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Sorry Warren! Another year of dragging ass...


ScottHall
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Everyone is talking about how great it is that Buffett is going to win his bet that the hand-picked hedge funds are going to lose to the S&P 500 index, but how about we ask some tough questions around here for once instead of worshipping a fallen god?

 

Let's face it, folks. Berkshire's 2016 growth in book value per share clocked in at 10.7% vs an S&P 500 that was up 12.7%. It was another year of ass dragging by Uncle Warren, not that we should be so surprised at that anymore. Berkshire has failed to compound book at a rate exceeding the market for four of the past five years.

 

It is not for Warren Buffett's lack of talent. No, rather it is because the glory of his past success has now become an albatross; he's stuck with a huge amount invested stocks of companies that used to represent the timeless quality of American business. The very best of the best.

 

The operative words are "used to." Now he owns a big slug of Coke, American Express and Wells Fargo with massive unrealized gains that he can effectively never sell because the deferred tax liability represents an obscene portion of their value. This float is supposedly not a real liability, despite the fact that it has shackled Berkshire with large equity stakes in declining businesses. Some are declining directly, like Coke, while the others have simply been eclipsed by a new breed of companies with zero capital intensity and nearly unlimited growth runways.

 

Maybe they'll do okay, but is it really any shock he's lagged the market when his internal R&D for understanding these companies failed? It's like in the new Cars 3 movie trailers where Lightning McQueen gets the shit kicked out of him by the new sleek, high tech race cars. My nephews will be so sad, but to me it's a great lesson that unless we constantly improve ourselves, we will become dated before our time.

 

 

The fact is that just like Lightning, many of the companies in Berkshire's portfolio are losing relevance in the modern economy, and in a market dominated by tech giants that enjoy economics that were previously not thought possible, they're likely to continue to do so. If anything, the trend will probably accelerate.

 

I think Buffett probably understands this, which may be part of the reason he's invested in Apple. It's funny to me, to watch so many people criticize him over this. Don't you realize that constant internal R&D is what made him so successful as an investor? Charlie Munger alluded to this recently, and it's obviously true. If he had never gotten beyond that Ben Graham mindset, he'd wouldn't be what he is today. If he never got past his "I don't understand technology" phase, his lessons could be relegated to the dustbin of history as dated and no longer applicable. That'd be a very sad thing to see, for a man who has contributed so much to the field.

 

What I care about is what Berkshire and Warren Buffett have taught me about human nature and the internalization of wisdom. All of those value guys shit talking Buffett because of his Apple purchase? They're so interesting to see; because they learned from him, and are now using his own teachings to reject him.

 

I want to touch on this, because I think it's probably the most underdiscussed aspect of investing and the art of learning it, and many other humanities subjects.

 

The internalization of wisdom can come with some horrendous side effects; in some cases, becoming a better investor actually cuts you off at the knees. I know this from experience, because I used to be a value guy that rejected growth. Out of hand. You're paying 100x EPS for that? You're stupid. Dumb. The history of investing doesn't support it. There will always be a better mousetrap. It'll never grow long enough to justify that value.

 

All of these beliefs were based on wisdom I internalized from the past. Buffett taught me how to become a business-focused investor, and he says he doesn't understand tech. It must be uninvestable. If my idol can't do it, how can I?

 

The key insight is that our progress as learners necessarily suffers from path dependency; from the time we are babies, we learn one new thing about the world, and build upon the foundations we were taught previously. But if those foundations are wrong, we are building a defective latticework that may serve to hinder us from future growth, even if it is sufficient enough to provide us with a decent result. Because wisdom is branching, having a defective branch not only stops us from learning positive mental models... the truth is, it can actively create negative ones, which can infect our other ideas.

 

In a previous thread I discussed how it can be useful to be wrong. If you block yourself off from one style of investing to focus purely on deep value, for instance, there's a pretty good shot you'll become good at that niche. But in doing so, you're foregoing potentially even more profitable situations by refusing to do the mental work required to understand them. Opportunity cost becomes a very real enemy, and errors of omission become more frequent.

 

The trouble is that this may be unavoidable at the outset. We all learn from each other; there is no one who is successful on this planet who has not built their foundation of wisdom on the ideas or work of others that came before them. It's made us an incredibly versatile and successful species, but it comes with one major downside.

 

The downside is that we don't always just absorb the wisdom of our teachers, but their defects too. Instead of letting Buffett teach us just about the business and investing techniques that have worked for him over the years, we might also pick up his aversion to tech & growth stocks more generally. And through social conditioning, over time that can become the accepted standard for being a value investor in forums just like this one. I like to call these Second Order Traits, because we pick them up by accident through learning from our predecessors and colleagues.

 

Smart people and thought leaders don't only have good ideas, or good traits; at the end of the day, their shit stinks too. By mimicking them, and by studying them, we can learn much about the world. Intergenerational transfer of wisdom has been a boon for society. But while we internalize what made those thought leaders successful, we can inadvertently internalize their mistakes that kept them from becoming as successful as they could have been.

 

The trouble with Second Order Traits is that they're hard to get rid of, once you have them. Path dependence being what it is, what we learn often ends up leading to the next subject we learn. I got hired as a junior investing analyst for an investing newsletter publisher, and because of that, ended up learning about marketing & copywriting in particular. Path dependence; learning about investing led to learning about marketing.

 

So it can be hard to go back and look at what we've learned, at what has been so successful for us... and admit that we're wrong, and that there are alternative, better paths. For years I refused tech stocks out of hand. It took some long and hard thinking, and direct and indirect guidance from investors who already made the transition, for me to get over that bias. I started investing in my own account in early 2008; it wasn't until 2014 that I really allowed myself to abandon this Second Order Trait.

 

It was so hard, because guys like Ben Graham and Warren Buffett helped inspire me to become an investor. They had taught me things that made me a lot of money, it felt like I was turning my back on them and my beliefs. But, because wisdom is branching, it opened me up to a whole new world of investments and I'm glad now that I bit the bullet and rejected that part of the value dogma.

 

I describe myself now as a hybrid investor, because I don't shy away from pretty much anything. I've read textbooks on bankruptcy law, stuff from Peter Thiel, Marc Andreessen and other Silicon Valley boys, and all of the classic value tomes. That's not to say that I'm without fault; I fuck up all the time. ALL THE TIME. And it'd be absurd for me to claim I've internalized all of the lessons these people have to offer just because I've read their shit.

 

But that's part of the system. When you do constant R&D on your investing style, you will fuck up. It's a cost of doing business, but net-net it has been very rewarding. That's why I think it's odd when people ask me why I'm always changing my style up, when what I have works for me. The reason what I have works for me is because I do change my style up and make investments in styles I'm not familiar with.

 

One of the biggest benefits of having a diversified portfolio is that it allows you to do more internal R&D on your investing process without betting the farm. If you have 20 positions of 5% each, it's not that big of a deal if you take a 100% loss on a few, because your winners are likely to make up for it. As a result, I actively look for unusual situations; no one stock is likely to make or break my returns at 31 positions, but the mental models I pick up from trying out so many different styles are likely to be useful. Some ideas lead to each other (FB led to GOOG for me) and it's a much broader universe to learn from.

 

Being a concentrated investor gives you more leverage to your favorite ideas. Being a diversified investor gives you more leverage to learning new investment styles without a lot of risk. You can do this without heavy diversification but the way my mind works, it's best for me to have a brokerage account that I can look at at the end of the day. It's real; those are the decisions I made, staring in my face every morning.

 

Path dependence in learning is a very real thing we should be aware of. All the time, we're picking up bad habits that are embedded inside good ones. And over time, unless we can cut out that cancer, those habits will stunt our growth.

 

I'm going to be straight with you. I don't really care about Berkshire or its ass dragging ways. It's a single digit percentage of my portfolio. Intrinsic value per share probably is growing at or above the market return, despite book. But it was useful for framing, and since when have I let facts get in the way of a good story?

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I believe Buffett stated that book value is no longer the best proxy for growth in value because IV is growing faster due to increasing value of goodwill which is sometimes written down but never written up.

As a result he added an increase in market value of Berkshire shares column in the annual report not too long ago.

 

So while the BV may have underperformed the S&P over the last 4-5 years, if you look at market price gain, it seems to be 115% vs 74% for S&P and for 4 years 70% vs 52%. Not crazy outperformance by any means, but a little bit better.

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I'm going to be straight with you. I don't really care about Berkshire or its ass dragging ways. It's a single digit percentage of my portfolio. Intrinsic value per share probably is growing at or above the market return, despite book. But it was useful for framing, and since when have I let facts get in the way of a good story?

In the last paragraph you answered the only critic I had to make.

 

I especially liked the idea of a diversified portfolio allowing you to try new investing styles and improving your circle of competence (I think you did not use this word... maybe investing mental model toolbox). However, that implies you have the time to do that kind of work. However:

- If you had a more limited time, you'd probably be better off maintaining your investing style as long as you got reasonable results

- a concentrated portfolio does not exclude you from trying new things, you just have to treat them as if you had a diversified portfolio and keep them small until you get confident with them

- a more "growth oriented" portfolio and a more refined investing style might not mean better investing results if you are good at the simple things (ok...I might be saying this because I have no idea of the kind of returns a good growth investor gets)

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Wow! What a post.

In all due respect, Mr. Buffett may not be able to go back in time but I would not rule him out as he may be able to opportunistically wind the clock a few more times. (reference to the movie trailer)

I came to investing mostly as an accident. Mental models and multi-disciplinary thinking are cool. (and useful)

What you describe makes me think of hysteresis. A concept applied mostly in science (often electro-magnetism). It has to do with the fact that exposure to a temporary phenomenon can leave a permanent impact (latent). This concept ties well with your path dependency description. Hysteresis is applied also to social sciences. I think it is used for instance to explain less than rational decisions related to the concept of sunk costs.

We tend to think that we are free from biases. Not true. Unrecognized biases are the worst. Your post helps with that. Thanks.

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I've read textbooks on bankruptcy law

 

Any recommendations?

 

Business Reorganization in Bankruptcy is incredibly detailed, but it's almost so dry and detailed that I wouldn't advise reading it from an investing practitioner's perspective. Distress Investing and the Vulture Investors are much better for distilling a lot of the concepts in a relatively condensed and entertaining way.

 

 

I believe Buffett stated that book value is no longer the best proxy for growth in value because IV is growing faster due to increasing value of goodwill which is sometimes written down but never written up.

As a result he added an increase in market value of Berkshire shares column in the annual report not too long ago.

 

So while the BV may have underperformed the S&P over the last 4-5 years, if you look at market price gain, it seems to be 115% vs 74% for S&P and for 4 years 70% vs 52%. Not crazy outperformance by any means, but a little bit better.

 

Yep.

 

 

I'm going to be straight with you. I don't really care about Berkshire or its ass dragging ways. It's a single digit percentage of my portfolio. Intrinsic value per share probably is growing at or above the market return, despite book. But it was useful for framing, and since when have I let facts get in the way of a good story?

In the last paragraph you answered the only critic I had to make.

 

I especially liked the idea of a diversified portfolio allowing you to try new investing styles and improving your circle of competence (I think you did not use this word... maybe investing mental model toolbox). However, that implies you have the time to do that kind of work. However:

- If you had a more limited time, you'd probably be better off maintaining your investing style as long as you got reasonable results

- a concentrated portfolio does not exclude you from trying new things, you just have to treat them as if you had a diversified portfolio and keep them small until you get confident with them

- a more "growth oriented" portfolio and a more refined investing style might not mean better investing results if you are good at the simple things (ok...I might be saying this because I have no idea of the kind of returns a good growth investor gets)

 

Haha, thanks. In my posts, I like the reader to be in on the joke. In most articles bashing Buffett like this, the reader is the joke.

 

I like all of your takeaways.

 

Wow! What a post.

In all due respect, Mr. Buffett may not be able to go back in time but I would not rule him out as he may be able to opportunistically wind the clock a few more times. (reference to the movie trailer)

I came to investing mostly as an accident. Mental models and multi-disciplinary thinking are cool. (and useful)

What you describe makes me think of hysteresis. A concept applied mostly in science (often electro-magnetism). It has to do with the fact that exposure to a temporary phenomenon can leave a permanent impact (latent). This concept ties well with your path dependency description. Hysteresis is applied also to social sciences. I think it is used for instance to explain less than rational decisions related to the concept of sunk costs.

We tend to think that we are free from biases. Not true. Unrecognized biases are the worst. Your post helps with that. Thanks.

 

Thanks, Cigarbutt, for introducing me to a new word for this concept.

 

I'm glad it was able to help you.

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I've read textbooks on bankruptcy law

 

Any recommendations?

 

Business Reorganization in Bankruptcy is incredibly detailed, but it's almost so dry and detailed that I wouldn't advise reading it from an investing practitioner's perspective. Distress Investing and the Vulture Investors are much better for distilling a lot of the concepts in a relatively condensed and entertaining way.

 

You sound like some kind of law student on this. Get a prip on it, or stay out. The FELP topic comes to mind.

 

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I've read textbooks on bankruptcy law

 

Any recommendations?

 

Business Reorganization in Bankruptcy is incredibly detailed, but it's almost so dry and detailed that I wouldn't advise reading it from an investing practitioner's perspective. Distress Investing and the Vulture Investors are much better for distilling a lot of the concepts in a relatively condensed and entertaining way.

 

You sound like some kind of law student on this. Get a prip on it, or stay out. The FELP topic comes to mind.

 

Thanks for making assumptions; I really appreciate that.

 

I don't know what you're talking about. GGP, in percentage terms, was my greatest investment of all time. I bought shares at $2 and sold at $16. My only mistake is that I didn't hang around even longer.

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I've read textbooks on bankruptcy law

 

Any recommendations?

 

Business Reorganization in Bankruptcy is incredibly detailed, but it's almost so dry and detailed that I wouldn't advise reading it from an investing practitioner's perspective. Distress Investing and the Vulture Investors are much better for distilling a lot of the concepts in a relatively condensed and entertaining way.

 

You sound like some kind of law student on this. Get a prip on it, or stay out. The FELP topic comes to mind.

 

John Hjorth, in case you don't know, there's an ignore option in CobF. It's there to keep jerks out of your circle. It is a giant waste of time trying to reason with p$!cks.

 

Hey guys, watch the language you use...much nicer ways of getting your point across.  Better yet, if you don't agree with someone, post a well-thought out reply or ignore.  Also ask that other posters facilitate the discussion by not antagonizing or pricking (used as an adverb, not a noun) other's sensitivities!  Cheers!

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Also, Scotty is like Andy Kaufman...his art is trying to get people to freak out one side or the other.  You don't have to like his art, but you have to admit it is well thought out and solicits some sort of response from the reader.  I wouldn't be surprised if some hedge fund gives him a billion dollars to manage pretty soon. 

 

Then he'll be on CNBC, his fund will blow up after buying up a basket of AI stocks, and he'll be prosecuted by the Justice Department for using fund capital for his coke habit with Jim Chanos.  Finally, he'll finish off with a tell-all memoir on how he got his start here on COBF, and what an ass the site administrator is.  But he will never let the facts get in his way...only yours! 

 

Hope that little blurb was up to your standards Scotty!    ;D  Cheers!

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Guest longinvestor

Also, Scotty is like Andy Kaufman...his art is trying to get people to freak out one side or the other.  You don't have to like his art, but you have to admit it is well thought out and solicits some sort of response from the reader.  I wouldn't be surprised if some hedge fund gives him a billion dollars to manage pretty soon. 

 

Then he'll be on CNBC, his fund will blow up after buying up a basket of AI stocks, and he'll be prosecuted by the Justice Department for using fund capital for his coke habit with Jim Chanos.  Finally, he'll finish off with a tell-all memoir on how he got his start here on COBF, and what an ass the site administrator is.  But he will never let the facts get in his way...only yours! 

 

Hope that little blurb was up to your standards Scotty!    ;D  Cheers!

 

Point taken. My earlier post redacted!

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Also, Scotty is like Andy Kaufman...his art is trying to get people to freak out one side or the other.  You don't have to like his art, but you have to admit it is well thought out and solicits some sort of response from the reader.  I wouldn't be surprised if some hedge fund gives him a billion dollars to manage pretty soon. 

 

Then he'll be on CNBC, his fund will blow up after buying up a basket of AI stocks, and he'll be prosecuted by the Justice Department for using fund capital for his coke habit with Jim Chanos.  Finally, he'll finish off with a tell-all memoir on how he got his start here on COBF, and what an ass the site administrator is.  But he will never let the facts get in his way...only yours! 

 

Hope that little blurb was up to your standards Scotty!    ;D  Cheers!

 

Thank you Parsad. You are a man who can truly appreciate the finer things in life.

 

We anticipate receiving your $1 billion check by the end of the week. All Become One When Growth Exceeds WACC, so we expect the value of your investments to compound at a rate approaching for the foreseeable future. Any given year it might be a little more or a little less, but over the long run, we expect our investors to have claims equivalent to the world's annual economic output which we expect to experience hyperbolic growth as the Singularity arrives.

 

My quarterly letter is in the mail. I request that you DO NOT distribute it publicly, as it contains proprietary information regarding our allocation to each of our four holdings and it would cause great financial harm to us if others were to copy our allocations in Facebook, Amazon, Netflix and Google instead of investing in our fund directly.

 

Thank you for your confidence in us. We won't let you down.

 

Scotty Hall

Founder & CEO

Horsefeather Capital Management

 

 

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Also, Scotty is like Andy Kaufman...his art is trying to get people to freak out one side or the other.  You don't have to like his art, but you have to admit it is well thought out and solicits some sort of response from the reader.  I wouldn't be surprised if some hedge fund gives him a billion dollars to manage pretty soon. 

 

Then he'll be on CNBC, his fund will blow up after buying up a basket of AI stocks, and he'll be prosecuted by the Justice Department for using fund capital for his coke habit with Jim Chanos.  Finally, he'll finish off with a tell-all memoir on how he got his start here on COBF, and what an ass the site administrator is.  But he will never let the facts get in his way...only yours! 

 

Hope that little blurb was up to your standards Scotty!    ;D  Cheers!

 

Thank you Parsad. You are a man who can truly appreciate the finer things in life.

 

We anticipate receiving your $1 billion check by the end of the week. All Become One When Growth Exceeds WACC, so we expect the value of your investments to compound at a rate approaching for the foreseeable future. Any given year it might be a little more or a little less, but over the long run, we expect our investors to have claims equivalent to the world's annual economic output which we expect to experience hyperbolic growth as the Singularity arrives.

 

My quarterly letter is in the mail. I request that you DO NOT distribute it publicly, as it contains proprietary information regarding our allocation to each of our four holdings and it would cause great financial harm to us if others were to copy our allocations in Facebook, Amazon, Netflix and Google instead of investing in our fund directly.

 

Thank you for your confidence in us. We won't let you down.

 

Scotty Hall

Founder & CEO

Horsefeather Capital Management

 

I think I'm experiencing hysteresis...

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That last bit was the first time I've LOLed on COBF. That doesn't happen often so thanks. It's like tears, I get about 2-6 tears a year.

 

In a sense I use to write copy for my direct mail marketing, basically, I took the copywriters work and changed about 10-20% twice a year for a decade. It's absolutely astounding what people respond to when in a emotional state. For some this is most of their lives. I use to think I was a scoundrel, fooling people and all, now that I've experienced the other end of the spectrum, unabashed honesty with others, they think I'm a scoundrel.

 

 

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Omfg, I just read this again after some whiskey and couldn't stop laughing.

 

You've encapsulated a meaningful part of my life thesis here.

 

Thank you, Flesh. I'm glad you enjoyed my post and that you managed to take something away from it.

 

I'm glad to see another marketer on here. Most people on this site don't appreciate the dark arts.

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  • 1 year later...

Scott

Thank for linking here on the "Berkshire 2018 Annual Meeting" topic.

A big little stimulus for paths checking you'd posted here.

I think that it's as basic as evolution. only the fittest survive and prosper and in order to be fitter than the next guy, in a changing environment, one has to adapt, get more tool, get rid of these which are obsolete etc.

 

 

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Scott

Thank for linking here on the "Berkshire 2018 Annual Meeting" topic.

A big little stimulus for paths checking you'd posted here.

I think that it's as basic as evolution. only the fittest survive and prosper and in order to be fitter than the next guy, in a changing environment, one has to adapt, get more tool, get rid of these which are obsolete etc.

 

I agree with you 100%, Reader. And you're welcome. :)

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Everyone is talking about how great it is that Buffett is going to win his bet that the hand-picked hedge funds are going to lose to the S&P 500 index, but how about we ask some tough questions around here for once instead of worshipping a fallen god?

 

Let's face it, folks. Berkshire's 2016 growth in book value per share clocked in at 10.7% vs an S&P 500 that was up 12.7%. It was another year of ass dragging by Uncle Warren, not that we should be so surprised at that anymore. Berkshire has failed to compound book at a rate exceeding the market for four of the past five years.

 

It is not for Warren Buffett's lack of talent. No, rather it is because the glory of his past success has now become an albatross; he's stuck with a huge amount invested stocks of companies that used to represent the timeless quality of American business. The very best of the best.

 

The operative words are "used to." Now he owns a big slug of Coke, American Express and Wells Fargo with massive unrealized gains that he can effectively never sell because the deferred tax liability represents an obscene portion of their value. This float is supposedly not a real liability, despite the fact that it has shackled Berkshire with large equity stakes in declining businesses. Some are declining directly, like Coke, while the others have simply been eclipsed by a new breed of companies with zero capital intensity and nearly unlimited growth runways.

 

Maybe they'll do okay, but is it really any shock he's lagged the market when his internal R&D for understanding these companies failed? It's like in the new Cars 3 movie trailers where Lightning McQueen gets the shit kicked out of him by the new sleek, high tech race cars. My nephews will be so sad, but to me it's a great lesson that unless we constantly improve ourselves, we will become dated before our time.

 

 

The fact is that just like Lightning, many of the companies in Berkshire's portfolio are losing relevance in the modern economy, and in a market dominated by tech giants that enjoy economics that were previously not thought possible, they're likely to continue to do so. If anything, the trend will probably accelerate.

 

I think Buffett probably understands this, which may be part of the reason he's invested in Apple. It's funny to me, to watch so many people criticize him over this. Don't you realize that constant internal R&D is what made him so successful as an investor? Charlie Munger alluded to this recently, and it's obviously true. If he had never gotten beyond that Ben Graham mindset, he'd wouldn't be what he is today. If he never got past his "I don't understand technology" phase, his lessons could be relegated to the dustbin of history as dated and no longer applicable. That'd be a very sad thing to see, for a man who has contributed so much to the field.

 

What I care about is what Berkshire and Warren Buffett have taught me about human nature and the internalization of wisdom. All of those value guys shit talking Buffett because of his Apple purchase? They're so interesting to see; because they learned from him, and are now using his own teachings to reject him.

 

I want to touch on this, because I think it's probably the most underdiscussed aspect of investing and the art of learning it, and many other humanities subjects.

 

The internalization of wisdom can come with some horrendous side effects; in some cases, becoming a better investor actually cuts you off at the knees. I know this from experience, because I used to be a value guy that rejected growth. Out of hand. You're paying 100x EPS for that? You're stupid. Dumb. The history of investing doesn't support it. There will always be a better mousetrap. It'll never grow long enough to justify that value.

 

All of these beliefs were based on wisdom I internalized from the past. Buffett taught me how to become a business-focused investor, and he says he doesn't understand tech. It must be uninvestable. If my idol can't do it, how can I?

 

The key insight is that our progress as learners necessarily suffers from path dependency; from the time we are babies, we learn one new thing about the world, and build upon the foundations we were taught previously. But if those foundations are wrong, we are building a defective latticework that may serve to hinder us from future growth, even if it is sufficient enough to provide us with a decent result. Because wisdom is branching, having a defective branch not only stops us from learning positive mental models... the truth is, it can actively create negative ones, which can infect our other ideas.

 

In a previous thread I discussed how it can be useful to be wrong. If you block yourself off from one style of investing to focus purely on deep value, for instance, there's a pretty good shot you'll become good at that niche. But in doing so, you're foregoing potentially even more profitable situations by refusing to do the mental work required to understand them. Opportunity cost becomes a very real enemy, and errors of omission become more frequent.

 

The trouble is that this may be unavoidable at the outset. We all learn from each other; there is no one who is successful on this planet who has not built their foundation of wisdom on the ideas or work of others that came before them. It's made us an incredibly versatile and successful species, but it comes with one major downside.

 

The downside is that we don't always just absorb the wisdom of our teachers, but their defects too. Instead of letting Buffett teach us just about the business and investing techniques that have worked for him over the years, we might also pick up his aversion to tech & growth stocks more generally. And through social conditioning, over time that can become the accepted standard for being a value investor in forums just like this one. I like to call these Second Order Traits, because we pick them up by accident through learning from our predecessors and colleagues.

 

Smart people and thought leaders don't only have good ideas, or good traits; at the end of the day, their shit stinks too. By mimicking them, and by studying them, we can learn much about the world. Intergenerational transfer of wisdom has been a boon for society. But while we internalize what made those thought leaders successful, we can inadvertently internalize their mistakes that kept them from becoming as successful as they could have been.

 

The trouble with Second Order Traits is that they're hard to get rid of, once you have them. Path dependence being what it is, what we learn often ends up leading to the next subject we learn. I got hired as a junior investing analyst for an investing newsletter publisher, and because of that, ended up learning about marketing & copywriting in particular. Path dependence; learning about investing led to learning about marketing.

 

So it can be hard to go back and look at what we've learned, at what has been so successful for us... and admit that we're wrong, and that there are alternative, better paths. For years I refused tech stocks out of hand. It took some long and hard thinking, and direct and indirect guidance from investors who already made the transition, for me to get over that bias. I started investing in my own account in early 2008; it wasn't until 2014 that I really allowed myself to abandon this Second Order Trait.

 

It was so hard, because guys like Ben Graham and Warren Buffett helped inspire me to become an investor. They had taught me things that made me a lot of money, it felt like I was turning my back on them and my beliefs. But, because wisdom is branching, it opened me up to a whole new world of investments and I'm glad now that I bit the bullet and rejected that part of the value dogma.

 

I describe myself now as a hybrid investor, because I don't shy away from pretty much anything. I've read textbooks on bankruptcy law, stuff from Peter Thiel, Marc Andreessen and other Silicon Valley boys, and all of the classic value tomes. That's not to say that I'm without fault; I fuck up all the time. ALL THE TIME. And it'd be absurd for me to claim I've internalized all of the lessons these people have to offer just because I've read their shit.

 

But that's part of the system. When you do constant R&D on your investing style, you will fuck up. It's a cost of doing business, but net-net it has been very rewarding. That's why I think it's odd when people ask me why I'm always changing my style up, when what I have works for me. The reason what I have works for me is because I do change my style up and make investments in styles I'm not familiar with.

 

One of the biggest benefits of having a diversified portfolio is that it allows you to do more internal R&D on your investing process without betting the farm. If you have 20 positions of 5% each, it's not that big of a deal if you take a 100% loss on a few, because your winners are likely to make up for it. As a result, I actively look for unusual situations; no one stock is likely to make or break my returns at 31 positions, but the mental models I pick up from trying out so many different styles are likely to be useful. Some ideas lead to each other (FB led to GOOG for me) and it's a much broader universe to learn from.

 

Being a concentrated investor gives you more leverage to your favorite ideas. Being a diversified investor gives you more leverage to learning new investment styles without a lot of risk. You can do this without heavy diversification but the way my mind works, it's best for me to have a brokerage account that I can look at at the end of the day. It's real; those are the decisions I made, staring in my face every morning.

 

Path dependence in learning is a very real thing we should be aware of. All the time, we're picking up bad habits that are embedded inside good ones. And over time, unless we can cut out that cancer, those habits will stunt our growth.

 

I'm going to be straight with you. I don't really care about Berkshire or its ass dragging ways. It's a single digit percentage of my portfolio. Intrinsic value per share probably is growing at or above the market return, despite book. But it was useful for framing, and since when have I let facts get in the way of a good story?

 

Everyone is talking about how great it is that Buffett is going to win his bet that the hand-picked hedge funds are going to lose to the S&P 500 index, but how about we ask some tough questions around here for once instead of worshipping a fallen god?

 

Scott, here’s a tough question. What has been in your portfolio (key contributors) over say the past 15 years? I think it’s important to include the last downturn because if not for the good fortune of government bailouts and FedReserve market meddling portfolio design and cash on hand matters most in downturns.

 

As for Gods. If I knew God existed and that it created the universe, I think I’d worship it even if it hadn’t done much since.

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Everyone is talking about how great it is that Buffett is going to win his bet that the hand-picked hedge funds are going to lose to the S&P 500 index, but how about we ask some tough questions around here for once instead of worshipping a fallen god?

 

Let's face it, folks. Berkshire's 2016 growth in book value per share clocked in at 10.7% vs an S&P 500 that was up 12.7%. It was another year of ass dragging by Uncle Warren, not that we should be so surprised at that anymore. Berkshire has failed to compound book at a rate exceeding the market for four of the past five years.

 

It is not for Warren Buffett's lack of talent. No, rather it is because the glory of his past success has now become an albatross; he's stuck with a huge amount invested stocks of companies that used to represent the timeless quality of American business. The very best of the best.

 

The operative words are "used to." Now he owns a big slug of Coke, American Express and Wells Fargo with massive unrealized gains that he can effectively never sell because the deferred tax liability represents an obscene portion of their value. This float is supposedly not a real liability, despite the fact that it has shackled Berkshire with large equity stakes in declining businesses. Some are declining directly, like Coke, while the others have simply been eclipsed by a new breed of companies with zero capital intensity and nearly unlimited growth runways.

 

Maybe they'll do okay, but is it really any shock he's lagged the market when his internal R&D for understanding these companies failed? It's like in the new Cars 3 movie trailers where Lightning McQueen gets the shit kicked out of him by the new sleek, high tech race cars. My nephews will be so sad, but to me it's a great lesson that unless we constantly improve ourselves, we will become dated before our time.

 

 

The fact is that just like Lightning, many of the companies in Berkshire's portfolio are losing relevance in the modern economy, and in a market dominated by tech giants that enjoy economics that were previously not thought possible, they're likely to continue to do so. If anything, the trend will probably accelerate.

 

I think Buffett probably understands this, which may be part of the reason he's invested in Apple. It's funny to me, to watch so many people criticize him over this. Don't you realize that constant internal R&D is what made him so successful as an investor? Charlie Munger alluded to this recently, and it's obviously true. If he had never gotten beyond that Ben Graham mindset, he'd wouldn't be what he is today. If he never got past his "I don't understand technology" phase, his lessons could be relegated to the dustbin of history as dated and no longer applicable. That'd be a very sad thing to see, for a man who has contributed so much to the field.

 

What I care about is what Berkshire and Warren Buffett have taught me about human nature and the internalization of wisdom. All of those value guys shit talking Buffett because of his Apple purchase? They're so interesting to see; because they learned from him, and are now using his own teachings to reject him.

 

I want to touch on this, because I think it's probably the most underdiscussed aspect of investing and the art of learning it, and many other humanities subjects.

 

The internalization of wisdom can come with some horrendous side effects; in some cases, becoming a better investor actually cuts you off at the knees. I know this from experience, because I used to be a value guy that rejected growth. Out of hand. You're paying 100x EPS for that? You're stupid. Dumb. The history of investing doesn't support it. There will always be a better mousetrap. It'll never grow long enough to justify that value.

 

All of these beliefs were based on wisdom I internalized from the past. Buffett taught me how to become a business-focused investor, and he says he doesn't understand tech. It must be uninvestable. If my idol can't do it, how can I?

 

The key insight is that our progress as learners necessarily suffers from path dependency; from the time we are babies, we learn one new thing about the world, and build upon the foundations we were taught previously. But if those foundations are wrong, we are building a defective latticework that may serve to hinder us from future growth, even if it is sufficient enough to provide us with a decent result. Because wisdom is branching, having a defective branch not only stops us from learning positive mental models... the truth is, it can actively create negative ones, which can infect our other ideas.

 

In a previous thread I discussed how it can be useful to be wrong. If you block yourself off from one style of investing to focus purely on deep value, for instance, there's a pretty good shot you'll become good at that niche. But in doing so, you're foregoing potentially even more profitable situations by refusing to do the mental work required to understand them. Opportunity cost becomes a very real enemy, and errors of omission become more frequent.

 

The trouble is that this may be unavoidable at the outset. We all learn from each other; there is no one who is successful on this planet who has not built their foundation of wisdom on the ideas or work of others that came before them. It's made us an incredibly versatile and successful species, but it comes with one major downside.

 

The downside is that we don't always just absorb the wisdom of our teachers, but their defects too. Instead of letting Buffett teach us just about the business and investing techniques that have worked for him over the years, we might also pick up his aversion to tech & growth stocks more generally. And through social conditioning, over time that can become the accepted standard for being a value investor in forums just like this one. I like to call these Second Order Traits, because we pick them up by accident through learning from our predecessors and colleagues.

 

Smart people and thought leaders don't only have good ideas, or good traits; at the end of the day, their shit stinks too. By mimicking them, and by studying them, we can learn much about the world. Intergenerational transfer of wisdom has been a boon for society. But while we internalize what made those thought leaders successful, we can inadvertently internalize their mistakes that kept them from becoming as successful as they could have been.

 

The trouble with Second Order Traits is that they're hard to get rid of, once you have them. Path dependence being what it is, what we learn often ends up leading to the next subject we learn. I got hired as a junior investing analyst for an investing newsletter publisher, and because of that, ended up learning about marketing & copywriting in particular. Path dependence; learning about investing led to learning about marketing.

 

So it can be hard to go back and look at what we've learned, at what has been so successful for us... and admit that we're wrong, and that there are alternative, better paths. For years I refused tech stocks out of hand. It took some long and hard thinking, and direct and indirect guidance from investors who already made the transition, for me to get over that bias. I started investing in my own account in early 2008; it wasn't until 2014 that I really allowed myself to abandon this Second Order Trait.

 

It was so hard, because guys like Ben Graham and Warren Buffett helped inspire me to become an investor. They had taught me things that made me a lot of money, it felt like I was turning my back on them and my beliefs. But, because wisdom is branching, it opened me up to a whole new world of investments and I'm glad now that I bit the bullet and rejected that part of the value dogma.

 

I describe myself now as a hybrid investor, because I don't shy away from pretty much anything. I've read textbooks on bankruptcy law, stuff from Peter Thiel, Marc Andreessen and other Silicon Valley boys, and all of the classic value tomes. That's not to say that I'm without fault; I fuck up all the time. ALL THE TIME. And it'd be absurd for me to claim I've internalized all of the lessons these people have to offer just because I've read their shit.

 

But that's part of the system. When you do constant R&D on your investing style, you will fuck up. It's a cost of doing business, but net-net it has been very rewarding. That's why I think it's odd when people ask me why I'm always changing my style up, when what I have works for me. The reason what I have works for me is because I do change my style up and make investments in styles I'm not familiar with.

 

One of the biggest benefits of having a diversified portfolio is that it allows you to do more internal R&D on your investing process without betting the farm. If you have 20 positions of 5% each, it's not that big of a deal if you take a 100% loss on a few, because your winners are likely to make up for it. As a result, I actively look for unusual situations; no one stock is likely to make or break my returns at 31 positions, but the mental models I pick up from trying out so many different styles are likely to be useful. Some ideas lead to each other (FB led to GOOG for me) and it's a much broader universe to learn from.

 

Being a concentrated investor gives you more leverage to your favorite ideas. Being a diversified investor gives you more leverage to learning new investment styles without a lot of risk. You can do this without heavy diversification but the way my mind works, it's best for me to have a brokerage account that I can look at at the end of the day. It's real; those are the decisions I made, staring in my face every morning.

 

Path dependence in learning is a very real thing we should be aware of. All the time, we're picking up bad habits that are embedded inside good ones. And over time, unless we can cut out that cancer, those habits will stunt our growth.

 

I'm going to be straight with you. I don't really care about Berkshire or its ass dragging ways. It's a single digit percentage of my portfolio. Intrinsic value per share probably is growing at or above the market return, despite book. But it was useful for framing, and since when have I let facts get in the way of a good story?

 

Everyone is talking about how great it is that Buffett is going to win his bet that the hand-picked hedge funds are going to lose to the S&P 500 index, but how about we ask some tough questions around here for once instead of worshipping a fallen god?

 

Scott, here’s a tough question. What has been in your portfolio (key contributors) over say the past 15 years? I think it’s important to include the last downturn because if not for the good fortune of government bailouts and FedReserve market meddling portfolio design and cash on hand matters most in downturns.

 

As for Gods. If I knew God existed and that it created the universe, I think I’d worship it even if it hadn’t done much since.

 

 

Well, I didn't start investing until age 16 so I can't give you a 15 year view.

 

Early on I was heavy into value, I started investing in early 2007, heading into the crash. I was running a concentrated portfolio and actually ended up making it through totally unscathed - and made quite a bit of money. My big investment at the time was GGP, the profits of which I used to finance a trip to England. Then my next big investment was Samson Oil & Gas, which was a triple in about a year.

 

I sold it, fortunately, as now it trades for pennies a share.

 

I got hired at a company then and my views about investing drastically shifted once I did. I moved to diversification and also a heavier growth component of the portfolio, with longer holding periods. That's where I'm at now. I recently took a massive gain on FB but am back in now based on board member rec.

 

My current largest percentage winners are AMZN, W, FSBW, MKL, NVR, MAR, CAOX. I have 33 stocks; the 16th best one is LSXMK which is up 40%. My worst stock right now is PDER, down 17% from purchase (but a lot more considering opportunity cost).

 

Hope that helps.

 

 

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I own a little Berkshire and have obviously learned a bit from him, but to the extent Morningstar is correct...It seems like he has underperformed the market on 3, 5, and 10 year period.  Over a 15 year period he has outperformed by 36 bps.  Does this just seem subpar to anyone other than me?  I get he's a great investor, but the fact that he HAS made billions and billions doesn't necessitate that he'll beat the market moving forward. 

 

Am I missing something here folks?

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What you might be missing is if you believe that Berkshire is undervalued relative to today's market.

 

I believe it is - and that is what is important. From this point, what matters is the forward return possibilities of

Berkshire vs, say, the S&P 500.

 

 

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