A brand is no longer what we tell the consumer it is – it is what consumers tell each other it is.” –Scott Cook
IPOs such as Facebook indicate a much warmer market. For those who might enjoy reading more on a psychological perspective: http://blog.marketpsych.com/2012_02_01_archive.html
Musings about the latest happenings in the fields of investor psychology, behavioral finance, and neuro-finance. We’ll explain what the latest research means for you and your bottom-line.
—
Be skeptical……….
Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining 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. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date. –Warren Buffett
In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives over time.
Obviously, the readers of this blog are aware of the Federal Reserves easy monetary policy–growing monetary aggregates, zero interest rate policy, and high reserves in the banking system. However, as followers of Austrian economics (some of us), we realize that there is no perfect correlation between X growth in money supply and Y increase in nominal stock prices. The world is an extremely complex place and to model precision and prediction is MADNESS. However, you can gain a sense of how the wind blows. If people wish to hold lower cash balances then the effects of inflation will be increased.
Learn more here about monetary policy: www.economicpolicyjournal.com and www.mises.org and http://scottgrannis.blogspot.com/
I strongly urge you to read one of the greatest articles on investing by Buffett, How Inflation Swindles the Equity Investor. HERE: http://www.scribd.com/doc/65198264/Inflation-Swindles-the-Equity-Investor
We spoke at length about investing and inflation during this post: http://wp.me/p1PgpH-1h
Posted in Economics & Politics, Investing Gurus, Valuation Techniques
Tagged Austrian Economics, Buffett, inflation
Perfect solutions of our difficulties are not to be looked for in an imperfect world.–Winston Churchill
If you haven’t signed up, then here is another chance. I signed up; I need all the help possible.
Hi Everyone,
Good News!!! The course ‘Model Thinking’ will go live very shortly. When it does go live, we’ll be asking you to officially register and agree to some standard terms and conditions. In the interim, you can now go to the site, at http://www.coursera.org/modelthinking/lecture/preview and watch the first two sets of lectures. The first set of lectures covers the benefits of modeling and provides a framework for the course. The second set covers Thomas Schelling’s seminar model of segregation as well as a model of standing ovations that I developed with John Miller of Carnegie Mellon University.
The full site with quizzes, discussion forums, and all the other bells and whistles will be operational very shortly. I thank you all for your patience. Enjoy the first few lectures!!
As we say in Ann Arbor… Go Blue!!!
Scotte
Just in case you missed these:
Ask for a free quarterly newsletter by emailing: Hewitt.Heiserman@EarningsPower.com,
Ask to be on his email list: kessler@robotti.com,
and his weekly emailings:sfriedman@gmail.com There will be overlap, but you will find interesting articles, videos and value investors. Read ruthlessly, however, I don’t bother to read about Fairholme’s investment in BAC or AIG, because those companies are out of my circle of competence. Only read what benefits YOU.
big picture blog: http://www.ritholtz.com/blog/
“If the world were merely seductive, that would be easy. If it were merely challenging, that would be no problem. But I arise in the morning torn between a desire to improve the world and a desire to enjoy the world. This makes it hard to plan the day.” ― E.B. White
http://moreintelligentlife.com/past-issues
http://moreintelligentlife.com/content/ideas/charles-nevin/60-year-job-freeman-dyson
I e-mailed to ask him: (1) why he remained hard at work; (2) what were his strengths and weaknesses now compared with earlier in his career; and (3) what advice would he give to those who have been working for (a) one year, and (b) 30 years? This was his reply, received the next day:
Here are brief answers to your questions.
1. I continue working because I agree with Sigmund Freud’s definition of mental health. To be healthy means to love and to work. Both activities are good for the soul, and one of them also helps to pay for the groceries.
2. In my younger days my work as a scientist was deep and narrow. Now, as I grow old, my work grows broader and shallower. As a young man, I solved technical problems of interest only to a few specialists. As an old man, I write books about human affairs of interest to a broad public. In both halves of my life, I tried to make the best use of my limited abilities.
3. (a). Advice to people at the beginning of their careers: do not imagine that you have to know everything before you can do anything. My own best work was done when I was most ignorant. Grab every opportunity to take responsibility and do things for which you are unqualified.
(b). Advice to people at the middle of their careers: do not be afraid to switch careers and try something new. As my friend the physicist Leo Szilard said (number nine in his list of ten commandments): “Do your work for six years; but in the seventh, go into solitude or among strangers, so that the memory of your friends does not hinder you from being what you have become.”
Advice about girls: http://www.youtube.com/watch?v=8QTm7mtxnX0&feature=related
Robin Williams on football: http://www.youtube.com/watch?v=inbhtK80LBc&feature=results_main&playnext=1&list=PL83AB2BF79F282FDF
Good movie on US History, The Conspirator (2010), Directed by Robert Redford: http://www.imdb.com/title/tt0968264/. The movie is about Mary Surratt, the first woman civilian tried and executed by a U.S. Military Court in July 1865.
Why The Conspirators is relevant for today: http://www.salon.com/2012/01/23/western_justice_and_transparency/
http://www.salon.com/writer/glenn_greenwald/
Take a break:http://www.youtube.com/watch?NR=1&feature=endscreen&v=13h__3of8fI
Posted in Economics & Politics, Humor & Entertainment
Tagged Advice on Life, Civil War, Girls, Mary Surratt, Robin Williams, The Conspirator
They say such nice things about people at their funerals that it makes me sad to realize I’m going to miss mine by just a few days.–Garrison Keillor
Having trained staff on call is one reason fixed costs are high for a funeral home. As you see here, my funeral preparations are wrenching.
That’s not my father: http://www.youtube.com/watch?v=iSng37NIbjw&feature=related
The coffin moved: http://www.youtube.com/watch?v=h4vxCq_-fzs&feature=related
My readers aced the quizzes. My choices were too easy but the exercises might have given you an inkling of how our minds work. Answers and follow-up below:
Listen to your intuition and solve the problems as quickly as you can—instantly or in under 2 seconds!
Quiz 1: A bat and a ball cost $1.10. The bat costs one dollar more than the ball.
How much does the ball cost? ANSWER: 0.05
Ball = x
Bat = x+1 total $1.10, so 2x + $1 = $1.10 or 2x = $1.10 – $1.00 = $0.10 or X = $0.10/2 = $0.05
Usually people reflexively say $0.10 giving a total of $1.20.
Quiz 2: Try to determine if the argument is logically valid. Does the conclusion follow from the premises? Yes or No? No. The argument is flawed, because it is possible that there are no roses among the flowers that fade quickly. A plausible answer comes to mind immediately. Overriding your intuition requires hard work–the insistent idea that “it’s true, it’s true!” makes it difficult to check the logic and most people do not take the trouble to think through the problem.
All roses are flowers.
Some flowers fade quickly.
Therefore some roses fade quickly
The quizzes and answers came from the book, Thinking, Fast and Slow by Daniel Kahneman, winner of the Nobel Prize in economics. See if you can borrow a copy from your local library. The book teaches you about the danger of jumping to conclusions, not thinking a problem through, and we often confuse luck with skill. I am disappointed to learn that I am not 30% smarter than last July just because the market has risen. Damn!
At first I was skeptical, but this book deals with the research on how fast thinking (largely intuitive) and analysis (slow thinking) interact. Intuition is automatic and instinctive; therefore much of it is hard-wired. It can somewhat be controlled by the analysis (slow thinking) but the analysis side will draw from it often. While the book mainly is concerned with how these systems can lead us into faulty thinking, it also has a sub-plot on how to make your side of the story more persuasive. These systems rely on each other much more than was previously thought, often at the wrong time or too much weight from one or the other. Sometimes this is automatic, such as fear, other times there is simply “lazy” thinking, one system imput is given too much weight because it is easier or has become a habit.
Kahneman podcast:http://www.thoughtleaderforum.com/default.asp?P=909655&S=945705
Transcript of the podcast:http://www.thoughtleaderforum.com/957443.pdf
Summary notes:
There is a distinction between System 1 and System 2.
System 1 is automatic, fast, and falls prey to illusions.
System 2 is controlled, slow, requires attention, and is easily distracted.
Conclusions about judgment heuristics (rules of thumb):
HARD to think statistically. EASY to think associatively
We have EXCESS CONFIDENCE in what we think we know, and a deep, deep, deep inability to acknowledge our ignorance.
Humans DEVIATE from rational model with two major CORRUPTIONS:
All should be forced to engage outside the box. All analytic teams need an independent Yoda to challenge them.
The author emphasizes that hypotheses should be confirmed by trying to REFUTE the hypothesis rather than by searching for additional supporting evidence. Having the hypothesis is enough. If it cannot be refutes, THAT is worth much more than a documented but not seriously challenged hypothesis.
QUOTE (117): The tendency to see patterns in randomness is overwhelming.
The book could have been shorter, but you learn more about the flaws and traps in your thinking.
Since the prior two quizzes were so easy try this: Multiply two, three-digit numbers together. Hard but you can do it. Now do this while multiplying two different three-digit numbers together. http://www.youtube.com/watch?v=H8f8drk5Urw
Our minds have limited capacity. Eliminate the clutter and stay focused on one problem at a time; don’t multi-task.
Good luck in your learning.
We are working over the next few weeks on improving the organization of this blog. Subjects will be posted individually rather than clumped together as in previous posts. We will have a category section for easier searching.
Posts will be sporadic for the next two weeks because of a death in my family.
Posted in Housekeeping
Hard work pays off in the future. Laziness pays off now.–Steven Wright
Please take the following quiz. Listen to your intuition and solve the problems as quickly as you can—instantly or in under 2 seconds!
Quiz 1:
A bat and a ball cost $1.10
The bat costs one dollar more than the ball.
How much does the ball cost? ANSWER:____________
Quiz 2:
Try to determine if the argument is logically valid. Does the conclusion follow from the premises? Y or N?
All roses are flowers.
Some flowers fade quickly.
Therefore some roses fade quickly
—
Ok, now take a minute and go back and try to answer the questions with deliberate thought.
The answers and further elaboration will be posted tonight.
I intend to live forever – so far, so good–Steven Wright
Let’s test our comprehension of the reading.
What competitive advantages does Microsoft enjoy in the operating system industry?
Why have “box makers” not been able to establish a competitive advantage over other competitors? Why was the enormous growth in the market for PCs such a problem for Compaq specifically? Did it have any alternatives that might have worked out better than its chosen strategy? Did Apple?
Posted in Competitive Analysis
Tagged AAPL, Compaq, Competition Demystified, Dilemma of Growth, Growth, Niche Advantages, Strategic Logic
Getting rid of a delusion makes us wiser than getting hold of a truth. –Ludwig Borne
We can always learn in any situation like a family death about an industry such as funeral homes or the death-care industry. Interestingly, bankruptcy statistics show the lowest failure rates for small businesses in the funeral industry. Funeral homes typically have high fixed costs like 24-hour call service and staff, hearses, showrooms, vaults, and embalming rooms yet low failure rates. Perhaps funeral homes act as local monopolies–they have local economies of scale. Many funeral homes are family-owned and passed from generation to generation. One of the firms I spoke to as been in business at that location for 80 years.
What should strike you as an investor is that there is strong stability in the asset and earnings power value of funeral homes–hence the business longevity and low failure rates. I quickly found out the power of their local monopoly through my battle to obtain the lowest prices for a funeral service. After all, I am a bargain hunter to the core. What was so bad about going “Dutch” on my honeymoon?
I asked why the prices were so high to move the deceased. The funeral director asked where the deceased was currently located. In my car trunk right here in your parking lot, I replied. I was quickly informed that one needed a license and death certificate to transport a body. Beyond fifty miles, I needed a refrigerated container. There went my chance to shop around.
I placed two case studies on the funeral industry:
The Loewen Group Inc. (Dec. 2000): An industry roll-up and the perils of debt to finance growth.
Service Corporation International (July 1996): How to manage a high growth company in a low-growth industry.
Though we will soon go over Chapter 6: The Dilemma of Growth in Competition Demystified by Bruce Greenwald, these cases can act as a supplement to studying economies of scale and corporate finance. I will send the key to the folder to anyone who has already asked for a key to strategic logic case studies. If you do not have a key by this evening or you are new to this blog, you can email me at aldridge56@aol.com with just FUNERAL HOMES in the subject heading, and you will receive a key.
Death is part of life. The goal is to live and learn fully. See the advice my Papa gave me:http://www.youtube.com/watch?v=AloNERbBXcc&feature=related
Thanks Papa!
“Politics: “Poli” a Latin word meaning “many”; and “tics” meaning “bloodsucking creatures”.”–Robin Williams
We will continue from our last post discussing a search for a job at a hedge fund found here http://wp.me/p1PgpH-lB
Several readers contributed insights that expand on my narrow, eccentric view. I want to repost some of their comments:
PT writes: As a side remark, I believe you should also be aware that there aren’t that many real analyst jobs available at funds. First of all, the same team often manages different funds. Secondly, from time to time they are actively recruiting but the boutique investment funds for example are not recruiting on a regular basis. Therefore, I believe going your own way is probably a rewarding one in the long term. By going your own way, I mean doing your own research, talking to people, writing about your findings, etc. It is probably a cliché but…for example if you are not printing an annual report and reading it (at home) because you are curious and have fun reading it…you are probably not made for it. When you have a clear investment process, valuation techniques, thinking outside the box mentality, etc. etc. you probably get involved into better and better discussions with other people (fund managers) as well.
From llmarsii
I strongly agree with your point about figuring out what one’s true passion is. I can’t remember where I saw this (maybe from one of the videos that you actually) but I believe there’s a clip where Bill Gates talks about the 10,000-hour rule in Malcolm Gladwell’s Outliers. Gates mentions how the rule is more tiered than linear, e.g. you do the craft for a hundred hours, then 50% of the people stop and after 500 hours, 70% of the people quit, etc. By extension, I think first determining one’s true passion and then the discipline to dedicate 100% of one’s effort are very underrated keys to success.
Here are two of my favorite “motivational” videos that I would like to share:
1. Will Smith on Success: http://www.youtube.com/watch?v=q5nVqeVhgQE
2. Maybe it’s my fault: http://www.youtube.com/watch?v=cEVCjUG1Mww
Also, to PT’s point, I’ve observed that many good investors don’t hire teams of analysts. My guess is that they limit their investment decisions to their circle of competence and must invest in something they have researched and fully understand. Nevertheless, there are still great investors that use/have used the help of analysts (Graham, Einhorn, Klarman). The struggle for a young aspiring investor with financial difficulty is s/he may not have the financial means to start independently yet it’s often hard to find a real research-based analyst job. With that said, I’m confident that anything is possible with hard work, perseverance, and time. END
Wonderful advice from those readers. Reviewing the previous post, I seemed critical of MBAs and CFAs. No, those are great credentials, but having gone through those programs is neither necessary nor sufficient to developing into a good investor. Certainly, a hiring money manager may think that if someone has completed a Columbia MBA, then the candidate is smart and motivated so one less worry in that hire. But what they really want is someone with the ability to find, research/analyze and communicate in order to help he or she add value for his clients.
How can you leverage your time and efforts to learn while pursuing your job search? You can follow the lead of Michael Burry who posted his investment ideas on various web-sites to obtain feedback to improve his process. He not only learned but he got “discovered” by Joel Greenblatt. Yes, luck was involved, but he pursued his passion while learning. Burry also realized that if HE was to be successful he was going to have to do it his way and not just be a mimic of Buffett—just as Buffett went his own way versus Graham’s style.
Whether you only have $3,000 to invest or $300 million, you want to keep careful track of your reasons for each investment so over and over again you can go back and try to see your patterns of thinking, success and failure to improve. Learning for your mistakes is often harder than it seems, but you would be surprised how few professionals ruthlessly do it.
So how does that help you find a job? You need to show someone the quality of your thinking/work so they have a compelling reason to hire you. Depending on your personal situation look around in the town where you live and what businesses or industry catches your attention? One day, I flipped through my Value-Line at the library and came across Miller Industries, Inc. (MLR), a tow-truck manufacturer- MLR_VLhttp://www.scribd.com/doc/80380931/MLR-VL. And Tow-Truck Magazine http://www.scribd.com/doc/80381569/Tow-Times-Miller-Industries.
I noticed the high returns on capital prior to 2007 and wondered how can a dinky tow-truck company earn such good returns, and then why was there a decline in ROA? Could I normalize earnings and was this a good business?
In the 10-K I saw that the business wasn’t that capital intensive plus the industry structure was more like a monopoly with MLR having a dominant share. In fact, a few years back, Miller was sued by the U.S. Justice Department to prevent an acquisition. Miller buys trucks beds at cost which they pass onto to the customer, then they make their money in assembly of the hydraulic winches and pumps plus providing parts to the dealers. Similar to Catepillar, success was driven by their dealer relationships. The wider selection of models, the better product offering for the dealers, while more dealers improved sales and service which allowed for economies of scale in making tow trucks. The strong become stronger. The decline in capital seemed temporary due to a retooling and restructuring investments plus the drop in sales due to the recession. Also, even I could grasp how the tow truck business worked.
To prove this to myself, I called on tow truck operators, dealerships and competitors. Sitting in a tow truck at 11 PM on a freezing Chicago Winter’s night, I learned about the importance of a strong dealer network. An operator doesn’t buy a tow truck to take Betty Lou to the drive-in; he or she buys a capital asset to make money. If the capital assets is out of service, then costs mount quickly. The winch stopped working while pulling out an over-turned bus. The dealer had two mechanics out there within 35 minutes and a hour later, we were up and towing the bus to its garage.
The analyst can writeup an industry map, show how the competitive dynamics work, prove that the company has strong assets (dealer relationships) that are reinforced by economies of scale as shown by their market share and low unit costs by work done outside of just the 10-K and normal analysts’ reports. When in 2009 the company was trading at a $36 million enterprise value with excess cash, you could buy the business for well under liquidation value plus its growth would be profitable. No one on Wall Street was covering the company. Yes, you have to spend a few nights drinking cold coffee, and driving around with a guy who chews tobacco, but go the extra mile. The investment worked out, but I no longer own the company’s stock. The point is to show you can do deep due-diligence and original work on your own.
Go back to this post on the Sleuth Investor: http://wp.me/p1PgpH-W to learn how to do more in-depth research. I can guarantee you will set yourself apart. You can even check your work by sending your report to the CEO of Miller or a competitor and asking what might you have done better before you send it to a small/micro cap money manager. You will receive feedback and may even get referrals to other opportunities.
Also, Wall Street is not the only place you can research companies. You can work for the M&A depart of a corporation; you can do investigative business journalism; you can become a loan officer, etc. There are many ways to go to heaven.
Granted, you might be out of your comfort zone like Gene Hackman, but you will learn: We Are Family http://www.youtube.com/watch?v=dYLk34GCXbo Turn up the volume after the annoying 30 second commerical (I don’t put those there!)
GOOD LUCK!