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Charlie Munger quotes – worth revisiting, revisiting, and revisiting again

“Deferred gratification really works if you want to get better and better.”

“I’ve never succeeded in something I wasn’t interested in.”

“The success of Berkshire came from making two decisions a year over 50 years.”

“Diversification is great for people who know nothing…one (investment) will work if you do it right.”

“You only need one cinch. When you get the chance, step up to the pie cart with a big pan.”

“We’re too soon old and too late smart. That’s the biggest problem we have.”

“I don’t think operating over many disciplines is a good idea for most people…get good at something that society rewards.”

“Even if you specialize, you should still spend 10-20% of your time learning the big ideas of the major disciplines.”

“I do not want a proctologist who knows Schopenhauer. On the other hand, a life devoted solely to proctology isn’t much of a life.”

“If you think you know what the state of the payments system 10 years out you’re in a state of delusion.”

“Both Warren and I know you can’t trust numbers put out by the banking industry.”

“We have a lot of businesses that neither Warren or I could run, but we’ve gotten good at judging which people can succeed.”

“One of the reasons I don’t go around talking about how the Fed should work is because I’d mostly be pounding my own ideas into my head.”

“Am I comfortable with a non-diversified portfolio? Yes. The Mungers have three stocks: Berkshire, Costco, and Li Lu’s fund.”

“Arrange your affairs so you can handle a 50% decline with aplomb…if it never happens to you, you’re not being aggressive enough.”

“The value of my partnership went down 50%…it’s a mark of manhood. You better be able to handle it without much fussing.”

“I like the Buffett system (0% fee, 6% hurdle, 25% gain-share). I’m looking at at Mohnish Pabrai who still uses it. I wish it would spread.”

“In many areas of life the only way to win is to grind away and work hard for a very long time.”

It’s been awhile. But after today’s outcome, check out the next sequence of events.

if you (like me) need help keeping your coffees straight


buffet’s checklist

Is the business simple and understandable?
“An investor needs to do very few things right as long as he or she avoids big mistakes.” Above-average returns are often produced by doing ordinary things exceptionally well.

Does the business have a consistent operating history?
Buffett’s experience has been that the best returns are achieved by companies that have been producing the same product or service for several years.

Does the business have favourable long-term prospects?
Buffett sees the economic world as being divided into franchises and commodity businesses. He defines a franchise as a company providing a product or service that is (1) needed or desired, (2) has no close substitute, and (3) is not regulated. Look for the franchise business.

Is the management rational with its capital?
A company that provides average or below-average investment returns but generates cash in excess of its needs has three options: (1) It can ignore the problem and continue to reinvest at below average rates, (2) it can buy growth, or (3) it can return the money to shareholders. It is here that management will behave rationally or irrationally. In Buffett’s mind, the only reasonable and responsible course is to return that money to shareholders by raising the dividend, or buying back shares.

Is management candid with the shareholders?
Buffett says, “What needs to be reported is data – whether GAAP, non-GAAP, or extra-GAAP – that helps the financially literate readers answer three key questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? and (3) How good a job are its managers doing, given the hand they have been dealt?” “The CEO who misleads others in public may eventually mislead himself in private.”

Does management resist the institutional imperative?
According to Buffett, the institutional imperative exists when “(1) an institution resists any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) any business craving of the leader, however foolish, will quickly be supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.”

Is the focus on Return On Equity?
“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the consistent gains in earnings per share.”

What is the rate of “owner earnings”?
Buffett prefers to modify the cash flow ratio to what he calls “owner earnings” – a company’s net income plus depreciation, depletion and amortization, less the amount of capital expenditures and any additional working capital that might be needed. Owner earnings are not precise and calculating future capital expenditures requires rough estimates.

Is there a high profit margin?
In Buffett’s experience, managers of high-cost operations continually add to overhead, whereas managers of low-cost operations are always finding ways to cut expenses. Berkshire Hathaway is a low-cost operation with after-tax overhead corporate expense of less than 1 percent of operating earnings, compared to other companies with similar earnings but 10 percent corporate expenses.

Has the company created at least one dollar of market value, for every dollar retained?
Buffett explains, “Within this gigantic (stock market) auction arena, it is our job to select a business with economic characteristics allowing each dollar of retained earnings to be translated into at least a dollar of market value.”

What is the value of the business?
Price is established by the stock market. Buffett tells us the value of a business is determined by the net cash flows expected to occur over the life of the business, discounted at an appropriate interest rate, and he uses the rate of the long-term U.S. government bond.

Can it be purchased at a significant discount to its value?
Having put a value on the business, Buffett then builds in a margin of safety and buys at prices far below their indicated value.


seminal wisdom from seth klarman

It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company’s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful. Those who used EBITDA as a cash-flow proxy, for example, either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out. In fact, many leveraged takeovers of the 1980s forecast steadily rising cash flows resulting partly from anticipated sharp reductions in capital expenditures. Yet the reality is that if adequate capital expenditures are not made, a corporation is extremely unlikely to enjoy a steadily increasing cash flow and will instead almost certainly face declining results.
It is not easy to determine the required level of capital expenditures for a given business. Businesses invest in physical plant and equipment for many reasons: to remain in business, to compete, to grow, and to diversify. Expenditures to stay in business and to compete are absolutely necessary. Capital expenditures required for growth are important but not usually essential, while expenditures made for diversification are often not necessary at all. Identifying the necessary expenditures requires intimate knowledge of a company, information typically available only to insiders. Since detailed capital-spending information was not readily available to investors, perhaps they simply chose to disregard it.
Some analysts and investors adopted the view that it was not necessary to subtract capital expenditures from EBITDA because all the capital expenditures of a business could be financed externally (through lease financing, equipment trusts, nonrecourse debt, etc.). One hundred percent of EBITDA would thus be free pretax cash flow available to service debt; no money would be required for reinvestment in the business. This view was flawed, of course. Leasehold improvements and parts of a machine are not typically financeable for any company. Companies experiencing financial distress, moreover, will have limited access to external financing for any purpose. An over-leveraged company that has spent its depreciation allowances on debt service may be unable to replace worn-out plant and equipment and eventually be forced into bankruptcy or liquidation.
EBITDA may have been used as a valuation tool because no other valuation method could have justified the high takeover prices prevalent at the time. This would be a clear case of circular reasoning. Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify an end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.

wrote the below email to a friend of mine just now and figured it was worthwhile posting.

Martin Feldman of “Harvard fame” addresses both the effectiveness of QE (it hasn’t been very effective in terms of spurring real GDP growth, asset prices is a different matter) and the low inflation rate (since 2008, for the first time in Fed history, the Fed has been paying 25bp interest on excess reserves, curbing M2 growth, which in turn has a direct corollary with inflation) in the following, accessible article.

On the latter point, consider this. In nominal terms, since 2000 the economy has increased 1.7x, but M2 has increased 2.3x. Add excess reserves and you get a 2.7x multiple. Say the Fed is unable to curtail these excess reserves from eventually finding their way into the economy – perhaps not plausible given their new “tool-kit,” but bear with me – and you’re in a situation where you’ve almost doubled the money circulating in the economy relative to the goods and services produced by the economy.

Intuition in these matters doesn’t get you far, but somehow that is a jarring number. And yet CPI is low, but how good a measure is CPI? The below shows the spread between the CPI methodology in 1980 versus today’s methodology. Point is: there is no right answer and a point-estimate won’t capture the whole truth. As with most things, there’s a distribution, and seemingly the distribution is pretty wide.

CPI vs Shadow CPI

Also bear in mind that the above metrics don’t account for dollars held overseas. The status of the US dollar as a de facto reserve currency and the preferable medium of exchange for settling things like oil, iron, precious metals, etc., isn’t a given. What if the share of transactions denominated in the USD falls at a faster rate than the growth in volumes of transactions? Is it an altogether implausible scenario in which, domestically, there’s too much money chasing too few goods and, internationally, there’s less demand for dollars?

M2 Growth

seth klarman on kicking the proverbial can

Seth Klarman Views 2

seth klarman on where bubbles come from

Seth Klarman Views

three baby bears.

charlie munger on two-track analysis

“Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things—which by and large are useful, but which often misfunction.”

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