The Berkshire annual meeting this past weekend came with one surprise announcement and a host of lessons. Buffett’s retirement as CEO at year’s end came as a surprise to many. He’ll remain as Chairman while Greg Abel takes the reins of Berkshire at the start of next year. So, it’s not over yet. Hopefully, there’s a few more years’ worth of lessons to come. Let’s dive in.

Downside of Success

Size is an enemy of performance at Berkshire. I don’t know any good way to solve that problem.

The downside of successful investing, at Buffett’s level, is that decades of outperformance grow your money so large that the odds of continued outperformance becomes less likely. Simply, the pool of available investments decreases as the size of your pot grows making it harder to outperform.

It’s a good problem to have. Invest long enough, and grow your money large enough, market returns become an eventuality.

Continue Reading…

Quote for the Week

 Yes, investors are right to be serious students of the markets, particularly the extremes that entice and ensnare, but markets are only part of the recommended curriculum. Know thyself is even more important, and all investors will want to recognize the central lessons of behavioral finance:

• As investors, we overreact to good news and to bad news.
• We believe in hot hands and winning streaks, and that recent events matter, even in flipping coins.
• We are impressed by short-term success, as in mutual fund performance.
• We are confirmation-biased, looking for and overweighting the significance of data that support our initial impressions.
• We allow ourselves to use an initial idea or fact as a reference point for future decisions even when we know it is just a number.
• We distort our perceptions of our decisions, almost always in our favor, so that we believe we are better than we really are at making decisions. And we don’t learn; we stay overconfident.
• We confuse familiarity with knowledge and understanding…

Investors — like dieters and teenage drivers — will be wise not to expect too much of themselves, particularly when superior personal behavior would be vital to achieving superior results. — Charley Ellis (source)

Continue Reading…

Quote for the Week

As usual after a recession there are many people in Wall Street who expect further weakness in security prices. But I would like to point out how minor this question is in the light of long-term investment policy. Suppose, a 10 or 15% decline in prices from this level is a fair possibility, what sense would there be for the true investor to take that into account? In the first place, there is still a substantial chance that it won’t happen at all, and, in the second place, if it does happen, there is a still greater chance that he will put his buying orders too low and miss his market. All my experience indicates that the proper method to buy stocks for a particular purpose is to buy them at once, unless you have a definite reason to believe that the price level is too high. — Benjamin Graham (source)

Continue Reading…

Tariffs became a larger part of the public discourse in the late 1800s following the Civil War. A search for “tariffs” in newspapers (based in Illinois) around the time shows the extent of it.

The initial bump happened in the early 1880s, peaked in 1897, picked up again in 1909, dropped off during WWI, and rose somewhat in the 1920s until it fell off during the Great Depression. The spikes coincide with Congress pushing high tariff bills, revising bills, and replacing old tariff bills with new ones.

Editorial cartoons captured it all. The political messaging, the public perception, and the reality play out over and over again. Tariffs were meant to protect American businesses, farmers, and workers. Promises of high wages and overwhelming prosperity was a recurring theme. Plus, the tariffs would generate tax revenue to help fund the government and lower the national debt.

Instead, business confidence suffered from the turmoil brought about by frequent tariff revisions. Certain businesses received more protection than others. Tariff revisions and carve outs favored big business interests first. Wages went unprotected. Higher unemployment was blamed on tariffs, whether it was a direct result or not. Of course, consumers faced higher prices and worried over the rising cost of living.

Sound familiar?

An early example shows fat monopolies feeding at the trough of taxation.

Continue Reading…

Quote for the Week

If you’re going to seek out volatility because that’s where opportunity is, you don’t want your entire portfolio to be volatile, you only want to make volatile bets within it. You have to be sure that there’s some systematic arrangement of the bets that you make so that the portfolio risk in the total portfolio is not as volatile as the individual components. One of Markowitz’s great insights was precisely that. That you can take a lot of high-risk bets — as long as they’re not correlated — and come out fine…

As I said, the markets are macro-inefficient. They can go haywire. That is a matter that you deal with through your asset allocation in the first place, so that you don’t get killed if the totally unexpected hits you in the face…

My own affairs are run that way because I know that extreme outcomes can happen and I don’t want to get killed. But that doesn’t mean that I’m not making bets in the middle of the portfolio somewhere. — Peter Bernstein (source)

Continue Reading…