Cool interactive chart of Buffett's record going back to the 1950's:
It shows if a person put $10k in the Buffett partnership in the 50's and held until today it would be worth ~$ 300,000,000. Many early investors in the partnership have never sold their shares.
If alternatively, that person decided to put $ 10k into the S&P 500, it would be worth ~$ 1.4 million today.
Multiple studies have shown most professional money managers, in fact, don't even get a return as good as the S&P 500 over the long run.
The problem is that many pros can have a good 5-10 year run...which unfortunately draws money in from investors during a bull market when everyone looks like a genius. Great investors separate themselves during bear markets and over time periods much longer than 5-10 years.
"You make most of your money in a bear market, you just don't realize it at the time." - Shelby Davis
Better to be not too impressed by fund managers boasting about 3, 5 or even 10 year performance.
Check out the chart.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, June 30, 2009
Monday, June 29, 2009
On Bear Markets
From an article on investing when markets are in turmoil:
In his 1961 letter to partners, a 31-year-old investor in Omaha named Warren Buffett told his partners that they should be judging him during times of turmoil and not times of jubilance. "I would consider a year in which we declined 15% and the [Dow Jones Industrial] Average 30%, to be much superior to a year when both we and the Average advanced 20%." Very early on in his career, Buffett was aware that performing well during market turmoil was the key to long-term success as an investor.
It is during bear markets -- when the economic environment is most challenging -- when the real money usually gets made. That's when the biggest discounts to value become available even if buying doesn't feel great at the time. The shares of a good businesses that might, in fact, be cheap (i.e. price is nicely below a conservative estimate of per share intrinsic value) will often go on to become temporarily even cheaper.
So near term price action must be ignored. The focus should be on buying shares of quality businesses at a discount -- on long-term effects and outcomes. Trying to buy at the bottom is futile. Attempts at avoiding the inevitable temporary paper losses generally just leads to missed opportunities.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
In his 1961 letter to partners, a 31-year-old investor in Omaha named Warren Buffett told his partners that they should be judging him during times of turmoil and not times of jubilance. "I would consider a year in which we declined 15% and the [Dow Jones Industrial] Average 30%, to be much superior to a year when both we and the Average advanced 20%." Very early on in his career, Buffett was aware that performing well during market turmoil was the key to long-term success as an investor.
It is during bear markets -- when the economic environment is most challenging -- when the real money usually gets made. That's when the biggest discounts to value become available even if buying doesn't feel great at the time. The shares of a good businesses that might, in fact, be cheap (i.e. price is nicely below a conservative estimate of per share intrinsic value) will often go on to become temporarily even cheaper.
So near term price action must be ignored. The focus should be on buying shares of quality businesses at a discount -- on long-term effects and outcomes. Trying to buy at the bottom is futile. Attempts at avoiding the inevitable temporary paper losses generally just leads to missed opportunities.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Sunday, June 28, 2009
Coca-Cola in 1930
Cool blog that each day posts a summary of the Wall Street Journal from the corresponding day in 1930.
Here is one headline from this past Friday in 1930.
Coca-Cola estimates earnings for second quarter $4.50M compared to $3.94M in 1929. Says depression is having little effect on operations. Trying to increase sales in foreign markets; export sales were up 32% in 1929 and 82% in 1928. Now sold in 76 countries, up from 30 in 1926.
Coca-Cola will earn over $ 6 billion in 2009.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Here is one headline from this past Friday in 1930.
Coca-Cola estimates earnings for second quarter $4.50M compared to $3.94M in 1929. Says depression is having little effect on operations. Trying to increase sales in foreign markets; export sales were up 32% in 1929 and 82% in 1928. Now sold in 76 countries, up from 30 in 1926.
Coca-Cola will earn over $ 6 billion in 2009.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, June 26, 2009
Max and the Chauffeur
The following story was told by Charlie in a 2003 speech at the University of California.
By the way there's a famous story about Max Planck which is apocryphal: After he won his prize, he was invited to lecture everywhere, and he had this chauffeur that drove him around to give public lectures all through Germany. And the chauffeur memorized the lecture, and so one day he said, "Gee Professor Planck, why don't you let me try it as we switch places?" And so he got up and gave the lecture. At the end of it some physicist stood up and posed a question of extreme difficulty. But the chauffeur was up to it. "Well," he said, "I'm surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I'm going to ask my chauffeur to respond." - Charlie Munger
In a separate speech in 2007, he added these comments to the above story.
In this world we have two kinds of knowledge. One is Planck knowledge, the people who really know. And then we've got chauffeur knowledge. They have learned the talk. They may have a big head of hair, they may have fine temper in the voice, they'll make a hell of an impression. But in the end, all they have is chauffeur knowledge. I think I've just described practically every politician in the US. - Charlie Munger
Check out both speeches.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
By the way there's a famous story about Max Planck which is apocryphal: After he won his prize, he was invited to lecture everywhere, and he had this chauffeur that drove him around to give public lectures all through Germany. And the chauffeur memorized the lecture, and so one day he said, "Gee Professor Planck, why don't you let me try it as we switch places?" And so he got up and gave the lecture. At the end of it some physicist stood up and posed a question of extreme difficulty. But the chauffeur was up to it. "Well," he said, "I'm surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I'm going to ask my chauffeur to respond." - Charlie Munger
In a separate speech in 2007, he added these comments to the above story.
In this world we have two kinds of knowledge. One is Planck knowledge, the people who really know. And then we've got chauffeur knowledge. They have learned the talk. They may have a big head of hair, they may have fine temper in the voice, they'll make a hell of an impression. But in the end, all they have is chauffeur knowledge. I think I've just described practically every politician in the US. - Charlie Munger
Check out both speeches.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tiger Woods and Bill Gates
Very different skills, similar advice.
Tiger Woods: Best advice (from his Dad)? Keep it simple.
"My dad's advice to me was to simplify. He knew that at my age I couldn't digest all of golf's intricacies. He kept it simple: If you want to hit the ball to a particular spot, figure out a way to do it. Even today, when I'm struggling with my game, I can still hear him say, "Pick a spot and just hit it." When I'm making adjustments during a round, I know some of the television commentators theorize that I'm changing this or moving that, but really what I'm doing is listening to Pop."
Bill Gates: Best advice (from Warren)? Keep it simple.
"Well, I've gotten a lot of great advice from Warren. I'd say one of the most interesting is how he keeps things simple. You look at his calendar, it's pretty simple. You talk to him about a case where he thinks a business is attractive, and he knows a few basic numbers and facts about it. And [if] it gets less complicated, he feels like then it's something he'll choose to invest in. He picks the things that he's got a model of, a model that really is predictive and that's going to continue to work over a long-term period. And so his ability to boil things down, to just work on the things that really count, to think through the basics -- it's so amazing that he can do that. It's a special form of genius."
I don't know much about golf...but the reasons to invest in a business should be pretty simple:
Something like this is a great investment because the company...
Having that patience is easier said.
Coca-Cola (KO) is a good example. If someone started investing in the mid-1990's and decided KO was a good business back then...that person would not have been able to buy it at a fair price until 2006. Patience is more important than IQ. Seeing that KO was overvalued back then required 4th grade math. It was selling at over $ 80/share in 1998, was earning less than $ 1.00/share yet informed market participants were still buying. Efficient markets? Today KO is selling in the mid to high $ 40's/share and will earn $ 3.00/share this year. So it can be bought at a fair price.
By the way, that's a rock solid $ 3.00/share of earnings that will grow over time. Earnings will not always be smooth but the general direction is up. So KO tripled its earning power per share in slightly more than a decade. Some cyclical businesses** can appear to triple earnings rapidly in an economic upturn but those profits usually get crushed during a downturn. These highly variable, not necessarily durable earnings need to be normalized across a business cycle to get a true picture. Not so for the KO's of the world...that triple in earnings power is the real deal.
With its growth in earnings KO intrinsically has become much more valuable over the last ten years. It's just that the stock price has been a very poor proxy for this increase in intrinsic value.
"I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost." - Warren Buffett in Forbes
One challenge in investing is the pressure from taking a swing now, but not getting meaningful feedback for many years. Some may say that quarterly earning reports, or the stock price itself provide a scorecard, but I mostly disagree. Quarterly earnings do not tell you whether a competitor will emerge (or a substitute technology) that alters the economics of a business a decade from now. You may see some cracks emerging but that's about it. Being able to see that the moat will be there ten years out or more is what matters. The rest is distraction. At the very least, this differentiates investing from things like golf, other sports and stock speculation where the performance feedback loop is more immediate.
So investing is easier if you can figure out the long-term strength of an economic moat. Things like quarterly earnings and recessions become just noise.
I know the businesses I like. I'm buying those businesses now. If it turns out my judgment is poor on the strength of the moat, it'll be tough without a time machine to make a meaningful adjustment that improves the result.
Traders and speculators live in a different world than this. They swing at many pitches and seem to accept a lot of mistakes as long as the gains are greater than the losses. In contrast, Buffett's approach is to take less swings...make few mistakes...but do your homework until you feel confident of the outcome.
Adam
* Not much complex math is required but as Charlie says: "Anyone with an engineering frame of mind will look at [accounting standards] and want to throw up in the aisle." The deconstruction of income statements, balance sheets, and cash flow statements into something meaningful economically is a bit of an art unto itself. So you need to not only have the ability to read financial statements in your "toolbox", but develop good judgment on what the numbers actually mean.
** There are plenty of good cyclical businesses you just have to take care to normalize the earnings.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tiger Woods: Best advice (from his Dad)? Keep it simple.
"My dad's advice to me was to simplify. He knew that at my age I couldn't digest all of golf's intricacies. He kept it simple: If you want to hit the ball to a particular spot, figure out a way to do it. Even today, when I'm struggling with my game, I can still hear him say, "Pick a spot and just hit it." When I'm making adjustments during a round, I know some of the television commentators theorize that I'm changing this or moving that, but really what I'm doing is listening to Pop."
Bill Gates: Best advice (from Warren)? Keep it simple.
"Well, I've gotten a lot of great advice from Warren. I'd say one of the most interesting is how he keeps things simple. You look at his calendar, it's pretty simple. You talk to him about a case where he thinks a business is attractive, and he knows a few basic numbers and facts about it. And [if] it gets less complicated, he feels like then it's something he'll choose to invest in. He picks the things that he's got a model of, a model that really is predictive and that's going to continue to work over a long-term period. And so his ability to boil things down, to just work on the things that really count, to think through the basics -- it's so amazing that he can do that. It's a special form of genius."
I don't know much about golf...but the reasons to invest in a business should be pretty simple:
Something like this is a great investment because the company...
- owns dominant brands with broad distribution creating a wide economic moat and durable high returns on capital.
- is selling at a fair price relative to its long-term prospects.
- has competent management with a solid track record.
- is built around a conservative capital structure.
Having that patience is easier said.
Coca-Cola (KO) is a good example. If someone started investing in the mid-1990's and decided KO was a good business back then...that person would not have been able to buy it at a fair price until 2006. Patience is more important than IQ. Seeing that KO was overvalued back then required 4th grade math. It was selling at over $ 80/share in 1998, was earning less than $ 1.00/share yet informed market participants were still buying. Efficient markets? Today KO is selling in the mid to high $ 40's/share and will earn $ 3.00/share this year. So it can be bought at a fair price.
By the way, that's a rock solid $ 3.00/share of earnings that will grow over time. Earnings will not always be smooth but the general direction is up. So KO tripled its earning power per share in slightly more than a decade. Some cyclical businesses** can appear to triple earnings rapidly in an economic upturn but those profits usually get crushed during a downturn. These highly variable, not necessarily durable earnings need to be normalized across a business cycle to get a true picture. Not so for the KO's of the world...that triple in earnings power is the real deal.
With its growth in earnings KO intrinsically has become much more valuable over the last ten years. It's just that the stock price has been a very poor proxy for this increase in intrinsic value.
"I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost." - Warren Buffett in Forbes
One challenge in investing is the pressure from taking a swing now, but not getting meaningful feedback for many years. Some may say that quarterly earning reports, or the stock price itself provide a scorecard, but I mostly disagree. Quarterly earnings do not tell you whether a competitor will emerge (or a substitute technology) that alters the economics of a business a decade from now. You may see some cracks emerging but that's about it. Being able to see that the moat will be there ten years out or more is what matters. The rest is distraction. At the very least, this differentiates investing from things like golf, other sports and stock speculation where the performance feedback loop is more immediate.
So investing is easier if you can figure out the long-term strength of an economic moat. Things like quarterly earnings and recessions become just noise.
I know the businesses I like. I'm buying those businesses now. If it turns out my judgment is poor on the strength of the moat, it'll be tough without a time machine to make a meaningful adjustment that improves the result.
Traders and speculators live in a different world than this. They swing at many pitches and seem to accept a lot of mistakes as long as the gains are greater than the losses. In contrast, Buffett's approach is to take less swings...make few mistakes...but do your homework until you feel confident of the outcome.
Adam
* Not much complex math is required but as Charlie says: "Anyone with an engineering frame of mind will look at [accounting standards] and want to throw up in the aisle." The deconstruction of income statements, balance sheets, and cash flow statements into something meaningful economically is a bit of an art unto itself. So you need to not only have the ability to read financial statements in your "toolbox", but develop good judgment on what the numbers actually mean.
** There are plenty of good cyclical businesses you just have to take care to normalize the earnings.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, June 24, 2009
Stocks Selling Below What Buffett Paid
This Wall Street Journal article mentions that JNJ, COP, KFT, USB have all been bought by Buffett in the past few years but are selling below the price he paid.
An opportunity to buy stocks below Buffett's price has not happened that often (though what this article points out has been true for over a year). They may not outperform in the short run but in the long run, if someone was looking for a guide of what to buy right now...not a bad place to start.
The article doesn't mention two other major positions that he bought in recent years also at higher prices than they are selling at today: BNI and WFC.
Stock/Buffett Paid Price/Current Price
JNJ/62/55
COP/82/41
KFT/33/25
USB/31/17
BNI/75/73
WFC/32/23
Not only did he buy these at prices higher than they are selling at today, all are major positions for Berkshire....anywhere from $ 2 billion to $ 7 billion each.
That's a lot of $'s even for Buffett. Combined the above 6 stocks make up over 40% of his current equity portfolio.
With a holding period that is typically "forever", I'm guessing he believes each of these businesses will be worth multiples of the current prices 20 years from now.
Though not everyone believes it. Recently, one of the regular guests on CNBC called Buffett an "idiot", but then backed off a bit 10 days later.
Here are excerpts of his comments from this article:
He (Dennis Gartman) scoffs at value-oriented, buy-and-hold stock investors who incurred deep losses last year. "Warren Buffett is an idiot," he said, emphatically, in a short interview after the speech. "Shame on Warren Buffett."
...but then backed off later saying the following on CNBC:
Gartman: ...I think that Mr. Buffett made some terrible mistakes last year and when you're down 45 percent for a year, I'm sorry, that's inexcusable.
Some thoughts:
Buffett has never been a trader and doesn't mind if a stock trades down if the long-term prospects for the business remain strong. Many of his best long-term investments initially went down 50% before going up many thousand %. GEICO (initially he owned the stock before buying the company outright), American Express, Washington Post and, of course, Berkshire Hathaway itself are some examples.
Berkshire has been down 50% before on many occasions. A quick history. When it was selling at $ 7/share it dropped 50%...then it rallied to $ 4,300/share (~50,000% gain within 20 years). From $ 4,300/share it then dropped ~40%...then rallied to $ 82,000/share in 1998. From that $ 82,000/share level it again dropped 50% to $ 41,000/share...then rallied recently to over $ 150,000/share in 2007...then it had the 45% drop that Gartman references in his comments. So including this most recent drop Berkshire is still up roughly 1,000,000% during the past 40 years (ie a $ 10k investment grew to $ 100 million...as Puddy would say right on queue: "Yeah, that's right"). A good chunk of that return came from buying concentrated positions in what seem like boring but stable businesses and holding them a long time.
20 years ago when the Berkshire A shares were selling at $ 4,000-5,000/share people were asking how much higher can it go. Well the A shares are now selling at $ 86,000/share. Given its current size, growth will certainly slow in the future. Still, in my view it'll be much higher than its current price in 20 years for a simple reason: Most of the businesses owned by Berkshire Hathaway (both those owned outright like See's Candies or partially owned...like shares in Coca-Cola) have durable high returns on capital.
It's still a compounding machine and it's about investing...not trading.
So that's about as much time as this deserves as far as I'm concerned.
"If you're an investor, you're looking at what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game." - Warren Buffett in the 1997 Berkshire Annual Meeting
"Even though they are going to be net buyers of stocks for many years to come, they (investors) are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." - Warren Buffett in the 1997 Berkshire Hathaway Shareholder Letter
"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price." - Warren Buffett in the 1987 Berkshire Hathaway Shareholder Letter
"I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out." - Warren Buffett in 2003 talking with Wharton MBA Students
It's always possible that he messes up this time but seems just a bit unwise to bet on that outcome.
Adam
Long positions in stocks mentioned
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
An opportunity to buy stocks below Buffett's price has not happened that often (though what this article points out has been true for over a year). They may not outperform in the short run but in the long run, if someone was looking for a guide of what to buy right now...not a bad place to start.
The article doesn't mention two other major positions that he bought in recent years also at higher prices than they are selling at today: BNI and WFC.
Stock/Buffett Paid Price/Current Price
JNJ/62/55
COP/82/41
KFT/33/25
USB/31/17
BNI/75/73
WFC/32/23
Not only did he buy these at prices higher than they are selling at today, all are major positions for Berkshire....anywhere from $ 2 billion to $ 7 billion each.
That's a lot of $'s even for Buffett. Combined the above 6 stocks make up over 40% of his current equity portfolio.
With a holding period that is typically "forever", I'm guessing he believes each of these businesses will be worth multiples of the current prices 20 years from now.
Though not everyone believes it. Recently, one of the regular guests on CNBC called Buffett an "idiot", but then backed off a bit 10 days later.
Here are excerpts of his comments from this article:
He (Dennis Gartman) scoffs at value-oriented, buy-and-hold stock investors who incurred deep losses last year. "Warren Buffett is an idiot," he said, emphatically, in a short interview after the speech. "Shame on Warren Buffett."
...but then backed off later saying the following on CNBC:
Gartman: ...I think that Mr. Buffett made some terrible mistakes last year and when you're down 45 percent for a year, I'm sorry, that's inexcusable.
Melissa (Lee): Right. OK. So maybe not an idiot but maybe some idiotic trading moves. (Laughs).
Gartman: Not an idiot. Clearly he's not. He's a genius trader ...
Some thoughts:
Buffett has never been a trader and doesn't mind if a stock trades down if the long-term prospects for the business remain strong. Many of his best long-term investments initially went down 50% before going up many thousand %. GEICO (initially he owned the stock before buying the company outright), American Express, Washington Post and, of course, Berkshire Hathaway itself are some examples.
Berkshire has been down 50% before on many occasions. A quick history. When it was selling at $ 7/share it dropped 50%...then it rallied to $ 4,300/share (~50,000% gain within 20 years). From $ 4,300/share it then dropped ~40%...then rallied to $ 82,000/share in 1998. From that $ 82,000/share level it again dropped 50% to $ 41,000/share...then rallied recently to over $ 150,000/share in 2007...then it had the 45% drop that Gartman references in his comments. So including this most recent drop Berkshire is still up roughly 1,000,000% during the past 40 years (ie a $ 10k investment grew to $ 100 million...as Puddy would say right on queue: "Yeah, that's right"). A good chunk of that return came from buying concentrated positions in what seem like boring but stable businesses and holding them a long time.
20 years ago when the Berkshire A shares were selling at $ 4,000-5,000/share people were asking how much higher can it go. Well the A shares are now selling at $ 86,000/share. Given its current size, growth will certainly slow in the future. Still, in my view it'll be much higher than its current price in 20 years for a simple reason: Most of the businesses owned by Berkshire Hathaway (both those owned outright like See's Candies or partially owned...like shares in Coca-Cola) have durable high returns on capital.
It's still a compounding machine and it's about investing...not trading.
So that's about as much time as this deserves as far as I'm concerned.
"If you're an investor, you're looking at what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game." - Warren Buffett in the 1997 Berkshire Annual Meeting
"Even though they are going to be net buyers of stocks for many years to come, they (investors) are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." - Warren Buffett in the 1997 Berkshire Hathaway Shareholder Letter
"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price." - Warren Buffett in the 1987 Berkshire Hathaway Shareholder Letter
"I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out." - Warren Buffett in 2003 talking with Wharton MBA Students
It's always possible that he messes up this time but seems just a bit unwise to bet on that outcome.
Adam
Long positions in stocks mentioned
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, June 23, 2009
Graham and Fisher
"As long as the company behind the common stock maintains the characteristics of an unusually successful enterprise, never sell it." - Philip Fisher in his book Common Stocks for Uncommon Profits
Many are familiar with Benjamin Graham's style of investing. Buying securities below what they were worth then selling them once they were fully priced (so-called "cigar butts"...not much of a puff, but the puff is all profit). He was also great at explaining how to manage the erratic behavior of markets.
Another influential investor was Philip Fisher. He founded a money management company in 1931 and was author of Common Stocks and Uncommon Profits. Philip Fisher's approach was more about growth and durability. He believed you should buy great companies and hold onto them forever.
Sound familiar?
Graham's emphasis was on the quantitative. In contrast, Fisher looked more at intangibles and the qualitative. For him it was about things like: management, product or service, competition, company culture, sales team, research capacity etc. The ideas of both became a significant part of Berkshire's investment approach.
Many are familiar with Benjamin Graham's style of investing. Buying securities below what they were worth then selling them once they were fully priced (so-called "cigar butts"...not much of a puff, but the puff is all profit). He was also great at explaining how to manage the erratic behavior of markets.
Another influential investor was Philip Fisher. He founded a money management company in 1931 and was author of Common Stocks and Uncommon Profits. Philip Fisher's approach was more about growth and durability. He believed you should buy great companies and hold onto them forever.
Sound familiar?
Graham's emphasis was on the quantitative. In contrast, Fisher looked more at intangibles and the qualitative. For him it was about things like: management, product or service, competition, company culture, sales team, research capacity etc. The ideas of both became a significant part of Berkshire's investment approach.
"If a company is of a high quality, then selling it is rather foolish, at almost any price, because of the scarcity of high quality investments. What will you do, with the proceeds from the sale of a world class company?" - Philip Fisher in his book Common Stocks and Uncommon Profits
If long-term prospects remain attractive for a business don't sell even if it gets temporarily somewhat overvalued (though Fisher would appear to take this further than "somewhat").
"...finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear." - Philip Fisher in his book Common Stocks and Uncommon Profits
Fisher did not think all that highly of most value investors who, he felt, were preoccupied with the numbers.
As a result, in many ways he is at odds with Graham.
As a result, in many ways he is at odds with Graham.
For completely different reasons, both have earned influence in modern investing. I find Graham's ideas more useful in understanding the psychology of "Mr. Market", but for picking individual stocks I lean heavily in favor of Fisher's approach. I'd rather pay a little bit more (though not much more) for a clearly superior and durable business.
With "cigar butt" investing, even if it works out, you never establish the kind of minimal transaction near auto-pilot that is possible with the Fisher approach.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, June 22, 2009
Benjamin Graham
Here's an article by Jason Zweig of the Wall Street Journal from this past May.
The article points out that during the crash in 1974, Ben Graham gave a speech and said that investors would be "enviably fortunate" if a long bear market were to occur.
These thoughts from Graham seem similar to the following quote by Shelby Davis:The article points out that during the crash in 1974, Ben Graham gave a speech and said that investors would be "enviably fortunate" if a long bear market were to occur.
"You make most of your money in a bear market, you just don't realize it at the time."
Davis was said to have borrowed $100,000 in 1947 and grew it to $800 million by the time of his death in 1994.
Here's another relevant quote by Graham:
"Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you little short of silly.
If you are a prudent investor or a sensible businessman, will you let Mr. Market's daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings…"
In Graham's allegory, Mr. Market is very temperamental. He has a tendency to swing from wild optimism to seemingly bottomless pessimism. As an intelligent investor, you should not fall under Mr. Market's influence, but rather learn to benefit from the irrational behavior.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, June 19, 2009
Enrico Fermi's Rule
Fermi believed the ability to effectively estimate was an important skill for physicists. A good way to solve physics, and other complex problems, was by coming up with simple shortcuts to make approximate, but meaningful, calculations.
Fermi was known for his ability to make good approximate calculations with little or no actual data, hence the name. One well-documented example is his estimate of the strength of the atomic bomb detonated at the Trinity test, based on the distance traveled by pieces of paper dropped from his hand during the blast. Fermi's estimate of 10 kilotons of TNT was remarkably close to the now-accepted value of around 20 kilotons. - Wikipedia
In physics, it is known as a Fermi problem. Here is an excerpt from an article that applies Fermi's approach to investing.
In competitions named after him (Fermi), engineering contestants were asked to estimate unusual values as closely as they could...tasks where precision is impossible, but where you can quickly estimate a range for the right answer.
So before putting a bunch of effort into measuring with precision, make a rough estimate of the answer, then decide whether it's worth going further. The competitions were meant to teach students the value of making meaningful rough estimations and to help them develop effective estimating skills.
The article also added this:
I've always thought this advice was as good for investing as for physics. And, you may be surprised to learn, Warren Buffett has been using something quite similar...
and...
Indeed, all true value investors do quick value estimations, à la Fermi, to hone in on bargains...
The article also explains a simple method to estimate the intrinsic value* of a business then closes with the following thought:
Better be approximately right than precisely wrong.
Spreadsheets not required. It also notes that that it works best for firms with predictable earnings and a strong business franchise.
Precisely valuing a business is impossible, but approximately estimating the value of a business is straightforward and becomes even easier when you focus on the great business franchises.
The reason? Qualitative judgments you make on a business are more important than the quantitative (brand strength, distribution, management capability etc). Will competition or a new technology adversely impact the economics of this business over the next ten years? Will the strengths of the franchise remain in tact? Let's say you think the economics will remain healthy and the franchise will remain strong for the next decade but you get it wrong. If that happens the detailed calculations you've made won't matter. So the qualitative stuff matters in a big way.
The article makes the point that it is much easier to correctly make those judgments with a proven franchise.
"It means we miss a lot of very big winners. But we wouldn't know how to pick them out anyway. It also means we have very few big losers - and that's quite helpful over time. We're perfectly willing to trade away a big payoff for a certain payoff." - Warren Buffett at the 1999 Annual Meeting
Check out the full article.
Adam
* Intrinsic value will increase over time for a good business franchise. An investor can attempt to estimate the present intrinsic value (a static value snapshot of something inherently dynamic) and then also make a rough judgment as to how that value is likely to change over time. If done well, the estimates should be meaningful even if rather imprecise.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Fermi was known for his ability to make good approximate calculations with little or no actual data, hence the name. One well-documented example is his estimate of the strength of the atomic bomb detonated at the Trinity test, based on the distance traveled by pieces of paper dropped from his hand during the blast. Fermi's estimate of 10 kilotons of TNT was remarkably close to the now-accepted value of around 20 kilotons. - Wikipedia
In physics, it is known as a Fermi problem. Here is an excerpt from an article that applies Fermi's approach to investing.
In competitions named after him (Fermi), engineering contestants were asked to estimate unusual values as closely as they could...tasks where precision is impossible, but where you can quickly estimate a range for the right answer.
So before putting a bunch of effort into measuring with precision, make a rough estimate of the answer, then decide whether it's worth going further. The competitions were meant to teach students the value of making meaningful rough estimations and to help them develop effective estimating skills.
The article also added this:
I've always thought this advice was as good for investing as for physics. And, you may be surprised to learn, Warren Buffett has been using something quite similar...
and...
Indeed, all true value investors do quick value estimations, à la Fermi, to hone in on bargains...
The article also explains a simple method to estimate the intrinsic value* of a business then closes with the following thought:
Better be approximately right than precisely wrong.
Spreadsheets not required. It also notes that that it works best for firms with predictable earnings and a strong business franchise.
The reason? Qualitative judgments you make on a business are more important than the quantitative (brand strength, distribution, management capability etc). Will competition or a new technology adversely impact the economics of this business over the next ten years? Will the strengths of the franchise remain in tact? Let's say you think the economics will remain healthy and the franchise will remain strong for the next decade but you get it wrong. If that happens the detailed calculations you've made won't matter. So the qualitative stuff matters in a big way.
The article makes the point that it is much easier to correctly make those judgments with a proven franchise.
"It means we miss a lot of very big winners. But we wouldn't know how to pick them out anyway. It also means we have very few big losers - and that's quite helpful over time. We're perfectly willing to trade away a big payoff for a certain payoff." - Warren Buffett at the 1999 Annual Meeting
Check out the full article.
Adam
* Intrinsic value will increase over time for a good business franchise. An investor can attempt to estimate the present intrinsic value (a static value snapshot of something inherently dynamic) and then also make a rough judgment as to how that value is likely to change over time. If done well, the estimates should be meaningful even if rather imprecise.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Tuesday, June 16, 2009
Michael Porter on Business and Investing
Check out this article from last Friday. In it, Michael Porter provides another view on the current state of business and investing and talks about the damage being done by short-term thinking.
"With so much focus on the immediate value of stocks, and the resulting costs from short-term trading in and out of individual company shares, "the stock market now is a tax on the real economy."
"The financial sector is extracting value from the rest of the economy [through] fees, costs and expenses."
To me, this take on the impact of today's prevailing investment practices is in many ways similar to the views stated by Munger, Bogle and Buffett (among others) in recent years. Here are a few quotes from previous posts that are consistent with what, I think, Porter is saying.
"And that's where we are today: A record portion of the earnings that would go in their entirety to shareholders - if they all just stayed in their rocking chairs - is now going to a swelling army of HELPERS" - Warren Buffett in the 2005 Berkshire Hathaway Shareholder Letter
"I will join Galbraith in coining new words, first, 'febezzle', to stand for the functional equivalent of 'bezzle' and, second, 'febezzlement', to describe the process of creating 'febezzle', and third “febezzlers” to describe persons engaged in 'febezzlement'. Then I will identify an important source of 'febezzle' right in this room. You people, I think, have created a lot of 'febezzle' through your foolish investment management practices in dealing with your large holdings of common stock.
If a foundation, or other investor, wastes 3% of assets per year in unnecessary, nonproductive investment costs in managing a strongly rising stock portfolio, it still feels richer, despite the waste, while the people getting the wasted 3%, 'febezzlers' though they are, think they are virtuously earning income. The situation is functioning like undisclosed embezzlement..." - Charlie Munger speaking to investors at the Philanthropy Round Table in 2000
Note: Telling a group of professional money managers that they are the functional equivalent of an embezzler may seem brutal, but I think if you read the whole talk by Charlie you'll see he does a good job of thoughtfully backing it up.
"As stocks became entertainment, perhaps our greatest circus became our financial markets." - John Bogle from his 2005 book "The Battle for the Soul of Capitalism"
"When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation." - John Bogle from his 2005 book "The Battle for the Soul of Capitalism"
"In other words, the burden of paying HELPERS may cause American equity investors to earn, overall, 80% or so of what they would otherwise ean if they just sat still and listened to no one." - Warren Buffett in the 2005 Berkshire Hathaway Shareholder Letter
Changes to prevailing investment practices isn't going to happen anytime soon. Today, what dominates is a high frictional cost approach with an emphasis on speculation, instead of a low frictional cost approach with emphasis on the magic of compounding.
A generation of investors seem to now have these habits and quite a lot of the money management industry's business incentives are built upon it. Tilting investor behavior toward low frictional costs and compounding would seem to be a wise move, but I don't expect it to happen soon.
At a minimum, as an individual investor you gain tremendously by going with this approach (Newton's 4th Law) in the long run. No need to wait for the rest of the world to come around to the Berkshire view of the world. What they do works. Buy durable businesses at a fair price...let high-powered compounding (i.e. by owning shares in high return on capital businesses) work.
As Porter says above, "the stock market is now a tax on the real economy". To me, that is measured both in terms of 1) direct fees, commissions and 2) an ever increasing tendency to attract the best future engineers, mathematicians, and scientists for largely unproductive activities and away from more productive areas. (BTW - I don't blame anyone for wanting to get rich at a hedge fund. As long as the incentives are there I expect them to do it. My inclination is to adjust the incentives so more want to use those talents creating new science and technology.)
"It's my guess that something like 5% of GDP goes to money management and its attendant friction. ...Worst of all, the people doing this are among the best and the brightest. Hundreds and thousands of engineers, etc. are going into hedge funds and investment banking. That is not an intelligent allocation of the brainpower of the civilization." - Charlie Munger at the 2005 Wesco meeting
Moving capital to the ideas that need it most is the purpose of a stock market...it's not meant to entertain us.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
"With so much focus on the immediate value of stocks, and the resulting costs from short-term trading in and out of individual company shares, "the stock market now is a tax on the real economy."
"The financial sector is extracting value from the rest of the economy [through] fees, costs and expenses."
To me, this take on the impact of today's prevailing investment practices is in many ways similar to the views stated by Munger, Bogle and Buffett (among others) in recent years. Here are a few quotes from previous posts that are consistent with what, I think, Porter is saying.
"And that's where we are today: A record portion of the earnings that would go in their entirety to shareholders - if they all just stayed in their rocking chairs - is now going to a swelling army of HELPERS" - Warren Buffett in the 2005 Berkshire Hathaway Shareholder Letter
"I will join Galbraith in coining new words, first, 'febezzle', to stand for the functional equivalent of 'bezzle' and, second, 'febezzlement', to describe the process of creating 'febezzle', and third “febezzlers” to describe persons engaged in 'febezzlement'. Then I will identify an important source of 'febezzle' right in this room. You people, I think, have created a lot of 'febezzle' through your foolish investment management practices in dealing with your large holdings of common stock.
If a foundation, or other investor, wastes 3% of assets per year in unnecessary, nonproductive investment costs in managing a strongly rising stock portfolio, it still feels richer, despite the waste, while the people getting the wasted 3%, 'febezzlers' though they are, think they are virtuously earning income. The situation is functioning like undisclosed embezzlement..." - Charlie Munger speaking to investors at the Philanthropy Round Table in 2000
Note: Telling a group of professional money managers that they are the functional equivalent of an embezzler may seem brutal, but I think if you read the whole talk by Charlie you'll see he does a good job of thoughtfully backing it up.
"As stocks became entertainment, perhaps our greatest circus became our financial markets." - John Bogle from his 2005 book "The Battle for the Soul of Capitalism"
"When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation." - John Bogle from his 2005 book "The Battle for the Soul of Capitalism"
"In other words, the burden of paying HELPERS may cause American equity investors to earn, overall, 80% or so of what they would otherwise ean if they just sat still and listened to no one." - Warren Buffett in the 2005 Berkshire Hathaway Shareholder Letter
Changes to prevailing investment practices isn't going to happen anytime soon. Today, what dominates is a high frictional cost approach with an emphasis on speculation, instead of a low frictional cost approach with emphasis on the magic of compounding.
A generation of investors seem to now have these habits and quite a lot of the money management industry's business incentives are built upon it. Tilting investor behavior toward low frictional costs and compounding would seem to be a wise move, but I don't expect it to happen soon.
At a minimum, as an individual investor you gain tremendously by going with this approach (Newton's 4th Law) in the long run. No need to wait for the rest of the world to come around to the Berkshire view of the world. What they do works. Buy durable businesses at a fair price...let high-powered compounding (i.e. by owning shares in high return on capital businesses) work.
As Porter says above, "the stock market is now a tax on the real economy". To me, that is measured both in terms of 1) direct fees, commissions and 2) an ever increasing tendency to attract the best future engineers, mathematicians, and scientists for largely unproductive activities and away from more productive areas. (BTW - I don't blame anyone for wanting to get rich at a hedge fund. As long as the incentives are there I expect them to do it. My inclination is to adjust the incentives so more want to use those talents creating new science and technology.)
"It's my guess that something like 5% of GDP goes to money management and its attendant friction. ...Worst of all, the people doing this are among the best and the brightest. Hundreds and thousands of engineers, etc. are going into hedge funds and investment banking. That is not an intelligent allocation of the brainpower of the civilization." - Charlie Munger at the 2005 Wesco meeting
Moving capital to the ideas that need it most is the purpose of a stock market...it's not meant to entertain us.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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