Nobody Knows

👇

“Sometimes you climb out of bed in the morning and you think, I'm not going to make it, but you laugh inside — remembering all the times you've felt that way.”

https://twitter.com/abhishec_s/status/1543117855889113088

Q: What are you proudest of?

Munger: I am proudest of avoiding things I don’t like.

Views on Investing & Investment Management Industry:

(developed/borrowed/collated/adopted)

They resonate strongly with me. But you have to keep reminding yourself as the world is always tempting you to abandon them.

👇 I find it challenging to get even one good new idea in a year.

When I started I could find something everyday. I am no longer young enough to know everything.

The Price You Pay - Matters.

In the last few year, you have probably been told that

"Valuations don't matter.

New businesses need new valuations metrics. Some old businesses will keep compounding at 25% ad infinitum".

Let's look at the data.

1/n The chart of Amazon PE is not "evidence". Stop this nonsense already.

How do you go about testing the hypothesis that 'valuations don't matter'?

Pick a well defined universe & run a systematic strategy that buys expensive/cheap stocks.

2/n

“How should I invest”?

I have recently been getting this question a lot from friends and family (last year I was a persona non grata).

This is usually how I answer.

👇 Can I make “just 20% to 25% a year” in stock markets?

No. You can’t. If you try this, you will lose all your capital. You can take my word for it or learn the hard way.

Take my word.

(3 people asked me this just in the last one week)

2/

4 Quotes from Jamie Dimon’s 2021 Letter

Accept failure as a “normal” recurring outcome.

1/4 Develop great models but understand they are not the answer — judgement has to be involved in matters related to human beings and extraordinary events.

2/4

Searching for Sugar Man

👇 In late 1960s a few music producers spotted Sixto Rodriguez playing in a club called The Sewer. He was the 6th child of his parents. The producers were certain that he was going to be the next Bob Dylan. He had mystical quality about him and his writing was transcendent.

2/

If you bought XYZ (quality, high PE, compounder) at worst/best day of every year, over a long period, it wouldn’t have made a difference!

The fallacy in this argument:

👇 If you buy a certain amount every year the timing element is applicable only for incremental purchases which get smaller with time as a percentage of overall holding.

2/5

Buffett & Holding Periods

The recent discussions that the median holding period for Berkshire is a year misses some key points.

1. Number of stocks churned is not same as high portfolio turnover. Low weight stocks could have been churned (why? many reasons...)

1/4 2. As per Sep’20 listed equity is only $245 BN in a $830 BN balance sheet.

Remember Berkshire is levered. Approximately 1.5X on average due to insurance float. Realised volatility of the stock is also 1.5X S&P’s.

2/4

Competitive Delusions

Even superior products can be crushed by competitive response especially if the incumbent brand is a sentimental, cash cow asset.

Examples:

👇 J&J denture cleanser, Purify scored highly in blind testings compared to category leader Efferdent. They decided to launch in a few test markets.

But, Efferdent hung free samples on EVERY door in these markets at the time of the launch.

2/8

A Stolen Pig, A Nervous Founder & A Regretful Fund Manager

👇 Robert Noyce got expelled in his junior year from Grinnell College for stealing a 25 pound pig from a local farm for a fraternity dare.

The head of the Physics department intervened claiming Noyce was the best student he ever had. Noyce was let back in.

2/

At a time when Buffett is being criticised for his style, again, I can't help but admire the investor & the person. Can't help but want to be more like him.

"Buy a company because you want to own it, not because you want the stock to go up."

Some excerpts:

👇

https://twitter.com/RamBhupatiraju/status/1335055560723603458

"Buy stocks for simple reasons, not torturous & sophisticated ones".

Eventually the thesis for a good investment boils down to 2-3 simple points. You have to do a lot of work to figure out what those are & why.

2/

Details, Screw-Ups & Butterfly Effects

👇 Disney’s first three theme parks (California, Florida, Tokyo) were a runaway success. The fourth park in Paris lost a billion dollars in the first two years. Why?

The plan projected 11 MN guests staying for an average of 3 days (average for other parks).

2/

On Deceptiveness of Investing

👇 Terry Smith says buy quality companies (you could have bought L’Oréal in 1973 at 240X and beaten the Index).

Munger says pay fair value for wonderful businesses.

Howard Marks is quality agnostic.

So which is it? What do you do?

2/

Italy & Coffee

Italy is the spiritual home of coffee.

The vocabulary of coffee (espresso/cappuccino/barista/macchiato/latte) is Italian.

1/ Coffee was introduced to Italy by Arabic travellers in 15th/16th century.

Wine sellers threatened by its popularity made an appeal to Pope Clement VIII to banish it.

Pope after tasting the coffee declared it to be delicious & quipped that it should be baptised.

2/

On Valuing Banks

Approximate MCAP/Deposits (adj. for subs):

AUBANK: 98%
Kotak: 90%
HDFC: 58%
ICICI: 30%
IndusInd: 28%
IDFCFIRST: 28%
Axis: 25%
RBL: 19%
Federal: 7%
SBI: 6%

1/ For banks first assess the strength of the liability franchise. Not just CASA ratio but total deposits to total liabilities.

A bank can have a low deposit share in liabilities and a high CASA.

Wholesale funding is not good.

Granular deposits are good.

2/

MARS: 4th largest privately held company in US.

It’s the largest pet care company in the world. Confectionary/Chocolates, technically, is not their primary business.

Bought Wrigley’s in 2008 for $23 BN.

1/4 MARS paid $11 BN itself. $ 5.7 BN debt was raised from Goldman.

Buffett invested $4.4 BN in bonds at 11.45%. And $2.1 BN in Wrigley’s preferred stock at 5%.

2/4

What’s your claim on alpha?

👇 I don’t know any endeavour where the difference between how easy something looks & how difficult it actually is, is as wide as in Investing (in the context of stock picking).

@passivefool says this is a “Blood Sport”. Apt.

2/10

When to sell:

👇 1/ The key to knowing when to sell is knowing ‘why you bought it in the first place'.

— Peter Lynch

Either the story has played out or the thesis has been violated or you have found something better.

Let’s examine the case where the stock is performing first.

How to track stocks/sectors:

(for the justifiably endangered retail active investor)

👇 1/ To have 10 stocks in your portfolio you probably have to track a 100 companies. These include competitiors of your holdings and potential inclusions.

Every company is telling a story not just about itself, but also about its peers, its customers, its vendors - the economy.

Few steps that can improve your returns:

(for the stubborn, amateur, active investor, who should rather be indexing)

👇 Don’t buy anything that you are not comfortable buying at least 5% of your portfolio.

This is not a return maximisation hack, it’s a risk mitigation one.

You will have higher thresholds for inclusions if you force yourself to buy at least 5%. You will be more selective.

1/