Friday, October 24, 2014

Charlie Munger on the importance of reading

From Poor Charlie's Almanack:
In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time--none, zero. You'd be amazed at how much Warren reads--and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

I am a biography nut myself. And I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It's way better than just being given the basic concepts.

Peter Cundill quote

From There's Always Something to Do:
I believe that there is probably one opportunity in every man’s life which demands his knowledge, his guts, his self-esteem, and his judgement. If he seizes it with both hands and it is successful, he joins the first rank, if not he remains a mortal with feet of clay.

Howard Marks quote

From The Most Important Thing:
...in order for something to be able to materially help your return if it succeeds, you have to do enough so that it could materially hurt you if it fails.

Thursday, October 23, 2014

Peter Cundill on forecasting

From There's Always Something to Do:
I think that intelligent forecasting (company revenues, earnings, etc.) should not seek to predict what will in fact happen in the future. Its purpose ought to be to illuminate the road, to point out obstacles and potential pitfalls and so assist management to tailor events and to bend them in a desired direction. Forecasting should be used as a device to put both problems and opportunities into perspective. It is a management tool, but it can never be a substitute for strategy, nor should it ever be used as the primary basis for portfolio investment decisions.

The biggest secret in venture capital...

From Peter Thiel via Zero to One:
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. 
This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can't be any other rules. 

Appraising management as operators, investors and financiers...

From Modern Security Analysis:
The view of businesses as pure going concerns has led to appraising managements only as operators. Once one recognizes that businesses generate wealth both through going concern and resource conversion activities, it becomes apparent that managements should be appraised not only as operators but also as investors and financiers. It is our experience that investment success is more often related to being associated with managements who are opportunistic and take advantage of the resources of the business than by any other financial factor. 

Wednesday, October 22, 2014

Two to five observations before changing one's mind...

The excerpt below is from James Montier in The Little Book of Behavioral Investing. One lesson from this is that if you get good at changing your mind quickly when the facts change, good at destroying your own best-loved ideas, and good and filtering and identifying truly important information, you can gain an advantage over others that may be looking at the exact same data. 
The classic study on conservatism (from which the urn example at the start of this chapter was drawn) concludes its analysis by saying: “A convenient first approximation to the data would say that it takes anywhere from two to five observations to do one observation’s worth in inducing the subject to change their opinions.” In other words, people underreact to things that should make them change their minds. That certainly seems to sum up the average analyst. 
I should also point out that it appears that people are particularly bad at spotting regime changes. Researchers have shown that in a series of experiments using urns like in the question above, people tend to underreact in unstable environments with precise signals (turning points), but overreact to stable environments with noisy signals (trending markets). This helps explain why economists and analysts tend to miss turning points in the market. They get hung up on the stable environment and overreact to it; hence they miss the important things that happen when the environment becomes more unstable (a recession starts) and underreact to such developments. 
Sunk Costs at the Root of Conservatism 
So why are analysts and the rest of us so reticent to alter views? What is the root cause of this conservatism? The answer seems to me to lie in the “sunk cost” fallacy. This is a tendency to allow past unrecoverable expenses to inform current decisions. Brutally put, we tend to hang onto our views too long simply because we spent time and effort in coming up with those views in the first place.

Earnings and revenues...

From Capital Account, and written in November 1999. I think it is also a lesson that repeats itself over time, and it reminded me of Graham and Dodd on the ‘Relation of the Future to Investment and Speculation’:
Coincident with the migration toward technology shares, the market has redefined what is meant by growth, away from earnings to revenues. This may be because many technology companies have little in the way of profits, and so revenues are seen as a proxy for future earnings. However, in our opinion there is no necessary link between the two, especially among unproven Internet companies.

Alfred North Whitehead quote

"To come very near to a true theory, and to grasp its precise application, are two very different things, as the history of science teaches us. Everything of importance has been said before by somebody who did not discover it." -Alfred North Whitehead

Tuesday, October 21, 2014

Berkshire Beyond Buffett: The Enduring Value of Values

Just a reminder that Lawrence Cunningham’s new book, Berkshire Beyond Buffett: The Enduring Value of Values, was released today. Chapter 8 is also available as a free excerpt, HERE.