It's easier to identify buying opportunities at times of extreme pessimism than it is to spot market peaks, which are more likely to be accompanied by complacency than by obvious euphoria. The Common Sense system sidesteps these issues by imposing purely mathematical criteria: When the market falls 10 percent from a previous high, it's an occasion to buy, as is every subsequent 10 percent decline. When the market rises 25 percent, it's an occasion to raise cash by selling.
What percentage of a portfolio to buy or sell at a trading opportunity is a decisions best left to individual investors. But one simple approach is to rebalance a portfolio divided between stocks and fixed income and cash on the other. At buying opportunities, when stocks are cheaper, you buy stocks to restore to a target ratio, such as 70 30 or 60 40, of stocks to fixed income. When there's a selling opportunity, you do the opposite.
The Common Sense system yielded a return of 20.8 percent over the decade we studied. That was five percentage points better than strict buy-and-hold
Thursday, February 09, 2012
http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+%28Top+Stories%29&utm_content=Google+Feedfetcher
Hilarious comparison of gold and alternate productive assets!
Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.
Hilarious comparison of gold and alternate productive assets!
Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
Friday, January 27, 2012
http://money.cnn.com/2012/01/13/technology/sal_khan_best_advice.fortune/index.htm
FORTUNE -- "One of the powerful things Bill Gates told me is 'Learn to say no.' You don't have to make everyone happy. I've also learned by observing how deeply he goes into anything he cares about. How well he knew the nuances of my product was a huge signal that no manager should feel they're above the pay grade.
"But one piece of advice that's driven me the most came from a commencement speech by then-MIT president Charles Vest. He said to keep on moving. Cheesy, but it's amazing how true it is. Don't talk about stuff. Do it. When your organization is paused, and when the spirit of just seeing what happens dies, that's when you should be worried. Before I make a video for Khan Academy, I don't think, Let me go talk to some people and do focus groups. Obviously you have to have some learning, but if it's ruining the tempo of activity, you have to rethink things. At the end of the day, what matters is whether your product works and whether people like it."
Thursday, January 26, 2012
Buffett Time article :
-He believes CEOs of publicly bailed-out companies should be on the hook for everything if their companies go bust.
-He'd like to see private schools banned so that rich families would be forced to invest in public schools
-His views are the opposite of the trickle down theory, echoing those of William Jennings Bryan "if you legislate to make the masses prosperous, their prosperity will find its way up and through every class that rests upon it".
- Howard Buffett was and is a hero to his son, because he operated by his inner scorecard. He was the least back-slapping Congressman to ever represent his state. He once turned down a raise because his constituents had voted him in at a lower salary. His picture hangs on Buffett's office, along with the Dale Carnegie course certificate , a 1973 Pulitzer and the Presidential Medal of honour.
- His other hero is his first wife. I've never felt my wife was remotely done justice to, she was just an incredibly wise and good person. She didn't do things with a metric attached to them. Warren's mother Leila was a difficult woman prone to hysteria and vicious verbal attacks on her children. Susie headed her off and managed her needs so that Warren could be left to do what he was good at - making money.
-"It may be true that the law can't change the heart" said King, "but it can restrain the heartless".
-He believes CEOs of publicly bailed-out companies should be on the hook for everything if their companies go bust.
-He'd like to see private schools banned so that rich families would be forced to invest in public schools
-His views are the opposite of the trickle down theory, echoing those of William Jennings Bryan "if you legislate to make the masses prosperous, their prosperity will find its way up and through every class that rests upon it".
- Howard Buffett was and is a hero to his son, because he operated by his inner scorecard. He was the least back-slapping Congressman to ever represent his state. He once turned down a raise because his constituents had voted him in at a lower salary. His picture hangs on Buffett's office, along with the Dale Carnegie course certificate , a 1973 Pulitzer and the Presidential Medal of honour.
- His other hero is his first wife. I've never felt my wife was remotely done justice to, she was just an incredibly wise and good person. She didn't do things with a metric attached to them. Warren's mother Leila was a difficult woman prone to hysteria and vicious verbal attacks on her children. Susie headed her off and managed her needs so that Warren could be left to do what he was good at - making money.
-"It may be true that the law can't change the heart" said King, "but it can restrain the heartless".
Saturday, December 31, 2011
Charlie Munger: Art Of Stock Picking: BRK.A, BRK.B
At Harvard Business School, the great quantitative thing that bonds the first year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems.
If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one‑legged man in an ass‑kicking contest.
So there's an iron rule that just as you want to start getting worldly wisdom by asking why, why, why, in communicating with other people about everything, you want to include why, why, why. Even if it's obvious, it's wise to stick in the why.
And once we get into microeconomics, we get into the concept of advantages of scale. Now we're getting closer to investment analysis because in terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important.
The very nature of things is that if you get a whole lot of volume through your joint, you get better at processing that volume. That's an enormous advantage. And it has a lot to do with which businesses succeed and fail....
For example, you can get advantages of scale from TV advertising. Well, if you were Proctor & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so many cans and bottles. Some little guy couldn't. And there was no way of buying it in part. Therefore, he couldn't use it. In effect, if you didn't have a big volume, you couldn't use network TV advertising which was the most effective technique.
So when TV came in, the branded companies that were already big got a huge tail wind. Indeed, they prospered and prospered and prospered until some of them got fat and foolish, which happens with prosperity -at least to some people....
And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz's chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don't know anything about Glotz's. So if one is 40 cents and the other is 30 cents, am I going to take something I don't know and put it in my mouth which is a pretty personal place, after all for a lousy dime? So, in effect, Wrigley , simply by being so well known, has advantages of scale what you might call an informational advantage.
Another advantage of scale comes from psychology. The psychologists use the term "social proof". We are all influenced subconsciously and to some extent consciously by what we see others do and approve. Therefore, if everybody's buying something, we think it's better. We don't like to be the one guy who's out of step.
The social proof phenomenon which comes right out of psychology gives huge advantages to scale -for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world.
Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup which is slowly won by a big enterprise gets to be a huge advantage.... And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you.
There's another kind of advantage to scale. In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm.
The most obvious one is daily newspapers. There's practically no city left in the U.S., aside from a few very big ones, where there's more than one daily newspaper.
And again, that's a scale thing. Once I get most of the circulation, I get most of the advertising. And once I get most of the advertising and circulation, why would anyone want the thinner paper with less information in it? So it tends to cascade to a winner take all situation. And that's a separate form of the advantages of scale phenomenon.
Similarly, all these huge advantages of scale allow greater specialization within the firm. Therefore, each person can be better at what he does.
And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, "To hell with it. We're either going to be # 1 or #2 in every field we're in or we're going to be out. I don't care how many people I have to fire and what I have to sell. We're going to be #I or #2 or out." That was a very tough‑minded thing to do, but I think it was a very correct decision if you're thinking about maximizing shareholder wealth. And I don't think it's a bad thing to do for a civilization either, because I think that General Electric is stronger for having Jack Welch there.
And there are also disadvantages of scale. For example, we by which I mean Berkshire Hathaway -are the largest shareholder in Capital Cities /ABC. And we had trade publications there that got murdered where our competitors beat us. And the way they beat us was by going to a narrower specialization.
We'd have a travel magazine for business travel. So somebody would create one which was addressed solely at corporate travel departments. Like an ecosystem, you're getting a narrower and narrower specialization.
Well, they got much more efficient. They could tell more to the guys who ran corporate travel departments. Plus, they didn't have to waste the ink and paper mailing out stuff that corporate travel departments weren't interested in reading. It was a more efficient system. And they beat our brains out as we relied on our broader magazine.
That's what happened to The Saturday Evening Post and all those things. They're gone. What we have now is Motorcross which is read by a bunch of nuts who like to participate in tournaments where they turn somersaults on their motorcycles. But they care about it. For them, it's the principle purpose of life. A magazine called Motorcross is a total necessity to those people. Arid its profit margins would make you salivate.
Just think of how narrowcast that kind of publishing is. So occasionally, scaling down and intensifying gives you the big advantage. Bigger is not always better.
The great defect of scale, of course, which makes the game interesting -so that the big people don't always win -is that as you get big, you get the bureaucracy. And with the bureaucracy comes the territoriality -which is again grounded in human nature.
They also tend to become somewhat corrupt. In other words, if I've got a department and you've got a department and we kind of share power running this thing, there's sort of an unwritten rule: "If you won't bother me, I won't bother you and we're both happy. "So you get layers of management and associated costs that nobody needs. Then, while people are justifying all these layers, it takes forever to get anything done. They're too slow to make decisions and nimbler people run circles around them.
On the subject of advantages of economies of scale, I find chain stores quite interesting. You get this huge purchasing power which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. And you get specialization.
If one little guy is trying to buy across 27 different merchandise categories influenced by traveling salesmen, he's going to make a lot of poor decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people that know a lot about refrigerators and so forth to do the buying.
Here's a model that we've had trouble with. Many markets get down to two or three big competitors or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well.
Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.
If it's a pure commodity like airline seats, you can understand why no one makes any money. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.
Yet, in other fields like cereals, for example almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%.But why are cereals so profitable despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.
Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.
For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening.
The great lesson in microeconomics is to discriminate between when technology is going to help you and when it's going to kill you. But a fellow like Buffett does.
For example, when we were in the textile business, which is a terrible commodity business, we were making low-end textiles which are a real commodity product. And one day, the people came to Warren and said, "They've invented a new loom that we think will do twice as much work as our old ones."
And Warren said, "Gee, I hope this doesn't work because if it does, I'm going to close the mill." And he meant it.
What was he thinking? He was thinking, "It's a lousy business. We're earning substandard returns and keeping it open just to be nice to the elderly workers.B ut we're not going to put huge amounts of new capital into a lousy business." And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners.
That's such an obvious concept -that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers.
Conversely, if you own the only newspaper in Oshkosh and they were to invent more efficient ways of composing the whole newspaper, then when you got rid of the old technology and got new fancy computers and so forth, all of the savings would come right through to the bottom line.
In all cases, the people who sell the machinery -and, by and large, even the internal bureaucrats urging you to buy the equipment show you projections with the amount you'll save at current prices with the new technology. However, they don't do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer. I've never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read: "This capital outlay will save you so much money that it will pay for itself in three years." So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you've earned a return of only about 4% per annum. That's the textile business.
And it isn't that the machines weren't better. It's just that the savings didn't go to you. The cost reductions came through all right. But the benefit of the cost reductions didn't go to the guy who bought the equipment. It's such a simple idea. It's so basic. And yet it's so often forgotten.
Again, that is a very, very powerful idea.
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position, etc., is way more likely to win than a horse with a terrible record and extra weight and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2.Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.
It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it, who look and sift the world for the mispriced, that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.
The way to win is to work, work, work, work and hope to have a few insights.
To me, it's obvious that the winner has to bet very selectively.
In the stock market, some railroad that's beset by better competitors and tough unions may be available at one-third of its book value. In contrast, IBM in its heyday might be selling at 6 times book value. So it's just like the pari-mutuel system. Any damn fool could plainly see that IBM had better business prospects than the railroad. But once you put the price into the formula, it wasn't so clear anymore what was going to work best for a buyer choosing between the stocks.
Graham was, by and large, operating when the world was in shell shock from the 1930s -which was the worst contraction in the English-speaking world in about 600 years. People were so shell-shocked for a long time thereafter that Ben Graham could run his Geiger counter over this detritus from the collapse of the 1930s and find things selling below their working capital per share and so on.
And in those days, working capital actually belonged to the shareholders. If the employees were no longer useful, you just sacked them all, took the working capital and stuck it in the owners' pockets. That was the way capitalism then worked.
Nowadays, of course, the accounting is not realistic because the minute the business starts contracting, significant assets are not there. Under social norms and the new legal rules of the civilization, so much is owed to the employees that, the minute the enterprise goes into reverse, some of the assets on the balance sheet aren't there anymore.
Now, that might not be true if you run a little auto dealership yourself. You may be able to run it in such a way that there's no health plan and this and that so that if the business gets lousy, you can take your working capital and go home. But IBM can't, or at least didn't. Just look at what disappeared from its balance sheet when it decided that it had to change size both because the world had changed technologically and because its market position had deteriorated.
At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up and those real obvious bargains disappeared. You could run your Geiger counter over the rubble and it wouldn't click.
But such is the nature of people who have a hammer -to whom, as I mentioned, every problem looks like a nail that the Ben Graham followers responded by changing the calibration on their Geiger counters. In effect, they started defining a bargain in a different way. And they kept changing the definition so that they could keep doing what they'd always done.
And it still worked pretty well. So the Ben Graham intellectual system was a very good one.
However, if we'd stayed with classic Graham the way Ben Graham did it, we would never have had the record we have.
For example, Graham didn't want to ever talk to management. And his reason was that, like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use. And he didn't feel that the man in the street could run around and talk to managements and learn things. He also had a concept that the management would often couch the information very shrewdly to mislead. Therefore, it was very difficult. And that is still true, of course human nature being what it is.
And so having started out as Grahamites which, by the way, worked fine we gradually got what I would call better insights. And we realized that some company that was selling at 2 or 3 times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other.
And once we'd gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.
And, by the way, the bulk of the billions in Berkshire Hathaway have come from the better businesses. Much of the first $200 or $300 million came from scrambling around with our Geiger counter. But the great bulk of the money has come from the great businesses.
We've really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses.
Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.
So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects.
How do you get into these great companies? One method is what I'd call the method of finding them small get 'em when they're little. For example, buy Wal-Mart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And it's a very beguiling idea. If I were a young man, I might actually go into it.
And some of it is predictable. I do not think it takes a genius to understand that Jack Welch was a more insightful person and a better manager than his peers in other companies. Nor do I think it took tremendous genius to understand that Disney had basic momentums in place which are very powerful and that Eisner and Wells were very unusual managers.
So you do get an occasional opportunity to get into a wonderful business that's being run by a wonderful manager. And, of course, that's hog heaven day. If you don't load up when you get those opportunities, it's a big mistake.
Occasionally, you'll find a human being who's so talented that he can do things that ordinary skilled mortals can't. I would argue that Simon Marks who was second generation in Marks & Spencer of England was such a man. Patterson was such a man at National Cash Register. And Sam Walton was such a man.
These people do come along and in many cases, they're not all that hard to identify. If they've got a reasonable hand with the fanaticism and intelligence and so on that these people generally bring to the party then management can matter much.
However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager.
But, very rarely. you find a manager who's so good that you're wise to follow him into what looks like a mediocre business.
But in terms of business mistakes that I've seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations.
So there are risks .Nothing is automatic and easy. But if you can find some fairly-priced great company and buy it and sit, that tends to work out very, very well indeed especially for an individual, Within the growth stock model, there's a sub-position: There are actually businesses, that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices and yet they haven't done it. So they have huge untapped pricing power that they're not using. That is the ultimate no-brainer.
That existed in Disney. It's such a unique experience to take your grandchild to Disneyland. You're not doing it that often .And there are lots of people in the country. And Disney found that it could raise those prices a lot and the attendance stayed right up.
So a lot of the great record of Eisner and Wells was utter brilliance but the rest came from just raising prices at Disneyland and Disneyworld and through video cassette sales of classic animated movies.
At Berkshire Hathaway, Warren and I raised the prices of See's Candy a little faster than others might have. And, of course, we invested in Coca-Cola -which had some untapped pricing power. And it also had brilliant management. So a Goizueta and Keough could do much more than raise prices.It was perfect.
In one of those The Washington Post we bought it at about 20% of the value to a private owner. So we bought it on a Ben Graham style basis at one fifth of obvious value and, in addition, we faced a situation where you had both the top hand in a game that was clearly going to end up with one winner and a management with a lot of integrity and intelligence. That one was a real dream. They're very high class people -the Katharine Graham family. That's why it was a dream an absolute, damn dream.
At Harvard Business School, the great quantitative thing that bonds the first year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems.
If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one‑legged man in an ass‑kicking contest.
So there's an iron rule that just as you want to start getting worldly wisdom by asking why, why, why, in communicating with other people about everything, you want to include why, why, why. Even if it's obvious, it's wise to stick in the why.
And once we get into microeconomics, we get into the concept of advantages of scale. Now we're getting closer to investment analysis because in terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important.
The very nature of things is that if you get a whole lot of volume through your joint, you get better at processing that volume. That's an enormous advantage. And it has a lot to do with which businesses succeed and fail....
For example, you can get advantages of scale from TV advertising. Well, if you were Proctor & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so many cans and bottles. Some little guy couldn't. And there was no way of buying it in part. Therefore, he couldn't use it. In effect, if you didn't have a big volume, you couldn't use network TV advertising which was the most effective technique.
So when TV came in, the branded companies that were already big got a huge tail wind. Indeed, they prospered and prospered and prospered until some of them got fat and foolish, which happens with prosperity -at least to some people....
And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz's chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don't know anything about Glotz's. So if one is 40 cents and the other is 30 cents, am I going to take something I don't know and put it in my mouth which is a pretty personal place, after all for a lousy dime? So, in effect, Wrigley , simply by being so well known, has advantages of scale what you might call an informational advantage.
Another advantage of scale comes from psychology. The psychologists use the term "social proof". We are all influenced subconsciously and to some extent consciously by what we see others do and approve. Therefore, if everybody's buying something, we think it's better. We don't like to be the one guy who's out of step.
The social proof phenomenon which comes right out of psychology gives huge advantages to scale -for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world.
Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup which is slowly won by a big enterprise gets to be a huge advantage.... And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you.
There's another kind of advantage to scale. In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm.
The most obvious one is daily newspapers. There's practically no city left in the U.S., aside from a few very big ones, where there's more than one daily newspaper.
And again, that's a scale thing. Once I get most of the circulation, I get most of the advertising. And once I get most of the advertising and circulation, why would anyone want the thinner paper with less information in it? So it tends to cascade to a winner take all situation. And that's a separate form of the advantages of scale phenomenon.
Similarly, all these huge advantages of scale allow greater specialization within the firm. Therefore, each person can be better at what he does.
And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, "To hell with it. We're either going to be # 1 or #2 in every field we're in or we're going to be out. I don't care how many people I have to fire and what I have to sell. We're going to be #I or #2 or out." That was a very tough‑minded thing to do, but I think it was a very correct decision if you're thinking about maximizing shareholder wealth. And I don't think it's a bad thing to do for a civilization either, because I think that General Electric is stronger for having Jack Welch there.
And there are also disadvantages of scale. For example, we by which I mean Berkshire Hathaway -are the largest shareholder in Capital Cities /ABC. And we had trade publications there that got murdered where our competitors beat us. And the way they beat us was by going to a narrower specialization.
We'd have a travel magazine for business travel. So somebody would create one which was addressed solely at corporate travel departments. Like an ecosystem, you're getting a narrower and narrower specialization.
Well, they got much more efficient. They could tell more to the guys who ran corporate travel departments. Plus, they didn't have to waste the ink and paper mailing out stuff that corporate travel departments weren't interested in reading. It was a more efficient system. And they beat our brains out as we relied on our broader magazine.
That's what happened to The Saturday Evening Post and all those things. They're gone. What we have now is Motorcross which is read by a bunch of nuts who like to participate in tournaments where they turn somersaults on their motorcycles. But they care about it. For them, it's the principle purpose of life. A magazine called Motorcross is a total necessity to those people. Arid its profit margins would make you salivate.
Just think of how narrowcast that kind of publishing is. So occasionally, scaling down and intensifying gives you the big advantage. Bigger is not always better.
The great defect of scale, of course, which makes the game interesting -so that the big people don't always win -is that as you get big, you get the bureaucracy. And with the bureaucracy comes the territoriality -which is again grounded in human nature.
They also tend to become somewhat corrupt. In other words, if I've got a department and you've got a department and we kind of share power running this thing, there's sort of an unwritten rule: "If you won't bother me, I won't bother you and we're both happy. "So you get layers of management and associated costs that nobody needs. Then, while people are justifying all these layers, it takes forever to get anything done. They're too slow to make decisions and nimbler people run circles around them.
On the subject of advantages of economies of scale, I find chain stores quite interesting. You get this huge purchasing power which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. And you get specialization.
If one little guy is trying to buy across 27 different merchandise categories influenced by traveling salesmen, he's going to make a lot of poor decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people that know a lot about refrigerators and so forth to do the buying.
Here's a model that we've had trouble with. Many markets get down to two or three big competitors or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well.
Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.
If it's a pure commodity like airline seats, you can understand why no one makes any money. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.
Yet, in other fields like cereals, for example almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%.But why are cereals so profitable despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.
Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.
For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening.
The great lesson in microeconomics is to discriminate between when technology is going to help you and when it's going to kill you. But a fellow like Buffett does.
For example, when we were in the textile business, which is a terrible commodity business, we were making low-end textiles which are a real commodity product. And one day, the people came to Warren and said, "They've invented a new loom that we think will do twice as much work as our old ones."
And Warren said, "Gee, I hope this doesn't work because if it does, I'm going to close the mill." And he meant it.
What was he thinking? He was thinking, "It's a lousy business. We're earning substandard returns and keeping it open just to be nice to the elderly workers.B ut we're not going to put huge amounts of new capital into a lousy business." And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners.
That's such an obvious concept -that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers.
Conversely, if you own the only newspaper in Oshkosh and they were to invent more efficient ways of composing the whole newspaper, then when you got rid of the old technology and got new fancy computers and so forth, all of the savings would come right through to the bottom line.
In all cases, the people who sell the machinery -and, by and large, even the internal bureaucrats urging you to buy the equipment show you projections with the amount you'll save at current prices with the new technology. However, they don't do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer. I've never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read: "This capital outlay will save you so much money that it will pay for itself in three years." So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you've earned a return of only about 4% per annum. That's the textile business.
And it isn't that the machines weren't better. It's just that the savings didn't go to you. The cost reductions came through all right. But the benefit of the cost reductions didn't go to the guy who bought the equipment. It's such a simple idea. It's so basic. And yet it's so often forgotten.
Again, that is a very, very powerful idea.
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position, etc., is way more likely to win than a horse with a terrible record and extra weight and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2.Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.
It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it, who look and sift the world for the mispriced, that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.
The way to win is to work, work, work, work and hope to have a few insights.
To me, it's obvious that the winner has to bet very selectively.
In the stock market, some railroad that's beset by better competitors and tough unions may be available at one-third of its book value. In contrast, IBM in its heyday might be selling at 6 times book value. So it's just like the pari-mutuel system. Any damn fool could plainly see that IBM had better business prospects than the railroad. But once you put the price into the formula, it wasn't so clear anymore what was going to work best for a buyer choosing between the stocks.
Graham was, by and large, operating when the world was in shell shock from the 1930s -which was the worst contraction in the English-speaking world in about 600 years. People were so shell-shocked for a long time thereafter that Ben Graham could run his Geiger counter over this detritus from the collapse of the 1930s and find things selling below their working capital per share and so on.
And in those days, working capital actually belonged to the shareholders. If the employees were no longer useful, you just sacked them all, took the working capital and stuck it in the owners' pockets. That was the way capitalism then worked.
Nowadays, of course, the accounting is not realistic because the minute the business starts contracting, significant assets are not there. Under social norms and the new legal rules of the civilization, so much is owed to the employees that, the minute the enterprise goes into reverse, some of the assets on the balance sheet aren't there anymore.
Now, that might not be true if you run a little auto dealership yourself. You may be able to run it in such a way that there's no health plan and this and that so that if the business gets lousy, you can take your working capital and go home. But IBM can't, or at least didn't. Just look at what disappeared from its balance sheet when it decided that it had to change size both because the world had changed technologically and because its market position had deteriorated.
At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up and those real obvious bargains disappeared. You could run your Geiger counter over the rubble and it wouldn't click.
But such is the nature of people who have a hammer -to whom, as I mentioned, every problem looks like a nail that the Ben Graham followers responded by changing the calibration on their Geiger counters. In effect, they started defining a bargain in a different way. And they kept changing the definition so that they could keep doing what they'd always done.
And it still worked pretty well. So the Ben Graham intellectual system was a very good one.
However, if we'd stayed with classic Graham the way Ben Graham did it, we would never have had the record we have.
For example, Graham didn't want to ever talk to management. And his reason was that, like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use. And he didn't feel that the man in the street could run around and talk to managements and learn things. He also had a concept that the management would often couch the information very shrewdly to mislead. Therefore, it was very difficult. And that is still true, of course human nature being what it is.
And so having started out as Grahamites which, by the way, worked fine we gradually got what I would call better insights. And we realized that some company that was selling at 2 or 3 times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other.
And once we'd gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.
And, by the way, the bulk of the billions in Berkshire Hathaway have come from the better businesses. Much of the first $200 or $300 million came from scrambling around with our Geiger counter. But the great bulk of the money has come from the great businesses.
We've really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses.
Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.
So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects.
How do you get into these great companies? One method is what I'd call the method of finding them small get 'em when they're little. For example, buy Wal-Mart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And it's a very beguiling idea. If I were a young man, I might actually go into it.
And some of it is predictable. I do not think it takes a genius to understand that Jack Welch was a more insightful person and a better manager than his peers in other companies. Nor do I think it took tremendous genius to understand that Disney had basic momentums in place which are very powerful and that Eisner and Wells were very unusual managers.
So you do get an occasional opportunity to get into a wonderful business that's being run by a wonderful manager. And, of course, that's hog heaven day. If you don't load up when you get those opportunities, it's a big mistake.
Occasionally, you'll find a human being who's so talented that he can do things that ordinary skilled mortals can't. I would argue that Simon Marks who was second generation in Marks & Spencer of England was such a man. Patterson was such a man at National Cash Register. And Sam Walton was such a man.
These people do come along and in many cases, they're not all that hard to identify. If they've got a reasonable hand with the fanaticism and intelligence and so on that these people generally bring to the party then management can matter much.
However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager.
But, very rarely. you find a manager who's so good that you're wise to follow him into what looks like a mediocre business.
But in terms of business mistakes that I've seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations.
So there are risks .Nothing is automatic and easy. But if you can find some fairly-priced great company and buy it and sit, that tends to work out very, very well indeed especially for an individual, Within the growth stock model, there's a sub-position: There are actually businesses, that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices and yet they haven't done it. So they have huge untapped pricing power that they're not using. That is the ultimate no-brainer.
That existed in Disney. It's such a unique experience to take your grandchild to Disneyland. You're not doing it that often .And there are lots of people in the country. And Disney found that it could raise those prices a lot and the attendance stayed right up.
So a lot of the great record of Eisner and Wells was utter brilliance but the rest came from just raising prices at Disneyland and Disneyworld and through video cassette sales of classic animated movies.
At Berkshire Hathaway, Warren and I raised the prices of See's Candy a little faster than others might have. And, of course, we invested in Coca-Cola -which had some untapped pricing power. And it also had brilliant management. So a Goizueta and Keough could do much more than raise prices.It was perfect.
In one of those The Washington Post we bought it at about 20% of the value to a private owner. So we bought it on a Ben Graham style basis at one fifth of obvious value and, in addition, we faced a situation where you had both the top hand in a game that was clearly going to end up with one winner and a management with a lot of integrity and intelligence. That one was a real dream. They're very high class people -the Katharine Graham family. That's why it was a dream an absolute, damn dream.
from http://www.nytimes.com/2012/01/01/opinion/sunday/the-joy-of-quiet.html?_r=1&pagewanted=all
In my own case, I turn to eccentric and often extreme measures to try to keep my sanity and ensure that I have time to do nothing at all . I’ve yet to use a cellphone and I’ve never Tweeted or entered Facebook. I try not to go online till my day’s writing is finished
None of this is a matter of principle or asceticism; it’s just pure selfishness. Nothing makes me feel better — calmer, clearer and happier — than being in one place, absorbed in a book, a conversation, a piece of music. It’s actually something deeper than mere happiness: it’s joy, which the monk David Steindl-Rast describes as “that kind of happiness that doesn’t depend on what happens.”
In my own case, I turn to eccentric and often extreme measures to try to keep my sanity and ensure that I have time to do nothing at all . I’ve yet to use a cellphone and I’ve never Tweeted or entered Facebook. I try not to go online till my day’s writing is finished
None of this is a matter of principle or asceticism; it’s just pure selfishness. Nothing makes me feel better — calmer, clearer and happier — than being in one place, absorbed in a book, a conversation, a piece of music. It’s actually something deeper than mere happiness: it’s joy, which the monk David Steindl-Rast describes as “that kind of happiness that doesn’t depend on what happens.”
Wednesday, December 28, 2011
Be Someone Warren Buffett Would Invest In
More countries, more soft drinks. That’s it. It has worked for over a century.
The #2 spot in Warren’s portfolio is Wells Fargo, a financial services company that stayed on the straight and narrow while other banks gave out risky loans. They stayed accountable and stuck to the strategies that already worked despite tremendous industry pressure. They stayed accountable to their shareholders as well, bypassing the short term gains that appeal to some investors.
19.5% of Warren’s holdings are in Wells Fargo. For a reason.
Warren’s Leadership Lesson #2: Be Accountable to your strategy and stick to your standards, avoiding flashy and risky short term gains.
#3 is American Express. Warren bought it at a discount in 1964 when a fraud scandal brought the shares to an all-time low. Amex had made millions in loans based on the assessed, verified value of oil used in salad dressings . One tiny snag–the oil was actually huge tanks of water with oil on top, part of a sophisticated scam. Amex had a choice: pay out the loans they’d been scammed out of or punt and tank their reputation. American Express delivered on its promises by footing a bill for millions. A massive loss was the result, but the scandal demonstrated leadership through a crisis. The following year the shares doubled.
Warren’s Leadership Lesson #3: Be Direct. If a crisis occurs, handle it swiftly and completely.
So what does Warren really want? The following leadership qualities plus one more that makes ALL the difference…
Be Accountable. Make and keep commitments to yourself and others. Developing leaders give their accountability away to either other people or circumstances. The quality and speed of results are directly proportional to how much accountability one takes on about having those results.
Be Direct. Be clear and explicit in your words, actions, visions, intentions and strategies. Otherwise misunderstandings, miscommunications and wasted resources will result. Clarity strengthens a team’s commitment and trust with one other and their projects.
Influence occurs through our language, decision making, requests and promises, actions, intentions and ways of being. Influence is all about empowering others in tangible, measurable, specific ways.
More countries, more soft drinks. That’s it. It has worked for over a century.
The #2 spot in Warren’s portfolio is Wells Fargo, a financial services company that stayed on the straight and narrow while other banks gave out risky loans. They stayed accountable and stuck to the strategies that already worked despite tremendous industry pressure. They stayed accountable to their shareholders as well, bypassing the short term gains that appeal to some investors.
19.5% of Warren’s holdings are in Wells Fargo. For a reason.
Warren’s Leadership Lesson #2: Be Accountable to your strategy and stick to your standards, avoiding flashy and risky short term gains.
#3 is American Express. Warren bought it at a discount in 1964 when a fraud scandal brought the shares to an all-time low. Amex had made millions in loans based on the assessed, verified value of oil used in salad dressings . One tiny snag–the oil was actually huge tanks of water with oil on top, part of a sophisticated scam. Amex had a choice: pay out the loans they’d been scammed out of or punt and tank their reputation. American Express delivered on its promises by footing a bill for millions. A massive loss was the result, but the scandal demonstrated leadership through a crisis. The following year the shares doubled.
Warren’s Leadership Lesson #3: Be Direct. If a crisis occurs, handle it swiftly and completely.
So what does Warren really want? The following leadership qualities plus one more that makes ALL the difference…
Be Accountable. Make and keep commitments to yourself and others. Developing leaders give their accountability away to either other people or circumstances. The quality and speed of results are directly proportional to how much accountability one takes on about having those results.
Be Direct. Be clear and explicit in your words, actions, visions, intentions and strategies. Otherwise misunderstandings, miscommunications and wasted resources will result. Clarity strengthens a team’s commitment and trust with one other and their projects.
Influence occurs through our language, decision making, requests and promises, actions, intentions and ways of being. Influence is all about empowering others in tangible, measurable, specific ways.
Wednesday, December 21, 2011
Labor and childbirth
Some notes I have made from various books to help me during labor : (natural hospital birth)
1) Avoid interventions. This is important since these interventions themselves lead down the path toward a cesearan section
2) Pitocin can cause abnormally painful contractions. Because it is administered intravenously, it requires a woman to lie in bed. Fetal monitoring is also required.
3) If pitocin does not speed things up, caregivers often recommend breaking the bag of waters. This too causes labor to feel more painful. It also puts a woman on a clock.
4) The combination of extra-painful contractions and lost mobility can quickly lead a woman to request an epidural. An epidural plus loss of mobility can slow labor. Epidurals often cause fever, and the woman ends up unnecessarily with a c-section.
5) also all these has the psychological effect on the woman that other people are in charge of her labor. If you remain active and mobile, you may have a long, exhausting labor, but you will remain in charge and not end upo with a c-section from an epidural induced fever.
6) CPD : Get 2nd, 3rd, 4th opinion. This is very rare that a baby's head is too big for pelvis. Mostly wrong diagnosis. Baby being too large is a common fallacy in twenty first century obstetrics. Never too large
7) Squatting provides 10% more space for baby's head than semi-reclining.
8) Dont use pitocin!!!!!! Natural induction is better - walking, herbs, spicy food
9) Onset of early labor - mild menstrual cramps.
Early labor : 0-3 cm. strong menstrual cramps. Pain may last as little as ten seconds or as long as a minute. The amount of time between cramps is 5-15 minutes. You are still able to walk, maywant to rock or sway. Still capable of rational thought. Stay in the moment. Ask your support team to help you stay in the present. Just deal with the contraction you are in, not the next one or the one after,
Give your mind something to focus on besides the pain. Watch a movie or cook or something. A contraction will bring your your focus back to body, then resume your activity.
Active labor : At some point, you will no longer be able to focus on anything besides labor.
1) Avoid interventions. This is important since these interventions themselves lead down the path toward a cesearan section
2) Pitocin can cause abnormally painful contractions. Because it is administered intravenously, it requires a woman to lie in bed. Fetal monitoring is also required.
3) If pitocin does not speed things up, caregivers often recommend breaking the bag of waters. This too causes labor to feel more painful. It also puts a woman on a clock.
4) The combination of extra-painful contractions and lost mobility can quickly lead a woman to request an epidural. An epidural plus loss of mobility can slow labor. Epidurals often cause fever, and the woman ends up unnecessarily with a c-section.
5) also all these has the psychological effect on the woman that other people are in charge of her labor. If you remain active and mobile, you may have a long, exhausting labor, but you will remain in charge and not end upo with a c-section from an epidural induced fever.
6) CPD : Get 2nd, 3rd, 4th opinion. This is very rare that a baby's head is too big for pelvis. Mostly wrong diagnosis. Baby being too large is a common fallacy in twenty first century obstetrics. Never too large
7) Squatting provides 10% more space for baby's head than semi-reclining.
8) Dont use pitocin!!!!!! Natural induction is better - walking, herbs, spicy food
9) Onset of early labor - mild menstrual cramps.
Early labor : 0-3 cm. strong menstrual cramps. Pain may last as little as ten seconds or as long as a minute. The amount of time between cramps is 5-15 minutes. You are still able to walk, maywant to rock or sway. Still capable of rational thought. Stay in the moment. Ask your support team to help you stay in the present. Just deal with the contraction you are in, not the next one or the one after,
Give your mind something to focus on besides the pain. Watch a movie or cook or something. A contraction will bring your your focus back to body, then resume your activity.
Active labor : At some point, you will no longer be able to focus on anything besides labor.
Monday, December 19, 2011
From http://www.oprah.com/spirit/Stop-Regretting-Decisions-Martha-Becks-Plan-to-Let-Go/print/1
Learn to Lean Loveward
When I saw A Chorus Line, I wondered if it's literally true that "I can't regret what I did for love." So I did a little thought experiment. I recalled all my significant regrets, and sure enough, I found that none of them followed a choice based purely on love. All were the consequence of fear-based decisions. In the cases where my motivations were a mix of love and fear, it was always the fear-based component that left me fretful and regretful.
For example, I'll be up most of tonight, having spent the daylight hours eating pudding in reaction to writer's block, which is a species of fear. I predict that tomorrow I'll regret this—I've spent many, many sleepless nights fearing this or that, and no good ever came of it. But I've also lost a lot of sleep for love. I've stayed up communing with friends, rocking sick babies, avoiding celibacy. And I really can't regret any choice that brought me one moment of love.
So the ultimate lesson of regret, the one that will help guide you into a rich and satisfying future, is this: Every time life brings you to a crossroads, from the tiniest to the most immense, go toward love, not away from fear. Think of every choice in terms of "What would thrill and delight me?" rather than "What will keep my fear—or the events, people, and things I fear—at bay?"
Sometimes the choice will be utterly clear. Love steers you forward, and no fear arises. But on many occasions, things will seem trickier. The path toward what you love may be fraught with uneasiness, anxiety, outright terror. The pound dog will tug at your heart, but worry about upkeep will push away the first sparks of love and leave you without a four-footed friend.
If you've grieved your losses, reclaimed your dreams, and articulated your anger, regret will have made you the right kind of tough-and-tender: dauntless of spirit, soft of heart, convinced by experience that nothing based on fear—but everything based on love—is worth doing. Living this way doesn't guarantee an easy life; in fact, it will probably take you on a wondrously wild ride. But I promise, you won't regret it.
When I saw A Chorus Line, I wondered if it's literally true that "I can't regret what I did for love." So I did a little thought experiment. I recalled all my significant regrets, and sure enough, I found that none of them followed a choice based purely on love. All were the consequence of fear-based decisions. In the cases where my motivations were a mix of love and fear, it was always the fear-based component that left me fretful and regretful.
For example, I'll be up most of tonight, having spent the daylight hours eating pudding in reaction to writer's block, which is a species of fear. I predict that tomorrow I'll regret this—I've spent many, many sleepless nights fearing this or that, and no good ever came of it. But I've also lost a lot of sleep for love. I've stayed up communing with friends, rocking sick babies, avoiding celibacy. And I really can't regret any choice that brought me one moment of love.
So the ultimate lesson of regret, the one that will help guide you into a rich and satisfying future, is this: Every time life brings you to a crossroads, from the tiniest to the most immense, go toward love, not away from fear. Think of every choice in terms of "What would thrill and delight me?" rather than "What will keep my fear—or the events, people, and things I fear—at bay?"
Sometimes the choice will be utterly clear. Love steers you forward, and no fear arises. But on many occasions, things will seem trickier. The path toward what you love may be fraught with uneasiness, anxiety, outright terror. The pound dog will tug at your heart, but worry about upkeep will push away the first sparks of love and leave you without a four-footed friend.
If you've grieved your losses, reclaimed your dreams, and articulated your anger, regret will have made you the right kind of tough-and-tender: dauntless of spirit, soft of heart, convinced by experience that nothing based on fear—but everything based on love—is worth doing. Living this way doesn't guarantee an easy life; in fact, it will probably take you on a wondrously wild ride. But I promise, you won't regret it.
Tuesday, December 06, 2011
buffettfaq
How would you define your character? And what portion of your character do you believe contributed the most to your success?
The important qualities you need are intelligence, patience, and interest, but the biggest thing is to be rational. In ‘97-8, people weren’t rational. People got caught up with what other people were doing. Don’t get caught up with what other people are doing. Being a contrarian isn’t the key, but being a crowd follower isn’t either. You need to detach yourself emotionally. You need to think about what is going on around you. Being in Omaha helps me in that regard. When I was in NYC, I had 50 people whispering in my ear before noon. It’s hard sometimes, like when the Internet craze hit. Nobody likes to see their neighbor doing stupid things and getting rich. It was like Cinderella’s ball, I think I’ll just have one more dance, it’s not midnight yet. Sounds simple – but it is hard to leave the party. The problem with stocks is they don’t have clocks. You don’t know when it will be midnight so you can leave the party. My partner Charlie Munger and Tony Nicely at Geico are always rational. 160 IQs can say stupid things that sound good. People do silly things, whether they have 120 IQ or 160. You can always improve your rational thought. Rationality is the only thing that helps you. One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down “I am buying Microsoft @ $300B because…” Force yourself to write this down. It clarifies your mind and discipline. This exercise makes you more rational.
Sunday, December 04, 2011
AMR bankrupt this week. Not thinking about it. Looking forward. Probably have to go back to some programming job after baby.
Seth Klarman with Charlie Rose on http://myinvestingnotebook.blogspot.com/2011/11/charlie-rose-interviews-seth-klarman.html
highlights:
*3-5 years investment horizon
*selling's harder than buying - hard to know when to get out
* You never know how big a bargain you will get offered tomorrow. Maybe someone comes and sells you a dollar for 50 cents, you never know if they will sell you the dollar for 40 cents a day later, so you need to buy it and maybe leave room to buy more more later. and maybe you spend the last dollar on buying it later and it goes down further after you buy it. So you always are checking and rechecking your work. The thing that would make you lose your confidence when you;'re doing that, is if you realize the dollar isnt actually worth a dollar, maybe it was a dollar but Greece failed or the Euro fell or collapsed and all of a suden, your dollar is worth only 30 cents.
* Its not so much figuring out what its worth today, its making sure it'll still be worth around the same tomorrow
* Stocks are cheap for a reason. good management is important.
Mine:
Debt/Capital is the main thing to check first for any company. Debt should include all LT and ST debt.
A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt.
Read more: http://www.investopedia.com/terms/d/debt-to-capitalratio.asp#ixzz1fcmioMiF
A company should own twice as much as it owes.. Rule of thumb from "Little Book of Value investing : Browne, pg 79"
x/x+2x = 1/3 = 33% (max debt to capital ratio)
Seth Klarman with Charlie Rose on http://myinvestingnotebook.blogspot.com/2011/11/charlie-rose-interviews-seth-klarman.html
highlights:
*3-5 years investment horizon
*selling's harder than buying - hard to know when to get out
* You never know how big a bargain you will get offered tomorrow. Maybe someone comes and sells you a dollar for 50 cents, you never know if they will sell you the dollar for 40 cents a day later, so you need to buy it and maybe leave room to buy more more later. and maybe you spend the last dollar on buying it later and it goes down further after you buy it. So you always are checking and rechecking your work. The thing that would make you lose your confidence when you;'re doing that, is if you realize the dollar isnt actually worth a dollar, maybe it was a dollar but Greece failed or the Euro fell or collapsed and all of a suden, your dollar is worth only 30 cents.
* Its not so much figuring out what its worth today, its making sure it'll still be worth around the same tomorrow
* Stocks are cheap for a reason. good management is important.
Mine:
Debt/Capital is the main thing to check first for any company. Debt should include all LT and ST debt.
A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt.
Read more: http://www.investopedia.com/terms/d/debt-to-capitalratio.asp#ixzz1fcmioMiF
A company should own twice as much as it owes.. Rule of thumb from "Little Book of Value investing : Browne, pg 79"
x/x+2x = 1/3 = 33% (max debt to capital ratio)
Sunday, November 27, 2011
Thursday, November 10, 2011
I had an epiphany on my hour long walk at sunrise today. By focusing on negative comments others make, I actually diminish my own potential. I need to just focus on improving myself and my skills in the direction of my interests. Even if others don't approve, that shouldn't distract me beyond considering if their comments appeal to my rationality and frame of mind at the moment. If their comments don't appeal, I should discard them like water off a duck and push forward on my own agenda. A good method to avoid thinking too much about someones judgemental or negative comments is to also repeat one's favorite mantra silently, a form of meditation. When I do this, life suddenly seems to alive and full of promise. Extraneous thoughts and worries fall away. The meditation blanks my mind and I know what is the best action for me to take next.
Even if others comments are indeed justified, I think it is important to arrive at their conclusions independently, I should make my own mistakes and live me own life even if its not optimal.
I should just be focusing on thoughts and actions that somehow move me forward, towards my goals and to achieving what I can truly achieve. Iam think joining toastmasters would be good too.
To truly discover love, one has to stop judging our parents and spouse. Also others. - A quote by Sri Bhagwan (not sure who he is but came across this quote by him). By judging or thinking too much about any comments any of them may have made, I lose focus from my goals. That should be the ultimate aim, to distract oneself as little as possible from achieving.
Even if others comments are indeed justified, I think it is important to arrive at their conclusions independently, I should make my own mistakes and live me own life even if its not optimal.
I should just be focusing on thoughts and actions that somehow move me forward, towards my goals and to achieving what I can truly achieve. Iam think joining toastmasters would be good too.
To truly discover love, one has to stop judging our parents and spouse. Also others. - A quote by Sri Bhagwan (not sure who he is but came across this quote by him). By judging or thinking too much about any comments any of them may have made, I lose focus from my goals. That should be the ultimate aim, to distract oneself as little as possible from achieving.
Thursday, November 03, 2011
Wow, great compilation of WB and CM Q&As :
http://buffettfaq.com/
We bought it because it was an attractive security. But it was not in an attractive industry. I did the same thing in Salomon. I bought an attractive security in a business I wouldn’t have bought the equity in. So you could say that is one form of mistake. Buying something because you like the terms, but you don’t like the business that well. I have done that in the past and will probably do that again.
http://buffettfaq.com/
If you were to teach an investment course, besides works by Ben Graham and Phil Fisher and your book on the instalment basis, what would be on the syllabus?
[Q - how would you teach the next generation of investors?]
Buffett: I had 49 university groups, in clumps of six, [visit me] last year. [An education in] investing requires only two courses: How to Value a Business, and How to Think About Markets. You don’t have to know how to value all businesses. Start with a small circle of competence, things you can understand. [Look for] things that are selling for less than they’re worth. Forget about things you can’t understand. You need to understand accounting, which has enormous limitations. [You need to] understand when a competitive advantage is durable or fleeting. Learn that the market is there to serve you, not instruct you. In the investing business, if you have an IQ of 150, sell 30 points to someone else. You do not need to be a genius. You need to have emotional stability, inner peace and be able to think for yourself, [since] you’re subjected to all sorts of stimuli. It’s not a complicated game; you don’t need to understand math. It’s simple, but not easy.
CM: I never took a business class, except accounting
WB: Not thinking of depreciation as an expense is crazy. I can think of a few businesses where one could ignore depreciation charges, but not many. Even with our gas pipelines, depreciation is real -- you have to maintain them and eventually they become worthless (though this may be 100 years).
It [depreciation] is reverse float -- you lay out money before you get cash. Any management that doesn't regards depreciation as an expense is living in a dream world, but they're encouraged to do so by bankers. Many times, this comes close to a flim flam game.
People want to send me books with EBITDA and I say fine, as long as you pay cap ex. There are very few businesses that can spend a lot less than depreciation and maintain the health of the business.
This is nonsense. It couldn't be worse. But a whole generation of investors have been taught this. It's not a non-cash expense -- it's a cash expense but you spend it first. It's a delayed recording of a cash expense.
We at Berkshire are going to spend more this year on cap ex than we depreciate.
[CM: I think that, every time you saw the word EBITDA [earnings], you should substitute the word "bullshit" earnings.]
Recommendation of a book on accounting?
I haven't read an accounting book in years. I think I read Finney[?] in college. I'd suggest reading Berkshire reports and things like magazine articles about accounting scandals. You need to know how figures are put together, but also have to bring something else. Read a lot of business articles and annual reports. If I don't understand it [an annual report], it's probably because the management doesn't want me to understand it. And if that's the case, usually there's something wrong.
[CM: You start with basic rules of bookkeeping, and then you have to spend a lot of time [to really become knowledgeable]].
Would you comment on companies you say use questionable accounting practices to make their operations look good?
We follow a policy of ““criticize by practice, and praise by name.”” You could say we hate the sin, but love the sinner. So I can’’t really name names of companies that I think are doing this kind of thing; I’’ve found that if you go around criticizing others, pretty soon the criticism comes back on you.
Do you think an MBA is an important degree for students to have today?
If you are interested in business, or likely to be in business, an MBA is very useful. But, what is really important is what you bring to a class in terms of being interested in the subject. If you view a course like accounting as a drudge and a requirement, you are missing the whole game. Any course can be exciting. Mastering accounting is like mastering a new language, it can be so much fun. The attitude should be one of discovery, that you are coming there and discovering. Accounting is the Rosetta Stone of business. Economics is fascinating, the first page of economics describes how mankind deals with insatiable wants and creates the systems to fulfill these wants. It’s great stuff. Really how the world works. Business is a subsection, a fairly understandable subsection, not like black holes, which are fairly hard to visualize, but business is everyday stuff and you are learning how the world works.
What do you remember about your education at the University of Nebraska?
I had a great experience at Nebraska. Probably the best teacher I had was Ray Dein in accounting. I think everybody in business school should really know accounting; it is the language of business. If you are not comfortable with the lan- guage, you can’ t be comfortable in the country. You just have to get it into your spinal cord. It is so valuable in business.
WB: I made a mistake when I bought US Air Preferred some years ago. I had a lot of money around. I make mistakes when I get cash. Charlie tells me to go to a bar instead. Don’t hang around the office. But I hang around the office and I have money in my pocket, I do something dumb. It happens every time. So I bought this thing. Nobody made me buy it.
Wednesday, November 02, 2011
From http://www.oprah.com/oprahs-lifeclass/Wildly-Improbable-Goals/2
In any case, learning to invite and accept your own WIG (wildly improbable goal) can awaken you to a kind of ubiquitous, benevolent magic, a river of enchantment that perpetually flows toward your destiny.
You can't force a WIG to happen, but you can create conditions that will either prevent it or invite it. One precondition is absolutely necessary: You must befriend, protect, and nurture your own spirit. This means paying attention to your real needs, treating yourself not just fairly but kindly, and standing up for yourself even if that displeases people around you. Just as a run-down body may be unable to conceive a healthy new life, a run-down soul can't support the healthy development of the life you were meant to have.
Take a pencil in your dominant hand (right for right- handers, left for lefties) and write down a few pointed questions, such as "What are you feeling?" "What do you need?" and "What do you want?" As soon as you've finished writing a question, switch the pencil to your other hand and write whatever words bubble up. You may be surprised. When your problem-solving mind is fully engaged, trying to master the task of writing with the "wrong" hand, hidden aspects of the self often surface. I've seen people encounter full-fledged WIGs in the shaky words written by their own nondominant hand.
Once you've written your WIG, the real work begins. I've had many clients who, impressed by the strange electricity of their WIGs, assume that this intense feeling alone will magically create the desired reward. Yeah, right. I think the reason WIGs have so much mojo is that we need a huge reservoir of desire to keep us slogging through the hard work needed to realize them. Almost invariably, the effort necessary to achieve a WIG is not less than we expect but more.
Clients reap the fruit of their labors only if they are willing to go out and "shake the trees," but weirdly, the fruit that falls almost never comes from the tree the person is shaking.
That pattern—the recognition of a WIG, followed by enormous amounts of work, followed by a miracle—has happened to me so many times that it's almost stopped surprising me. I see it strike my clients as well, when they prepare a safe space for their true selves, ask a few questions, and accept the answers. You already know your own WIGs, though you may not yet realize it. The part of you that is unhampered by illusion—the illusion of time, the illusion of powerlessness, the illusion of impossibility—is waiting for you to slow down and open up so that it can speak to your consciousness.
You can't force a WIG to happen, but you can create conditions that will either prevent it or invite it. One precondition is absolutely necessary: You must befriend, protect, and nurture your own spirit. This means paying attention to your real needs, treating yourself not just fairly but kindly, and standing up for yourself even if that displeases people around you. Just as a run-down body may be unable to conceive a healthy new life, a run-down soul can't support the healthy development of the life you were meant to have.
Take a pencil in your dominant hand (right for right- handers, left for lefties) and write down a few pointed questions, such as "What are you feeling?" "What do you need?" and "What do you want?" As soon as you've finished writing a question, switch the pencil to your other hand and write whatever words bubble up. You may be surprised. When your problem-solving mind is fully engaged, trying to master the task of writing with the "wrong" hand, hidden aspects of the self often surface. I've seen people encounter full-fledged WIGs in the shaky words written by their own nondominant hand.
Once you've written your WIG, the real work begins. I've had many clients who, impressed by the strange electricity of their WIGs, assume that this intense feeling alone will magically create the desired reward. Yeah, right. I think the reason WIGs have so much mojo is that we need a huge reservoir of desire to keep us slogging through the hard work needed to realize them. Almost invariably, the effort necessary to achieve a WIG is not less than we expect but more.
Clients reap the fruit of their labors only if they are willing to go out and "shake the trees," but weirdly, the fruit that falls almost never comes from the tree the person is shaking.
That pattern—the recognition of a WIG, followed by enormous amounts of work, followed by a miracle—has happened to me so many times that it's almost stopped surprising me. I see it strike my clients as well, when they prepare a safe space for their true selves, ask a few questions, and accept the answers. You already know your own WIGs, though you may not yet realize it. The part of you that is unhampered by illusion—the illusion of time, the illusion of powerlessness, the illusion of impossibility—is waiting for you to slow down and open up so that it can speak to your consciousness.
Thursday, October 27, 2011
Tuesday, October 25, 2011
A great article on needing time for true thought. Read the whole article at :
http://sciencecareers.sciencemag.org/career_magazine/previous_issues/articles/2006_10_13/opportunities_stealing_time
http://sciencecareers.sciencemag.org/career_magazine/previous_issues/articles/2006_10_13/opportunities_stealing_time
"I am very occupied with the courses, so that my real free time is less than in Bern."
--A. Einstein, in a letter to M. Besso, 1909
--A. Einstein, in a letter to M. Besso, 1909
In his latest book, Einstein 1905: The Standard of Greatness, scientist and historian John Rigden analyzes Albert Einstein's landmark year, in which he published 5 seminal papers that changed physics forever. As you probably know, Einstein wasn't in a university or laboratory at this time: He was a junior patent clerk in the Swiss patent office in Bern. When he wrote that letter to Besso, he was a professor at the University of Zurich. It seems odd to most of us now, but the isolation and free time that Einstein enjoyed while goldbricking in the patent office may have contributed to his extraordinary intellectual productivity. Einstein's "alternative career" may have contributed to some of the most important breakthroughs in the history of science.
As you know, science and engineering are creative activities. We rely on inspiration and serendipity to generate the insights and make the connections that are the kernel of new inventions and discoveries. Creativity requires many things: a prepared mind, obstacles to overcome, and time. What Einstein had in 1905--and what he had less of by 1909 when he wrote to Besso--was time: time to think, time to tinker, time to explore.
It is not uncommon for faculty to long for the relatively simple days of grad school and postdoc: Back then, they had TIME! Sometimes you can find yourself with so many interruptions and emergencies in succession that the e-mail you began to compose at 8 a.m. is still unfinished by the time you head to lunch!
This isn't just frustrating and stressful; it can be corrosive to your creativity, smothering the spark at the core of your intellectual engine. Can you imagine what it would be like if painters, playwrights, and composers had to produce their product in 5- to 10-minute bites between committee meetings and proposal reviews?
Stealing time
Creating time to think, explore, and tinker is critical to your effectiveness as a creative individual--as a scientist. Without time to explore, your chances of making a breakthrough are vastly diminished. And no matter where you end up professionally, your effectiveness--and your happiness--will depend on how well you manage your time.
Killing the time vampires
Time vampires are those small, seemingly helpful or innocuous things that nibble away at your day without really adding value to it.
- Keep e-mail in its place. Open Outlook only twice a day.
- Manage your interactions with the people around you. It's easy to get caught up in enjoyable, unplanned conversations with friends and colleagues. This may require a certain amount of tact and patience: You don't want to alienate others in your thirst for privacy.
- Create meeting-free Fridays. When I started work at a large national laboratory, lots of meetings were inserted into my workweek. Given the time I spent preparing, attending, assimilating, and following up those meetings, it was little wonder that I struggled to spend 20% of my time on productive research! I worked half days on Sundays, in peace and quiet, to get caught up on my real work.
- Spend at least one 3-hour chunk of time each week outside your office. any place where you can isolate yourself and read, review, and cogitate. Walking stimulates thoughts and connections differently than sitting idle does. So get out and take a walk.
- Think about big problems. In research, it's easy to get down to tiny details very quickly and spend the bulk of your time there. Making a habit of mentally stretching yourself from time to time can be intellectually stimulating and a lot of fun. This can be even more fruitful when done in conversation with the right people.
- The trick to maintaining your professional (and personal) sanity is knowing what tasks you can afford NOT to do--not trying to pack ever more tasks into the same day.
Monday, October 24, 2011
Character, the secret to a meaningful life ?
I came across this great (month old) article on NYtimes today. I thought it a tremendously useful and courageous contribution by these schools to teach the importance of character and to attempt to instill it. It may be even more important than academic grades. It may make all the difference especially in families where there aren't resources or a long background of education. The Gates foundation would do well to serve such efforts.
From one of the comments :
Einstein himself said that had he been a junior professor rather than a clerk in the Swiss patent office, he might not have developed his thinking as he did. Being a junior professor would have obligated him to publish, as a clerk he earned a living and physics was his hobby. A faculty position, he said, would have made it hard to avoid "superficial analysis" - i.e. produce results to ensure promotion.
How can you create a learning environment that allows curiosity to predominate? Can it be done? John Holt addressed these issues in his classic "How Children Fail". It seems his ideas were never heeded and now we have Seligman with his Positive Psychology industry focusing on individual character traits while ignoring the social context in which the schools exist.
What if the Secret to Success Is Failure?
Einstein himself said that had he been a junior professor rather than a clerk in the Swiss patent office, he might not have developed his thinking as he did. Being a junior professor would have obligated him to publish, as a clerk he earned a living and physics was his hobby. A faculty position, he said, would have made it hard to avoid "superficial analysis" - i.e. produce results to ensure promotion.
How can you create a learning environment that allows curiosity to predominate? Can it be done? John Holt addressed these issues in his classic "How Children Fail". It seems his ideas were never heeded and now we have Seligman with his Positive Psychology industry focusing on individual character traits while ignoring the social context in which the schools exist.