The Innovators: Author Walter Isaacson in Conversation with John Hollar

Link to video

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Related book:  The Innovators

Related video: Walter Isaacson gives the 43rd Jefferson Lecture

Links

FT interview with Google co-founder and CEO Larry Page (LINK)

Related books: How Google Works, In The Plex

Henry Blodget sits down with Clay Christensen (LINK)

Related books: HERE

Hussman Weekly Market Comment: Losing Velocity: QE and the Massive Speculative Carry Trade (LINK)

What central banks around the world seem to overlook is that by changing the mix of government liabilities that the public is forced to hold, away from bonds and toward currency and bank reserves, the only material outcome of QE is the distortion of financial markets, turning the global economy into one massive speculative carry trade. The monetary base, interest rates, and velocity are jointly determined, and absent some exogenous shock to velocity or interest rates, creating more base money simply results in that base money being turned over at a slower rate.

Economic growth and inflation do not arise from changing the mix of these government liabilities. Growth arises primarily from a) the channeling of scarce saving to productive investment that b) generates useful goods and services that c) can be purchased because the income paid to factors of production can – in a circular flow – be used to pay for that output. QE does nothing to aid this dynamic unless scarce bank liquidity is a binding constraint on productive investment or spending, which it presently is not. QE does not spur new demand in an environment where productive investment opportunities are satiated by the existing availability of loanable funds. It just provides cheap finance for speculative carry trades in the financial markets.

Meanwhile, inflation and hyperinflation typically do not arise from simply from changing the mix of government liabilities toward more currency. Inflation emerges primarily from supply constraints or an exogenous shock that reduces supply, coupled with fiscal policy where large government deficits are being used to finance consumption and transfer payments. In that environment, the marginal value of goods surges relative to the marginal value of a currency unit, and the mix of government liabilities held by the public doesn’t particularly matter. Financing the deficits with debt instead of money still results in exogenous upward pressure on interest rates and monetary velocity. Hyperinflation results when there is a complete loss in the confidence of currency to hold its value, leading to frantic attempts to spend it before that value is wiped out. I expect we’ll observe significant inflationary pressures late in this decade, but present conditions aren’t conducive to rapid inflation without some shock to global supply.

With regard to the recent move by the Bank of Japan, seeking to offset deflation by expanding the creation of base money, the move has the earmarks of a panic, which is counterproductive. The likely response of investors to panic is to seek safe, zero-interest money rather than being revolted by it. The result will be a plunge in monetary velocity and a tendency to strengthen rather than reduce deflationary pressures in Japan. In our view, the yen has already experienced a dramatic Dornbusch-type overshoot, and on the basis of joint purchasing power and interest parity relationships (see Valuing Foreign Currencies), we estimate that rather than the widely-discussed target of 120 yen/dollar, value is wholly in the other direction, and closer to 85 yen/dollar (the current exchange rate is just over 112). The Japanese people have demonstrated decades of tolerance for near-zero interest rates and the accumulation of domestic securities without any material inclination to spend them based on the form in which those securities are held. Rather than provoking strength in the Japanese economy, the move by the BOJ threatens to destroy confidence in the ability of monetary authorities to offset economic weakness – in some sense revealing a truth that should be largely self-evident already.

Peter Cundill on the timing difficulty of selling

From There's Always Something to Do:

As I proceed with this specialization into buying cheap securities I have reached two conclusions. Firstly, very few people really do their homework properly, so now I always check for myself. Secondly, if you have confidence in your own work, you have to take the initiative without waiting around for someone else to take the first plunge. I haven’t yet found a solution for determining timing on the sell tack. People say it ought to be largely dependent on one’s perception of the trend in the overall stock market, but I am suspicious of this. I think that the financial community devotes far too much time and mental resource to its constant efforts to predict the economic future and consequent stock market behaviour using a disparate, and almost certainly incomplete, set of statistical variables. It makes me wonder what might be accomplished if all this time, energy, and money were to be applied to endeavours with a better chance of proving reliable and practically useful. The timing difficulty in selling does not lie in not knowing when the trading discount to intrinsic value has been eliminated, but in judging by how much it is likely to be surpassed.

Tony Robbins, The CEO Whisperer

Link to article: Tony Robbins, The CEO Whisperer

Multibillionaire Bridgewater Associates founder Dalio, who manages money exclusively for institutional clients, had some familiarity with Robbins before sitting down for an interview for his book. He had listened to a set of Robbins’ tapes years earlier. But he was captivated by Robbins’ ability to converse with him—what Robbins likes to call “pitching and catching”—at a high level. “I was blown away by him,” says Dalio. “He got the investment concepts we talk about better than many highly professional institutional investors who devote their lives to this subject. And he was able to convert it to a practical level. For me, it was really exciting.” 

For Dalio, who last year released a 30-minute animated video called How the Economic Machine Works, that ability to distill information is particularly compelling. “Sometimes people are wary of simplicity,” he says. “He’s able to see things in a simple but granular way. It’s a talent. I find that it’s a rare case that people have an ability to see things in a simple way and also appreciate the complexity of things. He’s blessed with a mind that allows him to see that way.”

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Related book: MONEY Master the Game: 7 Simple Steps to Financial Freedom

Related link: Tim Ferriss interviews Tony Robbins

Walter Isaacson interview with Elon Musk

Link to video

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Related book: The Innovators

Links

Howard Marks' comments on Oaktree's call (LINK)

Michael Lewis on Charlie Rose discussing the 25th anniversary edition of Liar’s Poker (LINK)

Walter Isaacson does a reddit AMA [H/T Will] (LINK)

Related book: The Innovators

Jim Grant: Complexity: The Hidden Cost of Central Bank Actions (LINK)

Aswath Damodaran on Amazon (LINK)

Aswath Damodaran on HP (LINK)

The Great Philosophers: Henry David Thoreau (LINK)

Related book: Walden and Civil Disobedience

Links

Atul Gawande on Charlie Rose discussing his latest book, Being Mortal (LINK)

Talks at Google: Steve J. Martin discussing the book The small BIG: small changes that spark big influence (video) [H/T ValueWalk] (LINK)

Benedict Evans: Mobile Is Eating the World (LINK)

Frank Martin's latest: Why 1925? [H/T Santangel's Review] (LINK)

Jim Grant on Bloomberg (video) [H/T ValueWalk] (LINK)

Andrew Smithers: Fiscal stimulus – is it just a sugar rush? (LINK)

Buffett Pal Gottesman Says Don’t Expect Another Berkshire [H/T Will] (LINK)

Related book: Berkshire Beyond Buffett

Are You Sacrificing Your Health? (LINK)

Related book: The Primal Blueprint

Robert Sapolsky: Given chimps’ murderous tendencies, are we doomed to be violent? (LINK)

Related books (Sapolsky): A Primate's Memoir, Monkeyluv: And Other Essays on Our Lives as Animals

Related recent post: Robert Sapolsky interview with Nautilus

Links

Larry Cunningham gives a Google Talk on his book Berkshire Beyond Buffett (video) [H/T ValueWalk] (LINK)

Capitalize For Kids Conference Notes (LINK)

This University Teaches You No Skills—Just a New Way to Think (LINK)

Kevin Kelly: The Three Breakthroughs That Have Finally Unleashed AI on the World (LINK)

The Red Cross’ Secret Disaster (LINK)

IN 2012, TWO MASSIVE STORMS pounded the United States, leaving hundreds of thousands of people homeless, hungry or without power for days and weeks. 

Americans did what they so often do after disasters. They sent hundreds of millions of dollars to the Red Cross, confident their money would ease the suffering left behind by Superstorm Sandy and Hurricane Isaac. They believed the charity was up to the job. 

They were wrong. 

The Red Cross botched key elements of its mission after Sandy and Isaac, leaving behind a trail of unmet needs and acrimony, according to an investigation by ProPublica and NPR. The charity’s shortcomings were detailed in confidential reports and internal emails, as well as accounts from current and former disaster relief specialists.

E.O. Wilson on Charlie Rose discussing his book The Meaning of Human Existence (LINK)

Nova: How does the brain work (video) [H/T The Big Picture] (LINK)

Dr. Neal DeGrasse Tyson & NOVA science NOW delve into magic and the brain, artificial intelligence, magnetic mind control, and the work of neuroscientist and synesthesia researcher David Eagleman. Can we really believe our own eyes? Will machines one day think like us? Can magnetic wands effectively control brain functions and treat depression?

Links

Graham & Doddsville's Fall 2014 Issue (LINK)

The new issue features Wally Weitz of Weitz Investment Management, Guy Gottfried of Rational Investment Group and the team at Development Capital Partners.  Additionally, you will find pictures from the 2014 “From Graham to Buffett and Beyond” Dinner in Omaha, news about the recently launched 5x5x5 Student Value Investing Fund and two investment ideas from CBS students.

Steven Romick's Q3 Commentary (LINK)

Expeditors' latest investor Q&A (LINK) [Which includes a great Steve Jobs quote: "People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I'm actually as proud of the things we haven't done as the things I have done. Innovation is saying no to 1,000 things."]

Tracy Britt Cool named CEO of Berkshire Hathaway owned Pampered Chef (LINK)

Edward Snowden Explains Why He Blew the Whistle on the NSA in Video Interview with Lawrence Lessig (LINK)

The Great Philosophers: Michel de Montaigne (LINK)

Related book: The Complete Essays of Montaigne [Also available as an audiobook via MP3 CD or on Audible, which is one of the things I started listening to while on vacation last week.]

Investing quotes of the day:

Warren Buffett on EBITDA from the 2002 Berkshire Meeting (Source):

It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it. 

We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report. 

People who use EBITDA are either trying to con you or they’re conning themselves.

Charlie Munger on EBITDA:

I think that, every time you see the word EBITDA, you should substitute the words “bullshit earnings.”

Seth Klarman on EBITDA (from Margin of Safety, and previously posted HERE):

It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company’s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful. Those who used EBITDA as a cash-flow proxy, for example, either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out. In fact, many leveraged takeovers of the 1980s forecast steadily rising cash flows resulting partly from anticipated sharp reductions in capital expenditures. Yet the reality is that if adequate capital expenditures are not made, a corporation is extremely unlikely to enjoy a steadily increasing cash flow and will instead almost certainly face declining results. 

It is not easy to determine the required level of capital expenditures for a given business. Businesses invest in physical plant and equipment for many reasons: to remain in business, to compete, to grow, and to diversify. Expenditures to stay in business and to compete are absolutely necessary. Capital expenditures required for growth are important but not usually essential, while expenditures made for diversification are often not necessary at all. Identifying the necessary expenditures requires intimate knowledge of a company, information typically available only to insiders. Since detailed capital-spending information was not readily available to investors, perhaps they simply chose to disregard it. 

Some analysts and investors adopted the view that it was not necessary to subtract capital expenditures from EBITDA because all the capital expenditures of a business could be financed externally (through lease financing, equipment trusts, nonrecourse debt, etc.). One hundred percent of EBITDA would thus be free pretax cash flow available to service debt; no money would be required for reinvestment in the business. This view was flawed, of course. Leasehold improvements and parts of a machine are not typically financeable for any company. Companies experiencing financial distress, moreover, will have limited access to external financing for any purpose. An over-leveraged company that has spent its depreciation allowances on debt service may be unable to replace worn-out plant and equipment and eventually be forced into bankruptcy or liquidation. 

EBITDA may have been used as a valuation tool because no other valuation method could have justified the high takeover prices prevalent at the time. This would be a clear case of circular reasoning. Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify an end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.

Nebraska Furniture Mart: A Net-Net and 4x Earnings when Berkshire acquired it?

I had either forgotten this valuation or not paid enough attention to it before, but it is pretty interesting. From the book The Snowball:

The Blumkins had never had an audit, and Buffett did not ask for one. He did not take inventory or look at the detailed accounts. They shook hands. “We gave Mrs. B a check for fifty-five million dollars and she gave us her word,” he said. Her word was as good as “the Bank of England.”

… 

Soon after, Berkshire’s auditors conducted the Nebraska Furniture Mart’s first inventory. The store was worth $85 million. Mrs. B, seized with a severe case of remorse after she had sold it for a total value of $60 million, including the share retained by the family, told Regardie’s magazine, “I wouldn’t go back on my word, but I was surprised…. He never thought a minute [before agreeing to the price], but he studies. I bet you he knew.” Buffett, of course, could not have “known,” not literally. But he had certainly known there was a whopping margin of safety in the price.

And while this is probably a pre-tax number, here was a hint at what NFM was making around that time, which occurred after Mrs. B had left NFM to start a competing business, before eventually selling back to NFM:

Some time earlier, Buffett had created a saying. “I would rather wrestle grizzlies,” he said, “than compete with Mrs. B and her progeny.” Stuck wrestling grizzlies, Buffett acted as he always did when any of his friends’ relationships broke down. He refused to take sides. Mrs. B thought that was disloyal. “Warren Buffett is not my friend,” she told a reporter. “I made him fifteen million dollars every year, and when I disagreed with my grandkids, he didn’t stand up for me.”

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UPDATE - 10/28/2014

Thanks to Will who was kind enough to point out a 2014 Annual Meeting response from Buffett on the valuation (Q9 in these notes):

Q9: Station 9, Omaha.  Did you buy the Nebraska Furniture Mart at 85% of book value, or 2x earnings?

WB: I wish we had bought it that cheap.  We paid 11 or 12x p/e for 80% of company, and it was not a discount to book, $60m was the equivalent full purchase price, and there was a second transaction involved.  $60m for 100%, was not a bargain purchase, it was more than book at the time.  It would have been a multiple 11x or 12x pre‐tax.  It had $100m sales, pretax 7% margin, or about 4.5% after tax.  That is ballpark.  It was great business, but it was not a bargain.  It was great opportunity to join with this great family. There was another company from Germany trying to buy it at time.  Erskine Bowles was representing them actually.  On my birthday in 1983, in August, I gave a letter to Mrs. B, and Louis her son told her what was in it.  I asked, did she owe any money, did she own building?  No, and yes she did. 

So there's a little discrepancy between that comment and the above excerpt from The Snowball. I guess it can be reconciled a bit if earnings grew quite a bit from the time of Berkshire's purchase until Mrs. B left, and if the inventory was offset by a large accounts payable balance (given that there was no debt and the building was also owned). 

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UPDATE 2 - 10/28/2014

Thanks to Jeff for being less lazy than me and digging through Buffett's letters for the info. I thought they didn't break NFM out until later, but Jeff was kind enough to bring it to my attention. 

It appears that NFM averaged just a bit over $15 million per year pre-tax in the 3 years after Berkshire purchased it in 1983. And given that it still made $3.8 million in the last 3 months of 1983 when Berkshire owned it, NFM probably also made close to $15 million or so in 1983 as well, maybe a bit less. So it does appear that Berkshire did in fact pay about 4-5x pre-tax (and about 8-9x after-tax) for the business.