An interview with Kevin Clayton, CEO of Clayton Homes, from several years ago (LINK)
Stewart Brand on the Whole Earth Catalog’s Long Legacy over 50 years (video) (LINK)
Summer Solstice 2018: The Search for Life in the Galaxy (LINK)
I believe that the start of the 1980s is the ideal time to pick individual stocks on the basis of my rules. Unlike the early 1970s, it will not be hard to find an abundant selection of strong companies that fill the bill.
But remember that a large number of other investors—including the pros—are trying to play the same game. And the efficient-market theory suggests that the odds of anyone's consistently beating the market are pretty slim. Nevertheless, for many of us, trying to outguess the market is a game that is much too fun to give up. Even if you were convinced you would not do any better than average, I'm sure that most of you with speculative temperaments would still want to keep on playing the game of selecting individual stocks.
Picking the Manager
There's an easier, more profitable way to gamble in the race for investment performance: instead of pricing the individual horses (stocks), pick the best jockeys (investment managers).
...While some readers may well be disappointed that I do not "name" stocks in this book, I have absolutely no hesitation about citing mutual fund managers who run their portfolios by following rules similar to the rules I use and who have enjoyed perfectly splendid records. John Marks Templeton is one such person.
...According to every mutual fund rating service, the fund that bears John Marks Templeton's name has been the outstanding performer over the past two decades. Indeed, Templeton's record of beating the broad stock indexes extends as far back as the 1930s. In a field crowded with mediocrity, Templeton seems to be one of the true investment greats—a living embarrassment to the efficient-market theory.
Over the last twelve months I’ve devoted three memos to discussing macro developments, market outlook, and recommendations for investor behavior. These are important topics, but usually not the ones that interest me most; I prefer to discuss things that are likely to affect the functioning of markets for years to come. Since little in the environment has changed from what I described in those three memos, I feel I now have the liberty to turn to some bigger-picture issues.
This memo covers three ways in which securities markets seem to be moving toward reducing the role of people: (a) index investing and other forms of passive investing, (b) quantitative and algorithmic investing, and (c) artificial intelligence and machine learning.
Related book: Stealing Fire
Companies such as Coca-Cola and Gillette might well be labeled "The Inevitables." Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years. Nor is our talk of inevitability meant to play down the vital work that these companies must continue to carry out, in such areas as manufacturing, distribution, packaging and product innovation. In the end, however, no sensible observer - not even these companies' most vigorous competitors, assuming they are assessing the matter honestly -questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime. Indeed, their dominance will probably strengthen. Both companies have significantly expanded their already huge shares of market during the past ten years, and all signs point to their repeating that performance in the next decade.
Obviously many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms than will The Inevitables. But I would rather be certain of a good result than hopeful of a great one.
Of course, Charlie and I can identify only a few Inevitables, even after a lifetime of looking for them. Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish Survival of the Fattest as almost a natural law, most do not. Thus, for every Inevitable, there are dozens of Impostors, companies now riding high but vulnerable to competitive attacks. Considering what it takes to be an Inevitable, Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the Inevitables in our portfolio, therefore, we add a few "Highly Probables."
You can, of course, pay too much for even the best of businesses. The overpayment risk surfaces periodically and, in our opinion, may now be quite high for the purchasers of virtually all stocks, The Inevitables included. Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
A far more serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse. When that happens, the suffering of investors is often prolonged. Unfortunately, that is precisely what transpired years ago at both Coke and Gillette. (Would you believe that a few decades back they were growing shrimp at Coke and exploring for oil at Gillette?) Loss of focus is what most worries Charlie and me when we contemplate investing in businesses that in general look outstanding. All too often, we've seen value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander.
In the annual report, we talked about Coca-Cola and Gillette in terms of their base business being what I call “The Inevitables.” But that related, obviously, to the soft drink business in the case of Coca-Cola and the shaving products with Gillette. It doesn’t extend to necessarily everything they do. But fortunately in both those companies those are very important products.
I would say that in the food business, you would never get the total certainty of dominance that you would get in products like Coca-Cola and Gillette. People move around in the food business, from where they eat, from — they may favor McDonald’s but they will go to different places at different times. And somebody starts shaving with a Gillette Sensor Plus is very unlikely to go elsewhere, in my view.
So they do not — you just — you never would get in the food business, in my judgment, quite the inevitability that you would get in the soft drink business with a Coca-Cola.
And then he added more color in his answer to the next question at that meeting:You’ll never get it again in the soft drink business. I mean, it took a hundred — I guess it’d be 1886, so it’d be about 111 years to get to the point where they are. And the infrastructure’s incredible, and — so I wouldn’t put it quite in the same class, in terms of inevitability.
But I should — I’m glad you brought up the subject of the annual report. Because what I was doing in the annual report is I had talked about Coke and Gillette as being “The Inevitables,” and what wonderful businesses they were.
And I thought it appropriate, particularly — the report goes to a lot of people — that they would not take that as an unqualified buy recommendation about the companies, because they’re absolutely wonderful companies run by outstanding managers.
But you can pay too much, at least in the short run, for businesses like that. So I thought it was only appropriate to point out that no matter how wonderful a business it is, that there always is a risk that you will pay a price where it will take a few years for the business to catch up with the stock. That the stock can get ahead of the business.
And I don’t know where that point is with those companies or any other companies, but I did say that I thought that the risks were fairly high that that situation existed with most securities in the market, including companies such as “The Inevitables.”
But it was designed to be sure that people did not take the remarks that I made about those companies, and just take that as an unqualified buy recommendation regardless of price.
We have no intention of selling those two stocks. We wouldn’t sell them if they were selling at prices considerably higher than they are now.
But I didn’t want — particularly — relatively unsophisticated people to see those names there and then think, “This guy is touting these as a wonderful buy.” Generally speaking, I think if you’re sure enough about a business being wonderful, it’s more important to be certain about the business being a wonderful business than it is to be certain that the price is not 10 percent too high or 5 percent too high or something of the sort.
And that’s a philosophy that I came slowly to. I originally was incredibly price conscious. We used to have prayer meetings before we would raise our bid an eighth, you know, around the office. (Laughter)
But that was a mistake. And in some cases, a huge mistake. I mean, we’ve missed things because of that.
And so what I said in the report was not a market prediction in any sense. We never try to predict the stock market.
We do try to price securities. We try to price businesses, is what we try to do. And we find it hard to find wonderful, good, average, substandard businesses that look to us like they’re cheap now. But, you know, you don’t always get a chance to buy things cheap.
Related book: Theodore Roosevelt: A Literary LifeFear of Humans Is Making Animals Around the World Go Nocturnal [H/T Linc] (LINK)
Two years ago, NASA dismissed and mocked an amateur’s criticisms of its asteroids database. Now Nathan Myhrvold is back, and his papers have passed peer review.
The epidemics of the early 21st century revealed a world unprepared, even as the risk of pandemics continues to multiply. Much worse is coming. Is Donald Trump ready?
Related book: Measure What MattersTrees That Have Lived for Millennia Are Suddenly Dying - by Ed Yong (LINK)
And the third part was the idea of independence. So it was scarcity, permanence, independence.... And independence is even of significant value as well in the sense that much of what we see today in our world is interdependent.... We depend on so many external factors. We depend on suppliers. We depend on the light coming on when we turn on the switch. We take it for granted that the light will come on. We depend on the water company.
But more so, in a business sense, we depend on, perhaps, key suppliers, that often, perhaps, their situation is not as strong as we think it is. We have competitive pressures that come as a result of competition that would not have been there had there not been credit. So credit creation—the debasement of money—has created an environment in which there is falsity within the competitive arena in which companies operate. And in order to survive, they have to, more or less, adapt to the conditions. So there's dependence on government for subsidies, or for tax abatements, or other such things. Sometimes there's dependence on one customer.
So dependence makes a system fragile. So the more independent an organism is from external weaknesses, the more likely it is to add to its endurance, or its strength. So independence is very valuable, and is actually costly. There's an element of freedom. Freedom doesn't come free. You have to work at it. The threats to your freedom and to your liberty and to your independence are many, and they change from time to time and from apple to apple.
But a successful practice...which seeks to protect, preserve, and enhance the patrimony over many years is one that must be concerned with these three components.
Characteristically, stocks thought to have good prospects sell at relatively high prices. How can the investor tell whether or not the price is too high? We think that there is no good answer to this question—in fact we are inclined to think that even if one knew for a certainty just what a company is fated to earn over a long period of years, it would still be impossible to tell what is a fair price to pay for it today. It follows that once the investor pays a substantial amount for the growth factor, he is inevitably assuming certain kinds of risk; viz., that the growth will be less than he anticipates, that over the long pull he will have paid too much for what he gets, that for a considerable period the market will value the stock less optimistically than he does.
On the other hand, assume that the investor strives to avoid paying a high premium for future prospects by choosing companies about which he is personally optimistic, although they are not favorites of the stock market. No doubt this is the type of judgment that, if sound, will prove most remunerative. But, by the very nature of the case, it must represent the activity of strong-minded and daring individuals rather than investment in accordance with accepted rules and standards.
May Such Purchases Be Described as Investment Commitments? This has been a longish discussion because the subject is important and not too well comprehended in Wall Street. Our emphasis has been laid more on the pitfalls of investing for future growth than on its advantages. But we repeat that this method may be followed successfully if it is pursued with skill, intelligence and diligent study. If so, is it appropriate to call such purchases by the name of “investment”? Our answer is “yes,” provided that two factors are present: the first, already mentioned, that the elements affecting the future are examined with real care and a wholesome scepticism, rather than accepted quickly via some easy generalization; the second, that the price paid be not substantially different from what a prudent business man would be willing to pay for a similar opportunity presented to him to invest in a private undertaking over which he could exercise control.
We believe that the second criterion will supply a useful touchstone to determine whether the buyer is making a well-considered and legitimate commitment in an enterprise with an attractive future, or instead, under the guise of “investment,” he is really taking a flier in a popular stock or else letting his private enthusiasm run away with his judgment.
It will be argued, perhaps, that common-stock investments such as we have been discussing may properly be made at a considerably higher price than would be justified in the case of a private business, first, because of the great advantage of marketability that attaches to listed stocks and, second, because the large size and financial power of publicly owned companies make them inherently more attractive than any private enterprise could be. As to the second point, the price to be paid should suitably reflect any advantages accruing by reason of size and financial strength, but this criterion does not really depend on whether the company is publicly or privately owned. On the first point, there is room for some difference of opinion whether or not the ability to control a private business affords a full counterweight (in value analysis) to the advantage of marketability enjoyed by a listed stock. To those who believe marketability is more valuable than control, we might suggest that in any event the premium to be paid for this advantage cannot well be placed above, say, 20% of the value otherwise justified without danger of introducing a definitely speculative element into the picture.
Related book: Origin Story: A Big History of EverythingRevisionist History Podcast: Free Brian Williams (Memory Part 2) (LINK)
Texas food delivery startup Burpy was doing well, expanding from Austin to Houston, San Antonio and Dallas. But then Amazon got in to the same business. This week on Decrypted, Bloomberg Technology’s Olivia Zaleski goes to Austin to chart one startup’s struggle to survive while going up against a tech behemoth.Moving Animals to Safe Havens Can Unexpectedly Doom Them - by Ed Yong (LINK)
So when we look at religion, and, to some extent, ancestral superstitions, we should consider what purpose they serve, rather than focusing on the notion of “belief,” epistemic belief in its strict scientific definition. In science, belief is literal belief; it is right or wrong, never metaphorical. In real life, belief is an instrument to do things, not the end product. This is similar to vision: the purpose of your eyes is to orient you in the best possible way, and get you out of trouble when needed, or help you find prey at a distance. Your eyes are not sensors designed to capture the electromagnetic spectrum. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival.
...Survival comes first, truth, understanding, and science later.
In other words, you do not need science to survive (we’ve survived for several hundred million years or more, depending on how you define the “we”), but you must survive to do science. As your grandmother would have said, better safe than sorry. Or as per the expression attributed to Hobbes: Primum vivere, deinde philosophari (First, live; then philosophize). This logical precedence is well understood by traders and people in the real world, as per the Warren Buffett truism “to make money you must first survive”— skin in the game again; those of us who take risks have their priorities firmer than vague textbook pseudo-rationalism.
Let us return to Warren Buffett. He did not make his billions by cost-benefit analysis; rather, he did so simply by establishing a high filter, then picking opportunities that pass such a threshold. “The difference between successful people and really successful people is that really successful people say no to almost everything,” he said. Likewise our wiring might be adapted to “say no” to tail risk. For there are a zillion ways to make money without taking tail risk.
At Berkshire we have certain filters that have been developed. If in the course of a presentation or evaluation part of a proposal an idea hits a filter, then there is no way I will invest. Charlie has similar filters. We don’t worry about a lot of things as we only have to be right about a certain number of things – things that are within our circle of competence.
Typically, and this is not well understood, his way of thinking is that there are disqualifying features to an investment. So he rifles through and as soon as you hit one of those it’s done. Doesn’t like the CEO, forget it. Too much tail risk, forget it. Low-margin business, forget it. Many people would try to see whether a balance of other factors made up for these things. He doesn’t analyze from A to Z; it’s a time-waster.
There's no rule I can't have crotchets [crotchet: a perverse or unfounded belief or notion]. I don't have to be totally rational. Don't we all do that? We probably should, as a matter of fact. Certainly a crotchet that says this is too hard for me, I'm not going to try to understand it. That's a very useful crotchet.And while Munger was using the word 'rational' as might be defined by the economics profession, his crotchets would fit Taleb's definition of rational:
Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin.
Why? Clearly as we saw in the Lindy discussion:
Not everything that happens happens for a reason, but everything that survives survives for a reason.
Rationality is risk management, period.
Twenty years ago, Microsoft tried to eliminate its competition in the race for the future of the internet. The government had other ideas.Tokens (Don’t) Rule Everything Around Me — Thoughts On Security Tokens - by Parker Thompson (LINK)
Because the risk of overbetting far outweighs the penalties of underbetting, investors particularly those who are just beginning to use a focus investment strategy—should use fractional Kelly bets. Unfortunately, minimizing your bets also minimizes your potential gain. However, because the relationship in the Kelly model is parabolic, the penalty for underbetting is not severe. A half-Kelly, which reduces the amount of the bet by 50 percent, reduces the potential growth rate by only 25 percent.
This seems a good place to summarize:
1. To receive the benefit of the Kelly model, you must first be willing to think about buying stocks in terms of probabilities.
2. You must be willing to play the game long enough to achieve its rewards.
3. You must avoid using leverage, with its unfortunate consequence.
4. You should demand a margin of safety with each bet you make.
"The Kelly system is for people who simply want to compound their capital and see it grow to very large numbers over time," says Ed Thorp. "If you have a lot of time and a lot of patience, then it's the right function for you."