The Margin Of Safety

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.  The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.  Unfortunately, the first type of business is very hard to find:  Most high-return businesses need relatively little capital.  Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.
Though the mathematical calculations required to evaluate equities are not difficult, an analyst – even one who is experienced and intelligent – can easily go wrong in estimating future “coupons.”  At Berkshire, we attempt to deal with this problem in two ways.  First, we try to stick to businesses we believe we understand.  That means they must be relatively simple and stable in character.  If a business is complex or subject to constant change, we’re not smart enough to predict future cash flows.  Incidentally, that shortcoming doesn’t bother us.  What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.  An investor needs to do very few things right as long as he or she avoids big mistakes.
Second, and equally important, we insist on a margin of safety in our purchase price.  If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying.  We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.
—     Warren Buffett
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On This Day In:
2020	In The Path
	Hangin’ Out
	But I Won’t Do That
	Unless You Are #45
2019	Seeking Nobility
2018	My Family Calls It Hoarding
	Day 30: Done & Dusted
2017	Rogers’ Rules (Hexadecimal)
2016	But, It’s Such A Simple Mistake
2015	Crawl Towards The Light
2014	Sweet Songs
2013	The Wife Of An Ordinary Man
2012	Three Words
2011	Know Anyone Like This?
2010	Apoplexy??
	When Breaking Up Is Hard To Do…
	Sibling Awareness

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Four Buffett’s

Risk comes from not knowing what you’re doing.
—    Warren Buffett
Price is what you pay.  Value is what you get.
—    Warren Buffett
Rule No.1:  Never lose money.  Rule No.2:  Never forget rule No.1.
—    Warren Buffett
In the business world, the rearview mirror is always clearer than the windshield.
—    Warren Buffett
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On This Day In:
2018	Change Happens
	Day 13: Ginger / Mint Relief
2017	Still Removing Bricks
2016	Namaste
2015	Still Learning
2014	Dark Processes
2013	To The Last Link
2012	Slept In Again
2011	Home Again, Naturally
2009	Thoughts after a long day of OT…

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Thinking Ahead

If you are thinking a year ahead, sow a seed.  If you are thinking 10 years ahead, plant a tree.  If you are thinking 100 years ahead, educate the people.
—    Kuan Tzu
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On This Day In:
2017	I’d Like To Try
2016	Or Blog (And Bound)
2015	Welcome The Virtuous
2014	Closing The Gap?
2013	On Parenting
2012	What Knowledge Is
2011	The Indefinite Accumulation Of Property

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Stock Market Sets More Records Under #DumbDonald

And the records just keep on getting set this week:
1) First President to ever have the Stock Market fall 1,000+ points in one day during his administration  —  Donald Trump
2) First President to ever have the Stock Market fall 1,000+ points in one day TWICE during his administration  —  Donald Trump
3) First President to ever have the Stock Market fall 1,000+ points in one day TWICE in one week during his administration  —  Donald Trump
4) First President to ever have the Stock Market fall 1,000+ points TWICE during his first term  —  Donald Trump
As I said in a prior post, most market gains are not directly attributable to any specific action by a President, neither are most market losses.  But, when you take “personal” credit for the gains “since getting elected”, I think you should also accept the blame when there is a market loss – “correction” or otherwise – during your administration.  Oh, but not “TeflonDon”…  After all, the economy is still fundamentally sound.  Or, so we’re being told.
And, yes, Mr. President we’re tired of winning!  Please, make it stop!!
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On This Day In:
2017	An Accumulation Of Acts
2016	Here’s Lookin’ At You Kid
2015	How To Be Omnipotent
2014	The Promise Of Future Love
2013	Christian, n.
2012	Praise
	Don’t Let Me Be Misunderstood
2011	A Few More Lyrics From The Past
	5 For The Price Of 1

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Two Views Of The Starting Line

The foundation of wealth is the first decision well made.
—    John Pierpont (J. P.) Morgan
It is very much easier for a rich man to invest and grow richer than for the poor man to begin investing at all.
—    Barbara Ward
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On This Day In:
2016	Never Had It, Never Will (Donald Trump)
2015	20/20
2014	All Of My Best Ideas Come While Walking…
2013	Learn To Learn
2012	I Remind You
2011	Respect And Prestige
2010	Living Legends (Willie Nelson) and the Gettysburg Address

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Knowledge Pays

An investment in knowledge always pays the best interest.
—    Benjamin Franklin
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On This Day In:
2016	Brief Glimpses And Full Glances
2015	Pursuing Perspective
2014	Wearing Down?
2013	Labouring Under A Curse
2012	Listen To Yourself
2011	Career Tips (Part 1)
	No Captain Dunsel

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Accepted Fraud

“The Big Short”  (2015)  —  movie review
Last night I watched “The Big Short“, which is a movie about how the banking, finance, credit bureaus  and real estate industries defrauded the American public (actually the entire world) and got away with it.  The movie stars Christian Bale, Steve Carell, Brad Pitt and Ryan Gosling and is rated “R” for language and frontal nudity (brief scenes with strippers).  The movie uses cut-aways to random famous people to provide “definitions / explanations” and (I guess) a bit of levity.  This act of having the person on camera “speak” to the audience is known as “breaking the fourth wall”.
For some time now, about forty years ago, the banking industry moved away from traditional “banking” and started trying to make money off of making money.  This began as an attempt to monetize risk into products which could be sold.  This was done via derivatives, which is a fancy way of saying “money for nothing”.  It is not really “nothing”, it’s position, options, leverage, coverage, insurance, or any number of other names for financial security – or rather, the illusion of financial security.  Some people think of it as shared risk.  I think it’s more traditional name is gambling.
Okay.  I’ll get off my soap-box and get back to the movie.  Four groups of financial players discover the housing market is being fraudulently (and criminally) propped up and, in fact, is in a giant bubble.  A “bubble” happens when greed takes over common sense in a market and prices for the items in the market are far higher than the actual value of the item and / or the ability of the buyer in the market to purchase the item.  Theoretically, when you lose the ability to pay for something, you should stop buying it.  However, in a true bubble, because “everyone” expects the price to continue to increase, the buyers continue to buy under the assumption the price will continue to go up and just before you lose the item (foreclosure for realty), you sell the item and take whatever profit you can.  IF you can time your exit correctly and get out with a profit, you win.  However, this is not true investing.  It is merely speculating.  This speculation is what is at the heart of the movie.
That is the “before” side of the movie.  The four groups know there is a bubble and one of them creates a derivative to profit (vastly) if the housing market bubble bursts.  The other three parties  get wind of the derivative and essentially go “all-in” to bet on the crash.  This is all happening in roughly 2005.  The expectation is the crash will happen in early 2007 when a percentage of mortgage loans which are variable rates with short-term fixed rate teasers have the teaser expire.
When 2007 rolls around and the housing market does crash, the derivatives don’t initially pay out because the banks / credit agencies / insurance companies  and government don’t want the national economy to collapse.  Essentially, the U.S. Taxpayer (via the government) foots the bill for the losses of the restructuring financial market.  Inevitably, a few of the large financial players “go away” (get bought up at severe discount) and the global economy is saved.   Here, the key point of the movie is that the little guy in America loses their home, but none of the fraudulent bankers and financiers goes to jail.  The irony is they (the banks and financiers) have prevented legislation which might stop this from happening again in the future, and we are back on the same roller coaster again.
Final recommendation:  highly.  This is a complicated movie about a complex subject.  The average person seeing the movie will probably not understand the financial portions of the movie.  They will (probably) understand the effects of the bubble burst because most of us have been living through the results (recession) over the last ten years (and still going).  This is not a great movie, but it is an honorable attempt to educate the working people of America.
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On This Day In:
2015	Even The Little Ones
2014	Who’s On First?
2013	No Equal Measure
2012	A Single Host
2011	No Exemptions
2010	Memories Of KSA – Inside The Fire

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Economic Engines

In addition, at least in America, science has been treated sort of cavalierly, not only by the public but also by government.  The idea that science is just some luxury that you’ll get around to if you can afford it is regressive to any future a country might dream for itself.  Innovations in science and technology are the engines of the 21st-century economy; if you care about the wealth and health of your nation tomorrow, then you’d better rethink how you allocate taxes to fund science.  The federal budget needs to recognize this.
—    Neil DeGrasse-Tyson
Quoted by Rachel Edidin in the March 2014 Wired magazine article titled: “Neil DeGrasse Tyson on Why Cosmos Will Be Better Than Ever“
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On This Day In:
2013	Weren’t You Supposed To Be Reading?
	Absent Friends
	Where I Stand
2012	Hangin’ With His P’s
	Help Save
2011	Six Facets Of Good Leadership

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Creating Interlocking Fragility

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability.  In other words it creates devastating Black Swans.  We have never lived before under the threat of a global collapse.  Financial Institutions have been merging into a smaller number of very large banks.  Almost all banks are interrelated.  So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall.  The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.  We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another.  True, we now have fewer failures, but when they occur …. I shiver at the thought.  The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.  But not to worry: their large staff of scientists deem these events “unlikely”.
—    Nassim Nicholas Taleb
From his book:  “The Black Swan“
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Unpredictable Opportunity

The reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill.  The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.
—  Nassim Nicholas Taleb
From his book: “The Black Swan“
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All In The Family

Yesterday, I completed the book: “Buffettology” (1997©) written by Mary Buffett and David Clark.  This is the book I thought “The Snowball” was going to be, but wasn’t.  This is the book that tells you how you too can make a lot of money (with certain qualifications).  All of the “tricks of the trade” – what to look for and why, and how to figure out if a company is going to make you money or not (and how soon it will do it).  It’s all here in this little gem of a book. I highly recommend it!!

The main author – Mary Buffett is the former spouse of one of Warren Buffett’s sons.  Nothing like making a little bread off the ex-father-in-law’s name…

Oh, about those qualifications…  It helps to start off with about 15 years worth of the average persons gross pay in the bank to start investing.  You also have to be quite obsessed with making money.  You also have to be able to live off of a fraction of your earnings until you start to really roll in the dosh – that means patience and a willingness to forego instant gratification.  But once you do these things, you can be well on your way to becoming quite wealthy – in 30 or so years.  Actually, if you follow the guidelines laid out in this book, I’d wager you’d be quite well off in just 10 or 15 years.

Anyway, as I said, this is an excellent read for anyone interested in working their way into a comfortable lifestyle and I highly recommend the book.  Forgive my snarkiness.  It’s actually a very good book with lots of great tips for investing and clear explanations for how to understand how you really make money work for you.

Family Notes:

Today, my son James turned 21 years old!  We had a small family meal (curry and rice) and he was off to be with his mates.  I cautioned him about no drinking and driving.

Work Notes:

It looks like there will be no Federal budget extension tomorrow – so I may be on furlough as of 11:59:59pm.  At the moment, the main sticking point seems to be will the government fund Planned Parenthood or not.  The Republicans say, no.  The Democrats say, yes.  So a budget in the trillions of dollars is being held up over cuts of only about $330 Million.  This is a tiny fraction of one percent of the total budget ($330 Million / $3.7 Trillion), but the Republicans insist this cut is worth shutting down the government for, because the line for cutting has to be drawn somewhere.  It should be noted, that when the Republicans had complete control of the entire Federal government – Congress, the White House and the Supreme Court (from 2001 through Jan 2007), they did NOTHING to end abortion or defund Planned Parenthood.  But remember, according to the Republicans, this is about the budget and saving America from future debt and bankruptcy.  It’s not about policy debates or living in a democracy where the majority view (elections) gets their way, but the minority view is respected and protected.  Remember also, the majority of Americans favor a woman’s right to choice and funding for Planned Parenthood.

The good news is I’ll have a lot more time for blogging!!

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The Ideal Business…

The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns.  That business is a compounding machine.
–    Warren Buffett
(As quoted in: “The Snowball” by Alice Schroeder)
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Depending On Kindness

You absolutely never want to be in a position where tomorrow morning you have to depend on the kindness of strangers in the financial world.
—    Warren Buffett
(as quoted in “The Snowball” by Alice Schroeder)
[…Unless you’re a “too big to fail” bank and the stranger is the American Taxpayer.    —    KMAB]
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Taking Stock Over Time

Stocks are things to own over time.  Productivity will increase and stocks will increase with it.  There are only few things you can do wrong.  One is to buy or sell at the wrong time.  Paying high fees is the other way to get killed.  The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.  Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market.
—    Warren Buffett
(as quoted in “The Snowball” by Alice Schroeder)
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On Market Reactions…

On one point, however, I am clear.  I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully, and which, possibly, could lead to substantial permanent loss of capital.
—    Warren Buffett
[Invest wisely and the market will come back to you in the long run.    —    KMAB]
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