Buffett and Munger speak: Berkshire Hathaway 2021 oddities and highlights

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.

Buffett bits (and Munger)

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)

Munger speaks

Looking forward to getting a transcript of Charlie Munger yesterday at the Daily Journal shareholders’ conference.  Here the 95 year old former meteorologist and HelyTimes Hero talks to CNBC’s Becky Quick:

BECKY QUICK: Anything that rises to your radar screen now that may be under the radar for other people?

CHARLIE MUNGER: Well, nobody knows how much of this money printing we can do. And of course we have politicians who like– and are in both parties, who like to believe that it doesn’t matter how much you do. That we can ignore the whole subject and just print money as convenient. Well, that’s the way the Roman Empire behaved, then it was ruined. And that’s the way the Weimar Republic was ruined. And– it’s– there is a point where it’s dangerous. You know, and of course, my attitude when something is big and dangerous is to stay a long way away from it. Other people want to come as close as possible without going in. That’s too tricky for me. I don’t like it.

BECKY QUICK: In terms of possibly getting sucked up into it?

CHARLIE MUNGER: Yes. I– I– if there’s a big whirlpool in the river, I stay a long way away from it. There were a bunch of canoeists once that tried to– to run the Aaron Rapids. I think they were from Scandinavia. And– and the fact that the whirlpools were so big made them very eager to tackle this huge challenge. The death rate was 100%. I regard that as a normal result.

Are we in The Great Stagnation?

CHARLIE MUNGER: The opportunities that we all remember came from a demoralized period when about 90% of the natural stock buyers got very discouraged with stocks. That’s what created the opportunity for these fabulous records that my generation had. And that was a rare opportunity that came to a rare group of people of whom I was one. And Warren was another.

BECKY QUICK: So you’re talking–

CHARLIE MUNGER: And people who start now have a much less– they have lower opportunity.

BECKY QUICK: Do you think we saw a generational low after 2008, beginning of 2009?

CHARLIE MUNGER: Generational? Maybe.

Life advice:

BECKY QUICK: Charlie, so many of the people who come here come because they’re looking for advice not on business or investments as much as they’re looking for just advice on life. There were a lot of questions today, people trying to figure out what the secret to life is, to a long and happy life. And– and I just wonder, if you were–

CHARLIE MUNGER: Now that is easy, because it’s so simple.

BECKY QUICK: What is it?

CHARLIE MUNGER: You don’t have a lot of envy, you don’t have a lot of resentment, you don’t overspend your income, you stay cheerful in spite of your troubles. You deal with reliable people and you do what you’re supposed to do. And all these simple rules work so well to make your life better. And they’re so trite.

BECKY QUICK: How old were you when you figured this out?

CHARLIE MUNGER: About seven. I could tell that some of my older people were a little bonkers. I’ve always been able to recognize that other people were a little bonkers. And it helped me because there’s so much irrationality in the world. And I’ve been thinking about it for a long time, its causes and its preventions, and so forth, that I– sure it’s helped me.

I noticed a glitch in the transcript, btw.  It’s written as follows:

BECKY QUICK: Do you think we saw a generational low after 2008, beginning of 2009?

CHARLIE MUNGER: Generational? Maybe.

BECKY QUICK: We–

CHARLIE MUNGER: Yeah, I don’t think the market is going to be cheaper.

But if you listen closely it’s pretty clear Munger says “I don’t think Bank of America is going to be cheaper.”  Almost exactly nine years ago today, Feb 2009, BAC was trading at $5.57.  Today it’s at $29.12.

Value investing, growth investing, and vibes investing

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.)

Should you buy Twitter? Plus: Advice to Jack Dorsey

I’ve noticed that writing about investing is very popular on the Internet so I’m gonna try it.  

This post is about Twitter (TWTR).  At the moment: the stock is priced at 15.88, I don’t own it.

Twitter is one of my favorite products in the world.  If I’m being real, I probably spend minimum an hour a day looking at Twitter.

Lots of people hate it — my Great Debates colleague Dan Medina, for instance, claims to find it unusable.  Yet there he is:

and he’s fascinated by it.

How can you not be?  Here are entertainers, comedians, athletes, famous people of all kinds, plus millions of strong-opinioned randos, bots, sex bots, ordinary citizens, kids, organizations, Vine people, all gabbing away at some fantastically weird party / school assembly gone mad.

On the one hand maybe Twitter is a negative in my life, because I read fewer books.  On the other hand, while I’ve been putting off reading William Gibson’s books, I’ve been enjoying his Twitter feed:

Little Esther tells me Twitter is for losers, but her feed is hilarious:

Twitter is a fiendishly perfect invention for distracting comedians because so many of them

1. Crave instant feedback/laughs
2. Are desperate for connection
3. Are bored
4. Are traveling / waiting around for something
5. Are video game addicts

If anything, the biggest problem I have a user of Twitter is how much stuff there is I want to look at, and how to sift it out from all the garbage.

I’ve solved that problem more or less to my satisfaction by making private lists.  The second biggest problem might be the jarring combos of information:

but maybe that’s a feature, not a bug.

For all this entertainment, hours and hours of it, Twitter charges me…

NOTHING?!  Zero dollars?

That is ridiculous.

I mean, I guess sometimes I have to look at ads.  But I gotta tell ya, these ads don’t tend to get in the way.  Often they are wack enough to be part of the fun:

(What?  The Embassy of Poland wants to brag to me, specifically, about its military expenditures?)

What kind of wonderful company is this, that gives me entertainment, information and amusement for free?!

Should I get in on?

When a product becomes a part of your life, you have to ask yourself if maybe you should go ahead and own part of the company by buying shares in it.

SHOULD YOU INVEST IN TWITTER (TWTR)?

What I know about investing is cobbled together from skimming and half-reading investment books, blogs and articles (and Twitter) plus mistakes plus talking to people.

First, big believer in the Peter Lynch method.

Peter Lynch of Fidelity Investments.(Story/Paulson)

Peter Lynch was a wealthy Bostonian of my youth who got his start caddying for the president of Fidelity Investments, became an intern there, and rose up to manage Fidelity’s Magellan fund:

From 1977 until 1990, the Magellan fund averaged a 29.2% return and as of 2003 had the best 20-year return of any mutual fund ever.

and also wrote some bestselling investment guides:

which I haven’t read.  But which Wikipedia helpfully summarizes:

His most famous investment principle is simply, “Invest in what you know,” popularizing the economic concept of “local knowledge“. Since most people tend to become expert in certain fields, applying this basic “invest in what you know” principle helps individual investors find good undervalued stocks.

Lynch uses this principle as a starting point for investors. He has also often said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street. Throughout his two classic investment primers, he has outlined many of the investments he found when not in his office – he found them when he was out with his family, driving around or making a purchase at the mall. Lynch believes the individual investor is able to do this, too.

OK, great.

I would say I’m not an expert but I’m pretty serious about:

• comedy

Twitter is a great way to get comedy in quick, easy form.  Every comedian I know is on Twitter.

• written entertainment

Not every writer is on Twitter but a lot of them are, and there’s neat writing on Twitter every day.

• news/information/infotainment.

from this I’ve had my biggest insight of all: journalists are obsessed with Twitter.  They give better, faster, more interesting news directly to their Twitter feeds.

Plus, the news makers and influencers are themselves talking directly to the Twitter user:

and

That’s how I identified Twitter as a possible opportunity.  Now let’s run it through a rigorous Lynchian checklist.

Do you use it yourself?

Yes, so much so that I have to impose rules on myself that I then break.

Do people you know use it?

Oh God they’re obsessed.

Does it seem like a good product?

Well, I dunno.  For instance I have no idea how or if they make money.

That brings us to the next level.

Buffet analysis.

Everybody knows billionaire investor and Omaha cheapskate Warren Buffett, he is one of the great American characters.

You might also know his partner and former WWII Army Air Corps meteorologist Charlie Munger:

A good intro to some of Munger’s ideas can be found here on the blog of Tren Griffin, who rounds up a lot of wisdom.

Buffett and Munger’s insights are many and not easy to summarize, but a crudely simplified version in three quotes might be:

1:

Buy into a company because you want to own it, not because you want the stock to go up.

2:

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

(that quote I can’t 100% track down to the source but it appears legit). 

and 3:

Never invest in a business you cannot understand.

Buffett is a value investor.  He asks, is the business valuable?  For instance, a railroad.

Only a few companies control all the railroad track in North America:

and they’re not building more.  People continue to ship things on railroad.  Warren Buffett decided that he understood railroads I guess, because he bought one.

Presumably before he did that, though, he ran BNSF through the third level of investment analysis, which is the level of numbers.

This is the level that is so boring.  You almost can’t believe it.

Try, for instance, to read the wikipedia page on valuation (finance) and if your eyeballs don’t turn to mush maybe investment banking is for you.

For me, I can only handle the very basics.  There’s P/E (price of the stock to earnings), for instance.  Should be simple enough:

Theoretically, a stock’s P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it’s also called the “multiple” of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company’s growth prospects.

So says investopedia.  Ugh, everything is always far too simplistic with these guys.

Let’s take it down to basics.

Hmmmmmm.

OK, I can do this.

EBITDA is earnings before interest, taxes, depreciation, and amortization.  A measure, right, of how much money the company is making.

Twitter’s is negative two hundred and eight million dollars.

Coca-Cola, by comparison, is $124 million.

Amazon’s is $7.8 billion.

Netflix’s is $368.1 million.

Chipotle’s is $908 million.

How about profit margin, that seems simple.

Coca-Cola: 2.7%

Amazon: .56%

Netflix: 1.81%

Chipotle: 10.57%

Twitter: -27.99%

OK, so let us answer the key question:

• How much money is Twitter making?

Negative a lot?

• How is that possible?

Well, I took to the Internet.  Here are some things I learned:

• Twitter makes huge amounts of revenue, but not a profit.

From this week’s earnings call, we learned that Twitter’s revenue in the fourth quarter totaled $710 million, up 48 percent year-over-year.

Most of that money ($641 million) comes from ad sales, with the rest ($69 million?) coming I guess from data sales.  Although apparently Twitter has somehow screwed up selling that up — last year it made $147 million from data sales before they shut off their data “fire hose.”

I ran all this by my colleague Anonymous Investor.  Here’s what he has to say:

Let’s say you owned a pizza shop. In 2015 you sell a million dollars worth of pizza (or said another way, you made a million dollars in revenue). At first glance, that might seem good. But if your food, labor and rent costs add up 1.3 million, you would have ended up losing money for the year.   (a $300,000 loss for 2015).

Likewise, Twitter sold 2 billion dollars worth of stuff (mostly advertising sales).  But they spent around 2.5 billion dollars doing it.  I haven’t dug deep into it, but lots of their costs seem like wasteful spending — such as 778 million on research and development, which seems ridiculous for a company that’s basically not much more than a slightly-advanced message board.

Seems the company could be profitable if google or someone else bought it.  They could slash costs and make some profit off that revenue.

• Twitter wastes lots of money.

How much does it cost to run Twitter?  I honestly have no idea, but the brilliant thing about the business is that the users are doing the hard work of generating the content.  All Twitter should have to do is run the servers and so on, right?

In looking into it, I found that Twitter spends an insane amount of money on research and development.  This is from a 2013 Fortune article:

According to its IPO document, in the third quarter of the year, Twitter shelled out nearly $90 million on R&D. That was equal to more than half, 52%, of the company’s revenue in the same period. It is Twitter’s largest cost, nearly 50% more than it spent on marketing. And it’s far more than most of its rivals spend. Facebook, for instance, spent just 14% of its revenue on R&D in the the quarter right before it went public. It has since ramped up that spending to 26%. But Facebook FB 0.10% makes money, unlike Twitter.

Google spends just 15% of revenue on R&D. And Google is working on a self-driving car, high-tech glasses and, maybe, space elevators.

There is no sign that Twitter is working on anything that cool. Twitter actually gives very little detail about what it spends its R&D budget on in the offering documents for its IPO. It says that R&D expenses are to “improve our products and services.” And it doesn’t appear that Twitter is building some kind of high-tech lab or supercomputer. In fact, the bulk of Twitter’s R&D expenses go toward personnel-related expenses. And a good portion of that expense, about a quarter, was the cost of handing out stock options.

Twitter doesn’t say how many employees work in its R&D groups. The company has a total of 2,300 employees. That would be $104,000 per employee if all of its employees were in R&D, which they are not.

That sounds crazy.  And it seems like the problem has not been solved.  Take a look at this:

Again, I am no expert, the whole point of writing this is to educate myself, but Twitter is spending $800 million dollars on research & development?!  WTF?  To research and develop what?!

Your job is to bring me this shit as simply as possible:

And you don’t even do a good job of that!

Much of that money, apparently, is stock distribution.

• Twitter’s employee stock distribution system is screwy.

So I learn from this Quora post.  I don’t entirely understand this.  Neither do the folks at Vox I guess, who proclaim:

At the same time, depending on how you count Twitter employees’ stock options, the company is either still continuing to lose money or only modestly profitable.

That murkiness definitely makes me uneasy.

Is this an accounting anomaly that’s falsely inflating how much money Twitter is spending?

Or is Twitter like giving away too much of itself to its employees?

• Twitter is not gaining users

That seems to be what’s making “Wall Street” so mad, since when they bought into it at its IPO with a valuation of $30 billion dollars they were assuming it would be the next Facebook or whatever.  Not happening.

As far as I can tell at least some significant percentage of Twitter users are bots anyway.  If some of your users are artificial sex picture machines, and you’re still losing users?

• Twitter has untapped revenue potential?

So says this bullish article:

According to Twitter, there are 500 million people who consume Twitter that don’t actively use Twitter, or have accounts. These people see tweets on websites, mobile apps, in articles, or in Google search among other places. After much debate, and criticism about how Twitter can convert those users to the platform, Dorsey made the decision to begin showing promoted tweets to its logged out userbase of 500 million, rather than wasting money trying to convert those consumers to users.

I don’t really understand this.  Does it mean you’re gonna get users back to Twitter?  Doubt it.  We’ll watch the test case of our colleague Dan Medina, but in my experience people don’t come back to social media apps they left.

• This guy has a terrible idea.  Or is it genius?

To let everybody pay to push up their Tweets.  Users eat it.

The title of his article is:

How Twitter could be 10X bigger, 100X more profitable, and 1000X more awesome

and I have to say this is a case of what we might call Bro Exaggeration.

• What about the exact opposite?

Twitter pays you if your tweets get 2,500 RTS.  Celebrities excluded, can only win a few times, scams will have to be dodged etc., but: essentially Twitter becomes a joke casino where anyone can play.  Americans love casinos.  Casino owners do not go broke but they sometimes get murdered I guess.

OK so those are the things I know

Can I pass any of Buffett’s tests?

Do I want to own Twitter as a business, not just as a stock?

Not if it costs ten billion dollars, no, which is market cap as of this writing.

If the stock market shut down for five years tomorrow, would Twitter emerge well?

Ehhhhhh…. yes I think so but not worth ten billion dollars or its five year equivalent.

Do you understand the business?

Not really.  It is a simple mobile entertainment company where the content is generated for free but somehow it costs TWO billion dollars a year to run it?  Where all the ads are like garbage and increasingly young people tell me it is for losers?

I don’t understand that.

I kind of do understand it like the world’s news feed and it’s free.  Something like an AP wire that anyone can post on, that (mostly) sorts itself out but has as it’s biggest problem filtering, a problem it has to solve fast or it will be replaced like MySpace by something nimbler and cooler that doesn’t cost two billion dollars to run.

It all comes down to the final piece of the Hely Investment Method: look at a photo of the CEO.

Does he look like he knows what he’s doing?  Would you trust this man with your money?

Hrmm.  I dunno.  How can you tell with these tech guys?

Maybe Jack Dorsey will:

• figure out innovations that draw new users to Twitter without antagonizing the existing users
• find deep new trenches of revenue
• cut operating expenses

and Twitter will be an amazingly valuable company.  OR, maybe he will

• appear or come close enough to doing that so the stock price goes way up.

Very possible.

Another possibility is

• they go too far and drive off the users they do have.

Jack Dorsey, knowing he has to do something, uses his neuro-atypical brain to change interfaces in ways that actual humans hate.  No new users join, Wall Street freaks out.  The company stock plummets.  Maybe some giant buys it out of perverse experimentation or nostalgia or valuation of scrap parts at some lower level.

One thing I can almost guarantee:

• Twitter will not grow in new user gain numbers

New people are not lining up to join Twitter.  Everyone in the world has had a chance to try it out.

What I would suggest to Jack Dorsey?:

• DON’T DO ANYTHING.

Some huge number of people are insane devotees of your site as is.

Let them keep entertaining and informing themselves with it.

Change nothing.  You won’t gain any new users, but you won’t lose any either.  In the meantime, you can figure out how to sort out operating expenses and improve advertising.

Wall Street investment banks overvalued the company because they were in a hysteria about tech and had no idea how to value a company that had nothing but enormous user growth, so they overvalued it.  Now the user growth has stopped and they are panicking.  But it’s fine.  Maybe Twitter isn’t worth $10 billion / $15 a share, but it is worth something.

At this price I would suggest do not buy Twitter.  Marc Cuban agrees with me, here’s what he said to CNBC on Feb. 11 (funny how their transcripts are in all caps):

WAPNER: THAT LEADS ME TO MY LAST QUESTION. SINCE WERE TALKING TECH AND SO-CALLED FALLING KNIVES, WHEN YOU LOOK AT A TWITTER, WHAT DO YOU SEE IF YOU ARE PART OF AN INVESTMENT GROUP OR IF YOU WERE A CEO OF ANY NUMBER OF TECH COMPANIES OUT THERE, WOULD YOU LOOK AT THIS PROPERTY AS AN ASSET YOU WANTED TO HAVE?

CUBAN: YEAH, YOU KNOW, A LITTLE BIT LOWER I CERTAINLY WOULD. I THINK NOW IT IS AT THE QUESTION POINT WITH THE $10 BILLION MARKET CAP, BUT $6 BILLION MARKET CAP WITH $2 BILLION IN CASH, I WOULD BE A HUGE BUYER OF THE STOCK.

If you believe him, and I guess I do, somebody will buy Twitter soon.

So, there’s some stock price point at which that news will come out, and then the stock will go up some (probably).  So if you want to gamble on that exact moment you can make money.

Seems like a sucker’s game to me, but if you love gambling it’s probably fun.  Says Anonymous Investor:

Despite the fact that the company can’t make any profit, the stock is still selling for a high price.  It’s selling for 5 times its revenue. That’s higher than average.  The high valuation means that investors have the belief that in the future some of those revenues can be converted into profit.  And other investors might have the belief that twitter could be bought out by another company for a market cap north of 10 billion dollars (or to be more accurate: north of around 8 billion, since Twitter holds about 2 billion in net cash).

It’s all a matter of opinion.  To me, both assumptions have a pretty high risk of not happening. So in order for me personally to buy Twitter, I’d need to be compensated for that risk with a lower price.

Did you know Jack Dorsey has a whole other company he’s CEO of?

Wait what?  You’re telling me he’s working at most half time on fixing Twitter?

Yes he’s also busy being CEO of Square, the credit card payment company that might be hugely profitable or might be about to collapse?

Haha this guy.  How does he explain that?

He says it’s easy with his “theme day” system:

The way I found that works for me is I theme my days. On Monday, at both companies, I focus on management and running the company…Tuesday is focused on product. Wednesday is focused on marketing and communications and growth. Thursday is focused on developers and partnerships. Friday is focused on the company and the culture and recruiting. Saturday I take off, I hike. Sunday is reflection, feedback, strategy, and getting ready for the week.

HAHA amazing.  This guy.