"THIS IS A LEARNING BUSINESS"

-JOHN HARRIS

Mr. Harris, of Ruane, Cunnif and Goldfarb says, "Try to work with people who are good teachers in an environment where you can learn a lot."

Ray Dalio of Bridgewater says, "Having questions is better than having answers because it leads to more learning."

Warren Buffett, the Chairman of Berkshire Hathaway says, "The more you learn, the more you earn."

Steve Jobs used to say, "Stay hungry. Stay foolish."

If we surround ourselves - marry, work for and, if the day comes, hire - people who are smarter than us, we can LEARN from them. 

Indeed, "you don't have to be great to start, but you have to start to be great".

"Launch, Learn, Leap and Live!"

Notes on parts of The Graham and Doddsville Issue of January 2018 (part 2/2)

David Poppe and John Harris of Ruane, Cunniff & Goldfarb, which manages the Sequoia Fund.

1. It is important "to understand the culture of a company as well as its numbers".

2. "Align yourself with management teams which make good decisions" and then don't interfere. Follow the Buffett principle and ask yourself the question, "If you had to leave a million dollars with somebody for five years, would you trust this person to be a fiduciary of your investment?"

3. "As you start to weed out the bad actors, you also realise who the good actors are". This is like Howard Marks' ideology that "if you take care of the losers, the winners will take care of themselves".

4. "Is it as good as it looks? That's the hard part." Usually, John Harris says, "the closer you look, the more risks come into focus. It's very rare that the deeper you dig into a business, the better you like it". Essentially, Charlie Munger is right in saying, "Its not supposed to be easy. Anyone who finds it easy is stupid". In most cases, if it seems too simple, you have missed some risks.

5. MOATS
"All else equal," says Harris, "we would always rather own a business that doesn't have to put any money in to get money out," because this means that the 'ROCE' is probably quite high. But, Harris quickly provides the opinion that "Sometimes its good to have to spend a lot to make a lot, because that means its hard to copy", because "wide moats are preferable to narrow ones." For example, the fact that "it is hard to recreate the infrastructure that Jeff Bezos has built over the last 15 years," gives Amazon a wide moat. Asset-light businesses, such as Google, though economically superior, may not have as much of a moat, in Harris' opinion. In my view Google may not necessarily be the best example. This is because Google has a wide data moat, and also reinvests a lot of capital to fund experimental projects, despite its search engine being very asset-light.

6. UNCERTAIN FUTURE
"Most of the mistakes in our business are made when people look at numbers and naively extrapolate the past into the future." Not only is the past not always indicative of the future, but often, "the future is no longer what it used to be", or what we thought it was. Concurrently, several asset managers spend a disproportionate amount of time monitoring and reevaluating their existing portfolio. When you do this, however, you must be careful. This is because it is very easy to become unnerved by short term turbulence and lose faith in a business which still has good underlying economics. Hence, you must "adjust for the fact that its an inherently uncertain exercise".

7. EMOTION vs. INFORMATION
"Investing is more an emotional than intellectual exercise, and it becomes very hard to stay on an even keel and to make rational, unbiased judgements if you're making them base on someone else's information." Thus, you must always do your own research. They believe that it is not always possible to "have an information advantage and know more than the next guy." But, Harris says, "you are most certainly at awn informational disadvantage if you haven't made the effort to gather enough information to make an informed decision. " In order to even attempt to be rational, you must make an informed investment decision to begin with. This is because sooner or later, the business will experience a period of turmoil, and you will only be able to stick it out if you firmly believe in your 'story'. Indeed, some may say that you should make an informed decision and then leave the investment alone for a substantial period of time, in order to prevent sentiment from influencing your decisions, because "when you're lost in the fog you tend to make bad decisions because you're scared"

Oh, and don't forget to "be humble", because "the market can stay irrational longer than you can stay solvent."

8. VALUE
i. "You just have to be a bit of a cheapskate"
ii. "Buy for a discount to intrinsic value"
BUT, "focus on highest quality businesses that you can buy at a reasonable/cheap price as opposed to strictly looking for cheap stocks". Essentially, they don't believe in cigarette-butt investing. Though that can also generate a decent return, it is easier to invest in good businesses when they are available cheap, and concurrently align yourself with management teams that have set in place PROCESSES which yield good decisions.

9. INVESTING IN DISRUPTIVE TECHNOLOGY
You can't say, "I am not going to invest in technology because its too hard to look out five years and know what's going to happen," because technology and DISRUPTION have now come to every corner of the economy.

10. GARP
i. "Look for healthy businesses that are in an early stage of their lifespan and have good growth in front of them, because that's really where you can make a big return."
ii. Growth-at-a-reasonable-price investing
iii. They also believe that "for psychological reasons (uncertainty?), the market tends to underestimate the rate and duration of growth for businesses that can grow rapidly."

11. INVESTMENT MODEL
i. "Unique business model"
ii. Possibility for growth/ a bright future
iii. Good profitability/underlying economics
iv. Undervalued 

Notes on parts of The Graham and Doddsville Issue of January 2018 (Part 1/2)

Leon Cooperman of Omega Advisors, Inc.

1. "To be successful, you must love what you do. It is both my vocation and my avocation (as well as a means of supplementing my income)."

2. "Every recession leads to the next economic recovery, and every recovery leads to the next recession," because "everything in the world is cyclical"

3. "His philosophy: invest in any stock or bond at the right price." By contrast, most people will buy "only the right stock, at any price." Essentially, the price paid is pivotal. As Howard Marks says, "Well bought is half sold". Indeed, if the fixed assets are worth more than the market capitalisation, it is a good investment. However, it may be better to buy only good businesses which are available cheap. This is because, to paraphrase Buffett, when even the best manager attempts to tackle an industry with poor economics, it is usually the reputation of the industry, that survives.

4. "You evaluate management teams twice, once through the numbers and once face to face."

5. "You want to get rich quietly. I don't go on CNBC trying to talk a stock up." This is particularly true in relation to shorts. Cooperman makes this remark with regards to Bill Ackman's public campaign to expose Herbalife as a pyramid scheme. Though it is possible, that Ackman had no other option, it also resulted in Carl Icahn attempting to squeeze his short position.

6. "You need people that are long term thinkers because short term greed will jeopardise the firm."

7. John Templeton said, "Bull markets are born in pessimism, grow in skepticism, mature in optimism, and end in euphoria".

8. "The most important thing is to surround yourself with people smarter than yourself and fairly share the loot."

9. William Ward said, "Before you think listen. Before you spend, earn. Before you invest, investigate. Before you pray, forgive. Before you quit, try. Before you retire save. Before you die, give."

Notes on the Berkshire Hathaway Shareholder Letter 1981

1. "Predicting rain doesn't count, building arks does". i.e.: Predicting rain and cold doesn't count, but carrying a coat does :)

2. "We may very well pay a fairly fancy price for a business if we are reasonably confident of what we are getting. But we will not normally pay a lot in any purchase for what we are supposed to bring to the party - for we find that we ordinarily don’t bring a lot." In effect, most business, NOT all, are usually running at close to maximum efficiency. This ties well with the idea that usually, the reputation of an industry is more durable than the reputation of a fantastic manager. This also relates to the idea that potent "managerial kisses of wonder" are rare, because "turnarounds seldom turn."

3. Consider:

A. The management you are electing to join

B. The future economics of the business

C. The price you are (i) having to and (ii) are willing to pay

If A, B, and C are favourable its probably a good investment. If your investment goes wrong, where did you miscalculate?

4. INFLATION

    "For inflation acts as a gigantic corporate tapeworm.  That 
tapeworm preemptively consumes its requisite daily diet of 
investment dollars regardless of the health of the host organism.  
Whatever the level of reported profits (even if nil), more 
dollars for receivables, inventory and fixed assets are 
continuously required by the business in order to merely match 
the unit volume of the previous year.  The less prosperous the 
enterprise, the greater the proportion of available sustenance 
claimed by the tapeworm."

Essentially, inflation increases costs of operation, and if you do not have the pricing power to pass on this rise in costs to the consumer, even if, by some miracle, you are able to maintain the same nominal profitability, people will be willing to pay less for said profit stream. This is because you may be putting "cash into their wallets, but your not putting food in their stomachs." Thus, when risk free rates rise, and people demand greater compensation for the risk they undertake on the equity market, if companies cannot increase profits, the share prices fall.

5. FORECASTING

A. Sam Goldwyn said, "Forecasts, are dangerous, particularly those about the future".

B. Pogo says, "The future isn't what it used to be".

6. A company with a high ROCE should retain and reinvest earnings, whereas a company with a low ROCE should, ideally, return profits to investors as dividends, so that they can reinvest this to generate a higher return.

7. INSURANCE

Berkshire "sacrificed much volume, but have maintained a substantial underwriting superiority in relation to industry-wide results." Essentially, Buffett is saying that it is better to ensure you are correctly compensated for the risks you take in the long run, than to maintain a high underwriting volume and premium revenue, at the risk of becoming insolvent when policyholders claim insurance.

Learnings from Berkshire Hathaway Shareholder Letter 1980

Key takeaways from Buffett's letter to the Shareholders of Berkshire Hathaway in the year 1980.
1. a. "The value of retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage"

1. b. "We would rather have earnings for which we did not get accounting credit put to good use in a 10%-owned company than company by a management we did not personally hire, than have earnings for which we did get credit put into projects of more dubious potential by another management - even if we are that management."

Essentially, Buffett is saying that a company which reinvests retained earnings and generates a good ROI or increase in market value by doing so, can and should retain earnings. He says, "If a tree grows in a forest partially owned by us, but we don’t record the growth in our financial statements, we still own part of the tree." This essentially reiterates the idea that reinvestment for substantial ROI or increases in market value often benefit the investor more than dividends do. In brief, A good return on equity for retained corporate earnings generates value.


2. "If a company can repurchase its shares at a price under 50% of that needed to acquire the same earning power through acquisitions", share repurchases are often a better (and more tax-efficient) way of returning capital to investors, than negotiated acquisitions, in which the company often pays a premium over market value to purchase the company and hence the same increase in earnings.


3. "A silly purchase price for a block of stock in a corporation, can negate the effects of a decade of reinvestment of retained earnings by that corporation." This is applicable to both, point two, regarding reinvestment and acquisitions, and to an investor; this echoes of Howard Marks' statement, "Well bought is half sold".


4. "Only gains in Purchasing power represent real earnings on investment." Only if you can buy more have you really increased the money you have in terms of the value it holds.


5. Make investments in "well-run, favourably-situated businesses, which often pay out only a small proportion of their profits as dividends."


6. "When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." This reiterates the idea that turnarounds very rarely occur. This is because in most cases, incumbents are already working hard and smart, in order to survive. Nota Bene, however, that unlikely and unusual do not mean impossible.

7. An opportunity is often a company which is "temporarily reeling from the effects of a fiscal blow that did not destroy its exceptional underlying economics." Look for businesses undervalued as a result of temporary turbulence, which the management is resolving, and which are not a result of unfavourable industry changes.


8. "Short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."