Is there any easier way to say something intelligent than by quoting Buffet & Munger? So let them speak:
I have no use whatsover for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections (Warren Buffett)
Projections are put together by people who have an interest in a particular outcome, have a subconscious bias, and its apparent precision makes it fallacious. They remind me of Mark Twain`s saying “A mine is a hole in the ground owned by a liar”. Projections in America are often a lie, although not an intentional one, but the worst kind because the forecaster often believes them himself. (Charlie Munger)
Evoking the storytelling discipline, there`s a little story that says a CIO was presenting a M&A proposal to the key management and the board of directors. He made a very detailed slideshow, full of premises and sensitivity analysis. Being harshly questioned by his audience, he gave up by saying: “Ok, fellas! The deal doesn`t make any sense! I just need to beat the street`s growth estimates and earn my bonus!”
Remember, the more simpler, the more fairer. If you can`t explain it in plain straightforward language, there`s a chance you are deceiving even yourself.
“The brain can be developed just the same way as the muscles can be developed, if one will only take the pains to train the mind to think.”
– Thomas Alva Edison
I’d rather just quote this outstanding team than say the words by myself. For the full letter, click here
Investment philosophy in their words:
Rather than try to guess what might happen next, we think it more prudent to own a portfolio of market leading companies that earn high returns on capital, boast strong balance sheets and self-fund their growth. We try to invest alongside motivated and ethical management teams and to identify businesses with many years of growth ahead of them. We try to buy these businesses carefully, taking advantage of occasional periods when their stocks seem to be mispriced. Though it contradicts academic theory, we believe a concentrated portfolio of businesses that has been intensively researched and carefully purchased will generate higher returns with less risk over time than a diverse basket of stocks chosen with less care. However, a concentrated portfolio may deliver results in an individual year that do not correspond closely to the returns generated by the broader market.
Declining holding periods, for who?!
We have now owned TJX for 12 years and Mohawk for 10 years.
Signs of an expensive market:
In the fourth quarter of 2012, we were modest net sellers of equities for the first time since 2008, in response to specific situations at several of our portfolio holdings. In particular, we exited Target Corp., the discount retailer we’d owned since 2006, as we became increasingly concerned by its lackluster sales growth and vulnerability to competition from online retailers.
Given the huge run up in equities since early 2009, we are no longer finding compelling valuations, either for our existing holdings or for new ideas we are researching. Our current portfolio seems fairly valued today. That said, anyone who has paid attention over the past 15 years knows equities can trade at extreme levels, both of overvaluation and undervaluation.
Top down thoughts:
Valuations for stocks are heavily influenced by interest rates, and particularly by the risk-free rate of return on 10-year and 30-year United States Treasury bonds. Relative to the current return on Treasury Bonds, stocks continue to be quite attractive. However, the current risk-free rate of return is not a product of market forces. Rather, it is an instrument of Federal Reserve policy. As long as these policies remain in place, and stocks trade at higher levels of valuation, it will be more difficult for us to find individual stocks that meet our criteria for returns on a risk basis that incorporates substantially higher interest rates than exist currently. Just as we think it would be a mistake for investors to buy bonds at current levels, we believe it would be a mistake for us to buy stocks on the assumption that interest rates remain anywhere near current levels.
One thing I have come to realize by myself is that investing is much more of an art than what I thought before while trying to figure out exact calcs to reach a conclusion. Thus developing your framework – as Munger would say, wordily wisdom or mental models – is key to becoming a great investor. Perspective and curiosity are another two relevant characteristics. Naturally, perseverance must reign in your life so you can develop your mind.
Having read a book of the greatest CEOs of all time – if you are interested, just contact me, it made it easier for me to contemplate how they allocated capital: back of the envelope calculations, having a great knowledge of the specific market/segment they were investing in and knowing the two or three key issues on that topic. Therefore one reaches the conclusion that no complex DCF model is sharp enough predicting the future. Deep knowledge is the path to clarity and wise decision making.
Moreover elaborating on the above topic, portfolio turnover should be really low or none since your knowledge is so thorough you wouldn’t change your mind frequently.By the way, if you have any good books to recommend, please do not hesitate to share.
Thinking of the big picture forces me to read Marks’ comments. In his last memo, he goes on generalization issues; extrapolation risks which we oftentimes incur but shouldn’t; the role of PRICE as a proxy of risk, despite the asset class – for example, bonds today seem way riskier than equities; the concept of ERP – the one he likes the most is “the margin by which equity returns will exceed the risk-free rate in the future” and that can’t be read anyplace; three psychology-descriptive stages of bull and bear markets and so on.
Bottom line he is constructive on equities, since “A move upward can be powered by a switch from the fear of losing money to the fear of missing opportunity. When attitudes are moderate & allocations are low, it doesn’t take much.”
Howard Marks makes his point about what puzzles him the most in investing saying “Many of the important things in investing are counter intuitive.” and as Einstein has said once: “Not everything that counts can be counted, and not everything that can be counted counts.”
Another insightful thoughts from Warren Buffett in his last letter to Berkshire`s shareholders:
(i) he analyzes Berkshire performance in a rolling 5 year window against the S&P;
(ii) highlights the importance of brilliant people at management/board level;
(iii) little lesson on accounting of intangibles;
(iv) recent newspapers acquisitions rationale;
(v) the role of capital allocator and its options: reinvest, distribute dividends & share repurchases.