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Lessons from the 2020 Berkshire Letter

March 3, 2021

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Jon

Warren Buffett’s annual letter to shareholders was released this past weekend. Like previous letters, it’s filled with several lessons and great reminders for investors. Let’s dive in.

Even the Best Investor Makes Mistakes

The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential…

I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one.

Every investor loves to tout their winners. Nobody likes to talk about their losers. Well, almost nobody. Continue Reading…
The Coffee Can Approach

February 26, 2021

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Jon

The coffee can portfolio is a strategy built on one decision. You buy a stock. That’s it. It eliminates the difficult task of selling.

Robert Kirby envisioned the strategy after a client approached him. He had worked with the client for about a decade when she called. Her husband had suddenly died and she wanted to add his portfolio to hers so Kirby could manage it. As Kirby looked over her husband’s portfolio he was somewhat shocked and surprised by it. The husband not only cloned his wife’s portfolio but handily outperformed it.

Every time Kirby made a recommendation to buy a stock for the wife’s portfolio, the husband followed it too. Each time, he invested about $5,000 into the stock. But when Kirby made the recommendation to sell, the husband ignored it. Every time he bought a stock, he tossed the stock certificates into a safe deposit box and did nothing.

After a decade, with a growing pile of stock certificates, the husband’s portfolio became a weird mix of stocks. Many were worth less than the original $5,000 investment. A few were worth more. A lot more in fact. A handful were in excess of $100,000 and one small investment in Xerox exceeded $800,000. Continue Reading…
Foiling Mr. Market

February 24, 2021

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Jon

This imaginary person out there — Mr. Market — is kind of a drunken psycho. Some days he gets very enthused and some days he gets very depressed. – Warren Buffett

I like the way Warren Buffett simplifies Mr. Market. On any given day, Mr. Market can quote great prices or terrible prices. You can get caught up in his manic depressive behavior or you can ignore it. You can see the market as a tool to use or it can be a tool that uses you. It’s your choice.

Ever since Ben Graham offered up the first iteration of the Parable of Mr. Market, others have stepped up with their own versions. Charley Ellis has a more descriptive version I also like: Continue Reading…
Wise Words on Surviving Bull Markets

February 19, 2021

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Jon

Investing is a balancing act between the fear of missing out and fear of losing. Bull market optimism often makes it easy to forget losing is possible. It’s infectious. And the side effects can be costly.

Because greed, envy, and over-optimism around bull markets can lead to excesses in a portfolio. The stock portion grows in size, as markets rise, in relation to the rest of the portfolio. This can add to your returns in the short term. It may even tempt you to move money out of whatever is underperforming to put it into stocks. But both cases adds risk that can blow up when you least expect it.

This brings us back to the balancing act. It’s a trade-off. Gains against losses. Reward against risk. You don’t get one without the other. In fact, an excess of one means the other isn’t far behind.

So protection from losses is a critical piece of a portfolio. It needs to be weighed at all times. Especially in bull markets, when profits are easy to come by and losing seems impossible.

Because the long history of markets suggests that the current bull market is far more likely to end, like all the rest, than go on indefinitely. It’s best to prepare for that eventuality the further it drags on. Not doing so can be disastrous.

Finding the perfect balance is never easy but it means weighing the odds, diversifying, keeping the downside in mind, and not letting over-optimism infect your investment decisions.

Of course, it helps to keep some of the advice below in mind: Continue Reading…
Capital Account: A Money Manager’s Reports on a Turbulent Decade 1993-2002 by Marathon

February 17, 2021

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Buy the Book: Print

Capital Account is a selection of reports by Marathon Asset Management. The reports introduce their capital cycle approach to investing and explain the impact the cycle had on businesses, markets, and investors during the late 1990s bubble.

The Notes

Continue Reading…
Adjusting Return Expectations

February 12, 2021

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Jon

Expectations tend to seep into investment decisions. Not always in a good way.

Take the return expectations from a recent study by Schroders:

15.38% seems awfully specific. Maybe the U.S. stock market hits that mark over the next five years, but it’s eerily similar to returns over the last five years. From 2o16 to 2020, the S&P 500 earned an annual 15.22% total return. So recency bias may play a role. And with the S&P 500’s historical return closer to 10%, I think it’s safe to say those expectations are over-optimistic.

A safer assumption for future returns would be achieved with a formula John Bogle devised. Bogle’s simple formula looks like this: Continue Reading…

Lessons from the 2020 Berkshire Letter

The Coffee Can Approach

Foiling Mr. Market

Wise Words on Surviving Bull Markets

Capital Account: A Money Manager’s Reports on a Turbulent Decade 1993-2002 by Marathon

The Notes

Adjusting Return Expectations