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.

 


nothing but good news

in Bloomberg today!


Headlines and stocks

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!

 


Key Takeaways from the Year of Business

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.

Mark Burnett 

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 two big obstacles I could predict one: 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.

First up,

Excellent.  We’ve discussed Munger at length.  Most of his interviews and speeches are avail for free online

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.

Next:

 

The Ten Day MBA: A Step By Step Guide To Mastering Skills Taught In America’s Top Business Schools by Steven A. Silbiger.

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 Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments by Pat Dorsey

and

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.

Buying Businesses

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.

Here’s a roundup of quotes, ideas, points that jumped out at me from study of Warren Buffett and Charlie Munger

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

  • Earnings

  • Debt load

  • Share repurchases

  • 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:

(source)

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

15% interest, $10,000 principal, 40 years= $2,678,635.4

 

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:

in one of his great speeches.

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.”

says Buffett.

“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.

Narrative investing

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.

would you bet on this woman’s business?

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.

GuruFocus

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.

Templeton

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.

Key Takeaways:

  • 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

screen shot 2019-01-03 at 3.10.15 pm

 

 

 

 


Case Study in Business Journalism

As part of my Year of Business I’ve been reading some business articles.  Often I find that the headlines are incredibly misleading, often close to opposite of accurate.  Take this example:

Read the article, and the source is a Vanguard study which you can read here.  Here’s page one with an abstract:

A more accurate headline would be “A Small Minority of Millennials Are Sitting Out The Bull Market, While Most Of Them Are Doing Exactly What Everybody Else Does” which is kind of interesting.  The truth is well put in a footnote to the article:

Wouldn’t another, perhaps more accurate headline be: “Despite Lessons Of Their Youth, Millennials Follow Traditional Investing Path”?

But consider: we’re only talking about a sample of 4 million Vanguard investors.  So: a self-selected sample of people with 1) money to invest and 2) choosing a conservative investment company!  I would guess the “typical millennial household” has no equity at all?

Buried in the Vanguard study is a story that’s almost more interesting, namely that older generations are taking more investment risk than most advisors would think is wise:

Why this greater-than-expected taste for equity market risk among older investors? It’s worth noting that many current retirees hold traditional pensions, allowing, all other things equal, for more equity risk-taking. Other possible drivers of risk appetite among older investors include concerns over health care costs, low bond yields, and a desire to fund bequests for heirs. And beyond these financial factors are the shared generational experience of investing—both cohorts enjoyed the positive results of the great equity bull market from 1982–2000.

Even the Vanguard study itself contains strange, generational based assumptions:

Who is wiser, the 1/5 of millennials who witnessed 2008 and make the choice to have a “conservative” investment strategy relative to conventional wisdom, or the Baby Boomers who are still operating on 1980s assumptions?

My point here is not to criticize, it’s just to note ongoing observations:

  • headlines can be very misleading
  • when you go to the source of a story, it always gets deeper and more interesting
  • small inaccuracies of language, shorthands, and misleads can compound until we have a distorted picture of reality.  Was this not itself one of the causes of 2008 crisis?

The Gambler (2014)

Saw this clip on some retweet of this fellow’s Twitter.

I was struck by

  • the bluntness and concision of the advice
  • the fact that the advice contains a very specific investment strategy down to what funds you should be in (80% VTSAX, 20% VBTLX)
  • the compelling performance of an actor I’d never seen opposite Wahlberg (although I’d say it drops off at “that’s your base, get me?”)

It appeared this was from the 2014 film The Gambler

The film is interesting.  Mark Wahlberg plays a compulsive gambler and English professor.  There are some extended scenes of Wahlberg lecturing his college undergrads on Shakespeare, Camus, and his own self-absorbed theories of literature, failure, and life.  The character is obnoxious, self-pitying, logorrheic and somewhat unlikeable as a hero. Nevertheless his most attractive student falls in love with him.  William Monahan, who won an Oscar for The Departed, wrote the screenplay. The film itself is a remake of 1974 movie directed by James Toback, in which James Caan plays the Mark Wahlberg role.

Here’s the interesting thing.  Watching the 2016 version, I realized the speech I’d seen on Twitter that first caught my attention is different.  The actor’s different — in the movie I watched it’s John Goodman.

What happened here?  Had they recast the actor or something?  The twitterer who put it up is from South Africa, did they release a different version of the movie there?

Did some investigating and found the version I saw was made by this guy, JL Collins, a financial blogger.

Here’s a roundup of his nine basic points for financial independence.

He did a pretty good job as an actor I think!  I believe the scene in the movie would be strengthened from the specificity of his advice.  And the line about every stiff from the factory stiff to the CEO is working to make you richer is cool, maybe an improvement on the script as filmed.  I’ll have to get this guy’s book.

It would make a good commercial for Vanguard.

VTSAX vs S&P 500:

Readers, what does the one to one comparison of JL Collins and John Goodman teach us about acting?


What Will Trigger The Next Crisis?

What Will Trigger The Next Crisis? is a subtext of many a Wall Street Journal article, but this week that was the headline on what I found to be an unusually succinct and comprehensible roundup of possible catalysts.

Interest Rates Jump

Bad-Loan Boom

China Cracks

Supply-Chain Disruptions

were four of the possibilities, but the one that caught me was

Italy Dumps The Euro

But Italy may be wavering. Italian bond yields spiked in May after two parties with anti-euro leanings tried to form a new government. The crisis could escalate again once politicians return from holidays. Some 59% of Italians want to keep the common currency, official surveys show—the slimmest majority in the eurozone.

I like the idea that a bunch of Italian politicians coming back from vacation is a global financial crisis waiting to happen.

La grande bellezza

In this same issue of the WSJ: