Notes from the Final Conversation with Charlie Munger

Ben Claremon of Inoculated Investor has kindly shared his notes.

Link

The Most Important Thing: Uncommon Sense for the Thoughtful Investor

Below are quotes from Howard Marks' new book: The Most Important Thing.

A very good read. Highly recommended.

Happy learning,

David

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The Most Important Thing: Uncommon Sense for the Thoughtful Investor

by Howard Marks

“Experience is what you got when you didn’t get what you wanted.” Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times.

Everything should be made as simple as possible, but not simpler. ALBERT EINSTEIN

It’s not supposed to be easy. Anyone who finds it easy is stupid. CHARLIE MUNGER

In my view, that’s the definition of successful investing: doing better than the market and other investors. To accomplish that, you need either good luck or superior insight.

Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others . . . which by definition means your thinking has to be different.

The problem is that extraordinary performance comes only from correct nonconsensus forecasts, but nonconsensus forecasts are hard to make, hard to make correctly and hard to act on.

Second-level thinkers know that, to achieve superior results, they have to have an edge in either information or analysis, or both. They are on the alert for instances of misperception.

The key turning point in my investment management career came when I concluded that because the notion of market efficiency has relevance, I should limit my efforts to relatively inefficient markets where hard work and skill would pay off best.

“Being too far ahead of your time is indistinguishable from being wrong.”

Risk shows up lumpily. If we say “2 percent of mortgages default” each year, and even if that’s true when we look at a multiyear average, an unusual spate of defaults can occur at a point in time, sinking a structured finance vehicle.

“VOLATILITY + LEVERAGE = DYNAMITE,”

Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.

• The first, when a few forward-looking people begin to believe things will get better • The second, when most investors realize improvement is actually taking place • The third, when everyone concludes things will get better forever

One way to get to be right sometimes is to always be bullish or always be bearish; if you hold a fixed view long enough, you may be right sooner or later.

If you know the future, it’s silly to play defense. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary, and maximum leverage can be employed. In fact, being unduly modest about what you know can result in opportunity costs (forgone profits). On the other hand, if you don’t know what the future holds, it’s foolhardy to act as if you do.

We may never know where we’re going, but we’d better have a good idea where we are. That is, even if we can’t predict the timing and extent of cyclical fluctuations, it’s essential that we strive to ascertain where we stand in cyclical terms and act accordingly.

It would be wonderful to be able to successfully predict the swings of the pendulum and always move in the appropriate direction, but this is certainly an unrealistic expectation. I consider it far more reasonable to try to (a) stay alert for occasions when a market has reached an extreme, (b) adjust our behavior in response and, (c) most important, refuse to fall into line with the herd behavior that renders so many investors dead wrong at tops and bottoms.

When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive. So look around, and ask yourself: Are investors optimistic or pessimistic ? Do the media talking heads say the markets should be piled into or avoided? Are novel investment schemes readily accepted or dismissed out of hand? Are securities offerings and fund openings being treated as opportunities to get rich or possible pitfalls? Has the credit cycle rendered capital readily available or impossible to obtain? Are price/earnings ratios high or low in the context of history, and are yield spreads tight or generous? All of these things are important, and yet none of them entails forecasting. We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future. The key is to take note of things like these and let them tell you what to do. While the markets don’t cry out for action along these lines every day, they do at the extremes, when their pronouncements are highly important.

To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them—ideally, all three.

Charlie Munger's Parody from a "Morning With Charlie"

Handed out at Munger's meeting. Download it here: pdf

Battle Hymn of the Tiger Mother - Highly Recommended, One of the Best Books I Have Ever Read!

Battle Hymn of the Tiger Mother

by Amy Chua

What Chinese parents understand is that nothing is fun until you’re good at it. To get good at anything you have to work, and children on their own never want to work, which is why it is crucial to override their preferences.

Once a child starts to excel at something—whether it’s math, piano, pitching, or ballet—he or she gets praise, admiration, and satisfaction. This builds confidence and makes the once not-fun activity fun. This in turn makes it easier for the parent to get the child to work even more.

Thus began Sophia’s baptism of fire. Like Mrs. Vamos, Wei-Yi had expectations that were of an order galactically beyond what we’d been used to.

Bottom of Form

Note: This is an interesting statement. Wei-Yi had expected even more, far beyond Amy's expectation. What this really means is that incredible amount of work is expected to elevate one's standard, to break through the plateau.

“But you’ve given your girls so much,” Caren persisted. “A sense of their own abilities, of the value of excellence. That’s something they’ll have all their lives.”

“The important thing is that Lulu loves tennis,” the instructor said, very American-ly. “And she has an unbelievable work ethic—I’ve never seen anyone improve so fast. She’s a great kid. You and your husband have done an amazing job with her. She never settles for less than 110 percent. And she’s always so upbeat and polite.”

Michael Mauboussin on Consuelo Mack WealthTrack

Prof. David Sinclair on Ageing

David Sinclair, Ph.D. is a Professor at Harvard Medical School, Boston, and Co-Director of the Glenn Laboratories for Aging Research. He is a leader in the study of genes that control the aging process.

Ohio University Commencement Address by Dr. Atul Gawande

On June 11, 2011, I got a chance to do one of the more gratifying things an adult can be asked to do—to return to one’s hometown to give a graduation address, in this case the undergraduate commencement address for Ohio University in Athens, Ohio.

A Townie Speaks

Thank you, graduates and Ohio University, for this opportunity. I am a 1983 graduate of Athens High School. Which means, yes, you invited a townie to give your graduation address. I grew up here watching you, the students, come and go. Perhaps that should make you wonder whether it was foolish to have asked a townie to speak. I’m not sure, after all, how much you want me telling your parents about what I saw as a teenager on Court Street on Halloween nights.

What I want to talk about, though, is the huge impression you, the students, and this university made upon me. My sister and I were born in New York City. Our family moved to Athens when the two of us still had our baby teeth. And among the enduring beliefs I absorbed growing up here is a core American idea: Anything is possible in people’s lives. No one should be counted out.

It might seem strange to have learned this in a small Appalachian town. Thirty-five percent of Athens County’s population lives in poverty, the worst in the state. Almost half of my classmates never made it to college. Yet everywhere around me was also evidence that ordinary people could have extraordinary strength and contain possibilities no one imagined—even themselves.

Much of the evidence was right in my home. My parents were immigrants from India and they had somehow found it in themselves to swim against the tides of rural deprivation (in the case of my father) and of restrictions and low expectations for girls (in the case of my mother) to become doctors, to find their way to New York, to meet one another there and marry against caste restrictions, and to ultimately become regarded as local leaders here. But our town and Ohio University provided the rest of the evidence.

I remember, for instance, Karl Fry, a soft-spoken kid in the neighborhood who sometimes mowed our lawn for five bucks when I was in third grade and once showed me a nest of baby copperheads he’d found. When I was in eighth grade, he went to O.U. and made the ice hockey team. By my ninth grade year, he was a starting winger, and I used to go down to Bird Arena to watch him and the team play. I’d stand up against the glass behind the opponent’s goal where I could see up close the incredible speed of the slapshots he and his teammates unleashed, and feel the force of the Bobcats checking the other players against the boards. It seemed to me I was watching a person I had known and yet never knew existed. Karl and the team won the Midwest College Hockey League championship three times. And he also somehow worked hard enough to graduate summa cum laude in computer science, going on to become a computer systems engineer and entrepreneur.

No one comes to Ohio University anointed for the future. Nothing demonstrated that more clearly than the sports. I was here during the dark years of Bobcat football. You learned not to expect much. But you also learned you could still hope for it. My senior year in high school, the O.U. basketball team thrilled us all by winning a berth in the NCAA tournament. I drove my little red Datsun twenty-two hours down to Tampa, Florida, with three friends and two cassette tapes playing over and over—Pink Floyd, “The Wall,” was on one and Def Leppard, “Pyromaniac,” on the other—and we arrived in time to watch the Bobcats pull off a stunning, down-to-the-last-minute, two-point upset of far higher-ranked Illinois State.

Full Article

The Hindsight Fallacy

The recent sky-high IPO of LinkedIn, along with eye-popping valuations for other social networking and shopping companies, has raised concerns that we are now in the midst of another technology bubble, this one fueled by excessive investor enthusiasm for all things social.

No sooner have these concerns been raised, however, than they have been countered by an array of arguments, all of which are variations on the basic claim that this internet boom is unlike the previous one. This debate illustrates one of the central causes of financial bubbles: Although after the fact it seems obvious that prices were irrational and an unhappy end was inevitable, bubbles are neither obvious nor inevitable at the time.

The fact is that financial bubbles throughout history display almost metronomic regularity. Some asset class, often a product of new technology or financial innovation, becomes fashionable, and prices rise rapidly as demand outstrips supply. Excitement over early riches leads to speculation that the normal economic rules have changed, thereby justifying valuations that are based largely on assumptions about future profits. As prices balloon well beyond early investors' wildest dreams, disagreement over the correct measure of value increases. Then, finally, some adverse event that might normally have little impact triggers a downward spiral of selling, often accompanied by outright panic.

In hindsight, this pattern is so familiar that it's hard to believe anyone could have misunderstood what was happening—witness the now-ridiculous-seeming valuations of the 1990s Internet start-ups, and more recently the clearly misguided assumptions about perpetual growth in real estate prices that underpinned the 2008 financial crisis.

But if bubbles are so obvious, why do they keep happening?

Full Article

Fairholme Fund Conference Call Transcript

“In hindsight, we swapped from health insurers and defense to financials too early. Our companies continue to be priced for continuing stress and the price we paid reflects those stresses. And the prices we paid are quite cheap in our opinion compared to how these companies should perform in a more normal environment. Some people think we are spread too thin [and] we’ve slipped, but I must tell you we are smack dab in the middle of our circle of competence in financial services.”

Link

Bill Gates Talks with College Students

From time to time Bill visits college campuses to talk with students and faculty about using their education and research to tackle some of the world's biggest challenges. Watch his talk and Q&A session with students and faculty at Harvey Mudd College and Pomona College.

Bill Gates at Pomona College from Pomona College on Vimeo.