Related book: Kissinger: 1923-1968: The IdealistThis Is a Fine Time to Be a Big Corporation [H/T Matt] (LINK)
Related book (released next month): Superforecasting: The Art and Science of Prediction
Much of what is interesting about Munger is explained by this simple sentence: "I observe what works and what doesn't and why." Life happens to Munger as it does to everyone, but unlike many people he thinks deeply about why things happen and works hard to learn from the experience.
“The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.”- James Grant
When corporations and even developing countries experience debt crises, one of the primary means of restructuring is the debt-equity swap. This sort of transaction involves canceling out debt of the company or government in return for equity of the company, or privatization of some of the assets of the country. Corporate debt-equity swaps typically result in severe dilution of the equity claims of existing shareholders, and in some cases, can wipe those claims out as creditors take control of the company. At a national level, debt-equity swaps can take a punitive form that forces countries to privatize and sell off their assets in satisfaction of their debts. Aside from austerity demands, one of the most severe outcomes of the ongoing saga in Greece is the demand for exactly that kind of debt restructuring.
Book of the day: Leonardo: The Artist and the ManThe opposite of a debt-equity swap, of course, is a debt-financed stock repurchase, which leverages up the claims of existing shareholders. One of the more troubling aspects of the Federal Reserve’s suppression of interest rates is the speculation it has encouraged, by giving companies access to enormously cheap funding on a 5-7 year horizon. Though nominal economic growth has been tepid, revenue growth has turned negative, and profits as a share of GDP have been falling for more than a year, companies have scampered to boost their per-share earnings by taking out debt to repurchase and reduce the number of shares outstanding. This leveraging has been done at market valuations that are near the highest levels in history on historically reliable measures.
Related book: The Complete Essays of Montaigne (also has a good narration on the audiobook)A response by Charlie Munger at the May 2007 Berkshire Hathaway Annual Meeting to a question about derivatives that I came across again and think is worth sharing:
Munger: The accounting being enormously deficient contributes to the risk. If you get paid enormous bonuses based on profits that don’t exist, you’ll keep going. What makes it difficult [to stop] is that most of the accounting profession doesn’t realize how stupidly it’s behaving. One person told me the accounting is better because positions are marked to market and said, “Don’t you want real-time information?” I replied that if you can mark to market to report any level of profits you want, you’ll get terrible human behavior. The person replied, “You just don’t understand accounting.”
...As sure as God made little green apples, this will cause a lot of trouble. This will go on and on, but eventually will cause a big dénouement.
It is clear that Munger loves to learn. He actually has fun when he is learning, and that makes the worldly wisdom investing process enjoyable for him. This is important because many people do not find investing enjoyable, especially when compared to gambling, which science has shown can generate pleasure via chemicals (e.g., dopamine) even though it is an activity with a negative net present value. What Munger has done is created a system—worldly wisdom—that allows him to generate the same chemical rewards in an activity that has a positive net present value. When you learn something new, your brain gives itself a chemical reward, which motivates you to do the work necessary to be a successful investor. If you do this work and adopt a worldly wisdom mindset, Munger believes you will create an investing edge over other investors.
The life of Darwin demonstrates how a turtle may outrun a hare, aided by extreme objectivity, which helps the objective person end up like the only player without a blindfold in a game of Pin the Tail on the Donkey.
If you minimize objectivity, you ignore not only a lesson from Darwin but also one from Einstein. Einstein said that his successful theories came from "Curiosity, concentration, perseverance, and self-criticism." And by self-criticism, he meant the testing and destruction of his own well-loved ideas.
Buried in the Alphabet announcement was a significant piece of news: one of the new portfolio companies in Larry Page’s Scrabble game is Life Sciences. Until yesterday, the medical research operation had been one of the major initiatives inside of Google X. So Page’s declaration is the de-facto “graduation” of this enterprise from the moonshot-loving research division.Michael Mauboussin - Investing: The Art of Paying Attention (video) [H/T ValueWalk] (LINK)
The Aspen Institute’s 22nd Annual Summer Celebration Conversation, featuring Ken Burns: Filmmaker and 2015 Public Service Award Honoree. Moderated by Walter Isaacson, President and CEO of The Aspen Institute.Now THAT'S a Supernova (LINK) [Related video: The Most Astounding Fact About the Universe]
Supernovae are terrifying. But they’re also important; we literally owe our existence to them. They create heavy elements in the blast, then fling them for dozens of light years around. This can then seed other clouds of gas, which then make stars, planets… and you. Nearly every element in the Universe other than hydrogen and helium was forged in the heart of an exploding star like the one that created the Vela nebula, including the iron in your blood and the phosphorus in your DNA.
So when you look on this picture, you’re seeing death and destruction on a soul-crushing scale, but you’re also seeing the factory in which the ingredients of life itself are made.
Related previous post: Arthur Schopenhauer quoteHorizon Kinetics: Utilities - Running on Empty: Major Disruption Ahead (LINK)
The attached white paper was originally published in late 2014. However, we feel it sufficiently relevant, despite the modest 10% to 15% decline since year-end, such that it continues to bear reading. The Utilities sector was among the best-performing of 2014. Yet, it is not much represented in Horizon Kinetics strategies, despite the sector’s 3% weight in the S&P 500 Index®. This is not an oversight.
Larry Page on Google and Alphabet (LINK)We believe the Utilities sector is in the midst of a largely unrecognized bubble—a valuation correction of the scale we anticipate has never befallen it before. The source of the valuation risk, aside from any substantive increase in interest rates—which would be no small matter—is a threat to demand. The largest (of a number) of drivers for this drop is the emergence of solar power as a viable source for a meaningful share of the electricity supply. One need only look at the European experience (particularly in Germany) to preview what might occur in the United States as solar power adoption increases.
In an interview with The Financial Times in October, Page said there’s no precedent for the company he wants to build. But it seems he’s taking a page or two from the most successful investor in Wall Street history: Warren Buffett, who runs the vast conglomerate Berkshire Hathaway.
China Moves to Devalue Yuan (LINK)Indeed, Page pointed to Buffet as someone who knows how to lead the kind of company he and Google co-founder Sergey Brin have in mind. And according to The Wall Street Journal, Page went even further in December during a meeting with top shareholders, saying Berkshire Hathaway—which spans everything from insurance to underwear to aerospace supplies—exemplifies how a large, complex company should be run. “Mr. Buffett has a cadre of CEOs running operating companies and doles out capital from the holding company to these businesses based on their performance each year,” the Journal wrote.