I haven't had much time to write lately, so I figured I would share some investing wisdom I have come across recently.
Matt Schifrin over at Forbes has written a great synopsis of the investing habits of some extraordianrily successful individual investors.
Jason Trennart raises and interesting argument that successful investing may require less of the technical tools taught in busineses schools and more of the social sciences contextual approach to problems, with the ability to synthesize data of various (and often qualitative) sorts. Personally, I believe this is true. As an historian (undergrad) with an MBA, I can say that while financial skills are important (value is a financial concept), evaluating the risks around the estimate of value often require imprecise contextual thinking. This is most true in evaluating the managers who hold investors assets in their hands.
Aelph suggests that buy and hold investing is neither dead nor a bad idea. Admittedly, returns on equity do fall for most businesses over time as it gets harder to redeploy cash generated by the business in initiatives with the ROI of previous investments, but this is an argument for dividends, not an argument against buy and hold.
And a two-for-one: Aelph also has eight rules of investing. I generally agree with them, though I think he puts too much emphasis on relative valuation, which is a strategy for long-only mutual funds and investment "professionals" who cannot afford to appear to be too passive (especially if the market is rising). Personally, I believe a real advantage of the individual investor is the luxury of looking at absolute valuation, and mitigating risk by NOT INVESTING when there aren't attractive risk/return opportunities (e.g. US equities in 1999 and 2000).
Finally, I have to give Aelph huge credit for the diligence with which he posts. I aspire to have that much to contribute.
Showing posts with label Investing. Show all posts
Showing posts with label Investing. Show all posts
Monday, March 12, 2012
Thursday, February 09, 2012
Buffett article in Fortune
Warren Buffett, picking up on themes he has discussed many times before has a remarkably clear argument for the long term power of investing in real assets.
While I think his argument is persuasive, I have written a short reply questioning one of his core assumptions: that popular governments will always pursue inflationary policies. I am not so sanguine. Popular governments have often found deflation fighting more difficult than one would assume, and it is not clear whether an aging population, such as in Japan, is not a significant and contributory factor to deflationary policies.
You can read the article here.
My response:
As always, Buffett has a clarity which is refreshing and insightful.
The core assumption that Buffett makes that he does not explicitly clarify (though he hints at it) is he believe that ultimately, governments will always prefer inflation, and therefore over any extended period, he rules out the possiblity of deflation, which is the one scenario in which nominal assets could outperform real assets, even under conditions of low rates.
That he does not consider this possibility is a real weakness in his argument, as several societies have indeed experienced prolonged bouts of inflation, including the US between about 1870 and 1892 and again between 1928 and 1940. These were admittedly periods of extreme economic turmoil, as overleveraged households and firms folded, and bank failures encouraged credit and monetary contraction.
More recently, Japan is undergoing the same experience, even as the rest of the world has boomed. What would be interesting, from my perspective, is Buffett's view on the affect of aging on asset prices and a tendency toward deflationary policies. After all, old folks tend to have assets (and usually want nominal assets with steady, predictable cash flows, not lumpy albeit fast growing ones) - so their stronger voting power can encourage politicians to support policies favorable to creditors. Moreover, consumption declines with age, which may lead to an environment of falling prices and lower economic activity generally.
Since most people in the world now live in countries that are either at or below the replacement rate, most countries are expericing significant aging. Is it not possible as we look out over the 21st century that growth itself may grind to a near halt? In which case, might nominal assets outperform after all?
While I think his argument is persuasive, I have written a short reply questioning one of his core assumptions: that popular governments will always pursue inflationary policies. I am not so sanguine. Popular governments have often found deflation fighting more difficult than one would assume, and it is not clear whether an aging population, such as in Japan, is not a significant and contributory factor to deflationary policies.
You can read the article here.
My response:
As always, Buffett has a clarity which is refreshing and insightful.
The core assumption that Buffett makes that he does not explicitly clarify (though he hints at it) is he believe that ultimately, governments will always prefer inflation, and therefore over any extended period, he rules out the possiblity of deflation, which is the one scenario in which nominal assets could outperform real assets, even under conditions of low rates.
That he does not consider this possibility is a real weakness in his argument, as several societies have indeed experienced prolonged bouts of inflation, including the US between about 1870 and 1892 and again between 1928 and 1940. These were admittedly periods of extreme economic turmoil, as overleveraged households and firms folded, and bank failures encouraged credit and monetary contraction.
More recently, Japan is undergoing the same experience, even as the rest of the world has boomed. What would be interesting, from my perspective, is Buffett's view on the affect of aging on asset prices and a tendency toward deflationary policies. After all, old folks tend to have assets (and usually want nominal assets with steady, predictable cash flows, not lumpy albeit fast growing ones) - so their stronger voting power can encourage politicians to support policies favorable to creditors. Moreover, consumption declines with age, which may lead to an environment of falling prices and lower economic activity generally.
Since most people in the world now live in countries that are either at or below the replacement rate, most countries are expericing significant aging. Is it not possible as we look out over the 21st century that growth itself may grind to a near halt? In which case, might nominal assets outperform after all?
Wednesday, March 02, 2011
Buffett's interview with Becky Quick on CNBC
Warren Buffett had a three hour interview on CNBC today.
Becky Quick, the lead interviewer, is also one of the journalists that leads the question and answer period of the Berkshire Hathaway Annual meeting.
This secgment was particularly interesting. I particularly liked his response to Joe Kernan's question about whether there are moments to be in non-financial assets (he meant commodities).
Buffett's answer is to suggest that true investment is about purchasing an asset, it could be a business, or a farm, rental real estate, or a fixed income security, that pays you income over time, irrespective of the price for which the asset could be sold. In this sense, investors do not need the market, and they do not have to worry about market prices, because the income from the underlying asset, whether through operating income or dividends, is sufficient to provide a satisfactory return. If the market is also willing to pay high prices for that income, the capital gain is gravy. This is the sense in which investing is business-like. If you own a McDonalds franchise, you don't spend your time wondering what the market price of the franchise is, you spend your time worrying about how to improve the performance of the business - as measured by the income that it throws off.
Commodities, by contrast are speculation in Buffett's view. While he admits there is nothing wrong, immoral or bad about speculation, it is NOT investing, since the asset itself, whether it be gold, silver, cotton or oil, does nothing for the purchaser directly. Instead, the purchaser has to hope that someone else will pay more in the future. In that sense, it is a bet on future attitudes towards the commodity in question.
His description of gold, a current favorite, is hilarious. Note he contrasts the value of gold with the universe of other assets that could be had for the amount equivalent to the market cap of gold (price per ounce x all ounces outstanding). Not said, but I think intended, is that assets such as farmland and businesses which have pricing power are no worse an inflation hedge than gold. True enough, earnings multiples may decline, but as income rises, risk of capital loss from inflation should be muted. Meanwhile, unlike the commodity, the farm does not have to be sold to provide income, so market price fluctuations are not really a big problem.
Becky Quick, the lead interviewer, is also one of the journalists that leads the question and answer period of the Berkshire Hathaway Annual meeting.
This secgment was particularly interesting. I particularly liked his response to Joe Kernan's question about whether there are moments to be in non-financial assets (he meant commodities).
Buffett's answer is to suggest that true investment is about purchasing an asset, it could be a business, or a farm, rental real estate, or a fixed income security, that pays you income over time, irrespective of the price for which the asset could be sold. In this sense, investors do not need the market, and they do not have to worry about market prices, because the income from the underlying asset, whether through operating income or dividends, is sufficient to provide a satisfactory return. If the market is also willing to pay high prices for that income, the capital gain is gravy. This is the sense in which investing is business-like. If you own a McDonalds franchise, you don't spend your time wondering what the market price of the franchise is, you spend your time worrying about how to improve the performance of the business - as measured by the income that it throws off.
Commodities, by contrast are speculation in Buffett's view. While he admits there is nothing wrong, immoral or bad about speculation, it is NOT investing, since the asset itself, whether it be gold, silver, cotton or oil, does nothing for the purchaser directly. Instead, the purchaser has to hope that someone else will pay more in the future. In that sense, it is a bet on future attitudes towards the commodity in question.
His description of gold, a current favorite, is hilarious. Note he contrasts the value of gold with the universe of other assets that could be had for the amount equivalent to the market cap of gold (price per ounce x all ounces outstanding). Not said, but I think intended, is that assets such as farmland and businesses which have pricing power are no worse an inflation hedge than gold. True enough, earnings multiples may decline, but as income rises, risk of capital loss from inflation should be muted. Meanwhile, unlike the commodity, the farm does not have to be sold to provide income, so market price fluctuations are not really a big problem.
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