Some amazing stuff we are reading, watching, and observing during the middle of this week…
Warren Buffett’s Berkshire Hathaway’s unique managerial model is lauded for its great value. However, here is a
discussion paper that highlights its costs
Most costs stem from the same features that yield such great value, which boil down, ironically, to Berkshire trying to be something it isn’t: it is a massive industrial conglomerate run as an old-fashioned investment partnership.
The most visible—and measurable—costs of the Berkshire model appear in capital allocation, principally acquisitions and investments. Buffett relies on himself in making these decisions, without board or executive input or oversight. While most such decisions have succeeded, many spectacularly so, some bloopers have appeared, the best-known being Dexter Shoe and Gen Re. The costs of error from such self-reliance could readily be mitigated by broader distribution of decision-making power. Buffett does so by periodically consulting vice chairman Charles Munger. Yet since the net costs of this approach have been modest, thanks to Buffett’s acumen and stature, there is no reason for reform while Buffett is at the helm. But some additional power sharing and oversight would be appropriate for his successors, as Berkshire’s succession plan contemplates.
Rahul Saraogi of Atyant Capital
makes a case for cyclical businesses
, not because he believes them to be superior in quality to franchise businesses, but because some cyclicals possess attractive but overlooked business model features…
…the issue of cyclical versus franchise businesses should be seen in the context of the stock market as a pari mutuel betting system. In such a system, the objective of investors is not to identify the highest-quality companies. Rather, success is driven by maximizing the gap between the perception and reality of a business. The market’s perception is measured by the market price. The lower the stock price, the lower the quality hurdle a business needs to clear in order to qualify as a viable investment candidate. The art of investing centers on the tradeoff between price and value.
[Download PDF of this Issue of Stream]
Words of wisdom and
advice for aspiring value investors
, like this one…
Be curious and read everything you can get your hands on and try to identify the people who’ve been winners and then try to identify why they have been winners. What it is about what they’re doing that causes them to be successful? I mean that’s all I’ve ever done, and try to create a system that works for the way I’m wired and allows me to get along in the market. That’s all there is to it, be curious, interested and uninhibited.
“…a very high hurdle exists for altering your long-term asset allocation based on current events,” writes Oakmark Funds’
Bill Nygren in his latest market commentary
In case you are tempted to think the past 25 years was a positive “perfect storm” for equity prices (the real Perfect Storm with 100 foot waves off the East Coast did occur in 1991), let’s remember, chronologically, some of the key events that market-timers cited as reasons to not invest in stocks – Operation Desert Storm, global recession…Fed increasing rates…Asian Flu…Y2K, tech bubble, 9/11, Afghan War, recession, Iraq War, SARS…subprime mortgage crisis, Lehman Brothers…real estate collapse, Global Financial Crisis, Greek bailout, S&P downgrading U.S. debt, oil price collapse…and Brexit—just to name a few.
Yes, that all happened, and the market still went up more than ninefold. So, next time someone tells you that stocks can’t possibly go up because the Fed has to raise interest rates or because Congress is doing something stupid or because we have the worst presidential candidates ever, remember the very high hurdle that exists for altering your long-term asset allocation based on current events.
Why you shouldn’t worry about
It seems a better strategy is not to try to avoid corrections, but rather to embrace them and know that even with the ups and downs, those that can maintain investment in stocks for decades or more have generally enjoyed robust returns.
Historically, the stock market has done well despite war, recession and countless other problems. Those events are likely to occur in the future, but so are reasonable returns for the patient long-term stock investor.
A nice documentary on
Warren Buffett, the teacher
Things you can’t care about when
managing other people’s money
It’s easy to have all the opinions in the world when there’s no money at stake. When you’re managing other people’s money (OPM) you can’t worry about being right all the time. It’s very easy to be right and still not make any money in the markets. That’s how you lose sight of your clients’ end goals.
Past tense, present perfect, future ready –
How Hero MotoCorp has put the Honda split behind it
(Disclosure: Not invested; not a recommendation)…
Munjal, on his part, is ensuring Hero MotoCorp is future ready. He has handpicked Rajat Bhargava—who was senior partner, heading the industrial practice in India, at McKinsey’s—as head of strategy and performance transformation. The role, says Bhargava, means “I have to ensure that the company is not surprised by any development. We should surprise others and that is real victory.” His strategy is bi-focal: To study how changes impact existing business and how the company can take advantage of the disruption and prepare for the future.
India’s houses of debt
– Around 39% of debt is with companies that don’t earn enough to cover interest payments…
The country’s lenders hadn’t seen this coming. They had been growing their loan books at a compounded annual growth rate (CAGR) of almost 20 percent over the past five years. As the economy slowed and loans started to show signs of stress, banks simply threw them into the corporate debt restructuring cell which allowed them to recast the debt on easy terms with little additional provisioning.
Pat Dorsey’s book –
The Little Book That Builds Wealth
– is a great read to understand the characteristics of an economic moat. Here’s a sketchnote we’ve made that captures the important insights from the book…
Click on the image to open it in large size
I don’t completely agree with the Yuval Noah Harari’s conclusion on consciousness. Nevertheless it’s another riveting line of thought from the historian. Even if it isn’t true, as Harari concludes, it’s still worth thinking about. An excerpt from his book
Gabriel Weinberg is the founder and CEO of duckduckgo[dot]com, a silent competitor of Google search. He has compiled a
list of mental models
that he found useful and it’s one of the most comprehensive list of mental models that we have ever come across…
I wish I had learned many of these years earlier. In fact, the proximate cause for posting this was so I could more effectively answer the question I frequently get from people I work with: “what should I learn next?” If you’re trying to be generally effective, my best advice is to start with the things on this list.
The most reliable path to success is to gain an exponential advantage in some area. That can only happen if you start with the stuff you are best at and build on it.
Brilliant insight from Paul Graham
on how you can build an advantage…
The recipe, then, goes something like this. (a) Identify your strengths, (b) find the hardest problems for which your strengths may be an advantage in solving, and (c) drive hard in that direction.
how to raise kinder, less entitled kids
(according to science)…
Behavioral research shows that humans can become acclimated to almost anything if they’re exposed to it frequently. It’s called “hedonic adaptation,” and it’s why Justin Bieber is always buying more outrageous cars, why the kitchen we just remodeled suddenly needs a new backsplash and why lottery winners, after the initial thrill of winning, end up about as happy as they were before.
What does this mean for kids and parents? Anything we provide or do regularly will become the new norm, whether it’s postgame milkshakes or a certain brand of clothes. And not doing things can also become a norm: If our kids have gotten used to having their beds made or dinner table set, they’ll come to expect that, too.
If you suffer from high blood pressure, here’s some good news. Relaxing to a soothing
Mozart symphony can lower the blood pressure
as much as cutting salt from the diet or exercising, a new study has shown…
Scientists in Germany played Mozart’s Symphony No 40 in g minor, dances by Johann Strauss and songs by ABBA to 60 volunteers, monitoring their blood pressure before and after the experiment. The music of ABBA did not show any or only very small effects on blood pressure and heart rate.
They found that Mozart lowered systolic blood pressure (the pressure in blood vessels when the heart beats) by 4.7 mm Hg, Strauss 3.7 mm Hg but the Swedish pop group made no significant difference. Diastolic blood pressure (when the heart rests between beats) also fell by 2.1 mm Hg for Mozart and 2.9 mm Hg for Strauss.
Previous studies have found that aerobic exercise such as cycling, running or brisk walking had a similar impact on lowering blood pressure. Now you may add listening to Mozart to this list.
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