Worth reading and listening 07/07

Some articles and talks that I found worth reading and listening to over last few days:

Video: Why Bruce Berkowitz still likes stocks others hate? LINK

Get Rich Slowly – Jason Zweig LINK

Video: Mohnish Pabrai Talks at Google LINK



Worth Reading 16/06

Some articles that I found worth reading this week:

Pay Attention to Asset Allocation in this Bull Market  LINK

Active Value Investing: Is it really better?  LINK

Is the Product Attractive? Mental Models and Moats  LINK

The Seduction of Pessimism  LINK

Video Interview: The Contrarian Gene|Seth Klarman (~15 min)  LINK

Video Interview: Buffett, Jorge Paulo Lemann|Brazil Conference (~55 min)  LINK

“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. It’s imperfect, but that’s what it’s all about.” -Warren Buffett

Interesting conversation: Mohnish Pabrai with Steve Pomeranz

Came across an interesting conversation that the famous value investor Mohnish Pabrai had with Steve Pomeranz.

He talks about what value investing is, why individual companies matter to him more than broader markets (though not advised for normal passive or ‘defensive’ investors), the importance of temperament which should be a strange mix of patience and decisiveness, and contrary to popular perception – how entrepreneurs are actually looking for low risk opportunities with high potential returns.

You can listen to it at https://beta.prx.org/stories/207163

The audio has many other topics – the Pabrai talk is from minutes 9 to 18, and again from minutes 40 to 55 or so.

Some details of the talk are also at this link: http://www.stevepomeranz.com/mohnish-pabrai/

My Book Published and Available

It has been a while that I have posted to the blog, and one of the reasons has been editing my past writings in preparation for my book being published. So it is heartening to share on the auspicious occasion of Diwali that my book is published and is now available.

The title is ‘Path to Financial Independence: Simple Strategies for the Individual Investor’, and it is published by Wisdom Village Publications, New Delhi.

Printed copies are available online on Amazon, Flipkart.
Link for print copy on Amazon.in (domestic) is here
Link for print copy on Amazon.com (international) is here
Link for print copy on Flipkart.com is here
eBook for Kindle is available on Amazon and the link is here
The book is also displayed at the publisher’s website www.wisdomvillagepublications.com
Copies have reached the distributors and should be available next month provided the bookstores agree to display.
Please spread the word in your groups and networks to pass on the message of the book (and this blog!)

Thank you, and Wishing you and your families a very Happy Diwali.

Prem Watsa on the social bubble and other quotes

Prem Watsa was once called the savviest value investor you will never know. He is also known as the Canadian Buffett. In fact, his investing approach is uncannily similar.

He heads Fairfax which owns multiple insurance companies. He generally buys companies in whole and mostly when they are in trouble (Blackberry being a recent example). He also writes letters to his shareholders annually which seems similar to the ones that Buffett writes. Both Berkshire and Fairfax have offices with minimal staff.

The performance record he shared in his latest letter looks similar to the one Buffett shares, though it is not on page 1. Unlike Buffett though, his letter is mostly about performance of his company and investments it made, rather than the snippets of wisdom that Buffett’s letters are peppered with.

If interested, this year’s letter can be found at this link here

Interestingly though, Prem Watsa has commented on the bubble in social and tech companies both public and private.

“I have learned that the tech world is very difficult to predict and things change very quickly. Yesterday’s hit can be
today’s dog, but with the right leadership, things can also change very quickly for the positive. We continue to be
excited to be long-term shareholders of BlackBerry and have no intention of supporting a takeover of BlackBerry.

I am always amazed at the speculation that can take place in the stock market, as shown in the table below, and how
long it can last:”

Prem Watsa

And then he goes on:

“The Wall Street Journal says that worldwide there are 73 companies that are valued at more than $1 billion by
venture capital investors, versus half that number prior to the dot.com crash. The third column of the table above
shows the ratio of the latest valuation of each company to its total cumulative equity funding raised from inception.
So Uber has a valuation of $41.2 billion as compared to the cumulative equity capital raised of $2.8 billion – i.e., the
valuation is a hefty 14.7 times all of the money that was raised by the company.

We’re confident that most of this will end as other speculations have – very badly!”

Prem Watsa, an IIT Madras chemical engineer, who later moved to Canada, is a first generation value investing entrepreneur who bought Markel Financial in 1986 and named it Fairfax Financial to mean “fair, friendly acquisitions”.

In addition to his western holdings, the other difference from Buffett is that Watsa’s companies have holdings in India too – in the form of India Infoline, Thomas Cook, Sterling Resorts.

Not known to be flashy or open to media, he still has some wise words to share whenever he has spoken. Very often they would also remind the reader of the words of some of his other famous contemporaries.

Here is a brief compilation that one would do well to remember.

1. “Our long-term view has also meant that we have a commitment not to sell our core companies, no matter how attractive the price.”

2. “Buy when you hear the sound of canons. Sell when you hear the sound of trumpets.”

3. ” When the music stops, it stops very quickly.”

4. “Trees don’t grow to the sky, and markets don’t fall to the floor.”

5. “Don’t ever think that the [stock] market knows more than you do about the underlying business. That’s the biggest mistake you can make.”

6. “Speculation (and I have been in the business more than 35 years) is the same over time, over countries – the same.”

After 50 years: Excerpts from Buffett’s Letter to Shareholders

This year marks 50 years of Buffett and Munger running Berkshire Hathaway. Since 1977, Buffett has been writing an annual letter to his shareholders. A compilation of these letters was also published as a book.

This year the letter has its details on business performance, plus the now regular interesting insights and wisdom as usual, but is a bit different because it has a section by Buffett on the journey of 50 years and what the future might potentially hold, and section by Munger on what were the reasons for such stupendous success, both of which makes really good reading.

A lot of mainstream media (specially Western) has already covered highlights and salient points or key takeaways from this letter of 2014. You can read them from various sources if you simply google for it.

Also the letter itself is available here

All the letters from 1977 are available for free download here

Nevertheless, for those who are too lazy to do all of the above, at the risk of repetition, here are some excerpts, if you will, that might still be useful to a lay individual investor – just in case. I am not putting any of my own interpretations, as they are not required – it is simple, wonderful wisdom that doesn’t need any translation – only attentive reading and implementation.

1. On the limitations of his ‘cigar-butt’ investing strategy (buying businesses below book value or net working capital, and selling when they reach intrinsic value) in the early years – till the 1960’s

My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance.

But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only to a point. With large sums, it would never work well. In addition, though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating.

2. On Charlie Munger’s biggest contribution to Berkshire:

From my perspective, though, Charlie’s most important architectural feat was the design of today’s Berkshire. The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

3. On learning the value of buying and holding great businesses for the long-term from the See’s Candies experience:

The family controlling See’s wanted $30 million for the business, and Charlie rightly said it was worth that much. But I didn’t want to pay more than $25 million and wasn’t all that enthusiastic even at that figure. (A price that was three times net tangible assets made me gulp.) My misguided caution could have scuttled a terrific purchase. But, luckily, the sellers decided to take our $25 million bid.

To date, See’s has earned $1.9 billion pre-tax, with its growth having required added investment of only $40 million. 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.

4. On the chances of permanent capital loss by investing in Berkshire Hathaway shares: (which could probably equally apply to someone investing in an equity index fund too – useful if one reads this replacing Berkshire with an Index fund!)

I believe that the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments. That’s because our per-share intrinsic business value is almost certain to advance over time.

This cheery prediction comes, however, with an important caution: If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.

Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our view, that is an essential criterion for repurchases that is often ignored by other managements.)

For those investors who plan to sell within a year or two after their purchase, I can offer no assurances, whatever the entry price. Movements of the general stock market during such abbreviated periods will likely be far more important in determining your results than the concomitant change in the intrinsic value of your Berkshire shares. As Ben Graham said many decades ago: “In the short-term the market is a voting machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors – amateurs and professionals alike – border on lunacy.

Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.

Another warning: Berkshire shares should not be purchased with borrowed money. There have been three times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a satisfactory holding for investors. But it could well be a disastrous choice for speculators employing leverage.

5. On stock and bond investing and long term effects of inflation:

During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196%. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index).

There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.”

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

6. On Stocks and Bonds, and Risk and Volatility:

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits. For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.

7. On Investor Behaviour, Timing and Risk:

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.

8. On Investment Managers and Advisers:

The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.

There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.

Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.”

Notes from Prof Aswath Damodaran’s talk at Google

I found this wonderful talk – both in style and substance, in numbers and stories – as he mentions – delivered by Prof Aswath Damodaran (of New York University) at Google posted on Youtube over this weekend.

Here are some notes/ statements from this talk to takeaway:

“Accounting is not valuation”

“Goodwill is the most useless asset known to man – goodwill is a plug variable, the problem with goodwill is it sounds good”

“The Shareholder’s Equity is a reflection of the past. It is a record of everything that has happened to the company over its lifetime.”

“The value comes from Investments that you have already made or Growth assets”

“Growth assets is a bit messier. It is the value of investments I am expecting you to make over the future”

“You got to stop and make a reality check. What are you buying when you buy this company? Because the way you assess the company depends on that”

“You can’t make interest payments with ideas. If you are a young growth company, don’t go looking for trouble. You have to raise equity”

“Growth can be good, bad or neutral. So the question to ask is – what is the value you will create from the growth?”

“When I look at investing and valuation, there are two camps. There are the numbers people and there are stories people”

“The problem is that the stories people think that the numbers people are all geeks, and the numbers people think that the stories people are all crazy. And they can’t talk to each other. My endgame for my valuation class is to have numbers people with imagination, and stories people with discipline”

“And I think they (i.e. the numbers people and stories people) are both right and they are both wrong. There is something to be gained from the other side. And to me, that is the key to doing valuation right. Think about your weaker side and work on it – because that’s what is going to give you the power in valuation”

“When I hear strategic – I am going to run out to the door. Because you know what it means – that the numbers don’t fly but I really really want to do this. A strategic deal is a really stupid deal”

“If you have negative cash flows upfront, you should expect to see disproportionate positive cash flows at some point”

“I would rather be transparently wrong than opaquely right. And in this business of valuation, people want to be opaquely right. They will say things that are so difficult for you to construe that no matter what happens, they can say I told you so”

“Your estimates could be wrong, but that doesn’t mean you can’t make an estimate. Saying that there is too much uncertainty and then investing in a company, to me is the height of insanity”

“If you cannot value a company, atleast do the logical thing and never invest in those companies. But if you want to invest in growth companies, you have to get your hands around those numbers and make your best estimates”

“I have never got the urge to explain what some other person pays for something”

“Much of what you see passing for valuation out there is really pricing”

“Price and Value can diverge, and if they diverge, they can give you very different numbers”

” (On Social Media Companies and their valuation) This game is going crazy right now. People are buying users because that’s what the market is rewarding right now. You say- what’s wrong with that? Markets are fickle. Today they like users. Tomorrow they may not”

“This is a game – i.e. investing – where luck is the dominant paradigm. We like to think it is skill and hard work. It’s luck”

“There is no smart money. There is less stupid money and more stupid money”

“When we get big differences in value, it’s not because the numbers are different, it’s because we have different narratives. Not all of these narratives are equally likely.That’s really the question you got to ask. What is the right narrative for this company?”

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