Liberty

Ok... ThenI will warn Klarman that what he has written is meaningless… Though, I think I am already guessing how he might answer: “Lad, the numbers are not all that important… I was just trying to convey an idea through a numerical example!” ;) Cheers, Gio While you're at it, please ask him to get Margin of Safety reprinted. I have a PDF copy, but I wouldn't mind having a hard copy. You know what I meant. You come out with numbers that show that it's better to compound at 16% and not drop than to compound higher but have a higher drop. Well, sure. And I can make up numbers that show that it's better to have a temporary drop (as long as it's not a permanent loss) yet compound faster over the long term. That's another flaw in your example. You assume that the 30% drop in the last year is the end point and that's that, iit's a permanent loss. If you are in good businesses, it rarely is, and it can be an opportunity for these businesses to deploy capital, buy back shares, etc. How much would the market have to drop for Hussman to make up for the lost opportunity from the past 5 years when he was bearish? If someone holds 30% cash, what's the IRR that he would have to deploy that cash at to make up for, say, 5-10 15 years of holding cash when that cash was in the sidelines beacuse the CAPE was above average valuation or whatever? If you don't see opportunities, by all means hold cash. But realize what opportunity cost it has. If Buffett or Watsa or Munger or Klarman was running single-digit millions, do you think they'd be fully invested or do you think they'd hold cash based on market-timing/macro factors?

Gio, I don't know where that's coming from all of a sudden. Did you miss our discussion about this, which I thought was over? :) I never said I thought holding cash was a waste just in itself, in the abstract. I said that I don't see the point in holding cash if I see enough good places to invest (ie. holding cash for holding cash's sake). If I don't see enough good places to invest, then I'll hold cash. The examples you give are meaningless because they are handpicked to show what you want to show. I can make up numbers too that would show that holding cash over time is worse than being fully invested, even through downturns (which is actually what the REAL historical numbers show, as per Joel's paper). My thinking is that since it's almost impossible to time the market and there are no metrics that are reliable enough (ie. that don't predict 10 of the past 2 recessions, or that wouldn't keep you out of the market for decades because they see them as overvalued). Even if you do better during period A because you had cash, you might do worse during period B because you had cash, and so you aren't better off on average (but cash fans tend not to look at their opportunity cost -- what if your 30% of cash had been invested in your favorite companies in the past 5 years or whatever?). And since the market tends to go up a lot more than it goes down over time on average (capitalism and demography at work), there are more period Bs than period As... So under the condition that you can find sufficient ideas that meet your criteria, holding cash seems to be, on average, a drag. Remember, good investors/companies made money even in tough markets like the 70s or the 2000s.. Caveat is: If you have an operational business or external investors or your investment universe is very limited because of size (like Buffett who can basically just invest in the top of the SP500), then you might have to hold cash because you need liquidity elsewhere or can't find enough good ideas. But I thought we had gone over all this already...

Maybe… nonetheless I much preferred to read his stuff when he concentrated on analyzing owner-managers! ;) Cheers, Gio Me too.

Why should you devote so much time to something you believe to be basically useless? ??? Gio Useless doesn't mean uninteresting. But what's truly useless is what you see on CNBC or Bloomberg. This guy doesn't make forecasts or pretend to understand all the variables that affect the macro. He's thinking about it on a more meta level, explaining what he thinks can work and what doesn't and why, and sharing his mental models. His posts are also usually 3/4 digression about other things than the supposed main topic, and that's the best part (they're rarely really about actual macro anyway, more about investing strategies). Very different from what you're implying it is, and not useless, at least not to me.

Good post. I'm just watching oil for fun, I have no intention to invest because it's not in my circle of competence and I don't feel like it's possible to time commodities (if someone's call is right but it takes 5+ years to happen, is it different from being wrong?), but I think that one thing that might surprise some people is how shale production costs can keep going down over time as the tech becomes better. On first level thinking, this might seem like a good thing ("hey, we spend less on capex so we'll have higher profit margins"), but what will probably happen is just that a higher total number of wells will produce, keeping the oversupply around longer than if this was all traditional oil (with exploration and development becoming more costly over time, having to go farther offshore and drill deeper, etc). Basically, it's a bit like Buffett's story about the textile industry and more efficient machinery. The textile companies don't benefit from the increased productivity, their customers do. Shale production seems to be getting better over time, but because all the players can't coordinate and maintain discipline on price/supply, all they're doing is driving down the price of the commodity. Nobody wants to sacrifice their production just to see others who didn't cut benefit from the higher price... That's my impression from casually reading about the area. I could be wrong on this, so take it with a grain of salt (a grain of salt from brazil's pre sal sedimentary layer, preferrably).

Another one that might interest the Singleton fans: Leon Cooperman giving a presentation on him. http://videos.nyssa.org/a-case-study-in-financial-brilliance-dr-henry-e-singleton-of-teledyne-inc

Another one: http://brooklyninvestor.blogspot.ca/2015/01/what-to-do-in-this-market-gotham-funds.html

http://variety.com/2015/film/news/brad-pitt-christian-bale-and-ryan-gosling-to-star-in-financial-drama-the-big-short-exclusive-1201404038/ Hopefuly it's as well-made as Moneyball was.

By then Tesla won't sell just cars. They're already talking about this. http://www.greentechmedia.com/articles/read/Tesla-CTO-on-Energy-Storage-We-Should-All-Be-Thinking-Bigger I have no idea what they market cap will be at any point of the future, but I know that anyone who just looks at numbers of cars produced is missing part of the story (and they might not stop at cars and storage, they might do other things... they're not exactly just following the traditional playbook so far). Musk has already said he wants to do an electric pickup truck, similar to a Ford F150, but "better" with a dynamic suspension and gobs more torque than an ICE because electric motors just have superior characteristics on that front. He also said he had a design for a vertical landing and takeoff electric plane... Who knows what the company will do over time? Did anyone foresee them being where they are now when they had the Lotus-based $100k+ Roadster a few short years ago? Personally I would expect them to start work on a second battery gigafactory sooner than most people expect and go big in storage, especially as solar panels fall below everything else in cost per kWh, also do the electric pickup (which would sell great in the US), and maybe a smaller 'Model 1' EV that would be more targetted to Europe and Asia.

This is like the "Death of Equities" cover page. :) Capitulation and panic. My guess is that 'never' is shorter than 5 years. Or maybe $100+ oil was CISCO in the dot-com bubble. What is the intrinsic value of a barrel of oil? I certainly don't know :)

Yeah, it's a bad book about an interesting topic, which is a very frustrating thing. The Forbes article on Singleton is a good starting point, and the Manual of Ideas 2-hour podcast on Singleton covers pretty much everything that is interesting in Distant Force: http://seekingalpha.com/instablog/315877-the-manual-of-ideas/30189-the-manual-of-ideas-on-business-leader-henry-singleton-founder-of-teledyne-audio

Saudi prince: $100-a-barrel oil 'never' again http://www.usatoday.com/story/money/columnist/bartiromo/2015/01/11/bartiromo-saudi-prince-alwaleed-oil-100-barrel/21484911/ Interview with saudi prince Prince Alwaleed bin Talal on oil. Sorry if it has been posted elsewhere.

Homeschooling probably widens the range of outcomes tremendously, both in good and bad directions. In a regular school, if you have a bad teacher, well, that sucks but you'll get tons of other teachers, some of whom might be good. If you have a bad parent-teacher that homeschools you across all disciplines and over years, filling your head with garbage nonsense, well, the damage will probably be a lot more severe than what any bad teacher(s) can do at a regular school...

Rainforesthiker, what you say makes sense to me (I was also heavily concentrated in AIG and BAC, though I got in later than some others here, so I didn't make as much), but giving examples of this stuff succeeding always works better in hindsight. There are big mistakes that people make that, if you could go back in time and ask them their thesis and level of confidence at the time, they'd tell you similar things to what people said about BAC and AIG. Sometimes what seems like a sure bet no-brainer doesn't work. Sometimes you think you know enough about a situation, but you don't (unknowns unknowns). Etc. That's where not going to extremes of concentration - but still being concentrated enough so that your best ideas make a difference - can save you heartaches.

http://brooklyninvestor.blogspot.ca/2015/01/the-perils-of-market-timing-iii.html http://brooklyninvestor.blogspot.ca/2015/01/overvalued-market.html

jmp8822, I'd like to ask you a question. Can you give us the name of some of the stocks that you've held and had great success with in the past with your concentrated approach? No need to divulge your current portfolio if you are not comfortable with that (though that would be even better), but I'm curious to see what you consider businesses that are safe enough to put almost all your net worth into and yet that have potential to get superlative results.

jmp8822, the reason why I wouldn't go again into extreme concentration (I currently have about 15 positions (and many of those are businesses that own many other smaller businesses), with my biggest one being 20%, so I'm still fairly concentrated --but at some point I had 2-3 positions) is because investing isn't like chess. There's a big luck factor, and even the best poker player in the world wouldn't bet their net worth on 1-2-3 hands. Put options can definitely mitigate that, but in a universe of thousands of businesses to pick from, I think I should be able to find 10-15 ones that are good enough for me. Maybe your hurdle rate is much higher than mine, though...

The question was for 'household' expenses, so that would include you and your girlfriend (so 24k, if you split down the middle).

I thought this was interesting, especially the graph on page 3: http://policyschool.ucalgary.ca/sites/default/files/research/kneebone-unemplfinal.pdf Found via:

For lots of things, you can spend as much as you want. The thing is, a lot of the 'value' in the very expensive stuff is positional. It's about signalling your wealth to others. The things themselves are often only marginally better functionally than much, much cheaper alternatives, or better but in ways that don't matter that much in the grand scheme of things... If you spend $10k on a handbag, it's all about intangibles. It won't hold your stuff better, and you can get top quality materials and workmanship for a lot less than that. So if like me you don't give a crap about social hierarchy and signalling wealth and all that, the super-luxury things are not worth it. Buffett doesn't live in the same house and drive old hail-damaged cars out of sacrifice to make a point; he just doesn't care about that crap, it doesn't rank high on his inner scorecard.

I'm sure it's true for many. I know that if I made millions a year, I would have no problem spending 500k or whatever; my goal is to be independent, not to spend as little as possible. I'm not sure what I'd spend all that money on, as I don't have expensive tastes (technology has made most of the coolest things in life inexpensive... a top of the line iPhone and Mac, a fast internet connection, a good stereo, and all the books I can read.. not a very expensive proposition). I'd probably just get a really nice house in a quiet spot, get a Tesla, a cook, a helper for the kid, I'd add a few zeros to my donation to the SENS Foundation, and that's about it... But it's also true in general (maybe not on this forum) that many people who make a lot spend everything (and more) and don't have much saved. It's the old Ben Franklin line...

I don't know what those acronyms are, so probably not. But I'm guessing they are programs/goals that the frugal community uses? I'll look them up.. For me, the gist is: When I moved out of my parents' place and had to start paying for more of my stuff, I spent a while learning about how to be more frugal (and I already was quite money-efficient, mostly because as a kid I valued free time more than money and so didn't want to work at crappy jobs, so I stretched every dollar that I received to avoid having to go work). I got the 'Complete Tightwad Gazette', read The Simple Dollar and other similar blogs that were popular at the time (Mr. Money Mustache became popular a bit later, so I know about it, but I haven't really read it), etc. I don't do all the stuff that they preach, but I've picked up many ideas and concepts that have saved me many many thousands of dollars without any noticeable effect on my wellbeing (I don't feel I'm making any sacrifices). The most important thing is the mindset of always asking: "Is this worth the price? How many hours have I worked to earn that money? How much happiness/dollar does this provide? Would I be happier with the money in my pocket? As happy with a cheaper alternative?" For me the goal of money has never been to buy lots of stuff, it has always been independence, which I value above pretty much all else. Update: For those who, like me, were wondering about the acronyms: http://forum.mrmoneymustache.com/ask-a-mustachian/all-these-acronyms!/

Our average (me, my wife, 1 kid) for the past few years has been CAD $37-38k. One third of that is rent. We save multiples of what we spend, which is the way I like it.

Great post, cwericb. This line is so true: "I felt that if I continued to urge him to sell and then the price recovered I would never been forgiven." That's why I don't want to give specific money advice to friends and family. I'm more than happy to share everything that I know about value investing and asset allocation, portfolio construction, how to read a 10K, what books to read, how to think about risk and value creation and such, but I'm always afraid to recommend company A or B or to recommend buying or selling at a specific time, because I know I'll always be tracking that stock to see how it does and thinking about how that person might be happy/mad about it. Even if things go well, I don't want the mental clutter, and if things go badly and significant money is lost - even if the person claims to understand that it's not my fault and that they made the decision themselves - I know that there'll be bad vibes, even if they're not on the surface or unconscious. The only person I manage money for is my wife, and it's all in Berkshire and short-duration bond index ETFs...

I think these should be included. Mortgage falls into housing IMO. And student loans, credit cards, etc.. I don't see why that should be excluded, unless it's a loan to invest, or something that is clearly not a "living expense" (education falls in that broad category, I'd say).