Wednesday, April 24, 2019

Warren Buffett and Charlie Munger on post-crisis macroeconomics

As this year's Berkshire Hathaway Annual Meeting is approaching, I've been thinking about some of the comments Warren Buffett and Charlie Munger have made since 2009 about how the post-crisis government and central bank interventions in economies and markets will play out. Basically, my impression from attending all of the annual meetings since the crisis was that they believe that since a lot of this, including zero and negative interest rates, has never happened before, no one really knows how it will all play out (although plenty of commentators will tell you otherwise). 

As such, it's best to just continue to focus on the micro factors, and manage risk by investing in businesses likely to survive and hopefully thrive under a wide range of scenarios, including potentially high inflation at some point. After going back through things, it seems my impression was roughly correct. Below are some of their comments over the last several years that I think give a good summary.

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"We are doing things that we haven’t seen in the past. And policymakers do not know the outcome of that. I don’t know the outcome of it. You do know it will have consequences." --Warren Buffett (2009)

"I do not know the answer as to what happens if you keep rates close to zero for a very, very long time." --Warren Buffett (2014)

"Nobody, for instance, in Japan would ever have anticipated that interest rates would go way down and stay down for 20 years. And nobody would’ve expected common stocks to decline by huge amounts and stay down for 20 years. So strange things have happened. And they’re very confusing to the economics profession. In fact, if you’re not confused, you really probably don’t understand it very well." --Charlie Munger (2014)

"We’ve taken the Federal Reserve balance sheet up from a trillion to over 4 trillion, and we’ve done a lot of things that weren’t in my Economics 101 course, and so far nothing bad has happened, except for the fact that people who saved and kept their money in short-term savings instruments have just totally gotten killed, in terms of the income that they received from that. But it’s still hard for me to see how if you toss money from helicopters that eventually you don’t have inflation. Certainly, if the money supplied grows faster and faster relative to the output of goods and services, something like that is supposed to happen. But I’ve been surprised by what’s happened. When Poland issues bonds at negative interest rates, you know, I did not have that in my list of forecasts a few years ago. And so I think we’re operating in a world that Charlie and I don’t understand very well." --Warren Buffett (2015)

"We have made very little progress in life by trying to outguess these macroeconomic factors. We basically have abdicated. We’re just swimming all the time, and we let the tide take care of itself.... The trouble with making all these economic pronouncements is that people gradually get so they think they know something. It’s much better just to say, 'I'm ignorant.'" --Charlie Munger (2015)

"We’re interested in economic matters, and political matters, for that matter. We know a lot, or are familiar...with almost all the macroeconomic factors. That doesn’t mean we know where they’re going to lead. We don’t know where zero interest rates are going to lead." --Warren Buffett (2016)

"I don’t think anybody really knows much about negative interest rates. We never had them before. And we’ve never had periods of stasis like — except for the Great Depression — we didn’t have things like happened in Japan: great modern nation playing all the monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years. And none of the great economists who have studied this stuff, and taught it to our children, understand it, either. So we just do the best we can. Our advantage is that we know we don’t understand it. If you’re not confused, you haven’t thought about it correctly. " --Charlie Munger (2016)

Tuesday, April 23, 2019

Links

"Inflation destroys value, but it destroys it very unequally. The best business to have during inflation is one that retains its earning power in real dollars without commensurate investment to, in effect, fund the inflation-produced nominal growth. The worst kind of business is where you have to keep putting more and more money into a lousy business. In effect, the airlines have been hurt by inflation over the last 40 years, because now they have to put a whole lot of money in a lousy investment, which is a plane, compared to 30 or 40 years ago. And they have to stay in the game. They have to keep buying new planes. And the new planes cost far more now, and the returns continue to be inadequate. So the best protection is a very good business that does not require big capital investment...  Inflation is always a factor in calculating the kind of investment, the kind of business, that we want to buy. But it isn’t like it crowds out all other factors. I mean, it’s always been with us. We’ll think about it always." --Warren Buffett (2005)  [Related link: Warren Buffett’s Comments on Inflation]

Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated [H/T @MebFaber, whose Twitter thread is worth reading as well] (LINK)

Ray Dalio at Stanford (video) (LINK)

Value Investing with Legends (a new podcast): Mario Gabelli (LINK)

Invest Like the Best Podcast: Josh Wolfe – The Tech Imperative (LINK)

Against the Rules with Michael Lewis (podcast): The Hand of Leonardo (LINK)

Decrypted Podcast: As Amazon Gets Bigger, Sellers Feel the Squeeze (LINK)

WorkLife with Adam Grant (podcast): When Strength Becomes Weakness (LINK)

Lifesaving Forecasts Start Here: Inside the Storm Prediction Center [H/T @pcordway] (LINK)

Monday, April 22, 2019

Links

"Doing nothing often leads to the very best something." --Winnie the Pooh

Warren Buffett says stock buybacks make 'nothing but sense' (video) (LINK) [I haven't seen the full interview yet, but Yahoo has slowly released some clips. There isn't much, but some of the others can be found mixed in with other things HERE.]

The Man Who SOLD The WORLD [John H. Patterson] (video) (LINK)

The Anatomy of a Great Decision (LINK)

Uber Questions - by Ben Thompson (LINK)

You, Dear Investor, Are Patient, Prudent and Calm - by Jason Zweig ($) (LINK)

Budweiser Boss's Recipe for Growth: More Time Away From the Office ($) (LINK)

Kraft Heinz Names New CEO ($) (LINK)

Mattel: Buybacks, Barbie and dead babies - by John Hempton (LINK)
I am short Mattel based on seemingly dysfunctional management and too much debt. I regarded these in part as flip sides of the same problem. Too much debt meant that Mattel found it hard to take risks, to invent new toys, to hire and nurture the talent that keeps a toy company fresh. 
Debt meant that Mattel had to "milk" brands, prioritising short-term cash for stock repurchase and eventually for interest payments. This led to cashing the iconic American Girl brand in for a short-term sugar hit when it was stocked in Toys R Us. 
I knew management were dysfunctional. Churn in the c-suite proves it. But recent stories leave me reeling. Mattel have morphed into a truly evil company. One that kills babies.
EconTalk: Paul Romer on Growth, Cities, and the State of Economics (LINK)

The First Sheep Farmers and Their 10,000-Year-Old Urine - by Sarah Zhang (LINK)

Friday, April 19, 2019

Links

"The best investment you can have, for most people, is in your own abilities." --Warren Buffett

Some presentation slides are available from the Ben Graham Centre's 2019 Value Investing Conference [H/T @chriswmayer] (LINK)

Prediction is Difficult, Especially About the Future (LINK)

When You’ll Believe Anything - by Morgan Housel (LINK)

Hard Truths for the Inflation Truthers - by Cullen Roche (LINK)

Secrecy, Self-Dealing, and Greed at the N.R.A. (LINK)

Exponent Podcast: Family-Friendly Disney (LINK)

Longform Podcast: Michael Lewis (LINK)

Freakonomics Radio: The Most Interesting Fruit in the World (LINK)

Radiolab Podcast: Americanish (LINK)

Scientists Partly Restore Activity in Dead-Pig Brains - by Ed Yong (LINK)

The Predator That Makes Great White Sharks Flee in Fear - by Ed Yong (LINK)

TED Talk: Inside the black hole image that made history | Sheperd Doeleman (LINK)

Wednesday, April 17, 2019

Links

"The history of much of which we don’t like in modern corporate capitalism comes from an unreasonable expectation, communicated from headquarters, that [corporate] earnings have to go up with no volatility and great regularity. That kind of an expectation from headquarters is not just the kissing cousin of evil. It’s the blood brother of evil. And we just don’t need that blood brother in our headquarters." --Charlie Munger (2005)

 "Businesses do not meet expectations quarter after quarter and year after year. It just isn’t in the nature of running businesses. And, in our view, people that predict precisely what the future will be are either kidding investors, or they’re kidding themselves, or they’re kidding both. Charlie and I have been around the culture, sometimes on the board, where the ego of the CEO became very involved in meeting predictions which were impossible, really, over time. And everybody in the organization knew, because they were very public about it, what these predictions were and they knew that their CEO was going to look bad if they weren’t met. And that can lead to a lot of bad things." --Warren Buffett (2005)

Michael Mauboussin: Looking for Easy Games in Bonds (LINK)

A compilation of Q1 investor letters [H/T @MineSafety] (LINK)

CNBC’s interview with ValueAct’s Jeff Ubben (video) (LINK)

Invest Like the Best Podcast: Katherine Collins – Impact and ESG Investing (LINK)

Against the Rules with Michael Lewis (podcast): The Alex Kogan Experience (LINK)

WorkLife with Adam Grant (podcast): Bouncing Back from Rejection (LINK)

The Knowledge Project with Shane Parrish (podcast): Catalyzing Success (LINK)

Business Wars Podcast: Ferrari vs. Lamborghini (Part 1, Part 2)

Edge #535: Machines Like Me - A Talk By Ian McEwan (LINK)

The world’s deadliest shapeshifter - by Bill Gates (LINK)

Exploding Aphids Plaster Holes in Their Home With Bodily Fluids - by Ed Yong (LINK)

Monday, April 15, 2019

The Big Ideas, Discover Magazine, and a request...

In a talk last year at Cal Poly Pomona, Peter Kaufman said the following:
I tried to learn what Munger calls, ‘the big ideas’ from all the different disciplines. Right up front I want to tell you what my trick was, because if you try to do it the way he did it, you don’t have enough time in your life to do it. It’s impossible. Because the fields are too big and the books are too thick. So my trick to learn the big ideas of science, biology, etc., was I found this science magazine called Discover magazine. Show of hands, anybody here ever heard of Discover magazine? A few people. OK. 
And I found that this magazine every month had a really good interview with somebody from some aspect of science. Every month. And it was six or seven pages long. It was all in layperson’s terms. The person who was trying to get their ideas across would do so using good stories, clear language, and they would never fail to get all their big ideas into the interview. I mean if you’re given the chance to be interviewed by Discover magazine and your field is nanoparticles or something, aren’t you going to try your very best to get all the good ideas into the interview with the best stories etc. OK. So I discovered that on the Internet there were 12 years of Discover magazine articles available in the archives. 
So I printed out 12 years times 12 months of these interviews. I had 144 of these interviews. And I put them in these big three ring binders. Filled up three big binders. And for the next six months I went to the coffee shop for an hour or two every morning and I read these. And I read them index fund style, which means I read them all. I didn’t pick and choose. This is the universe and I’m going to own the whole universe. I read every single one. 
Now I will tell you that out of 144 articles, if I’d have been selecting my reading material, I probably would have read about 14 of them. And the other 130? I would never in a million years read six pages on nanoparticles. Guess what I had at the end of six months? I had inside my head every single big idea from every single domain of science and biology. It only took me 6 months. And it wasn’t that hard because it was written in layperson’s terms. And really, what did I really get? Just like an index fund, I captured all the parabolic ideas that no one else has. And why doesn’t anybody else have these ideas? Because who in the world would read an interview on nanoparticles? And yet that’s where I got my best ideas. I would read some arcane subject and, oh my god, I saw, ‘That’s exactly how this works over here in biology.’ or ‘That’s exactly how this works over here in human nature.’ You have to know all these big ideas. 
As I've tried to find all 144 articles, I've had trouble getting them all. For example, if one subscribes and goes to the archives, I can see ones for the first few months of 2009, but not for May 2009. Has anyone else tried to find all of these? There is a good Discover Q&A page HERE, which has 74 interviews. Of those 74 interviews, 67 of them don't require a subscription, and I've compiled those for interested readers in chronological order HERE, but I'm having trouble figuring out exactly what Peter Kaufman was referring to when he mentioned the 144 number. If anyone has any thoughts, feel free to email me at valueinvestingworld@gmail.com. Thanks!

Links

Terry Smith, Fundsmith LLP, March 2019 Presentation (video) [H/T @iancassel] (LINK)
Related book: Accounting for Growth
Disney and the Future of TV - by Ben Thompson (LINK)

Disney CEO Bob Iger lays out details on company’s Netflix competitor (video) (LINK)

GMO White Paper - Thinking Outside the Box: How and Why to Invest in a Climate Change Strategy (LINK)

Interview Transcripts Tell Story of Fed Over Past 50 Years ($) (LINK)
Transcripts of more than 50 interviews with top Federal Reserve officials and staffers offer an inside view of central bank-operations over the past 50 years, including internal debates and pressures from the White House. 
Among the documents released Friday are interviews with former Fed leaders Paul Volcker, Alan Greenspan and Janet Yellen as part of an oral history project in advance of the central bank’s centennial in 2013.
Notes from Toronto - by Chris Mayer (LINK)

Uber's Coming out Party: Personal Mobility Pioneer or Car Service on Steroids? - by Aswath Damodaran (LINK)

Venture Stories Podcast: Robert Greene on his book “The Laws of Human Nature” (LINK)

Exponent Podcast: A Community of Loonies (LINK)

HBR IdeaCast Podcast -- HBR Presents: After Hours (LINK)
Harvard Business School professors and hosts Youngme Moon, Mihir Desai, and Felix Oberholzer-Gee discuss news at the crossroads of business and culture. In this episode, they analyze the current food delivery wars and garner some lessons in crisis management from Boeing.
FT Alphachat Podcast: Odette Lienau on the most complicated debt restructuring in history (LINK)

The Peter Attia Drive (podcast): Matthew Walker, Ph.D., on sleep – Part III of III (LINK)
Related book: Why We Sleep
Cracking the Code: A Toddler, an iPad, and a Tweet - by Evan Osnos (LINK)

Hubble lights up Saturn’s aurorae - by Phil Plait (LINK)

A Natural History Museum Is Under Fire for Hosting Brazil's New President - by Ed Yong (LINK)

'Extraordinary' 500-year-old library catalogue reveals books lost to time (LINK)

Thursday, April 11, 2019

Links

"Once you talk about something that’s an asset appreciation investment, ignoring the underlying economics of what you’re lending on, you’re really talking about the bigger-fool game. You’re saying...this is a silly price but there’ll be a bigger fool that comes along. And that actually can be a profitable game for a while. But it’s nothing that bankers should engage in." --Warren Buffett (2005)

"It’s obvious that the easy lending on houses causes more houses to be built and causes housing prices to be higher, probably, in the new field. Eventually, of course, if you construct enough of new anything, you can have a countervailing effect. If you build way too many houses, you’d eventually cause a price decline." --Charlie Munger (2005)

Jeff Bezos' 2018 Letter to Shareholders (LINK)

Cullen Roche on Minsky's Financial Instability Hypothesis (LINK)

A review of Merger Masters: Tales of Arbitrage (LINK)

Previously unknown human species found in Asia raises questions about early hominin dispersals from Africa (LINK)

Wednesday, April 10, 2019

Links

"The idea that you risk what you need and is important to you for something that you don’t need and it is unimportant, is just craziness." --Warren Buffett (2005)

You Have To Live It To Believe It - by Morgan Housel (LINK)

Congress Is About to Ban the Government From Offering Free Online Tax Filing. Thank TurboTax. (LINK)

Making Uncommon Knowledge Common (LINK)
Preface: This is part of a longer private memo analyzing Zillow and its recent shift towards Opendoor’s model. May publish rest of memo at some later point. But wanted to share first part, on Rich Barton and Zillow’s initial rise.
Edge #534: Is Superintelligence Impossible? - David Chalmers and Daniel C. Dennett (Video and Transcript, Podcast)

Bill Gates discusses Melinda Gates' new book, The Moment of Lift (LINK)

Peering down the cliff of infinity: The first image of the event horizon of a black hole - by Phil Plait (LINK)
For the first time in human history, astronomers have combined the power of telescopes from across our planet to create an image that shows the event horizon of a black hole.

Tuesday, April 9, 2019

Links

Released today: The Great Mental Models: General Thinking Concepts

A Regulatory Framework for the Internet - by Ben Thompson (LINK)

Frackers, Chasing Fast Oil Output, Are on a Treadmill ($) (LINK)

Why is a good management so important? A talk with Robert Vinall on his approach (video) (LINK)

Against the Rules with Michael Lewis (podcast): The Seven Minute Rule (LINK)

The Tim Ferriss Show: Eric Schmidt — Lessons from a Trillion-Dollar Coach (LINK)

WorkLife with Adam Grant (podcast): How to Remember Anything (LINK)

Venture Stories Podcast: Tyler Cowen On His New Book: “Big Business: A Love Letter To An American Anti-Hero” (LINK)

Invest Like the Best Podcast: Geoffrey Batt – The Nature of Transformational Returns (LINK)

The Investing City Podcast: Portfolio Manager, Gautam Baid: Joyful Compounding (LINK)
Related book: The Joys of Compounding