Friday, December 26, 2014

Quotes of 2014

A collection of quotes said or written at some point during this calendar year.

In a review of the book: Fortune Tellers, James Grant offered the following on the limitations of forecasting and predictions:

Henry Singleton: Why Flexibility Beat Long-Range Planning

"Henry Singleton (1916-99), longtime chief executive officer of the technology conglomerate Teledyne Inc...understood the limits of forecasting. Once a Business Week reporter asked him if he had a long-range plan. No, Singleton replied, 'we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.' His plan was to bring an open mind to work every morning." - James Grant

Some thoughts from Warren Buffett on Berkshire Hathaway's (BRKa) intrinsic value and buybacks:

Intrinsic Value

"As I've long told you, Berkshire's intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That's why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.

Charlie Munger, Berkshire's vice chairman and my partner, and I believe both Berkshire's book value and intrinsic value will outperform the S&P in years when the market is down or moderately up. We expect to fall short, though, in years when the market is strong – as we did in 2013. We have underperformed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%." - Warren Buffett

Sometimes, the ability to calculate extremely well can be an obvious advantage yet also a blind spot. Earlier this year, in a review of the book Brilliant Blunders, Freeman Dyson offered up Lord Kelvin as an example. Dyson describes "Kelvin's wrong calculation of the age of the earth" as resulting from "blindness to obvious facts." He attributes the misjudgment, at least in part, to Kelvin's exceptional math skills. In other words, too much focus on what can be calculated without due consideration for other, more important, less quantifiable factors can lead to avoidable misjudgments/incorrect conclusions. This can be as relevant to investment decision-making as it is to the development of scientific theory.*

On the downside of calculating too much:

Intrinsic Value

"Kelvin lacked our modern knowledge of the structure and dynamics of the earth, but he could see with his own eyes the eruptions of volcanoes bringing hot liquid from deep underground to the surface. His skill as a calculator seems to have blinded him to messy processes such as volcanic eruptions that could not be calculated." - Freeman Dyson

Here's Buffett on some of the fundamental elements of investing:

Buffett on Farms, Real Estate, and Stocks

"You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick 'no.'" - Warren Buffett

"Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake." - Warren Buffett

"If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game." - Warren Buffett

"Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays." - Warren Buffett

"...macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: 'You don't know how easy this game is until you get into that broadcasting booth.')" - Warren Buffett

Below, Warren Buffett and Charlie Munger offer some views on retail businesses:

Buffett and Munger Talk Retail Businesses, Nebraska Furniture Mart, and Amazon

MUNGER: I think Warren and I can match anybody's failures in retail.

BUFFETT: Yeah, we have a really bad record, starting in 1966. We bought what we thought was a second-rate department store in Baltimore at a third-rate price, but we found out very quickly that we bought a fourth-rate department store at a third-rate price. And we failed at it, and we failed...

MUNGER: Quickly.

BUFFETT: Yeah, quickly. That's true. We failed other times in retailing. Retailing is a tough, tough business, partly because your competitors are always attempting and very frequently successfully attempting to copy anything you do that's working. And so the world keeps moving. It's hard to establish a permanent moat that your competitor can't cross. And you've seen the giants of retail...a lot of giants have been toppled.

MUNGER: Most of the giants of yesteryear are done.

More specifically, here's how they view Amazon (AMZN):

MUNGER: Well, I think it's very disruptive compared to everybody else, I think it's a formidable model that is going to change America.

BUFFETT: I agree. It's one of the most powerful models that I've seen in a lifetime, and it's being run by a fellow that has had a very clear view of what he wants to do, and does it every day when he goes to work, and is not hampered by external factors like people telling him what he should earn quarterly or something of the sort. And ungodly smart, focused. He's really got a powerful business, and he's got satisfied customers. That's hugely important.

More in a follow-up.

Adam

Long position in BRKb established at much lower prices. No position in AMZN.

Quotes of 2013 Part I & II

* Here's how Charlie Munger explained it at the 2002 Wesco annual meeting: "Organized common (or uncommon) sense -- very basic knowledge -- is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little."

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