Disclosure: I am not receiving any compensation for any of the links provided. I have no business relationship with any company or individual mentioned in this article. I have no position in any stock mentioned.
Marc Andreessen joined Barry Ritholtz for the Masters in Business episode on May 19, 2017. At the end of the interview Marc shared a few of his favorite books.
To find out what Marc’s favorite books are, just keep reading the transcript below.
Barry Ritholtz: The question I get from listeners more than anyone, ask your guests what their favorite books are.
Marc Andreessen: Favorite books… So I have three quick nominations, and I’m gonna getting the hook here. “Poor Charlie’s Almanack”, the compendium of Charlie Munger’s speeches I think is tremendous. “Extreme Ownership” has been a favorite recent book by a guy named Jocko Willink, he’s a former Navy seal commander.
BR: “Extreme Ownership”…
MA: “Extreme Ownership”, one of the best books on leadership I’ve ever read and a tremendous, by the way, war story book as well. And then, what is the… man, there are so many. There is a brand new book by Robert Sapolsky I just started on human behavior, it’s sort of his magnum opus on human behavior. He’s the great evolutionary theorist, and so that would probably be the third one. That’s the new one but it looks very exciting.
Disclosure: I am not receiving any compensation for any of the links provided. I have no business relationship with any company or individual mentioned in this article.
Well-known investor Martin J. Whitman has published a book called Dear Fellow Shareholders that is publicly available via his website. Check it out here.
Disclosure: I am not receiving any compensation for providing this link.
Anurag Sharma is the author of Book of Value: The Fine Art of Investing Wisely published in September 2016. Book of value provides both theoretical and philosophical aspects relevant for an investor conducting a business analysis and deciding on whether or not to invest in a certain business.
The core thesis of the book is that fundamental analysis – both quantitative and qualitative – is useful when it comes to investing. Further, the approach of investing should be considered as a problem of choice, not as a mathematical problem. In the author’s view “wise investing” is based on carefully made choices based on sound intelligent analysis of facts and circumstances. Every investor then must learn to make a habit out of making good choices. Something that is easier said than done since undoing oneself from bad habits, even changing good ones, is rather complicated to accomplish in practice. But having a robust framework will at least help you on the way.
Book of Value provides a framework for the reader to use as a basis for developing a way of thinking – about financial markets, business analysis, and investing – and of casting investing as a problem of choice, and then drawing upon a broad range of disciplines to improve the quality of choice. Recasting investing as a problem of choice will require professional judgement from the investor, something that this book attempts to provide a basis for.
We are all prone to systematic biases to some extent which could make our decision-making process easily corrupted. Confirmation bias and loss-aversion are only two examples that could lead to irrationality and in the end, permanent loss of capital. By incorporating these behavioural economical aspects into the framework – even though they are pretty hard to manage many times – we increase the odds of 1) not forgetting them to start with and 2) managing them as best as we can as part of our investment process. Building upon this the author sets out to build a framework for investing based on the principle of negation, i.e., a systematic approach to disconfirmation. The systematic approach to business analysis and investing is essential here.
Walmart is used as a case study throughout the book and the author applies the different concepts for analysis in a coherent way, from valuation to analysis of stability and strength on to qualitative analysis. This will make it possible for the reader to conduct the same analytical process applied to other businesses. By setting up an investment thesis the analysis is then carried out with the aim of negation, that is, to disconfirm the thesis (for example, current market price = value). The first step is the quantitative analysis and to look at market price, valuation, stability of earning power and cash flows and returns, financial strength etc. If the investment thesis still stands and is not refuted from the qualitative analysis, the next step is to move on to the qualitative analysis and looking at the business itself, the industry it’s in, and any trends etc. The question then is whether we are going to be able to refute the investment thesis from the conclusions drawn based upon our qualitative analysis.
The last section of the book provides some discussion and thinking about how to set up a stock portfolio in a proper way. Also, the author reviews Berkshire Hathaway’s stock portfolio in the most recent years and also reviews the IBM investment to see whether this was a reasonable investment at the time it took place and what it looks like at the moment.
This book could have been much longer than it actually is, something that applies to a lot of other books as well. Some parts are a bit thin but the reader most likely gets the basic principles and concepts needed to be able to see the framework as a whole. When reading the book you can highlight any parts that you want to learn more about. For example when reading about what makes a good or great business you might want to consider reading other books on the same subject to deepen your understanding even further (for example in this case you could read Competition Demystified, Competitive Strategy, The Little Book That Builds Wealth, Strategic Logic, just to name a few). The same goes for the part about valuation and how to value a business.
To conclude, the Book of Value is clearly a good book, and definitely a book worth reading. It might even be a great book, but that I leave for you to find out.
Disclosure:Book of Value: The Fine Art of Investing Wisely (Kindle version) was purchased by Hurricane Capital from Amazon at the retail price.
“This is much more than a book about index funds. It is a book that is determined to change the very way that you think about investing.”
―John C. Bogle
Bogle, Vanguard, The Gotrocks Family & Common Sense Investing Wisdom
John Bogle is someone that I admire deeply. Maybe because he’s old, have been around for some time and acquired a lot of wisdom along the way. Or maybe it’s just that he reminds me of my grandpa that isn’t around any longer.
I especially favour the Masters in Business interview where Ritholtz talks to Bogle, an interview I must have listened to at least three or four times by now. Such a great episode. If you haven’t listened to it yet, my advice is that you go check it out. You won’t regret it.
The Little Book series contains 16 books covering different topics related to investing. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns is one of these books.
The real formula for investment success is to own the entire market, while significantly minimizing the costs of financial intermediation. That’s what index investing is all about. And that’s what this book is all about.
See here for an excerpt of chapter one “A Parable: The Gotrocks Family” where you will find the story about the Gotrocks Family and their fortunes and mis-fortunes in their investment (or speculation) endeavours.
Bogle himself is the founder of Vanguard, one of the world’s largest mutual funds and investment companies with about $3.5 trillion (that’s right, trillion…) in assets under management and an average expense ratio of 0.18%. Vanguard’s core purpose is:
To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success
The underlying theme of The Little Book of Common Sense Investing is how you, as an investor, make investing a winner’s game by investing regularly with a long-term focus in mind in a low-cost index fund–without caring about beating the market–and as a result most likely will end up with better total returns then the returns generated by maybe 80 or 90 percent of the professional active money managers.
Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), and after the substantial costs of investing are deducted, it becomes a loser’s game. Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.
The Little Book of Common Sense Investing will serve as your guide, with Bogle as your mentor, on how to incorporate Bogle’s proven low-cost index fund investment strategy. The reader is introduced to some historical background–efficient markets, value investing–and also on what experts and academics have to say about index investing.
Bogle begins the book with the story about the Gotrocks Family. The essence in this story is that the more they trade, the more they loose, and the more the so-called Helpers gain. With a focus on the fundamental value drivers–dividends and earnings growth–and by providing insights about the impacts of transaction activity, costs, taxes and inflation, Bogle lays out his thesis in favour for why the layman should buy a low-cost index fund and hold it forever.
The moral of the [Gotrocks] story, then, is that successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s—and, for that matter, the world’s—corporations. The higher the level of their investment activity, the greater the cost of financial intermediation and taxes, the less the net return that the business owners as a group receive. The lower the costs that investors as a group incur, the higher rewards that they reap. So to realize the winning returns generated by businesses over the long term, the intelligent investor will minimize to the bare bones the costs of financial intermediation. That’s what common sense tells us. That’s what indexing is all about. And that’s what this book is all about.
As an example Bogle provides some data for the period of 1900-2005. During these years compounding for 106 years produced accumulations where each dollar initially invested in 1900 at an investment return of 9.5 percent grew by the close of 2005 to $15,062. Pretty darn good. From this we can clearly see the power of compounding returns.
Total Stock Return: Investment Return Plus Speculative Return
In chapter two–Rational Exuberance–Bogle discusses the historical stock market return and its different components. This is one of the chapters in the book that I enjoyed the most. The total market return equals investment return plus speculative return. Investment return consists of dividends and earnings growth. Speculative return is measured as the change in the price-to-earnings ratio.
The average annual total return (1900-2005) on stocks was 9.6 percent, virtually identical to the investment return of 9.5 percent—4.5 percent from dividend yield and 5 percent from earnings growth. The difference of 0.1 percent per year arose from what Bogle calls speculative return, i.e., change in market or investor sentiment in a certain time period and measured as the change in the price-to-earnings ratio from the start of the period to the end of it.
This dual nature of returns is reflected when we look at stock market returns over the decades. Using Keynes’s idea, I divide stock market returns into two parts: (1) Investment Return (enterprise), consisting of the initial dividend yield on stocks plus their subsequent earnings growth, which together form the essence of what we call “intrinsic value”; and (2) Speculative Return, the impact of changing price/earnings multiples on stock prices.
Final Words
The Little Book of Common Sense Investing is a great book providing great insights about investing and what drives return (dividends and earnings growth) together with a thorough discussion about historical market returns, what to think about when investing (costs, taxes, inflation etc.) and why a low-cost index fund is the best alternative for the layman when it comes to investing for the long-term.
I highly recommend this book as a useful guide and reference when it comes to thinking about the stock market and investing in funds.
As Charlie Munger once said:“It’s not supposed to be easy. Anyone who finds it easy is stupid.” I think Bogle lays out a trustworthy case in support of this statement. For anyone investing on their own, the need of a benchmark to compare investment returns against is critical. This book truly serves as a great guide on how to think of and what different kinds of benchmarks and stock market index to look for. And also whether you should just find yourself a low-cost index fund to invest your savings into.
Table of Contents
Introduction.
Chapter One: A Parable.
Chapter Two: Rational Exuberance.
Chapter Three: Cast Your Lot with Business.
Chapter Four: How Most Investors Turn a Winner’s Game into a Loser’s Game.
Chapter Five: The Grand Illusion.
Chapter Six: Taxes Are Costs, Too.
Chapter Seven: When the Good Times No Longer Roll.
Chapter Twelve: Profit from the Majesty of Simplicity.
Chapter Thirteen: Bond Funds and Money Market Funds.
Chapter Fourteen: Index Funds That Promise to Beat the Market.
Chapter Fifteen: The Exchange Traded Fund.
Chapter Sixteen: What Would Benjamin Graham Have Thought about Indexing?
Chapter Seventeen: “The Relentless Rules of Humble Arithmetic.”
Chapter Eighteen: What Should I Do Now?
Acknowledgments.
Let’s end this post with three more insightful quotes, one from Charlie Munger and the other two from Warren Buffett.
The general systems of money management [today] require people to pretend to do something they can’t do and like something they don’t. [It’s] a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That’s the way it has to work. Mutual funds charge two percent per year and then brokers switch people between funds, costing another three to four percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it’s disgusting. It’s much better to be part of a system that delivers value to the people who buy the product.
―Charlie Munger
“The most that owners in the aggregate can earn between now and Judgment Day is what their business in the aggregate earns.”
“When the stock temporarily overperforms or underperforms the business, a limited number of shareholders—either sellers or buyers—receive out-sized benefits at the expense of those they trade with. [But] over time, the aggregate gains made by Berkshire shareholders must of necessity match the business gains of the company.”
―Warren Buffett
Disclosure: The Little Book of Common Sense Investing was purchased by Hurricane Capital from Amazon at the retail price. If you want me to review a book, please let me know.
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
This quote then serves as a thread throughout the book as the different parts about dividend investing are accounted for. The main theme in The Snowball Effect is how dividends should be considered by any long-term investor as a crucial part of the total returns. And, for sure, wouldn’t it be great if you knew that you’d have recurring dividends coming into to your account, certainly if the stock market were to close down for some time (hopefully it won’t).
The Snowball Effect starts off with a discussion about the different secular bear markets that’s taken place from 1906 up until 2011. And I’m pretty sure that many of us are familiar with the mantra “stocks always go up.” A statement that, according to the author himself, is “a falsehood.” To back his view up the author lays out some interesting statistics that also serves as a great summary of financial stock market history. The different secular bear markets up for an review by the author are the ones occurring in 1906-1924, 1929-1954, 1966-1982, and 2000-2011.
Except for the historical lessons in this book, I also enjoyed all the data provided regularly throughout about dividend yields and stock market returns, just to give a few examples. Also, there’s an interesting table in the midst of the book summing up the best and worst single days in the DOW. A table that in hindsight serves as a fascinating read and reminder of Mr. Markets presence throughout the years.
Another theme is the collection and reinvestment of dividends back into the stock market to increase the future dividend power of your stock portfolio. A great way enabling the investor to (hopefully) collect stable and growing cash returns in the future, especially if the stock market enters into another secular bear market.
The author provides the reader with some checks to be used when picking the best dividends stocks, what to look for, as well as some guidance on market timing (even though timing is a tricky part of it all as we know when it comes to investing).
The dividend yield, that is dividend in relation to price, is a metric that is often shown on different sites and also in most investment publications. Inverting the dividend yield we get the price to dividend ratio, about which the author writes:
If you apply a price-to-dividend ratio analysis to stocks you are thinking of purchasing or already own, you can purchase, or reinvest, cash at optimal points in time. If Pepsi’s share price falls and the yield nears 4 percent, the investor could then time her purchases in the most efficient manner and gain the most shares of Pepsi stock possible. Following this type of market timing will allow an investor to collect more share of a company’s stock at the times when it is most undervalued.
The reader also gets a chapter devoted to the covered-call strategy in dividend investing, and a chapter with a discussion of what makes the best investment area when it comes to dividends (micro-cap or larger-cap dividend firms).
To sum up, this is a book well worth reading. With the important overall topic about dividends (as one of the factors in the calculation of the total return) the book’s building blocks (see table of content below) make this a great read.
Summary of Content
Introduction
Chapter 1: The Treacherous Secular Bears
Chapter 2: The Power of Dividends
Chapter 3: The Snowball Effect: The Promise of Reinvesting Income
Chapter 4: The Small-Cap Paradox
Chapter 5: The Power of Bond Interest
Chapter 6: The Covered-Call Strategy
Chapter 7: The Future and the Top 100
Suggestion for Additional Reading
The Top 100 List
Disclosure: I received the book in this post without having to pay a cent. Regardless, as in any case when I haven’t received something, I only make recommendations I personally believe will be of benefit to my fellow readers. I cannot tell for sure whether the fact that I received the book for free made me write this post, i.e., reciprocation tendency. I sincerely hope that I would have written the same words in a situation where I had bought the book myself. Except for receiving the book for free (and the stamps on the envelope) I have not, and will not, be compensated in any way for any further writings etc. If you want me to review a book, please let me know.
“I particularly recommend attention to the idea that an ounce of prevention is worth a pound of cure—except it really isn’t often a mere pound. An ounce of prevention is often worth a ton of cure.”
—Charlie Munger
The Greatest Gift: A Great Book
This summer I received a book from someone I do not personally know, have never met in person, or even talked to before for that matter. A familiar name though, and I was very surprised to say the least and also very grateful. Since there’s nothing better than a great book, a gift in the form of a great book must clearly be considered a great gift. Anyway, the book that I’m talking about here is All I Want To Know Is Where I’m Going To Die So I’ll Never Go There: Buffett & Munger – A Study in Simplicity and Uncommon, Common Sense, written by Peter Bevelin. Peter is also the author of a few other well-known books, namely Seeking Wisdom: From Darwin to Munger, A Few Lessons for Investors and Managers From Warren Buffett, and A Few Lessons from Sherlock Holmes.
Having disclosed these material circumstances I hope each and everyone reading this piece, by now, should be well aware of any bias on my side due to the fact that I received the book for free. Beyond this, also remember (how could anyone forget…) that I suffer from a serious degree of what is usually called the Buffett/Munger bias. For repeat visitors and readers of this blog this isn’t any surprise. Except for what has already been told, there’s no more significant matters to disclose for today, so let’s have a look at what this book is all about. Enjoy.
Seek and You Shall Find… Wisdom
All I Want To Know is a book about a fictitious character, the Seeker, visiting the Library of Wisdom where he (or she) meets the Librarian, also a fictitious character, together with Warren Buffett and Charlie Munger. The Seeker has had his fair share of trouble and misery so far in his life and visits the Library of Wisdom with the intent to learn some basics about how to make better decisions, or rather, how to avoid making stupid ones.
Bevelin’s most recent book is a bit different compared to most other books, at least the book that I have come across earlier on. This is mostly due to the way it is structured; as an ongoing discussion and dialogue full of quotations from Buffett and Munger, and also from other, both known and unknown, people. In total we’re talking about 1827 quotes throughout the book. An exercise requiring a lot of hours, as well as some patience, to complete. Thus, what we have here is sort of an encyclopedia of quotes, arranged and all put together in different parts as a long talk with the full intent of sharing wisdom. In short, nothing but impressing.
The overall theme of the different conversations is: “All I want to know is where I’m going to die so I’ll never go there,” something Charlie Munger has been quoted as saying. The conversations cover a few different areas, not just business and investing but also decision-making in general. When it comes to business and investing the Seeker gets to listen and learn about what doesn’t and what does work, and also about different filters and rules that could be of benefit to the shrewd business analyst and investor.
If you’re already familiar with a lot of the stuff that’s been written over the years about Buffett and Munger there’s not much news here in the quotes themselves. Although I’m pretty sure that you’ll manage to find some quotes that you haven’t read before. This is, in my opinion not a bad thing, not at all, since all great things are worth rereading. But if you have not dug into the Buffett/Munger treasure throve yet, All I Want To Know offers a great starting point on the journey that lies ahead of you. Either way, together with the way that Bevelin has chosen to structure the book I am most certain that it will make for an interesting read for pretty much everyone. It could be said though, without embarrassment, that the book itself is a bit “heavy,” this due to the ongoing cavalcade of quotations with each page full of great discussions, insight and wisdom. But there’s no need to stress here, just keep calm and keep on reading and you’ll do just fine. As Walter Schloss once said; “Investing should be fun and challenging, not stressful and worrying.” Remember, the same applies to reading as well.
I highly recommend All I Want To Know to everyone with an interest in business analysis and investing. What we have here is nothing but a great book filled with numerous examples one should try to steer away from as well as insights about how to think about things, or how not to think about things. It’s a great book, and deserves to be read first once and then reread once or twice.
Disclosure: I received the book in this post without having to pay a cent. Regardless, as in any case when I haven’t received something, I only make recommendations I personally believe will be of benefit to my fellow readers. I cannot tell for sure whether the fact that I received the book for free made me write this post, i.e., reciprocation tendency. I sincerely hope that I would have written the same words in a situation where I had bought the book myself. Except for receiving the book for free (and the stamps on the envelope) I have not, and will not, be compensated in any way for any further writings etc.
“I think that’s the single best piece of advice: constantly think about how you could be doing things better and questioning yourself.”
—Elon Musk
Living in the Future, Learning From the Past
I just finished reading Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, written by Ashlee Vance. The book is about Elon Musk and his entrepreneurial life, and the different businesses that he’s been involved with during the last 20 years; Zip2, X.com/PayPal, SpaceX, Tesla, SolarCity and Hyperloop.
Let’s start out with a recap of Musk’s different businesses, just to get some understanding about what he’s done.
Zip2. Founded by Elon Musk in 1995 when he was fresh out of collage. Originally called Global Link Information Network, and later renamed Zip2. A web software company, “a primitive Google Maps meets Yelp.” Zip2 was acquired by Compaq in 1999 for $307 million.
”The Zip2 idea was ingenious. Few small businesses in 1995 understood the ramifications of the Internet. They had little idea how to get on it and didn’t really see the value in creating a website for their business or even in having a Yellow Pages–like listing online. Musk and his brother hoped to convince restaurants, clothing shops, hairdressers, and the like that the time had come for them to make their presence known to the Web-surfing public. Zip2 would create a searchable directory of businesses and tie this into maps. Musk often explained the concept through pizza, saying that everyone deserved the right to know the location of their closest pizza parlor and the turn-by-turn directions to get there. This may seem obvious today—think Yelp meets Google Maps—but back then, not even stoners had dreamed up such a service.”
X.com/PayPal. Musk made $22 million from the sale of Zip2, of which almost all of it was invested in his next venture, a start-up called X.com. Musk co-founded X.com in March 1999, an online financial services and e-mail payment company. A year later on X.com merged with Confinity which had a money transfer service called PayPal. After the merger the company came to focus on the PayPal service, and was then renamed PayPal.
PayPal was acquired by eBay for $1.5 billion in 2002. From the profits made by Musk from the deal, he invested $100 million into SpaceX, $70 million into Tesla, and $10 million into SolarCity.
In the book Musk briefly discusses the lack of understanding that he sees regarding PayPal’s business model, and why he thinks that PayPal is worse today than it was before (emphasis added).
“I’ve thought about trying to get PayPal back. I’ve just been too strung out with other things. Almost no one understands how PayPal actually worked or why it took off when other payment systems before and after it didn’t. Most of the people at PayPal don’t understand this. The reason it worked was because the cost of transactions in PayPal was lower than any other system. And the reason the cost of transactions was lower is because we were able to do an increasing percentage of our transactions as ACH, or automated clearinghouse, electronic transactions, and most importantly, internal transactions. Internal transactions were essentially fraud-free and cost us nothing. An ACH transaction costs, I don’t know, like twenty cents or something. But it was slow, so that was the bad thing. It’s dependent on the bank’s batch processing time. And then the credit card transaction was fast, but expensive in terms of the credit card processing fees and very prone to fraud. That’s the problem Square is having now.”
“Square is doing the wrong version of PayPal. The critical thing is to achieve internal transactions. This is vital because they are instant, fraud-free, and fee-free. If you’re a seller and have various options, and PayPal has the lowest fees and is the most secure, it’s obviously the right thing to use.
When you look at like any given business, like say a business is making 10 percent profitability. They’re making 10 percent profit when they may net out all of their costs. You know, revenue minus expenses in a year, they’re 10 percent. If using PayPal means you pay 2 percent for your transactions and using some other systems means you pay 4 percent, that means using PayPal gives you a 20 percent increase in your profitability. You’d have to be brain dead not to do that. Right?
“So because about half of PayPal’s transactions in the summer of 2001 were internal or ACH transactions, then our fundamental costs of transactions were half because we’d have half credit cards, we’d have that and then the other half would be free. The question then is how do you give people a reason to keep money in the system.
“That’s why we created a PayPal debit card. It’s a little counterintuitive, but the easier you make it for people to get money out of PayPal, the less they’ll want to do it. But if the only way for them to spend money or access it in any way is to move it to a traditional bank, that’s what they’ll do instantly. The other thing was the PayPal money market fund. We did that because if you consider the reasons that people might move the money out, well, they’ll move it to either conduct transactions in the physical world or because they’re getting a higher interest rate. So I instituted the highest-return money market fund in the country. Basically, the money market fund was at cost. We didn’t intend to make any money on it, in order to encourage people to keep their money in the system. And then we also had like the ability to pay regular bills like your electricity bill and that kind of thing on PayPal.
“There were a bunch of things that should have been done like checks. Because even though people don’t use a lot of checks they still use some checks. So if you force people to say, ‘Okay, we’re not going to let you use checks ever,’ they’re like, ‘Okay, I guess I have to have a bank account.’ Just give them a few checks, for God’s sake.
“I mean, it’s so ridiculous that PayPal today is worse than PayPal circa end of 2001. That’s insane.
“None of these start-ups understand the objective. The objective should be—what delivers fundamental value. I think it’s important to look at things from a standpoint of what is actually the best thing for the economy. If people can conduct their transactions quickly and securely that’s better for them. If it’s simpler to conduct their financial life it’s better for them. So, if all your financial affairs are seamlessly integrated one place it’s very easy to do transactions and the fees associated with transactions are low. These are all good things. Why aren’t they doing this? It’s mad.”
SpaceX. Space Exploration Technologies Corporation, better known as SpaceX, was founded in 2002 by Musk. SpaceX is an aerospace manufacturer and space transport services company. Musk’s goal is to create technologies to reduce the costs of space transportation, and also to enable the colonization of Mars.
”SpaceX would build its own engines and then contract with suppliers for the other components of the rocket. The company would gain an edge over the competition by building a better, cheaper engine and by fine-tuning the assembly process to make rockets faster and cheaper than anyone else. This vision included the construction of a type of mobile launch vehicle that could travel to various sites, take the rocket from a horizontal to vertical position, and send it off to space—no muss, no fuss. SpaceX was meant to get so good at this process that it could do multiple launches a month, make money off each one, and never need to become a huge contractor dependent on government funds.”
Tesla. Originally incorporated in 2003 by Martin Eberhard and Marc Tarpenning, Tesla manufactures and sells electric cars. Musk got involved in Tesla during the 2004 investment round, after which he also joined the board as chairman. Later on in 2008 Musk was appointed CEO of Tesla. Tesla’s initial public offering was on June 29, 2010. The IPO was priced at $17 per share. As of July 27, 2016 the stock is trading at $229.
Click image below to enlarge summary of Tesla’s financial key ratios from Morningstar.com as of July 27, 2016.
SolarCity. Musk provided the initial concept and financial capital for SolarCity, which was then co-founded in 2006 by his cousins Lyndon and Peter Rive.Musk remains the principal shareholder and chairman. SolarCity’s stock first traded on the public markets on December 12, 2012 at $8 per share. As of July 27, 2016 the stock is trading at $27.
SolarCity business overview from 10-K for fiscal year 2015:
SolarCity’s founding vision is to accelerate mass adoption of sustainable energy. We believe solar power can and will become the world’s predominant source of energy, and that we can speed widespread adoption of solar power by offering products that save our customers money. We sell renewable energy to our customers at prices below utility rates, and are focused on reducing the cost of solar energy. Since our founding in 2006, we have installed solar energy systems for over 230,000 customers. Our long-term agreements with our customers generate recurring payments and create a portfolio of high-quality receivables that we leverage to further reduce the cost of making the switch to solar energy. (Source: 2015, 10-K)
Click image below to enlarge summary of SolarCity’s financial key ratios from Morningstar.com as of July 27, 2016.
Hyperloop. A concept for a high-speed transportation system billed as “a new mode of transportation, … a large-scale pneumatic tube like the ones used to send mail around offices,” and “linking cities like Los Angeles and San Francisco via an elevated version of this kind of tube that would transport people and cars in pods.”
”Musk had been thinking about the Hyperloop for a number of months, describing it to friends in private. The first time he talked about it to anyone outside of his inner circle was during one of our interviews. Musk told me that the idea originated out of his hatred for California’s proposed high-speed rail system. “The sixty-billion-dollar bullet train they’re proposing in California would be the slowest bullet train in the world at the highest cost per mile,” Musk said. “They’re going for records in all the wrong ways.” California’s high-speed rail is meant to allow people to go from Los Angeles to San Francisco in about two and a half hours upon its completion in—wait for it—2029. It takes about an hour to fly between the cities today and five hours to drive, placing the train right in the zone of mediocrity, which particularly gnawed at Musk. He insisted the Hyperloop would cost about $6 billion to $10 billion, go faster than a plane, and let people drive their cars onto a pod and drive out into a new city.”
So, let’s move on and see what Elon Musk wrote in an email sent to all SpaceX employees about going public.
Thinking About Public Markets, and a Few Other Things
Back on June 7, 2013, Elon Musk sent an email to the employee’s of SpaceX, in which he discussed the issue of going public, and why it probably is better to wait with this part. The mail is an interesting read because it shows some of Musk’s own thinking about this IPO issue. Excerpt below from the book (emphasis added).
From: Elon Musk
Date: June 7, 2013, 12:43:06 AM PDT
To: All <All@spacex.com>
Subject: Going Public
Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.
Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so. Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.
It is important to emphasize that Tesla and SolarCity are public because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital. SolarCity also needed to raise a huge amount of debt at the lowest possible interest rate to fund solar leases. The banks who provide that debt wanted SolarCity to have the additional and painful scrutiny that comes with being public. Those rules, referred to as Sarbanes-Oxley, essentially result in a tax being levied on company execution by requiring detailed reporting right down to how your meal is expensed during travel and you can be penalized even for minor mistakes.
YES, BUT I COULD MAKE MORE MONEY IF WE WERE PUBLIC For those who are under the impression that they are so clever that they can outsmart public market investors and would sell SpaceX stock at the “right time,” let me relieve you of any such notion. If you really are better than most hedge fund managers, then there is no need to worry about the value of your SpaceX stock, as you can just invest in other public company stocks and make billions of dollars in the market.
If you think: “Ah, but I know what’s really going on at SpaceX and that will give me an edge,” you are also wrong. Selling public company stock with insider knowledge is illegal. As a result, selling public stock is restricted to narrow time windows a few times per year. Even then, you can be prosecuted for insider trading. At Tesla, we had both an employee and an investor go through a grand jury investigation for selling stock over a year ago, despite them doing everything right in both the letter and spirit of the law. Not fun.
Another thing that happens to public companies is that you become a target of the trial lawyers who create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price. Tesla is going through that right now even though the stock price is relatively high, because the drop in question occurred last year.
It is also not correct to think that because Tesla and SolarCity share prices are on the lofty side right now, that SpaceX would be too.
Public companies are judged on quarterly performance. Just because some companies are doing well, doesn’t mean that all would. Both of those companies (Tesla in particular) had great first quarter results. SpaceX did not. In fact, financially speaking, we had an awful first quarter. If we were public, the short sellers would be hitting us over the head with a large stick.
We would also get beaten up every time there was an anomaly on the rocket or spacecraft, as occurred on flight 4 with the engine failure and flight 5 with the Dragon prevalves. Delaying launch of V1.1, which is now over a year behind schedule, would result in particularly severe punishment, as that is our primary revenue driver. Even something as minor as pushing a launch back a few weeks from one quarter to the next gets you a spanking. Tesla vehicle production in Q4 last year was literally only three weeks behind and yet the market response was brutal.
BEST OF BOTH WORLDS My goal at SpaceX is to give you the best aspects of a public and private company. When we do a financing round, the stock price is keyed off of approximately what we would be worth if publicly traded, excluding irrational exuberance or depression, but without the pressure and distraction of being under a hot public spotlight. Rather than have the stock be up during one liquidity window and down during another, the goal is a steady upward trend and never to let the share price go below the last round. The end result for you (or an investor in SpaceX) financially will be the same as if we were public and you sold a steady amount of stock every year.
In case you are wondering about a specific number, I can say that I’m confident that our long term stock price will be over $100 if we execute well on Falcon 9 and Dragon. For this to be the case, we must have a steady and rapid cadence of launch that is far better than what we have achieved in the past. We have more work ahead of us than you probably realize. Let me give you a sense of where things stand financially: SpaceX expenses this year will be roug[h]ly $800 to $900 million (which blows my mind btw). Since we get revenue of $60M for every F9 flight or double that for a FH or F9-Dragon flight, we must have about twelve flights per year where four of those flights are either Dragon or Heavy merely in order to achieve 10% profitability!
For the next few years, we have NASA commercial crew funding that helps supplement those numbers, but, after that, we are on our own. That is not much time to finish F9, FH, Dragon V2 and achieve an average launch rate of at least one per month. And bear in mind that is an average, so if we take an extra three weeks to launch a rocket for any reason (could even be due to the satellite), we have only one week to do the follow-on flight.
MY RECOMMENDATION
Below is my advice about regarding selling SpaceX stock or options. No complicated analysis is required, as the rules of thumb are pretty simple. If you believe that SpaceX will execute better than the average public company, then our stock price will continue to appreciate at a rate greater than that of the stock market, which would be the next highest return place to invest money over the long term. Therefore, you should sell only the amount that you need to improve your standard of living in the short to medium term. I do actually recommend selling some amount of stock, even if you are certain it will appreciate, as life is short and a bit more cash can increase fun and reduce stress at home (so long as you don’t ratchet up your ongoing personal expenditures proportionately).
To maximize your post tax return, you are probably best off exercising your options to convert them to stock (if you can afford to do this) and then holding the stock for a year before selling it at our roughly biannual liquidity events. This allows you to pay the capital gains tax rate, instead of the income tax rate.
On a final note, we are planning to do a liquidity event as soon as Falcon 9 qualification is complete in one to two months. I don’t know exactly what the share price will be yet, but, based on initial conversations with investors, I would estimate probably between $30 and $35. This places the value of SpaceX at $4 to $5 billion, which is about what it would be if we were public right now and, frankly, an excellent number considering that the new F9, FH and Dragon V2 have yet to launch.
Elon
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article.I have no positions in any stocks mentioned.
“In the case of good books, the point is not to see how many of them you can get through, but rather how many can get through to you.”
―Mortimer J. Adler
“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads–and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
—Charlie Munger
The Knowledge Project: Interview With Professor Sanjay Bakshi
In the third episode of the Knowledge, Shane Parrish talks to Professor Sanjay Bakshi on reading, mental models, worldly wisdom, checklists and investing. The interview starts with a conversation about Professor Bakshi’s reading habits, and how the way he reads has changed, from reading physical books to now reading most books on his Kindle device.
To listen to the interview, click here. To read the transcript, click on the image below or here. Transcripts are provided for all podcast interviews, and available via signing up for a membership over at Farnam Street. This particular transcript was made available to Professor Bakhi’s readers for free to download via his blog Fundoo Professor.
Takeaways: Reading on a Kindle
Here are a few takeaways from the discussion (excerpt below from transcript):
Start reading books on a Kindle and reduce your physical library and free up space
Reduce paper waste
New possibilities with the Kindle, for example search for the books you’ve read and the underlinings made in an easy way
Underline stuff and write your own notes, and they get synced to the cloud, and once they’re in the cloud you can copy and paste
Kindle doesn’t have any eye-strain
Some books not available electronically, so will still have to read them physically
A Discussion About Reading Habits
I appreciate that. I definitely have— my bookshelves are starting to overflow, so it’s getting to be a bit of a problem.
How can I persuade you to get into Kindle then? [laughs]
Actually let’s talk about the Kindle vs the physical book. What do you prefer and why? And how do you use that?
Well, I used to prefer the original one, of course, because you can underline; you love the smell of the paper; and you have nostalgic associations with the physical book, which looks like you have read it, which you lose when you do it on a Kindle. But over time, I realised that these are prejudices that should be let go of, because there are other things that are possible with the Kindle, which are not possible with the physical book. And for me, as a professor, it really helps me to be able to know that I’ve read this somewhere. The kind of associations that occur in memory as you experience something – you know that you have read about this particular aspect in some book, but you don’t know which one. And if this was all with physical books, you would go crazy looking for that book. But if you just do a search for a term across all your books in your Kindle library, it comes up in a flash.
And the interesting thing is that you sometimes discover things that you didn’t know existed – the serendipitous discovery of wonderful words of wisdom about a certain topic in your Kindle library is amazing, and when that happens, I have my eureka moments. And the other reason I love Kindle is that you can underline stuff and write your own notes, and they get synced to the cloud, and once they’re in the cloud you can copy and paste, and use them for your lectures. It’s very helpful, so I’m very grateful to Amazon. And of course it’s environmentally friendly: you don’t have to waste paper.
Do you read exclusively on the Kindle now?
Yes, I like to but only for books. Of course there are annual reports, and there is a lot of wisdom in annual reports of businesses that I like to study, and those you don’t get on Kindle. I don’t like reading on computer monitors – it’s very strenuous to the eye. Kindle, therefore, is much better because it doesn’t have any eye-strain. Then, of course, there are letters written by investors that are not usually available on Kindle. So I read on Kindle any book that it is available on Kindle. Some books are not – then you have to buy the physical ones.
You’re a prolific reader, so do you—
About 5% of what you are!
[laughs] Do you notice a difference in what you retain when you’re reading on the Kindle, or your takeaways from the book, in terms of how your brain is storing or organising? There have been a lot of studies that say that reading on a screen and reading a physical book impacts your memory in different ways and how you make connections and associations.
Sure, that’s true. But I think there’s a trade off here: you might retain more when you read a physical book, and a bit less on the Kindle, but that’s offset by the fact that you are creating a document in the cloud which contains the best things you have read in a book, the ones which influenced you the most; because you have underlined them, and sometimes the underlined portions of a book span many pages. And all of that gets synced to the cloud, and when you work on that particular passage again in the context of something that you’re trying to evaluate, then all of that comes back. So in a sense I think there is a trade off here: while reading in a physical book you get to underline physically, and you may have a moment of reflection and write things on the side, you can do that on a Kindle as well. So net-net, I don’t feel the loss of memory, compared to using a physical book.
So what’s your process for reading? You purchase a Kindle book, you get it to your Kindle… take me through how you read, in terms of are you reading one book at a time; are you reading multiple; do you put it aside at the end and then go back to it; or do you immediately take your notes out?
Well, I don’t like to read one book— maybe I will read 3 or 4 books at any given point of time, and when I finish them I’ll pick up another 2 or 3 books to read. One reason is you get kind of bored reading the same thing, the same subject. And based on what Charlie [Munger] says, you should have a multidisciplinary mind-set. So it’s good to have different books from different disciplines and read them. And then one of the amazing things that I discovered is that you then associate one thought with another one. And that really is helpful to me. So far as note-taking is concerned: I underline stuff on the fly, as I read it. And once the book is over, I go back on the cloud and take out what I had underlined in that particular book, whatever notes I had, whatever annotations are there. I put them in a different document, and then I let that be.
Because I have already studied the underlined text a second time, in a sense, I have done a second reading of the things that I like the most in that particular book. And then I let that be, to reside in my memory for some time. And then when I experience the world out there and there is a moment when I remember that there is something that relates to something that I read somewhere, then I can always go back to the document and be able to pull out whatever is useful.
So you have a different document for each book?
Not always. But I have a master document because once you have it in the cloud, you can always copy and paste any annotations, any underlined text for that particular book, in a different document. I do that for some books, though not all of them.
That’s a really good way to do it. Do you use Evernote or anything?
I do, I use Evernote; that’s been helpful to me. I use other tools like The Brain, which is a wonderful piece of software available.
What is that?
It kind of replicates what a human brain does. It helps you create thoughts, and it helps you connect different kinds of thoughts. And you can put your emails in it, and you can put your sound files in it, any kind of document in it, and then you can look at any particular topic from the perspective of a thought. So you have all these thoughts which are connected – and this is exactly how the human brain works. New associations are created. So when you’re looking at The Brain screen, and your actual brain is thinking about those associations, new associations get created. So in that sense, it’s an external brain that is working for you, and the size of which keeps on growing – it’s virtually infinite; you can keep on adding stuff to it.
I have been thinking about getting a Kindle for a while now, and also received some great feedback via Twitter on the subject. So, yesterday I ordered my first Kindle, and I hope to get it by next week so I can start trying out whether reading on a Kindle is of any value .
Feel free to share your own experience from reading on a Kindle versus reading physical books, note-taking etc in the comment section below.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.
“Buffett leaves us a road map that is invaluable for students and investors alike. It’s as if he’s laid down a challenge to all of us. It’s as if he has written the letters, made them public, and said, ‘Here’s how to invest, here’s how I did it; this is the road I took. Now, let’s see if you can follow me down the path.”
—Jeremy Miller, author of Warren Buffett’s Ground Rules
A Road Map for a Road Less Traveled
Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor is written by Jeremy Miller and was released in 2016. The book consists of three parts, all of them discussing and summarizing the most important things from Warren Buffett’s Partnership Letters, letters written by Warren during the Partnership era in 1959-1970.
Here’s what I like the most about this book.
The Ground Rules. “These ground rules are the philosophy. If you are in tune with me, then let’s go. If you aren’t, I understand.” (p. xii)
Structure and the fee setup of the Buffett Partnership. “The interest provision was set at 6% for everyone, beyond which Buffett would take 25% of the gains. Since he figures the market was going up 5-7% a year on average, the interest provision was set at a level so he earned nothing unless he was beating the market. He had a “high-water mark”—any cumulative deficiency below a 6% annual gain would have to be recouped before he would resume taking fees.” (p. 59)
Alignment of manager incentives and investors. “If you want your investment manager to behave with your best interests in mind, you have to ensure that your interests are aligned. Buffett was masterfully aligned with his investors.”
Investment categories. From the beginning Warren utilized three categories to describe the investment operations to his partners: Generals-Private Owner, Workouts, and Controls. In January 1965 he added another one—Generals-Generally Undervalued—to reflect his “…further consideration of essential differences that have always existed to a small extent with our ‘Generals’ group.”
Inside the Book: An “Investment” Treasure
The book is divided into three parts, each containing a few chapters. Each chapter ends with a few excerpts from the Partnership letters that have been discussed by the author earlier in the chapter.
Part I lays out the investment principles and ground rules employed by Warren between 1956-1970. It also describes the Partnership structure and the fees that all partners paid to Warren based on the investment returns realized each year.
Part II explains the different investment categories. In the beginning there were three; Generals-Private Owner, Workouts, and Controls. A fourth category was added later on: Generals-Relatively Undervalued.
Part III contains a few different topics, all related to investing; “Conservative Versus Conventional,” “Taxes,” “Size Versus Performance,” “Go-Go or No-Go,” “Parting Wisdom,” and “Toward a Higher Form.” Each one of the chapters touch upon important questions to consider for an investor, and at the same time shows what Warren’s thoughts looked like in these areas.
The Ground Rules
At a dinner at the Omaha Club where the Partnership’s first members gathered, Buffett focused on the thing that he thought to be of most importance; the Ground Rules—this to make sure that all of the partners understood and accepted the rules that Warren was going to follow when carrying out the investment operations for the Partnership.
Click image below to read an excerpt of “The Ground Rules.” These rules were first published in writing by Warren in his Partnership Letter from January 18, 1963. To read this letter, click here.
Structure and fee setup of Buffett Partnership
The fee structure set by Warren for the Partnership was; 1) no management fee, 2) no fees paid by partners for any annual investment returns up to 6%, and 3) above 6% Buffett would take 25% of the gains.
The fee structure of the Partnership is a bit different compared to many of today’s hedge funds and mutual, something that is discussed by the author himself in the book.
The fee structure can be compared to “Today’s hedge funds and mutual funds that typically charge a management fee, compounded as a fixed percentage of the investor’s assets under management. These can range from .25% to 2% or more, per year, and the fee is taken irrespective of performance.” Also, “Because the as asset management business is highly scalable—an increase in assets usually requires few additional costs—the more funds under management, the more profitable the asset manager will be. While performance is certainly a key component of a fund’s ability to grow, a great marketing effort can bring in new investors and has the ability to drive asset growth even faster. Most asset managers—particularly mutual fund companies—earn fees, and therefore are incentivized to maximize the size of their total assets. Fees based on a fixed percent of assets under management make it hard for asset managers to say no to the incremental dollar of investor capital, even when it’s clearly going to have a dampening effect on performance. When an investor’s primarily interest (annual percentage gains) is out of step with the primary interest of the manager (more assets, more fees), a potential conflict exists. Buffett charges no management fee. He got paid only for performance. His system was better because it removed a source of potential conflict between his interest and the interest of the LPs [Limited Partners]. (pp. 59-60)
Buffett’s Four Investment Categories
Buffett employed three principal types, or categories, of stock picking that he referred to as; Generals, Workouts, and Controls. These three categories define Warren’s investment style during the Partnership era.
Talking about portfolio composition, “Buffett typically committed 5-10% if his total assets in five or six Generals with smaller positions in another 10-15%. Concentrating on his best ideas was another key component of his success.” The maximum size on any single investment was revised upwards in 1965 when the rules was amended to allow as much as 40% of the portfolio in a single General (hint… American Express). The amount of assets used for Workouts “…in most years […] made up 30-40%.”
Here are the categories used by Warren during the Partnership era to explain and describe the investment operations conducted by him to his partners.
Generals-Private Owner. “‘Generals’—A category of generally undervalued stocks, determined primarily by quantitative standards, but with considerable attention also paid to the qualitative factor. There is often little or nothing to indicate immediate market improvement. The issues lack glamour or market sponsorship. Their main qualification is a bargain price; that is, an overall valuation on the enterprise substantially below what careful analysis indicates its value to a private owner to be.” (BPL, January 18, 1964)
Generals-Relatively Undervalued. “…this category consists of securities selling at prices relatively cheap compared to securities of the same general quality. We demand substantial discrepancies from current valuation standards, but (usually because of large size) do not feel value to a private owner to be a meaningful concept.” (BPL, January 18, 1965)
Workouts. “These are securities whose financial results depend on corporate action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are securities with a timetable where we can predict, within reasonable error limits, when we will get how much and what might upset the applecart. Corporate events such as mergers, liquidations, reorganizations, spin-offs, etc., lead to work-outs.” (BPL, January 24, 1962)
Controls. “The final category is ‘control’ situations where we either control the company or take a very large position and attempt to influence policies of the company.” (BPL, January 24, 1962)
Each of the sub-chapters about the different investment methods also includes examples of investments that Warren made. For Generals, only one was ever named explicitly; Commonwealth Trust Company, and this only in order to illustrate the type of stocks Warren was buying in this category. In 1964, the same year as Warren introduced the new category—Generals-Relatively Undervalued—he also made his now famous investment in American Express. Another example of Generals was Walt Disney. The most important characteristic of the investments in the Generals-Relatively Undervalued category was that they produced magnificent profits year in and year out, and that Warren potentially could hold them for a very long time, compared to most Generals-Private Owner investments with their one free puff.
Warren outlined four critical questions needed to evaluate these kinds of investments, i.e, Workouts: “(1) what chance does the deal have of going through, (2) how long will it take to close, (3) how likely is it that someone else will make an even better offer, and (4) what happens if the deal busts?” One example of a Workout was the investment in Texas National Petroleum. The Workouts were expected to do as well as the Generals (10 points better than the market, or 15-17% per year on average). They not only produced solid, fairly stable returns, but their success was largely independent of the DOW and so insured BPL’s overall performance in down markets.
Warren also invested in companies like the Sanborn Map Company, Dempster Mill Manufacturing Company, and Berkshire Hathaway, all examples of businesses in the Controls category.
I enjoyed this book, and I would say it’s a great one. I like the way the partnership letters have been reorganized into topics, so that you get everything from the letters regarding a certain topic in one chapter. This is pretty much the same setup as in The Essays of Warren Buffett, with the only difference being that the essays focus on the Letters to Shareholders written by Warren during the Berkshire Hathaway era that started in 1970 when the Partnership years ended.
The Little Book of Common Sense Investing will serve as your guide, with Bogle as your mentor, on how to incorporate Bogle’s proven low-cost index fund investment strategy. The reader is introduced to some historical background–efficient markets, value investing–and also on what experts and academics have to say about index investing.
Hurricane Capital 