Charlie Munger - the Complete Investor

No discussion about Berkshire Hathaway is complete without a discussion about Charlie Munger.
Tren Griffin's book Charlie Munger: The Complete Investor is a welcome addition to the pantheon of books written about Charlie Munger and Berkshire Hathaway.  Of course if you haven't read the greatest book about Charlie, (which incidentally contains much of his works) check out Poor Charlie's Almanack.

Griffin writes a wonderful blog over at 25iq - he is adept at compressing the pearls of wisdom of the gurus into his posts. Granted, some of the material in this book may be familiar to those who have already read much of the Berkshire Hathaway literature that is out there (and the pile of books continues to grow each year it seems), this is one of the first to condense Charlie's ways of thinking (a "latticework of mental models") into one tome.

Happy reading!

Thoughts on Quantitative Screens

"Many shall be restored that are now fallen and many shall fall that are now in honor." Horace

Toward the end of his life, Benjamin Graham, the genius who essentially founded the field of security analysis with his book of the same name decided that much of security analysis was pointless. In the 1970s, he had been studying the returns of stocks bought with low P/E ratios in conjunction with low Debt/Equity ratios and found that it would be quite simple for the know-nothing investor to outperform the market using such blind stockpicking.

Much has been written about such "quantitiative" or "mechanical" investing, especially since the publication of Joel Greenblatt's Magic Formula, which in essence ranks stocks by return on capital (ROC) and EV/EBIT (enterprise value/earnings before interest and taxes). Others who have followed in this vein include Tobias Carlisle (Quantitative Value, Deep Value) and James O'Shaughnessey (What Works on Wall Street). The latter two authors have most recently endorsed the use of EV/EBITDA, or the acquirer's multiple, as the single best value criterion for buying stocks.

In fact, Carlisle suggested that the addition of ROC to the Greenblatt formula has reduced the returns of the Magic Formula due to reversion of the mean; that is companies which now exhibit high ROC are more likely to return to normal.

Greenblatt himself found that most people who used the Magic Formula still underperformed! The reason? They were tweaking the formula. It is so emotionally difficult to hold stocks which are clearly "value traps" (for instance, for-profit education stocks). But perhaps in stocks with such an obvious "ick" factor is where the gains lie.

(and for what it's worth, by this  time, he had also been turning his attention to many of his other pursuits like classic literature, but that is besides the point).

I think Nate Tobik has done a wonderful job synthesizing some of the pros and cons of quantitative investing here: http://www.oddballstocks.com/2013/01/thoughts-on-quantitative-value-investing.html

What are your thoughts?

Investable stock markets

If you are seeking greener pastures compared to wherever home currently is, here is a (subjective) list of what may be deemed "investable" countries, where otherwise there are no major macroeconomic or accounting fraud risks to consider.

A verdict on the market is not the same as a judgment on a stock, so you must come to your own conclusions on each individual company yourself.


North America
USA
Canada

Europe
Germany (Warren Buffett has recently invested here)
UK
Switzerland
France
Belgium
Netherlands
Norway
Sweden
Finland
Spain and Italy - Buffett has expressed interest in these countries (https://www.youtube.com/watch?v=ti1hjSZdEZY)

Asia/Middle East
Israel (Buffett has said this nation reminds him of the United States at its own birth)
Singapore
Hong Kong
South Korea
Taiwan
Japan
India
China

Australia
New Zealand

You may find the Economist's rankings of Business Economic Risk here: http://pages.eiu.com/rs/eiu2/images/BER_2014.pdf?mkt_tok=3RkMMJWWfF9wsRogsqrBZKXonjHpfsX67eosWKexlMI%252F0ER3fOvrPUfGjI4ES8pmI%252BSLDwEYGJlv6SgFTbjGMbht2bgMUhU%253D

Thoughts? Additions or subtractions? Please share.

How to read 3 books a week..without really trying

“In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. You'd be amazed at how much Warren reads--and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.” -Charlie Munger

“Read 500 pages like this every day. That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”  - Warren Buffett

Apologies for the rather sensational title - but I'm hoping to make you more productive reader - by actually making you a more efficient listener. Nonetheless, I hope the heavyweight quotes above reinforce the importance of reading.

Simple thought experiment: if you did something for 1 minute every day over the course of a year - you would have devoted 6.5 hours to it.

Now let's invert: if you waste o minute every day for one year, you've wasted 6.5 hours of your life.

So let's do some quick math to calculate what I call "lost minutes," that is, times  throughout the day during which we are completing a brainless task on autopilot.

Shower(s): 10 minutes
Morning/evening self-care (cleaning, getting ready, etc.): 10 minutes
Cooking, washing dishes, and other miscellaneous chores: 20 minutes
Exercise (hopefully?): 20 minutes

We're already at...wait for it...365 hours per year of mindless tasks. Of course, this should be tailored to your particular schedule, but I figure most of our days look at least something like this.

OK, so how does that translate to books? In my experience, the average audiobook is about 6-12 hours apiece. That means that you could easily read 30-60 books/year with the help of a Bluetooth shower radio and headset (or if you're cheap, simply the speaker on your phone or tablet).

To put that in perspective, you could finish the complete Bible and the complete works of Shakespeare - and still have time to spare for singing in the shower.

And what about if you commute? Let's say the average commute is 40 minutes each way. If you work 300 days/year, that's another 400 hours.

But wait, there's more.

If you can train yourself to listen at 2x speed at least, go ahead and double all those numbers above (which isn't that difficult considering that the average reading speed is 300 words per minute (WPM) while the average audiobook is read at 150-160 WPM).

So in sum:

400 + 365 hours = 765 hours/year.
Assuming, you read books at 2x speed, and most books are 6-12 hours apiece, that's 63-127 books per year. 

Doesn't sound as impossible now, does it? I've been conservative with the "lost minutes," and I'm confident that most books can, with some training, even be sped up to 2.5x understandably.

One additional lifehack to recommend (not for everyone) is to listen to audiobooks as a prelude to an afternoon nap or when going to sleep at night. I think fiction likely serves this purpose better than nonfiction - but to each his own.

To clarify, I am not a fan of multi-tasking during activities that require concentration; it is better to do a wonderful job at one thing than to do a mediocre or sub-par job of two things done simultaneously. However, these half-tasks completed during the lost minutes leave room for the brain to chew on the thoughts of an author.

How many lost minutes can you reclaim? Feel free to comment with how many lost minutes you can find in your day.

50 years of Berkshire

Hedge fund billionaire Edward Lampert read all of Warren Buffett's shareholder letters and tried to reverse engineer Berkshire's trades to learn the art of investment. And a plethora of other great investors have raved about the treasures contained in these annual pieces (Buffett has said he would one day like to write a book, but he has actually written it piecemeal over the past several years, in the public domain! Charles Dickens would be proud).

Berkshire Hathaway released its 50th anniversary shareholder letter a few weeks ago. Have , you read it yet? If not, don't procrastinate - here's the PDF:

http://www.berkshirehathaway.com/letters/2014ltr.pdf

At the very least, read Warren's and Charlie's specific thoughts on 50 years at Berkshire at the end. These have been long in the making (this letter was hinted at 25 years ago in the 25th anniversary letter - looking forward to the 75th anniversary letter!)

Here's what Bill Gates has to say about this piece:

https://www.youtube.com/watch?v=RVGVjk1amWE

I would give a CliffNotes version, but this is something that really ought to be taken straight from the horse's mouth. Twitter summaries will do no good here. In future posts, I will highlight salient points of the letters of the previous 50 years, so stay tuned.

Embrace the analog

What were you doing this Valentine's Day? Nothing says I love you like a set of fresh 13F's from your favorite investors.

Holdings from gurus like Mohnish Pabrai were realized over the weekend, and another flood is being released today, including those of Berkshire Hathaway.

As I sit here taking note of some of the more interesting stock picks with my favorite gel ink pen (oh how it glides so smoothly across the page!), I want to impart something I have learned through years in pursuit of life-hacker elite productivity through hi-tech gadgets and psychological nudges.

Embrace the analog.

Here is a tour of Warren Buffett's office:

https://www.youtube.com/watch?v=uoaGaz-KDaw

Where's the TI-83 calculator? Where's the computer? Not even a cordless phone? Or an ergonomic chair? It looks like Warren Buffett operates in much the same way he did when he first started out in the 1950s.

Peter Lynch, author of One Up on Wall Street, even said his most useful tool was the yellow legal pad. And Mohnish Pabrai says that if he needs to even reach for a spreadsheet to make a calculation regarding an investment, it's a sign that he should pass--value ought to be stunningly obvious. In other words, go for the low-hanging fruit.

Now I'm far from a Luddite - technology is immeasurably useful for investing and multitudes of other endeavors. But sometimes it gets in the way, rather than being a complement to productivity and thinking. Psychological research has shown that writing by hand can even get you past writer's block much quicker than typing. And there's something to be said for those old Dictaphone voice memo recorders.

If spreadsheets have become more of a chore rather than a tool, take a step back and try something a little bit new.

The humble notebook.

Hello World!

This website will explore investing (particularly in common stocks) through the filters of other disciplines like behavioral psychology, medicine, literature, and the arts. The inspiration for the title comes from Charlie Munger, Warren Buffett's second-in-command at Berkshire Hathaway, who maintains that investing can be improved by having a latticework of mental models acquired through the study of other disciplines.

A true Renaissance man for our times, he studied meteorology at Caltech, graduated with a JD from Harvard Law school. He founded the famous law firm Munger, Tolles, and Olson several years before he committed to investing full time investment partnership in the 1960s--at Warren's prodding.

What's his secret? Reading. Mr. Munger says that his children call him a book with legs. It's a theme that comes up again and again when studying the lives of the guru investors. And having an understanding of other disciplines augments one's understanding of investing. Advising a group of business students on how to get ahead, Buffett said, "Read 500 pages like this every day. That's how knowledge works. It builds up, like compound interest," as he pulled out a stack of papers from his briefcase,

Now some may maintain that all you need are financial statements. Of course, there is no substitute for reading far and wide - 10K's, 10Q's, proxies, 13F's, and then some.

And even simple, quantitative investing executed mechanically works out wonderfully over the long-term (if you haven't already, check out Joel Greenblatt's Little Book that Beats the Market for a powerful primer written so even his 5th-grade son could understand. "When money dumb money acknowledges that it is dumb, it ceases to be dumb," according to Buffett.

Though there are simple ways to beat the market, many of us enjoy the thrill of the hunt--the immeasurable joy on finding gold among the soil. For better or worse, this is one of humankind's ingrained psychological biases, which we will explore in other posts.

I hope that investors of all stripes will find something of interest here--be they value, growth, momentum value, mechanical, shameless cloners, etc.. Thank you for visiting and stay tuned for more!