#$brk-b

[geldhoch2]

Those of you who, after we are gone, sell your Berkshire stock and do something else with it I think are going to do worse. Keep the faith.

Charlie Munger

[geldhoch2]

Der beste ETF ist ...

Gestern durfte ich “mal wieder” Zeuge einer leidenschaftlichen Diskussion über die Geldanlage werden. Protagonisten waren Growth Anhänger, Kommeristen und Finanzblogger (Abteilung ETF und nur ETF) und natürlich das Value Lager. Es gab die üblichen Argumente, MSCI World ETF schlägt alle sagt der Wesir, S&P500 ETF schlägt noch mehr, eMobilität muss man haben, Tech bleibt der Sieger, Small Caps wachsen schneller, Cash ist King, die Kosten (TER), der Crash kommt - was dann und so weiter. Du kennst das alles aus der Finanzpornographie. Und wie üblich gab es auch kein Ergebnis was glaube ich daran liegt, das man keines möchte.

Gibt es wirklich kein Ergebnis? Lasst uns mal überlegen, worum es rational gesehen geht. Wir suchen als erstes etwas für den Vermögensaufbau. Ein Basisinvestment. Quasi das Fundament. Danach kann es ja dann noch viele andere Werte / Strategien geben. Was erwarten wir von dem besten Wert der besten Aktie, dem besten Fond, dem besten ETF?:

Geschäftsmodell: Der Wert sollte ein tragfähiges Geschäftsmodell haben welches Geld verdient, zukunfts- und wettbewerbsfähig ist. In seinem Segment sollte der Wert unter den Top 5 sein.

Diversifikation: Schwerpunkt wäre für mich USA, aber auch Positionen in Europa und China wären wünschenswert.Auch sollte eine Branchen und Sektor Diversifikation vorhanden sein. Und etwas mehr Titel als der Dax oder der Dow Jones bitte.

Small Cap; Es sollten sowohl “Big Player” wie auch kleinere Werte enthalten sein. Dickschiffe bringen Sicherheit, die kleineren Speed.

Value: Der Wert sollte vor allem Value orientiert vorgehen. Das ist die beste Art, wirklich Geld zu verdienen. Und genau das wollen wir.

CA$H: Ganz wichtig, der Wert sollte in schöner Regelmässigkeit eine “Schweinekohle” verdienen und über unanständig hohe Cash Reserven verfügen.

Schulden: Am besten keine bzw. so wenig wie möglich

Management: Der Wert bzw Fond bzw ETF sollte ein vernünftiges Management haben. Dieses sollte durch Demut, Sparsamkeit und Vertrauen auffallen. Der Aufbau sollte aber so gestaltet sein, das bei Ausfall des Managements der Cashflow erhalten bleibt und ein Affe das Kommando übernehmen könnte. 

Spekulation: Dem Management sollte der Unterschied zwischen Spekulation und Investition bekannt sein. Das wollen wir nicht, auch keine grössenwahnsinnigen Projekte.

Familie: Das Management ist wesentlich in dem Wert investiert oder er gehört Ihr. Mit eigenem Geld geht man anders um als mit Fremden. Nachfolger stehen bereit und haben sich bereits bewährt.

Dividende: Die sind natürlich ganz wichtig. Da wir aber etwas für den Vermögensaufbau suchen, wäre natürlich ein “thesaurierender” Wert optimal, obwohl das bei der Gesetzgebung nicht mein favorisiertes Modell ist.

Performance: Klar, am besten sollte unser Wert den S&P 500 und den MSCI World übertreffen, und nicht nur 2 Jahre.

Sicherheit: Das wäre super, quasi so ähnlich wie ein Discount Zertifikat. Das wenn der Kurs fällt, irgendeine “Versicherung” greift.

Kosten: Die TER sollten so gering wie möglich sein. 

Sparplan: Der Wert sollte sparplanfähig sein, so das regelmässiger Vermögensaufbau möglich ist. 

Zeit: Zeit ist das kostbarste Gut der Welt. Und hat beim Investieren 2 Aspekte. Der erste ist, wir wollen unser Leben nicht mit Aktienanalyse und ähnlich verbringen. Und der 2. Aspekt ist die Zeit im Markt. Je läger wir investiert sind, um so besser unsere Chance auf Gewinne. Buy & Hold ist das Ziel. Wir wollen ein “zeitloses” Investment für ein und mehr Leben,

Das wären erstmal meine Wünsche an den optimalen Wert. Klar denkt man da zuerst an einen ETF auf den S&P 500. Vielleicht als Faktor Value ETF. Das Problem ist nur, der ist halt “nur” USA. Also doch den MSCI World ETF. Die Kommeristen wussten es ja schon immer. 

Nun, da bekomme ich sehr viel Zeug, was ich nicht will. Das heisst ich kaufe teuer ein. Und ob China wirklich so wichtig wird? Die älteren Investoren erinnern sich noch an die 70er. Da war Japan das China von heute und alle Finanzjournalisten prognostizierten, das Japan die neue Weltmacht wird. Die USA haben Japan schnell gezeigt, wer Chef im Ring ist. Und vielleicht passiert das ja mit China wieder. Wer weiss das schon. 

Deswegen ist CA$H so wichtig. Mit vollen Hosen ist gut stinken. Da kann man in Krisen richtig einkaufen, das hilft dann für den nächsten Zyklus, um wieder richtig Geld zu verdienen. Einkaufen geht aber weder der MSCI World ETF noch der S&P 500 ETF. Passiv ist passiv.

Also doch Fonds. Nein, kein passendes Angebot, zu teuer, zu schlecht in der Performance und gesteuert von bezahlten Managern, die nur an sich denken. Das geht schon mal gar nicht. 

Einen Wert gibt es allerdings, ein quasi Fonds / ETF mit überzeugendem Geschäftsmodell (seit über 60 Jahren erfolgreich), hoher Diversifikation über Länder und Sektoren (KHC, BYD, Lanxess). Investiert in grosse und kleine Werte (Apple, SeeCandies, Omaha Furniture) und ist bekannt als Value Papst. Der Wert hat soviel CA$H das er nicht weiss wohin damit und ist Hauptaktionär an einem Unternehmen, was noch mehr CA$H hat. Er ist nicht verschuldet und hat das beste Management der Welt, welches keine wilden Spekulationen oder ausschweiffendes Leben führt. Der Hauptaktionär ist auch Vorstand, quasi Familie. Bis jetzt zahlt der Wert keine Dividende, aber thesauriert mit hervorragenden Ergebnissen. Die Perfomance ist legendäre, die Sicherheit ist da, denn es gibt ein Aktienrückkaufprogramm, sofern der Kurs sich zu stark dem Buchwert nährt. Kosten entstehen keine und es gibt ihn als Sparplan bei unsern deutschen Lieblingsbrokern. Und weiss Gott, mit diesem Investment ist man endlich am Markt, Buy & Hold wird wahr.

Ihr ahnt es schon. Der beste ETF / Fond ist eine Aktie. Mit grosser Freude darf ich Berkshire Hathaway Inc, $BRK-B, WKN A0YJQ2 vorstellen. Dieser Wert ist das Alpha und das Omega für den Vermögensaufbau. Einfach = besser. “Dem ist nichts hinzuzufügen”, wie Charlie Munger zu sagen pflegt.Vielen Dank

[johnhuber]

Berkshire Meeting Notes – Daily Improvement, Business Evolution, and Investment Strategy

Last week I headed to Omaha to attend Berkshire Hathaway’s annual meeting. Nowadays, there is less of a reason to attend the meeting in person because it is available to watch online, but I love attending the event for all of the peripheral meetings that occur. It was a great weekend, and I got to connect with a few Saber Capital clients, as well as some good friends that I don’t see very often.

No matter how long you’ve been following Buffett and Munger, there are almost always some valuable learnings to be had at this event, and they usually touch on a topic or two that provokes me to think more deeply about a particular subject.

Here are a few main highlights from the meeting that I thought were worth mentioning:

On Learning and Getting Better

I’ve talked before about the process of continually getting better as an investor. I think investing is in some ways similar to other performance-based disciplines such as athletics or music. Top performers work on getting better each day, and while there isn’t usually a noticeable difference on any given day, stringing together a bunch of days where you are getting incrementally better by even a very small margin leads to a collectively significant improvement over time. As Buffett has pointed out many times, knowledge builds on previous foundations and grows over time, just like compound interest.

Munger has often said that your goal as an investor should be to go to bed a little bit smarter than when you woke up. Along with the idea of focusing on “the work that’s on your desk” (i.e. not looking too far ahead and just keeping focused on the task at hand), I think this goal of daily improvement is one of the most useful and practical lessons that Munger has ever taught us. I’ve tried to build Saber Capital’s business around this idea, keeping a clear schedule each morning to ensure that this objective stays at the top of my priority list.

Over the weekend, this topic of self-improvement came up, as it often does. Munger talked about his most important learning lesson, which he thought was See’s Candies.

I want to go into a brief tangent on some thoughts I have relating to this discussion. I occasionally think about what Buffett and Munger might be investing in if they were starting today. I think it would look a lot different than it did then.

First off, Munger said See’s was his most important learning lesson because it taught Munger and Buffett about the value of owning a great business, specifically one that can produce ever growing levels of cash flow with very little incremental capital requirements. See’s was a cash cow that didn’t need to be fed. And it produced more and more milk each year, still without requiring any “food” (i.e. little to no cash needed to be invested back into the business to grow).

See’s produced $4 million of pretax earnings the year they bought it. They paid $25 million, or somewhere around 12 times earnings after tax. Since that time, the company has sent around $2 billion of pretax cash flow to Berkshire, using just $40 million or so of incremental capital investments. As Buffett said in the 2014 shareholder letter:

“See’s has thus been able to distribute huge sums that have helped Berkshire buy other businesses that, in turn, have themselves produced large distributable profits. (Envision rabbits breeding.) Additionally, through watching See’s in action, I gained a business education about the value of powerful brands that opened my eyes to many other profitable investments.”

What If Buffett Knew What He Knows Now?

Everyone knows by now that See’s was a great business to buy. But the tangent I wanted to briefly take is to consider how the See’s experience likely would have impacted the decisions Buffett previously made. In other words, would it have changed some of his investments, or would it have changed his investing approach had he been able to go back in time, knowing in the 50’s and 60’s what he learned in the 70’s from the See’s investment?

I think the answer to that is undoubtedly yes. And while I’ve always thought that there is somewhat of a misunderstanding* about Buffett’s early investment strategy, it is true that he bought some cigar butts (seemingly cheap stocks of poor businesses). I think the learning experience they had with See’s would have significantly changed some of their major early investments. Buffett almost certainly wouldn’t have started buying Dempster Mill in the 1950’s—a capital intensive windmill and farm equipment company with sub-par returns on equity. Nor would he likely have purchased Hochschild Kohn (the Baltimore department store) in the 1960’s.

*(Note, when I say misunderstanding about Buffett’s early investment style, I mean the following: yes, he bought some cigar butts of mediocre businesses, but even very early on he grasped the power and value of owning a good business—he bought GEICO in 1951, putting 65% of his then-small net worth into the stock as a 21-year old. Also, two of his biggest and most meaningful contributors to his results in the 1960’s, American Express and Disney, were stocks purchased while still running his partnership. Even the incredibly cheap stocks that he bought in the early years of his fund, like Commonwealth Bank or Western Insurance, were still pretty decent businesses with stable earning power and good balance sheets. He certainly bought some laggards like Dempster Mill and even Berkshire Hathaway itself, but those were usually when he felt like he could gain control of the business eventually and reallocate the cash. Even early on, he made most of his money in the stocks of better businesses).

So the point is: I don’t think Buffett and Munger would be buying cigar butts in today’s world if they were starting from scratch, given the knowledge they gained in the 70’s and 80’s from investing in both good and bad businesses.

If they could start over with their current knowledge base, I think Buffett and Munger would be buying small and large cap stocks (and everything in between). I think they’d be turning over rocks just as they did in the early days, but I think they’d place a much greater emphasis on the earning power and longer-term viability of the business.

This Time is Different

This also gets me into a broader point on today’s markets: Things would look a lot different if Buffett and Munger were starting today. Buffett said recently that if he had started a partnership in 2004, he would have been 100% invested in South Korean stocks. Munger said at the Daily Journal Meeting that he’d be focused on looking for opportunities in China if he were starting out today.

Neither of these ideas are recommendations, it just means that they’d be approaching things differently based on the skillsets they’ve developed over the years and the knowledge they’ve accumulated. They would use that experience to capitalize on the most obvious and best available opportunities that are offered in today’s business world.

Capital Light Businesses

Along these lines, Buffett talked about how different businesses are now. He mentioned that business moguls like Carnegie, Mellon, and Rockefeller would be absolutely shocked if they knew how quickly companies could grow today and how little capital would be required to support that growth.

He pointed out that the five largest companies in the market are:

Apple

Google

Microsoft

Amazon

Facebook

With the exception of maybe Amazon, those companies require virtually no capital to grow, and even Amazon, despite spending billions of dollars building out its foundation for growth, has a number of major business lines like its third party seller marketplace and its cloud business that produce extremely high returns on incremental capital investments. Facebook, which was founded just over a decade ago, did $27 billion of revenue that had 45% operating margins last year. In just the last twelve months, the company grew its pretax earnings by $6.2 billion on just $3.7 billion of additional capital investments, including acquisitions (good for a healthy 170% incremental ROIC).

In fact, the business probably would be growing even without that additional capital, and the nature of Facebook, Microsoft, and Google’s main businesses are that they produce huge returns on capital, significant cash flow, and require little to no capex.

All of these businesses got to scale much more quickly than Carnegie’s steel plants, Rockefeller’s oil refineries, or Mellon’s banks. It took decades of toil and significant sums of capital to go around the country and cobble together a network of refineries in the late 19th and early 20th century. It took Zuckerberg just eight years to build a business from scratch that reached a $100 billion valuation, and four more to reach $300 billion. In 2010, Facebook had $1.9 billion in revenue. Last year it did over $12.5 billion in pretax profits. These are businesses that Carnegie and Rockefeller could only have dreamed about.

I’d also add that the great companies of a century ago were confined primarily to their industries. Rockefeller was an oil man. He wouldn’t have even thought about getting into retail, or banking. But companies like Alibaba or Amazon start in retail, and then use their foundations and user bases to expand into businesses such as banking, payments, storage, and even investment management.

Given the value these companies provide and the size of the markets they might enter, these businesses can likely become much larger than the relative size of even the greatest monopolistic giants of last century.

I’m simply using the large-cap tech stocks as an example to illustrate my point (I’m not suggesting that buying mega-caps is solely what Buffett would be doing). I don’t pretend to know what stocks Buffett and Munger would be buying today if they were starting over, but what I do think is relevant to take home is that Buffett and Munger were both very independent-minded in the 1960’s. They did things their own way. They capitalized on the opportunities they had at that time, and I think they’d be doing the same today.

I think the foundation of value—getting more future cash flow for the price paid—will always be the philosophy that works. I also think that investors should use Buffett’s blueprint to form their own independent thoughts about opportunities—both big and small—in today’s business world. There are lots of incredible opportunities, and the one thing that will always stay the same is human nature—Mr. Market will always be moody.

Consumer Shift

Buffett also mentioned Apple, and how his main thesis was observing consumers’ perception of the brand and the stickiness of the software ecosystem. This leads to predictable demand for the iPhone, and other related Apple hardware products.

But he also said that consumer behavior is more difficult to judge than it used to be. I think that this is in part because people aren’t as beholden to consumer brands as much as they used to be. Or, put differently, I think many companies that we think had a brand really just had a distribution advantage that came from being a big incumbent with the largest market share for many years. The high gross margins led to bigger advertising budgets, which further entrenched these market leaders. Kraft used to own its place in the center of the grocery isle. This advantage is eroding, as distribution costs have plummeted. The internet and social media have lowered the cost of getting products to market and reduced the time required to get to scale. They’ve cut out the middleman in many cases, allowing small upstart companies to sell directly to consumers and avoid the typical retail markup.

Is the Product Undervalued?

As I mentioned in my 2016 year-end investor letter, one of the things I try to consider when analyzing a potential investment is whether the company’s product or service is a good deal for customers. If a business has attractive economics but is extracting value from (rather than adding value to) its customers, then I think there are some inherent risks in that model that will eventually come home to roost. This parasitic relationship might lead to above average profitability in the near term, but it also leads to customers who feel exploited, and when a competitor comes in that offers more value to customers (in the form of better products and/or lower prices), these alienated customers will be much more quick to leave.

For example, Costar owns a commercial real estate website called Loopnet, which had enormous embedded pricing power when Costar bought the site. The company understood that the site was essential to commercial real estate brokers, and began raising prices very rapidly. Some brokers I’ve talked to have seen their Loopnet subscription costs rise multiples from where they were just a couple years ago. Just about everyone in that business that I’ve talked to feels that they aren’t getting good value, but they continue to pay because of the monopoly-like position of the website (it’s basically the commercial real estate MLS, and brokers must have access to it to do business in most cases).

This type of position is often viewed as an attractive asset, a moat. But as a business owner, I’d be worried that my customers would quickly jump ship if a competitor came up with an alternative. Contrast that with the experience customers feel at Amazon Prime, which continues to provide more and more value to customers through wider selection, greater convenience, and prices that more often than not can’t be beat. This extreme customer value makes it more and more difficult for a competitor take customers away from Amazon’s platform.

The Most Important Moat

I gave a talk last weekend in Omaha called “The Most Important Moat”, which basically outlined this idea that the best way to build an enduring competitive advantage is to focus on ensuring that the customer feels like the product or service that you’re selling is a good deal.

If not, you will no longer be able to rest on the laurels of barriers to entry, high distribution costs, incumbent advantages like shelf space, bigger advertising budgets, switching costs, or just about any other advantage that you used to enjoy in years past. It’s much easier to start a business, sell directly to consumers and build a product brand using social media. This allows you (and other small like-minded upstart companies) to collectively compete against much larger brands, despite having much lower advertising or distribution resources.

I think the advantages that used to be relied on by big incumbents like Gillette, Kraft, or Kellogg are eroding. Consumers have more options to choose from, better information on products, and receive more value for the price paid.

High margins and consumer brands are still very valuable, but I think the key is determining whether a company’s perceived brand comes from its market share, distribution, or advertising budget, or whether it comes from providing customers with great value. I think the former category will see their brands lose value. The latter category will still face plenty of competition, but I think it’s much harder to dislodge a company with the best value proposition to the end customer.

Bezos said the following:

“The balance of power is shifting toward consumers and away from companies. The right way to respond to this if you are a company is to put the vast majority of your energy, attention and dollars into building a great product or service and put a smaller amount into shouting about it, marketing it.”

So I think some things to keep in mind regarding Buffett’s comments about the greater difficulty in predicting consumer behavior are the following:

Brands are generally less powerful than they used to be

Distribution and advertising costs are no longer insurmountable barriers to entry (companies can sell directly to consumers on a shoestring ad budget)

Products can scale much faster

Large market share and well-known products don’t necessarily equal a moat

Key questions:

Does the company have a true brand that offers a valuable product?

Or is it a highly profitable incumbent whose high margins are due to an overpriced product and an eroding “shelf space” distribution advantage?

Is the customer getting a good deal when they buy the company’s products or services? I think spending time trying to think about and answer this question will go a long way in helping understand consumer behavior and also help value the business in question.

That wraps up some of my main notes/thoughts on this year’s meeting. I enjoyed meeting some of you in Omaha, both readers and clients of Saber Capital, and hope to see you there next year!

Disclosure: John Huber and Saber Capital Management clients owns shares of AAPL.

John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

To read more of John’s writings or to get on Saber Capital’s email distribution list, please visit the Letters and Commentary page on Saber’s website. John can be reached at [email protected].

[geldhoch2]

Investor Whitney Tilson discusses why Warren Buffett hasn't named a successor.

[stefancheplick]

15 Quotes I Love About Value Investing

I recently read about 40 pages of quotes from value investors around the world. The quotes were compiled by Value Investor Insight and they’ve made the entire collection free for anyone to read — you can view them all here.

But for those who don’t want to read all 40 pages, I’ve highlighted 15 of my favorite quotes below. By journaling and sharing them here, I hope they help my investment process going forward and also yours.

1. It is one of the hardest things to do and that is to remain a disciplined, long-term investor at all times.

“If the entire country became securities analysts, memorized Benjamin Graham’s Intelligent Investor and regularly attend- ed Warren Buffett’s annual shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads. People would still find it tempting to day-trade and perform technical analysis of stock charts. A country of security analysts would still overreact. In short, even the best-trained investors would make the same mistakes that investors have been making forever, and for the same immutable reason — that they cannot help it.” Seth Klarman

2. Value investors need to harness time and use it tactically.

“Time arbitrage just means exploiting the fact that most investors — institutional, individual, mutual funds or hedge funds — tend to have very short-term time horizons, have rapid turnover or are trying to exploit very short-term anomalies in the market. So the market looks extremely efficient in the short run. In an environment with massive short-term data over- load and with people concerned about minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12 months.” Bill Miller

3. Great investment ideas are not necessarily complicated.

“There’s a clarity that comes with great ideas: You can explain why something’s a great business, how and why it’s cheap, why it’s cheap for temporary reasons and how, on a normal basis, it should be trad- ing at a much higher level. You’re never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not.” Joel Greenblatt

4. There’s a perception that numbers, quants, and algorithms rule the stock market, but it’s so much more than that.

“I think my background has helped me learn to think well conceptually. Investing is not just about numbers. It’s also about imagination and structure and narrative and characters — the types of things we liberal-arts majors should know something about.” John Burbank

5. You should be able to defend your highest conviction investments at all times.

“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker — you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.” Joel Greenblatt

6. Your edge is not going to come from data or news, it’s going to come from something of your creativity.

“Everyone tends to see the same things, read the same newspapers and get the same data feeds. The only way to arrive at a different answer from everybody else is to organize the data in different ways, or bring to the analytic process things that are not typically present.” Bill Miller

7. A good investment is not entirely dependent on the balance sheet, it’s also about the management team.

“We tend to be more about the jockey than the horse. It’s important to under- stand how people are going to behave under stress. You don’t have to predict the future if you know the company has the assets and management to do well in difficult times. I believe that’s when the seeds for exceptional performance are planted.” Bruce Berkowitz

8. Every investment should have a price, and if it’s not there now, you will be rewarded greatly if it ends up there down the road.

“Our best ideas tend to come from what I call “old research, new events.” That’s typically the good company you’ve studied carefully and would love to own at the right price, that gets marked down after it trips or its industry goes out of favor.” Ricky Sandler

9. Always remember that a cheap investment is cheap for a reason and cheap does not automatically make it a value.

“One of the big mistakes value investors can make is to be too enamored with absolute cheapness. If you focus on statistical cheapness, you’re often driven to businesses serving shrinking markets or that have developed structural disadvantages that make it more likely they’re going to lose market share.” Bill Nygren

10. You must know your circle of competence and when you should or should not be investing.

“I’d always said that if a guy was long the best 50 companies he knew and short the 50 worst, if that didn’t work you were in the wrong business. But that strategy was literally a recipe for bankruptcy from 1998 to 2000. I said when I closed down that it was a market I didn’t understand, and I didn’t.” Julian Robertson

11. Change your outlook on life, it will spark the little things, which in turn will lead to the big things.

“People who are in a good mood are more inclined to try learning new skills, to see things in a broader context, to think of creative solutions to problems, to work well with other people, and to persist instead of giving up. If you were writing a recipe for how to make more money, those are among the first ingredients you would include.” Jason Zweig

12. Human psychology plays a massive role in the world of investing.

“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed.” Jim Grant

13. Durability is a trait you should never overlook.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren E. Buffett

14. Avoid complacency and stay vigilant.

“One of the economists who has heavily influenced the way I think is Hyman Minsky, who always said, “Stability begets instability.” The very idea is that the more stable things appear, the more dangerous the ultimate outcome will be because people start to assume everything will be all right and end up doing stupid things.” James Montier

15. I am making this investment today because… You need to be able to answer that every single time.

“I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. “I’m paying $32 billion today for the Coca Cola Company because.” If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money.” Warren Buffett

[vkatsenelson]

Manifesto – The Values of Value Investing

By Vitaliy Katsenelson, CFA

Part One: Introduction

The relationship between a client and a money manager is like a marriage: even if you’re married to the right person, it’s just a matter of time before your relationship will hit hard times that test the strength of your marriage. After all, life is not linear, it’s full of ups and downs. The downs will ultimately test a couple’s commitment to one another.

Just like life, stock returns are anything but linear. Over the last one hundred-plus years, stocks returned about 11% a year on average. But if you were to look at stock market returns on an annual basis, they were usually anything but 11%. This 11% average is the culmination of a very combustible mixture of numbers that individually bear very little resemblance to the average they result in.

Side effects of nonlinearity of stock behavior clearly show up in investor returns. The financial services market research firm DALBAR studied historical returns of mutual funds and actual (realized) returns of investors who invested in those mutual funds. DALBAR’s findings were stunning. For decades fund investors had significantly underperformed the mutual funds they invested in, not by a percent or two but by a mile, capturing only a small fraction of the returns of those mutual funds.

For a civilian (nonprofessional) investor, understanding the investment process of a fund manager is usually difficult. Often, performance is the only thing investors can judge objectively, so recent performance overshadows all other metrics. Investors compare the most recent returns of their favorite new mutual fund versus the returns of the one they’re holding. If the new mutual fund has done better recently, they’ll sell the old one and buy the new one. This often results in buying high and selling low.

Any money manager, whether he is managing separate accounts or a mutual fund, will go through stretches where he looks smarter or dumber than he really is, though his IQ hasn’t actually changed.

When we look smarter than we are, we’re not worried about what clients think of us (though we try to temper their expectations of our future brilliance). At that point our biggest concern is our own self-perception: we don’t want success to go to our heads and result in overconfidence.

On the flip side, it’s just a matter of time before we look dumber than we are, and that’s when our relationship with a client gets tested. Especially if it’s a very new relationship and the client hasn’t had a chance to experience our brilliance.

Historically, value investing (owning undervalued companies) has done significantly better than other strategies. Paradoxically, the reason it has done well in the long run is because it did not work consistently in the short run. If something works consistently (key word), everybody piles into it and it stops working.

These aforementioned cycles of temporary brilliance and dumbness are not just common to us mere mortals. Even Warren Buffett’s Berkshire Hathaway goes through them. As just one example, in 1999, when the stock market went up 21% Berkshire Hathawaystock declined 19%. In 1999 the financial press was writing obituaries for Buffett’s investment prowess.

Suddenly, in 1999 Buffett’s IQ was lagging the market by 40%. At the time investors were infatuated with internet stocks that were not making money but that were supposed to have a bright future. Investors were selling unsexy “old economy” stocks that Buffett owned to buy the “new economy” ones.

If at the end of 1999, you were to sell Berkshire Hathaway and buy the S&P 500 instead, you would have done the easy thing, but it would have been a large (though very common) mistake. Over the next three years Berkshire Hathaway gained over 30% while the S&P declined over 40%. During the year 1999 Buffett’s IQ did not change much; in fact the (book) value of businesses Berkshire Hathaway owned went up by 0.5% that year. But in 1999 the market’s attention was somewhere else and it chose to price Berkshire Hathaway 19% lower.

Where are we going with this? We look at the relationship with our clients as a partnership. For this partnership to work we need to communicate on the same wavelength. In this letter we would like to establish this common wavelength.

Part Two: The Values of Value Investing

To read part TWO of this manifesto, titled the “Values of Value Investing” follow this link or this  http://ima​usa.com/receive-manifesto/

[stefancheplick]

3 Pieces of Wisdom from Warren Buffett’s Best Friend and Business Partner

Everyone knows about Warren Buffett.

But not nearly as many know about Charlie Munger.

Munger has been Buffett’s business partner for about 50 years. They both continually say their success is partly due to each other. Their personalities and temperaments balance out in near perfection.

Below you will find 3 sayings from Charlie Munger. They are insightful, witty, and and inspiring. They will also shine more light on who Munger is and what he teaches:

ONE: EPICTETUS

“Life will have terrible blows in it, horrible blows, unfair blows. It doesn’t matter. And some people recover and others don’t. And there I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well. Every missed chance in life was an opportunity to learn something and that your duty was not to be submerged in self-pity. But instead to utilize the terrible blow in constructive fashion. That is a very good idea.” — Charlie Munger

TWO: REMEMBER MOZART

“I’m always reminded of the young guy who went to Mozart and said, ‘I’d like to write symphonies.’ When Mozart said, ‘You’re too young,’ the young man replied, ‘But you were young when you started.’ Mozart pointed out, ‘Yes, but I wasn’t asking anyone else for advice on how to do it.’” — Charlie Munger

THREE: INVERT

“Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead. Tell me where I’m going to die, that is, so I don’t go there.” — Charlie Munger

If you enjoyed this post and want to share other great quotes from Charlie Munger, please leave a comment below. If you want to see 118 more quotes from Charlie Munger, including where these 3 quotes were found, go visit this page here.

[samro]

Warren Buffett has a simple explanation for why economic growth has been weak

Warren Buffett

Two weeks ago, we learned US GDP was growing at a lackluster 1.2% pace in Q2. It’s nothing to get too excited about.

But in a new interview with Politico Playbook, billionaire Warren Buffett argues that we should think about GDP growth in the context of the economic crisis from which we’re recovering.

“What you’ve seen overall since 2008 and ‘09 – that was a wound to the American psyche,” Buffett said. “People were scared silly then … really we hadn’t had since the Great Depression.”

Simply put, it’s trauma.

“Some people are still recovering from the trauma of what happened in 2007-2008,” President Barack Obama said in an interview with Yahoo Finance’s Nicole Sinclair. “You know, we went through a really scary time.”

Economies go from expansion to contraction and expansion again all of the time. But the magnitude of the cycle can have long-lasting psychological effects. Just ask any adult in the labor force who has been jobless for an extended period of time. This trauma of getting crushed by debt payments while jobless can explain why consumers are reluctant to borrow money even as interest rates are near 0%. And so since the recession ended in 2009, the US economy has been growing below the 3% long-term rate we’re used to.

“We’re showing 2% growth, which isn’t bad,” Buffett argued.

“Same thing happened in the Great Depression,” Buffett said. “People don’t get over that very quickly. When they started worrying about their money-market funds, and they start worrying about their jobs and they worry about the economy coming off the tracks, and banks and everything else, they don’t forget about that six months later.”

Read the whole interview at Politico.com.

– Sam Ro is managing editor at Yahoo Finance. Read more:

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Now’s a great time to reread Warren Buffett’s op-ed he wrote after one of history’s worst sell-offs

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