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Random Thoughts

|Includes: SPDR S&P 500 Trust ETF (SPY)

Summary

Extraordinary (and extraordinarily rare) conviction to sit on cash

Macro forecasts as a general rule don't make anybody any money over time

The most important thing is the return on tangible capital employed

"It amazes me that "analysts" spend so much time on cyclical swings. Just because winter is coming doesn't mean a farm loses its value. There's going to be a winter every year. There will be a couple of earnings recessions every decade.'

"The only macroeconomic forecasts which will make you any money are the ones that are both (A) right and (B) forecasting radical change. The consensus outcome is generally already baked into current prices, so believing the consensus, and having it come true, gets your investment positions nowhere. Since it's so hard to hit both of those requirements consistently, macro forecasts as a general rule don't make anybody any money over time."

"It takes extraordinary (and extraordinarily rare) conviction to sit on cash or hedge during high and rising market valuations, and on the way down too. You have to set aside all emotions and make a decision purely on your rational numerical evaluation of the situation. Quite aside from whether or not it's the sensible thing to do and whether it works, it's definitely not the path of least resistance."

"A business line (not always a whole company) has a "moat" if and only if the customers of that product or service perceive, rightly or wrongly, that there is no close substitute. Keep that sentence in the top of your mind every time you start to look at a new company." 

"Few people have stock portfolios which are so skillfully picked, so long term in holding horizon, and so concentrated in deep value that the broad market valuation level has no valid input to their rational expectations of future returns."

"Buybacks are not returns of capital to shareholders. If funded by debt, they are simply increased gearing. The resulting increase in earnings per continuing share is real, just risky. If funded by cash flow, they are simply allocated capital."

"The most important thing is the return on tangible capital employed, which for the vast majority of firms is equal to the average cost of capital since almost all firms have unavoidable competition. The second key thing is the ability to reinvest new capital at high rates of return. The third leg of the tripod is the importance of having management which is smart enough to appreciate these two rules. Firms not meeting both criteria should distribute all income, either as dividends or share repurchases, because reinvestment which doesn't have an expected return above cost of capital destroys value or is at best a breakeven proposition. Those that meet both criteria should reinvest as much capital as possible at superior rates of return, and no more."

A child dies of starvation every 3 seconds!!

UNICEF can feed a child for 50 cents a day.