Links... and What can go wrong?

"The best way to get what you want is to deserve what you want." --Charlie Munger

Daniel Kahneman on Expertise, Bias, and the Investment Industry [H/T Phil] (video) (LINK)

Ray Dalio at the Aspen Ideas Festival -- Success in Leadership and Life: A Function of Principles (video) (LINK)

Aspen Ideas Festival -- Deep Dive: Leading Transformational Change (video) (LINK)

Little Money Rules - by Morgan Housel (LINK)

Twists and Turns in the Tesla Story: A Boring, Boneheaded Update! - by Aswath Damodaran (LINK)

Rocket Men Precision - by Ben Carlson (LINK)

Related book: Rocket Men: The Daring Odyssey of Apollo 8 and the Astronauts Who Made Man's First Journey to the Moon

The Knock-On Effect Podcast: Rising dollar to unleash unusual ice cream flavors? (LINK) [Interesting topic of vanilla beans, which have risen in price from $20/kilo to about $600/kilo since 2016. It looks like there is also a recent article in the The Globe and Mail (Canada) on the topic.]

How One Number Could Change the Lives of People With a Rare Disorder - by Ed Yong (LINK)

Book of the day: Social Value Investing - by Howard W. Buffett and William B. Eimicke

Also, for Audible members, Pre-Suasion by Robert Cialdini is the Daily Deal today ($3.95).

*****

Posting may be light over the next 7-10 days, so before the weekend, I'll leave you with a little more wisdom from Warren Buffett (via Alice Schroeder) and Tony Deden. I enjoy learning something from one great investor that reminds me of a lesson from another, as it gives one a new perspective on which to build the mental model in one's mind. Deden's discussion in regards to the question "What can go wrong?" reminded me of a story Schroeder told about Buffett's investment in Mid-Continent Tab, when she described Buffett's first filter as being "What can go wrong?" First, the excerpt from Deden, where he made the point using his firm's investment in a salmon business (which I believe is Bakkafrost):

So we have a relatively important stake in the business of salmon farming, for argument's sake. Well, not just myself, perhaps, but we have a team that knows, more or less, everything there is to know about salmon farming literally everywhere in the world. We know what can go wrong. We know where the strengths are. We know where the abilities, where the skill is.    

And not just merely from what will happen in the price of...salmon today or tomorrow, the demand or supply of it, but in terms of those ingredients that contribute to the long-term viability of a business. But we also pay to understand what can go wrong. What can go wrong is really more important than what can go right, because over time, even a marginally good business will profit, will do well.    

So you really need to understand, you don't know what anything is worth until you know what can go wrong. Because we value things differently because we weigh components differently. There's no such thing as valuation metrics based on some standardized formula, unless you see it in connection with other issues.

And then Schroeder's story, from a 2008 talk, about Buffett and Mid-Continent Tab (from a file I have compiled on investing wisdom over the years, but I believe the original source for this excerpt is the CS Investing blog):

So when Wayne Ace and Warren Cleary who were two friends of Warren’s saw that IBM was going to have to divest in this business, and they thought, “We are going to buy a Carroll Press which was a press that makes these cards. And we are going to compete with IBM because we are based in the Mid West, we can ship faster. We can provide better service. And they went to Warren and they said, “Should we invest in this company and would you come in with us? And Warren said, “No.” 

Well, why did he say no? He didn’t say no because it was a technology company. He said no because he went through the first step in his investing process. This is where I think what he does is very automatic but it isn’t well understood. He acted like a horse handicapper. The first stop in Warren’s investing process is always to say, “What are the odds that this business could be subject to any type of catastrophe risk—that could make it (the business) fail? And if there is any chance that any significant part of his capital would be subject to catastrophe risk, he just stops thinking. NO. He just won’t go there. 

It is backwards the way most people think because most people find an interesting idea and figure out the math, they look at the financials, they do a projection and then at the end, they ask, “What could go wrong?” 

 Warren starts with what could go wrong and here he thought that a start-up business competing with IBM can fail. Nope, pass, sorry.  And he didn’t think anymore about it. But Wayne and Cleary went ahead anyway and within a year they were printing 35 million tab cards a month. At that point, they knew they had to buy more Carroll Presses so they came back to Warren and said, we need money—would you like to come in? 

So now, Warren is interested because the catastrophe risk is gone.  They are competing successfully against IBM. So he asks them the numbers, and they explain to him that they are turning their capital over 7 times a year. A Carroll Press costs $78,000 dollars and every time they run a set of cards through and turn their capital over, they are making over $11,000.  So basically their gross profit on a press (7 x $11,000 = $77,000) is enough to buy another printing press. At this point Warren is very interested because their net profit margins are 40%. It is one of the most profitable businesses he has ever had the opportunity to invest in. 

Notably people are now bringing Warren special deals to invest in—it is 1959. He has been in business for 2.5 years running the partnership. Why are they doing that? It is not because he is a great stock picker. They don’t know that. He hasn’t yet made that record.   It is because he knows so much about business, and he started so early he has a lot of money. So this is something interesting about Warren Buffett—people were bringing him special deals like they are today with Goldman Sachs and GE. 

He decided to come in and invest in the Mid-Continent Tab Company but, interestingly, he did not take Wayne and John’s word for it because the numbers they gave him were very enticing. But, again, he went through, and he acted like a horse handicapper. 

Now here is another point of departure. Everyone that I know or knew as an analyst would have created a model for this company and projected out its earnings or looked at its return on investment in the future. Warren didn’t do that. In going through hundreds of his files, I never saw anything that looked like a model. What he did is he did what you would do with a horse….he figured out the one or two factors that determined the success of the investment. In this case, it was the cost advantage that had to continue for the investment to work. And then he took all the historical data, quarter by quarter for every single plant and he obtained similar information as best he could from every competitor they had, and he filled several pages with little hen scratches with all this information and then he studied that information. 

Then he made a yes/no decision. He looked at—they were getting 36% margins, they were growing over 70% a year on a $1 million of sales—so those were the historical numbers. He looked at them in great detail like a horse handicapper would studying the races and then he said to himself, “I want a 15% return on $2 million of sales and said, Yes, I can get that.” Then he came in as an investor. 

OK, what he did was he incorporated his whole earnings model and compounding (discounted cash flow or DCF) into that one sentence.  He wanted 15% on $2 million of sales (a doubling from $1 million current sales). Why does he choose 15%? Warren is not greedy, he always wants 15% day one return on investment, and then it compounds from there. That is all he has ever wanted and he is happy with that.  …You are not laughing, what’s wrong? (Laughs)  

It is a very simple thing, nothing fancy about it. And that is another important lesson because he is a very simple guy. He doesn’t do any DCF models or anything like that. He has said for decades, “I want a 15% day one return on my capital and I want it to grow from there-ta da! The $2 million of sales was pretty simple too. It had a million in sales already and it was growing at 70% so there was a big margin of safety built into those numbers. 

It had a 36% profit margin—he said I would take half that or 18%. And he ended up putting in $60,000 of his personal, non-partnership money which was 20% of his net worth at that time. He got 16% of the company’s stock plus some subordinated notes.   And the way he thought about it was really simple. It was a one step decision. He looked at historical data and he had this generic return that he wants on everything. It was a very easy decision for him. He relied totally on historical figures with no projections.  

I think that is a really interesting way to look at it because I saw him do it over and over again in different investments.

Links

Mohnish Pabrai's Advice For Value Investors (LINK)

One of the big issues investors face is preconceived perspectives.  When we look at a stock, what goes on in our brains when we encounter a company for the first time?  For the first 30, 60 seconds, or first couple minutes? That has a huge impact on our financial well being and how our portfolio does.  In the first few minutes, you’re making a decision on whether you’re going to take a pass at a company, or spend another 15 minutes. And at the end of that 15 minutes, you’re going to make another decision as to whether you’re going to take a pass or spend an hour or two, and so on.  No investor has enough time in the day, week or year, to look at anything more than a small handful of businesses in some depth. 

Even if I look at the United States with its 3500 some odd publicly traded businesses, an investment manager can really not drill down on more than a few dozen of them every year.  So they have to make a decision relatively quickly on which ones they are or are not going to focus on.  Commitment bias that comes in once we start spending time on something, our brains play games with us.  One of the games our brain plays is that we feel entitled. “Hey, if I spent some time on it, I ought to make money on it”. 

And that’s really not how investing works. I think it’s very important to be aware of commitment bias, and to be very aware that the first two or three minutes that when you’re looking at a company are when you have to make the call.  It’s okay to let a winner go, but more important not to let a loser stay.

The Nutella Billionaires: Inside The Ferrero Family’s Secret Empire (LINK)

Amazon to acquire online pharmacy PillPack in a deal that could disrupt the US drugstore business (LINK)

Jim Chanos and James Grant talk about fraud (video) [H/T ValueWalk] (LINK)

Sophisticated investors have been the victims of deception throughout our nation's history. Celebrated financial experts Jim Chanos and James Grant explore historical examples of businesses that became notorious after having been accused or convicted of defrauding their shareholders.

Moving the Needle on a Portfolio - by Frank K. Martin (LINK)

Robert Greene on The Knowledge Project Podcast (LINK)

Talks at GS: Malcolm Gladwell on the Art of Storytelling – From Print to Podcasts (video) (LINK)

Revisionist History Podcast: Malcolm Gladwell's 12 Rules for Life (LINK)

Aspen Ideas Festival -- Jordan Peterson: From the Barricades of the Culture Wars (video) (LINK)

Aspen Ideas Festival -- Democracy Dies In Darkness: An Interview with The Washington Post's Martin Baron (video) (LINK)

Aspen Ideas Festival -- On the Road with Rise of the Rest (video) (LINK)

Entrepreneur Steve Case and "Hillbilly Elegy" author-turned-venture-capitalist J. D. Vance have taken their investment mission on a bus tour they’re calling “Rise of the Rest.” They are travelling around Middle America, identifying and rewarding entrepreneurs who exhibit the kinds of talent and ingenuity that many mistakenly believe only happens in Silicon Valley. What are they learning about the US innovation economy? Joining them in discussion is Katie Couric, who herself has been crisscrossing America to find out what makes us tick.

Trailblazers with Walter Isaacson (podcast): Timing the Market (LINK)

American Innovations Podcast: Nuclear Energy | Atoms For Peace | 3 (LINK)

The last couple of Crazy Genius podcasts are complementary... Why Haven’t We Found Aliens? and Should We Go to Mars?

The Smithsonian Had To Dig Up Their Dinosaurs Again - by Ed Yong (LINK)

Book of the day: Mises: The Last Knight of Liberalism – by Jörg Guido Hülsmann

Links

"When the rules of the game change, the process with which you make decisions, the process with which you act, the value of information, the value of inputs, must change with it." --Tony Deden

"The first principle I operate from is the idea of exclusion. I exclude whole swaths of things from my universe of things. I think that, in the whole world, there are probably 150, 200 listed companies that I would even consider owning a piece of. It's a completely different way of looking at the world.... I think that when you start examining what it is you own—what happens if you're on a ship and it's going down, and you're in your cabin and you have five minutes to get out, to get up to the deck. You look at your possessions that are sitting in your cabinet and you say, what's worth taking with me? Not very many things, is it? And this is what I did, in essence." --Tony Deden

"Earlier, I talked to you about the idea of like-mindedness, for example. And so I'm serious about this in a sense that I want to own a participation—I don't call it a stock or equity—I want to own a business participation in a business that is run by owners whose motivation is the same as mine, who are responsible to their family and to their community and to the capital that they employ, as much as I would have been if I owned the same enterprise." --Tony Deden

How Atul Gawande landed perhaps the most extraordinary (or impossible) job in health care [H/T Linc] (LINK)

Atul Gawande at the Aspen Ideas Festival: Is Health Care a Human Right? (video -- starts at 2:23) (LINK)

Eric Topol chats with John Ioannidis (video and transcript) (LINK)

Memorizing these three statistics will help you understand the world (LINK)

Wells Fargo Brokers Loved Structured Notes (LINK)

Invest Like the Best Podcast: The Past, Present & Future of ETFs with Eric Balchunas (LINK)

The Male Echo Chamber of Political Twitter - by Ed Yong (LINK)

An asteroid impact triggered an avalanche on Mars! -  by Phil Plait (LINK)

Books of the day:

Frenemies: The Epic Disruption of the Ad Business (and Everything Else)

A Word from Our Sponsor: Admen, Advertising, and the Golden Age of Radio

***

I'm also pleased to announce that, if you have been planning to sign up for Real Vision and haven't yet done so, you can now support this blog by signing up for Real Vision using THIS LINK. As I mentioned before, I signed up for the free trial when they lowered the price, and ended up keeping my subscription. So I was happy to jump at the chance when they recently started offering a referral program for subscribers. My favorite interview so far is the one with Tony Deden (see quotes above for a sample), which you actually don't need a subscription to view, but there is plenty of other good content on there as well, for investment philosophies of all types. The referral link will also be posted on the right side of the blog's home page, under the Support section.

Links

Amazon, the Brand Buster [H/T Linc] (LINK)

Amazon-Berkshire-JPMorgan Health Venture Takes Aim at Middlemen (LINK)

Intel and the Danger of Integration - by Ben Thompson (LINK)

Inside a Heist of American Chip Designs, as China Bids for Tech Power (LINK)

The Best Defense is a Quality Business - by Ian Cassel (LINK)

High Quality Vs Low Price - by Vishal Khandelwal (LINK)

Is there a next act for one of Silicon Valley’s top investors after Uber? Benchmark and Bill Gurley are about to find out. (LINK)

16+ Terms Entrepreneurs Should Know for Navigating the Healthcare Industry (LINK)

Feeding the gods: Hundreds of skulls reveal massive scale of human sacrifice in Aztec capital [H/T @JonHaidt] (LINK)

Links

Some industry primers, and other things [H/T @NeckarValue] (LINK)

Howard Marks on Bloomberg TV a couple of days ago discussing his latest memo, "Investing Without People" (LINK)

An interview with Kevin Clayton, CEO of Clayton Homes, from several years ago (LINK)

Stewart Brand on the Whole Earth Catalog’s Long Legacy over 50 years (video) (LINK)

Summer Solstice 2018: The Search for Life in the Galaxy (LINK)

Links

[If anyone happens to have a copy Peter Bernstein's article "Where, Oh Where Are the .400 Hitters of Yesteryear?" I'd love to have a copy, and can't seem to find one in the public domain. Thanks.]

How Amazon Became One of Washington's Most Powerful Players ($) (LINK)

Tails, You Win - by Morgan Housel (LINK)

Jeremy Grantham interview from the Morningstar Investment Conference (video) [H/T ValueWalk] (Video 1, Video 2, Video 3, Video 4)

Paul Tudor Jones: Investing in a More “JUST” World (video) (LINK)

How Netflix changed entertainment -- and where it's headed | Reed Hastings (TED video) (LINK)

Boyar Value Group's Orphaned Equity Strategy Presentation: 5 High Conviction Stock Ideas [free registration required] (LINK)

Pedophrasty, Bigoteering, and Other Modern Scams - by Nassim Nicholas Taleb (LINK)

Annie Duke: "Thinking in Bets" | Talks at Google (LINK)

Revisionist History Podcast: The Hug Heard Round the World (LINK)

American Innovations Podcast: Nuclear Energy | Bombs Come First | 2 (LINK)

An Extraordinarily Expensive Way to Fight ISIS - by William Langewiesche (LINK)

A Landmark Study on the Origins of Alcoholism - by Ed Yong (LINK)

New Gibbon Species Discovered In a 2,200-Year-Old Royal Chinese Tomb - by Ed Yong (LINK)

Koko the Gorilla Dead at 46, Her Legacy Lives On (LINK)

Book of the day: Full House: The Spread of Excellence from Plato to Darwin - by Stephen Jay Gould 

Links

"When I was a lawyer, I used to say, 'The best business getter any lawyer has is the work that's already on his desk.'...it's a very old-fashioned idea. You just do well with what you already have and more of the same comes in." --Charlie Munger (2001)

Buffett, Bezos, Dimon appoint Dr. Atul Gawande as CEO of their newly formed health-care company (LINK)

Tom Peters on the Recode Decode Podcast (LINK)

How To Stop Worrying: 7 Powerful Secrets From Mindfulness (LINK)

Parasites Can Mind-Control Animals Without Infecting Them - by Ed Yong (LINK)

Links

"It does not matter what you bear, but how you bear it." --Seneca ("Of Providence")

Warren Buffett and Bill Gates visit a candy store in Omaha (LINK)

The Behavioral Economics Guide 2018 (Introduction by Robert Cialdini) (LINK)

Theranos Lessons - by Morgan Housel (LINK)

The Koch Brothers Say No to Tariffs (podcast) (LINK)

TED Talk: The surprising science of alpha males | Frans de Waal (LINK)

***

An excerpt from Burton Malkiel that I came across today in The Inflation-beater's Investment Guide: Winning Strategies for the 1980s that seemed to fit well with the latest Howard Marks memo:

I believe that the start of the 1980s is the ideal time to pick individual stocks on the basis of my rules. Unlike the early 1970s, it will not be hard to find an abundant selection of strong companies that fill the bill. 

But remember that a large number of other investors—including the pros—are trying to play the same game. And the efficient-market theory suggests that the odds of anyone's consistently beating the market are pretty slim. Nevertheless, for many of us, trying to outguess the market is a game that is much too fun to give up. Even if you were convinced you would not do any better than average, I'm sure that most of you with speculative temperaments would still want to keep on playing the game of selecting individual stocks. 

Picking the Manager 

There's an easier, more profitable way to gamble in the race for investment performance: instead of pricing the individual horses (stocks), pick the best jockeys (investment managers). 

...While some readers may well be disappointed that I do not "name" stocks in this book, I have absolutely no hesitation about citing mutual fund managers who run their portfolios by following rules similar to the rules I use and who have enjoyed perfectly splendid records. John Marks Templeton is one such person. 

...According to every mutual fund rating service, the fund that bears John Marks Templeton's name has been the outstanding performer over the past two decades. Indeed, Templeton's record of beating the broad stock indexes extends as far back as the 1930s. In a field crowded with mediocrity, Templeton seems to be one of the true investment greats—a living embarrassment to the efficient-market theory.

Howard Marks Memo: Investing Without People

Link to Memo: Investing Without People

Over the last twelve months I’ve devoted three memos to discussing macro developments, market outlook, and recommendations for investor behavior.  These are important topics, but usually not the ones that interest me most; I prefer to discuss things that are likely to affect the functioning of markets for years to come.  Since little in the environment has changed from what I described in those three memos, I feel I now have the liberty to turn to some bigger-picture issues. 

This memo covers three ways in which securities markets seem to be moving toward reducing the role of people: (a) index investing and other forms of passive investing, (b) quantitative and algorithmic investing, and (c) artificial intelligence and machine learning. 

Links

Giving it Away: The Other Buffett Family Business (LINK)

AT&T, Time Warner, and the Need for Neutrality - by Ben Thompson (LINK)

Oaktree Capital CEO Jay Wintrob at the 7th Annual Fink Investing Conference at UCLA Anderson (video) (LINK)

Steven Kotler: "The Science of Maximizing Human Potential" | Talks at Google (LINK)

Related book: Stealing Fire