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The common thread that runs through all equity bull markets is confident expectations of higher earnings ahead. The common thread that ties the onset of all bear markets together is the loss of those confident expectations of higher earnings ahead. History shows that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive. — Peter Bernstein (source)
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Warren and Charlie were back to answering questions last weekend at the Berkshire annual meeting. For over five hours, the duo answered questions from a packed house.
The broader lesson from the meeting revolved around the duality of mistakes. It’s an inevitable aspect of investing that creates setbacks for some but opportunities for others.
Let’s dive in.
New things coming along don’t take away the opportunities. What gives you opportunities is other people doing dumb things… In the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things. And they do big dumb things. — Warren Buffett
The question related to how new tech (AI) might impact industries and markets and how investors might benefit from it. Of course, new tech impacts businesses. It always has. Creative destruction is a byproduct of innovation but it rarely happens instantaneously. It’s also hard to predict which companies might suffer the most. Continue Reading…
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Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error. — Charlie Munger (source)
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Warren Buffett’s Partnership Letters hold a number of lessons for everyone. Some stand out more than others because he repeats them throughout the letters. Those lessons are worth repeating again.
It is always startling to see how relatively small differences in rates add up to very significant sums over a period of years.
Exponential growth doesn’t come naturally to everyone. Mostly because it’s hard to imagine the huge amount of growth that happens on the backend based on what we experience on the frontend.
To help his partners understand it, Buffett wrote three versions of alternate history to explain it. He rewrote the history of Christopher Columbus, da Vinci’s Mona Lisa, and the sale of Manhattan. His stories offer a fun way to rewrite historical outcomes and show the power of compounding. Continue Reading…
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Someday I’m going to write a piece called “The Perils of Brilliance.” The times I have been most wrong are the times I thought I was most right. You asked me at the beginning about the things I’ve learned from all of this, and I have to repeat: It’s humility. I think the reason I’ve been able to survive 55 years in this business is because I developed humility, at least after 1958. It’s the only way to survive—not necessarily to be the top quartile—but survival is really the name of the game we’re playing with long-term considerations. — Peter Bernstein (source)
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Howard Marks is a philosopher of risk management. His quarterly memos are a crash course on the subject.
Marks got his start as an equity analyst at Citicorp in the late 1960s. It was the peak of the Nifty-Fifty. They were considered one-decision stocks. The companies were so great that you could buy them at any price. Citicorp and many investors took it to heart and the Nifty-Fifty stocks traded upwards of 80x earnings.
Over the next five years, Marks watched the Nifty-Fifty’s stock prices fall 70% or more in price. It provided the perfect lesson that even the best companies can be risky at too high a price.
His attention switched to junk bonds as Micheal Milken drove the junk bond craze in the 1980s. It was here that Marks applied Ben Graham’s “negative art” running a portfolio of high-yield bonds.
Unlike stocks, bonds typically have limited upside, so not losing is of the utmost importance. Because if you buy a basket of bonds that all yield 6%, the best you can earn is 6% per year from now to maturity. The risk is that a company behind a bond stops paying, the bond falls in price, and your returns fall short of 6%. So the goal of bond investing is to filter out the bonds that won’t pay. Loss avoidance is the priority.
Loss avoidance was equally important when Marks started one of the first distressed debt funds for TCW in 1988. Distressed debt offered a potential upside, unlike his previous bond fund. Seven years later he, with several colleagues, founded Oaktree Capital and infused risk management into its philosophy. Continue Reading…