Thursday, August 4, 2016


Seth Klarman slams Trump, vows to work for Clinton (LINK) [Speaking of Klarman, it may be an interesting time to go back and review his real-time thoughts on the financial crisis back in 2008 and 2009, via THIS video from March 2009 and via THESE comments at the Graham & Dodd Breakfast in early October 2008. The Breakfast comments are from an OID sample and it appears there is more not included in this sample. So if anyone has the whole thing, I'd be greatly appreciative if you wouldn't mind passing it along. Thanks.] Eyes an Exit Short of Its Audacious Goal (LINK) Inc. told investors last summer that the company would be worth $40 billion in five years. 
Now the e-commerce startup that had aspired to rival Inc. is in talks to sell itself to Wal-Mart Stores Inc. for far less, the latest sign that Jet couldn’t live up to founder Marc Lore’s grandest ambitions.
Episode 08 of Malcolm Gladwell's Revisionist History podcast (LINK)

Book of the day: Value Creation Thinking

I just received the book Inside the Investments of Warren Buffett: Twenty Cases in the mail and am looking forward to reading it. Especially after seeing the excerpt from @HurriCap on Twitter that is pasted below. It touches on two pet peeves of mine when it comes to investment commentary: 1) Simply defining a good business as one with a high return on capital, without regard to whether or not reinvestment is also occurring at a high rate of return; and 2) Missing the forest for the trees. Now, from the book: 
When it comes to compounders and current earnings (which many investors will devote disproportionate time to calculate precisely to the nth degree), the argument is even more straightforward. Determining current earnings is important; it gives an investor a sense of what the valuation of the business is. And understanding the return on capital of a business is important as well; without a return on capital that is significantly higher than the cost of capital, a business cannot compound. However, the true value of a business is the aggregate of its future earnings. It does not matter so much if an investor gets current earnings exactly right at $80 or $82 or $79—it matters much more if the future earnings in five years are around $700 or $15 or $3000. Similarly, while having a high return on capital is one requirement for compounding, if the future prospects of a company are unclear, then having a high return on capital is clearly insufficient. A business that has a wonderful 50 percent return on capital employed but that grows its revenues or earnings zero percent has exactly zero benefit from its high return on capital compared to a company with lessor returns, since it will not be able to reinvest its earnings into growing the business.  
Given this, I now believe that rather than spending 80 percent of one's research time determining with extreme accuracy what current earnings in the last year were or establishing a precise return on capital for a business, one should spend significantly more time looking for businesses with great consistency in earnings growth and finding quality data that support a clear rationale why this growth is occurring. One should not fall victim to the phenomenon of being precise but wrong.
That excerpt also reminded me of a few more of my favorite quotes:
"There's no use running if you're on the wrong road." -Warren Buffett 
"We use a lot of experience and do it [investment returns] in our heads. We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false. We’re so afraid of that process so we don’t do it." -Charlie Munger 
"Considering the downside is the single most important thing an investor must do. This task must be dealt with before any consideration can be made for gains. The problem is that people nowadays think they’re pretty smart because they can do something quite rapidly. You can make the horse gallop. But are you on the right path? Can you see where you’re going?" -Irving Kahn