. You’d starve to death.
You’ve gotta figure out what your competitive position is in what you’re choosing. Real estate has a lot of difficulties. And those Patels from India that buy all the motels, they know more about motels than you do. They live in a god damn motel. They pay no income taxes. They don’t pay much in worker’s compensation and every dime they get, they fix up the thing to buy another motel. Do you want to compete with the Patels? Not I.
on Sumner Redstone:
Well, I never knew Sumner Redstone but I followed him because he was a little ahead of me in Law School, but Sumner Redstone is a very peculiar man. Almost nobody has ever liked him. He’s a very hard-driven, tough tomato, and basically almost nobody has ever liked him, including his wives and his children. And he’s just gone through life. There’s an old saying, “Screw them all except six and save those for pallbearers.” And that is the way Sumner Redstone went through life. And I think he was in to the pallbearers because he lived so long. So I’ve used Sumner Redstone all my life as an example of what not to do.
He started with some money, and he’s very shrewd and hard-driven. You know he saved his life by hanging while the fire was up in his hands. He’s a very determined, high IQ maniac, but nobody likes him and nobody ever did. And though he paid for sex in his old age, cheated him, you know always had one right after another.
That’s not a life you want to admire. I used Sumner Redstone all my life as an example of what I don’t want to be. But for sheer talent, drive and shrewdness, you would hardly find anybody stronger than Sumner. He didn’t care if people liked him. I don’t care if 95% of you don’t like me, but I really need the other 5%. Sumner just…
on the movie business:
And the movie business I don’t like either because it’s been a bad business-—crooked labor unions, crazy agents, crazy screaming lawyers, idiosyncratic stars taking cocaine-—it’s just not my field. I just don’t want to be in it.
on copying other investors:
Q: On the topic of cloning, do you really believe that Mohnish said that if investors look at the 13Fs of super investors, that they can beat the market by picking their spots? And we’ll add spinoffs.
MUNGER: It’s a very plausible idea and I’d encourage one young man to look at it, so I can hardly say that it has no merit. Of course it’s useful if I were you people to look at what other—what you regard as great—investors are doing for ideas. The trouble with it is that if you’d pick people as late in the game as Berkshire Hathaway, you’re buying our limitations caused by size. You really need to do it from some guy that’s operating in smaller places and finding places with more advantage. And of course, it’s hard to identify the people in the small game, but it’s not an idea that won’t work.
If I were you people, of course I would do that. I would want to know exactly what the shrewd people were doing and I would look at every one of them, of course. That would be a no-brainer for me.
on Li Lu:
I got to tell you a story about Li Lu that you will like. Now General Electric was famous for always negotiating down to the wire and just before they were at close, they’ll add one final twist. And, of course, it always worked, the other guy was all invested, so everybody feels robbed and cheated and mad, but they get their way in that last final twist.
So, Li Lu made a couple of venture investments and he made this one with this guy. The guy made us a lot of money in a previous deal and we’re now going in with him again on another—a very high-grade guy and smart and so forth.
Now we come to the General Electric moment. Li Lu said, “I have to make one change in this investment.” It sounds just like General Electric just about to close. I didn’t tell Li Lu to do it; he did it himself. He said, “You know, this is a small amount of money to us and you got your whole net worth in it. I cannot sign this thing if you won’t let me put in a clause saying if it all goes to hell we’ll give you your money back.” That was the change he wanted. Now, you can imagine how likely we were to see the next venture capital investment. Nobody has to tell Li Lu to do that stuff. Some of these people, it’s in their gene power. It’s just such a smart thing to do. It looks generous and it is generous, but there’s huge self-interest in it.
on Al Gore:
Oh, I got another story for you that you’ll like.
Yeah get that thing (peanut brittle out of here or I’ll eat it all).
Al Gore has come into you fella’s business. Al Gore, he has made $300 or $400 million in your business and he is not very smart. He smoked a lot of pot. He coasted through Harvard with a Gentlemen’s C. But he had one obsessive idea that global warming was a terrible thing and he understandably predicted the world for it. So his idea when he went into investment counseling is he was not going to put any CO2 in the air. So he found some partner to go into investment counseling with and he says, “we are not going to have any CO2”. But this partner is a value investor. And a good one.
So what they did was Gore hired his staff to find people who didn’t put CO2 in the air. And of course, that put him into services-—Microsoft and all these service companies that were just ideally located. And this value investor picked the best service companies. So all of a sudden the clients are making hundreds of millions of dollars and they’re paying part of it to Al Gore, and now Al Gore has hundreds of millions of dollars in your profession. And he’s an idiot. It’s an interesting story and a true one.