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  • Dividends: A Case of Behavioral Heuristics? [View article]
    Extreme, there is a large field on the way from the Omaha airport into town. For the past two years I have noticed dozens of turkeys in the field. One can easily pick out the puffed-up toms--having a field day! A couple of years ago in the fall when turkeys seem to flock together we had 40 turkeys trying to play tennis. They weren't very good.

    Having, likely, a lesser assessment of my skill than you of yours, I have never taken to exotic securities, but early in my career I became quite comfortable using margin as negative cash. Back in the '70s one could deduct margin expense from earned income, so I used my salary to buy Berkshire shares with bank debt, then margin. In this way I converted a marginal tax, which then was on its way to 50%, to a deferred dividend rate. I'm still deferring. I became very comfortable using margin in a bankerly fashion. I developed a pretty good sense of how much distance I had between by back and the wall of a margin call, and how I was going to get through the wall without breaking down the entire building, losing my entire stake. The bank called once, and I paid down the loan without having to sell. I still have those shares 35 years later.

    Yes, wine, particularly red wine, is medicinal--even generic bottles--but your doctor will surely offer only non-generic! Enjoy!
    Jul 5, 2015. 09:35 AM | 1 Like Like |Link to Comment
  • Dividends: A Case of Behavioral Heuristics? [View article]

    Good to hear from you!

    Your use of a synthetic portfolio--futures plus cash--is very sensible. Back, after the '87 crash I raised this with a friend at Fidelity: mutual funds are demand-deposit accounts not unlike bank accounts. But they are under pressure to be fully invested, so liquidity is a problem. Indeed, Fidelity at the time did just that. I use margin--have for thirty-five years--for some leverage but mainly for liquidity.

    Since my trust account is now entirely Berkshire with low cost basis I have the liquidity of margin (50 basis points below broker loan). To offset the margin, to the extent I feel necessary, I hold cash in my retirement account.

    This summer I am reading books on memory: Daniel Schacter, The Seven Sins of Memory, and Eric Kandel, In Search of Memory. Most of us older folk were taught to view memory as a black box; we even believed until not too recently that we were born with the maximum number of synapses and that this number diminishes with each bottle of wine. (I must have a negative balance by now!) I should now reread Nietzsche's Use and Abuse of History (memory) for Living.

    My more general summer project is to spend more time reading books and less time with the stuff that has a rather short half life. And to avoid multitasking, which is a very distracting bad habit: not condusive to good memory.

    I had an odd insight last summer. We have a rural place in NH, which is frequented daily by turkeys. I have concluded that we are not much different from turkeys, wild or domestic. We, of course, think that they move randomly and not very intelligently. Well, at each step, they look left and right and make a rational decision about which direction has more bugs. Their apparent randomness that we condescendingly look down upon is really a series of rational decisions. Incidentally, turkeys have very good peripheral vision: unless you are a well-trained hunter, they will know your presence well before you see them. And they know when you might be dangerous: if you drive by them on the highway, as I did this morning, they will take little notice, but if you stop they will fly, if needed.

    Well, Charlie and Warren would agree that this model captures how they built Berkshire. Indeed, Charlie once said, if you think that they had a grand plan back in 1965 when they took control of Berkshire you have a very different view of the world from theirs. We were taught in school that we needed a business plan for life. I think turkeys--and Warren and Charlie--are having more fun by not following some smart business plan but, rather, aiming to make one sensible decision one step at a time.

    I wish you fun on this Fourth of July!
    Jul 4, 2015. 11:31 AM | Likes Like |Link to Comment
  • Berkshire Hathaway - Sell-Off Stress Test [View article]
    Honeycomb, you make some useful points. It is easy for the would-be investor to overlook his or her own performance. Some years ago M* did an interesting analysis of the top fund for the previous ten years and compared it to the S&P and to actual investors in the fund during the ten years. While the fund, CGM, way out performed the S&P, the investors, on average, markedly underperformed both CGM and the S&P, giving proof that investors, on average, remain hinged to buying high, selling low.

    One important quality that a company like Berkshire has over any index is that it exudes a culture of trust that encourages shareholders to sit tight. With an index, the investor is entirely on his or her own. For many of us that is a rather weak link. Perhaps we should carry around the admonishment: Beware the investor: he is you!
    Jun 28, 2015. 08:41 AM | 1 Like Like |Link to Comment
  • Google Share Gap Hitting New Highs [View article]
    Judging alpha based upon a year's performance is short sighted. It is entirely possible that either the market has over priced the value of a vote, which I suspect it has, or, if the price differential remains stable, the underpriced shares will out-perform the higher (mislabeled alpha) shares. Earnings of both classes, being equal, will compound at the same rate. But you can buy one for less money, so your compounding on those will be greater: that is the one to buy.

    To have the alpha nonsense bare fruit the spread between the two classes has to widen. My bet is that it will not.
    Jun 6, 2015. 09:44 AM | Likes Like |Link to Comment
  • Google Share Gap Hitting New Highs [View article]
    Dennis, again, I think you are correct: The value of management having voting control is that it is able to trust its staff to make sensible decisions, thus multiplying the number of eyes and potentially creating more value. Look at the Washington Post Company under Katherine then Donald Graham, or Berkshire under Buffett. Both companies have been able to think very long term and empower their managers to think like owners.

    I delight in finding good management with voting control. They are freer to act sensibly, ignoring the backseat drivers who always seem to think they know better.

    It is the baby boomers greed for a short-term gain--aided and abetted by salivating Wall Street investment bankers--that has gotten us to a very warped way of thinking about how to compound wealth.
    Jun 6, 2015. 09:09 AM | Likes Like |Link to Comment
  • Google Share Gap Hitting New Highs [View article]
    Dennis, I totally agree: why one would pay an extra $15 per share to be able to vote is beyond comprehension. Years ago I noticed that Buffett frequently bought non-voting shares in companies. If you make a good decision on management having voting power is like insisting on being a backseat driver. That's counter productive.
    Jun 6, 2015. 08:50 AM | 1 Like Like |Link to Comment
  • Berkshire Hathaway - Sell-Off Stress Test [View article]
    And 20+% a number of times!
    Jun 2, 2015. 10:08 AM | Likes Like |Link to Comment
  • Berkshire Hathaway - Sell-Off Stress Test [View article]
    I have noticed over the years, in others as well as myself, that dividend income magically relieves one of facing opportunity cost. The dividend simply shows up in the account and is spendable. Selling equivalent shares forces one, emotionally, to face the lost opportunity of allowing the sold shares to continue to compound. "Dammit, if I had just waited XX months I would be worth 20% more." We fool ourselves when we think that a dividend doesn't have an opportunity cost.

    As Eli's stylized examples demonstrate, the more you withdraw, whether by dividend or sale of shares, the less your account will compound. Those who think they can have growth AND income commit the folly of thinking they can have their cake and eat it. Life isn't so generous! When it comes to compounding, it is growth OR income: you choose.
    May 31, 2015. 02:48 PM | 2 Likes Like |Link to Comment
  • Berkshire Hathaway - Sell-Off Stress Test [View article]
    BitterrootBrown, my advice is to sit tight, don't be in a rush to come current on your deferred taxes, only to produce more taxable income. To avoid the naturally occurring volatility, plan ahead; keep a sufficient cash reserve--I call it a buffer--to protect you from being forced to sell at an inopportune moment. (In a taxable account find a broker who will offer you an attractive margin rate. Having an account qualified for margin functionally turns your account into the equivalent of overdraft protection on a checking account. The difference it that you are posting very good collateral and receiving a more attractive rate than you would on a non-collateralized loan.)

    If your spending is below 4.5% of investible assets annually with a little bit of cash management you can live forever. What more do you want? If you don't live forever your heirs will be measurably more grateful for your good sense.

    I have never been able to figure out how a bunch of people can sit around a table and quarterly decide what is the right amount for each shareholder to get to spend. Your judgment is far keener than theirs! Some people seem to think that these directors making decisions for me relieve me from personal responsibility. Not living beyond one's means is not the directors' problem.
    May 30, 2015. 03:46 PM | 7 Likes Like |Link to Comment
  • Sears: Past Actions Suggest Future Value [View article]

    Sears remains for me in Charlie's third desk box "Too Difficult". But I commend you for making the effort I'm not inclined to make. Warren learned to study the fine print of a business from Ben Graham, and you are now learning it from Warren. Surely with patience you will discover enough hidden gems to make you wealthy.

    I suppose my only advice is a caution not to become too convinced and to maintain adequate margins of safety. I keep two quotes firmly in mind. The first by the Nobel Laureate P.B. Medawar “I cannot give any scientist of any age better advice than this: the intensity of the conviction that a hypothesis is true has no bearing on whether it is true or not.” from Advice to a Young Scientist, p.39.

    The second is from Charles Munger: "The harder you work, the more confidence you get. But you may be working hard on something that is false."

    I have no idea if either quote applies to your Sears analysis, but I urge you to keep them in mind: you are on the right track. Good luck!
    May 9, 2015. 09:09 AM | 1 Like Like |Link to Comment
  • Notes from 2015's "Capitalist Woodstock" [View news story]
    Occasionally I find that a comment I write isn't posted for hours. That happened yesterday. I wrote one in the morning but it wasn't posted until evening. It was, however, time-stamped 11:00 am.

    Oddly, it showed up promptly at the head of my comment, which is how I check to see, if it was received. If an SA editor is monitoring this thread perhaps they can explain this discrepancy.

    I am not aware of having a comment deleted without being notified who pressed delete.
    May 7, 2015. 09:19 AM | Likes Like |Link to Comment
  • Notes from 2015's "Capitalist Woodstock" [View news story]
    And Ibex, Warren would surely agree that Berkshire was his worst activist investment. After he took control, he quipped, he soon learned that the assets weren't worth what he thought they were, "but the liabilities were solid". Of course what he made of a dumb investment is history.
    May 6, 2015. 04:30 PM | 1 Like Like |Link to Comment
  • Warren Buffett And Losing Billions Of Dollars [View article]

    Don't get mislead by the natural volatility of prices. Think of them as a seesaw: sometimes the first will be higher, the second lower--and then the reverse. In the past 50 years there were dozens of times when Berkshire had underperformed the market for some period--you fill in the preferred period--these are seats of the seesaw. The patient investor ignored those comparisons--and made a lot of money.

    At the annual meeting Warren commented that value investing involved two things: viewing a share of stock as a portion of a business, and welcoming volatility. Try to figure out how to make volatility your friend and don't look to Mr. Market for wisdom.

    In short, pick your swing and only look to the position of the swing when you are aiming to get on or off, then enjoy the ride.
    May 6, 2015. 11:14 AM | 1 Like Like |Link to Comment
  • Notes from 2015's "Capitalist Woodstock" [View news story]
    "How would you characterize walking into a company on the verge of bankruptcy, making a take it or leave it offer, which is good for 24 hours?"

    Putting a limit on an offer keeps the counterparty from shopping for a better deal. Warren is able to make quick decisions: that is his advantage. Think of how many slower souls would jump to top Warren by a little. That possibility creates a bidding war, which he assiduously avoids.

    I strongly disagree that there is no Win/win with Warren. He tells potential sellers not to bother calling if they don't have a price in mind: we are wasting each other's time. He aims to become partners with the seller. He wants a deal to come with managers. Spending time haggling over price would not be conducive to forming a partnership.
    May 5, 2015. 09:22 AM | 1 Like Like |Link to Comment
  • Notes from 2015's "Capitalist Woodstock" [View news story]
    Ben Graham was the first activist investor.

    Those who find it convenient to make out Buffett to be a cutthroat manager ought to ponder why so many company owners want to sell to him. Why does he enjoy low turnover in managers? Being an SOB is one thing; knowing what makes sense financially is quite another. One never has to fear being blindsided by Warren, or that he will cheat you if he has a chance.

    There are many people who would love to see Warren stumble. Germans call that Schadenfreude. They would use their time more profitably if they spent it figuring out why they are consumed by envy.
    May 4, 2015. 08:17 PM | 2 Likes Like |Link to Comment