Monday, February 29, 2016


Warren Buffett on CNBC.... Links to videos:

Warren Buffett: When stocks go down it's good news

Warren Buffett: Negative effects of low oil

Warren Buffett: Expected rails to do better

Warren Buffett: Earning power our annual goal

Distracted driver deaths will likely increase insurance rates: Warren Buffett

Buffett: Never sold a share of IBM

Buffett: Our job is to educate 'Watson'

Berkshire to webcast annual meeting

Buffett's 'ultimate' $1M bracket

Negative rates 'distorts' everything: Warren Buffett

Economist don't make money buying and selling stocks: Buffett

Trump's popularity surprises me: Warren Buffett

How Berkshire differs from 3G: Buffett

We like Dow Chemical preferred: Buffett

THIS was Coca Cola's dumbest deal ever: Buffett

Buffett on Apple's DOJ battle

Buffett: Don't penalize non-solar customers

Buffett: Robot - wouldn't it be wonderful if...

Buffett: Clayton Homes does not discriminate

Buffett: Hope Britain stays in EU

Don't sleepwalk through life: Warren Buffett


Bill Gates cautions on unicorn valuations over short term (LINK)

Max Levchin on Charlie Rose discussing the Apple encryption debate (video) (LINK)

Morrisons signs deal to sell food to Amazon customers (LINK)

This is from a couple of weeks ago, but I just got to it over the weekend and it was pretty interesting.... Walter O’Brien (AKA “Scorpion”) on Tim Ferriss' podcast (LINK)

Book of the day (which I've mentioned before and which is currently near the top of my to-read pile, but Mr. Buffett's comments about Keynes' change in investment style reminded me that I should get to it soon): Keynes and the Market: How the World's Greatest Economist Overturned Conventional Wisdom and Made a Fortune on the Stock Market

Sunday, February 28, 2016


As a reminder, Warren Buffett will be on CNBC tomorrow (Monday, February 29th) from 6am-9am ET.

Warren Buffett's Shareholder Letter, Annotated (LINK)

A Dozen Things Learned from Richard Thaler about Investing (LINK)

A review of the book Quality Investing: Owning the best companies for the long term (LINK)

No Pain No Gain (LINK)

Bankers have not learnt the lessons of the Great Crash (LINK)
Related book: The End of Alchemy: Money, Banking, and the Future of the Global Economy - by Mervyn King

Friday, February 26, 2016

Five Good Questions for Gene Hoots

This week, Jake Taylor talked to my friend Gene Hoots about his book Pay Attention to the Thin Cow. Gene is not only a great person with an incredible career, but also one of the most interesting people you could ever meet. So make the video below your must-read watch of the day or weekend. 

Link to video


Seth Godin had a short blog post on intuition that is worth thinking about. For a while I've been thinking about how to apply the 'Intuition = Pattern Recognition' equation to the process of continuing to develop one's skill in investing. And I think a lot of how to do that is to put in the work to really understand one's investments at a fundamental level, and to spend time studying the great business and investment successes and failures throughout history to recognize when a pattern may be repeating itself. It is also good to study all mistakes (one's own and those of others) to recognize when a potential negative pattern of any size may be repeating. And I think a thorough understanding of psychology, and a continuous process trying to improve upon one's own psychology, also goes a long way.

Berkshire Hathaway: The Next Ten Years (LINK)

The Last Days of Target Canada [H/T Phil] (LINK)

Ranking Global Stock Markets On Valuation - by Meb Faber (LINK)

FT Alphachat (podcast): Boardroom battles and the rise of Xiaomi (LINK)
Related book: Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism

Thursday, February 25, 2016


Eddie Lampert's 2015 letter to Sears shareholders (LINK)

Banks Brace for Potential Energy Losses (LINK)

Farnam Street: James Cash Penney and the Golden Rule (LINK)

Did the Universe Have a Beginning? (LINK)

Book of the day [H/T Derek Sivers]: Cows, Pigs, Wars, and Witches: The Riddles of Culture

Wednesday, February 24, 2016


Here's What Buffett Wouldn't Do, and Maybe You Shouldn't Either (LINK)

Sanjay Bakshi: The Eventual Consequences of Risk Seeking or Risk Blind Behavior (LINK)

Bruce Berkowitz's 2016 investor call from yesterday (audio) [H/T ValueWalk] (LINK)

Managing Risk vs. Managing Returns (LINK)

Latticework of Mental Models: Permutation and Combination (LINK)

Tuesday, February 23, 2016


Bill and Melinda Gates' 2016 Annual Letter (LINK)

Bill Gates on Charlie Rose (video) (LINK)

There are also news reports all over the place this morning that Bill Gates supports the FBI in the case with Apple. But that isn't exactly correct, which Gates discusses in THIS Bloomberg video from this morning. 

Apple, the FBI, and Security - by Ben Thompson (LINK)

The Knowledge Project podcast: Julia Galef on Becoming More Rational, Changing Minds, and Filtering Information (LINK)

Nate Silver in conversation with Tyler Cowen (LINK)

Exclusive Insights from Jeff Gramm (videos) (LINK)
Related book (released today): Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
The video of the 60 Minutes Australia segment on Australian house prices (LINK)

An Accident Waiting to Happen (LINK)
I don’t waste tons of time on macro analysis, but I think it’s folly to ignore macroeconomic data as well. As the most junior component in a corporation’s capital structure, equity has to be paranoid. Every level of a corporation’s capital structure is a derivative of the fundamentals of the corporation and a corporation’s fundamentals are to some degree a derivative of macroeconomic conditions. Therefore, I think it’s just doctrinaire and received wisdom to ignore macro factors. 
There is a massive accumulation of inventory in the economy that has been underway for a few years. That’s fine coming out of recession, once the liquidation event has passed, but we’re seven years removed from entering the crisis and inventories are at their highest level since 2000, according to the inventory / sales ratio on Census Bureau[i] data.
Books of the day:

Innovation and Entrepreneurship - By Peter F. Drucker

The Story of Earth: The First 4.5 Billion Years, from Stardust to Living Planet

Science Matters: Achieving Scientific Literacy

Monday, February 22, 2016


What to expect when Warren Buffett releases his annual letter to shareholders [H/T Linc] (LINK)

Jonathan Tepper appeared on 60 Minutes Australia, predicting Australian property values to fall by 30 to 50 percent (LINK)

Matt Ridley on EconTalk discussing The Evolution of Everything (LINK)

Inside Mark Zuckerberg’s Big Bet That Facebook Can Make VR Social (LINK)

Meb Faber's Portfolio Allocation for 2016 (LINK)

Hussman Weekly Market Comment: Speculative Half-Cycles Tend To Be Completed Badly (LINK)
In any event, there are currently a number of problems with the cries of an addicted Wall Street for negative interest rates from the Fed. The first, as Janet Yellen acknowledged to Congress in recent weeks, is that the Fed has “not fully investigated” the question of whether it actually has the legal authority to charge interest on reserves held by the banking system. Second, the monetary base can take two forms: currency and bank reserves, and as long as individuals can deposit and withdraw cash from banks, those two forms are freely convertible. As a result, we now observe increasing calls from monetary interventionists to eliminate currency (or at least high-denomination bills that represent the bulk of currency outstanding). This is presumably on the argument that currency is used for “crime,” but the main goal is so negative interest rates can be imposed without cash withdrawals by depositors hoping to avoid them. 
Also, while depressed food and energy prices have held year-over-year CPI inflation to 1.34%, year-over-year core inflation increased to 2.22% in January. That, combined with evidence of rising wages and a relatively low unemployment rate, is likely to be enough to dissuade any shift to ZIRP in the near future. 
Edge #459: The Genomic Ancient DNA Revolution - A Conversation With David Reich (LINK)

What is CRISPR? (video) (LINK)

Book of the day: The Power of Story

Saturday, February 20, 2016


Your must-read of the day.... A review, and some great personal reflections, after reading the book Not Fade Away (LINK)

Umberto Eco Dies at 84; Leaves Behind Advice to Aspiring Writers (LINK)

A good 5-minute Howard Marks interview from a couple of weeks ago (video) (LINK)

Aswath Damodaran - Management Matters: Facebook and Twitter! (LINK)

a16z Podcast: Open vs. Closed, Alpha Cities, and the Industries of the Future (LINK)
Related book: The Industries of the Future
My time at Nest - by Vibhu Norby (LINK) [This quote from the article is something to think about: "To me, doing great work is a habit, not an occasional outcome."]

Henry Ford, business reinvestment, and higher wages leading to lower labor costs

I think the excerpt below, from The Dao of Capital, about Henry Ford shows a few traits that many successful businesses have in common. I specifically thought about and Costco in regards to lowering costs, heavy reinvestment, and selling more goods at a smaller margin; and then Costco and Trader Joe's when I read the part about how higher wages can actually lead to lower overall labor costs (when you get better and more efficient workers who stay longer... and lower employee turnover leads to less time having to train new people, etc.):
Ford stood for the “buying public” and its right to goods and services at the lowest possible cost. He believed it was far better to “sell a large number of cars at a reasonably small margin than to sell fewer cars at a large margin of profit.” With this attitude, he viewed a profit as “far more a fund to insure future progress than it is a payment for past performance.” Paying out profits in the form of dividends, particularly on preferred stock with burdensome payouts, put profits into a few hands rather than back into more roundabout production. As Ford said, “The owners and the workers will get their reward by the increased amount of business the lower prices bring. Industry cannot exist for a class.” (Insufficient capital reinvestment, as we will revisit later on, is essentially capital consumption in lieu of the roundabout.) Focusing on profits over productivity, ends over means, was, in Ford’s words, “trying to drive with the cart before the horse.” 
Ford warned against “the most common error of confusing money and business,” which he blamed on the stock market for leading people to believe that “business is good if there is lively gambling upward in stocks, and bad if the gamblers happen to be forcing stock prices down.” He eloquently viewed the stock market as a “side show,” and little did he know how increasingly true this would be—as so much of investing today is the domain of “punters” over seekers of productive capital. To Ford, like in taijiquan and at the weiqi board, there were two distinct games going on between the stock market and true investment, the former a mere shadow of the latter. Disdainful of finance and suspicious of banks all his life (his abominable stereotypes and prejudices aside), Ford made the “shortsighted finance” of Wall Street his nemesis, viewing it as “strings on a business” in stark opposition to his roundabout redirecting of profits back into the operation and focusing instead on an immediate return. “The majority are so interested in getting the utmost out of the machine that they will give no time to improving it as it runs.” Ford cited the “Parable of the Talents” (interestingly, as Clausewitz did, in Chapter 3) “to whom much is given, of him shall be much required,” thus exhorting entrepreneurs never to sacrifice working capital for the sake of amassing personal fortune. He exposed what he called the “fallacy which has steered our country and other countries wrong on so many matters touching industry—the fallacy that business is money, and that big business is big money.” Make no mistake: Ford was a true-blue capitalist, who believed in making profits, but rather than consuming the capital produced today, saw the infinitely better wisdom of reinvesting intertemporally for a position of greater strategic advantage. 
As Ford Motor Company expanded, the costs were paid for by efficiencies gained through faster output at the last “ring” of production and by eliminating in previous “rings” stockpiles of iron, coal, and steel—all unnecessary inventories that Ford saw as idle waste. By the mid-1920s, he would boast, “We do not own or use a single warehouse.” Ford also didn’t believe in having too much labor on hand, considering hiring two men for the job of one to be a crime against society, although he did have to account for high turnover because of the tedium of the assembly line work. In 1913, turnover reached an unbelievable 370 percent, and Ford hired more than 50,000 people to maintain an average labor force of about 13,600. 
When profits swelled, he paid well for labor, creating an uproar when he doubled the basic wage to $5.00 a day, which triggered a virtual stampede of job seekers. Paying higher wages for labor was not altruistic in Ford’s eyes. Moreover, it wasn’t simply that Ford was trying to pay his workers “enough to buy back the product,” although he did preach a high-wage doctrine after the stock market crash in 1929. Rather, paying relatively high wages was, for Ford, a matter of smart business. He regarded well-paid skilled workers as important as high-grade material. By paying workers well, he effectively lowered his costs because higher wages reduced turnover and the need for constant training of new hires.

Friday, February 19, 2016


How Charlie Munger Transformed the Daily Journal -- in 2 Charts [H/T Linc] (LINK)

Mark Spitznagel on Bloomberg (video) [H/T James] (LINK)

FT Alphachat (podcast): Fintech's search for a 'super-algo', and Mohamed El-Erian on avoiding the next collapse (LINK)

Five Good Questions for Adam Levin about his book Swiped (video) (LINK)

How hunter-gatherers preserved their food sources (LINK)

Book of the day: Corporate Culture and Performance

The danger of multitasking

I've heard Charlie Munger mention the danger of multitasking a few times over the last couple of years, including this comment from last week's Daily Journal Annual Meeting:
And that brings me to the subject of multitasking. All you people have gotten very good at multitasking. And that would be fine if you were the chief nurse in a hospital. But as an investor, I think you’re on the wrong road. Multitasking will not be the highest quality thought man is capable of doing. 
Juggling two or three balls at once, where people come at you on their schedule, not yours, is not an ideal thinking environment. Luckily a lot of you are so obscure that you have plenty of time to think. 
And I was in that position for a long time and it helped me, and I hope it works well for you. If it doesn’t, I think you’re going to have to be satisfied with life in the shallows. 
Josh Waitzkin also commented on this a number of years ago in a two-part article posted on the blog of Tim Ferriss: 

The Multitasking Virus and the End of Learning? Part 1

The Multitasking Virus and the End of Learning? Part 2


Related book: The Art of Learning

One of the keys to success is flexibility...

This quote was from Jim Rohn in How to Use a Journal, and I think it is applicable to one's investment process as well:
"As you continue to grow and develop, you will soon discover that last year's systems won't likely meet this year's needs. You see, one of the keys to success is flexibility. We must always be on the search for more effective methods to facilitate and accommodate new ideas."

Thursday, February 18, 2016


TED Talk - Allan Adams: What the discovery of gravitational waves means (LINK)

Latticework of Mental Models: Switching Costs (LINK)

Marathon Asset Management – Culture Vulture (LINK)

Why stream Berkshire meeting online? To reach 'key financial centers around the world,' Buffett says [H/T Linc] (LINK)

This indie retailer is thriving thanks to Warren Buffett [H/T Linc] (LINK)
And as for, the scourge of smaller retailers everywhere? "People don't buy paint online," Greenberg said. "Paint spills. The freight (cost) is outrageous. Technology hasn't impacted our business in the same way it has many others."
Howard Marks' video segments from Bloomberg today (LINK)

‘Helicopter money’ on the horizon, says Ray Dalio (LINK)

Apple Versus the FBI, Understanding iPhone Encryption, The Risks for Apple and Encryption - by Ben Thompson (LINK)

Adam Grant continues to make the media rounds, this time talking to James Altucher about his book Originals: How Non-Conformists Move the World (LINK)

Charlie Munger and circle of competence...

Munger has a range of approaches he uses to avoid mistakes. To make this point by analogy, Munger is fond of saying that he wants to know where he will die so he can intentionally never go there. His friend and investor Li Lu described one such approach:  
When Charlie thinks about things, he starts by inverting. To understand how to be happy in life Charlie will study how to make life miserable; to examine how a business becomes big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. —LI LU, CHINA ENTREPRENEUR MAGAZINE, 2010 
By adopting this approach Munger is trying hard to limit his investing to areas in which he has a significant advantage in terms of competence and not just a basic understanding. To illustrate this point, he has in the past talked about a man who had “managed to corner the market in shoe buttons—a really small market, but he had it all.” It is possible to earn an attractive financial return in a very limited domain like shoe buttons, although that is an extreme example of a very narrow circle of competence. The areas in which you might have a circle of competence will hopefully be significantly larger than just shoe buttons. However, if you try to expand that circle of competence too far, it can have disastrous results. Li Lu has written about how Munger has described this point to him:  
The true insights a person can get in life are still very limited, so correct decision making must necessarily be confined to your “circle of competence.” A “competence” that has no defined borders cannot be called a true competence. —LI LU, CHINA ENTREPRENEUR MAGAZINE, 2010 
Once the borders of a circle of competence are established, the challenge is to remain inside those borders. Staying within a circle of competence is obviously not rocket science in theory, but it is hard for most people to do in practice. Lapses by investors are more likely to occur when they meet a slick promoter who is highly skilled at telling stories. This is a case where emotional intelligence, which is very different than intellectual intelligence, becomes critically important. Humans love stories because they cause them to suspend disbelief. Some of the biggest frauds in financial history, like Bernie Madoff and Ken Lay, were excellent storytellers. Stories cause people to suspend disbelief, and being in that state is harmful to any person’s investing process. 
Too many investors confuse familiarity with competence. For example, just because a person flies on airlines a lot does not mean that he or she understands the airline industry well enough to be competent as an investor in that sector of the economy. Using Facebook a lot does not make you qualified to invest in a social media startup. If you have not gone beyond simply using a product or service and have not taken a deep dive into the business of a company, you should not invest in that company. 
Among the people who know how to stay within their circle of competence are the chief executive officers of Berkshire subsidiaries. For example, Buffett once pointed to Rose Blumkin of Furniture Mart as a person who fully understands the dimensions of her capabilities: 
[If] you got about two inches outside the perimeter of her circle of competence, she didn’t even talk about it. She knew exactly what she was good at, and she had no desire to kid herself about those things. —WARREN BUFFETT, THE SNOWBALL, 2008

Wednesday, February 17, 2016


Tim Cook's letter about The Need for Encryption (LINK)

Aswath Damodaran: The Disruptive Duo: Amazon and Netflix! (LINK)

Matt Ridley's Google Talk about his latest book, The Evolution of Everything: How New Ideas Emerge (LINK)

Brain Pickings discusses Adam Grant's new book Originals: How Non-Conformists Move the World (LINK)

Book of the day: Wired to Create: Unraveling the Mysteries of the Creative Mind

Tuesday, February 16, 2016


What Can the Three Buckets of Knowledge Teach Us About History? (LINK)

Yahoo to live-stream Warren Buffett's Berkshire meeting (LINK)

The Best Stock Over the Last 30 Years? You’ve Never Heard of It - by Jason Zweig (LINK)

Why Wall Street Is Embracing the Blockchain—Its Biggest Threat (LINK)

The Fastest Way To Learn (LINK)

Derek Sivers: Why I don’t want stuff (LINK)

Book of the day: Debt: The First 5,000 Years (Seth Godin recently recommended this as an audiobook.)

Monday, February 15, 2016


How to Raise a Creative Child. Step One: Back Off [H/T Will] (LINK)
Related book: Originals: How Non-Conformists Move the World
The new Leithner Letters are now available (Part 1, Part 2)

Aswath Damodaran: Race to the top: The Duel between Alphabet and Apple! (LINK)

Zenefits and Regulation - by Ben Thompson (LINK)

A good podcast conversation with Dale Wettlaufer of Charlotte Lane Capital (LINK)

William White on Bloomberg (video) (LINK)
Related speech (from October): The Ultra-Easy Money Experiment
Hussman Weekly Market Comment: Warning with a Capital "W" (LINK)
In a market return/risk classification that is already the most negative we identify, where a sustained period of speculation has given way increasing risk-aversion, the position of the market relative to very widely identified “support” (about the 1820 level on the S&P 500) is of particular note. 
... The present widely-followed “support” shelf for the S&P 500 is roughly 14% below the 2015 market peak, but most domestic and international indices have already broken corresponding support levels. Given the obscene valuations at the 2015 peak, my impression is that a run-of-the-mill completion of the current market cycle (neither an unusual nor worst-case scenario from a historical perspective) would comprise an additional market decline of roughly 40-50% from present levels. I certainly don’t expect that kind of market loss in one fell swoop. Rather, my immediate concern is that the first leg of this decline could be quite steep.
Columbia: Ideas at Work - The Centennial Issue [H/T Favio] (LINK)
In celebration of Columbia Business School’s Centennial we sat down with twenty-five professors to discuss the single biggest question facing researchers in their field. From lingering questions left in the wake of the global financial crisis and the future of the global economy to the way we make choices and the very idea of what makes us human, these are just some of the questions that will define the next century at the very center of business.
Iran’s Revolutionary Grandchildren (LINK) [H/T @WalterIsaacson, who wrote "For those who truly wish to understand Iran, look at the Revolutionary Grandchildren."]

Charlie Rose segment on the detection of Gravitational Waves (video) (LINK)

Book of the day: Origins of Genius: Darwinian Perspectives on Creativity

Shane Parrish's 2016 Daily Journal Meeting Notes

Shane Parrish has finished his extensive notes from the 2016 Daily Journal Meeting. Shane is charging $33 for them until March 1st (then the price will rise to $49) . And while there are free notes from the meeting out there as well as an audio of the meeting, these will be the best notes by a long shot. 

And as I've written about his notes the last couple of years, it’s also a way to show your appreciation for the work Shane has done, not just on the notes, but also on Farnam Street. 

Asking more valuable questions...

From Capital Returns (the excerpt below was from a Marathon letter in March 2003):
While the case for long-term investment has tended to centre around simple mathematical advantages such as reduced (frictional) costs and fewer decisions leading (hopefully) to fewer mistakes, the real advantage to this approach, in our opinion, comes from asking more valuable questions. 
The short-term investor asks questions in the hope of gleaning clues to near-term outcomes: relating typically to operating margins, earnings per share and revenue trends over the next quarter, for example. Such information is relevant for the briefest period and only has value if it is correct, incremental, and overwhelms other pieces of information. Even when accurate, the value of the information is likely to be modest, say, a few percentage points in performance. In order to build a viable, economically important track record, the short-term investor may need to perform this trick many thousands of times in a career and/or employ large amounts of financial leverage to exploit marginal opportunities. 
And let’s face it, the competition for such investment snippets is ferocious. This competition is fed by the investment banks. Wall Street relies heavily on promoting client myopia to earn its crust. Why else would Salomon Smith Barney produce a research report which begins “We are focusing on the three month sales momentum model this month”; or Deutsche Bank publish a “Weekly Autos” review? Can there really be much of value to say about industry developments over such limited time frames? Of course not. Even so, we would hate to discourage such research as, from time to time, what the short-term guys are selling can turn out to be wonderful long-term investments. 
The operative word here is “quick.” The longer one owns the shares, however, the more important the firm’s underlying economics will be to performance results. Long-term investors therefore seek answers with shelf life. What is relevant today may need to be relevant in ten years’ time if the investor is to continue owning the shares. Information with a long shelf life is far more valuable than advance knowledge of next quarter’s earnings. We seek insights consistent with our holding period. These principally relate to capital allocation, which can be gleaned from examining the company’s advertising, marketing, research and development spending, capital expenditures, debt levels, share repurchase/issuance, mergers and acquisitions and so forth. 
Take marketing, for instance, which can be vital to long-term value creation, yet is often ignored. An understanding of the economics of line extensions and an advertising strategy would have proved useful to investors in consumer products companies. Colgate Palmolive introduced its first line extension – a blue minty gel – in the early 1980s, and supported this new product with a hefty advertising spend. This was Colgate’s first new toothpaste in a generation, and line extensions, which had been used successfully in other household goods, were novel to the toothpaste market. By advertising heavily, the firm hoped to change the buying habits of a generation of shoppers who would subconsciously think of Colgate as they approached the toothpaste section of a supermarket, and when they got there, would find a product which was new, superior and, because of advertising spend, trusted. 
We did not attend any Colgate meetings in the early 1980s, but if they were anything like their equivalents today the questions might have been along the lines of: what does the rise in advertising spend mean for margins next quarter (an almost worthless piece of information)? Or, how will the increase in depreciation from the new product line for minty gel affect earnings (yawn)? Brokerage reports following the meeting may have been like one which crossed our desks this morning, entitled “Thinking Outside the Box, but near term outlook remains dreary,” recommendation: under-perform. Few investors would have understood, and even fewer would have cared, about the transformation that was taking place. 
Even today, Colgate presentations do not mention the company’s advertising spend, which remains in excess of market share in all countries except Mexico, where market share is around 90 per cent. And this is despite 20 years of the firm demonstrating that line extensions and advertising support are powerful competitive weapons. “Most people don’t think it is important,” confessed the firm’s investor relations spokeswoman. Even though we don’t own the shares, Marathon is the only fund manager to have sought and gained a meeting with Colgate’s director of advertising and marketing. 
In the two decades since its first line extension, Colgate’s share price has risen 25 fold, handsomely beating the market. This shows how important it is for long-term investors to understand a firm’s marketing strategy. Yet, given the annual 100 per cent turnover in Colgate shares, very few of the firm’s shareholders have benefited fully from its success. And since Colgate’s investment returns didn’t outperform the S&P 500 in any meaningful way for a full ten years after the introduction of its first line extension, investors with short time horizons wouldn’t have cared about such matters. 
Why did so few Colgate investors stay the course? There are a range of psychological forces stacked up against the long-term investor. In particular, there is strong social pressure from peers, colleagues and clients to boost near-term performance. Even if one has developed the analytical skills to spot the winner, the psychological disposition necessary to own shares for prolonged periods is not easily come by. J.K. Galbraith observed that: “nothing is so admirable in politics as a short-term memory.” Why should politics have a monopoly on sloppy thinking? Which makes us think that long-term investing works not because it is more difficult, but because there is less competition out there for the really valuable bits of information.

Sunday, February 14, 2016


East Coast Asset Management 2015 Letter - Twin Lights (LINK) [Chris Begg's letters are always one of my favorite reads, and this particular letter even more so, as I think the insights discussed relating to business culture are both important and enduring models of how the world works.]
The foundational understanding where we are looking to arrive at is to determine the compounding merit of the investment–superior returns, asymmetric risk, and ideally a long-duration.  We value the important truth that almost any advantage can be copied away eventually and  that  the  only  truly sustainable  long-term  competitive  advantage lies  in  the culture of  a business. 
The more businesses we study, the more we find that these insights apply perfectly to what determines an outlier organization. The common thread that connects our greatest investments over the longest durations has been one of greater structural organization leading to the ability to scale those businesses whereby greater and greater amounts of work are attracted to that system. Intuition might suggest that the great investments came from being early to a revolutionary product or an early entrant into a huge market opportunity. This has not proven to be the case. What we have found is that an evolved system that values persistent incremental progress eternally repeated (PIPER mindset) has delivered the greatest return, while taking the least amount of risk over the longest duration.
A Dozen Things you can Learn from the Anti-Models that are Bernard Madoff and his Victims (LINK)

FPA Crescent Fund's Q4 2015 Webcast Replay and Transcript (LINK)

Heed the threats to globalization - By Edward Chancellor [H/T @ChrisPavese] (LINK)

Opalesque.TV talks to Michael Lewitt, whose new book, The Committee to Destroy the World: Inside the Plot to Unleash a Super Crash on the Global Economy, comes out next month (video) [H/T ValueWalk] (LINK)

Mohammed El-Erian on the Masters in Business podcast (LINK)

Sebastian Thrun on Charlie Rose (from December) (video) (LINK)

One friend and blogger's list of books read in 2015 is a good place to start if you're looking for your next read (LINK)

George Washington, the Whiskey Baron of Mount Vernon (LINK)
Related book: Washington: A Life
PBS Nova: Memory Hackers (video) [H/T Linc] (LINK)

How Jaguars Survived the Ice Age (LINK)

Friday, February 12, 2016


Today's Audible Daily Deal ($1.95) is a book I remember hearing recommended on a recent podcast, though I don't remember which one: How to Talk to Anyone: 92 Little Tricks for Big Success in Relationships

Daily Journal Annual Meeting Notes (and audio) (LINK)

A friend also reminded me of some comments by Charlie Munger in 2007 about how Berkshire became successful (LINK), which he of course went on to discuss in more detail in last year's 50th anniversary letter (LINK).

Five Good Questions for Christopher Mayer about his book 100 Baggers (LINK)

The Moneyball of Quality Investing (LINK)

Jamie Dimon just dropped $26 million on JPMorgan shares (LINK)

The second golden age of American railroads is drawing to a close. Consolidation may follow. [H/T Linc] (LINK)

FT Alphachat (podcast): The lasting damage of China's one-child policy and Theranos's precipitous fall from grace (LINK)

Naval Ravikant on habits, present state awareness and light reading [H/T Abnormal Returns] (LINK) [The full podcast appearance is HERE.]

Edge Conversation With Ed Boyden: How the Brain Is Computing the Mind (LINK)

LIGO Sees First Ever Gravitational Waves as Two Black Holes Eat Each Other (LINK)
Better start shining up some new Nobel Prize medals: Scientists have reported that, for the very first time in history, they have detected gravitational waves. 
And oh my yes, this is a very big deal. It will open up an entirely new field of astronomy, a new way to observe the Universe. Seriously.

The melting ice cubes of previously good businesses...

Some more great comments from Seth Klarman, this time about the disruptive forces of technology:
While operating within the constraints of value investing principles, we are determined to look far and wide for opportunity, building our competencies over time based on learning and experience. We must neither be confined by a narrow mindset of what may or may not be undervalued, nor become so aggressive in pursuing opportunity that we deviate far beyond our circles of competence. I tell our team that we wouldn’t be doing our jobs if we remained locked in the past, buying only the melting ice cubes of previously good businesses now in decline as though technological change weren’t accelerating the obsolescence of entire industries. We would also be remiss if we failed to take advantage of new analytical tools and resources. We must consider new ways of thinking. We must continuously ask ourselves whether any investment under consideration is just too hard to properly assess: Is the fruit too high-hanging? In investing, there are no style points awarded for degree of difficulty. However, the complexity and opacity that may cause others to discard potential opportunities as “too hard” can drive market inefficiencies that result in opportunity for us. In 2015, we took a close look at “big data” technology as a research tool and potential “edge” for Baupost. While there are a number of applications that may be interesting over time, we continue to strongly believe that our investment success will ultimately depend not so much on big data as on big judgment. 
... Disruptive forces continue to roll across the global business landscape. Unprecedented changes are taking place as technology advances and entrepreneurs drive creative destruction. Numerous industries, including the behemoth energy, pharmaceutical, automobile, and retailing sectors, are experiencing waves of increased competition and disruption. In many cases, the new competitors simply have a better business model. Andreessen Horowitz co-founder Marc Andreessen has said that “we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures.” Certainly, no investor can blithely assume that what has heretofore been regarded as a “good business” will automatically retain its pre-eminence and, for some, even viable existence.

Thursday, February 11, 2016

Improving rationality...

Someone over at the Corner of Berkshire & Fairfax posted their question and Charlie Munger's answer from yesterday's Daily Journal Meeting this is worth repeating here as well: 
Hi Charlie, I'm JD from Phoenix. At Berkshire last year you said that rationality was one of the things that was most important to you. What advice can you give to someone who's looking to improve his own rationality? 
Charlie Munger: Well I say if you start working at it young and keep doing it until you're as old as I am, that's a very good idea. It's a very good idea, and it's a lot of fun-- particularly if you're good at it. I can hardly think of anything that's more fun. I think I have a lot of cousins in this room, and--and I can say you're on the right track. 
You don't have to be the Emperor of Japan to get fun out of rationality. You can avoid a lot of hopeless messes, you can help other people scramble out of their messes, you can be a very constructive citizen if you're always rational. And being rational means you avoid certain things. It's like, I don't want to go where the standard result is awful. 
Where is the standard result awful? Try anger. Try resentment. Try jealousy. Envy. All these things are just one-way tickets to hell. And yet some people just wallow in them. And of course it's a total disaster for them and everyone around them.


Seth Alexander and Joel Cohen of MIT Investment Management Company talk to Sanjay Bakshi's class (LINK)

Warren Buffett and the Great Salad Oil Swindle [H/T Linc] (LINK)
Related book: Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
The guy who blew the whistle on Bernie Madoff's Ponzi scheme says there's one 'bigger than Madoff' [H/T @chriswmayer] (LINK)
Related book: No One Would Listen
Seth Godin on the Tim Ferriss podcast (LINK)

Brain Pickings - The Life of the Mind: Oliver Sacks’s 121 Formative and Favorite Books from a Lifetime of Reading (LINK)

Egg Russian Roulette with Peyton Manning and Magic Johnson (video) (LINK)

Book of the day: Against the Odds: An Autobiography - by James Dyson [I also linked to James Dyson on the Charlie Rose show a couple of years ago, which was a great interview, and which you can find HERE.)

Wednesday, February 10, 2016


Alex Rubalcava is Tweeting live from the Daily Journal Meeting today (LINK)

A short overview of Kyle Bass' latest letter (LINK)

Horizon Kinetics' latest in their index series: Robo-Adviser, Part II, or What’s in Your Asset Allocation Program? (LINK)

First…Dominate a Small Market (LINK)

This Chinese City’s Property Market Is Out of Control [H/T @jasonzweigwsj] (LINK)

The Middle East: The Way It Is and Why - by George Friedman (LINK)

JHL Capital Group's October 2015 Presentation - Conglomerate Boom 2.0: A Stable Platform? [H/T @chriswmayer] (LINK)

Latticework of Mental Models: The Bystander Effect (LINK)

The Omura's Whale Is Even More Unusual Than We Thought (LINK)

Books of the day:

Satisfaction: The Science of Finding True Fulfillment [A book Marc Andreessen called one of his favorite books of all-time.]

Unmaking the West: "What-If?" Scenarios That Rewrite World History

Howard Marks comments...

Some comments from Howard Marks during Oaktree Capital Group's call yesterday:

Howard S. Marks

As you know, 2015 was generally challenging for the credit markets. The carnage in commodities, coupled with macroeconomic concerns about possible slowing growth worldwide, particularly in China, led to broad market volatility which emerged at the end of the second quarter and persisted through year-end. Further fueling this fire, banks trading capital is at a low ebb. With more restricted regulatory policies, the banks are increasingly unwilling to make markets.

With this as the backdrop, riskier assets such as high yield bonds were particularly impacted. Reflecting levels of risk aversion not seen since the financial crisis, the average U.S. High Yield Bond plunged 10 points in the second half to a price of 87, its lowest level since June '09.

All told, the asset class lost a substantial 8% in the second half, making 2015 the third worst year in our more than 30 years of involvement with high-yield bonds. 12-month performance across all of Oaktree's high-yield strategies was strong in relative terms, with all of them, that's U.S., European, expanded and global, beating their primary benchmarks. Our skill in credit selection and an underweight position in energy gave us our superior relative outperformance.

For U.S. High Yield Bonds, however, that still translated into a loss of about 4% for the year. The start of 2016 marked the 30th anniversary of the beginning of the excellent management of this area by Sheldon Stone and the team he's built. Their outperformance in down-markets has given rise to a since inception gross return that has beaten the benchmark by more than 100 basis points a year for 30 years. That edge compounds into a lot of additional money for Oaktree's long-term clients.

Further, our expertise in high yield bonds contributes to enhanced expertise across the whole credit spectrum. We expect a meaningful uptick in U.S. High Yield Bond default rates over the next 12 months, with distressed energy sector contributing more significantly. As I believe you know, over the last 5 years the average default rate has been just about the lowest in history for such a period.

Now supporting the expectation that defaults will increase is the sharp increase over the past year in the fraction of U.S. High Yield Bond universe trading at or below 70% of par. This stressed cohort grew to 15% at the end of 2015. Additionally, billions of dollars in investment-grade energy and metals and mining debt could be downgraded to high-yield status if commodity prices remain depressed.

With the record amount of dry powder and our ability to add value and distressed assets across multiple strategies, including control investing, real estate, strategic credit and, of course, most prominently the Opps Funds, we are more optimistic about the ability to find attractive investments than we have been for several years. Risk aversion is back after a 5-year hiatus, and a burgeoning supply of distressed opportunities is on the horizon. What started as a largely oil-and-gas-focused dislocation has generalized into weakness across nearly every commodity subsegment. And weakness is starting to bleed into other segments of the bond market, including media and retail. While more interesting debt opportunities are on our plate now than at any point in the last 5 years, we plan to be patient and wait for a pickup in default rates before becoming materially more aggressive in investing our capital.

As Bruce said in the last quarter's call, we have been patient in deploying Opps Xa's capital as we expect better bargains down the road with lower-priced, higher-prospective return distressed debt opportunities. One area we are selectively adding to at the present, however, is Europe. The reasons for our optimism about Europe include Europe's evolving economy and the ECB's quantitative easing, which is supporting credit fundamentals. It's also worth reemphasizing Europe's lower exposure to known troubled sectors, such as commodities, and its structurally lower sensitivity to interest rate movements.

Turning to the opportunity in our distressed power funds, we are hopeful that the sustained decline in commodity prices and the recent turmoil in the energy and public markets will lead to lower-value Asian expectations on the part of owners of companies we'd like to acquire. In many cases, relatively indiscriminate market dynamics are affecting the perceived value of companies in the sector, even businesses that are not highly correlated with commodity prices. We currently have a very robust pipeline of potential acquisition opportunities, and our deal funnel is about as strong as it has been in some time.

The bottom line is that this is a good time to have capital to spend. Back 21 months ago, May 2014, Bruce and I and the Opportunities Fund team sat around and talked about sizing Fund X. And we made the decision at that time to target about $10 billion for the sum of Xa and Xb. And this was based on our belief that the capital markets had been overly generous and indiscriminate in the preceding 3 or 4 years and that the economic recovery was both very modest and long in the tooth and that -- especially that it would be long in the tooth by the time we got around to investing Xb. We do these things kind of on instinct and judgment and gut feel and hunch. And the reasons are not always documentable at the time. But I can tell you that we're feeling very good at this point about our decision almost 2 years ago to raise a very substantial Xb fund in reserve. And of course, this is something we've been doing for almost 30 years now in the distressed debt funds, and these gut decisions have been surprisingly beneficial.

So it's impossible to know with certainty what lies ahead. And that's why our investment approach emphasizes risk control and selectivity rather than market timing. And we try to size the funds right, but we don't feel that market timing is going to give us our edge.

In the short and long run, we continue to believe that avoiding the losers will allow the winners to take care of themselves, as it always has in Oaktree's history.

I've often said that it's difficult to be able to accomplish all 3 key aspects of our business at the same time: raising capital, investing it wisely and harvesting it profitably. We are rarely able to make great buys and great sells simultaneously, and it would be naive to expect otherwise. It's also rarely the case that you can raise capital from your worried investors at the very same time as you have opportunities to invest in a plummeting market; the 2 rarely go together.

2015 was a strong period for raising assets, and we believe we're very well positioned to begin a period of more aggressive deployment. There's a better chance than we've had for years that opportunities will invest -- to invest profitability and then harvest will follow in the desired order.


Patrick Davitt

To your comments around maybe still waiting a little bit to get very aggressive, particularly in the Opps funds, could you give us a little bit of an idea of any kind of broad indicators you look at to suggest that either credit has corrected too far in certain places or has further to go? And in that vein, how do you balance your very, very long history of investing in credit/wealth with the very, very different liquidity environment that it feels like we're in now relative to pretty much any other time given kind of the pullback in the banks?

Howard S. Marks

Well, thanks for that question, Patrick. I think that there is no one quantitative thing that we follow to tell us how to behave. As I indicated in what I said before, it's really judgmental. We just want to have a feeling as to whether -- how bad we think things are going to get and the extent to which the coming problems are incorporated in prices. Now most of the work we do is bottom-up rather than top-down. So we make our decisions based on individual cases, how -- what do we think it's worth and how cheap do we think it is now. And I think we'll always continue to do that. Now we do like to bring our experience to bear and say that this kind of feels like that period or that period and think about how they worked out. Now one thing to take note off is that the average spread on high-yield bonds passed the threshold of 800 basis points. And we've been having a lot of discussion about that around here. Historically, on average, when you bought high-yield bonds when they pass that 800 bps threshold, you did extremely well over the coming 1 and 3 years -- yes -- and especially well relative to treasuries. Now having said that, however, most of the time when high yield bonds exceeded 800 they went on to exceed 900 and 1,000 and 1,100. So -- and that's really what we struggle with. And I have to tell you, Patrick, that this is never an easy decision. And I have the most vivid memory back in the fourth quarter of '08 after the bankruptcy of Lehman Brothers. Of course, I was meeting with Bruce several times a day. He had $11 billion in Fund VIIb that he was trying to decide whether to invest and how fast. And I got to tell you, one day he would say, "I think we're going too slow." And the next day, he'd say, "I think we're going too fast." And the next day, he'd say, "I'm going too slow." So I figured, well, we must be doing it about right. As I indicated in one of my recent memos, we never feel that great about these decisions when we make them. They're hard decisions. And you have to make it without any real concrete milestone. And the only thing I can take comfort with is looking back all those uncomfortable decisions have pretty much worked out.

Patrick Davitt

Okay. That's all very helpful. And how do you balance all of that historical knowledge with what feels like a very, very new type of liquidity environment than we've ever really seen?

Howard S. Marks

Well, it's always something's different. But that's why Twain said history does not repeat but it rhymes. The great thing, especially for the distressed debt business, but for most of our business as you look across Oaktree, is that our returns don't come from Mr. Market. And particularly in distressed, typically we buy the debt; we go through a restructuring process; the restructuring process kind of crystalizes the value and unlocks it. And after holding for a few years, we tend to start selling when it approaches what we consider full value and then scale out. But I have to say that we enjoy an enormous luxury that in our -- in the strategies where we own the most liquid assets, we have the most lock-up. And I shudder at the thought of trying to invest in these asset classes without locked-up money. And you just couldn't possibly do the right thing. So we are -- if we invest Opps Xb, and if we start sometime in '17 or in the early '18, and I don't need to say I know when it's going to be, that means that, that fund has until 2025, '26, '27 for their investments to work out. And I fully believe that sometime in that time span, as Ben Graham said, the market will convert from a voting machine to a weighing machine; and sometime in that period, we'll get full value if we bought the right things.


Michael J. Cyprys

So first, just a question for Howard. With high-yield spreads today certainly, well over 70, 100 basis points, at levels typically associated with recession, but then we see U.S. housing seems strong, improving jobs are strong, corporate balance sheet in good shape. Yes, energy is under stress. But I guess, just how do you think -- but do you think that credit markets and commodities could shake enough that causes corporates broadly to cut back on hiring and CapEx and overall kill [indiscernible] and possibly bring the U.S. into a recession? How are you thinking about this year?

Howard S. Marks

Well, first of all, Michael, we fired our economist. So -- actually that's not true. We never had one. But we really don't take a position on questions like that. My general feeling is, and I think I expressed this in -- on the couch, I just don't think that we're in for a recession this year. And my feeling is that we've been limping along for several years now with an anemic recovery and even seems to be losing energy from that low level. But having said that, the consumption side is pretty good. I think that the gas savings are allowing people to improve their financial pictures. And the services businesses are resilient. Of course, we're not highly dependent on China for purchases of our exports. So -- and again, the last thing I want to do is present myself as an economist. But I just don't think that there's going to be a recession starting this year. Eventually, we're going to have a recession. We always do. But I just don't think it's imminent, and I don't think it's going to be a strong one, in large part because we didn't have a strong boom. We didn't have an overexpansion of facilities or of payrolls. And so I just -- I think it's -- people are so down on everything now, because -- largely because of the market performance, but I just don't share it.

If investors could know only one thing about greed and fear...

From Seth Klarman:
Fear of missing out, of course, is not fear at all but unbridled greed. The key is to hold your emotions in check with reason, something few are able to do. The markets are often a tease, falsely reinforcing one’s confidence as prices rise, and undermining it as they fall. Pundits often speak of the psychology of markets, but in investing it is one’s own psychology that can be most dangerous and tenuous. 
If investors could know only one thing about greed and fear, they should know this: Over the 30-year period from 1984 to 2013, the Standard & Poor’s 500 Index returned an annualized 11.1%. Yet according to Ashvin Chhabra, head of Euclidean Capital and author of “The Aspirational Investor,” the average returns earned by investors in equity mutual funds over the same period was “a paltry 3.7% per year, about one-third of the index return.” Bond fund investors fared even worse: while the Barclays Aggregate Bond Index returned an annualized 7.7%, investors in these funds “captured just 0.7% (not a misprint!) in annualized returns… That staggering underperformance is the cost that individual investors paid for following their instincts” by adding to and pulling money out of their funds at precisely the wrong times. In short, retail investors, in aggregate, substantially underperformed both the markets and the very funds in which they were invested.

Tuesday, February 9, 2016


Jason Zweig on Full Disclosure Radio [H/T ValueWalk] (LINK)
Related book: The Devil's Financial Dictionary
Amazon Is Building Global Delivery Business to Take On Alibaba (LINK)

The Reality of Missing Out - by Ben Thompson (LINK)

The Broyhill Annual Letter (LINK)

Video Reveals Why Roaches Are So Hard to Squish (LINK)

Book of the day: A Natural History of Human Thinking

Monday, February 8, 2016

Tilting the investment odds in your favor...

From Seth Klarman:
Did we ever mention that investing is hard work – painstaking, relentless, and at times confounding? Separating relevant signal from noise can be especially difficult. Endless patience, great discipline, and steely resolve are required. Nothing you do will guarantee success, though you can tilt the odds significantly in your favor by having the right philosophy, mindset, process, team, clients, and culture. Getting those six things right is just about everything. 
Complicating matters further, a successful investor must possess a number of seemingly contradictory qualities. These include the arrogance to act, and act decisively, and the humility to know that you could be wrong. The acuity, flexibility, and willingness to change your mind when you realize you are wrong, and the stubbornness to refuse to do so when you remain justifiably confident in your thesis. The conviction to concentrate your portfolio in your very best ideas, and the common sense to nevertheless diversify your holdings. A healthy skepticism, but not blind contrarianism. A deep respect for the lessons of history balanced by the knowledge that things regularly happen that have never before occurred. And, finally, the integrity to admit mistakes, the fortitude to risk making more of them, and the intellectual honesty not to confuse luck with skill.

Sunday, February 7, 2016


The inner lives of animals are hard to study. But there is evidence that they may be a lot richer than science once thought. [H/T Will] (LINK)
Related previous post: The Worst Crime in History - by Yuval Noah Harari
Bruce Greenwald Resource Page (LINK)

Don’t Break Up the Banks. They’re Not Our Real Problem. - by Steve Eisman [H/T ValueWalk] (LINK)

The above also reminded me of a recent Eisman interview which I don't think I linked to yet, HERE, with the excellent quote/advice below.
Is there any wisdom you can impart to average investors? 
Do your own homework. I can’t overstate the importance of this. When things start to go bad, speaking to the management of the company may be the worst thing you can do. You can walk away thinking things are okay when in fact they’re not, because seeing outside your own paradigm is sometimes the hardest thing to do.
Stocks That Triple In One Year (LINK)

Hussman Weekly Market Comment: When Stocks Crash and Easy Money Doesn't Help (LINK)
Credit default swaps continued to soar last week, particularly among European banks. Given that risks surrounding China and the energy sector are widely discussed, European banks continue to have my vote for “most likely crisis from left field.” 
With regard to the stock market, I suspect that the first event in the completion of the current market cycle may be a vertical loss that would put the S&P 500 in the mid-1500’s in short order. That area is a widely-recognized “role-reversal” support level matching the 2000 and 2007 market peaks, and would at least bring our estimates of prospective 10-year S&P 500 nominal total returns to about 5%, which seems a reasonable place for value-conscious investors to halt the initial leg down.

Saturday, February 6, 2016


As this year's Daily Journal Annual Meeting draws near, it may be a good time to review some notes from last year. There are some free ones out there, but the most extensive ones are the ones Shane Parrish put together for $49. If you haven't seen them yet: Daily Journal 2015 Meeting Notes - About Richard Dawkins: On the 40th Anniversary of "The Selfish Gene" (LINK)

What’s Wrong With Craig Venter? -- Craig Venter, multi-millionaire maverick, says he can help you live a better, longer life. [H/T The Big Picture] (LINK)

The Brazilian Doctors Who Sounded the Alarm on Zika and Microcephaly (LINK)

a16z Podcast: Building Affirm, and Why Max Levchin Has Watched Seven Samurai 100-Plus Times (LINK)

Five Good Questions for Tadas Viskanta about his book Abnormal Returns (LINK)

ValueWalk interviews my friend Christian Olesen (Part 1, Part 2)

Thursday, February 4, 2016


Bill Gates interview on BBC's Desert Island Discs (LINK) [Also available via podcast.]

The Reith Lectures - Professor Stephen Hawking (LINK) [Also available via podcast.]

GMO's Q4 2015 Letter (LINK)
The 4Q15 Letter features Ben Inker answering the question as to whether high yield debt today is cheap in "Giving a Little Credit to High Yield" and is followed by a continuation of Jeremy Grantham's piece from last quarter. Part I of Jeremy’s section, “The Real American Exceptionalism” discusses the benefits of the entrepreneurial spirit that characterizes the U.S. as well as its advantage in the world given its abundant resources. Part II offers a brief review of 2015 and a look ahead to 2016, followed by an update to his views on whether the U.S. equity market is nearing bubble territory and a discussion as to how the free fall in the price of oil is playing out in the markets.
Charlie Munger on Cost of Capital [H/T @Sanjay__Bakshi] (LINK)

The Fairholme Fund's 2015 Annual Report (LINK)

Horizon Kinetics' latest in their index series: The Robo-Adviser, Part I: What Does Rebalancing Mean to You? (LINK)

John Hempton: Mr Ackman, I forgive you. Mike fooled almost everybody... (LINK)

Interview with Russell Napier author of Anatomy Of The Bear (LINK)

James Surowiecki on oil (LINK)

Kyle Bass: China banks months away from ‘danger territory’ (LINK) [The video is HERE.]
The premise of Bass' bet goes like this: China's banking system has grown to $34.5 trillion, equal to more than three times the country's GDP. The country is due for a loss cycle as cracks begin to show in its economy. 
When that happens, central bankers will have to dip into China's $3.3 trillion of foreign exchange reserves to recapitalize the banks, causing a significant depreciation in the value of the yuan, according to Bass. 
On Wednesday, he said China's export-import industry requires China to maintain $2.7 trillion in foreign exchange reserves to continue operating smoothly, citing an International Monetary Fund assessment. 
"They'll hit that number in the next five months," he said in an interview on CNBC's "Squawk on the Street." "Those that think they can burn it to zero and they have many years ahead of them, they really only have a few months ahead of them before they get into a real danger territory." 
...Bass confirmed Wednesday he is devoting much of his fund to his bet the yuan will depreciate. He characterized shorts against the currency, including his, as totaling "billions." 
The market will ultimately come to view a 10 percent yuan devaluation as "a pipe dream," he said. "When you look at the size of the imbalance and the size of their economy, it's going to go 30 or 40 percent in the end, and it's going to be the reset for the world."
Five Good Questions for Robert Murphy about his book The Primal Prescription (video) (LINK)

TED Talk - Judson Brewer: A simple way to break a bad habit (LINK)

E.O. Wilson on humanity's troubles

From E.O. Wilson – Of Ants and Men (PBS documentary):
"Humanity's troubles are due substantially to the fact that we are a dysfunctional species. Dysfunctional. And why? Because we have Paleolithic emotions. We have medieval institutions. And on top of all that we've developed God-like technology. And that's a dangerous mix."

Wednesday, February 3, 2016

Howard Marks quotes

From The Most Important Thing (and his April 2007 letter, "Everyone Knows"):
...most investors think quality, as opposed to price, is the determinant of whether something’s risky. But high quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them. . . . Elevated popular opinion, then, isn’t just the source of low return potential, but also of high risk.

In that memo, Marks also wrote:
The bottom line is that what “everyone knows” isn’t at all helpful in investing. What everyone knows is bound to already be reflected in the price, meaning a buyer is paying for whatever it is that everyone thinks they know. Thus, if the consensus view is right, it’s likely to produce an average return. And if the consensus turns out to be too rosy, everyone’s likely to suffer together. That’s why I remind people that merely being right doesn’t lead to superior investment results. If you’re right and the consensus is right, your return won’t be anything to write home about. To be superior, you have to be more right than the average investor.

Tuesday, February 2, 2016

The Endgame Investor

Below are a couple of sections from the Boyles Q4 letter to investors. Most of it is based on an idea originally mentioned on the blog, which is expanded upon below. 
Disclosure: I am a portfolio manager at Boyles Asset Management, LLC ("Boyles") and the fund managed by Boyles may in the future buy or sell shares of the stocks mentioned below and we are under no obligation to update our activities. This is for information purposes only and is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

The Endgame Investor

Josh Waitzkin, chess champion at many levels and inspiration for the movie Searching for Bobby Fischer, wrote an excellent book entitled The Art of Learning.  At one point in the book, he mentions that a key difference between how he was taught chess as a young boy and how most of his rivals were taught was his teacher’s focus on the endgame.  By breaking down the complexities of each chess piece during isolated endgame scenarios, he was able to understand the intricacies of the game in more depth, and use that understanding to form a more complete picture of the games he played.  Waitzkin describes the contrasting learning methods used by most of his rivals:

There is a vast body of theory that begins from the starting position of all chess games, and it is very tempting to teach children openings right off the bat, because built into this theoretical part of the game there are many imbedded traps, land mines that allow a player to win quickly and easily—in effect, to win without having to struggle to win.  At first thought, it seems logical for a novice to study positions that he or she will see all the time at the outset of games.  Why not begin from the beginning, especially if it leads to instant success?  The answer is quicksand.  Once you start with openings, there is no way out. Lifetimes can be spent memorizing and keeping up with the evolving Encyclopedia of Chess Openings (ECO).  They are an addiction, with perilous psychological effects.

There’s an analogy to be made between investing and the process of learning chess.  The opening variations in chess are like having a focus on short-term results or on cheapness based solely on backward-looking statistical metrics.  But the endgame is comparable to focusing on long-term results and the qualitative aspects of a company.  It is also about the time one spends studying the great businesses (both current and historical) and how they became that way.  And it’s important because as Waitzkin says, “Once you start with openings, there is no way out.”  While we wouldn’t say “no way out” when it comes to one’s investing process, once you develop certain habits and a certain definition of what you think is worth spending time on, it can be hard to reverse course, so the time spent developing and implementing sound theory and core principles is vital.

Thinking about an investment’s downside before considering its upside may be another aspect of the investing process comparable to studying the endgame in chess.  It’s easy to fall into the trap of thinking about how much one can make before thinking about how much one can lose.  Thinking about that upside scenario can paint a picture in one’s mind about exactly how the future will play out, and that often leads one down the road of being overconfident and misjudging that outcome’s probability.  It can make one forget how uncertain the future is and how often the markets will surprise you.  And it can prevent a person from spending enough time thinking about one of investing’s most important questions: What if I’m wrong?

What are some of the qualities of a good “endgame investor?”  The keys are not to think only about the prices and multiples at which one is buying and the prices and multiples at which one thinks is a reasonable level to sell, but to also think about how the “game” will develop before you sell.  It’s looking at the qualitative aspects of a business that are hugely important but often don’t show up in reported numbers, such as a company’s culture or management’s integrity.  And it’s also about looking for businesses that are thinking about the endgame themselves by foregoing short-term profits in order to strengthen their competitive advantages and increase total profit over the long term.  As Charlie Munger has said, “Almost all good businesses engage in ‘pain today, gain tomorrow’ activities.”  Finding management teams that understand and can execute on this idea can be hugely rewarding.  While we’ve yet to ever own the stock, one great example of this kind of management thinking and execution is Jeff Bezos at  And Bezos put it best when he said, “If we have a good quarter it’s because of the work we did three, four, and five years ago. It’s not because we did a good job this quarter.”

When it comes to looking at one’s downside, a good endgame investor needs to not just focus on current earnings or stated asset values, but needs to think deeply about how those will evolve over time, and consider worst-case scenarios, especially for asset values that are dependent on outside forces (such as commodity price changes or credit market accessibility).  The good endgame investor will be what Howard Marks refers to as a “second-level thinker.”  As described by Marks in his book The Most Important Thing:

Second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account:

§ What is the range of likely future outcomes?
§ Which outcome do I think will occur?
§ What’s the probability I’m right?
§ What does the consensus think?
§ How does my expectation differ from the consensus?
§ How does the current price for the asset comport with the consensus view of the future, and with mine?
§ Is the consensus psychology that’s incorporated in the price too bullish or bearish?
§ What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

While the process of learning to be a good second-level thinker will always be ongoing, and we don’t claim to have anywhere near the ability of someone like Howard Marks, asking the types of questions above did help us make Cambria a decent-sized position just over a year ago.  As we mentioned above, it was our best performer in 2015. One of the key things that drew us to it was that after doing our work and having conversations with management, we came to the conclusion that the earning power of the business was demonstrably above the consensus estimate.  And we also came to the conclusion that the earnings-multiple discount that the market was giving Cambria was unjustifiably low compared to its peers, due to what we believed were better-than-average growth prospects and a management team with exceptional capital allocation skills.

Cambria is also a good example of a management team that, when the price didn’t reflect what they thought the stock was worth, just kept on performing and waited for Mr. Market to eventually take some notice. This reminds us of a comment made by actor and comedian Steve Martin on the Charlie Rose show in 2007.  When asked what he tells people who ask him for advice, Martin responds, “Be so good they can’t ignore you.”  Many management teams focus too much on their stock prices and not enough on their businesses. But if the businesses perform, the stock prices will eventually follow.

A Brief Comment on Oil

Given the volatility of oil prices in 2015, which continued and accelerated at the start of 2016, we thought we’d make a brief comment on the oil space.  A friend of ours (Thanks, Phil) pointed us to a Bloomberg survey of 36 oil analysts that was done around October 1, 2014. Oil had traded just above $100 a barrel in the summer of 2014 and had fallen to around $85 (WTI) and $90 (Brent) per barrel at the time of the survey.  The analysts made estimates of the average price per barrel from the fourth quarter of 2014 through the first quarter of 2016.  In the two quarters following the survey, the actual price of oil was almost half of what even the most pessimistic analyst predicted it would be during that time. And those “Titans of Oil” also predicted an average price close to about $100 a barrel during the first quarter of 2016, with the most pessimistic analyst still predicting a price above $95 a barrel.  That’s a far cry from the $25-35 range it is trading at as we type these lines.

We bring this up not to point out any flaws in those predictions.  The mistake for anyone not required to make these kinds of predictions lies in trying to make them at all.  As Yogi Berra said, “It’s tough to make predictions, especially about the future.”  It is nearly impossible to predict the prices of things such as stocks or commodities over any short period of time.  But that doesn’t mean that companies tied to a commodity price can’t be worthwhile investments.  The key, for us at least, is to explore these areas for potential investments where the downside doesn’t rely on a certain commodity price.  The upside may depend on the price of a given commodity, but if we are confident about the downside protection and we think that any downside risk is more than offset by potential return even if prices remain depressed, then we may get interested.  This often leads us to look at niche service providers with good balance sheets, and while we’ve yet to commit any capital to companies in this space, the recent and significant downturn has us exploring several potential opportunities.