Part 1 was looking at some of his wisdom, Part 2 was looking at his personality traits. This week I’ve highlighted some of his insights on financial markets, etc.
I mean he’s the world’s most successful capital allocator and he has considerable influence over markets. He might know a thing or two ;)
Part 1 - Wisdom/Advice (https://kobekoto.com/blog/snowball-warren-buffett-summary/)
Part 2 - Personality Traits (https://kobekoto.com/blog/snowball-warren-buffett-pt2-summary)
Part 3 - Financial/Investing Insights
Part 4 - Warren’s Social Circle
Time To Read: 4 minute and 30 seconds
What The (Stock) Market Is
- In the short run, the market is a voting machine. In the long run, it’s a weighing machine.
- “Weight counts eventually. But votes count in the short term.”
- Ultimately, the value of the stock market could only reflect the output of the economy.
Retailing Is Like The Restaurant Business
- Buffett and his partners learned that retailing was a lot like the restaurant business, a wearying marathon in which every mile, fresh, aggressive competition could leap in and race ahead of you.
- Munger says “Retail is a very tough business - Practically every great chain-store operation that has been around long enough eventually gets in trouble and is hard to fix.”
- The essential skill in retailing was merchandising, not finance
Buying A Yacht
- “Buying Hoschild-Kohn (retail store) was like the story of a man who buys a yacht. The two happy days are the day he buys it and the day he sells it.” - Charlie Munger (Warren Buffett’s business partner)
Thoughts On Investing In Innovation
- Although innovation might lift the world out of poverty, people who invest in innovation historically have not been glad afterward (Internet stocks - 2000, for example of the 2000 car companies created in the US, only 3 car companies survived).
- Buffett says instead you should have shorted horses.
- It’s wonderful to promote new industries, because they are very promotable. It’s very hard to promote investment in a mundane product. It’s much easier to promote an esoteric product, even particularly one with losses, because there’s no quantitative guideline.
Warren Buffett’s Cigar Butt Technique
- Keep buying a stock as long as it continues to sell below book value.
- If the price rose for any reason, he could sell out at a profit.
- If it didn’t and he ended up buying until he owned so much stock that he controlled the company, he could sell off its assets as a profit.
Warren’s Investment Preferences
- We will not go into businesses where technology which is way over my head is crucial to the investment decision.
- We will not seek out activity in investment operations, even if offering splendid profit expectation, where problems such as layoffs, plant closings appear to have a substantial chance of developing.
Cardinal Sin of Investment
- Deploying capital with no hope of a return was a cardinal sin to him.
Desert Island Challenge
- “If you were stranded on a desert island for 10 years, what stock would you invest in?”
- To find the company least subject to the corroding forces of competition and time.
When Companies Don’t Pay Dividends
- When a company stops paying dividends, it’s a move that conveys to shareholders that the till is empty.
When To Buy A Company
- “Time is the friend of the wonderful business, the enemy of the mediocre...It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- “Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class management. That leads right into a related lesson: Good jockeys will do well on good horses but not on broken-down nags.”
- They wanted businesses that would marmalade them with money, businesses that had some sort of sustainable competitive advantage and could outwit the natural cycle of capital creation and destruction as long as possible.
Factors To Look For
- Good qualitative factors to look for in a good stock investment for a company:
- The ability to maintain sales growth
- Good management
- Research and development
Buffett’s Early Investing Strategy
- Buffet to his partners in the early days “The really big money tends to be made by investors who are right on qualitative decisions.”
- Buffett had a buoyant optimism about the long-term economic future of American business, which had enabled him to invest in the market against his father’s and Graham’s advice.
Warren’s Stock Advice To The Average Person
- “Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong.
- One is to buy and sell at the wrong time.
- Paying high fees is the other way to get killed.
- The best way to avoid both of these is to buy a low-cost index fund, and buy it over time.
- Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market.
- Interest rates - the cost of borrowing
- As interest rates vary, the value of all financial assets - houses, stocks, bonds change
- A short seller borrows a stock and sells it, betting it will go down.
- If so the “short-seller” profits from buying the stock back cheaper.
- He loses if the price rises. Short-selling is risky because you are betting against the long-term trend of the market.
- The gold standard - back in the day, the amount of gold held by government treasuries fixed the amount of dollars in circulation. The “gold standard” stopped the government from provoking inflation simply by printing money.
- Current assets are a measure of liquidity - how fast a company can raise cash. They include cash, easily saleable investments, inventory, and money due from others. They exclude items like real estate, equipment, debt, and pensions. which cannot be readily liquidated or are owed to others.
- Capital allocation - placing money where it would earn the highest return
- Arbitrage ⇒ buying and selling two nearly identical things to profit from their difference in price - required scaffoldings of debt, in which more and more assets were sold short to buy more and more assets on the “long” side.
- Arbitrage: two nearly identical things trading at a different price
- Warren Buffett quote: “Give a man a fish and you feed him for a day. Teach a man to arbitrage and you feed him forever”.
- arbitrage ⇒ Two trades must take place simultaneously to eliminate market risk. Buying a stock and selling it later is not an arbitrage. Buying cocoa beans in Ecuador and selling them in San Diego is not an arbitrage.
- “Futures” market lets buyers and sellers agree to exchange commodities like cocoa or gold or bananas in the future at a price agreed upon today.
- Futures contracts give someone the right to buy soybean oil at a later date, betting on the price of oil in the future versus the price today.
- “Book value” is the stated value of a company’s assets less what it owes - like a house less the mortgage, or cash in the bank less a credit-card balance.
- Inventory “shrinkage” - inventory that is unaccounted for, usually because of shoplifting or employee theft.
- Leverage ⇒ a way of boosting profits using borrowed money.
- “Reaganomics” ⇒ the “supply-side” idea that cutting taxes would ultimately increase tax revenues by stoking the economy.
- supply-side theory ⇒ cutting taxes would force the government to cut expenses
- trade deficit ⇒ Americans were buying more from other countries than they were selling, and at a fast-accelerating rate.
- Americans were paying for the difference thru borrowing: foreigners were buying treasury bonds, and I.O.U. from the US government.
- capital asset pricing model ⇒ underpins EMH, and it launches a view of the stock market as an efficient statistical machine
- Launched a view of the stock market as an efficient statistical machine
- credit seizure ⇒ Lenders become afraid to make even reasonable loans, and the resulting lack of financing sends the economy spiraling downward.
- Credit seizures had in the past tipped economies into depressions.