Berkshire Hathaway 4th Quarter 2014 13F-HR

The Berkshire Hathaway (BRKa) 4th Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 3rd Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

Added to Existing Positions
IBM (IBM): 6.49 mil. shares (incr. 9%); total stake $ 12.3 bil.
DaVita (DVA): 944k shares (2%); total stake $ 2.92 bil.
DirecTV (DTV): 1.35 mil. shares (4%); total stake $ 2.72 bil.
Deere & Co. (DE): 9.53 mil. shares (125%); total stake $ 1.51 bil.
General Motors (GM): 1.0 mil. shares (2%); total stake $ 1.43 bil.
Charter (CHTR): 1.25 mil. shares (25%); total stake $ 1.03 bil.

I've included above only those positions worth at least $ 1 billion at the end of the 4th quarter. In a portfolio this size -- roughly $ 240 billion (equities, fixed income, cash, and other investments) as of the latest available filing with roughly half made up of common stocks** -- a position that's less than $ 1 billion doesn't really move the needle much.

Other positions that were added to but worth less than $ 1 billion include: Suncor (SU), Precision Castparts (PCP), Visa (V), Viacom (VIAB), Liberty Global (LBTYA), Phillips 66 (PSX), and Mastercard (MA).

A couple of relatively small brand new positions were also added.

New Positions
Rest. Brands Int'l (QSR): 8.44 mil. shares worth $ 329 mil.***
21st Century Fox (FOXA): 4.75 mil. shares worth $ 182 mil.

It turns out that some Deere & Company shares were actually purchased during the 3rd quarter but not disclosed until yesterday.

Berkshire's 3rd Quarter 13F-HR filing had indicated some activity was being kept confidential. That filing said: "Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission."

We now know it was the Deere position that was omitted.
(Last quarter's 13F-HR made it appear as if Berkshire had sold its stake in Deere. In fact, they were quietly adding to the position with SEC approval.)

This separate 13F-HR/A filing reveals the specific number of shares of Deere that were bought prior to the 4th quarter. That Berkshire had initially purchased some shares of Deere in the 3rd quarter of 2012 was already known. We now know they added to the position in both 3rd and 4th quarter of last year.

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential.

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Reduced Positions
Positions that were reduced somewhat but not sold outright include Bank of New York Mellon (BK), National Oilwell Varco (NOV), and Liberty Media (LMCA) with each being worth less than $ 1 billion.

Sold Positions
Exxon Mobil (XOM): 41.1 mil. shares worth $ 3.80 bil.
Express Scripts (ESRX): 449k shares worth $ 38.1 mil.
ConocoPhillips (COP): 472k shares worth $ 32.6 mil.

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio. These days, any changes involving smaller positions will generally be the work of the two portfolio managers.
(Though some of the holdings they're responsible for have become more substantial over time.)

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer and, to a lesser extent, technology stocks (mostly IBM).

1. Wells Fargo (WFC) = $ 25.4 bil.
2. Coca-Cola (KO) = $ 16.9 bil.
3. American Express (AXP) = $ 14.1 bil.
4. IBM (IBM) = $ 12.3 bil.
5. Wal-Mart (WMT) = $ 5.18 bil.

At the end of the quarter, Berkshire's Wal-Mart position was only somewhat larger than the Procter & Gamble (PG) position. Well, that's going to change with Berkshire recently agreeing to acquire Duracell from P&G in exchange for Berkshire's ownership stake in the consumer goods company.
(P&G will also contribute some cash.)

As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus fixed maturity securities, cash and cash equivalents, and other investments.

As mentioned above the portfolio value equals ~ $ 240 billion. This number includes the investment in Heinz. (The Heinz common and preferred stock are separately on the books for just under $ 12 billion with that book value likely diverge greatly from economic value over time.) The portfolio naturally excludes all the operating businesses that Berkshire owns outright with ~ 330,000 employees according to last year's letter. Numbers like these -- along with many other things of interest especially for Berkshire shareholders -- will soon be updated when the new annual report and letter is released.

Here are some examples of Berkshire's non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candies, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, Oriental Trading Company, as well as 50% of Heinz.
(Among others.)

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 111 of last year's annual report for a full list of Berkshire's businesses.

Adam

Long positions in BRKb, WFC, KO, AXP, USB, WMT, PG, DTV, COP, and PSX established at much lower than recent market prices. Also, small long position in IBM established at slightly higher than recent market prices.

* All values shown are based upon the last trading day of the 4th quarter.
** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares, if a large enough position, are updated in the annual letter. So the only way any of the stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. Investments in things like the preferred shares (and, where applicable, related warrants) are also not included in the 13F-HR. The same is true for the Heinz common shares (i.e. not just the Heinz preferred shares).
*** This December 2014 press release further explains the investment in Restaurant Brands International.
(Formed as a result of the merger between Tim Hortons Inc. and Burger King Worldwide, Inc.)
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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.

Apple: Market Share vs Profit Share

Those who think it's such a wonderful idea to aggressively pursue market share might want to consider Apple's (AAPL) share of the worldwide smartphone market.

As things currently stand, Apple's share was 15% last year and nearly 20% in the fourth quarter.

More than solid, of course, but that measure doesn't do much to reveal the true economic picture.

According to Canaccord Genuity, roughly 93% of fourth quarter smartphone profits went to Apple while Samsung (005930.KS) captured 9% of the profits. The fact that the profits of Apple and Samsung are greater than 100% means the remaining competitors combined are actually losing money. The rest collectively aren't just eating crumbs, many competitors are essentially at or near the business equivalent of starvation.

Basically, Apple feasts while, other than maybe Samsung, the rest don't even have enough leftovers to share.

Apple had something like 87% of smartphone profits roughly a year ago. So, while the new iPhones certainly contributed a bunch to the fourth quarter performance, Apple was getting more than their fair share of profits well before the new products were launched.

Now, as I've said on prior occasions, I'm generally no fan of technology stocks unless the margin of safety becomes very large.

Yet it's still hard to not admire what Apple has been doing. Describing Apple as exceptional is not only stating the obvious, it's actually a huge understatement.

Here's the tough part: Is that level of profitability is sustainable over the longer haul? For me, that still seems not an easy thing to gauge at all.

The fact that so much of Apple's profit comes from the iPhone is another important consideration.

In other words, a company's accomplishments can be extremely impressive -- as it certainly is with Apple -- but that doesn't necessarily mean estimating per share intrinsic value is easy. Figuring out Apple's value within a narrow enough range is, to me, challenging at best and warrants a significant margin of safety.*
(When I've purchased the stock in the past, my judgment was that the market price at the time offered a great deal of protection against permanent capital loss. Still, it's no favorite -- and likely never will be -- for the longer haul.)

Apple is currently a valuable business but, as far as I'm concerned, the range of outcomes is still rather too wide.

Others naturally might feel more comfortable with judging Apple's future prospects. It won't surprise me if Apple's continues to do very well. It's just that my favorite businesses have more understandable long-term prospects -- and usually that means less dependence on creating/updating brilliant products on a regular basis -- within a comparably narrow range.

How well would one of Apple's products from seven years ago compete against current alternatives?

How well would some trusted brand of soda from seven years ago compete against current alternatives?

Businesses that need to produce one hit after another run the risk of eventually hitting a wall. It's not that the business necessarily fails altogether; it's that remaining competitive long-term necessitates material changes to core business economics (i.e. increased investment and operating costs, reduced pricing power) with serious consequences for owners.

The net result being a range of outcomes -- after a number of product cycles and maybe a technological shift or two -- that's often too wide with the worst case scenario being unacceptable.

Apple, it seems more than fair to say, has earned and deserves huge respect. It's an extraordinary enterprise with, at least at the present time, astonishing economics. What they've created over the years has had an enormous favorable impact on the world. It's just important to remember this guarantees absolutely nothing about future results for a long-term shareholder.

Societal impact and rewards to investors need not necessarily be positively correlated. Over the past decade or so the correlation has clearly been, to say the least, rather very positive for Apple.

This may continue to be the case going forward but is far from a given.

It's understandable that some will pursue the transformational businesses with the potential for spectacular returns. Yet the chance for costly mistakes is usually high. Compounding at attractive (even if less than spectacular) rates of return for a very long time is, for investors, not easy but all-important.

Well, it's tough to be confident the time frame will be a very long time with any business that depends extensively on ingenious innovations being delivered on a regular basis.**

The power of long-term compounding effects can inadvertently become lost in the chase for the next big thing.

The market eventually weighs business success or failure reasonably well even if sometimes the recognition is delayed.

That delayed recognition can, at times, be a very good thing for the long-term owner.

Adam

Long position in AAPL established at much lower than recent market prices

Related posts:
Mr. Market
Buffett on Autos, Airplanes, and Airlines
Warren Buffett on "The Key to Investing"
Technology Stocks

* As always, I have no opinion about how Apple's stock (or any stock) might perform in the near-term or even intermediate-term. In fact, I never have a view on such things. Those who attempt to profit from price action are engaged in an entirely different game (whether or not fundamentals are used in their decision-making). My emphasis is on how price compares to value (based upon the excess cash a business is expected to produce over time), the likelihood that the value will increase at least at a satisfactory clip, and long-term effects. Business prospects are sometimes mispriced -- even for an extended period -- but eventually should be confirmed by, and reflected in, market prices.
** Some quality businesses can maintain substantial competitive advantages over the longer haul without lots of innovation. Still, even the best businesses will face real challenges from time to time.
---
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.

Buffett's Hedge Fund Bet

Warren Buffett made a bet quite a while back with Protege Partners, LLC. He bet that, over ten years, an S&P 500 index fund* would outperform a basket of hedge funds chosen by Protege.

The bet started in 2008 and goes through 2017.

Well, Buffett is well ahead seven years into the bet.

More specifically,it turns out that, seven years in to a ten year bet, so far Buffett is up 63.5% while Protege Partners is up an estimated 19.6 % (this is an estimate because some of the funds returns are yet to be finalized).

Here's an excerpt of Buffett's argument: "A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors."

And an excerpt of Protege's argument: "There is a wide gap between the returns of the best hedge funds and the average ones. This differential affords sophisticated institutional investors, among them funds of funds, an opportunity to pick strategies and managers that these investors think will outperform the averages."

So Buffett is betting on a more passive approach while Protege is advocating a more active approach. A charity of the winner's choosing will get $ 1 million once the bet has been complete. It turns out that Buffett and Protege initially put $ 320,000 each into a zero-coupon bond with the idea that its value would be roughly $ 1 million when it came time to donate the money. Well, both sides agreed -- after the zero-coupon bond did rather better than expected due to the substantial drop in interest rates -- to sell the zero-coupon bond in 2012 and put the money into Berkshire Hathaway's (BRKb) Class B common stock.
(Buffett has apparently promised to pay the full amount if the stock ends up being worth less than $ 1 million at the end of the bet.)

In fact, Berkshire's stock has rallied quite a bit since they made that switch. The value currently sits at $ 1.68 million. So the initial investment by both Buffett and Protege seems rather likely to be worth much more than $ 1 million once this bet is settled.

Buffett wrote the following in the 2013 Berkshire letter:

"...the 'know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

If 'investors' frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties."

Consistent with this thinking, he has instructed a more passive investment approach for his wife's future benefit:

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)"

Buffett has previously made a similar point. He thinks that many investors would end up better off if they simply bought index funds on a periodic basis. John Bogle and others seem to think along the same lines.

The emphasis being on increases to intrinsic value and long-term effects instead of cleverly timing price movements. It's generally foolish to try and time the market (or, for that matter, an individual stock) though obviously that doesn't stop many from trying to do so.

Attempts at clever timing tend to subtract from results.

Act accordingly.

Stocks, in general, seem not at all cheap these days. That doesn't make it time to sell. To me, it means lowering expectations and learning how to deal with the inevitable but unpredictable price moves. Substantial price moves may be inevitable, but it's nearly impossible to know when and by how much. Stocks (and funds) will drop dramatically from time to time. What's expensive goes on to become even more expensive. So assume that predicting near-term price moves is nearly futile.

Better to expend energy elsewhere.

Those who can't handle the fluctuations -- sometimes driven more by psychology than fundamentals -- likely won't do all that well in stocks or funds. Too often, they end up buying and selling at inopportune times.

So trying to time price action is not a solution; it likely creates more problems than it solves. Now, for those inclined/able to judge price versus value and in a position to act decisively, the next big decline should be viewed as an opportunity. Pay sensible prices and simply expect, ignore, or even benefit from the price action. The price paid is in an investor's control; most everything else is not. If a good business is bought cheap and intrinsic value increases at a satisfactory rate, those fluctuations should over time increasingly look meaningless once the weighing machine asserts its influence. What about those who don't feel comfortable judging business economics and whether a particular enterprise has real durable advantages? Well, as Buffett has pointed out, they can do just fine as long as they recognize their own limits.

"By periodically investing in an index fund..... the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb."

Excessive buying and selling, even if thoughtful and well-intentioned, will too often just create unnecessary frictional costs (taxes, commissions, etc.) with little benefit otherwise.** The same goes for the fees that are typically charged by hedge funds. Those costs are incurred by investors -- transferring wealth in the process -- whether there's lots of trading activity by the fund or not.

Of course, it's not as if there aren't a large number of investors who are capable of doing very well owning individual stocks. Many, in fact, do very well.

Buffett once wrote that those who are "able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages," can do just fine.

It's just that too many also have an unwarranted confidence in their own capabilities especially once all the frictional costs are taken into account. Lots of incremental effort with no incremental benefit (or, in enough cases to at least be of interest, returns that are made worse by all the activity).

As a result, the vast proportion of market participants -- and it's not just the amateurs -- can't match the performance of a minimal effort required low-cost index fund that's bought periodically, almost never traded, and held for the long-term.

The emphasis is on how the business (or businesses) increase intrinsically in value instead of trading the price movements or, as Buffett calls it, attempting "to dance in and out".

Long-term investors in individual common stocks need not have some special talent for trading; they need to understand how price compares to value; they need to have the patience to wait until the price-value comparison is hugely in their favor and stick to owning what they truly understand.

Sounds simple enough.

In many ways it actually is.

It's just not all that easy.

That's because the simplicity is deceptive.

Lots of discipline and hard work is still very much required.

Important qualitative and quantitative elements must be carefully considered.

Psychological factors that can impact results must be understood then managed or, at the very least, the damage that various biases can do needs to be contained.

They aren't just someone else's problem.

Also, temperament come into play.

Common stocks can make sense for those who feel comfortable judging and valuing individual businesses; index funds make more sense for those who do not.

Some will overestimate their own ability to pick stocks consistently well; they'll end up doing a bunch of work that adds nothing to returns and might even subtract. With individual stocks, it's far more likely that big and costly mistakes -- including substantial permanent capital loss -- will be made.

With index funds, psychological biases and temperamental factors still matter; discipline is still required.

Otherwise, index funds should require a whole lot less work and far fewer difficult judgments compared to stocks.

Adam

Long position in BRKb established at much lower than recent market prices

Related posts:
The Curse of Liquidity
John Bogle's "Relentless Rules of Humble Arithmetic", Part II
Index Fund Investing Revisited
Charlie Munger on Complexity, Hedge Funds, and Pension Funds
Why Do So Many Investors Underperform?
When Mutual Funds Outperform Their Investors
Buffett on "Asset Gathering" vs "Asset Managing"
John Bogle's "Relentless Rules of Humble Arithmetic"
Investor Overconfidence Revisited
Newton's Fourth Law
Investor Overconfidence
Chasing "Rearview-Mirror Performance"
Index Fund Investing
Investors Are Often Their Own Worst Enemies, Part II
Investors Are Often Their Own Worst Enemies
The Illusion of Skill
Buffett's Bet Against Hedge Funds, Part II
Buffett's Bet Against Hedge Funds
The Illusion of Control
Buffett, Bogle, and the "Invisible Foot" Revisited
If Buffett Were Paid Like a Hedge Fund Manager - Part II
If Buffett Were Paid Like a Hedge Fund Manager
Buffett, Bogle, and the Invisible Foot
Charlie Munger on LTCM & Overconfidence
"Nothing But Costs"
Bogle: History and the Classics
Recent Study on Investor Returns
When Genius Failed...Again
Best Performing Mutual Funds - 20 Years

* Vanguard 500 Index Fund Admiral Shares (VFIAX).
** Excessive activity can also lead to mistakes. Each move is an opportunity to improve results; it's also an opportunity to make things worse. It's easy to put too much emphasis on the former while giving too little consideration for the latter.
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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.

Zero-Sum Games

While sports is not a subject that's covered much on this blog, I'll use the upcoming Super Bowl -- with consideration for the amount of betting on the event that will occur in mind -- as a convenient excuse to revisit some of the differences between gambling, speculation, and investment.

Naturally, a variety of bets will be placed on that big game. Also, plenty of bets were made on game outcomes and individual player performance (through, for example, various forms of fantasy football) during the regular football season. On occasion, I'll hear someone suggest that owning stocks is just another form of gambling. Well, it certainly can be turned into gambling -- or a gambling-like activity -- but it need not be. It all comes down to behavior. Those who trade rather frequently are doing what, at least to me, is effectively gambling. There's nothing inherently wrong with that approach other than too often it tends to be not all that lucrative.

In fact, what happens to a stock over short amounts of time is essentially a coin flip. The price action of a stock is moved in the near-term by the voting machine. The price level in the long run is set, within a range, by the weighing machine. In the short run it's a popularity contest; in the long run it mostly comes down to what something is intrinsically worth.

Now let's say, for example, someone participated in fantasy football league and ended up winning 7-8 times their money that was put at risk.
(Over the course of the regular football season.)

That's a nice rate of return by any standard, right?

It would be tough to match that by owning common stocks -- other than , maybe, the most speculative variety -- even with some leverage involved (e.g. via margin or equity options).

Yet such an impressive return can't viewed in a vacuum.

First, the fact is it's likely that all or a good chunk of that money put at risk in the sports bet could be permanently lost. In contrast, that can be a much lower probability outcome with, for example, a quality common stock that's bought well (i.e. plain discount to a conservative estimate of value) and owned for a very long time.

A sports bet -- or any bet -- is generally a zero-sum outcome. The reward comes at the expense of at least one other person.*

A good investment is -- or should be  -- very different. Capital certainly can and does get permanently lost with equity investments but, with a sound overall approach, the probability of it happening can be much reduced (over the long haul relative to typical pure zero-sum bets).

The value of a dollar bill will not increase in purchasing power over time. Well, at least that's the case if history is any guide. The fact is, especially over the very long run, most currencies tend to decline in purchasing power rather substantially. For a business -- whether owned outright or via common stock -- this need not be the case. Good businesses, unlike dollar bills, can intrinsically increase in value especially over the longer haul. They do so because, through their competitive advantages, quality businesses can profitably produce something of value year after year at an attractive rate of return on capital.** A business that is financially sound with a strong at least sustainable (though ideally improving) competitive position has the potential to generate attractive returns for quite some time.

So a key difference is investment can provide an outcome that is not zero-sum:

"...stocks grow in value over time because they retain earnings and they expand basically the companies underneath you." - Warren Buffett on CNBC

Those retained earnings may or may not be put to good use but, at least with capable management in place, it's unlikely the cash that's generated is being thrown into a furnace (though sometimes dumb capital expenditures and acquisitions act as a functional equivalent to this behavior). The earnings from a business with durable advantages should directly benefit long-term owners (via dividends and buybacks) or be of indirect benefit as the retained earnings are put to work (on hopefully what are high return investments) with an eye toward the longer term.

If two people put $ 100 each into a bet with each other then the winner walks away with $ 200 and the other walks away with, well, nothing.

Zero sum.

One winner.

One loser.

Much like the big football game this weekend.

If the same two people put $ 100 each into an investment that doubles in value both end up with $ 200. Both win.

Of course, it's also possible, unlike the bet, that they could have both ended up with a loss.

Now, an investment generally require much longer time horizons than a bet. Think decades. So they mostly will just not produce lottery ticket like outcomes. For those stocks that do happen to produce quick and spectacular returns, the risk of permanent loss was likely very high.

A big part of the challenge is minimizing the possibility of capital being permanently lost while still generating an attractive return. Risk and reward need not be positively correlated. Temporary paper losses are acceptable; permanent losses are not. Mistakes will inevitably be made but, when you can minimize the big losers then the winning decisions usually take care of things.

So returns need to be viewed in the context of the possibility of permanent capital loss. Most forms of gambling fail miserably in this regard. Gambling might provide some entertainment but, otherwise, it has little in common with investment.

I'd rather do something that's not such a zero-sum game. If I invest in equities – the businesses are growing; for example, Wrigley's will make more gum. It's automatically working for me, even if I do nothing. But if I invest in currencies, it's not working for me. - Charlie Munger at the 2005 Wesco Annual Meeting

Speculation and gambling are similar in many ways yet they are not the same:

"...I would distinguish between speculative and gambling. Gambling involves, in my view, the creation of a risk where no risk need be created." - Warren Buffett at the FCIC

Buffett contrasts pure gambling -- the taking on of risk that need not be taken on -- with someone who plants a crop early in the year, now has locked in expenses, and needs to speculate on what commodity prices will be late in the year.

The possible price fluctuation represents a real risk that already exists and needs to be managed. That kind of speculation is necessary and very important.

Lions, leopards, and house cats have some similarities but the differences matter.

Gambling, speculation, and investment might also have some similarities but the differences matter.

Investing well requires, among other things, figuring out what something is conservatively worth then buying when the discount becomes meaningful. A margin of safety is what protects against the unexpected and mistakes.

Buying a dollar bill for 50 cents makes permanent capital loss rather a lot less likely. The same goes for buying all or part of a good business at a 50% discount to intrinsic value (again, conservatively estimated) especially since there's the potential for increases to value.

Along the way market prices may fluctuate quite a bit but that, in itself, doesn't necessarily make the asset risky.

Adam

Related posts:
On Speculation and Investment
Bogle on the Financial System
Graham on Investment: "Most Intelligent When It Is Most Businesslike"
John Bogle on Speculation & Capitalism's "Pathological Mutation"
Bogle: Back to the Basics - Speculation Dwarfing Investment
Buffett on Gambling and Speculation
Buffett on Speculation and Investment - Part II
Buffett on Speculation and Investment - Part I

* For simplicity, I'm ignoring frictional costs here though many forms of gambling have huge frictional costs. So it's actually a negative-sum game for the participants putting money at risk (though not for the croupier).
** High returns on capital beats growth for its own sake. Businesses with exciting growth prospects understandably get plenty of attention. The question is (or should be) whether that growth can be achieved in a way that is beneficial to owners. Durable high returns on capital -- whether growing quickly or not -- is what matters. Growth can certainly be a good thing; it's just not inevitably a good thing.
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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.

Forecasting Folly

"There are two kinds of forecasters: those who don't know, and those who don't know they don't know." - John Kenneth Galbraith

With this Galbraith quote in mind, consider what Professor Daniel Kahneman wrote in an article back in 2011.

In that article, Kahneman explains that he was responsible for evaluating candidates for officer training during his time in the military several decades ago. The methods he and others at the time used were apparently developed by the British Army during World War II. Part of his job was to, after careful observation of potential officers, offer what were thought to be useful predictions about how these candidates were likely to perform in the future. Seems straightforward enough: simply figure out who was clearly qualified and who was not via a sound methodology.

Since certain individuals appeared to have strong leadership skills while others plainly did not, Kahneman (and others) felt quite comfortable making definitive predictions.

Unfortunately, that confidence was unfounded:

"...despite our certainty about the potential of individual candidates, our forecasts were largely useless. The evidence was overwhelming."

In the same article Kahneman also added -- and this might at least partially help explain why prognosticators continue to confidently prognosticate despite the folly of it -- the following:

"The statistical evidence of our failure should have shaken our confidence in our judgments of particular candidates, but it did not. It should also have caused us to moderate our predictions, but it did not. We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each particular prediction was valid. I was reminded of visual illusions, which remain compelling even when you know that what you see is false. I was so struck by the analogy that I coined a term for our experience: the illusion of validity.

I had discovered my first cognitive fallacy."

If it's difficult to predict how one individual is going to perform, then the inherent difficulty of predicting what will happen with the stock market or something as complex as the global economy shouldn't exactly be a surprise.

Forecasting is tough to do reliably well. This article by Barry Ritholtz puts its more bluntly:

Pro Forecasters Stink, You're Worse

That doesn't stop many from trying to predict what is mostly just not predictable. There is, and there will continue to be, no shortage of experts making forecasts about, among other things, the markets and the economy. Many of them are extremely smart, informed, well-intentioned, credible sounding, and a number even have some interesting things to say.

The problem is that those well-intentioned experts may not necessarily be producing something that's genuinely useful. There naturally will be exceptions but, especially as the forecasts become more macro-oriented, I think it increasingly makes sense to be skeptical. The world has always been an uncertain place and will continue to be that way. Being flexible and open-minded beats rigid certitude.

Expert forecasters will no doubt continue looking into their crystal ball and offer what at least sounds like compelling thoughts about the future.

The fact that they continue to do so with a high level of confidence just might be, at least in part, the "illusion of validity" at work.

Unfortunately, some of us will also likely pay way too much attention to it.

From a separate article written by Ritholtz late last year:

"Despite the abysmal track record of almost all forecasters, the news media still loves them. It has air time and pages to fill and seems little concerned about giving space to money-losing prognosticators.

As I first wrote a decade ago, to forecast is folly. Today, we have Google Search to help us prove it. Pundits may forget, but not the Internet."

At a minimum, it seems like not a bad idea at all to at least pause for a second or two and consider carefully whether someone's predictions deserves any more consideration than the outcome of a coin flip.

Adam

Related posts:
Henry Singleton: Why Flexibility Beats Long-Range Planning
Forecasters & Fortune Tellers
Charlie Munger: Snare and a Delusion
On Forecasting
James Grant on Economic Forecasting

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.

High Returns on Capital vs High Returns on Incremental Capital

The importance of high returns on capital has been covered a number of times in prior posts over the years.*

Well, it's not just the overall return on capital that needs to be considered. Some good businesses can generate very attractive returns on capital but not nearly as much on incremental capital. Naturally, some not so good businesses, whether they are growing or not, don't earn an attractive return on capital on much of anything. In this context, here's what Warren Buffett said about Coca-Cola (KO), See's Candies, and Buffalo News at the 2003 Berkshire Hathaway (BRKa) meeting:**

"The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. Coke has high returns on capital, but incremental capital doesn't earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money, but can't generate high returns on incremental capital -- for example, See's and Buffalo News. We look for them [areas to wisely reinvest capital], but they don't exist.

So, what we do is take money and move it around into other businesses. The newspaper business earned great returns but not on incremental capital. But the people in the industry only knew how to reinvest it [so they squandered a lot of capital]. But our structure allows us to take excess capital and invest it elsewhere, wherever it makes the most sense. It's an enormous advantage."

One thing I think gets too little emphasis capital allocation decisions -- and doesn't get challenged nearly enough -- is the probability that the capital needed to pursue incremental growth will produce lousy returns or losses.

Questions like: Is the capital that's being allocated in pursuit of growth likely to produce an attractive rate of return adjusting (qualitatively) for the risks and considering alternatives? Are the range of outcomes narrow or wide? Is the worst case acceptable?

In other words, maybe the company will get bigger -- even impressively so -- but the shareholders end up no richer or even worse off and management ends up with a huge headache. Well, that headache just might lead to a core business that's not getting the attention it needs.

A number of otherwise sound businesses just can't get high returns on incremental capital. So it makes little sense for them to invest for growth. Unfortunately, this reality doesn't necessarily prevent the capital from being allocated imprudently anyway.

Intelligent capital allocation is one of those hard to measure but extremely important contributors to how much per share intrinsic business value will change, for better or worse, over time. Maintaining a comfortable financial position -- one that supports the business even in very difficult economic environments -- and competitive position is all-important. These things interact. Financial strength and flexibility allows the focus to be on creating/enhancing durable competitive advantages over time.

A business with a moat has a long-term competitive advantage.

Buffett calls activities that increase those advantages "widening the moat" and is paramount for investors.

Capital that's allocated to build, or at least maintain, long-lasting competitive advantages should take priority over, well, pretty much everything else.

Buffett on Widening The Moat

Wide Moat Businesses at the Right Price

Investment decision-making should come down to what will produce the highest returns on capital, with all risks and alternatives carefully considered, over the long haul. That, first and foremost, includes incremental investments aimed at protecting and strengthening the existing franchise(s).

The fact is that growth is too often pursued for its own sake and ends up destroying investment returns. As an example, costly and less than successful international expansions comes to mind. Lots of effort and capital put to work that ends up producing subpar results and even losses. Before meaningful capital is put at risk some healthy skepticism isn't the worst thing. Opportunity costs matter. An ill-conceived expansion or acquisition can become an expensive and high risk distraction. On the other hand, growth (whether organic or through acquisition) can at times be both high return while also making the moat wider.***

It's just not inevitably the case.

Some businesses have substantial financial strength along with durable competitive advantages but not much ability to make high return incremental investments. In those cases buying back stock can make a lot of sense if the shares are selling at a plain discount to per share intrinsic value.

From the 1984 Berkshire Hathaway shareholder letter:

"By making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders."

The pursuit of dumb growth at the expense of moat widening initiatives should be avoided. This seems like it should be obvious but, even with good intentions, growth initiatives too often end up producing lousy or negative returns at significant risk compared to simply buying back a cheap stock.

Charlie Munger added this at the 2003 Berkshire meeting:

"There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there's never any cash. It reminds me of the guy who looks at all of his equipment and says, 'There's all of my profit.' We hate that kind of business."

There's too much emphasis on growth with the implied or explicit assumption that all growth must be a good thing. Well, growth is just not necessarily a good thing.

There's too little emphasis on returns on capital (incremental or otherwise) and "widening the moat." 

Considering their importance to investors these things still often don't seem to get the attention that's warranted.

Adam

Long position in KO and BRKb established at much lower than recent prices

* Charlie Munger explains it this way: "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."
** From notes taken by Whitney Tilson.
*** Or, at the very least, does no damage to the existing moat.
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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.

Charlie Munger on Focus Investing

Charlie Munger once said:

"Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund."

It's simple.

There's plenty of low cost alternatives available.

Historically, index funds have performed better than the vast majority of active market participants over the longer haul.

So it at least seems a very reasonable prescription for many.

Well, what about those who think they aren't in the "know-nothing" category?

More from Munger:

"You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge."

Here's where his thinking gets more than just a bit less than conventional. He also happens to think, for those who are rightly confident and comfortable picking individual stocks, it makes little sense to diversify a whole lot.

"Our investment style has been given a name - focus investing - which implies ten holdings, not one hundred or four hundred. The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obvious idea. But 98% of the investment world does not think this way." - From Poor Charlie's Almanack

In a 1998 speech, Munger said he has "more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment."

So just how far from the "orthodox view" does he think it can make sense to go in some cases?*

"In the United States, a person or institution with almost all wealth invested, long term, in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse. And particularly so when he rationally believes, like Berkshire, that his long-term results will be superior by reason of his lower costs, required emphasis on long-term effects, and concentration in his most preferred choices.

I go even further. I think it can be a rational choice, in some situations, for a family or a foundation to remain 90% concentrated in one equity. Indeed, I hope the Mungers follow roughly this course."

That is, to say the least, far from conventional thinking, but the point is that diversification can be overrated.

Munger also once said:**

What's funny is that most big investment organizations don't think like this. They hire lots of people, evaluate Merck vs. Pfizer and every stock in the S&P 500, and think they can beat the market. You can't do it. Very few people have adopted our approach.

Now, the amount of portfolio concentration described above probably will likely be too extreme for most investors. It not only requires, after paying at least a fair price, having enough justified confidence in a very limited number of equities, it requires confidence that they will remain fine businesses long-term (and, as a result, will increase in per share value at a satisfactory rate).

So a concentrated portfolio becomes a recipe for real trouble for those who overestimate their own investing abilities. As always, it comes down to an awareness of limitations.

I think correctly judging which end of the spectrum -- with owning index funds being at one end, and owning a very limited number stocks at the other end -- is closer to the right approach for someone is easier said than done. At least it is based upon how poorly so many market participants have historically performed compared to the market overall.

At some level it comes down to knowing what you know and don't know.

Am I actually good at picking stocks?

Or am I getting into something I'm likely to not do very well?

It seems pretty clear that many don't quite get the answer to these kind of questions right. Too many think they're good at picking individual stocks and end up learning the hard way that they're just not; they attempt to outdo the market averages and, well, just don't in the long run. Lots of energy expended doing something that produces a result that's less than, all risks considered, what could have been accomplished simply buying a low-cost index fund (and learning to ignore the noise).

The reality seems to be that there are lots of active stock pickers --  some professional, some not -- who would be plainly better off NOT owning individual stocks. For these investors, index funds would not only improve long-term returns, they'd offer the bonus of additional free time to do something else more fruitful. I mean, the reality is that individual stocks often require a whole lot of work whether or not results turn out to be satisfactory.

Some might choose to think of an index fund as a way to simply match the "market average". Well, the word average is a distraction in this case. It turns out that, while it might called a "market average", it has hardly been an average result once frictional costs and mistakes are taken into account.
(i.e. If the vast majority of active participants are underperforming, then that by definition means simply matching the average is an outperformance. The word average in this context seems unfortunate.)

Now, it's worth pointing that index funds will only work if they're left alone over the long haul as the market (or individual stocks) goes through the inevitable -- occasionally rather wild -- fluctuations.

So fund investor behavior is a big factor and too often it is a negative one.

Unfortunately, it's the well-intentioned temptation to jump in and out of investments that too often contributes to bad outcomes. In other words, those fluctuations should either serve or be ignored. It's also worth pointing out that future expectations for long-term returns should probably be much reduced compared to the historic norms. Those who don't temper their long-term return expectations for the market as a whole going forward just might end up being rather disappointed.

As far as I'm concerned, though forecasters and fortune tellers will no doubt keep trying to prove otherwise, it's nearly impossible to know what's likely to happen in the future. The world for investors always has been, and always will be, an uncertain place. This reality need not adversely impact investment performance but too often that's exactly what happens. There's just no point in trying to foresee the mostly unforeseeable. Yet that doesn't stop smart people from wasting way too much energy trying to do just that. Instead of focusing on what's in their control (price paid, estimates of value, emotions, etc.) they focus on those things they mostly control or reliably predict.

I'll take someone any day who just says "I don't know" what an individual stock or the market as a whole is likely to do (near-term and even much longer) over those who are willing to make prognostications. Better to just expect difficult market conditions from time to time and realize that those difficulties may look nothing like those of the past; maintain reasonable but conservative expectations then end up pleasantly surprised if things go a bit better.

Also, having a flexible approach doesn't hurt.

Effectively picking individual stocks doesn't just come down to whether an individual possesses the necessary background technical abilities, it just as often comes down to psychological factors. For starters, it's not a bad idea to consider overconfidence the greatest enemy of all for investors. More generally, investing well means having a realistic sense of limits, abilities, and characteristics. Those that possess an ability to be sensible and long-term oriented when the markets become emotionally-charged from time to time (and they surely will!) have a big advantage.

So index funds, individual stocks, or some combination can be a logical approach depending on circumstances, skill set, and temperament (among other things). There is also, of course, a number of very capable active fund managers. It's one thing to identify who has done well in the past but it's much tougher to identify who will do well, over the long run, going forward.

In any case, no matter what the necessarily-unique-for-each-investor approach might be, lots of trading activity will likely do more damage (via additional mistakes and frictional costs) than good to long-term results. In other words, it's buying what makes sense consistently, trading minimally, then allowing those investments to compound over many years. The emphasis being on what's produced over time. Price and value should dictate investor action; market price action should not. Again, how prices fluctuate near-term or even longer should either serve the investor or be ignored.

Unfortunately, stocks are hardly cheap these days. So, for those with a long enough time horizon, a rising market is the last thing they should want right now. A rising market would make what is not particularly cheap even less so. More risk; less potential reward.

Whatever approach happens to make sense a very long time horizon is essential. Investment requires that the capital won't be needed anytime soon. Think decades not years.***

I'd add that who offer opinions on and attempt to understand hundreds of different stocks (and other investments) aren't acting in a way that's likely to produce great overall results. At least not for most of us mere mortals. Some skepticism seems in order for those who confidently offer a view on practically every investment alternative.

To me, the expert who frequently says "I don't know" when asked a question deserves credit instead of criticism. Though in itself insufficient, it's at least one indication that they're aware of their limitations.

Investment results are heavily influenced by the avoidance of big mistakes (i.e. permanent loss of capital that's substantial relative to the portfolio being managed). It's not that mistakes won't be made. In fact, they're unavoidable even for those who are very capable. The key is that they're kept small in relation to the overall portfolio. The possibility of a big gain should take a back seat the risk of permanent losses. Sticking with what you really know goes a long way towards this.

It's worth noting that Berkshire Hathaway's (BRKa) current size (and other factors) doesn't allow it concentrate the way it once did.

Still, if you look at the Berkshire equity porfolio, most of the dollars are invested in just five stocks.

It's also worth mentioning that, other than Berkshire's portfolio, the other (much, much, much smaller) portfolio that Charlie Munger apparently has some influence over these days is, I think it's fair to say, rather concentrated.

It's very much consistent with what Munger said above.

Adam

Long position in BRKb established quite a while back at much less than recent market prices. No intent to buy or sell near current prices.

Related posts:
The Seventh Best Idea
Index Fund Investing Revisited
Why Do So Many Investors Underperform?
When Mutual Funds Outperform Their Investors
Investor Overconfidence Revisited
Investor Overconfidence
Charlie Munger: Focus Investing and Fuzzy Concepts
Chasing "Rearview-Mirror Performance"
Index Fund Investing
Investors Are Often Their Own Worst Enemies, Part II
Investors Are Often Their Own Worst Enemies
The Illusion of Skill
Buffett's Bet Against Hedge Funds, Part II
Buffett's Bet Against Hedge Funds
The Illusion of Control
Buffett, Bogle, and the "Invisible Foot" Revisited
If Buffett Were Paid Like a Hedge Fund Manager - Part II
If Buffett Were Paid Like a Hedge Fund Manager
Buffett, Bogle, and the Invisible Foot
Charlie Munger on LTCM & Overconfidence
"Nothing But Costs"
Bogle: History and the Classics
When Genius Failed...Again

* Munger also once said: "The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?"
** This Charlie Munger comment comes from notes taken by Whitney Tilson.
*** Returns measured over time frames like two to three years or less are essentially coin flips. I'd argue five years is the absolute minimum and more like ten to twenty years or longer should be the focus.
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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.

Quotes of 2014 - Part II

Some additional quotes from 2014 as a follow up to this recent post.

Quotes of 2014

In the quote below, Buffett explains why liquidity sometimes is converted into a curse when it should be a clear advantage:

Buffett on Farms, Real Estate, and Stocks - Part II

"Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of 'Don't just sit there, do something.' For these investors, liquidity is transformed from the unqualified benefit it should be to a curse." - Warren Buffett

He then explains how both he and Charlie Munger like to think about stocks:

"When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

It's vital, however, that we recognize the perimeter of our 'circle of competence' and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses." - Warren Buffett

Here's Charlie Munger's take on some of the boardroom dynamics that can cause compensation to end up being less than optimal for shareholders:

Buffett & Munger on Compensation - Part II

"You start paying directors of corporations two or three hundred thousand dollars a year, it creates a daisy chain of reciprocity where they keep raising the CEO and he keeps recommending more pay for the directors..." - Charlie Munger

He also explained why lots of disclosure regarding executive compensation is not necessarily the best thing for shareholders:

"I think envy is one of the major problems of the human condition... And so I think this race to have high compensation because other people do, has been fomented by all this publicity about higher earnings. I think it's quite counterproductive for the nation. There's a natural reaction to all this disclosure because everybody wants to match the highest." - Charlie Munger

In a memo written by Howard Marks back in September of 2014, he offered some thoughts about the various forms of risk. It is, to say the least, rather comprehensive. In my view, the memo is well worth reading -- not at all surprising since it is written by Marks -- in its entirety.

Some thoughts from Marks on risk:

Howard Marks on Risk

"We hear it all the time: 'Riskier investments produce higher returns' and 'If you want to make more money, take more risk.'

Both of these formulations are terrible. In brief, if riskier investments could be counted on to produce higher returns, they wouldn't be riskier." - Howard Marks

"...the riskiest thing is overpaying for an asset (regardless of its quality), and the best way to reduce risk is by paying a price that's irrationally low (ditto). A low price provides a 'margin of safety', and that's what risk-controlled investing is all about. Valuation risk should be easily combatted, since it's largely within the investor's control. All you have to do is refuse to buy if the price is too high given fundamentals.'Who wouldn't do that?' you might ask. Just think about the people who bought into the tech bubble." - Howard Marks

Here's how Buffett and Munger view macro factors in the context of investing:

Buffett: We Ignore the Macro Factors

"We look at opportunities, as they come along, we try to figure whether we can understand the long term economic prospects of the business. A lot of times the answer is no, then we forget it. We are not making any judgment about where the market is going or we are not looking at any macro factors.

My partner Charlie Munger and I have been working together now 55 years. We've talked about every business you can imagine and stocks. We have never had one decision that involved a macro factor. It just doesn't come up." - Warren Buffett

Buffett then added:

"We don't get into macro. It just doesn't make any difference. We do decide whether we think we know where that business will be in 10 years or 20 years, and we know what we'll pay in terms of valuation." - Warren Buffett

More from Buffett on why liquidity can become a curse when it really should not be:

The Curse of Liquidity

"...if you are buying a business to own...the idea of what the market does on any given day, it's just meaningless. What you really have to look at is where you expect the business to be 5 or 10 or 20 years from now." - Warren Buffett

That's how most will think about businesses that aren't traded daily but, because stocks are quoted so frequently, behavior is changed for the worse.

 "...you can look at stock prices minute by minute. And that should be an advantage but many people turn it into a disadvantage." - Warren Buffett

Happy New Year,

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.