One of the interesting things to analyze from an aerial view is the difference between how strategies are taught in the classroom and how they are executed in reality by those with real world experience. For instance, in business schools across America, students are taught that it wise for a company to take on debt in a low interest rate environment if it can earn higher returns on capital with that money when adjusted for the interest rate payouts. Of course, old-school operators understood that you cannot go bankrupt if you do not owe anybody anything and tended to eschew debt in good times because it could turn into a noose that drains cash flow in bad times.
An education in “comparative economics” offers a similar divergence between how things work in theory compared to the real world. In textbook economic theory, you are supposed to focus on what you … Read the rest of this article!
One of the statistics that I often think about, and have mentioned with some frequency on this site, is the fact that the average equity investor compounded his wealth at 3.49% annually from 1990 through 2010 while the S&P 500 Index posted annual returns of 7.81% during that time frame.
To check out the study yourself, click here: http://www.thewpi.org/pdf_files/dalbar.2012.roccy.pdf
When I pursue investing, my long-term assumption is that I will achieve returns somewhere between 8-12% annually (assuming 3.5% annual inflation). If everything goes right, and companies like Coca-Cola, Johnson & Johnson, and Procter & Gamble are able to replicate their former glories (in terms of earnings per share growth) due to a combination of population growth, share buybacks, and price increases/productivity increases, then I imagine that figure will lean closer to 12%. If I make some big mistakes along the way like buy a decaying tech stock or a bank … Read the rest of this article!
If I come up with an intelligent investment idea, the ultimate value of the the idea hinges upon my ability to actually put up funds and make an investment in the business that I believe will deliver excellent long-term returns. What is the old Mark Twain quote? Something like: “The man who can read but chooses not to read exercises no advantage over the man who cannot read.” Maybe there is an investing corollary to that: “One who can identify great long-term investment opportunities but does not actually put money into them exercises no advantage over the one who cannot identify great long-term investment opportunities.”
Like the great majority of individual investors, I do not make a single lump-sum investment at one point, but rather, accumulate shares of a given stock over time as surplus capital from labor becomes available.
This leads me to an important conclusion: When I identify … Read the rest of this article!
A couple weeks ago, the Wall Street Journal published an article that explained why the gap between professional and amateur-ish players is narrowing: the proliferation of information about every possible minutia and technique associated with poker playing gets debated endlessly on online forums accessible to everyone that the information asymmetry between the pros and the aspirational is quite small compared to what it once was.
That general trajectory applies to investing as well. The free, easily accessible information that we take for granted today—how much profit each Johnson & Johnson brand makes, IBM’s dividend history over the past century, profit reports from Chevron, are all easily available through a Google search. If you have a question about a company’s business model, you can find the answer in a couple mouse clicks in a second or two. Up until twenty or so years ago, that kind of information was only in … Read the rest of this article!
I was just reading through Seth Klarman’s 2010 letter to his investors at The Baupost Group and I wanted to share with you three quotes that caught my attention enough to reflect upon:
(1)Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
To deal with this problem, I like to go straight to the Charlie Munger playbook. Instead of crafting a strategy that fears bad things happening, I try to ask myself this question: “If the world gets even messier, what companies will still be making a profit even if everything falls apart?”
When I answer that question, I think of Exxon making $38 billion in profits across 38 countries. I think of Coca-Cola making $10+ billion … Read the rest of this article!