Why Some Excellent Companies Would Make Disastrous Personal Investments

In 1923, a lawyer from Columbia University named Robert Lee Hale wrote the charmingly titled “Coercion and Distribution in a Supposedly Non-Coercive State” to argue that there is a significant gap between the theory of a how is supposed to work and how it actually gets applied in practice. It was Hale’s work, along with the Supreme Court opinions written by justice Oliver Wendell Holmes, that helped give rise to a school of philosophy called legal realism in which you focus on the real-world effects of laws rather than regarding laws as self-executing principles that get properly applied as intended.

A similar shift is taking place in the field of investing as The Dalbar Institute has led studies showing that investors actually reap returns of 3-4% over 20+ year measuring periods in which the stock market delivers 9-10% annual returns, providing data ammunition that confirms behavior economics and … Read the rest of this article!

Warren Buffett’s End-Game With Berkshire’s Apple Stock

Warren Buffett’s investment in Apple stock is particularly interesting because it is the only example of a Berkshire investment in a large-cap stock that is both repurchasing shares aggressively and does not require Berkshire to sell the stock at certain levels do to pragmatic legal reasons. For instance, he would never allow the Bank of America, Wells Fargo, or American Express holdings to ever eclipse more than 20% of each stock even as they repurchase their own shares because it would activate the “financial strength” (sometimes called “source of strength”) doctrine that requires the parent entity of a failed financial institution to pay for liabilities. 

In other words, if you own 19.9999% of Bank of America or less, and the bank were to make some awful loans that resulted in $100 billion losses, the result would be a bankruptcy and the value of your shares would diminish to $0. That … Read the rest of this article!