A Masters in Munger Take the university level course.
What is Mr. Druckenmiller worried about?
A Masters in Munger Take the university level course.
What is Mr. Druckenmiller worried about?
A case study of Warren Buffett and Charlie Munger’s investment in and management of Blue Chip Stamps. Includes:
If you find any errors or have any other contributions, make a pull request or contact me through the Twitter handle @maxolson.
PS: On the road, but I haven’t forgotten about Yamana. I wouldn’t buy above $8.00.
If gold is down because the market thinks the Fed will raise rates and end QE, then those assumptions are based on fantasy. HOW can the FED EVER stop QE without the house of cards collapsing? What does history say: http://www.zealllc.com/2014/goldrrf.htm
Here is the Argentina Peso in free-fall:
HAVE A GREAT WEEKEND!
Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past. –Charlie Munger
Thanks to a reader:
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple. –Charlie Munger
Dare to Be Great You have to weight your opportunities. Of course, how do you know when you have an exceptional opportunity? Experience and method. Joel Greenblatt was a master at position-sizing when he found low risk investments.
position_sizing (Academic paper)
Trembling with Greed http://www.fool.com/news/foth/2001/foth010213.htm
Trading Places (SELL!): http://youtu.be/1tmI867fAYU?t=1m55s Note the patience, patience and then ACT IMMEDIATELY IN SIZE.
Thank you once again sharing the links, access to the value vault, and your blog posts. My experience over the last couple of years has been primarily in private growth investing, and the insights you have shared have helped me significantly reconsider my investment approach.
My Reply: There are plenty of case studies and examples on this site to learn about valuation. You can visit:http://pages.stern.nyu.edu/~adamodar/ https://www.coursera.org/course/accountingand…Value Investing for Grown ups by Damodaran to learn about valuation and accounting. But the secret to investing and improvement lies within you. That sounds either profound or hokey, but true. I don’t believe MBA courses or apprenticeship (if you can find one) will really help. You don’t want to learn about another person’s style, you want to develop your own. Google and youtube.com Michael Burry for why this is true.
As an example, you can read 5 Keys to Value Investing. The author worked as an analyst for Micheal F. Price. He would submit ideas and get grilled by Price. I didn’t see a whole lot of mentoring going on. Of course, you want to study other investors and the psychology of investment:
But there are no shortcuts to studying yourself. You have to consistently and persistently keep a notebook, log, diary or tape recorder of your trades/investments/decisions. Review them that day and a week, month and year later. Study your proclivities. Can you step outside and see yourself objectively? Impossible? Hire a high school kid on Summer Vacation to film your day at work and see if you notice tendencies. You won’t believe the tape!
Do you have a business plan for your investing career? Goals? Map out the steps.
I highly suggest you see how your countrymen developed their own styles in: http://www.amazon.com/Free-Capital-private-investors-millions/ by Guy Thomas
Review: Conclusion “Free Capital” treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.
As an example, I know that I am an emotional basket-case. I cry during the cartoons if Tweedy Bird gets hurt (http://youtu.be/89FDAYsTgfs). If I buy a stock at $7.05 and the next print is 7.04, I am on the floor wailing. If Jim Cramer on CNBC said buy Tweedle Dumb stock, I would wait for the stock to rally, then buy after the news is priced in only to sell at a loss seconds later.
Also, I have an aversion to paying full price. I went “Dutch” on my honeymoon; my wedding had a cash bar. My guests had to take the subway to the reception; some had to hitch-hike. I am a cheapie.
Ok, I have to deal with serious psychological issues, but how does that help YOU?
Well, even I can develop methods to work around my quirks. See the chart at the top of the page. I have been buying certain gold/silver stocks over the past year because of two reasons: historic/generational low cheapness and lack of the same in other markets, in general. But prices can swing 10% in a day! How would I survive?
My time frame is the next three-to-five years. I study the companies without input from others, I turn off CNBC, and I place my buy and sell orders BEFORE the market and then check at the end of the day. I may go months without doing anything in terms of buying or selling, but I will keep following the companies and their industries closely. I have also held stocks like Enstar (ESGR) for a decade.
My time-frame is longer than most participants. I work around my psychological hurdles because I have faced them. And only YOU can face yours.
Education is the ability to listen to almost anything without losing your temper or your self-confidence. –Robert Frost
My idea of education is to unsettle the minds of the young and inflame their intellects. –Robert M. Hitchins
My own education operated by a succession of eye-openers each invovling the repudiation of some previously held belief. –George Bernard Shaw
Every act of conscious learning requires the willingness to suffer an injury to one’s self-esteem. That is why young children, before they are aware of their own self-importance, learn so easily; and why older persons, especially if vain or important, cannot learn at all. –Thomas Szasz (www.gloomboomdoom.com)
A Young Reader’s Question
How do I become a great investor?
CSInvesting: Well, it might be too late for you. I started at age eight, and I struggle to keep the pace. However, if you still wish to learn, read widely and experience life. Start a small business. Sell T-shirts or think of a fun business where you can sell products to your classmates.
My grandfather’s advice: “John, that’s your name right?” http://youtu.be/AloNERbBXcc
Buffett’s lecture to Indian business students (MUST SEE): http://youtu.be/4xinbuOPt7c (Value the business BEFORE you see the price.)
A Course in Charlie Munger’s Worldly Wisdom
The journey towards worldly wisdom travels through two equally important territories. Firstly, learning significant concepts from the different disciplines (“the big ideas”). Secondly, learning to recognize patterns of similarities among them.
Course Outline for Worldly Wisdom
Track down more lectures: http://www.safalniveshak.com/fundoo-professor-called-sanjay-bakshi/
HAVE A GREAT WEEKEND!
“The best thing a human being can do is to help another human being know more.”
— Charlie Munger
“Go to bed smarter than when you woke up.”
— Charlie Munger
Most people go though life not really getting any smarter. Why? They simply won’t do the work required.
It’s easy to come home, sit on the couch, watch TV and zone out until bed time rolls around. But that’s not really going to help you get smarter.
Sure you can go into the office the next day and discuss the details of last night’s episode of Mad Men or Game of Thrones. Sure you know what happened on Survivor. But that’s not knowledge accumulation, it’s a mind-numbing sedative.
You can acquire knowledge if you want it.
In fact there is a simple formula, which if followed is almost certain to make you smarter over time. Simple but not easy.
It involves a lot of hard work.
We’ll call it the Buffett formula, named after Warren Buffett and his longtime business partner at Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They are also learning machines.
Read more every day here: http://www.farnamstreetblog.com/
Commenting on what it means to have knowledge, in How To Read A Book, (PLEASE follow that link!) Mortimer Adler writes: “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”
Can you explain what you know to someone else? Try it. Pick an idea you think you have a grasp of and write it out on a sheet of paper as if you were explaining it to someone else. (see The Feynman Technique and here, if you want to improve retention.)
Nature or Nurture?
Another way to get smarter, outside of reading, is to start surround yourself with people who are not afraid to challenge your ideas.
Like what you’re reading? Join thousands of others and get a free weekly update via email.
“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” — Charlie Munger
Progress, changes in the index and more money in circulation.
Have a good weekend. I highly recommend, HOW TO READ A BOOK by Adler.
You will become a better analyst/investor. Plus, I need everyone here to become a whole lot smarter the next time I pose a “brain crusher.”
He is a deep value investor in small caps.
VII_Oct2010_Ghazi and Ghazi-ValueInvestingCongress-100112 Learn more by downloading the annual reports (3 years) and proxies, study and try to value the company. THEN read his presentation. Do you agree/disagree? I bet less than 1 in 10,000 people would make the effort. While I bet some “investors” bought LAYN on their crackberries/IPhones after a few words by the speaker. You can do better. Make the effort and go the extra mile.
Gottfried-ValueInvestingCongress-100212 (obscure micro-caps)
Life is my college. May I graduate well, and earn some honors.” –Louisa May Alcott, American writer
I will be posting almost exclusively on strategic logic as we study Competition Demystified by Bruce Greenwald (in the Value Vault, see ABOUT, http://csinvesting.org/about/) in early 2012. Now is the time to voice a complaint, comment or suggestion if you have reservations about our impending trek. Understanding financial statement analysis, studying market history and other great investors are all part of your investment journey. The gap, I see, in the education of many is in understanding competitive advantages. There is no way around studying case studies and thinking hard about the subject.
The most profound effect studying competitive analysis, franchises, and barriers to entry as an investor has been to understand how rare structural competitive advantages really are. And the great businesses that can grow and redeploy capital at high rates are precious and difficult to find. Companies are often non-franchise, asset-type investments that an investor should buy only when there is a huge discount (read: massive disappointment, despair and disgust with the business) between reproduction and earnings power value (See Greenwald Lecture Notes here: http://wp.me/p1PgpH-23). If you are similarly influenced, you will be much more discerning in your investments. You may even invest as Buffett suggests, with a 20-hole punch-card. Much of your investment life will be spent reading while waiting for the perfect pitch.
Back to why our study of Competition Demystified is critical. Buffett is a keen student of business franchises as he was tutored by Charlie Munger when they bought See’s Candy.
(Source 1983 Berkshire Annual Report and Letter to Shareholders). Despite the volume problem, See’s strengths are many and important. In our primary marketing area, the West, our candy is preferred by an enormous margin to that of any competitor (Regional/Local Economies of Scale).
You also alluded to getting a return on the amount of capital invested in the business. How do you determine what is the proper price to pay for the business?
Buffett: It is a tough thing to decide but I don’t want to buy into any business I am not terribly sure of. So if I am terribly sure of it, it probably won’t offer incredible returns. Why should something that is essentially a cinch to do well, offer you 40% a year? We don’t have huge returns in mind, but we do have in mind not losing anything. We bought See’s Candy in 1972, See’s Candy was then selling 16 m. pounds of candy at a $1.95 a pound and it was making 2 bits a pound or $4 million pre-tax. We paid $25 million for it—6.25 x pretax or about 10x after tax. It took no capital to speak of. When we looked at that business—basically, my partner, Charlie, and I—we needed to decide if there was some untapped pricing power there. Where that $1.95 box of candy could sell for $2 to $2.25. If it could sell for $2.25 or another $0.30 per pound that was $4.8 on 16 million pounds. Which on a $25 million purchase price was fine. We never hired a consultant in our lives; our idea of consulting was to go out and buy a box of candy and eat it.
What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn’t take any capital.
And we make more money 10 years from now. But of that $60 million, we make $55 million in the three weeks before Christmas. And our company song is: “What a friend we have in Jesus.” (Laughter). It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts—somebody’s birthday or more likely it is a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three-week period. Men buy on Valentine’s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won’t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine’s Day is the biggest day.
Can you imagine going home on Valentine’s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let’s say there is candy available at $6 a pound. Do you really want to walk in on Valentine’s Day and hand—she has all these positive images of See’s Candy over the years—and say, “Honey, this year I took the low bid.” And hand her a box of candy. It just isn’t going to work. So in a sense, there is untapped pricing power—it is not price dependent. (Source: Buffett’s 1998 Speech to Univ. of FL Business School Students)
Strategic logic or microeconomics is one of the mental models that Charlie Munger suggests you know cold.
Too Much Emphasis on Macroeconomics
My fourth criticism is that there’s too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It’s like trying to master medicine without knowing anatomy and chemistry. Also, the discipline of microeconomics is a lot of fun. It helps you correctly understand macroeconomics. And it’s a perfect circus to do. In contrast, I don’t think macroeconomics people have all that much fun. For one thing they are often wrong because of extreme complexity in the system they wish to understand.
Let me demonstrate the power of microeconomics by solving a microeconomic problem. One simple problem is this: Berkshire Hathaway just opened a furniture and appliance store in Kansas City [www.nfm.com/store_kansascity.asp]. At the time Berkshire opened it, the largest selling furniture and appliance store in the world was another Berkshire Hathaway store, selling $350 million worth of goods per year. The new store in a strange city opened up selling at the rate of more than $500 million a year. From the day it opened, the 3,200 spaces in the parking lot were full. The women had to wait outside the ladies restroom because the architects didn’t understand biology. (Laughter). It’s hugely successful.
Well, I’ve given you the problem. Now, tell me what explains the runaway success of this new furniture and appliance store, which is outselling everything else in the world? (Pause). Well, let me do it for you. Is this a low-priced store or a high-priced store? (Laughter). It’s not going to have a runaway success in a strange city as a high-priced store. That would take time. Number two, if it’s moving $500 million worth of furniture through it, it’s one hell of a big store, furniture being as bulky as it is. And what does a big store do? It provides a big selection. So what could this possibly be except a low-priced store with a big selection?
But, you may wonder, why wasn’t it done before, preventing its being done first now? Again, the answer just pops into your head: it costs a fortune to open a store this big. So, nobody’s done it before. So, you quickly know the answer. With a few basic concepts, these microeconomic problems that seem hard can be solved much as you put a hot knife through butter. I like such easy ways of thought that are very remunerative. And I suggest that you people should also learn to do microeconomics better. END.
You should read the first three chapters of Competition Demystified to explain how Mrs. Bee developed Nebraska Furniture Market’s advantage. We will review those chapters in the next several posts while delving deeply into minimum efficient scale and economies of scale.
Whether you learn about microeconomics here or elsewhere, it is critical to apply these mental models in your business analysis.
Johnson spoke well when he said that life is hard enough to swallow without squeezing in the bitter rind of resentment. Charlie Munger
“Invert, always invert,” Jacobi said. He knew that it is in the nature of things that many hard problems are best solved when they are addressed backward. –Charlie Munger
Below are tips from the great and the not-so-great on how to guarantee misery and second-rate achievement in your life.
Johnny Carson says,
John Chew pleads: Meet my Ex. http://www.youtube.com/watch?v=i5OlolbLXvw. Not to be watched if squeamish.
Charlie Munger intones:
Now to put our lessons to the test…
I read the news this morning…Oh boy. –The Beatles.
This morning I read a Bloomberg story discussing First Solar’s attractive valuation following its recent selloff. Also analysts have rekindled takeover chatter. “First Solar is still profitable,” a Kaufman analyst explains. “So you are buying the best in the industry at a discount price. Certainly for both GE and Siemens (SI), it would diversify their energy platform.” FSLR trades at 60% of book value and 5 or 6 times trailing earnings.
If the Kaufman analyst said that to me, this is exactly how I would respond. http://www.youtube.com/watch?v=6eXFxttxeaA
Why? What is the strategic thinking you would need to do before considering this as an investment?
How could you have avoided this house of pain before the price drop?
Subsidy Orgy Ending, First Solar’s Hangover is Just Beginning By Jeff Bailey
Ever been to a sporting event where, during a break in the action, they wheel out that clear booth, stick some poor sucker from the crowd inside, and cash is blown into the enclosure for a brief period of shameless money-grabbing?
The global boom in government subsidies to the solar panel industry went something like that, and one can see the brief and frenzied joy of that period in First Solar’s (FSLR) up-and-down stock chart, with today’s price a steep 90% or so below the peak.
The good times were good. Malaysia was handing out huge tax holidays for manufacturers, so First Solar built plants there. Germany seemed intent on covering every roof with solar panels, paid for in part by government subsidy, so First Solar sales were huge there. And not to be left out, the U.S., during its giddy economic stimulus days, offered cash grants for solar installations. Party on.
But, as with past alternative-energy orgies, the good times must come to an end. Goodbye to First Solar’s market cap of $20 billion. Jimmy Carter’s Public Utility Regulatory Policies Act of 1978, known as PURPA, led to tens of billions of dollars of alternative energy projects, including some early and costly solar. But paying above-market electricity rates to subsidize the projects became so costly that PURPA was eventually curtailed.
Poor politicians can’t help themselves. They love stuff like solar and wind, which generate manufacturing and construction jobs and makes everyone involved seem so with it. More efficient energy projects – like ones that reduce consumption – are by comparison so boring, even if they make more sense.
Last week, in announcing reduced earnings projections for 2011 and 2012, First Solar’s CEO Mike Ahearn said, “we are recalibrating our business to focus on building and serving sustainable markets rather than pursuing subsidized markets.” Investors can count on thinner margins and all the hassles and expenses that go with building and operating huge energy projects. And solar remains a relatively expensive way to make power. Unless the brent crude oil price chart goes to $200 a barrel.
In the meantime, the stock is bound to look super cheap by some measures. A trailing PE of 5, of course, suggests some big adjustments ahead to the E.
But it won’t be until 2014, Ahearn said in a statement, that First Solar’s will “earn substantially all” of its revenues from non-subsidized markets. So the results until then are nothing to make long-term bets on. The last of the party is still winding down. End.
OK, I am not saying First Solar is not a buy at any price, but what did the Wall Street “analysts” not analyze.
Studying competitive advantage will help us as much in avoiding a house of pain as in finding profitable investments.