Saw this on twitter and this explains a view that takes a decade to assimilate. It certainly took that much time for me.
In a recent Daily Journal Annual Meeting, Charlie Munger was asked
Question: Do the great tech giant franchises of our day, specifically Microsoft, Apple, and Alphabet, have the same long-term durability that Coca-Cola had 30 to 40 years ago?
Charlie Munger: It’s a lot easier to predict who flourished in the past because we know what happened in the past. But now I want to compare what’s gonna happen in the future. Of course, that’s harder.
It’s very hard for me to imagine—that doesn’t mean it couldn’t happen—but I would expect Microsoft, Apple, and Alphabet to be strong 50 years from now—really strong, still strong. But if you’d asked me when I was young what was gonna happen to the department stores that went broke or the newspapers which were broke, and so on, I wouldn’t have predicted that either. I think it’s hard to predict how your world is going to change if you’re going to talk about 70, 80, 90 years.
Just imagine, they wiped out the shareholders of General Motors, they wiped out the shareholders at Kodak. Who in the hell would have predicted that? This technological change can destroy a lot of people. It’s hard to predict for sure in advance.
This year Indian equity market saw launch of numerous number of IPO’s. From zomato to cartrade, its raining IPO.
I am part of a couple of whatsapp group whose name has stock in them. Most started by relatives and friends. So whenever there is a new IPO, these groups buzz like a bee.
And almost every time someone or other will ask each others opinion on an IPO, my standard response is to point them to 1993’s annual letter written by Warren Buffet.
An intelligent investor in common stocks will do better in the secondary market than he will do buying new issues…[IPO] market is ruled by controlling stockholders and corporations, who can usually select the timing of offerings or, if the market looks unfavourable, can avoid an offering altogether.
Understandably, these sellers are not going to offer any bargains, either by way of public offering or in a negotiated transaction.
It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).Warren Buffet in 1993 Annual Report
Read the entire 1993 Annual report here
I agree with this and have expressed similar sentiment in being a gardener.
Investing is like planting an orchard
In the beginning, it’s all effort with nothing to show
After a few years, fruit starts to appear
After 10 years, you are reliably producing fruit
After 30 years, you’re producing more fruit than your family could eat in a lifetimebrianferoldi on twitter
Everyone knows the investing duo of Warren Buffett and Charlie Munger. But 40 years ago there was a third member, Rick Guerin. The three made investments together. Then Rick kind of disappeared while Warren and Charlie became the most famous investors of all time.
A few years ago hedge fund manager Mohnish Pabrai asked Buffett what happened. Rick, Buffett explained, was highly leveraged and got hit with margin calls in the 1970s bear market.
Buffett told Pabrai:
Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.via collaborativefund
If you are looking for investing book to read, I highly recommend starting with The Psychology of Money by Morgan Housel.
Was reading an investing book and came up with this note on reinforcement from Charlie Munger.
All human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you’re Warren Buffett, you’ll respond – and few things give more rewards than being a great investor. The money comes in, people look up to you and maybe some even envy you. And if you buy a whole lot of operating businesses and they win a lot of admiration, there’s a lot of reinforcement.
Learn from this and find out how to prosper by reinforcing the people who are close to you. If you want to be happy in marriage, try to improve yourself as a spouse, not change your spouse. Warren has known this from an early age and it’s helped him a lot. Wesco Annual Meeting Notes 2007
The markets are all time high, despite the situation on the ground. Take any stock portfolio and you will see high returns.
I receive at least one call from my acquaintance on investing in stocks. When the markets are booming like, everyone wants to join in. No one wants to be left behind.
I am not immune to these behaviors. I am looking at my portfolio more often than I should. Have read and clicked on news articles of stock more than I did last year.
I like revisiting the books on investing to stay grounded.
Legendary investor Warren Buffett has this aphorism: My favorite holding period is forever. If we think this way, never planning to sell, we force ourselves to value stocks based on the cash they generate, instead of being distracted by guesses about future prices.
A Buffett variation on this theme is, I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. If we think this way, we stop speculating about zigs and zags in stock prices and focus on the cash generated by the money machine.
The idea is simple and powerful, but often elusive. It is very hard to buy a stock without looking at what its price has been in the past and thinking about what its price might be in the future. It is very hard to think about waiting patiently for cash to accumulate when it is so tempting to think about making a quick killing by flipping stocks.From the book Money Machine by Gary Smith
Stumbled upon this video from the recomeneding gods of youtube. Applies not only to investing but to other things in life.
You can learn everyday, but you can’t act everyday…. – Warren Buffett
Every quarter when results come out, I spend sufficient hours looking at the financial results of the stocks I am tracking to elicit nagging comments from my better half. So developed this simple python script which does the analysis and generates me the PDF which I email to myself to look at during office commute.
The code as always is available at my github page here.
Some sample plots
Intend to update the scripts for other analysis as and when I get some time.
If you are into investing or even if you are not, here’s a lucid explanation of what might be the effects of the demonetisation move of PM Modi.
Ten minutes worth spending..
Here are 6 initial plots that I create for any business I am looking at as a stock investors.
Average of Reported Net Profit and Cash Flow from Operations
Value of Each Rupee Invested Back in Business
As Elbert Hubbard said “It does not take much strength to do things, but it requires great strength to decide on what to do”.
Similarly in equity investing, it does not take much to trade, but it requires a great strength and patience to decide on what and when to trade.
My colleague is a hard core trader. He intellectually understands the Gardner mentality to investing but doesn’t believes in it.
Most of his investing is based on momentum and he trades on news.
With the recent crush his trades like many have decreased and he is daily looking at the market movement trying to guess if it will rebound or see a new lower bottom.
Today as we were discussing markets, got reminded of the following Berkshire letter of 1987 about market.
From: 1987 letter
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.
From about 2000 years, in many European languages, a black swan was a metaphor for something that was clearly impossible. And then black swans were found in Australia. So a black swan became a metaphor for a completely unexpected event actually occurs, one we had not imagined was impossible. Black swans appear regularly – Skype, iPhone, the Cloud…. If a black swan landed in your marketplace, would you recognize it? Most companies don’t. It’s no coincidence that the average age of companies – big companies – is falling fast, at the same time that black swan events are increasing.
You never see black swans coming – you have to be ready to respond when they arrive.
This talk is about the kind of thinking and organizational structure that can help you live successfully with the black swans. It is about how to build an innovative, responsive, enduring organization
Goes well with this post on antifragile.
Here’s a stab from Rohit Chauhan’s model portfolio update.
As an investor, our portfolio cannot be built on hope. As a result, i am not picking or retaining stocks based on some macro event or grand thesis playing out (restructuring of PSU or removal of subsidies etc). I would like to hold companies in the portfolio which can perform inspite of the environment and not because of it.
All my investor/trader buddies are excited about the recent bull run and the prospect of Modi as PM.
Exact words that I want to convey to my enthusiastic investor buddies!!
Totally agree with him. And interestingly this applies not just to stocks! Just substitute portfolio with career!!
I am half way with this excellent book, The Warren Buffett Portfolio by Robert G. Hagstrom. Here are some of the most popular highlights by Kindle users from amazon.com for this book.
Loved the idea of viewing building a portfolio to building a company!!
Buffett does not adjust the discount rate for uncertainty. If one investment appears riskier than another, he keeps the discount rate constant and, instead, adjusts the purchase price.
Review annual reports from a few years back, paying special attention to what management said then about strategies for the future. • Compare those plans to today’s results: How fully were they realized? • Compare the strategies of a few years ago to this year’s strategies and ideas: How has the thinking changed? • Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights.
Buffett tells us that, in a low-interest-rate environment, he adjusts the discount rate upward. When bond yields dipped below 7 percent, Buffett adjusted his discount rate up to 10 percent. If interest rates work themselves higher over time, he has successfully matched his discount rate to the long-term rate. If they do not, he has increased his margin of safety by three additional points.
“The goal of each investor,” says Buffett, “should be to create a portfolio (in effect, a `company’) that will deliver him or her the highest possible look-through earnings a decade or so from now.”
“Charlie and I let our marketable equities tell us by their operating results-not by their daily, or even yearly, price quotations-whether our investments are successful,” explains Buffett. “The market may ignore business success for a while, but it eventually will confirm it.”
“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do,” says Buffett. “It’s imperfect, but that’s what it is all about.”
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
“Face up to two unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.”
“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now,” explains Buffett. “Over time, you will find only a few companies that meet these standards-so when you see one that qualifies, you should buy a meaningful amount of stock.”
Warren Buffett applies three tenets about a company’s management: (1) rationality, (2) candor, and (3) resisting the institutional imperative.
And then there was this mention of uncertainty, how could I resist? 🙂