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Month: January 2012

Buffett: Inflation Is Just A Tax, So Why Expect Economic Miracles?

Buffett: Inflation Is Just A Tax, So Why Expect Economic Miracles?

Since the global economic crisis began in 2007, many observers and commentators of economic and financial events alike have suggested that inflation (a little, some, a lot) is part of the solution to our troubles. From Ben Bernanke to Joseph Stiglitz, from Paul Krugman to Jeremy Siegel, it seems like everyone’s got something good to say about inflation and its miraculous economic benefits.

But what has Warren Buffett, the “greatest investor of all time” and, by correlation, one of the greatest businessmen and economic actors of all time, had to say about inflation?

The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn’t seem to notice that 6 percent inflation is the economic equivalent.

If my inflation assumption is close to correct, disappointing results will occur not because the market falls, but in spite of the fact that the market rises. At around 920 early last month, the Dow was up fifty-five points from where it was ten years ago. But adjusted for inflation, the Dow is down almost 345 points – from 865 to 520. And about half of the earnings of the Dow had to be withheld from their owners and reinvested in order to achieve even that result.

In the next ten years, the Dow would be doubled just by a combination of the 12 percent equity coupon, a 40 percent payout ratio, and the present 110 percent ratio of market to book value. And with 7 percent inflation, investors who sold at 1800 would still be considerably worse off than they are today after paying their capital-gains taxes.

I can almost hear the reaction of some investors to these downbeat thoughts. It will be to assume that, whatever the difficulties presented by the new investment era, they will somehow contrive to turn in superior results for themselves. Their success is most unlikely. And, in aggregate, of course, impossible. If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker – but not your partner.

According to Warren Buffett and the simple arithmetic he shares, inflation is a tax. If inflation is a tax, it follows that it can not produce economic growth and miracles. Taxes represent confiscation of real wealth by taxing authorities, at which point that wealth is consumed as government authorities do not earn a profit on their expenditures and therefore these expenditures can not be looked at as productive.

Are higher taxes good for stock prices in the long run?

No. Higher taxes reduce the value of discounted future cash flows of any given asset and thereby reduce their present, capital value. Inflation is bad for stock prices (denominated in real terms) over time.

If inflation is a tax and taxes are not beneficial to economic growth, how does Buffett suggest American corporations can increase their returns on equity over time?

Corporate America cannot increase earnings by desire or decree. To raise that return on equity, corporations would need at least one of the following: (1) an increase in turnover, i.e., in the ratio between sales and total assets employed in the business; (2) cheaper leverage; (3) more leverage; (4) lower income taxes; (5) wider operating margins on sales.

Inflation, and taxation generally, do nothing to increase sales turnover, they do not make leverage cheaper, they do not create more leverage, they do not lower income taxes (obviously!) and they do not create wider operating margins on sales. Inflation/taxation are not a quick fix for an ailing economy according to Buffett!

To reiterate:

We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.

If inflation doesn’t help Warren Buffett earn higher returns on equity (that is, greater equity claims to real production on existing assets), what chance does anyone else have for benefitting from inflation in this way?

And again, if Buffett hadn’t been clear before:

As we said last year, Berkshire has no corporate solution to the problem. (We’ll say it again next year, too.) Inflation does not improve our return on equity.

Higher return on equity means more real value produced from the same base of assets.

And the taxation effect of inflation is so nefarious, it even extends to “tax-exempt” institutions, as Buffett explains:

At 7 percent inflation and, say, overall investment returns of 8 percent, these institutions, which believe they are tax-exempt, are in fact paying “income taxes” of 871⁄2 percent.

Everyone is caught in the net of inflation-taxation, even the so-called tax-exempt.

If inflation is a tax, and inflation, like other forms of taxation, consumes real wealth and depletes capital, and society doesn’t benefit from this, then who benefits? Who is consuming all of that capital?

The answer must be the individuals who stand outside of society and prey on its productive efforts, that is, the institution of government:

Investors in American corporations already own what might be thought of as a Class D stock. The class A, B and C stocks are represented by the income-tax claims of the federal, state, and municipal governments. It is true that these “investors” have no claim on the corporation’s assets; however, they get a major share of the earnings, including earnings generated by the equity buildup resulting from retention of part of the earnings owned by the Class D shareholders

You’ve heard it from the “greatest investor of all time”, Warren Buffett– inflation is a tax, it consumes real wealth and accumulated capital, it forces many corporations (and therefore, the people who work for them and own them) to run vigorously just to stand in place, and it places the equity of the country in a subordinate role to local, state and federal government.

Inflation is bad for the economy as it consumes the real returns of everyone’s productive efforts, sometimes so much that nothing is left over and in fact previous savings must be consumed, as well. Therefore, inflation is bad for your investments and bad for real returns in the stock market over time.

As Warren Buffett once said,

external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.

And Berkshire Hathaway is no different from any other business, in that sense.

Notes – Competition Demystified: Preface, Chapter 1 (#competitiveadvantage)

Notes – Competition Demystified: Preface, Chapter 1 (#competitiveadvantage)

Reading notes to Competition Demystified, by Bruce Greenwald and Judd Kahn.

What is strategy?

Strategy is the art of making business decisions with respect to the actions and responses of competitors. Strategy revolves around creating, protecting and exploiting competitive advantages.

Strategy and competitive advantage go hand in hand; where there is no possibility to develop a competitive advantage, there can be no strategic decisions. Markets where competitors have similar access to customers, technology and other cost advantages are not strategic but tactical markets where the only strategy possible is to outrun the competition through operational efficiency– most competitors will be about the same size and none will manage to make or maintain an outsize profit margin as the lack of competitive advantages will drive economic profits toward average cost.

What are the differences between strategy and tactics?

The easiest way to think about the difference between strategy and tactics is to understand that strategic decisions are focused on competitors, while tactical decisions are focused on operations. In other words, strategy is external, tactics are internal in nature.

This helpful table from Competition Demystified may also convey the differences:

  • Strategic Decisions
    • Management level –> top management, board of directors
    • Resources –> corporate
    • Time frame –> long-term
    • Risk –> success or survival
    • Questions: “What business do we want to be in?”, “What critical competencies must we develop?”, “How are we going to deal with competitors?”
  • Tactical Decisions
    • Management level –> midlevel, functional, local
    • Resources –> divisional, departmental
    • Time frame –> yearly, quarterly, monthly
    • Risk –> limited
    • Questions: “How do we improve delivery times?”, “How big a promotional discount do we offer?”, “What is the best career path for our sales representatives?”

Additionally, there are two major strategic issues every business faces:

  1. the arena of competition – which external characters will affect the firm’s economic future?
  2. the management of competition – how do you anticipate and, if possible, control, the actions of these external agents?

Porter’s “Five Forces” and the Greenwald/Kahn “One Ring” that binds them

Michael Porter, author of Competitive Strategy (1980), identified “Five Forces” critical to the competitive environment:

  • Substitutes
  • Suppliers
  • Potential Entrants
  • Buyers
  • Competitors Within the Industry

Greenwald and Kahn focus on one as being the dominant force, potential entrants, specifically from the viewpoint of barriers to entry.

Either the existing firms within the market are protected by barriers to entry (or to expansion), or they are not.

Barriers to entry are critical for maintaining stable businesses and above average profit margins as without them the market will be flooded with competitors whose existence serves to drive down average industry profitability.

As more firms enter, demand is fragmented among them. Costs per unit rise as fixed costs are spread over fewer units sold, prices fall, and the high profits that attracted the new entrants disappear.

The end result is all firms are placed on the operational efficiency treadmill where no firm ever reaches the goal of above average profitability and everyone must run as fast as they can simply to stay in place.

Operational effectiveness might be thought of as a strategy, indeed, as the only strategy appropriate in markets without barriers to entry.

How to conduct a strategic analysis

Ask yourself, in the market in which the firm currently competes or is considering an entrance:

  1. do any competitive advantages exist? And, if so,
  2. what kind of advantages are they?

Exploring competitive advantage

There are only three types of genuine competitive advantage:

  1. supply – a company can produce or deliver its products or services more cheaply than competitors
  2. demand – a company has access to market demand that competitors can not match, usually based upon…
    1. habit
    2. switching costs
    3. search costs
  3. economies of scale – an incumbent firm operating at large scale will enjoy lower costs than its competitors

Companies which manage to grow yet maintain profitability usually achieve this one of three ways:

  • replicate their local advantage in multiple markets
  • continue to focus on their product space as that space becomes larger
  • gradually expand their activities outward from the edges of their dominant market position

Elephants versus ants

Markets which offer competitive advantages are typically characterized by one or two large firms which possess the competitive advantage, elephants, and several smaller, less profitable “competitors”, the ants.

A firm which finds itself in a market where it is the ant should consider getting out of the market as painlessly as possible. A firm which is considering entering a market where an elephant already resides should reconsider the decision as the only real hope for competing in that market is if the elephant creates an opportunity by making a mistake.

With a competitive advantage in place, an elephant can enjoy the outsized profits of his competitive position. Still, developing strategic awareness about its competitive advantages will allow it to:

  • reinforce and protect existing advantages
  • identify areas of growth (geographic and product line-related) that are likely to yield high returns
  • develop policies that extract maximum profitability from the firm’s competitive circumstances
  • identify threats that are likely to develop
Strategic planning

In other words, strategic planning concerns itself with the different areas of business decision-making that competitors can respond to, such as:

  • pricing policies
  • new product lines
  • geographic expansions
  • capacity additions

Questions from the reading

  1. With regards to the elephant vs. ant paradigm, why do ants exist at all, that is, why don’t more firms exit markets where they are ants?
  2. What are common ways in which elephants misstep and allow competition from the ants?

 

Frank Shostak: Is Krugman Joking? Liquidity Traps Are Impossible (#economics)

Frank Shostak: Is Krugman Joking? Liquidity Traps Are Impossible (#economics)

The Mises Institute’s Frank Shostak is out with another simple-yet-edifying piece on the “liquidity debate”, that is, is the US facing a liquidity or solvency crisis? Shostak argues that liquidity traps are impossible.

Shostak ranks with Gary North as one of the most accomplished observers of economic events through an Austrian lens, in my opinion. Here’s the salient snippet, though I recommend reading the whole piece:

To suggest then that people could have an unlimited demand for money (hoarding money) that supposedly leads to a liquidity trap, as popular thinking has it, would imply that no one would be exchanging goods.

Obviously, this is not a realistic proposition, given the fact that people require goods to support their lives and well-being. (Please note: people demand money not to accumulate indefinitely but to employ in exchange at some more or less definite point in the future).

Being the medium of exchange, money can only assist in exchanging the goods of one producer for the goods of another producer. The state of the demand for money cannot alter the amount of goods produced, that is, it cannot alter the so-called real economic growth. Likewise a change in the supply of money doesn’t have any power to grow the real economy.

Contrary to popular thinking we suggest that a liquidity trap does not emerge in response to consumers’ massive increases in the demand for money but comes as a result of very loose monetary policies, which inflict severe damage to the pool of real savings.

Lessons in Short Selling: Why Jim Chanos Targeted Enron

Lessons in Short Selling: Why Jim Chanos Targeted Enron

I saw this testimony, delivered to Congress February 6, 2002, by Jim Chanos on his decision to short Enron before it collapsed, posted over at John Chew’s Case Study Investing. I enjoyed reading it and thought it was worth commenting on as a kind of basic guide to short-selling– why and how. This testimony is a Warren Buffett-style (and quality) lesson on short-selling fundamentals.

How To Identify A Short-Sell Opportunity

Kynikos Associates selects portfolio securities by conducting a rigorous financial analysis and focusing on securities issued by companies that appear to have (1) materially overstated earnings (Enron), (2) been victims of a flawed business plan (most internet companies), or (3) been engaged in outright fraud.

Three key factors to look for in a short-sell:

  1. Overstated earnings
  2. Flawed business model (uneconomic activity)
  3. Fraud

As with the Enron fiasco, Chanos first became interested when he read a WSJ article that discussed Enron’s aggressive accounting practices. Aggressive, confusing, archaic or overly technical accounting practices are often a potential red-flag that could identify a company which is not actually as profitable as it appears to be to other market participants. When this profitability if revealed to be illusory later on, a catalyst is in place to galvanize investors into mass selling.

Another factor which can create an opportunity for a short is when the company has a flawed business model which essentially means the company is engaged in uneconomic activity. Short of government subsidies and other protective regulations, the market place tends to punish uneconomic (wasteful, that is, unproductive) activity with the tool of repeated and mounting economic losses until the offending individual or firm’s resources are exhausted and they must declare bankruptcy and liquidate their assets into the hands of more able owners. Chanos gives the example of tech bubble companies which never managed to achieve operating profitability– their business models were nothing more than exciting ideas, unable to overcome the reality check of achieving business profit.

The last type of short Chanos describes is general fraud– a company claims to own assets it does not own, or it is subject to liabilities and debts it has not disclosed, or there is an act of corruption or embezzlement amongst employees or managers of the business. Recent examples could be found in the growing “China short” sub-culture of financial research and hedge fund activity, such as the Sino Forest company which did not have thousands of acres of productive timberland it claimed to own.

The Enron “Case Study”

Returning to the Enron example, Chanos discloses three suspicious facts he and his firm uncovered through perusal of public financial disclosures that got them thinking about shorting Enron:

The first Enron document my firm analyzed was its 1999 Form 10-K filing, which it had filed with the U.S. Securities and Exchange Commission. What immediately struck us was that despite using the “gain-on-sale” model, Enron’s return on capital, a widely used measure of profitability, was a paltry 7% before taxes. That is, for every dollar in outside capital that Enron employed, it earned about seven cents. This is important for two reasons; first, we viewed Enron as a trading company that was akin to an “energy hedge fund.” For this type of firm a 7% return on capital seemed abysmally low, particularly given its market dominance and accounting methods. Second, it was our view that Enron’s cost of capital was likely in excess of 7% and probably closer to 9%, which meant, from an economic cost point-of-view, that Enron wasn’t really earning any money at all, despite reporting “profits” to its shareholders. This mismatch of Enron’s cost of capital and its return on investment became the cornerstone for our bearish view on Enron and we began shorting Enron common stock in November of 2000.

Chanos essentially did a competitive analysis on Enron and concluded that Enron was underperforming its competitors in the energy trading arena, despite large size and market dominance. He also concluded that its returns appeared uneconomic because they did not cover costs (capital), implying the company was  consuming capital rather than generating it.

We were also troubled by Enron’s cryptic disclosure regarding various “related party transactions” described in its 1999 Form 10-K as well as the quarterly Form 10-Qs it filed with the SEC in 2000 for its March, June and September quarters. We read the footnotes in Enron’s financial statements about these transactions over and over again but could not decipher what impact they had on Enron’s overall financial condition. It did seem strange to us, however, that Enron had organized these entities for the apparent purpose of trading with their parent company, and that they were run by an Enron executive. Another disturbing factor in our review of Enron’s situation was what we perceived to be the large amount of insider selling of Enron stock by Enron’s senior executives. While not damning by itself, such selling in conjunction with our other financial concerns added to our conviction.

Importantly, Chanos notes that it was not the insider selling alone, but within the context of other suspicious activity, that concerned him. Often executives and insiders sell for personal liquidity reasons (buying a new home, sending kids to college, buying a boat, etc.) and some observers necessarily conclude this means foul play or that the insider knows the Titanic is about to hit an iceberg.

More common with smaller companies where management and ownership are often synonymous, related-party dealings are always something to be skeptical about and almost never are harmless in the context of multi-billion dollar public corporations.

Finally, we were puzzled by Enron’s and its supporters boasts in late 2000 regarding the company’s initiatives in the telecommunications field, particularly in the trading of broadband capacity. Enron waxed eloquent about a huge, untapped market in such capacity and told analysts that the present value of Enron’s opportunity in that market could be $20 to $30 per share of Enron stock. These statements were troubling to us because our portfolio already contained a number of short ideas in the telecommunications and broadband area based on the snowballing glut of capacity that was developing in that industry. By late 2000, the stocks of companies in this industry had fallen precipitously, yet Enron and its executives seemed oblivious to this! Despite the obvious bear market in telecommunications capacity, Enron still saw a bull market in terms of its own valuation of the same business — an ominous portent.

Again, Chanos and his firm were able to see the Enron picture more clearly by comparing it to the competitive landscape as a whole. How much validity does a firm’s claims possess when looked at in the context of the wider industry (or economy), rather than just its own dreams and/or delusions?

Throughout the rest of the testimony, we learn a few other interesting details about the development of his short thesis concerning Enron: the use of Wall Street analysts for sentiment feedback, the analysis of additional qualitative data for confirming target company statements and the use of conferences and investor communications networks to spread an idea and generate critical investor momentum.

Chanos also shares this helpful Wall Street axiom:

It is an axiom in securities trading that, no matter how well “hedged” a firm claims to be, trading operations always seem to do better in bull markets and to struggle in bear markets.

An important reminder for considering all business strategies which require positive momentum (ie, Ponzi schemes) to work.

More telling than insider selling, in Chanos’ mind, is management departures, change ups and board reshufflings:

In our experience, there is no louder alarm bell in a controversial company than the unexplained, sudden departure of a chief executive officer no matter what “official” reason is given.

In the case of Enron, the executive to depart was Enron CEO Jeff Skilling who was considered to be the “chief architect” of the company’s controversial trading program. His absence meant not only that Enron was potentially a ship without a rudder, but that the captain had found a leak and was jumping overboard with the rats before everyone else figured it out.

In Summary

To summarize the lessons of the Enron case, good shorts usually involve at least one or more of the following: questionable earnings, uneconomic business models and/or fraud.

Accomplished short-sellers look for clues suggesting the presence of the above factors by reading between the lines in public financial disclosures and major news stories. They use social signaling clues like surveying Wall Street analysts and other market participants to gauge sentiment, which is a contrarian tool for discovering whether controversial information they are aware of is likely priced into the market or not. They engage in competitive analysis to judge whether the target firm’s claims are credible and reasonable. They watch the activity of insiders, specifically unanticipated departures of key staff, for confirmation of their thesis. They anticipate stressors to a firm’s business model which might serve as catalysts for revealing the precarious state of a firm’s business to other market participants.

Finally, and perhaps most importantly, they never take the price of the shorted security going against them as evidence that they are wrong and they add to their position as their conviction rises with new evidence of weakness or trouble for the target firm.

As Ben Graham would observe, in the short term the market is a voting machine and it’s common for those who are responsible for a fraud or dying business to cheerlead the market out of desperation. And as Chanos himself observed,

While short sellers probably will never be popular on Wall Street, they often are the ones wearing the white hats when it comes to looking for and identifying the bad guys!

Geoff Gannon As Kierkegaard: Leap Of Faith Net-Net Investing

Geoff Gannon As Kierkegaard: Leap Of Faith Net-Net Investing

Net-Net guru Geoff Gannon breaks down the secret ingredient to successful Net-Net investing using the example of one of his recent Japanese Net-Nets which received a buyout offer:

What special skills did earning this 130% return require? You didn’t need smarts. The key information – the cash and securities per share – was publicly available. Anyone could find it on the Internet. And the gap was egregious. If you looked at hundreds or even thousands of stocks – in Japan and around the world – Sanjo would’ve popped as a Ben Graham bargain.

No. You didn’t need smarts. You didn’t need any real insight or appetite for risk or anything like that. You just needed to embrace uncertainty.

Sanjo was certainly worth more than 200 yen a share. A lot more. No reasonable person would deny this. But most reasonable investors probably wouldn’t buy the stock. Why? There was no catalyst. No reason for the stock price to rise. Sanjo is a Japanese company. It’s a micro cap. Stocks like that don’t get bought out.

As it turns out, Sanjo’s largest shareholder had been in “intensive discussions and price negotiations with management over the last year.” So there was a catalyst. It’s just that nobody – except the company’s biggest shareholder and its president – knew about it.

That’s the uncertainty in net-nets. Most of the best net-nets have this certain/uncertain duality. It is certain the stock is selling for less than it’s worth. It is uncertain how the stock will ever sell for what it’s worth.

Net-nets are half about knowing and half about believing. They are part knowledge and part faith. If you can’t accept both of those ideas at once – you’ll never be a good net-net investor.

You can only know the stock is selling for less than it’s worth. You simply have to believe the stock will someday sell for what it’s worth.

This is probably also why Net-Nets are best bought in baskets and groups. You usually don’t have enough of a clue of what the catalyst will be to concentrate your holdings into just one company.

So it isn’t necessary to be super smart in your analysis as long as you are super smart in your actions. The big problem for a lot of would-be net-net investors is not bad analysis. It is bridging the gap between analysis and action.

And this is the key point to make about net-nets that earn low returns on equity. You don’t have to see how mean reversion will occur for it to occur.

The future does not care if you can envisage it ahead of time. It comes whether you see it or not. The good news: You can bet on things you can’t imagine.

Close your eyes and jump!

Thorsten Polleit: Deflation Will Not Be Tolerated

Thorsten Polleit: Deflation Will Not Be Tolerated

Over at the Mises Blog, Frankfurt-based business professor Thorsten Polleit explains the deflationary forces active in the banking system following the 2008 crisis:

In “fighting” the credit crisis, the US Federal Reserve increased US banks’ (excess) reserves drastically as from late summer 2008. As banks did not use these funds (in full) to produce additional credit and fiat-money balances, however, the credit and money multipliers really collapsed.

The collapse of the multipliers conveys an important message: commercial banks are no longer willing or in a position to produce additional credit and fiat money in a way they did in the precrisis period.

This finding can be explained by three factors. First, banks’ equity capital has become scarce due to losses (such as, for instance, write-offs and creditor defaults) incurred in the crisis.

Second, banks are no longer willing to keep high credit risks on their balance sheets. And third, banks’ stock valuations have become fairly depressed, making raising additional equity a costly undertaking for the owners of the banks (in terms of the dilution effect).

The bold part in effect represents Mike Shedlock’s argument for why we will see sustained deflation due to economic forces. He insists that the only way mass inflation or hyperinflation could occur is if the political forces in society decide to create it.

Interestingly, Polleit agrees:

The political incentive structure, combined with the antideflation economic mindset, really pave the way for implementing a policy of counteracting any shrinking of the fiat-money supply with all instruments available.

And the shrinking of the fiat-money supply can be prevented, by all means. For in a fiat-money regime the central bank can increase the money supply at any one time in any amount deemed politically desirable.

Even in the case in which the commercial banking sector keeps refraining from lending to the private sector and government, the central bank can increase the money supply through various measures.

Polleit says mass inflation can be produced by a central bank policy of quantitative easing (direct monetization of existing and newly issued government debt) and that in fact this is the policy choice already being observed with regards to the actions of the Federal Reserve and European Central Bank.

Deflation will be incredibly painful for the political and financial classes. But mass inflation is not necessarily a policy that will delight them either. On each side lies disaster and it’s hard to make the case that any particular disaster is more preferential than the other from the perspective of the political and financial interests. And surely, the absolute size of the problem and the precariousness of the perch currently enjoyed seems to dictate that an attempt at finding an “easy middle” ground will fail this time around.

John Chew of “csinvesting” Responds

John Chew of “csinvesting” Responds

John Chew, publisher of “csinvesting“, which it only took me about two weeks to realize stood for “Case Study Investing”, was kind enough to respond to a personal e-mail I sent him by publishing his reply on his blog.

The post itself is a great reference, like everything on John’s blog, and I wanted to link to it here to make sure I always can find the link again for future review. A few of my favorite sentiments are below:

You never “master” investing which is why the journey is fascinating.

Rational humility, the moment you think you know it all, you learn about a shortcoming you never knew you had.

Investing really is constant applied learning which is cumulative.

“Compounding” returns to one’s investment of time and energy in learning the trade!

Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach.

Don’t box yourself in with silly mandates or addiction/devotion to one strategy or style. Markets are dynamic and the best strategy is not the same at all times and in all places. The natural laws of reality dictate that basic truths and financial mechanics will always be active and provide general boundaries within which a rational, conservative investor must operate (such as margin of safety and the principle of buying value at a discount), but even Ben Graham in The Intelligent Investor clearly demonstrated that different markets provide different opportunities: sometimes it is the opportunity to buy outstanding businesses at a discount, sometimes it is the opportunity to buy certain businesses for less than their liquidation values, sometimes it is the opportunity to take advantage of special situation arbitrage, etc.

Few great investors are overnight successes. Many have to overcome failure.

It’s unreasonable to expect perfection because we are not omniscient. We will misstep and occasionally even fall. The art is in finding ways to take tumbles that do not break your leg, back or skull, and learning to pick yourself up again.

Money is about freedom, not consumption.

Money is the ultimate form of potential opportunity. It helps us with, “What can I do?” and not, “How much can I have?” Life is dynamic and it is lived best through abundant action, not abundant accumulation (static).

[Great investors] enjoy the process, not the proceeds.

We have a relative great deal of control over the process we employ, but relatively less control over the proceeds that result from that process. We are not omnipotent– life is volatile. There will be disappointments. Self-esteem and self-satisfaction are built on acting the best way we know how, not achieving the best we know of at any given moment. In life, a journey is guaranteed, a destination is not. Best to learn to savor the ride as it’s all you’ve ever got until it’s over.

Ever wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials.

A great application of Austrian economics to investment analysis!

Good reminders, all.

A Future Full of Urban Gulches

A Future Full of Urban Gulches

Zach Caceres over at Let A Thousand Nations Bloom has penned a rebuttal to a critic, called “In Defense of Urban Life“:

Urban life brings people together for mutual aid, and it opens wealth-generating possibilities for specialization and trade. It can integrate otherwise contentious groups, and it melds culture together to bring about beautiful new hybrids of music and art. We shouldn’t write off cities because of a romanticized ideal of the pastoral.

Indeed. There’s more and it’s a good, brief apologia for the urban environment versus the un-urban (suburbia, rural, pastoral, wilderness) in terms of satisfying human needs and lifestyle preferences. He touched on it briefly but I believe it bears further emphasizing, much of the problems his critic and those like him cite about urban environments are caused by central planning and non-market regulation.

Pollution, economic exploitation, environmental degradation and destruction (a poorly defined term for an ill-premised concept, but even accepted at its face in this situation it makes some sense), resource “overuse”, all of these problems are caused by undefined or poorly defined property rights and arbitrary interference and dictates from governments and other political, non-market institutions.

The solution to society’s economic ills are free markets. And the solution to society’s habitat ills are free cities. More of the current paradigm of Ponzi city construction based upon uneconomic, unproductive government infrastructure, city service and land-use planning will surely doom us all. But free cities, organized voluntarily by the participants and outcomes of local and international free markets, are just as surely the salvation, offering nearly limitless density, technological innovation, economic opportunity and variety in lifestyle.

Imagine the high rise urban wonderland of New York City meeting the honesty, productivity and heroic excellence of Galt’s Gulch.

That’s the way forward.

Aswath Damodaran: What Is Private Equity All About? (#investing, #PrivateEquity)

Aswath Damodaran: What Is Private Equity All About? (#investing, #PrivateEquity)

NYU Stern corporate finance professor Aswath Damodaran has a good summary of the types of private equity investors that exist in the financial markets, how they add value through their corporate activism and what motivates them on his blog in “Private Equity: Hero or Villain?“:

Here is an indisputable fact. If you are a stockholder in a publicly traded company, the entry of a private equity investor into your stockholder ranks is good news, since stock prices go up substantially.

Overall, a useful post for anyone looking to understand the basics of private equity, just don’t pay too much attention to his naive suggestion that the political problem facing this country is potentially just “mismanaged” government.