Monday, June 25, 2018

Berkshire's Annual Meeting has not been improved by expanding the format

I have been listening to video of the 1994 Berkshire meeting which covers the Q&A.  As always, Warren and Charlie have some insights about investing and human nature.  Berkshire was quite a different business then than it is today.  It was more heavily in insurance and owned many fewer operating businesses.

My take is that the meetings were more interesting when shareholders asked questions and those shareholders were fewer in number and likely savvier investors, on average, as a group.  Questions were much more focused on investing and on business and much less about macro policy.  I have a sense that the celebrity interlocutors that they have brought in to ask questions have not improved the quality of the questions.  I get why they do it - there are just so many people now who have an interest in the business they need a way to filter things and to group questions.

I suspect that to a significant extent there are two factors at work.  First, that the new format encourages people to emphasize questions that are *popular* rather than useful.  If hundreds or thousands of people ask in one format or another, question X, then a tendency will be to ask that question because lots of people want the answer.  Media personalities are very concerned about the quantity of eyeballs more than the quality of eyeballs.  Second, and relatedly, I think there is greater awareness that the meeting has wide following in a community of interest much wider than that of shareholders and necessarily that audience has more utility in questions about what books to read or how to have a good life.  But of course, those are not necessarily the questions that help one understand how to value Berkshire which remains, I believe, the chief purpose of an annual meeting of shareholders.  Third (I know, I said two factors … but this is perhaps point 2b) I think the questioners, being sort of special invitees, just don't think it is their job to be that challenging.  The best question asked at this years' meeting came from an 8 year old shareholder who was at her second meeting and asked why BRK has moved from high returns on capital businesses to low return regulated utilities.

In any case, I think there probably is value in listening to them at these meetings.  This is how the circus really got going, after all.

Here is the link.

P. S. Bill Ackman and Carol Loomis asked questions.

Sunday, June 24, 2018

Strategy and Political Economy

Strategy is actually the study of differential outcomes.  Why do some businesses succeed wildly while others, with similar talent and effort come to nothing?

This is an essential issue in investing; a few firms will produce excellent returns on capital and have almost unlimited ability to reinvest that capital.  They will (and have) become the dominant share of all tradable equity securities.  Finding just one, as an investor in an early phase pretty much guarantees you the ability to get fantastically rich without having to work all that hard.  (Depends on how lucky you get, in terms of finding said firm).

Occasionally you can find one of these firms who is essentially *known* to be a big winner trading at silly valuations and have a risk free ride to pretty good returns (though in most cases not nearly as good as some early investors, but Apple, Amazon, Bank of America, S&P Global, Microsoft, Bassett Furniture and Ford, among others have offered opportunities to earn staggering amounts for late entering shareholders).

The thing is - what is important to understand is how a business will compete within its industry, to understand the scale and scope of that industry and then to recognize that almost all of the gains will go to the top firms or people and that this is true in all fields of human endeavor, whether it is art, literature, sports or enterprise.  Riding the wave of the Pareto distribution is really the secret of success.  The problem is, it is extremely difficult to determine which actors (in the sense of one who takes action, not in the theatrical sense) will get to ride that distribution.  I am not sure it is possible to know with much certainty, although being marginally better at determining it can make you a very much better investor (because the irony is that there aren't huge differences between people at say the middle and top of the distribution in terms of starting talent and resources - at least early in the game.  After awhile of course, the compounding effects of opportunities, networks and resources tend to spin some far out the distribution).

Jordan Peterson, who is a political theorist and philosopher talks about why Pareto is such an important principle of societal organization and how deeply embedded it is in human experience.  While he is really talking about a critique of Marxist organization, he is illustrating the core challenge of investment; finding those opportunities that offer the investor the chance to spin off the end of the distribution while guaranteeing that one doesn't run the risk of winding up on the other end of the distribution.

A fantastic short excerpt and well worth one's time.

Friday, May 04, 2018

Fun Infographics about Warren Buffett

Like most value investors, I have spent lots of time studying Buffett and Munger.  You can absorb much of their principles from reading their letters to shareholders.  Books like the Snowball are also helpful in filling in key details and context.

The simplest lesson in business valuation probably was the 1989 Berkshire Hathaway shareholder letter from Buffett.

In this nice set of infographics (not yet complete as of this post), Visual Capitalist does a nice illustration of Buffett's from his early years to his ideas to his empire.

Tuesday, January 30, 2018

Greatness from Megan McArdle

The most indispensable blogger we have.

At 43, I understand EXACLTY what she means.

Tuesday, January 23, 2018

US Household Assets by Net Worth

This is a great graphic by Visual Capitalist.  You can see how assets are spread across income groups.  Note that this Makkimoto chart shows the relative distribution across groups, it doesn't show the spread of total assets or of the size of the groups (it would be cool if the vertical dimension were used to have the areas correspond to the actual amounts, but probably the top group would become very hard to distinguish.

Not surprisingly, less well off folks have a greater share of their wealth in liquid assets (everyone needs some cash and checking) and in "use" assets, those assets that, while they have financial resale value, are really a form of consumption (transportation and shelter).

It is also pretty clear that if you want to be really wealthy, you need to have a successful business in which you are a significant shareholder or control person.  Since large, successful businesses are pretty rare (even small successful businesses are tough to operate, I speak from experience here, but will start another business soon), very few people can be truly rich.  But passive investments, particularly cashflow real estate (which is also a business but except for skyscrapers or PUDs are also small) can make you quite comfortable.

You have to think about your personal strategy and what you want.

Friday, January 19, 2018

The future of returns: an ongoing series

Long time readers know that I am pretty bearish on the ability of investments, as a whole, to earn historical rates of return.  It would be nice, of course, if they could, since with low inflation, high rates of return would mean an increase in *real* returns and the ability to fulfill the fantasy that we can all be rich.  Just put a little bit aside every week or month and watch the power of compounding make you a very comfortable person.

Logically, though, this is impossible, since as "everyone" did this, competition for goods, services and assets would drive prices higher.

Alas, among the most fanciful are the most "sophisticated" investors - pension funds.  Public pension funds have a major weakness, they are run by politicians and public employees, who desire attractive work conditions: easy jobs, comfortable pay, job security, and cushy benefits like attractive pensions.

Politicians like to give this constituency what it wants (see Megan McArdle on this topic) but prefer taxpayers not know what this costs.  Since many of the actual costs can be shifted to the future (for a different electorate and politician set to deal with and when later pols can deny responsibility) assumptions about the future tend to be pretty rosy.

Here is Jason Zweig, one of the best financial journalists we have, writing about this topic.

Happy do discuss in more detail.

Monday, January 15, 2018

From the Screen of the Strategic Investor

Philosophical Economics has a really nice essay on returns and what investors can expect going forward.  The news is bad.  We concur that returns are likely to be well below the experience of the past 40 years, even taking into account that the decade from 1999-2008 was truly abysmal.

For many reasons, valuations in 1999 were at absolutely incredible levels.  Valuation-indifferent buyers of equities, largely focused on low cost index products, who have to buy every month because of the need to save for retirement are a major factor.

We believe that many historical rates of return are driven higher by one time factors that will not recur and therefore, we will see a significant revaluation, which will punish investors (particularly GenX and particularly early cohorts).

Note that the author has not accounted for changes in tax policy.  Over time these things are somewhat cyclical, however, markets tend to experience significant downward valuation as taxes rise (since it reduces earnings and EPS, and also because it discourages redeployment toward better uses and finally because, investors care about their real after tax return and if you raise taxes, then the nominal pre tax return must go up to provide stable after tax returns and this means prices - at least relative to earnings, have to decline).

Sunday, January 14, 2018

Stephan Co - My Seeking Alpha Write Up

At the urging of a friend, I published a write up I did on one of the stocks I own on Seeking Alpha.

If you are interested you can read it here.

Wednesday, January 10, 2018

From the Screen of the Strategic Investor

Thought I would start a set of daily links.  In part, this helps me keep track of them (though of course, I also have favorite lists and folders) and also because some of these are really interesting.

Investments and Valuation:

CAPE naysayers are wrong.  Arnott and his crowd discuss the evolution of CAPE over time (generally higher) and consider return to the mean.  Smart guys.  They are aware of the threat of valuation indifferent buyers and sellers.

Is the bond market finally about to swing back into a long-term bear market?  Seems tantalizingly close, but then global rates are low and demographics seem likely to create valuation indifferent buyers here, too.


Are we at the top of the job cycle?  This is a non-trivial question.  Seems pointless to create lots more jobs when there aren't enough workers.

Tuesday, January 09, 2018

Contributions to Clintons dropping?

This is not a political blog, but we like to look at businesses of all kinds.  Charities are a special kind of business - a business in which value provided to end users is less than the cost of the inputs of that value, necessitating continuous access to capital.  Government supports that access through favorable tax treatment (either at the organizational level, where an organization itself pays no taxes on its inflows) and/or at the donor level.

One of the largest charities in the United States is the Clinton Foundation, which during the presidential campaign came under mild scrutiny for being a (taxpayer supported) campaign in waiting and for offering opportunities for foreign and domestic interests to buy access to the Clinton family and therefore indirectly the White House.

The Clintons insisted that this was all simply due to the unique scale and reach of the Foundation which enabled (big money) donors to write one check and have significant impact.

The telltale signs would always be, what happened to donations if Hillary lost.  Absent future access to the White House, would the donors keep giving?

The first results are in and they suggest that interest might be falling.  In November 2017, the foundation finally published financials for 2016.  Comparing them to 2015 indicates that there have been a decline both in receipts and also in the balance sheet (assets).  It will apparently be another year before we get the details on 2017, but isn't it simply interesting that 2016 was down about 15%, which is about 6 weeks of the year, or about the amount of time between election day and December 31.  Could it be that funds just dried up on November 9, 2016?  Only time will tell.

Interestingly, though, the "Clinton Health Access Initiative" CHAI, made a decision on March 7th, 2017 (a subsequent event to the released financials) to change its governance.  Prior to that date the Clinton Foundation appointed five of the nine members effectively controlling the charity (and so it was consolidated).  Thereafter, the Clinton Foundation is entitled only to "recommend" five members to an expanded board of 15, with the other 10 members being recommended by the independent board members, and with the charity then ratifying the entire slate (or not).  Thus, the charity is no longer controlled by the Clinton Foundation and will be deconsolidated (indeed, it will cease reporting).  This takes about $152mn of revenue (from a total of $222mn) out of the picture.  It effectively reduces the scale of the Foundation by 68% on a revenue basis and about 21% of the assets.

Many postulates are possible here - perhaps in a post-campaign world the Clinton team no longer have enough human resources to staff the larger institution.  Perhaps fundraising will be easier if there is more separation from the Foundation?  This would make sense if most of the donors up to this point saw the charity less as a civic duty and more of an influence buying vehicle.

This is one of the perils of having a business that has a moat which is heavily dependent on the personal assets of the people running it.