Graham Osborn

https://www.fidelity.com/news/article/investing-ideas/201903151210KIPLNGERFINANCE__20194 There is some interesting history here. "Times change but people don't."

Our innovation for this study was to also control for the factors betting against beta, BAB, described in Frazzini and Pedersen (2014) and quality, QMJ, of Asness, Frazzini, and Pedersen (forthcoming 2018). A loading on the BAB factor reflects a tendency to buy safe (i.e., low-beta) stocks while shying away from risky (i.e., high-beta) stocks. Similarly, a loading on the QMJ factor reflects a tendency to buy high-quality companies—that is, companies that are profitable, growing, and safe and have high payout.8 Table 4 reveals that Berkshire Hathaway loads significantly on the BAB and QMJ factors, indicating that Buffett likes to buy safe, high-quality stocks. Controlling for these factors drives the alpha of Berkshire’s public stock portfolio down to a statistically insignificant annualized 0.3%. That is, these factors almost completely explain the performance of Buffett’s public portfolio. Hence, a significant part of the secret behind Buffett’s success is the strategy of buying safe, high-quality, value stocks. These factors also explain a large part of Berkshire’s overall stock return and of the private part in that their alphas become statistically insignificant when BAB and QJM are controlled for. The point estimate of Berkshire’s alpha, however, drops only by about half. Herein lies the problem. It might be true that, in retrospect, you can define the price action (eg "beta") and fundamental action (eg "quality") with meaningful precision. But portfolios aren't built in retrospect. The "alpha" comes from the ability to predict which companies will manifest such qualities in the future. It's easy to construct models that explain the past. It's much harder to construct models that predict the future. It is interesting to note that Berkshire roughly equaled the S&P500 return over the past 10 years. You could say that Berkshire underperformed after backing out leverage - but that would overlook that many of the S&P500 businesses have huge amounts of leverage which is far more callable and expensive than Berkshire's is. On the other hand, Berkshire has meaningfully underperformed the Nasdaq over the same period, and that has more to do with the superior quality of the Nasdaq businesses vs Berkshire's. I don't think anyone would debate that Google is a better business than BNSF. Sounds to me like Buffett should fire Ted and Todd and put Berkshire's portfolio in an index fund (obviously not at present levels though).

Very helpful, thank you! Clawbacks seem to present unique challenges to the hedge fund industry given the presumed liquidity of the structure. Performance fees are taxed annually, I think even if they are held in an escrow account. In private equity, clawbacks are usually implemented once upon liquidation of the fund. It's unclear to me how you would implement annual carry backs without making things very messy. Buffett admits in his letter that any structure without a clawback can be abused unless the manager has a significant portion of his net worth in the fund - and I think that may be the reason why he transitioned from a carry back to a carry forward when he merged the partnerships. The text reference is on page 15: http://csinvesting.org/wp-content/uploads/2012/05/complete_buffett_partnership_letters-1957-70_in-sections.pdf

I am having some difficulty interpreting the following: A division of profits between the Limited Partners and the General Partner, with the first 6% per year going to Limited Partners based upon beginning capital at market, and any excess divided one-fourth to the General Partner and three-fourths to all Limited Partners proportional to their capital. Any deficiencies in earnings below 6% will be carried forward against future profit allocations to the General Partner, but will not be carried back against amounts previously credited to the General Partner. It seems this describes a high-water mark with a 6% ramp and not a clawback. Buffett's subsequent criticism of clawback-free formulas casts some doubt on my interpretation however. Does anyone know?

Hi John, that's fine. I often edit my posts several times after I write them and I'm sure people end up seeing multiple versions. I try not to offend anyone more than is necessary, although I do admit my sarcasm runneth over from time to time.

Erm - how is AIM.TO a winner? Looks like the stock has performed horribly over the past 10 years. How did you achieve 350%+ in 2016? I guess maybe I am an annoyance here, but I am always a bit skeptical when I hear someone post 100%+ returns in a year. People who do small caps can have maybe a 10-bagger in a year if something crazy happens. So you invested $10 at the start of the year and wind up with $2*10+$8 = $28 or 180%. That's a very outlier scenario. So I tend to assume people who are doing 100%+ in a year are doing one or more of the following: (1) using a nominal % of their net worth as their "trading" account (2) taking huge concentrated positions (3) putting meaningful amounts of money in high risk/ high reward asset classes like bitcoin, venture capital, etc. To me, it's far more impressive when someone with 1M in net worth goes to 2M than when someone with 10K in net worth goes to 1M (assuming a year for both). Buffett never did much more than 100% even in the early years, but the magic of his career was he was still doing 20-30% even with huge amounts of capital (and in a very low risk way). As Buffett says, it only takes one zero. If the coin is heavily weighted, it takes many flips to realize the coin doesn't always come up heads. Outcomes are not specific to process in investing. I don't envy those who get rich quickly and thoughtlessly in finance, because either (1) once they've made the money they will correctly realize they don't have a repeatable process to protect that capital, so they migrate to something boring like real estate and stop earning attractive returns or (2) they assume they do have a repeatable process and wind up losing most of it or churning. Process before outcomes - think of it as having a fiduciary responsibility to yourself.

LOL. Get me some of this. That’s also after 12000% last year so is this year humbling after a year like that? The portfolio must be well over a $100m now. Is that making it harder to find opportunity? Fat Pitch, I read all your posts. It would seem that you started out as a garden variety value investor. You were heavily long FNMA/ FMCC preferreds until sometime in 2017 at which you suddenly abandoned the faith and jumped on the cryptocurrency bandwagon. Your first post on the crypto threads appears to be in November 2017. Assuming you had gone 100% XRP with your 75K on Jan 1, 2017 and sold at the peak you would have booked a 3.40/ 0.006 = 556X gain. But your posts on crypto suggest you believed cryptocurrency adoption to represent a secular shift, which implies to me that you would have held on rather than selling near the peak. It seems like less than a year later you did a 360 a denounced the speculators - even though you yourself were one of them. And now you are posting 700% for 2018 on "applications building on blockchain infrastructure." You also say you've hired your own developer team to build some sort of blockchain-related product. Unless you had an exit in less than 12 months (either from your own startup or another startup you invested in), it seems a bit hard to see how you managed 8X in 2018. And even if you did, cramming 30M of cash (which would imply a 300M+ pre) would imply the exit was for 2.4B. Care to mention the name of the unicorn? And since you must be worth about 250M by now, congrats on that too. In summary, I call BS. Show me the brokerage statements and I'll believe. There's no shortage of traders on these threads who claim impeccable timing, but I've found most of them just don't have the data to back up their claims.

I was amused to read this today. Seems like Buffett is repeating his trick from the late 90s of trying to generate income for Berkshire by buying convertible preferreds in mediocre businesses since common stock valuations are too high. Unfortunately this pick sounds all too similar to USAir (cash-sucking transportation company). In almost every instance where a convertible preferred worked well for Buffett (e.g. Gillette in the 90s, banks in 2008), the common would have worked out very well too. Buying any type of security in a crappy business is a recipe for pain. He would be far better off just sitting on his Treasuries and waiting for some attractive common-stock investments. These sorts of distractions are the reason he missed Google the first time.

Hi folks, if you could buy any business on the stock exchange today at around intrinsic value (per your calculation), what would be your first pick?

That's an interesting concept. I remember at one point Buffett called Graham "quantitative" and Fisher "qualitative". Of course, these are relative terms. When you get into early stage situations the uncertainty goes up dramatically. Buffett was very much opposed to angel/ venture investing, but as I thought about it I realized that it didn't fit the statistical construct of his portfolios at BPL and Berkshire. Buffett liked positions he could max out to 20% of assets or so, and that just isn't something you can do in early stage. Additionally, for most of his life Buffett has had so much capital that deploying in a low-capacity strategy like angel investing would have been a waste of time. But to your question, yes I think there might be an analogy. The difference is that with a net-net there is some kind of margin of safety (at least in the short term) to the downside, and you can be fairly quantitative in what that is. In startup investing, the value of a pre-traction business is at best an order-of-magnitude calculation. There is really no equivalent margin-of-safety concept at the individual-security level, except that obtained by keeping the pre's below 5M inflation-adjusted.

For Google and Facebook that has definitely been true. Microsoft is close to a 1000-bagger since IPO I think, before adjusting for inflation. There's definitely a bias for companies to go public later, which has taken some of the opportunity out of growth investing for the little guy.

I agree with you in the sense that growth investing is more of a buy-at-intrinsic-value-and-wait-for-intrinsic-value-to-increase game vs a buy-at-a-discount-to-present-intrinsic-value-and-wait-for-the-differential-to-close game. But still, your valuation in these cases heavily depends on how sustainable the company's growth is over the next 10-25 years. So uncertainty about the business and uncertainty about the valuation are 2 sides of the same coin. It's also true that such companies are more often overvalued than undervalued, or at least that has been the case since the 1970s. But that is very different from saying they are never undervalued. The early 90s (Microsoft) and 2008-2012 (Google, Apple, Netflix) were times when you could have bought businesses like these for very attractive prices.

No, before they were on boards together there would have been no issue. In fact, Buffett bought a tracking position after he met Gates. He just never loaded up. He saw the economics, but he was anti-tech at that point. One should have a circle of competence defined by economics rather than by industry. As far as the industrial circle of competence goes, you gotta learn - or you'll miss things.

What would those big-picture, difficult questions be? Obviously I have a personal ax to grind. I emailed Sorkin my question about new/ seasoned insurance business depressing the cost-of-float calc. That got booted in favor of AI and healthcare. If you're out there, Sorkin, know this: next year I'm emailing someone else.

Wow, thanks Dynamic. I'm overwhelmed. You certainly provided ample evidences there that dividends have a huge impact on TR in a range of situations. And as noted, dividend yields were much higher in earlier times.

Hi folks, I thought some of you might have feedback on this. The talk is on angel investing but I think the conclusions are applicable to "growth" investing as well. The_power-law_method_of_angel_investing.pptx

The first stock exchange wasn't founded in the US until 1790. And the S&P wasn't created until 1923.

Thanks, I missed dividends. Now, the SPXTR has returned about 10% annually since 1988 vs 8% for the SPX. One will note that the S&P dividend yield was much higher in earlier times: http://www.multpl.com/s-p-500-dividend-yield/ However, there are some major problems with the assumptions in this calculator: 1. the dividends are not taxed before reinvestment 2. transaction costs for buying a couple shares of an S&P500 ETF each month (or each year) would be a high % of the total 3. it's a bit hard to see how the dividend yield is being applied in this calculator, since the dividends received by the investor on his existing shares would be determined by his purchase price and not by the dividend yield for new purchasers in a given year - only the newly purchased shares would have that yield I have to admit I am highly skeptical that dividends alone can increase the annualized return from 8% to 12% (a 50% increase). Something doesn't smell right here.

If you look at Buffett's historical purchases, he rarely pays more than 20X earnings even for a franchise. And the only time Google made it there was in 2008-2009, when I think Buffett was distracted by opportunities in the financials sector. He doesn't do so well with these higher-growth businesses where you might have to put up to 20X earnings (or maybe a bit more). That's why he missed Microsoft too.

Does anyone get Buffett's math at the annual meeting about the S&P return vs gold since 1942? He says that 10K invested in the S&P500 in 1942 would be worth 51M today. That would work out to about 12% compounded annually, which is definitely wrong. I don't have detailed data going back to 1942 for the S&P, but for the Dow that 10K would have turned into 2.6M (7-8% compounded annually). That sounds about right for all 3 of the major indices, although the IXIC has outperformed somewhat. Buffett's gold calculation (10K -> 400K) works out to a rate of 5% compounded annually for gold, which looks about right.

I have to agree with the complaint often voiced here that the quality of the questions is just not good. Very few substantive issues about the business are being addressed. Unfortunately the journalists and analysts aren’t helping that much - they tend to delve into the weeds rather than asking big-picture, difficult questions.

I think it’s interesting that both Buffett and Munger don’t seem repelled by the structural/ regulatory risk of Chinese securities. Then again, I guess BYD hasn’t had a lot of sequels this far.

I have to agree with you on that. If Hitler hadn’t ejected Jewish quantum physicists, they might have built the fission bomb for the Third Reich - and I think we all know what Hitler would have done to each and every Allied nation that did not “surrender unconditionally” once he was so equipped. Every nation that is born must die, and investors must consider that in their personal calculations. I for one know that my calculations do not align 100% with Uncle Sam’s. But I think if I’d been there I would have bet on the US too - who wants to bet in a nation that nationalizes industry. And if you’re wrong, you’re screwed anyway. That said, i am looking for ways to bet on Asia-Pacifc once the securities regulations firm up. 300 years ago it was said that “the sun never sets in the British Empire.” Now, Britain is little more than a flyspeck on the economic landscape. WW2 devastated the UK economically and paved the way for the US to steal market share.

Dynamic duo coming out..

Apparently Berkers are now paying Omahans to camp out overnight to save their spots. That’s crazy - I don’t care how rich he is. And there is a kid next to me holding a giant poster of Charlie Munger’s head.