First Quarter Letter: Globalism, 1982 to 2000 Bull Market, Global Middle-Class Growth, Focus on the present.
Third Quarter Letter: Volatility Underlying a Calm Market, Middle Class Growth 2015-2030, Brookings Institution’s Estimates, LKQ Corporation.
The trend to passive investing (investing in an index funds or ETFs based on an index such as the S&P 500) has accelerated in the last to few years to the point where we have to wonder how much longer this trend can go on. Last year, American investors plowed a record $504.8 billion into passive funds.
The best investment philosophy understands the cyclical nature of our economy, using these economic cycles rather than getting used by them.
Interesting and Intriguing Quotes from Daily Journal Annual Meeting 2014 from Charlie Munger.
Yet, Jeremy Grantham says that commodities have entered a “new normal” and if he is correct, any successful investment program will need an effective way to hedge the rise in commodity prices. With Fortescue Metals, it seems that Leucadia does indeed own a successful commodity hedge.
There are two elements that govern the stock market price of any common stock or other security at any given time. One is mathematical (earnings, revenues, assets and liabilities) the other is emotional (greed, fear, etc.). The relative importance of either of these components varies. The emotional component of security prices is always present, but seldom as strongly felt as it is currently.
In view of the fact that the recent rally is not based only on earnings improvement, and that the hurricane season has not generally been a strong period for the stock, it is likely this rally will be temporary. We reduced our overweight position in Berkshire Hathaway for two reasons. First, the recent correction in the overall stock market has left us with a lot of good quality stocks that are currently selling at attractive prices, and second, the prospect of a bad hurricane season, and/or a lot of petroleum sloshing around in the Gulf of Mexico may provide us with an attractive re-entry price for Berkshire Hathaway.
As long as there are markets, there will be bubbles; and all bubbles end with a crash. Economics is the study of human behavior and markets are a product of that behavior. So, Markets are not efficient and often not very rational. In October of 2007, the Dow and the S&P were making all time highs at a point when disaster was inevitable.
Newly arrived in Omaha, 73 years late, but just in time for Christmas a shiny, but not exactly new Billion Dollar Train Set.
Regulation of credit default swap should be easy; after all they are just a form of insurance. Insurance companies have been highly and more or less successfully regulated for more than a century.
The "Shadow Banking System" includes hedge funds, private equity, and structured investment vehicles and depending on whose definition you accept investment banks.
The miracle of Capitalism is that it works at all. Its main virtue, we have been told, is that it is better than the alternatives. To the extent that it does work it is because of its ability to adapt and change, whereas competing ideologies are so dependent on dogma that they become fossilized shortly after conception. Important as this ability to chance is, it does not come easy. Capitalism is no pushover; it is more like a very stubborn mule, so for progress to continue the occasional application of a very large 2x4 is necessary.
It will not come as a shock that 2008 was not a good year in investment. Unfortunately the fact that we have been predicting this sort of market for a few years does not seem to eliminate the pain from watching asset values decline. While it was easy to see the accident about to happen we were still surprised by its magnitude. For the year our average long term account was down about 23% – 25% and the average short term account down somewhat less. This compares to a 37% decline in the S&P 500 Average, a 40% decline in the NASDAQ Composite, a 45% decline in international markets and a 55% decline in emerging market equities.
Western Refining Inc is an independent crude oil refiner and marketer of refined products. It also operates service stations and convenience stores. The Western Refining owns and operates four refineries with a total crude oil capacity of approximately 234,000 barrels per day.
This year’s Berkshire Hathaway Chairman’s Letter is enclosed. Berkshire Hathaway’s 2006 earnings were spectacular. My estimate (which I considered overly optimistic) for the fourth quarter, was for net of $3.2 billion, but the earnings actually came in at $3.6 billion.
"We’re not saying that we do things better, but rather that this is us. We want people with a lifetime commitment to their business. To underscore the values that we have, everything we do is consistent with Berkshire Hathaway’s culture. Everything they see hear, and read from the company should be consistent ... Homes have cultures. Companies have cultures. Countries have Cultures at Berkshire Hathaway's people buy into it and see that it works. This kind of thing doesn’t require mentoring. Managers see consistency in how Charlie and I act." Warren Buffett.
We have been hearing so long about this Warren Buffett premium and the universal assumption has always been that there will be stock decline when he leaves. I, as investment manager, would like to suggest, just for the sake of being argumentative, the possibility of a Warren Buffett discount and propose a scenario where the stock price will increase in his absence.
Charlie Munger that Uses the Best Models Wins. A transcript of a speech given by Charlie Munger in 1994. It is in my, as investment manager, opinion a masterpiece of simple logic as developed by a very complex intellect. The basic premise is that a person's ability to deal successfully with life is based the investment models that they use to interpret events.
More remarkable still is the fact that this is the latest in a series of large macro bets: the purchase of S&P puts, junk bonds purchases, and fixed-income sales; actions so wonderfully out of character for the world's greatest value investor as to suggest that by some mysterious process Kiewit Plaza had been magically transported to Lower Manhattan and George Soros has taken possession of the Oracle's body.
There is no such thing as a risk free investment all investments carry some risk ... A good investment is one minimizes the risk that the investor faces, and that pays you well for taking the risk. All investments decisions should start with measuring risk.
If 2003 trends quoted in the paragraph above from the Worldfact Book where to continue for the next twenty years, several interesting things would happen: 1) The world GDP would double by 2022. 2) China's GDP would be larger than ours by 2013 and be twice as big as the US by 2025. 3) India's GDP would pass us in 2035.
In October of 2003 Charlie Munger gave a lecture to the economics students at the University of California at Santa Barbara in which he discussed problems with the way that economics is taught in universities. One of the problems he described was based on what he called "Physics Envy". This Charlie says is "the craving for a false precision. The wanting of a formula ..."
I, as investment manager, have taken his table and added a couple of columns on the left side to cover the period that included the 1996 acquisition of GEICO. The result is a dramatic representation of Warren Buffett's move away from the equity market. The move is very Warren Buffett in that the shift is massive, but it was handled in such a way that unless you are really paying attention you would not notice. This table tells us better than mere words what is going on in Warren Buffett's mind.
The trade deficit exists because of the power of the American consumer, and while it is likely that currency markets will remain volatile, and may even perhaps get violently more so in the near term, the underlying factors that are the cause of this overvaluation of the dollar are not likely to change in our lifetime.
John Bogle says that during the greatest bull market in history the average equity fund investor has received just 2.7% per year return. In other words after taxes and inflation the average John that had his money in mutual funds for the last eighteen years is probably in the hole. This is indeed something to ponder. At first it does not seem possible, but mindless pursuit of performance gets the crowd to always buy last years winners and we all know how that turns out.
From a Charlie Munger speech at Harvard Law School. "Although I am very interested in the subject of human misjudgment - and lord knows I've created a good bit of it – I don't think I've created my full statistical share, and I think that one of the reasons was I tried to do something about this terrible ignorance I left the Harvard Law School with. When I saw this patterned irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life."
Sitting on the sidelines may be no fun, but it is hardly an accurate description of what has been going on at 1440 Kiewit Plaza for the last year. I, as investment manager, have revised my table of recent acquisition activity to include figures for junk bond purchases and activity in the equity market (see below). If activity is the definition of fun, then Warren Buffett has been having a ball. Reading the first couple of pages of the chairman's letter I get the impression he is tap-dancing like crazy. Certainly 72 years has not dulled his sense of humor.
Warren Buffett's $45,000 offer in 2000 was an important marker for intrinsic value, because we know that his figure must have represented a substantial discount to the intrinsic value of the stock at the time it was made. This is an attempt to adjust that price for the growth of the last three years.
Owner Earnings, Cash Flow and Berkshire Hathaway - "I have no clear idea how to value the float when computing intrinsic value, but I am fairly confident of two things: 1. money is going to keep pouring into Omaha, and 2. I am not sure that any future attempt to value Berkshire based solely on reported earnings will be satisfactory for me."
It has been eleven months now, since the Federal Reserve Board started to pull back on the stick, but the economy still has not been able to get off the ground. Every recession since the end of World War II has ended as soon as the FED stated to ease. Is it going to be different this time?