Sunday, July 5, 2015

Montaigne quote

"In order always to be learning something by communication with others (which is one of the finest schools there can be), I observe in my travels this practice: I always steer those I talk with back to the subjects they know best....For most often the opposite happens: each man chooses to hold forth on another man's occupation rather than his own, thinking that this is so much new reputation acquired....Thus we must always throw the architect, the painter, the shoemaker and the rest each back to his quarry. And apropos of this, in the reading of history, which is everybody's business, I make it a habit to consider who are the authors. If they are people who have no other profession than letters, I learn mainly their style and language; if they are doctors, I believe them most readily in what they tell us about the temperature of the air, the health and constitution of princes and and wounds and maladies; if they are lawyers, we must take what they say on controversies over rights, the laws, the establishment of governments, and things like that; if theologians, Church affairs, ecclesiastical censures, dispensations, and marriages; if courtiers, manners and ceremonies; if men of war, what belongs to their business, and principally the accounts of the great actions at which they were present in person; if ambassadors, negotiations, understandings, and diplomatic practices, and the way to conduct them." -Michel de Montaigne (The Complete Essays of Montaigne)

Saturday, July 4, 2015

Thomas Huxley quote

“Sit down before facts like a child, and be prepared to give up every preconceived notion, follow humbly wherever and to whatever abysses Nature leads, or you shall learn nothing.” -Thomas Huxley 

Friday, July 3, 2015

Graham and Dodd on business quality and price...

From Security Analysis (The abridged audiobook of what I believe is the 1934 edition is also on YouTube. It's a great narration by John Lescault, a great overview of 'how to think about investing', and something great to listen to before going to sleep so that you can dream sweet value investing dreams.):
Our distinction between the character of the enterprise and the terms of the commitment suggests a question as to which element is the more important. Is it better to invest in an attractive enterprise on unattractive terms or in an unattractive enterprise on attractive terms? The popular view unhesitatingly prefers the former alternative, and in so doing it is instinctively, rather than logically, right. Over a long period, experience will undoubtedly show that less money has been lost by the great body of investors through paying too high a price for securities of the best regarded enterprises than by trying to secure a larger income or profit from commitments in enterprises of lower grade. 
From the standpoint of analysis, however, this empirical result does not dispose of the matter. It merely exemplifies a rule that is applicable to all kinds of merchandise, viz., that the untrained buyer fares best by purchasing goods of the highest reputation, even though he may pay a comparatively high price. But, needless to say, this is not a rule to guide the expert merchandise buyer, for he is expected to judge quality by examination and not solely by reputation, and at times he may even sacrifice certain definite degrees of quality if that which he obtains is adequate for his purpose and attractive in price. This distinction applies as well to the purchase of securities as to buying paints or watches. It results in two principles of quite opposite character, the one suitable for the untrained investor, the other useful only to the analyst.  
1. Principle for the untrained security buyer: Do not put money in a low-grade enterprise on any terms.  
2. Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another.  
We have criticized the placing of exclusive emphasis on the choice of the enterprise on the ground that it often leads to paying too high a price for a good security. A second objection is that the enterprise itself may prove to be unwisely chosen. It is natural and proper to prefer a business which is large and well managed, has a good record, and is expected to show increasing earnings in the future. But these expectations, though seemingly well-founded, often fail to be realized. Many of the leading enterprises of yesterday are today far back in the ranks. Tomorrow is likely to tell a similar story. The most impressive illustration is afforded by the persistent decline in the relative investment position of the railroads as a class during the past two decades. The standing of an enterprise is in part a matter of fact and in part a matter of opinion. During recent years investment opinion has proved extraordinarily volatile and undependable. In 1929 Westinghouse Electric and Manufacturing Company was quite universally considered as enjoying an unusually favorable industrial position. Two years later the stock sold for much less than the net current assets alone, presumably indicating widespread doubt as to its ability to earn any profit in the future. Great Atlantic and Pacific Tea Company, viewed as little short of a miraculous enterprise in 1929, declined from 494 in that year to 36 in 1938. At the latter date the common sold for less than its cash assets, the preferred being amply covered by other current assets. 
These considerations do not gainsay the principle that untrained investors should confine themselves to the best regarded enterprises. It should be realized, however, that this preference is enjoined upon them because of the greater risk for them in other directions, and not because the most popular issues are necessarily the safest. The analyst must pay respectful attention to the judgment of the market place and to the enterprises which it strongly favors, but he must retain an independent and critical viewpoint. Nor should he hesitate to condemn the popular and espouse the unpopular when reasons sufficiently weighty and convincing are at hand. 

Peter Bernstein quote

Risk is about how we make decisions, and only incidentally about the math that we employ to reach those decisions. Knowing how it works is just the beginning. Knowing how to use these tools is the introduction to wisdom. And that is no easy task. 
At its roots, risk is about mystery. It focuses on the unknown, for there would be no such thing as risk if everything were known. Pascal himself, the father of probability, touched the heart of the matter in his wager: God is or God is not. “Which way should we incline?” Pascal asks. And then he puts the clincher on the matter when he asks: “Reason cannot answer.” That is what life is all about: dealing with problems to which there is no certain solution and where any kind of rational decision is often impossible to define. 
Today’s obsession with risk management focuses too intently on the instruments of the management and measurement of risk. The more we stare at the jumble of equations and models the more we lose sight of the mystery of life. All too often, reason cannot answer. Even the most brilliant of mathematical geniuses will never be able to tell us what the future holds. In the end, what matters is the quality of our decisions in the face of uncertainty. 
The theme that I want to emphasize here is the dominance of decision-making over the analysis of probability. I am going to explore these matters from three points of view: Pascal’s Wager as the ideal model for making decisions, the impact of time on decisions, and an exploration into the sources of uncertainty, which lead us to philosophical and moral issues that illuminate the same theme.

Related book: Against the Gods: The Remarkable Story of Risk

Related link: Peter L. Bernstein on risk

Thursday, July 2, 2015


I'll be on vacation posting over the next week and a half or so, where I've scheduled some quotes and book excerpts, but probably won't post much else, if anything.

Latticework of Mental Models: Law of Diminishing Marginal Utility (LINK)

Mutual Fund Observer, July 2015 (LINK)



Disruptive diagnostics firm Theranos gets boost from FDA (LINK)
Related links: 
Elizabeth Holmes' Academy of Achievement interview 
Elizabeth Holmes on Charlie Rose (video) 
11 timeless lessons from a book that changed billionaire CEO Elizabeth Holmes' life [The book is Meditations by Marcus Aurelius.]
Book of the day (free on Kindle until tomorrow): Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies

On another note, I've been impressed by the Overcast app for listening to podcasts, using its Smart Speed and Voice Boost tools. I realized that it would be great to convert a lot of YouTube videos to MP3 and put them into a podcast on the app, both so that I could use the app features, and so that I could easily download and delete those audio files straight onto my phone more easily, as well as make it easy to save my spot for long recordings that I don't listen to in a single sitting. So if anyone has any experience with setting up a podcast, I'd love to get some tips on how to make this as easy as possible. The goal is to essentially put audio files like THESE into podcast form. Thanks.

Wednesday, July 1, 2015


For those interested, we've filed as a substantial shareholder on our second Australian name at Boyles. The details of which can be seen HERE.


Robert Shiller on CNBC (video) (LINK)
Related book: Irrational Exuberance 3rd edition
Rob Arnott: From Innovation to Impact (video) [H/T ValueWalk] (LINK)

The Absolute Return Letter - July 2015: A Return to Fundamentals? (LINK)

Monthly Investment Outlook from Bill Gross: It Never Rains in California (LINK)

Andrew Smithers: How fast is moderate growth? (LINK)

Book of the day: Explaining Social Behavior: More Nuts and Bolts for the Social Sciences

Tuesday, June 30, 2015

Seth Klarman letter excerpt from 1999

From Seth Klarman in June 1999:
Students of financial history can point to historic levels of valuation to suggest that we are in a bubble. But students of psychology may be needed to complete the picture. For one thing, the financial markets have been so strong for so long that fear of market risk has mostly evaporated. People who used to hold bank certificates of deposit now maintain a portfolio of growth stocks. It is not really within human nature to comprehend that you may not know everything you think you know, and, further, that what you believe in could change on a dime. When your investments are backstopped by reasonably-priced tangible assets, the prospect of a change in sentiment is not very costly. If a building is no longer needed as a furniture retailer, maybe it would make a good warehouse. If you can't make money as a distributor, you can recover most of your capital by reselling your inventory.  
Not so for dreams. With more and more of the market value of U.S. equities represented by lofty (in some cases infinite) multiples of current results, a change in sentiment could wipe out a large percentage of investor net worth. Sentiment, existing only in the minds of investors, is subject to change quickly and without notice. Perhaps today's dreams will become realities for some of the current Internet and technology favorites; and perhaps not. For many, the dream will be replaced by a nightmare. Then, the escalating bill for betting on dreams rather than on realities will have to be paid up.   
Real value, of bricks and mortar, finished goods inventories, accounts receivable, operating factories and businesses, and even brand names, is hard, although far from impossible, to destroy. If you don't overpay for it, your downside is protected. If you purchase it at a discount, you have a real margin of safety.

Tom Gayner's Talk at Google: The Evolution of a Value Investor

Link to video

[H/T BeyondProxy]

Monday, June 29, 2015


Wilbur Ross on CNBC (video) (LINK)

This short piece from Michael Lewis last month is making its rounds again: Greece Saunters Across the Autobahn (LINK)

The recent Greek drama reminded me of the short "discussion" from 5 years ago between Hugh Hendry, Gillian Tett and Jeffrey Sachs (video) (LINK)

Claudio Borio's slides on persistently low interest rates [H/T Marginal Revolution] (LINK) [And you can watch him give his talk on them as well, HERE.]

Grant's Interest Rate Observer on Puerto Rico, from May 2014 (LINK)

Matt Ridley on EconTalk (LINK)
Related book: The Rational Optimist
Hussman Weekly Market Comment: Durable Returns, Transient Returns (LINK)
Significant news items tend to concentrate selling decisions that contribute to abrupt losses, but those losses are already inevitable once valuations become extreme. In the current cycle, the catalyst might be European bank leverage (which is the main reason Greece is a concern), credit concerns related to covenant lite junk debt, economic weakness, investor concern about monetary shifts, or possibly by wholly unanticipated events. But the “catalyst” will merely affect the timing of the losses. 
This is not a Goldilocks market. No, this is a Roseanne Roseannadanna market (Gilda Radner’s character from Saturday Night Live). Though investors seem to believe that catalysts for a market plunge should be known ahead of time, they’re likely to learn in hindsight that the specific catalyst didn’t matter. History teaches that once obscene valuation is coupled with overvalued, overbought, overbullish extremes, and is then joined by deterioration in market internals, the outcome is already baked in the cake. Afterward, investors discover “Well Jane, it just goes to show you… It’s always something. If it’s not one thing, it’s another.” 
Understand that now. Once extreme valuations have been established, further market gains have always been transient. Once market internals deteriorate, it’s a signal that investors have shifted from risk-seeking to risk-aversion. At that point, there is no specific event that must be known in advance. One need only have an appreciation for the inevitable swing of the pendulum from extreme euphoria to extreme fear that has characterized the financial markets for centuries. The “catalyst” is rarely appreciated as a catalyst until after severe market losses have already occurred, and in many cases, that catalyst is simply an event that concentrated selling plans that were already being contemplated. If it’s not one thing, it’s another. But it’s always something. 
The message here is not “sell everything.” The message is to understand where we are in the market cycle from the standpoint of a century of reliable evidence, and to act in a way that meets your investment objectives. Align your portfolio with careful consideration for your tolerance for losses over the market cycle; with your willingness to miss out on interim market gains should they emerge; with the horizon over which you will actually need to spend from your investments; with the extent that you believe that history is actually informative for making investment decisions; with the extent to which alternative investment outlooks are supported by evidence, ideally spanning numerous market cycles.

Sunday, June 28, 2015


The BIS Annual Report (LINK)

Steve Keen: "If you want to understand Greece today, read Wynne Godley from 1992." (LINK)

The Bruce Greenwald Method [H/T @mjmauboussin] (LINK)

Steven Romick’s Speech To CFA Society Of Chicago [H/T ValueWalk] (LINK)
We will therefore continue to focus our energies on the search for great businesses at good prices or decent businesses at great prices. We try and keep it simple. I confess that I didn’t always operate this way. In my early years, I ended up too much in the weeds. I had to know everything about a company and its industry. I’ve since learned that knowing less is okay as long as you have identified the one to three things that will drive the company. We believe exactness offers little so we prefer to establish a potential range of outcomes instead. We’d rather be directionally right rather than precisely wrong. 
We spend a lot of time asking such questions as: “How does the business work?” “Why does this opportunity exist?” And then, “What if?” Knowing that successful investing is as much about finding winners as it is about avoiding losers, we invert a favorable thesis so as to see it through less rose-colored lenses, all of which hopefully limits negative surprises. 
Stocks ask you different questions at different prices. One needs fewer answers at a low price versus a high price. For example, a container ship company priced as if its vessels are worth just scrap value requires only a couple of questions like, “How much cash might be burned before the market rebounds?” and “Can its balance sheet support that?” Whereas if you bought that same container ship company with good current cash flow but day rates are at highs and its stock is trading at two times book value, you’d be far more dependent on the sustainability of the day rate. You’d then have to ask whether or not the management team would spend their free cash flow wisely. In the first case, you’d worry less about their capital allocation decisions because they’d be lacking free cash flow and financial flexibility. 
Scott Adams: How Do You Avoid Email? (LINK)

TED Talk - Chris Urmson: How a driverless car sees the road (LINK)

Brad Feld speaks at Big Omaha 2015 (video) (LINK)

Sam Harris and Dan Carlin in podcast discussing American interventionism, the war on terror, and related topics (LINK) [And on a related-to-podcasts note, thanks to Max for telling me about the Overcast app, which is great for listening to podcasts.]

Matt Ridley: Invasive species are the greatest cause of extinction (LINK)

Cephalopod Week Wrap-Up (LINK)

Book of the day [H/T @dccommonsense]: The Wages of Destruction: The Making and Breaking of the Nazi Economy