Cigarbutt

This thread connects several interesting topics: -Resistance to change and loss of control When cars started to hit the road, many felt they constituted a threat and even were evil. Even stone throwing was common. It is remarkable how humans adapt and adopt. http://www.press.uchicago.edu/Misc/Chicago/467412.html http://www.detroitnews.com/story/news/local/michigan-history/2015/04/26/auto-traffic-history-detroit/26312107/ -How small things can make a huge difference Some suggest that the washing machine (with the advent of electricity) may have been one of the great modern inventions. http://www.gapminder.org/videos/hans-rosling-and-the-magic-washing-machine/

Situation in 2007 versus now? There are parallels and there are differences. Then?, "past performance indicative of future results". ;)

Thought I could bump this up vs recent comments by Mr. Buffett. So, -bought the house for 150 000 in 1971, -took on a mortgage of +/- 120 000 on it, -invested the borrowed funds in Berkshire stock, -which value comes to 750 million these days, -and now asking 11 million. Impressive. These days, one can get a very low fixed rate 30-year mortgage quite easily. The challenge may be to find something to invest into. I wonder if BRK now has the same return potential characteristics as in the 1970's. https://www.msn.com/en-ca/money/topstories/why-one-of-the-worlds-richest-people-took-out-a-mortgage/ar-AAnNpRy

Conventional teaching says that earnings growth is what drives market valuations. In fact, the correlation between earnings growth and share price appreciation is weak over periods. That correlation gets confirmed in the longer term. What is long term these days? The big mover is multiple expansion (or multiple compression). But that is based on animal spirits. If you think that Economics is a soft science, what do you think of Emotional Economics? Interesting times. I just read Mr. Hussman's weekly letter and despite deserved criticism, some of his points about cycles are relevant. The last PCM commentary from Mr. Maida coincides when he asks if this time is different. One perhaps has to wait for a complete cycle before comparing to some kind of benchmark. But, of course, cycles can be long and, in the long run, we will all be dead. To win the race; you have to finish the race. Carpe diem?

You may like: http://www.etf.com/etfanalytics/etf-fund-flows-tool https://www.ici.org/research/stats And relevant/interesting comments by Mr. Ed Yardeni with a possible link with the FAANGs. http://blog.yardeni.com/2017/06/hannibal-spirits-s-500-climbing.html If you want to know, in terms of strategy, I think that Fabius was the real hero in the second Punic War against Hannibal. (Who cares?) The strategy of opportunistic attrition has been applied repeatedly ie British victory over the Spanish Armada, Napoléon's defeat in Russia, the guerilla in Vietnam and many others. The link with investing could be to not fight the Fed or bet on momentum. I like patience and opportunism.

Cognitive biases are pervasive in decision making and can potentially make us go astray. I am reviewing (again) this topic. The reason for this post is not really for others (even if I hope it can be useful). Mainly, I find that by writing about it and putting it on a public forum for scrutiny makes me more aware of these behavioral/cognitive biases. We are (I am) heavily influenced by biases and the unrecognized ones, especially, have potential for very bad decisions (and make you lose money or opportunities) when analyzed in retrospect. Anchoring bias This has to do with a common tendency to focus on a specific piece of info (the « anchor ») that comes spontaneously early on in the process and that somehow is deemed to be defining in nature. Think of the price tag on an object. Our primitive brain hates uncertainty and tends to look for an « anchor ». Once that process sets in, it can become really hard to change one’s mind. Obviously, in terms of evolution and survival, this type of behavior/reasoning has potential usefulness. If you meet a bear in the forest, there’s no time for scenarios analysis or probability assessment. It’s fight or flight. Our neuro-endocrine system, in fact, works well in these circumstances. However, the anchoring bias can lead us to poor investing decisions. One related application of this bias comes from « forecasts » of financial variables (GDP, oil, last quarterly EPS, etc) that are derived from present conditions or very recent trends. A lot of money has been made by those who can correctly detach themselves from this type of anchor. Another potential problem comes from relative value investing : ie if the PE of comparables is such then the value of my target investment should be such. Also, our tendency to hold an investment that is trading lower when the actual intrinsic value of that investment no longer warants holding that investment. A few years ago, I invested in a canadian envelope manufacturer. Bought around 4$ and sold around 4$ a few years after (this is not the way to get rich). This was a mistake. I realized after that my investment decision had been influenced (at least partly) by the fact that the IPO price was 10$ and that somehow, this issuing price meant that there was upside at 4$ when, in fact, it was no longer relevant. Another way to appreciate this bias is through the conditional probability prism (Bayes’ Theorem). Obviously, this is potentially a great statistical tool that can provide « ajustments » to the initial thesis but relies on an appropriate initial or « anchor » assessment. So, what to do? The challenging part is that self-awareness is not enough to eliminate this bias. To control for that bias: -acquiring most/all relevant data and independently coming up with a range for IV before focusing on share price. -writing down the fundamental reasons supporting the thesis. -listing the fundamental factors that would kill your thesis. -participate in a forum like this one in order to have your « anchor » tested. I plan to cover other biases over time. For those who feel that this is a waste of time, the last bias that I will cover will be the blind-spot bias which is the failure to notice one’s own cognitive biases.

Thought this was a nice article giving perspective on Hyman Minsky, the economist. (From David Hay, Gavekal) Credit amplifies business cycles. Where are we in the cycle (supercycle)? I somehow feel that bottoms have not been tested. Enjoy the ride. http://files.constantcontact.com/3bf703a6001/0b7092c0-e570-46ec-8b59-4c01e6d749aa.pdf?ver=1496433429000

Thought this recent CFA publication was worth sharing. https://www.cfainstitute.org/learning/future/Documents/future_state_of_investment_profession.pdf Takeaways for me: -Know the rules before you play the game. -On robo-advisers and “smart” artificial intelligence. Reminds me of “smart” beta investing. When pushed too far, even good ideas can become counterproductive. -On blockchain technology disruption. “The Economist described blockchain as the great chain of being sure about things.” I would humbly add: “A chain is only as strong as its weakest link.” -On scenario planning: “We prefer scenario planning to forecasting, which typically represents a “best guess.” Scenario planning is about opening minds and painting pictures of the future that decision makers can refer to when digesting current news and making investment and business decisions.” Perhaps just a fancy way to define divination and fortune telling. -On purposeful capitalism. Yeah right. -The section on page 16-17: “The problem with the investment management industry” The industry is not a net value creator. To the contrary. And then what else is new?

Fascinating topic. At this point, I like what is said towards the end of the second link (Vox link) that jeffmori7 provided: "Above all, the haziness of the long-term view argues for humility on all sides. There’s much we do not yet know and cannot possibly anticipate, so it’s probably best for everyone to keep an open mind, support a range of bet-hedging experiments and initiatives, and maintain a healthy allergy to dogma." Let's keep moving then.

Coming somewhat from a scientific background, this is a relevant question for me too. To deal with uncertainty can be fun and rewarding. Yes, stories, hunches, intuitions play roles. However, thinking of fields where art and science are combined, perhaps a way to bring uncertainty down to a level contained within a margin of safety is to use a thought process based primarily on the deliberate application of a framework guided by rational, analytical and rules-based criteria. To check your assumptions. In contentious legal issues, each case "story" is different but case law comes up with frameworks, rules and principles. For controversial accounting reporting requirements, accounting boards use guidelines and other criteria. In complex medical presentations, the "story" is different but there are clinical and radiological criteria, clinical scoring systems as well as diagnostic and treatment algorithms. My point is simply that if you start with a decision tree based on "hard evidence" (more objective and verifiable), you may be able to incorporate the subjective aspects into a relevant range of intrinsic values. If you take an insurance company like Fairfax, based on the "numbers", I would submit that most would come to a relatively narrow range of intrinsic value. On this board, for instance, there are often comments on the IV based on reported balance sheet values. However, if you add the "story" part, you may adjust (up or down) the estimated IV and the associated margin of safety.

Nobody's perfect. Linking with a related post, investing may be an interesting example of a single player game. Learning from mistakes is key. From Liberty’s “single player game” recent post: On the importance of the inner score card (both in investing and in life). And self evaluation. “So the mind does what it always does when it is bothered; it changes reality. We invent stories that are not really true. Our mind fills in details that didn’t actually happen and creates a seamless appearance of reality from a smattering of sensory input.” It’s important to be fair for others but it starts home as a single player. In this case (ATD.B), because of investing style, I felt that the share price was in general too expensive. We all know that it is worth paying for quality but I always put more emphasis (too much?) on the margin of safety. But I had my finger on the trigger in 2008-9. I chose well overall but ATD.B remained on the selected watchlist. Linking with longlake95, in 2009, one of the selected buys was Brampton Brick. Brampton Brick was a classic value play but remained so. I sold in 2011 resulting in a minimal loss. But the opportunity cost was huge. Since 2008-9, ATD.B got multiplied by ten and more. Alain Bouchard did buy shares in 2008-9 (huge chunk). Even if this is retrospective thinking, 2008-9 was a time for me to focus on long term compounders and I missed ATD.B. I will do more mistakes but I will keep rubbing my nose in this one. When you read the book, it helps to confirm what I felt about management all along. When we analyze companies and management teams, we look at competence, integrity and passion. It's rare that you have great score on all three. All the ingredients were there in ATD.B. The business was extremely competitive but they had moat. When I read/heard about this CEO who had an extremely strong inner score card humbly describing his weaknesses and how he needed to surround himself with complimentary individuals, I missed an excellent opportunity. Lesson learned.

Thanks for the links and perspective. My take: a strong inner score card as a single player does not have to be associated with a toxic ego. What is "MMO"?

Just finished the book. https://www.amazon.ca/Daring-Succeed-Bouchard-Couche-Tard-Convenience/dp/198800263X Alain Bouchard built a retail empire starting from scratch. He is a true example of an exceptional owner-operator-capital allocator (the Thorndike type). Book well done and is a nice addition to Alimentation Couche-Tard financial reports. Disclosure: I have followed this company for such a long time and failed to identify an entry point. Can't turn back the years. Hopefully this huge omission mistake will help to pull the trigger when the next opportunity comes around. When I read about a company and feel that I would like to work for that company will constitute one of those subjective inputs that go into business analysis.

Nice to think that we have "control" over things. Certainly helpful to try to understand and make useful decisions, ie make a difference. But there are larger forces. Historical perspective. I happen to think that we live in a great period (despite just going over the news...). A simple variable like the year one is born can have a lasting impact (in the aggregate, but of course one can aim for the standard deviations) on investment results. Thought the article was interesting. https://ofdollarsanddata.com/bad-investment-results-your-birth-year-may-be-to-blame-94feb68e7ee4

I'm fairly new but here is my take. Political and personal values discussions are helpful to some degree (think about topic, learn about the poster) but can rapidly become detrimental. There is a lot of web-based competition in that space. If possible, I submit that these threads should be closed before/during escalation. I like the concept of a community. Rules should be loose but some red lines should not be crossed. For those who like mud wrestling, other venues are available.

So why is America so rich? And why should we invest in the US? A possible reference is from Acemoglu's Why nations fail? The authors take a useful look at the origins of power and prosperity. They give a historical perspective (longitudinal) and a cross-border perspective. Institutions matter. Why not Adam Smith's Wealth of Nations published in 1776. There was another famous document written by a few good men in 1776 that perhaps made sure that the "invisible hand" could operate. The US is far from perfect, many countries are solid and viable challengers, many unknowns have yet to manifest and I really like Canada, but my long term bet is on the US.

Volatility. Sense of calm. Many theories. Another one. https://www.nytimes.com/2017/05/09/upshot/the-stock-market-is-weirdly-calm-heres-a-theory-of-why.html?_r=1 Clearly the “trend” is down (outside of isolated small blips). Some suggest that low volatility is the result of better policies and better risk management. The author even suggests that some of the volatility may be suppressed by the “technical” use of risk mitigating “products”. Hmmm… My opinion is that there may be a component related to complacency. Volatility has two components: volatility of fundamentals and volatility of market sentiment. Volatility levels and trends may be one of these things that can’t be explained or “predicted”. Mr. Market can be a friend. An unpredictable friend. https://www.crestmontresearch.com/docs/Stock-Volatility-Cycle.pdf Some food for thought: -Volatility tends to be volatile. -Swings can be violent. -At best, volatility is a coincidental indicator. Volatility perhaps is like riding a wave. To be on top requires preparation and balance but this is where you get your best opportunities. But it’s hard to catch the right wave. Nexflix is mentioned and this is related to another topic: some divergence which may be visible in this sea of calm (apparent low volatility). http://wolfstreet.com/2017/05/09/faang-stocks-gain-rest-of-sp500-lose/ This is short term but interesting nonetheless from the FAANG point of view. https://www.ft.com/content/b3cb9a98-acb4-11e5-b955-1a1d298b6250 Similar longer term insights. Different currents under the surface. Reminds me too of the Nifty Fifty. Difficult for a typical value investor to benchmark against the index. Isn’t it? A lot has been said and written about the Nifty Fifty period. However, even if one bought at the top and even if one looked very awkward for a while, long term results (holding period of at least 20-30 years!) show that eventually, one would have done better than the index and quite well on an absolute basis. Moats matter. And then, if you were able to invest at the lows, one would have done as well as Mr. Buffett! Of course history does not repeat itself. Sorry, long post.

"We live in interesting times." Absolutely. "Change" needed perhaps more than usual. "Progress" can be linear but can occur in leaps and bounds. The US maybe has the best of the worst systems to allow/survive changes. My take is that meritocracy may be more complicated but is alive and well. Essential. Would prefer adjustments but the context may require creative destruction. Or destructive creation. Based in Canada but have 65-70% net exposure to the US dollar. Long USA. Long term view required.

Individualism vs collectivism. Perhaps "no fits all" answer here. Reminds me of youtube verbal matches between Milton Friedman and "progressist" students. Especially the video showing a student discussing the responsibilty of car manufacturers vs defects and injuries/deaths resulting from the defects. The "if you can save one life" argument is convincing but often one realizes that there is no free lunch. Often decisions involve trade-offs. One has to be mindful of the not so visible trade-offs that come with decisions. For instance, respectfully submitted, the "if you can save one life argument" can be insidiously very demanding if applied widely. Most here have accumulated (or will accumulate) significant wealth. In a way, this "excessive" saved wealth could be used to save lives. I like the way SharperDingaan puts it and submit that we should exercise care before judging others based on individual moral grounds. Relevant link: https://www.currentaffairs.org/2017/04/its-basically-just-immoral-to-be-rich I suggest that morality tests that are applied to others should also be applied to oneself. Often it is a matter of balance and compromise. Nobody's perfect. But we can try? Interestingly for investments and to evaluate management, as investors, we often use the three tests: competence, passion AND integrity. So these ethics question can be used as an input for the third criteria. This is the area that I compromise the least on. I often ask myself if I would accept to work with or partner with people in charge. But often difficult to evaluate. Easier to calculate profit margins and financial ratios. Important nonetheless.

Thank you rukawa for the Singapore reference. They seem to combine various features that maximize the right incentives. Why are you not fan of the Canadian system? difficult access? long waits in the emergency room?, long waits for primary and specialized care? others? Most "successful" countries tend to have a hybrid system (private and public). I would like to add that specialized care tends to become more expensive (at rates much above GDP/inflation) and my opinion is that this tendency overall, despite what is often mentioned in the mainstream media, has NOT brought proportional health benefits. Another major problem is information asymmetry as Richard Gibbons describes. There is what seems to be a paradigm shift coming with a tendency to focus on evidence-based care. There are now poor incentives built-in the system. The patients want the best care and the treating teams/MDs want to provide the best care but, somehow, the end result ends up often being VERY far from optimal care. In addition to evidence-based medicine and algorithmic based guidelines, perhaps a private/public intermediary could become an option in the future. Just think of the transport logistics providers (C.H. Robinson, Expeditors) and how they really optimized the use of transport ressources and ended up creating value along the way. In the US, there are already some of this in action in the workmans comp "business" space. I submit that this could become a nice opportunity in healthcare as well. There is a potential relative win-win with care obtained/provided being optimized and, at the same time resulting in a profit potential for an asset-light private model based on knowledge and technology acting within the restraints of basic regulations. There are potential opportunities there. For those interested, Corvel (CRVL) is worth looking at because it has already a long and profitable operating history (mainly workmans comp) and may be in a position to expand. Many large health insurers have subs that tend to reach similar objectives but these subs tend to be regarded as "cost control" tools and don't seem to be a priority for the parent company. For instance, for those who followed Zenith (before and after it has been acquired by FFH), a component of the business (claims management) deals indirectly with this aspect of "optimal care" but again here, that component is not seen as a dynamic tool to maximize efficiency but more like a cost control unit to keep costs along reserves.

Again, interesting reference. Thank you. Fascinating, in order to learn (and improve), sometimes, if you like metaphors, you have to lower your guard (listen) and accept punches (uncertainty and dissonance) before engaging in the intellectual "fight". The primitive parts of our brains are not wired that way. Probably a good thing in the evolution scheme of things. Perhaps, we, humans, have reached another stage of the game. But, when one reads the news, that does not appear to be true. Doesn't it? Sounds easy to apply in theory. In practice, incredibly difficult. Worth the try?

I would tend to agree that Mr. Buffett doesn't work for money. He simply has a passion to make money. Not exactly the same. Yet.

Link to a Mr Ritholz article with reference to Michael J. Mauboussin's book "The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing". https://www.bloomberg.com/view/articles/2017-04-24/the-average-person-today-really-isn-t-rockefeller-rich "...skill and luck are “hopelessly entangled.” Everyone possesses different levels of skill, and we are all subject to outcomes that are based on luck. We also are not very good at distinguishing between the two. How large a role chance plays in determining outcomes may be variable but it is also significant. Once we acknowledge how much of our individual success or failure can be at the mercy of random fortune, it changes the usual assignment of causation and blame." "...serendipity. This isn't false modesty or humility, but rather, an honest acknowledgment that chance can make a significant difference in people’s lives."

Libertyarian?

Maybe that's the fascinating part. I would venture to say that a society could not function very well as a whole with a bunch of unconventionals. But somehow, value investing can be an tool that allows to deviate from the norm in a way that you decide. Assuming that basic luck is on your side too.