Links

A LETTER TO MY UNBORN GRANDCHILDREN - by Jason Zweig (LINK)

Will there ever be another Charlie Munger? (LINK)

Related book: Charlie Munger: The Complete Investor

Sanjay Bakshi: The Multiplication Rule (LINK)

Bill Gates launches multi-billion dollar clean energy fund (video) [H/T Will] (LINK)

The New Atomic Age We Need - by Peter Thiel (LINK)

Talks at Google: Pedro Domingos discusses his book The Master Algorithm (video) (LINK)

Investing quote of the day, via Howard Marks in The Most Important Thing (longer excerpt HERE), and similar to the quote I posted this weekend:

Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story. . . . Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity. 

The balance between an openness to new ideas and a healthy skepticism...

This is from the book Capital Account and was written in 2001 during the tech bust, but it is probably timely for many technology companies today as well:

The challenge for investors is to distinguish the genuine innovations which create sustainable competitive advantage for companies and value for shareholders from the MacGuffins of this world. This requires a balance between an openness to new ideas and a healthy scepticism. In the last few years, we have seen many new investment concepts turn out to be nothing more than flagrant promotions. Even in the more questioning times that lie ahead, an aptitude for spotting absurdities in the stock market -- the financial equivalent of devices for trapping lions in Scotland -- remains an invaluable component in the fund manager's tool-kit.

Links

Warren Buffett: The Oracle of Nebraska Shares His Wit and Wisdom With Business Students [H/T Linc] (LINK)

Vegas Casinos Can Fire Buffett's Utility -- for $127 Million [H/T Linc] (LINK)

An excerpt from Michael Lewitt's The Credit Strategist (via John Mauldin), "Be Careful Out There" (LINK)

Commodity prices are plunging, the dollar is powering higher, the yield curve is flattening, ObamaCare is collapsing, global trade is plummeting and terrorism is spreading across the globe. The high yield credit markets are sending distress signals and 10-year swap spreads are negative. Energy companies are going out of business faster than you can say “frack” and trillions of dollars of European bonds are again trading at negative interest rates. The world is drowning in more than $200 trillion of debt that can never be repaid while European and Japanese central bankers promise to print more money and the Federal Reserve is being dragged kicking-and-screaming into raising interest rates by a paltry 25 basis points. Accurate pricing signals in the markets are distorted by overregulation, monetary policy overreach and group think. Hedge funds are hemorrhaging and investors, desperate to generate any kind of nominal return on their capital, continue to ignor e the concept of risk-adjusted returns. Some market strategists believe this is a positive environment for risk assets; I am not among them. 

... 

Companies in the United States have taken advantage of low interest rates to issue record levels of debt over the past few years to fund buybacks and M&A. This has driven the total amount of debt on balance sheets to more than double pre-crisis levels. However, cash flows have not kept pace, resulting in leverage metrics that are the highest in 10 years.

I missed these earlier, but Jake Taylor's latest Five Good questions interviews were with Dorie Clark about her book Stand Out, and with Wesley Gray about his book The DIY Financial Advisor. And then released today was his interview with Kabir Sehgal about his book Coined.

For print books at Amazon, you can use the coupon code 'HOLIDAY30' to get an extra 30% of that print book (up to $10 value) if you order over weekend. So while it wouldn't ship until next month, it looks like it'll save you $10 on a more expensive book like Capital Returns. I used my code on a cheaper option from Vaclav Smil: Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines.

And for the next few days, Audible is having a sale with 300+ books priced at $4.95. After going through the list, here are some that I've either listened to and liked or that look interesting:

Misbehaving: The Making of Behavioral Economics

Bird by Bird: Some Instructions on Writing and Life

Why Zebras Don't Get Ulcers: The Acclaimed Guide to Stress, Stress-Related Diseases, and Coping

Meditations (only $2.99)

Do More Faster: TechStars Lessons to Accelerate Your Startup

Lawrence in Arabia: War, Deceit, Imperial Folly, and the Making of the Modern Middle East

The Fellowship of the Ring: Book One in The Lord of the Rings Trilogy [A classic work of fiction with a highly-rated narration.]

What It Is Like to Go to War

Means of Ascent: The Years of Lyndon Johnson

The Curious Incident of the Dog in the Night-Time

Medical School for Everyone: Grand Rounds Cases

Links

While the hardcover still doesn't look like it's available until next month, the Kindle version of Capital Returns is now available, HERE. And if you don't have a Kindle yet but are considering one, it looks like Amazon has them on sale for Black Friday week (Kindle; Kindle Paperwhite).

Latticework of Mental Models: Gambler’s Fallacy (LINK)

Yahoo Finance asks Warren Buffett about what gives him optimism (video) (LINK)

Yahoo Finance asks Warren Buffett about what keeps him up at night (video) [H/T Will] (LINK)

What is a Better Strategy – Invest in Berkshire, or Buffett’s Stock Picks? (LINK)

As China's Workforce Dwindles, the World Scrambles for Alternatives (LINK)

The First Woman Of Women: How Melinda Gates Became The World's Most Powerful Advocate For Women And Girls (LINK)

Trends in oil production [H/T @cullenroche] (LINK)

How Failed JC Penney CEO Ron Johnson Is Redeeming Himself With Enjoy [H/T Phil] (LINK)

Uber and the Sharing Economy’s Biggest Threat (LINK)

This looks like an interesting little book (based on THESE free recordings): Exploring the Practice of Antifragility

Links

60 Minutes on The Future of Money (video) (LINK)

A "mobile money" revolution has swept Kenya, where people can send and receive money on their cell phones. It's improved commerce and brought basic necessities to poorer areas

Howard Marks on Bloomberg last Friday (video) [H/T ValueWalk] (LINK)

Howard Marks, co-chairman at Oaktree Capital, discusses high-risk debt markets and the future of hedge funds. 

Bob Gurr, Disney Imagineer | Talks at Google (video) (LINK)

Retired Disney Imagineer Bob Gurr stopped by Google to discuss his career which spans 40 years developing more than 100 designs for attractions ranging from the Disneyland and Walt Disney World Monorails to the design of the mechanical workings of Disney’s first Audio-Animatronics® human figure, Abraham Lincoln, featured in Great Moments with Mr. Lincoln.

Blue Origin completes successful Earth landing of its New Shepard rocket (LINK)

Jeff Bezos just accomplished the near impossible: one-upping Elon Musk. 

Bezos’s private space company, Blue Origin, has just completed a successful Earth landing of its New Shepard rocket, making it the first reusable rocket to land totally intact, something that has eluded Musk’s SpaceX.

Quote of the day, from John Mackey in the Whole Foods conference presentation from last week:

"But one thing about business is that if you're not willing to attack your own business model, you can't expect other people not to attack it.... You have to be willing to disrupt yourself because others are going to disrupt you."

Book of the day: How the World Was One [H/T Chris Dixon in his chat with Shane Parrish. There are also more good books mentioned in the show notes]

Links

Jason Zweig on WealthTrack (video) (LINK)

Related book: The Devil's Financial Dictionary

Even Michael Lewis Was Surprised Hollywood Bet on The Big Short [H/T Linc]  (LINK)

Related book: The Big Short

Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate? (LINK)

Grant’s bearish view on Valeant from March 2014 (LINK)

Buffett's Grandson Seeks Own Investment Route: Social Change [H/T Will] (LINK)

ValueWalk's three-part interview with Christopher Pavese (LINK) [PDF at bottom of page of all three parts]

Achal Bakeri's talk to Sanjay Bakshi's class at MDI (LINK)

How A “Platform Company” Works: The Shortcomings of DCFs and Why People Miss Lollapaloozas (LINK)

Books of the day:

Essentialism: The Disciplined Pursuit of Less

Luck: The Brilliant Randomness Of Everyday Life

Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change [A book described in Breaking Smart as being "For readers interested in a broad understanding of the economic context of software eating the world, Phelps’ book is probably the single best resource."]

Montaigne quote

From The Complete Essays of Montaigne:

"Look on each day as if it were your last, And each unlooked-for hour will seem a boon." HORACE

It is uncertain where death awaits us; let us await it everywhere. Premeditation of death is premeditation of freedom. He who has learned how to die has unlearned how to be a slave. Knowing how to die frees us from all subjection and constraint. There is nothing evil in life for the man who has thoroughly grasped the fact that to be deprived of life is not an evil. 

What kind of learner are you?

When you see a couple of references to the same idea within a 24-hour period, it makes you take notice. As is evident from some of the excerpts I've posted recently, I just finished going back through Josh Waitzkin's book, The Art of Learning. In the book, he talks about different types of learning styles, and compares and contrasts his own way with some other people that were a part of his life at various times. I had made a note to explore this further, and I got a little clarity on some of it while re-listening to his 2008 talk at Google today. The whole discussion is good, but the key minutes about this idea occur in the 31:17-35:36 range. Toward the beginning of those minutes in the video, Josh says:

"The biggest flaw in the educational system is that people are trying to fit all students into the same cookie-cutter mold.... I think people have to become much more observant about their own character; about the way they learn. Are you a kinesthetic learner, a visual learner, an auditory learner? Are you a naturally more aggressive person, or are you a more cautious person?"

That comment made my ears perk up because I had just finished reading an article about the football coach at my alma mater (which also has a couple of good quotes from Warren Buffett). This paragraph from that article is the one that sounds a lot like the above:

While Moglia may not pick apart the offense's play-calling strategy, he remains passionate about teaching. All of his players are required to take a VAK learning test, so the coaches know if they're visual, audio or kinesthetic learners. Coaches should be aware if they should teach a specific player by acting out technique, drawing on a whiteboard or providing verbal instruction. Moglia doesn't want his assistants to tell him they explained something to a player who didn't get the message. It's incumbent on coaches to communicate their points more effectively. "That's our fault if a player doesn't understand something," Moglia says. "So, if he doesn't understand it, why doesn't he understand it? Coaches need to be great teachers."

It looks like there's a good overview HERE, and a short book on it HERE. But if anyone has more familiarity on applying this or some good resources, I'd love to know more. 

The natural voice...

As I go back through Josh Waitzkin's book The Art of Learning, which I had originally read several years ago, I'm paying special attention to things that might be applicable to business and investing; ideas that may lead one to achieve peak performance, and things that may lead one to failure. As I came across the excerpt below, it made me think that there may be some insight into why certain partnerships and groups of people can work incredibly well together, and why some are likely to end in failure. I haven't read Michael Eisner's book yet, Working Together: Why Great Partnerships Succeed, but I know Warren Buffett and Charlie Munger are included in it, so I may need to look into it.

After reading the excerpt below, it made me think that one of the reasons they may have succeeded so well together is that their relationship is structured in a way that allows them to both learn and pursue their interests in their own way; with Buffett spending more time with Berkshire businesses and managers and Munger spending more time pursuing worldly wisdom. Their pursuits and the way they spend their time have plenty of overlap, but the details are more personalized to each of them. And the knowledge they've gained and the progress they've made individually come together in a way that leads to a smarter and more objective way to make decisions over time. In essence, they have structured their environments in a way where they can pursue what they are passionate about, and that allows them to stay interested and keep on tap dancing to work every day. 

From The Art of Learning:

A key component of high-level learning is cultivating a resilient awareness that is the older, conscious embodiment of a child’s playful obliviousness. My chess career ended with me teetering on a string above leaping flames, and in time, through a different medium, I rediscovered a relationship to ambition and art that has allowed me the freedom to create like a child under world championship pressure. This journey, from child back to child again, is at the very core of my understanding of success.  

I believe that one of the most critical factors in the transition to becoming a conscious high performer is the degree to which your relationship to your pursuit stays in harmony with your unique disposition. There will inevitably be times when we need to try new ideas, release our current knowledge to take in new information—but it is critical to integrate this new information in a manner that does not violate who we are. By taking away our natural voice, we leave ourselves without a center of gravity to balance us as we navigate the countless obstacles along our way.

Links

Getting caught up on a few links after a little time away...

Notes from the Berkshire Hathaway 50th Anniversary Symposium (Market Folly, ValueWalk)

Prominent film company focuses documentary lens on Buffett [H/T Linc] (LINK)

How does Charlie Munger recommend dealing with adversity? (LINK)

Shane Parrish talks to Chris Dixon on The Knowledge Project (LINK) [Shane is also starting a membership program that is worth considering, HERE.]

John Malone interview on CNBC (video) [H/T Santangel's Review] (LINK) 

"I'm an investor. When I see opportunity to create value for my shareholders, I tend to want to dabble in that. So that effort to position capital, to anticipate value creation, I think is my job."

How to Become a Better Reader (LINK)

Related book: How to Read a Book

Latticework of Mental Models: Reciprocation Tendency (LINK)

Related book: Influence: The Psychology of Persuasion

Robert Shiller at the LSE discussing Phishing for Phools (LINK)

Robert Shiller's Talk at Google for Phishing for Phools (video) (LINK)

Beyond Banking: under attack on all sides (LINK)

Huge Valeant Stake Exposes Rift at Sequoia Fund [H/T Linc] (LINK)

ACHAL BAKERI, LEARNING MACHINE - by Sanjay Bakshi (LINK)

Managing a creative culture (LINK)

Related book: Creativity, Inc.

The Bill Simmons Podcast - Episode 19: Malcolm Gladwell (LINK)

HBO's Bill Simmons talks to best-selling author Malcolm Gladwell about Grantland's abrupt demise, public funded sports arenas/stadiums, new owner syndrome, Tom Brady's never-ending career, the corrupt NCAA, Obama's next job and how America needs a sports czar more than ever.

The Saudi Wahhabis are the real foe: We must take our fight to the preachers and financiers of terror - By Nassim Nicholas Taleb (LINK)

Some highlights from the book Seneca: A Life (Part 1, Part 2, Part 3, Part 4)

Some interesting books I've seen recommended by others: 

The Food Lab: Better Home Cooking Through Science

Rationality for Mortals: How People Cope with Uncertainty

Homicide

I Think You'll Find it's a Bit More Complicated Than That

Regaining and clarity of mind after making a mistake...

From Josh Waitzkin in The Art of Learning:

One idea I taught was the importance of regaining presence and clarity of mind after making a serious error. This is a hard lesson for all competitors and performers. The first mistake rarely proves disastrous, but the downward spiral of the second, third, and fourth error creates a devastating chain reaction. Any sports fan has seen professional football, basketball, and baseball games won and lost because of a shift in psychological advantage. People speak about momentum as if it were an entity of its own, an unpredictable player on the field, and from my own competitive experience, I can vouch for it seeming that way. The key is to bring that player onto your team by riding the psychological wave when it is behind you, and snapping back into a fresh presence when your clarity of mind begins to be swept away. 

With young chess players, the downward spiral dominates competitive lives. In game after game, beginners fall to pieces after making the first mistake. With older, more accomplished players the mistakes are subtler, but the pattern of error begetting error remains true and deadly.

The delicate balance of process vs. goal...

From Josh Waitzkin in The Art of Learning:

Chess was a constant challenge. My whole career, my father and I searched out opponents who were a little stronger than me, so even as I dominated the scholastic circuit, losing was part of my regular experience. I believe this was important for maintaining a healthy perspective on the game. While there was a lot of pressure on my shoulders, fear of failure didn’t move me so much as an intense passion for the game. I think the arc of losing a heartbreaker before winning my first big title gave me license to compete on the edge.  

This is not to say that losing didn’t hurt. It did. There is something particularly painful about being beaten in a chess game. In the course of a battle, each player puts every ounce of his or her tactical, strategical, emotional, physical, and spiritual being into the struggle. The brain is pushed through terrible trials; we stretch every fiber of our mental capacity; the whole body aches from exhaustion after hours of rapt concentration. In the course of a dynamic chess fight, there will be shifts in momentum, near misses, narrow escapes, innovative creations, and precise refutations. When your position teeters on the brink of disaster, it feels like your life is on the line. When you win, you survive another day. When you lose, it is as if someone has torn out your heart and stepped on it. No exaggeration. Losing is brutal.  

This brings up an incipient danger in what may appear to be an incremental approach. I have seen many people in diverse fields take some version of the process-first philosophy and transform it into an excuse for never putting themselves on the line or pretending not to care about results. They claim to be egoless, to care only about learning, but really this is an excuse to avoid confronting themselves. This issue of process vs. goal is very delicate, and I want to carefully define how I feel the question should be navigated.  

It would be easy to read about the studies on entity vs. incremental theories of intelligence and come to the conclusion that a child should never win or lose. I don’t believe this is the case. If that child discovers any ambition to pursue excellence in a given field later in life, he or she may lack the toughness to handle inevitable obstacles. While a fixation on results is certainly unhealthy, short-term goals can be useful developmental tools if they are balanced within a nurturing long-term philosophy. Too much sheltering from results can be stunting. The road to success is not easy or else everyone would be the greatest at what they do—we need to be psychologically prepared to face the unavoidable challenges along our way, and when it comes down to it, the only way to learn how to swim is by getting in the water.

Studying the endgame

I think there's a good analogy to be made between the excerpted paragraphs below, from The Art of Learning, and investing. The opening variations in chess are like short-term results and the time spent looking at everything that looks cheap on a current, statistical basis. Whereas the endgame is comparable to focusing on long-term results, the qualitative aspects of a company, and the time one spends studying great businesses (both current and historical) and how they became that way. And I think it's important because as Waitzkin says below, "Once you start with openings, there is no way out." While I wouldn't say "no way out" when it comes to one's investing process, once you develop certain habits and a certain definition of what you think is worth spending time on, it can be hard to reverse course, so the time spent getting the theory and core principles behind one's process correct is vital.

Let’s return to the scholastic chess world, and focus on the ingredients to my early success. I mentioned that Bruce and I studied the endgame while other young players focused on the opening. In light of the entity/incremental discussion, I’d like to plunge a little more deeply into the approach that Bruce and I adopted.  

Rewind to those days when I was a six-year-old prankster. Once he had won my confidence, Bruce began our study with a barren chessboard. We took on positions of reduced complexity and clear principles. Our first focus was king and pawn against king— just three pieces on the table. Over time, I gained an excellent intuitive feel for the power of the king and the subtlety of the pawn. I learned the principle of opposition, the hidden potency of empty space, the idea of zugzwang (putting your opponent in a position where any move he makes will destroy his position). Layer by layer we built up my knowledge and my understanding of how to transform axioms into fuel for creative insight. Then we turned to rook endings, bishop endings, knight endings, spending hundreds of hours as I turned seven and eight years old, exploring the operating principles behind positions that I might never see again. This method of study gave me a feeling for the beautiful subtleties of each chess piece, because in relatively clear-cut positions I could focus on what was essential. I was also gradually internalizing a marvelous methodology of learning—the play between knowledge, intuition, and creativity. From both educational and technical perspectives, I learned from the foundation up.  

Most of my rivals, on the other hand, began by studying opening variations. There is a vast body of theory that begins from the starting position of all chess games, and it is very tempting to teach children openings right off the bat, because built into this theoretical part of the game there are many imbedded traps, land mines that allow a player to win quickly and easily—in effect, to win without having to struggle to win. At first thought, it seems logical for a novice to study positions that he or she will see all the time at the outset of games. Why not begin from the beginning, especially if it leads to instant success? The answer is quicksand. Once you start with openings, there is no way out. Lifetimes can be spent memorizing and keeping up with the evolving Encyclopedia of Chess Openings (ECO). They are an addiction, with perilous psychological effects.  

It is a little like developing the habit of stealing the test from your teacher’s desk instead of learning how to do the math. You may pass the test, but you learn absolutely nothing—and most critically, you don’t gain an appreciation for the value or beauty of learning itself.

Learning and fundamentals...

From Josh Waitzkin in The Art of Learning, and applicable to investing and just about everything else as well:

As I struggled for a more precise grasp of my own learning process, I was forced to retrace my steps and remember what had been internalized and forgotten. In both my chess and martial arts lives, there is a method of study that has been critical to my growth. I sometimes refer to it as the study of numbers to leave numbers, or form to leave form . A basic example of this process, which applies to any discipline, can easily be illustrated through chess: A chess student must initially become immersed in the fundamentals in order to have any potential to reach a high level of skill. He or she will learn the principles of endgame, middlegame, and opening play. Initially one or two critical themes will be considered at once, but over time the intuition learns to integrate more and more principles into a sense of flow. Eventually the foundation is so deeply internalized that it is no longer consciously considered, but is lived. This process continuously cycles along as deeper layers of the art are soaked in.   

Very strong chess players will rarely speak of the fundamentals, but these beacons are the building blocks of their mastery. Similarly, a great pianist or violinist does not think about individual notes, but hits them all perfectly in a virtuoso performance. In fact, thinking about a “C” while playing Beethoven’s 5th Symphony could be a real hitch because the flow might be lost. The problem is that if you want to write an instructional chess book for beginners, you have to dig up all the stuff that is buried in your unconscious—I had this issue when I wrote my first book, Attacking Chess. In order to write for beginners, I had to break down my chess knowledge incrementally, whereas for years I had been cultivating a seamless integration of the critical information.  

The same pattern can be seen when the art of learning is analyzed: themes can be internalized, lived by, and forgotten. I figured out how to learn efficiently in the brutally competitive world of chess, where a a moment without growth spells a front-row seat to rivals mercilessly passing you by. Then I intuitively applied my hard-earned lessons to the martial arts. I avoided the pitfalls and tempting divergences that a learner is confronted with, but I didn’t really think about them because the road map was deep inside me—just like the chess principles.

....................

Related quote: "Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning." -Charlie Munger

Related previous post: Fundamentals...

Howard Marks quote

From The Most Important Thing:

Superior investors know—and buy—when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit. Yogi Berra is famous for having said, “Nobody goes to that restaurant anymore; it’s too crowded.” It’s just as nonsensical to say, “Everyone realizes that investment’s a bargain.” If everyone realizes it, they’ll buy, in which case the price will no longer be low. . . .  Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates. . . . 

In short, there are two primary elements in superior investing: 

• seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and 

• having it turn out to be true (or at least accepted by the market). 

It should be clear from the first element that the process has to begin with investors who are unusually perceptive, unconventional, iconoclastic or early. That’s why successful investors are said to spend a lot of their time being lonely.

Misfortune weighs most heavily on those who expect nothing but good fortune...

"He who fears death will never do anything worthy of a man who is alive, but he who knows that these were the terms drawn up for him at the moment of his conception will live according to the bond, and at the same time will also with like strength of mind guarantee that none of the things that happen shall be unexpected. For by looking forward to whatever can happen as though it would happen, he will soften the attacks of all ills, which bring nothing strange to those who have been prepared beforehand and are expecting them; it is the unconcerned and those that expect nothing but good fortune upon whom they fall heavily. Sickness comes, captivity, disaster, conflagration, but none of them is unexpected — I always knew in what disorderly company Nature had confined me." -Seneca, "On Tranquility of Mind" 

John Maynard Keynes' change in investment philosophy

Via Chris Mayer in his book, 100 Baggers:

Keynes’s investment performance improved markedly after adopting these ideas. Whereas in the 1920s he generally trailed the market, he was a great performer after the crash. Walsh dates Keynes’s adoption of what we might think of as a Warren Buffett sort of approach as beginning in 1931. From that time to 1945, the Chest Fund rose tenfold in value in 15 years, versus no return for the overall market. That is a truly awesome performance in an awfully tough environment. 

A more recent paper is “Keynes the Stock Market Investor,” by David Chambers and Elroy Dimson. They add more interesting details about how his investing style changed. As Chambers and Dimson note, “As a young man, Keynes was supremely self-assured about his capabilities, and he traded most actively to the detriment of performance in the first period of his stewardship of the College endowment up to the early 1930s.”  

In the early 1930s, he changed his approach. With the exception of 1938, he would never trail the market again. This change showed up in a number of ways. First, he traded less frequently. He became more patient and more focused on the long-term. 

Here is his portfolio turnover by decade: 

1921–1929:  55%

1930–1939:  30%

1940–1946:  14% 

Turnover was just one aspect of Keynes’s change. Another was how he reacted during market declines. From 1929 to 1930, Keynes sold one-fifth of his holdings and switched to bonds. But when the market fell in the 1937–1938, he added to his positions. He stayed 90 percent invested throughout. 

This is a remarkable change. It again reflects less concern about short-term stock prices. He was clearly more focused on the value of what he owned, as his letters show. The authors of the paper note of Keynes’s change, “Essentially, he switched from a macro market-timing approach to bottom-up stock-picking.” 

In a memorandum in May of 1938, Keynes offered the best summing up of his own philosophy: 

1. careful selection of a few investments (or a few types of investment) based on their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments; 

2. a steadfast holding of these investments in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it has become evident that their purchase was a mistake; and 

3. a balanced investment position, that is, a portfolio exposed to a variety of risks in spite of individual holdings being large, and if possible, opposed risks. 

Here is one last bit of advice from the same memo: 

In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact.

...................

Related book: Keynes and the Market: How the World's Greatest Economist Overturned Conventional Wisdom and Made a Fortune on the Stock Market

Related video: John Wasik on "Keynes's Way to Wealth: Timeless Investment Lessons from the Great Economist"

John Maynard Keynes quote

"To suppose that safety-first consists in having a small gamble in a large number of different [companies] where I have no information to reach a good judgment, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy." - John Maynard Keynes

More thoughts from Phil Fisher on selling a great (and growing) business...

From Common Stocks and Uncommon Profits:

There is still one other argument investors sometimes use to separate themselves from the profits they would otherwise make. This one is the most ridiculous of all. It is that the stock they own has had a huge advance. Therefore, just because it has gone up, it has probably used up most of its potential. Consequently they should sell it and buy some-thing that hasn't gone up yet. Outstanding companies, the only type which I believe the investor should buy, just don't function this way. How they do function might best be understood by considering the following somewhat fanciful analogy: 

Suppose it is the day you graduated from college. If you did not go to college, consider it to be the day of your high school graduation; from the standpoint of our example it will make no difference whatsoever. Now suppose that on this day each of your male classmates had an urgent need of immediate cash. Each offered you the same deal. If you would give them a sum of money equivalent to ten times whatever they might earn during the first twelve months after they had gone to work, that classmate would for the balance of his life turn over to you one quarter of each year's earnings! Finally let us suppose that, while you thought this was an excellent proposition, you only had spare cash on hand sufficient to make such a deal with three of your classmates.  

At this point, your reasoning would closely resemble that of the investor using sound investment principles in selecting common stocks. You would immediately start analyzing your classmates, not from the standpoint of how pleasant they might be or even how talented they might be in other ways, but solely to determine how much money they might make. If you were part of a large class, you would probably eliminate quite a number solely on the ground of not knowing them sufficiently well to be able to pass worthwhile judgment on just how financially proficient they actually would get to be. Here again, the analogy with intelligent common stock buying runs very close. 

Eventually you would pick the three classmates you felt would have the greatest future earning power. You would make your deal with them. Ten years have passed. One of your three has done sensationally. Going to work for a large corporation, he has won promotion after promotion. Already insiders in the company are saying that the president has his eye on him and that in another ten years he will probably take the top job. He will be in line for the large compensation, stock options, and pension benefits that go with that job.  

Under these circumstances, what would even the writers of stock market reports who urge taking profits on superb stocks that “have gotten ahead of the market”think of your selling out your contract with this former classmate, just because someone has offered you 600 per cent on your original investment? You would think that anyone would need to have his head examined if he were to advise you to sell this contract and replace it with one with another former classmate whose annual earnings still were about the same as when he left school ten years before. The argument that your successful classmate had had his advance while the advance of your (financially) unsuccessful classmate still lay ahead of him would probably sound rather silly. If you know your common stocks equally well, many of the arguments commonly heard for selling the good one sound equally silly.  

You may be thinking all this sounds fine, but actually classmates are not common stocks. To be sure, there is one major difference. That difference increases rather than decreases the reason for never selling the outstanding common stock just because it has had a huge rise and may be temporarily overpriced. This difference is that the classmate is finite, may die soon and is sure to die eventually. There is no similar life span for the common stock. The company behind the common stock can have a practice of selecting management talent in depth and training such talent in company policies, methods, and techniques in a way which will retain and pass on the corporate vigor for generations.

Some thoughts from Phil Fisher on selling a great (and growing) business...

From Common Stocks and Uncommon Profits:

A word of caution may not be amiss, however, in regard to too readily selling a common stock in the hope of switching these funds into a still better one. There is always the risk that some major element in the picture has been misjudged. If this happens, the investment probably will not turn out nearly as well as anticipated. In contrast, an alert investor who has held a good stock for some time usually gets to know its less desirable as well as its more desirable characteristics. Therefore, before selling a rather satisfactory holding in order to get a still better one, there is need of the greatest care in trying to appraise accurately all elements of the situation. 

At this point the critical reader has probably discerned a basic investment principle which by and large seems only to be understood by a small minority of successful investors. This is that once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all. However, recommendations and comments continue to pour out of the financial community giving other types of reasons for selling outstanding common stocks. 

... 

There is another and even more costly reason why an investor should never sell out of an outstanding situation because of the possibility that an ordinary bear market may be about to occur. If the company is really a right one, the next bull market should see the stock making a new peak well above those so far attained. How is the investor to know when to buy back? Theoretically it should be after the coming decline. However, this presupposes that the investor will know when the decline will end. I have seen many investors dispose of a holding that was to show stupendous gain in the years ahead because of this fear of a coming bear market. Frequently the bear market never came and the stock went right on up. When a bear market has come, I have not seen one time in ten when the investor actually got back into the same shares before they had gone up above his selling price. Usually he either waited for them to go far lower than they actually dropped, or, when they were way down, fear of something else happening still prevented their reinstatement. 

This brings us to another line of reasoning so often used to cause well-intentioned but unsophisticated investors to miss huge future profits. This is the argument that an outstanding stock has become overpriced and therefore should be sold. What is more logical than this? If a stock is overpriced, why not sell it rather than keep it? 

Before reaching hasty conclusions, let us look a little bit below the surface. Just what is overpriced? What are we trying to accomplish? Any really good stock will sell and should sell at a higher ratio to current earnings than a stock with a stable rather than an expanding earning power. After all, this probability of participating in continued growth is obviously worth something. When we say that the stock is overpriced, we may mean that it is selling at an even higher ratio in relation to this expected earning power than we believe it should be. Possibly we may mean that it is selling at an even higher ratio than are other comparable stocks with similar prospects of materially increasing their future earnings. 

All of this is trying to measure something with a greater degree of preciseness than is possible. The investor cannot pinpoint just how much per share a particular company will earn two years from now. He can at best judge this within such general and non-mathematical limits as “about the same,” “up moderately,” “up a lot,” or “up tremendously.” As a matter of fact, the company's top management cannot come a great deal closer than this. Either they or the investor should come pretty close in judging whether a sizable increase in average earnings is likely to occur a few years from now. But just how much increase, or the exact year in which it will occur, usually involves guessing on enough variables to make precise predictions impossible. 

Under these circumstances, how can anyone say with even moderate precision just what is overpriced for an outstanding company with an unusually rapid growth rate? Suppose that instead of selling at twenty-five times earnings, as usually happens, the stock is now at thirty-five times earnings. Perhaps there are new products in the immediate future, the real economic importance of which the financial community has not yet grasped. Perhaps there are not any such products. If the growth rate is so good that in another ten years the company might well have quadrupled, is it really of such great concern whether at the moment the stock might or might not be 35 per cent overpriced? That which really matters is not to disturb a position that is going to be worth a great deal more later.

Charlie Munger on what makes investment hard

From Poor Charlie's Almanack:

What makes investment hard...is that it's easy to see that some companies have better businesses than others. But the price of the stock goes up so high that, all of a sudden, the question of which stock is the best to buy gets quite difficult. 

We've never eliminated the difficulty of that problem. And ninety-eight percent of the time, our attitude toward the market is ... [that] we're agnostics. We don't know. Is GM valued properly vis-à-vis Ford? We don't know. 

We're always looking for something where we think we have an insight which gives us a big statistical advantage. And sometimes it comes from psychology, but often it comes from something else. And we only find a few -- maybe one or two a year. We have no system for having automatic good judgment on all investment decisions that can be made. Ours is a totally different system. 

We just look for no-brainer decisions. As Buffett and I say over and over again, we don't leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side. So we've succeeded by making the world easy for ourselves, not by solving hard problems. 

... 

It doesn't help us merely for favorable odds to exist. They have to be in a place where we can recognize them. So it takes a mispriced opportunity that we're smart enough to recognize. And that combination doesn't occur often. 

But it doesn't have to. If you wait for the big opportunity and have the courage and vigor to grasp it firmly when it arrives, how many do you need? For example, take the top ten business investments Berkshire Hathaway's ever made. We would be very rich if we'd never done anything else-in two lifetimes. 

So, once again, we don't have any system for giving you perfect investment judgment on all subjects at all times. That would be ridiculous. I'm just trying to give you a method you can use to sift reality to obtain an occasional opportunity for rational reaction. 

If you take that method into something as competitive as common stock picking, you're competing with many brilliant people. So, even with our method, we only get a few opportunities. Fortunately, that happens to be enough.

Links

I will be mostly without internet for the next couple of weeks. I have a few quotes and book excerpts scheduled, but this may be the last compilation of links during that time.

AMA on Charlie Munger: What did Charlie Munger Learn from Phil Fisher? (LINK)

Farnam Street: Lifelong Learning (LINK)

The Root of Wisdom: Why Old People Learn Better (LINK)

Track and Measure (LINK)

If you listed the habits of successful people, tracking and measuring would be near the top of that list. I see it with people, companies, and teams that I work with. I see it in my own behavior.

Ron Baron interviews Elon Musk at the Baron Investment Conference (video) [H/T ValueWalk] (LINK)

Related book: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

Richard Duncan: Yuan Devaluation Likely (LINK)

Hussman Weekly Market Comment: Psychological Whiplash (LINK)

On a 10-12 year horizon, we expect the total return of the S&P 500 to fall short of 1% annually, and given that more than that amount is likely to represent dividends, it follows that we expect the level of the S&P 500 Index to be lower 10-12 years from now than it is today (recall a similar outcome after the 2000 peak). On a shorter horizon, market action remains unfavorable as well, which leaves prospective outcomes skewed to the downside, but we don’t need to take a particularly strong near-term view. Stocks appear to be in an extended top formation much like 2000 and 2007, so our inclination is more toward patient discipline than aggressive expectations of imminent market losses.

Ray Dalio Talks Meditating With Martin Scorsese (video) (LINK)

Stoic movie review: The Martian [H/T @TimHarford] (LINK)

In 5 Minutes, He Lets the Blind See (article and video) (LINK)

When the Sun Went Medieval on Our Planet (LINK)

Here's a link to a post from earlier this year that I've been discussing among friends, related to position-sizing: A quick diversification thought...

Which also reminded me of this quote from Warren Buffett that I posted around the same time:

"If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification... If it’s your game, diversification doesn’t make sense. It’s crazy to put money into your 20th choice rather than your 1st choice... Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. Later in 1998, LTCM was in trouble. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up."

On Twitter, Ian Cassel also posted a great quote from Charlie Munger:

"Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the exact rule is the opposite. The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a life-time, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to."

Related book to the above (Kelly formula): Fortune's Formula

Book of the day: Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Global Warming

Links

Cure for low commodities prices is staring us in the face (LINK) [The book discussed in the article is one I'm really looking forward to: Capital Returns: Investing Through the Capital Cycle: A Money Manager's Reports 2002-15. It is a collection of London-based Marathon Asset Management's letters from 2002-2015. I've mentioned their previous collection several times before: Capital Account: A Fund Manager Reports on a Turbulent Decade, 1993-2002. And if someone from the publisher is reading this, I'd love to review an advanced copy of the new book.]

Oil Slump Forces Deep Cuts by Service Providers [H/T Matt] (LINK)

Notes From Invest For Kids Chicago 2015: Burbank, Sandler, Tananbaum & More (LINK)

Jim Chanos Pitches Short Position in Alibaba (LINK)

Glad to see Jake back with Season 2... Five Good Questions for Andrew Palmer about his book, Smart Money (LINK)

Phil Ordway's "Hall of Fame" Reading List (LINK) [I can't argue with the names on Phil's list. I have my own list HERE.]

Gene editing saves girl dying from leukaemia in world first (LINK)

Book of the day: A Guide to Rational Living

Links

Baupost letter gives a rare glimpse into one of the world's most secretive — and most successful — hedge funds [H/T Will] (LINK)

We can do this successfully because we have a culture of patience. Even though we work hard every day trying to uncover the next great investment, we only deploy our capital when we have real conviction that we have found one. When we don’t find interesting ideas, we do nothing and hold cash. For this reason, I’ve often joked that I’m 97% unproductive. While this means I better be damn productive the other 3% of the time, it also means exercising patience often and waiting for great opportunities. On the flip side, when an idea has been analyzed and is fully baked, we drop whatever else we are doing, discuss the investment, and make a decision. Our portfolio decision process must be incredibly efficient, as we recognize that good ideas are scarce and may prove fleeting. 

Warren Buffett said, 'Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble.' When a great opportunity comes around, it is imperative to size it correctly. 

... 

One of the most common misconceptions regarding Baupost is that most outsiders think we have generated good risk-adjusted returns despite holding cash. Most insiders, on the other hand, believe we have generated those returns BECAUSE of that cash. Without that cash, it would be impossible to deploy capital when we enter a tide market and great opportunities become widespread. Seth has said on a number of occasions in both types of markets, 'If you have great ideas, you will have capital to deploy.' This is incredibly motivating to our investment team.

The video of Michael Mauboussin interviewing Daniel Kahneman from last month (LINK)

More videos from the Fortune Global Forum are starting to be put online (LINK) [Such as Jamie Dimon, Sheryl Sandberg and Marc Andreessen, Paul Tudor Jones, How biology and big data converge in the medicine world, a VC panel on future growth opportunities, a panel on 100-year-old companies, Peter Diamandis on What You Can Learn From Kodak’s Demise, etc.]

Wells Fargo and the Incredible Predictability of Deposit Growth (LINK)

Wall Street is starting to believe what Jim Chanos has been saying about Valeant all along (LINK)

Back in May of 2014, Chanos went on CNBC and said: "We're short [Valeant] because it's a roll-up. And roll-ups present a unique set of problems." 

Chanos added: "Roll-ups are generally accounting-driven, and we certainly think that's the case in [Valeant]. We think [Valeant] is playing some very aggressive accounting games when they buy companies, write down the assets, and also engaged in what we call spring-loading." Spring loading is a practice in which a company grants investors options before it knows good news is about to come out.

Valeant 'Witch Hunt' Going Too Far for Brave Warrior's Greenberg (LINK)

Collection of old Enron sell-side research (LINK)

Related books:  

Conspiracy of Fools (a Charlie Munger recommendation as well) 

The Smartest Guys in the Room

How an F Student Became America's Most Prolific Inventor [H/T David] (LINK)

Book of the day (recommended by Marc Andreessen): Tricky Dick and the Pink Lady

Links

Latticework of Mental Models: Twaddle Tendency (LINK)

Charlie Munger: Valeant Isn’t Enron or American Express [H/T Linc] (LINK)

Buffett's BYD Vs. Musk's Tesla: Electric Vehicle Race Still Undecided [H/T Linc] (LINK)

Related book: The Great Race: The Global Quest for the Car of the Future

Baupost Is Said to Decline 3.8% in September on Energy, Biotech [H/T Will] (LINK)

DealBook Conference 2015 videos:

Stanley Druckenmiller 

Carl Icahn 

Peter Thiel and Chris Sacca  (Related book: Zero to One)

Reed Hastings (Netflix) 

Max Levchin (Affirm)

James Gorman (Morgan Stanley) 

Gary Cohn (Goldman Sachs) 

Muhtar Kent (Coca-Cola) 

Ginni Rometty (IBM) 

Nico Sell (cybersecurity) 

John Carlin (cybersecurity) 

Al Gore

What makes a historical arsonist? A conversation with Dan Carlin. (podcast) (LINK)

El Niño Paints the World's Driest Place with Color (LINK)

TED Talk - Patrícia Medici: The coolest animal you know nothing about ... and how we can save it (LINK)

Although the tapir is one of the world's largest land mammals, the lives of these solitary, nocturnal creatures have remained a mystery. Known as "the living fossil," the very same tapir that roams the forests and grasslands of South America today arrived on the evolutionary scene more than 5 million years ago. Today, threats from poachers, deforestation and pollution, especially in quickly industrializing Brazil, threaten this longevity. In this insightful talk, conservation biologist, tapir expert and TED Fellow Patrícia Medici shares her work with these amazing animals and challenges us with a question: Do we want to be responsible for their extinction?

Links

Larry Page Talks Alphabet, Warren Buffett and Project Loon at Fortune Global Forum 2015 (video) [H/T Linc] (LINK)

Howard Buffett Is Getting His Hands Dirty [H/T Linc] (LINK)

Related book: 40 Chances

The Light-Beam Rider - by Walter Isaacson (LINK)

Related book: Einstein: His Life and Universe

Amazon Killed the Bookstore. So It’s Opening a Bookstore (LINK)

Sam Altman: The Tech Bust of 2015 (LINK)

So where is the problem?  Late-stage private valuations.  But perhaps the answer is that these “investments” aren’t really equity—they’re much more like debt. [1] I saw terms recently that had a 2x liquidation preference (i.e. the investors got the first 2x their money out of the company when it exited) and a 3x liquidation cap (i.e. after they made 3x their money, they didn’t get any more of the proceeds). 

This is hardly an equity instrument at all. [2] The example here is an extreme case, but not wildly so.  Investors are buying debt but dressing it up close enough to equity to maintain their venture capital fund exemption status.  In a world of 0 percent interest rates, people become pretty focused on finding new sources for fixed income.

Links

Charlie Munger Isn't Done Bashing Valeant [H/T Will and Linc] (LINK)

Ackman said during the presentation that he spoke with Munger about his March remarks. The Berkshire vice chairman’s objections focused on leverage, tax rates and acquisitions, and Munger explained that he says what comes to his mind, according to Ackman. 

Munger elaborated on Saturday: Valeant relied on “gamesmanship” to run up its value. Its strategy, using acquisitions and price increases, is different from ITT, but it still created a “phony growth record,” he said. Unlike Enron, Valeant’s stock isn’t a house of cards because it has some some valuable properties, including its portfolio of treatments, he said. He isn’t holding or shorting the shares. 

..... 

Munger’s critique has been a topic of conversation at the fund manager. At a May investor meeting for Ruane Cunniff, someone asked what Goldfarb and his colleagues thought about the dig from Buffett’s right-hand man, according to a transcript of the event. 

Ruane Cunniff dismissed the comparison to ITT, saying that Valeant is more concentrated in a single industry and less likely to dilute shareholders by issuing stock to fund deals. The share plunge in recent weeks has pushed Sequoia’s current managers to publicly defend their pick to investors. 

..... 

It’s easy to see why investors have been so taken with the stock, Munger said. "It looks kind of Buffett-like,” because Chief Executive Officer Mike Pearson “cut out all the glitz” of running a drug company, he said. However, Valeant’s tumbling share price shows why morals should still be a part of the calculation for making an investment, Munger said. 

“They’re deeply intertwined,” he said. "I don’t think that investing should be divorced from reality."

Pharmacist at center of Valeant scandal accuses drugmaker of 'massive fraud' [H/T Will] (LINK)

John Kay discusses his latest book, Other People's Money, at Google (video) (LINK)

The Absolute Return Letter - November 2015 (LINK)

Hussman Weekly Market Comment: Last Gasp Saloon (LINK)

At present, the valuation measures we find most strongly correlated with actual subsequent S&P 500 total returns suggest zero total returns for the S&P 500 over the coming 10 years, and total returns averaging only about 1% annually over the coming 12-year period. After inflation, we estimate negative prospective real returns on both horizons. Over shorter horizons, market internals, and the investor risk-preferences they convey, are the hinge that determines how stocks are likely to respond to a broad range of other factors, including valuations, interest rates, Fed action, and economic activity.

Exponential Wisdom podcast: Ripe For Disruption… Agriculture and Transportation (LINK)

The Power of Nudges, for Good and Bad (LINK)

Related book: Nudge (and currently only $5.95 on Audible)

Pluto’s Moon Charon Has an Ammonia Leak (LINK)

Book of the day: On Writing: A Memoir of the Craft - by Stephen King