Wednesday, July 31, 2019


"If you make yourself a very reliable person and stay reliable all your life, faithfully doing whatever you engage to do, it will be very hard for you to fail at anything you want."  --Charlie Munger (2007)

Looking for a Financial Planner? The Go-To Website Often Omits Red Flags - by Jason Zweig and Andrea Fuller ($) (LINK)

Universal Laws of the World - by Morgan Housel (LINK)

The Investing City Podcast: 32 - CEO of Sarah Cannon, Dee Anna Smith: Doing the Rounds (LINK)

Venture Stories Podcast: The State of Fintech in 2019 with Seth Rosenberg and Sheel Mohnot (LINK)

Radiolab Podcast: G: The World’s Smartest Animal (LINK)

Bugged By Insects? 'Buzz, Sting, Bite' Makes The Case For 6-Legged Friends [H/T Linc] (LINK)
Related book: Buzz, Sting, Bite: Why We Need Insects
Why the Placental Microbiome Should Be a Cautionary Tale - by Ed Yong (LINK)

Tuesday, July 30, 2019


"There are lots of things in life that come to you where you have no option to not consider the issue. But where it’s voluntary, like choosing one investment from many, then the 'too difficult' pile is a marvelous way of sifting your daily grist." --Charlie Munger (2007)

Horizon Kinetics 2Q 2019 Portfolio Update - July 17, 2019 (audio) (LINK) [If anyone at Horizon Kinetics reads this blog, it would be fantastic if you make these podcasts available for download on Overcast, etc.]

Claire Barnes' Q2 report for the Apollo Asia Fund (LINK)

Is CVS A Value Trap Or A Fallen Angel Ready To Rise Again? - by Jonathan Boyar (LINK)

GMO White Paper | Risk and Premium: A Tale of Value - by John Pease (LINK)
The performance of U.S. value over the last decade has led many to wonder whether the value premium has been completely eroded. We analyze this question by decomposing the relative returns of cheap stocks in order to understand what has driven this change in performance. Our return decomposition suggests value stocks’ performance erosion can be evenly attributed to a reduction in the value premium and a widening of the value spread. Though value might deserve to trade at a greater discount today due to the market’s current dynamics, we believe that cheap stocks are still likely to deliver a premium and are therefore well-positioned to outperform the broad market.
Passive investing boom could be causing a market bubble, but not in the stocks you would expect (LINK)
Critics of passive investing argue it is inflating the prices of high-flying stocks such as Amazon and creating a bubble in those names. However, data compiled by Ned Davis Research shows the bubble may be forming elsewhere. 
The firm found that real estate and utilities stocks are the two sectors that have benefited the most from the rise of passive investing vehicles including exchange-traded funds. ETFs hold more than 11% of the real estate sector and 9.8% of the utilities sector. 
At the individual stock level, Tanger Factory Outlet Centers, a real estate company that invests in shopping centers, has had nearly 32% of its available stock, or float, taken over by ETFs, by far the most of any stock.
With Stocks at Fresh Highs, Investors’ Portfolios Look Alike ($) (LINK)
A rally in stocks has triggered unusual circumstances for some of Wall Street’s biggest investors—they are holding many of the same companies. 
A list of the market’s most crowded trades includes Mastercard Inc., Microsoft Corp., Inc., Abbott Laboratories and PayPal Holdings Inc., according to analysts at Bernstein, who tracked institutional ownership, price momentum, earnings forecasts and valuations. 
The overlap in the top 50 stockholdings between mutual funds and hedge funds—two types of investors whose styles typically differ—now stands at near-record levels, a study by Bank of America Merrill Lynch found.
Hidden Networks: Network Effects That Don’t Look Like Network Effects (LINK)

Albert Wenger: World after Capital | Rise of AI conference 2019 (video) (LINK)

BIS Annual Economic Report 2019 (LINK)

Invest Like the Best Podcast: Brian Christian – How To Live With Computers (LINK)

North Star Podcast: Tren Griffin: The Love of Learning (LINK)

Hidden Forces Podcast: Raoul Pal | The Fourth Turning: Generational Theory and the Future of Global Money (LINK)

5 Mindsets that Create Success - by Mark Manson (LINK)

They Found 43,130 of Her Relatives Before Solving Her Cold Case - by Sarah Zhang (LINK)

Monday, July 29, 2019

Industry growth and competition...

"Investors have consistently lost money by assuming that if they invest in the equity of companies engaged in a growth market it is logical that they must make money. They should take a leaf from the book of US investors in the 1970s who correctly identified air travel as a growth market and then underperformed the market by investing in airline stocks. How? Because they missed the point that the link between growth in air travel and the profitability of airlines was about to be broken by the intervention of a force called deregulation. More air miles were flown, but at lower and lower fares." --Terry Smith ("Accounting for Growth")

"Any time you get more and more people competing in any given area, generally, the economics deteriorate. And the economics have deteriorated for newspapers, although they’re still enormously profitable in relation to tangible equity employed, but they do not have the same economic prospects, if you look at the future stream of earnings, that it looked like they had 20 or 30 or 40 years ago. And television, again, the margins have been maintained surprisingly well, but the audience keeps going down.... So, that has to erode economics over time. Cable was thought to operate pretty much all by itself, and the telecoms come in. Very few businesses get better because of more competition." --Warren Buffett (2006)

"It’s simplicity itself. It will be a rare business that doesn’t have a way worse future than it had a past." --Charlie Munger (2006)

"There’s industries we know that may have a wonderful future, but we don’t have the faintest idea who the winners will be, so we don’t think about those.... So there’s a whole lot of things we don’t think about. Charlie and I have a number of filters that things have to get through very quickly before we’re willing to think about them. And sometimes we’re thought of as rude...because people will call us and they start explaining some idea to us, and it just doesn’t make it through the first filter or two. So we...think we’re saving their time if we just politely say, you know, that we just have no interest, and we don’t want to have you finish the sentence."  --Warren Buffett (2012)

"We have found in a long life that one competitor is frequently enough to ruin a business." --Charlie Munger (2012)

Sunday, July 28, 2019


"Most powerful is he who has himself in his own power." --Seneca

A Few Gentle Thoughts on Journalism - by Jason Zweig (LINK)

What You Gain—and Lose—When You Lock Money Up for the Long Run - by Jason Zweig ($) (LINK)

America’s Public Pensions Are Stuck In The Clouds ($) (LINK)

Beyond Ridiculous (LINK)

Oaktree Insights: Structured Credit Primer & Commentary (LINK)

Paradigm Shifts - by Ray Dalio (LINK)

Kyle Bass on CNBC last week (video) (LINK)

Value Investing with Legends Podcast: Connecting Theory and Practice Through The 5x5x5 Student Investment Fund (LINK)
Today’s conversation is with Tom Russo, the master of consumer brand investing, and two of our best students, Jeffrey Johnson '19 and Michael Allison '19. We’re talking about the 5x5x5 Student Investment Fund and having a deep discussion about some of the specific stocks in the portfolio. The concept for the 5x5x5 fund came out of Tom’s concern that conventional investment funds for students offered limited learning potential due to their short-term nature and was made possible by a generous gift given by him and his wife, Georgina.
a16z Podcast: The Search for the Secret Metal that Powers All Our Devices (LINK)

Revisionist History Podcast: Dr. Rock’s Taxonomy (LINK)

Radiolab Podcast: G: Unnatural Selection (LINK)
This past fall, a scientist named Steve Hsu made headlines with a provocative announcement. He would start selling a genetic intelligence test to couples doing IVF: a sophisticated prediction tool, built on big data and machine learning, designed to help couples select the best embryo in their batch. We wondered, how does that work? What can the test really say? And do we want to live in a world where certain people can decide how smart their babies will be?
Should the Rich Be Allowed to Buy the Best Genes? - by Walter Isaacson (LINK)

What Tick Saliva Does to the Human Body - by Sarah Zhang (LINK)

The Stump That Didn’t Die - by Ed Yong (LINK)
Through underground connections with its neighbors, it somehow stays alive. What does that say about the concept of a tree, or the future of forests?
Book of the day: The Bubble that Broke the World - by Garet Garrett

Audible also has some notable titles currently on sale for $5....

The Fifth Risk - by Michael Lewis

Skunk Works - by Ben R. Rich and Leo Janos

The Crusades - by Thomas Asbridge

The Invention of Nature: Alexander von Humboldt's New World - by Andrea Wulf

The Sixth Extinction - by Elizabeth Kolbert

Cosmos - by Carl Sagan

Friday, July 26, 2019

Howard Marks Memo: On the Other Hand

Link to Memo: On the Other Hand
Expectation that the Federal Reserve will cut interest rates has been a primary factor driving investor sentiment and actions in recent months. It should be noted, though, that the considerations and actions of the Fed are part of a complex ecosystem that has financial, political and behavioral components that come with considerable uncertainty. In his latest memo, Howard Marks addresses what the Fed's actions are predicated on, whether low rates are permanently a good thing, and how investors should view the Fed's rate management.

Wednesday, July 24, 2019


"We don’t formally have discount rates. Every time I start talking about all this stuff, Charlie reminds me that I’ve never prepared a spreadsheet. But, in effect, in my mind I do. We are going to want to get a significantly higher return, obviously — in terms of cash produced relative to the amount we’re outlaying now — for a business than we are from a government bond. That has to be the yardstick at a base. And how much more do we want? Well, if government bond rates were 2 percent, we’re not going to buy a business to earn 3 or 3 1/2 percent expectancy over the years. We just don’t want to commit our money that way. We’d rather sit around and wait a little while. If they’re 4 3/4 percent, you know, what do we hope to get over time? Well, we want to get a fair amount more than that. But I can’t tell you that we sit down every morning and I call Charlie in Los Angeles and say, 'What's our hurdle rate today?' I mean, we’ve never used the term. We want enough so that we feel very comfortable if they closed down on the stock market for a couple of years, if interest rates go up another hundred basis points or 200 basis points, we’re still happy with what we’ve bought. I know it sounds kind of fuzzy, but it is fuzzy." --Warren Buffett (2007)

"The concept of a hurdle rate makes nothing but sense, and yet a lot of terrible errors are made by people who are talking about hurdle rates. Just because you can measure something and guess it, doesn’t mean that it’s the controlling variable in what you’re dealing with in a messy world. And I don’t think there’s any substitute for thinking about a whole lot of investment options and thinking about why one is better than another and what the likely returns are from each, et cetera, et cetera. And the trouble with the hurdle rate concept — not that we don’t have one, in a sense — is it doesn’t work as well as a system of comparing things. In other words, if I have something available that I think will give me 8 percent for sure and I can buy all I want of it, and you’ve got a perfectly good investment that I think will earn 7, I don’t have to waste 5 minutes with you. You’re like the mail order service offering the bride through the mail and she’s got AIDS. You know, I can go on to some different subject. The concept of opportunity cost is so little taught in investment. They teach it in the freshman course in economics in all the major universities, but when you get to the corporate finance departments and so forth, it doesn’t lend itself with the kind of mathematics they want to use, so they ignore it. But in the real world, your opportunity costs are what you want to make your decisions based on." --Charlie Munger (2007)

"Yeah. And even if you had something you were really familiar with and were very sure on the 8 percent, 8 1/2 wouldn’t tempt you if somebody came along, as a practical matter." --Warren Buffett (2007)


A list of Q2 2019 Investment Letters & Reports (LINK)

A History and Overview of Visa (Part 1, Part 2)

The Fed is Always Looking For Risk, But These Officials Seek The Unimaginable Ones (LINK)

Amazon partners with Realogy, sending the real-estate brokerage giant’s shares soaring (LINK)

Stansberry Investor Hour: 109: How to Be an Above-Average Investor [with Chris Pavese, ~26:09 mark] (LINK)

The School of Greatness Podcast: Mark Sisson: Building a $200 Million Dollar Personal Brand [Starting ~6:32 mark] (LINK)

The Quietly Changing Consensus on Neutering Dogs (LINK)

Book of the day: Novacene: The Coming Age of Hyperintelligence - by James Lovelock [Via Stewart Brand on Twitter: "The most thrilling book I have read in years.... It’s short, easy to read twice. Maybe necessary to read twice."]

Tuesday, July 23, 2019


"If the business is good enough, it will carry a lousy manager. And the converse case, where a really good manager gets in a really lousy business, he’ll ordinarily have a very imperfect record. In other words, it’s a rare person that can take over a textile business, totally doomed—which is what Warren [Buffett] did in his youthful folly— and turn it into what’s happened here. You should not be looking for other Warrens on the theory they’re under every bush." --Charlie Munger (2007)

The Amazon dilemma: how a tech powerhouse that fulfills our every consumer need still lets us down (LINK)
Related podcast (new): Land of the Giants
How I Spotted A Fraud (Before It Was Too Late) (LINK)

Game of Tongues: How Duolingo Built A $700 Million Business With Its Addictive Language-Learning App [H/T @ChrisPavese] (LINK)

How Disruptive Innovation addresses 3 of education’s most critical issues today (LINK)

The Investing City Podcast: 31 - Alex Rubalcava: Seed Stage Investing (LINK)

Invest Like the Best Podcast: Eric Sorenson - How Quant Evolves (LINK)

Big Questions with Cal Fussman (podcast): David Griffin: How Good People Influence Your Life (LINK)

Bill Gates reviews “Blueprint: The Evolutionary Origins of a Good Society” by author Nicholas Christakis. (LINK)

A summary of Peter Wohlleben's The Hidden Life of Trees (LINK)

A summary of Richard Hamming's book The Art of Doing Science and Engineering: Learning to Learn (LINK)
PS – The book is expensive and hard to find but here is a PDF copy of the book and if you’re more of an auditory learner, here are Hamming’s “Learning to Learn” lectures

Monday, July 22, 2019


"You have to keep learning that you don’t know, because you find models that work, ways to make money, and then they blow sky-high. There’s always somebody around who looks very smart. I’ve learned that the people who are the most smart aren’t going to make it. What’s great about this business is that you keep learning. In fact, I don’t know anybody who left investing to become an engineer, but I know a lot of engineers who left engineering to become investors. It’s just so infinitely challenging. You just have to be prepared to be wrong and to understand that your ego had better not depend on being proven right. Being wrong is part of the process. It’s really why the market fluctuates." --Peter Bernstein  [Source]

The Psychology of Prediction - by Morgan Housel (LINK)

Billionaire’s 2005 ‘Almanack’ of sage advice finds an audience in S.F. tech world (LINK)
Related book: Poor Charlie's Almanack
Blind Spots in Investing (LINK)

The Amazing Story of Guidewire Software (LINK)

Horizon Kinetics' 2nd Quarter Commentary (LINK)

The Mirage of Cloud Gaming (And How to Reach the Oasis) - by Matthew Ball (LINK)
Cloud game delivery and "Netflix of Gaming" are the big new "things" in media today. But they're unlikely to deliver the player or playtime growth that many expect.
D.I.Y. Private Equity Is Luring Small Investors (LINK)
Amateur investors are setting up high-risk, high-return deals on their own, but the key to success varies.
This Banker Gets to Drink Wine All Day ($) (LINK)

China’s Built a Railroad to Nowhere in Kenya [H/T @wolfejosh] (LINK)

Acquired Podcast: Huawei (LINK)

Retirement Is A State Of Mind (LINK)

Notre-Dame came far closer to collapsing than people knew. This is how it was saved. [H/T @morganhousel] (LINK)

The Human Brain Project Hasn’t Lived Up to Its Promise - by Ed Yong (LINK)

Book of the day: The Moon: A History for the Future

Friday, July 19, 2019


"Volatility is not a measure of risk.... Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you’re in, and it comes from not knowing what you’re doing. And if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk." --Warren Buffett (2007)

"One of the reasons we’ve been able to do pretty well is that we early recognized that very smart people do very dumb things. And we tried to figure out why. And we also wanted to know who, so we could avoid them." --Charlie Munger (2007)

Financial Twitter Loses a Source of Humility and Wisdom, but Good Voices Remain - by Jason Zweig (LINK) [And a big thank you to @jasonzweigwsj, an ultimate must-follow, for including me in his list.]
Twitter isn’t just a megaphone for bragging about yourself and insulting your enemies, real or imagined. All investors should appreciate that some financial thinkers have turned the social-media site into a force for enlightenment and fun—if you follow the right people. 
That’s never been clearer than it was a few days ago, when the person behind the @Nonrelatedsense account died, prompting an outpouring of love and grief in the financial quadrant of Twitter known as FinTwit. (Although I know who he was and where he worked, I’m honoring the wishes of his family and friends to preserve his anonymity.) 
Those who followed him, even without meeting him in real life, felt as if we had lost one of our smartest friends.
The Meb Faber Show (podcast): #165 - Chris Mayer - I Do Think The Biggest Challenge…Is Keeping It, Holding On To It (LINK)
Related books: 1) 100 Baggers: Stocks That Return 100-to-1 and How To Find Them; 2) 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities - by Thomas W. Phelps
Revisionist History Podcast: The Standard Case (LINK)

If You’re Angry, You’re Part of the Problem, Not the Solution - by Ryan Holiday (LINK)

Blurring Offline and Online: More on the Potential of Long Tail Social Media - by Cal Newport (LINK)

The Future of the City Is Childless - by Derek Thompson (LINK)
America’s urban rebirth is missing something key—actual births.
Apollo 11 at 50 (LINK)

The Disturbing Sound of a Human Voice - by Ed Yong (LINK)
Hearing people talk can terrify even top predators such as mountain lions, with consequences that ripple through entire ecosystems.
The WHO Finally Sounds Its Loudest Alarm Over Ebola in the Congo - by Ed Yong (LINK)
The ongoing outbreak is the second worst in history and has proved to be unusually difficult to contain.

Thursday, July 18, 2019

David Abrams on the “Great Illusion of the Stock Market"

From his introduction to Part VII of Security Analysis: Sixth Edition (published in 2008):
I am optimistic about the future of value investing. To be sure, there are many bright and savvy people in the financial markets employing Graham and Dodd’s techniques, but the markets themselves have grown exponentially. The chunk of capital being invested by the value-investing crowd is a small percentage of the overall capitalization of global financial markets. Having observed the markets for more than two decades, my sense is that, rather than a glut of Graham and Dodd acolytes picking through scarce opportunities to find a place for their cash, money is ever more prone to sloshing around in giant waves, flowing from one fad to the next. If anything, it seems that the people controlling these megasums have become less intelligent and less sophisticated over time. The last decade alone has brought incredible extremes in valuation, starting in 1999 and 2000 with the high-altitude Internet bubble that was followed in short order by the utter collapse of the tech market. In the summer of 2002, we witnessed a tremendous corporate debt meltdown. But soon, these excessively low valuations were pushed off the front pages by the most generous and lax lending standards of all time. Now, as I write this introduction, the mortgage market is imploding, creating perhaps yet another new set of opportunities. That we’ve seen the last of these extreme swings seems doubtful. 
What is driving this manic phenomenon? The explanation is something I call the “Great Illusion of the Stock Market.” Investing looks easy, particularly in a world of inexpensive software and online trading. Buying a stock is no more difficult than buying a book on And because a great many people have gotten wealthy in the stock market, lots of others have come to believe that anyone can get rich with very little effort. They are wrong. All the people I know who’ve built wealth in the stock market have worked very hard at it. Graham and Dodd understood the effort it took to be successful in the market. They wrote: 
Since we have emphasized that analysis will lead to a positive conclusion only in the exceptional case, it follows that many securities must be examined before one is found that has real possibilities for the analyst. By what practical means does he proceed to make his discoveries? Mainly by hard and systematic work. (p. 669) 
So, yes, you can get rich buying and selling stocks, but, as the authors well knew, it takes hard work and patience. Nevertheless, the Great Illusion persists, maybe because, like Woody Allen’s film character Zelig, the market is a chameleon that changes its appearance to suit the times. Sometimes, it shows up as a tech stock bubble. Other times, it manifests itself as a ludicrously overvalued stock market as seen in the late 1980s in Japan. In a current incarnation, a raft of financial institutions across America are trying to emulate the success of David Swensen and his colleagues who manage Yale University’s endowment by allocating large percentages of the capital to “alternative investment managers.” 
But the Great Illusion is just that—an illusion. If you want to get wealthy in the financial markets, you’ll need to engage in “hard and systematic work.” 

Tuesday, July 16, 2019


"The biggest thing, too, is to have something in the way you’re programmed so that you don’t ever do anything where you can lose a lot. I mean, our best ideas have not been better than other people’s best ideas, but we’ve never had a lot of things that pulled us way back. So we never went two steps forward and one step back. We probably went two steps forward and a fraction of a step back. But avoiding the catastrophes is a very important thing, and it will be important in the future." --Warren Buffett (2007)

The Agony of Hope Postponed, by a Value Investor (LINK)

Why 1925? - by Frank K. Martin (LINK)

Bill Nygren Market Commentary | 2Q19 (LINK)

Notes from Peter Thiel’s speech at the National Conservatism conference on July 14, 2019 [H/T @tylercowen] (LINK)

The Long View Podcast: James Montier: ‘How Do I Get Paid for Owning This Asset?’ [H/T Ritholtz] (LINK)

EdSurge On Air Podcast: Sal Khan: Test Prep Is ’the Last Thing We Want to Be’ (LINK)

A great summary of Matthew Walker's key ideas on sleep via excerpts from his podcast chat with Peter Attia (LINK)

Monday, July 15, 2019


The Streaming Wars: Its Models, Surprises, and Remaining Opportunities - by Matthew Ball (LINK)

Star of the North: How Warren Buffett Bought the Best Industrial Firm in Israel [H/T Linc] (LINK)

William Nygren at the Ben Graham VI Conference (video) (LINK)

Joel Greenblatt at the Ben Graham VI Conference (video) (LINK)

Bob Robotti at the Ben Graham VI Conference (video) (LINK) [His Subsea 7 thesis starts around the 7-minute mark.]

40 Years Later, Lessons From the Rise and Quick Decline of the First ‘Killer App’ ($) (LINK)

Meditations On Meditation - by Blas Moros (LINK)

The Promise and Price of Cellular Therapies - by Siddhartha Mukherjee (LINK)

Not freezing yourself out...

Here's a reply from Buffett and Munger at the 2007 Berkshire Hathaway Annual Meeting—to a question posed by Frank Martin (Question 24)—that I thought was worth posting separately here. Going back and (slowly) reading the transcripts with the benefit of hindsight has been a fantastic learning experience, and this excerpt is a great example. All three of them clearly saw trouble ahead given the excesses that existed. And given that belief—and the belief that timing the downturn and its magnitude with precision was nearly impossible—Buffett and Munger gave this advice about how to act: 
WARREN BUFFETT: ...We don’t have the faintest idea where the S&P will be in three years, or where the long-term bond will be in three years, but we do know which we would rather own on a 20-year basis. 
CHARLIE MUNGER: Warren, we’d also expect that the current scene will cause some real disruption, not too many years ahead. 
WARREN BUFFETT: That’s true, but if you go back a hundred years, you could almost say that in almost any period. You will get disruptions from time to time, and it’s very nice if you have a lot of cash then and you have the guts to do something with it.  
But predicting them or waiting around for them, that sort of thing, is not our game. And I mean, we bought $5 billion worth of equities in the first quarter, something like that. would be a joke to even compare them to 1974 or a whole bunch of other periods. But we decided we would rather have them than cash, or we would rather have them than sit around and hope that things get a lot cheaper. 
We don’t spend a lot of time doing that. You can freeze yourself out indefinitely.  
So any time we find something that we think is intelligent to do, we just do it, and we hope we can do it big.

Saturday, July 13, 2019

Graham and Dodd quote

Exact Appraisal Impossible. Security analysis cannot presume to lay down general rules as to the “proper value” of any given common stock. Practically speaking, there is no such thing. The bases of value are too shifting to admit of any formulation that could claim to be even reasonably accurate. The whole idea of basing the value upon current earnings seems inherently absurd, since we know that the current earnings are constantly changing. And whether the multiplier should be ten or fifteen or thirty would seem at bottom a matter of purely arbitrary choice.  
But the stock market itself has no time for such scientific scruples. It must make its values first and find its reasons afterwards. Its position is much like that of a jury in a breach-of-promise suit; there is no sound way of measuring the values involved, and yet they must be measured somehow and a verdict rendered. Hence the prices of common stocks are not carefully thought out computations but the resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly but only as they affect the decisions of buyers and sellers.

Interestingly, I can't seem to find a direct source for the more popular version of Graham's weighing machine quote. Warren Buffett has quoted it a couple of times, including in his 1987 letter
As Ben said: "In the short run, the market is a voting machine but in the long run it is a weighing machine."
And in his 1993 letter
As Ben Graham said:  "In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."
And in the revised edition of The Intelligent Investor, Jason Zweig writes: 
As Graham liked to say, in the short run the market is a voting machine, but in the long run it is a weighing machine.
So I'd be curious if anyone knows where Graham used the weighing machine reference in regards to the long run. I don't see a direct source, but given the personal relationship Warren Buffett and others had with him—and considering that Buffett and Zweig used the words "said" and "say" in their references—it may have just been something he communicated verbally instead of in his written works. 

And on a related note, this Seth Klarman quote from the Preface to the Sixth Edition of Security Analysis is one that I also think is worth re-reading, and including with the others in this post:
As Graham has instructed, those who view the market as a weighing machine—a precise and efficient assessor of value—are part of the emotionally driven herd. Those who regard the market as a voting machine—a sentiment-driven popularity contest—will be well positioned to take proper advantage of the extremes of market sentiment.

Friday, July 12, 2019


"When you’re trying to determine something like intrinsic value and margin of safety and so on, there’s no one easy method that could be simply mechanically applied by, say, a computer and make anybody who could punch the buttons rich. By definition, this is going to be a game which you play with multiple techniques and multiple models, and a lot of experience is very helpful. I don’t think you can become a great investor very rapidly any more than you could become a great bone tumor pathologist very rapidly. It takes some experience and that’s why it’s helpful to get a very early start.... We’ve never had any system for being able to make correct judgments on the values of all businesses. We throw almost all decisions into the too hard pile, and we just sift for a few decisions that we can make that are easy. And that’s a comparative process. And if you’re looking for an ability to correctly value all investments at all times, we can’t help you." --Charlie Munger (2007)

"We know how to step over one-foot bars. We don’t know how to jump over seven-foot bars. But we do know how to recognize, occasionally, what is a one-foot bar. And we know enough to stay away from the seven-foot bars, too." --Warren Buffett (2007)

On Writing - by Chris Pavese (LINK) [A big thanks to Jason Zweig for the writing series last year (Part 1, Part 2, Part 3), and to Chris for this summary of some key points. I've also added Chris' highlights of Jason's series to the end of my file on writing tips.]

Lucy Kellaway on turning 60 — and starting out afresh [H/T @jasonzweigwsj] (LINK)

Shopify and the Power of Platforms - by Ben Thompson (LINK)

The Amazon Arbitrage - by David Perell (LINK)

History of Public SaaS Returns and Valuations (LINK)

Six Reasons Why the Rebate Rule Failed—And What’s Next (LINK)

Value Investing with Legends: Taking a Top-Down Approach to Value Investing [with Jean-Marie Eveillard] (LINK)

Venture Stories Podcast: The Intersection of Financial Services and Marketplaces (LINK)

The James Altucher Show: 470 - Ramit Sethi: (Part 2) (LINK)
Related book: I Will Teach You to Be Rich
Revisionist History Podcast: Good Old Boys (LINK)

Stuff You Should Know Podcast: How Sloths Work (LINK)

No, You Can’t Make a Person Change - by Mark Manson (LINK)

Have You Seen Britain’s Tiny Potential Tree-Killer, the Adorable Spittlebug? (LINK)

A Groundbreaking Study Is Good News for Cats—And People - by Ed Yong (LINK)

Wednesday, July 10, 2019


"Markets will do crazy things over time. When Charlie and I were at Salomon, they’d always talk to us about five sigma events or six sigma events, and that’s fine if you’re talking about flipping coins, but it doesn’t mean anything when you get human behavior involved. And people do things that — intelligent people do things — very intelligent, educated people do things — that are totally irrational, and they do them en masse. And you saw it in 1998. You saw it in 2002. And you’ll see it again." --Warren Buffett (2007)

"When people talk about sigmas, in terms of disaster potentialities in markets, they’re all crazy. They got the idea that bad results in markets would be predicted by Gaussian distributions. And the way they decided on that outcome was it made everything so easy to compute. They don’t follow Gaussian distributions. You have to believe in the Tooth Fairy to believe that." --Charlie Munger (2007)

Sub-Zero Yields Start Taking Hold in Europe's Junk-Bond Market (LINK)
Central bankers hinting at more monetary stimulus have depressed yields so much that even some European junk bonds trade at levels where investors have to pay for the privilege of holding them. 
The number of euro-denominated junk bonds trading with a negative yield -- a status until recently associated with ultra-safe sovereign borrowers -- now stands at 14, according to data compiled by Bloomberg. At the start of the year there were none.
Extreme Makeover: Rich Barton Has A $700 Million Stake In Zillow And Plans To Turn It Into A Home-Flipping Machine (LINK)

Inseparable Pairs - by Morgan Housel (LINK)

Dr. Fox - by Chris Pavese (LINK)

The James Altucher Show: 469 - Ramit Sethi: (Part 1) (LINK)
Related book: I Will Teach You to Be Rich
Money And Politics, Not Technology, Stand Between Us And Self-Driving Cars (LINK)

Daniel Ruiz talks about the auto sector (videos) (Part 1, Part 2, Part 3, Part 4, Part 5, Part 6)

AI Trained on Old Scientific Papers Makes Discoveries Humans Missed (LINK)

Venture Stories Podcast: Value Hacking and How To Avoid The Fake Growth Epidemic with Mike Maples (LINK)

What Ego Edges Out… - by Ryan Holiday (LINK)

You’ve probably never heard of CGIAR, but they are essential to feeding our future - by Bill Gates (LINK)

The Story of Humans and Neanderthals in Europe Is Being Rewritten - by Ed Yong (LINK)

Book of the day: Master of the Game - by Connie Bruck

Monday, July 8, 2019


"It's not that I'm so smart, it's just that I stay with problems longer." --Albert Einstein

Ruane, Cunniff & Goldfarb Investor Day Transcript (May 2019) [H/T @BluegrassCap] (LINK)

John Hempton on The Jolly Swagman Podcast (LINK)

The Fireworks Over Share Buybacks Are Duds - by Jason Zweig ($) (LINK)
Share buybacks are as American as mom, apple pie and hot dogs on the Fourth of July. 
You’d never guess that given the many politicians on both the left and the right who say share repurchases are a newfangled, evil spawn of deregulation. 
Complexity Investing [H/T @BluegrassCap] (LINK)

My Questions About Negative-Yielding Debt - by Ben Carlson (LINK)

Marketing 3.0: How L’Oréal is embracing new marketing codes [H/T @ivan_brussels] (LINK)

Raoul Pal with a Twitter thread about some of the macro risks he sees in Europe (LINK)

Short Seller Targets Anta in Another Attack on China’s Biggest Sportswear Company ($) (LINK)
Carson Block’s firm takes aim at Anta in report titled ‘Turds in the Punchbowl’
Huawei staff share deep links with Chinese military, new study claims (LINK) [The paper is available HERE.]

Cyberweapons: A Real Worry - by Kevin Kelly (LINK)

Ben Thompson on The Talk Show With John Gruber Podcast (LINK)

Techmeme Ride Home Podcast: The Man Who Could Have Been Bill Gates? (Part 1, Part 2)

Robert Greene: "The Laws of Human Nature" | Talks at Google (LINK)

TED Talk: Grief and love in the animal kingdom | Barbara J. King (LINK)

Ancient life awakens amid thawing ice caps and permafrost [H/T Linc] (LINK)

Not a Human, but a Dancer - by Ed Yong (LINK)
What Snowball the parrot’s spontaneous moves teach us about ourselves

Sunday, July 7, 2019

Tandy Leather Factory, Inc. (TLF)

Here is a write-up I posted on MicroCapClub last month for those that may be interested in the micro-cap space. But first, please read the relevant disclosure below.

Disclosure: I am the portfolio manager at Sorfis Investments, LLC ("Sorfis") and the separate accounts that Sorfis manages own shares in Tandy Leather Factory, Inc. We may in the future buy or sell shares and are under no obligation to update our activities. This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.


Tandy Leather Factory, Inc. (TLF)

Ticker: TLF
Price: $5.45
Shares outstanding: 8,934,024
Market cap: $48.7 million
Cash: $17.7 million
Debt: $0
Enterprise value: $31 million

Tandy Leather Factory is a specialty retailer of leather and leathercraft related items. Leather is ~40% of sales, hand tools ~20% of sales, and then there are a bunch of items that make up a single-digit percent of sales (dyes, finishes, glues, hardware, kits, stamping tools, etc.). They are basically a one-stop shop, and by far the largest player in this niche.

They categorize their customers into 2 types: Retail (~62% of sales) and Non-Retail (~38% of sales). Retail customers are individuals that come into their stores and are the end-user. Non-Retail customers are small businesses, youth organizations (Boy Scouts, 4-H, etc.), hospitals, military, distributors, re-sellers, and other similar, non-individual customers.

At the end of Q1, the company operated 117 stores, which are mostly in low-rent, strip mall type of locations. With the closure of the last U.K. store which was planned for this month, there will be 116 stores, with 115 in North America and 1 in Spain. A few more underperforming stores are also expected to be closed as leases expire in the near future.

In Q4 of last year, the company made both a management and strategy change. I think the previous management, which were long-time company veterans, did a good job over the years, but as is often the case, especially in the micro-cap world, put too much emphasis on top-line growth over economically profitable growth. And when cash flow slowed a bit, they started trying new things, such as starting a district manager program, continuing to operate the international stores (which lacked scale) that were unprofitable, as well as some other things which may have been reasonable experiments, but ended up being bad returns on investment (conference sponsorships, opening on Sundays, etc.). More expectations were also put on store managers to get out and try and sell non-retail/commercial business, which took them away from running their stores and providing great customer service to the retail customer base. 

The new CEO (Janet Carr) is focusing more on cash flow. So unprofitable stores will be closed when leases are up. The district manager program has been scrapped in favor zone managers, where 12 district managers have been replaced by 8 zone managers, reporting to 1 retail head manager instead of 2 regional managers. The store managers will also get to spend more time in their stores, as well as new incentives (pay based on cost of living, can now earn overtime, and incentive pay now based on sales, inventory turn, and labor costs instead of just store profit—so that more is in their control). The factory in Fort Worth, which produced about 10% of company product, has been reduced from about 25 employees down to 6, as some of the product it produced can be sourced from cheaper from elsewhere. 

But there is also money being spent on other things in 2019. They’ve hired a few people to focus solely on reaching out to commercial customers. This is potentially an area for growth, as we don’t really know how big this niche market is, but there is now a select, lower overhead group operating out of company headquarters focused on it, instead of having a lot of reliance on store managers to also perform much of those duties. They’ve also hired some other people in Fort Worth to professionalize other departments (marketing, merchandising, human resources, logistics), and are investing in technology that is long overdue to be updated (accounting and POS systems). 

I think there is a lot of uncertainly about how some of these changes may pan out, but I think there’s little downside buying at these levels. Tangible book value is around $6.30 per share the way I calculate it, which should be pretty close to liquidation value given that the inventory does not go bad quickly, and the inventory that was bad (e.g. faded leather that is hard to sell) or slow moving was written down when the new management team came in at the end of 2018 to provide a clean slate.

And while there is investment and some changes happening in 2019, I think—unless they really make some bad capital allocation decisions—the underlying earning power in 2018 should be the minimum level of earning power going forward. Given that I really do think the inventory write-down here can be counted as a one-off expense, and if we add that plus the portion of the previous management severance expensed during 2018, then the after-tax income at a normalized ~25% tax rate going forward would have been around $4.2 million last year. So besides buying it below tangible book value, we’re also getting about an 8.6% after-tax earnings yield (even without backing out excess cash), which I think is likely to grow in the years ahead.

Helping to protect the capital allocation going forward, we also have two former MicroCap Leadership Summit speakers on the board in Jeff Gramm and Brent Beshore. Jeff’s firm, Bandera, owns around 32% of the company. And another board member that runs an investment firm owns a little under 10% of the company.

While it’s often hard to know what actually causes a stock’s price to drop, and it could be coincidence, there is some probability that worries over the tariffs have caused concern among one or more investors with enough shares to move the price. As part of her immersion process into Tandy, Janet Carr mentioned visiting the company’s tanneries in Mexico during the company’s earnings call in March. And then in the week after President Trump’s tweet about the tariffs on Mexico, volume increased in the stock and many shares traded down just slightly above and below the $5 per share range. It may be a coincidence, but I thought it was worth noting, though the company actually gets a little less than 5% of its leather from Mexico (the sources are diversified, but South American countries seem to be the biggest source). And of the $17 million in imports last year, about $2 million were from China (Taiwan was the biggest at around $5 million).

Janet Carr also received restricted shares for joining the company and will receive some extra shares if operating income exceeds $12 million for 2 years in a row and $14 million in one year, which, given the company made $12 million in 2014 and had operating margins in the 12.4-14.4% range from 2012 to 2016, this is a reachable goal—which should certainly make buyers at today’s valuation happy if it is achieved.

Over the next few years, given the company still has a great competitive position and many of the inefficiencies of the past are in the process of being addressed, I think getting somewhere back in the 10-15% operating margin range is likely achievable, and probably within the next 2 or 3 years. So if we assume no growth and the closure of a few more stores, we’d be around $80 million of revenue which, at a 25% tax rate, gets us somewhere in the $6 million to $9 million range of after-tax income, which would give us a very good earnings yield on today’s sub-$50 million market cap, even before backing out excess cash. The company has also paid out a few special dividends in the past, and has been buying back stock. 

What would that cash flow be worth? It’s hard to predict multiples, and I prefer to mostly focus on my downside and earnings yield as a base return. But multiples of small, private businesses with $5 million+ in EBITDA that have a good competitive position, aren’t necessarily growth businesses, but also aren’t too capital intensive tend to sell for 6-8x EBITDA. So assuming a 12.5% operating margin on $80 million of sales, we get $10 million in operating earnings plus about $1.8 million in Depreciation and Amortization, so $11.8 in EBITDA. This would give us a valuation range of $70.8 million to $94.4 million. Assuming 9 million shares outstanding (i.e. buybacks roughly offset extra restricted shares), and $1 per share in excess cash (probably too low), we’d get a valuation somewhere in the $8.85 to $11.50 per share range. 

So in summary, there is uncertainty with how some of the changes will play out, but many of the operational things may be “unrecognized simplicities” that a fresh set of eyes can fix fairly quickly and return the business and operating margins back to where they were a few years ago. If margins get back there, I actually expect it to be with slightly lower gross margins, as the company focuses more on gross margin dollars instead of the percentage, but gains efficiency on the operating costs. All in all, I think it is a potential low downside investment with a reasonable path to doubling over the next 2 or 3 years.

Disclosure: Long

Friday, July 5, 2019


"You don’t get paid for what’s already happened. You only get paid for what’s going to happen in the future. The past is only useful to you in the extent to which it gives you insights into the future, and sometimes the past doesn’t give you any insights into the future." --Warren Buffett (2007)

Being Ethical Is Long-term Greedy (LINK)

Markel Omaha brunch 2019 (video) (LINK)

Use Your Edge (LINK)

Why Things Break: Easy Causes of Business and Investing Failure (LINK)

Tim Wu Explains Why He Thinks Facebook Should Be Broken Up (LINK)
Related book: The Curse of Bigness
The Absolute Return Letter - July 2019: Energy Misconceptions (LINK)

A Return to Tiananmen - by Peter Zeihan (Part I: The Evolution of China, Part II: The Ending of Hong Kong)

Grant’s Current Yield Podcast: Middle Kingdom microscope (LINK)

Eric Cinnamond talks small cap, absolute return value investing with Tobias Carlisle on The Acquirers Podcast (LINK)

The James Altucher Show (podcast): 468 - David Epstein: Proof That It’s Never Too Late to Master Something New (LINK)
Related book: Range: Why Generalists Triumph in a Specialized World
Revisionist History Podcast: Tempest in a Teacup (LINK)

American Innovations Podcast: Biologist Timothy Mousseau Can’t Stop Going Back To Chernobyl (LINK)

AI: Hype vs. Reality: Doctor AI (LINK)

Eric Topol on the Making Sense podcast (LINK)
Related book: Deep Medicine: How Artificial Intelligence Can Make Healthcare Human Again
(Re)Building the Good Society (video) (LINK)

Humanization, Dehumanization and Other Things Psychologists Do (video) (LINK)

Alex Honnold: A Soul Freed (video) (LINK)

Edge #545: Collaboration and the Evolution of Disciplines - A Talk By Robert Axelrod (LINK)
Related book: The Evolution of Cooperation
Why Waves of Seaweed Have Been Smothering Caribbean Beaches - by Ed Yong (LINK)

For Smart Animals, Octopuses Are Very Weird - by Ed Yong (LINK)

"We learn who we are in practice, not in theory." --Herminia Ibarra

Tuesday, July 2, 2019


"What we really want to do is buy a business that’s a great business, which means that business is going to earn a high return on capital employed for a very long period of time, and where we think the management will treat us right. We don’t have to mark those down a lot when we find those factors. We’d love to find them when they’re selling at 40 cents on the dollar but we will buy those as much closer to a dollar on the dollar. We don’t like to pay a dollar on the dollar, but we’ll pay something close." --Warren Buffett (2007)

The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors (LINK)

The P/E Ratio: A User’s Manual [H/T @justvalue2] (LINK)

Availability-Misweighing Tendency (LINK)

Invest Like the Best Podcast: Bill Gurley – All Things Business and Investing (LINK)

The Knowledge Project Podcast: When Good Intentions Go Bad [with Jonathan Haidt] (LINK)

V > Λ: The Inverted Hierarchy (LINK)

The Stoic Magazine (Volume 1, Issue 7, July 2019) (LINK)

"This is the secret of cheerfulness—not depending on someone's help or expecting them to provide us tranquillity." --Marcus Aurelius

Monday, July 1, 2019


"The whole investment world is more and more competitive, and if you talk about a real credit contraction, which gums up the whole civilization, no one would welcome that. And I would predict that if we ever had a really big credit contraction after a period like the one we’re in with all this excess, which is causing so much envy and resentment, that we would get legislation that most of us wouldn’t like." --Charlie Munger (2007)

Once Upon A Time In Tech (LINK) [H/T @AlexRubalcava, whose comments are also worth posting: "If you’re a software investor in private or public markets, you should check out this massive, comprehensive Seeking Alpha post, which is decidedly bearish. Naturally I don’t agree with everything in the post, but I appreciate its depth and rigor."]

a16z Podcast: Entrepreneurs, Then and Now [with Marc Andreessen, Ben Horowitz, and Stewart Butterfield] (LINK)

The Peter Attia Drive Podcast: #60 - Annie Duke (LINK)
Related book: Thinking in Bets
Radiolab Podcast - G: Relative Genius (LINK)
Albert Einstein asked that when he died, his body be cremated and his ashes be scattered in a secret location. He didn’t want his grave, or his body, becoming a shrine to his genius. When he passed away in the early morning hours of April, 18, 1955, his family knew his wishes. There was only one problem: the pathologist who did the autopsy had different plans.
Robert Caro Reflects on Robert Moses, L.B.J., and His Own Career in Nonfiction (Transcript, Podcast)
Related book: Working - by Robert A. Caro 
The Power of One Push-Up [H/T @Atul_Gawande] (LINK)
Several simple ways of measuring a person’s health might matter more than body weight.
Oregon’s Tsunami Risk: Between the Devil and the Deep Blue Sea - by Kathryn Schulz (LINK)

'Apollo 11': 8 moments from the documentary to watch for [H/T Linc] (LINK)

Book of the day [H/T @cristinagberta]: Grocery: The Buying and Selling of Food in America