New Mauboussin Report: Looking for Easy Games – How Passive Investing Shapes Active Management

Looking for Easy Games – How Passive Investing Shapes Active Management

“As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.’” –Warren E. Buffett

  • Investors are rapidly shifting their investment allocations from active to passive management. This trend has accelerated in recent years.
  • The investors leaving active managers are likely less informed than those who remain. This is equivalent to the weak players leaving the poker table. Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain.
  • Active management provides price discovery and liquidity, valuable social goods. However, the fees are higher for active managers than passive ones, identifying skill ahead of time is not easy, and there is a cost to assessing skill.
  • Passive management has lower costs and hence higher returns per dollar invested than active management does in the aggregate. But passive management introduces the possibility of market distortions.
  • Active managers have to constantly ask, “Who is on the other side?” The unrelenting objective is to find easy games, where differential skill pays off.

Click here to read the full report.

See here for a collection of links to other Mauboussin papers.

#WeeklyInvestorReader | wk. 52

Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles that may not have been included. 

How Can I Hurt You? – MicroCapClub, December 27, 2016 | If a competitor had unlimited resources, how quickly could they duplicate the company’s competitive advantage? This is a simple question that I ask myself and management when I try to measure the moat of a microcap company. Microcap companies are small companies and often times vulnerable to larger competitors with more resources. Paraphrased, even further, How Can I Hurt You?, is very powerful.

The Competitive Advantage of Disney – The Conservative Income Investor, December 27, 2016 | In 2012, Disney made an acquisition of LucasFilms for “only” $4 billion. Because the Star Wars franchise has now generated $2 billion in profit in the four years since making the acquisition, many casual commenters are observing that Disney got a steal of a deal.

Alexa, What Should Investors Know About Amazon? – Morningstar, December 28, 2016 | On Dec. 27, Amazon noted that sales of its Alexa-enabled Echo devices increased more than 9 times over last year’s holiday sales, which could imply 4 million-5 million Alexa units sold to date, based on third-party estimates.

The Conjunction Fallacy Explains Why People Believe Fake News – Slate, December 19, 2016 | This fallacy warns that stories with more facts sound more believable, even though they’re actually less probable.

A Half-Dozen Ways to Look at the Unit Economics of a Business – Tren Griffin, December 31, 2016 | Amazon and Netflix are examples of the same value creation phenomenon as are many businesses that John Malone has created over the years. This post will try to help people understand why this is true.

Donald Trump’s market-moving tweets are a huge scandal waiting to happen – Los Angeles Times, December 23, 2016 | An undercurrent of amusement has been detectable in some of the news coverage of Donald Trump’s recent market-moving tweets, as though it serves big companies right to have a few billions stripped off their market values because the president-elect is holding them to account.

The Chevy Bolt Is the Ugly Car of the (Very Near) Future – Bloomberg, December 19, 2016 | With brilliant financial engineering, GM beats Tesla to the punch.

Surging Buybacks Say Stock Boom Isn’t Over – Wall Street Journal, December 26, 2016 | Stock repurchases have spiked in December on expectations of tax cuts, which could put more money in corporate coffers

Glenn Greenberg: the world’s greatest investors – MoneyWeek, December 23, 2016 | Glenn Greenberg was born in New York in 1947, the son of baseball player Hank Greenberg. After studying English at Yale and New York University, he set up Chieftain Capital Management with John Shapiro in 1984. In 2009 they split and he founded Brave Warrior Advisors, which manages nearly $3bn worth of assets.

HOW PHIL KNIGHT BUILT NIKE INTO A $100 BILLION GLOBAL EMPIRE – Maxim, September 29, 2016 | Find out Nike’s high-flying founder became the Sultan of Swoosh.

Are You Solving the Right Problems? – Harvard Business Review, September 29, 2016 | How good is your company at problem solving? Probably quite good, if your managers are like those at the companies I’ve studied. What they struggle with, it turns out, is not solving problems but figuring out what the problems are.

Biggest Billionaire Gainer Of 2016: Warren Buffett’s Fortune Surges More Than Anyone Else In America – Forbes, December 27, 2016 | Shares of Warren Buffett’s firm Berkshire Hathaway soared 20% in 2016, helping to boost Buffett’s personal fortune by $12.3 billion – more than any other billionaire in the United States. The Oracle of Omaha is now worth $74.2 billion, enough to make him the 2nd-richest person in the world (behind only Bill Gates, who is worth $84 billion), according to FORBES’ calculations.

Not Everyone Wants to Shop on Amazon – Wall Street Journal, December 29, 2016 | Roughly 22 million U.S. households didn’t use the retailer this year.

Make the Risk Premium Small Again – Antonio Fatas on the Global Economy, December 29, 2016 | In one my previous posts I looked at the stock market valuations in the US to conclude that they were in line with recent historical data. In fact the stock market looked cheap relative to most years since the mid 1980s. But that was before the US election! Since the election the stock market has gone up and interest rates have gone up as well. How do stock market valuations look like today?

Are mergers good or bad for the economy? – CBS Money Watch, December 29, 2016 | This year sure was a busy one for mergers and acquisitions. In October alone, nearly $490 billion of deals were announced, including AT&T’s (T) purchase of Time Warner (TWX) for $85.4 billion. While that massive telecom-media combination got plenty of headlines, most people pay little attention to mergers between firms, or the acquisition of one firm by another.

The key takeaway from Bill Gates and Warren Buffett’s all-time favorite book – CNBC, December 24, 2016 | “There’s an essential human factor in every business endeavor. It doesn’t matter if you have a perfect product, production plan and marketing pitch; you’ll still need the right people to lead and implement those plans.”

Five industries under threat from technology – Financial Times, December 26, 2016 | Travel agents, manufacturers, insurers, advisers and car repair garages face strain.

Don’t Get Trumped in 2017 – Pragmatic Capitalism, December 26, 2016 | Anyhow, the big trend this year was clear – 2017 will be all about Trump. And as we’ve seen in the media in recent weeks, Trump is perceived as very bullish for the stock market. In fact, a few people even admitted that they’d sold all their bonds and loaded the boat with stocks following the election.

Article in Swedish

Jan Jörnmark: Subventioner orsaken till dysfunktionell bomarknad – Dagens Industri, December 26, 2016 | DEBATT DEL ETT. Under mellandagarna kommer Jan Jörnmark att skriva om bostadspolitiken och dess problem. Ursprunget till dagens situation finns i hyresregleringen från 1942, som också innefattade en kontroll av priserna på bostadsrätter och statligt belånade villor, skriver han i den första delen.

Jan Jörnmark: Sverige har ingen bostadsbubbla – Dagens Industri, December 27, 2016 | DEBATT DEL TVÅ. I del två i serien om den svenska bostadsmarknaden behandlas utvecklingen i storstäderna. Allvarligast är att det som egentligen är en massiv förändring av relativa priser på olika bostäder har kommit att tolkas som en bubbla, skriver Jan Jörnmark.

Jan Jörnmark: Bygglagen uppmuntrar inte bostadsproduktion – Dagens Industri, December 28, 2016 | DEBATT DEL TRE. I den tredje delen i serien om bostadsmarknaden har turen kommit till lagarna som reglerar bostadsproduktion. Följden av dem blir en fortsatt stadsutspridning, med de negativa miljömässiga och mänskliga konsekvenser som det har, skriver Jan Jörnmark.

Jan Jörnmark: Nya lagar vägen framåt för bostadsmarknaden – Dagens Industri, December 29, 2016 | DEBATT DEL FYRA. Den avslutande delen i artikelserien om den svenska bostadsmarknaden handlar om framtiden. Först måste vi erkänna att ”bostadsbristen” är ett efterfrågeöverskott på en viss typ av mycket lågt prissatta centrala lägenheter, skriver Jan Jörnmark.


#WeeklyInvestorReader | wk. 51

Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles that may not have been included. 

Move Over Small Dogs Of The Dow, Here Come The Uber Cannibals – Forbes, December 22, 2016 | About cash-rich, undervalued businesses that are consistently buying back shares, thereby generating tremendous value for shareholders.

What’s So Significant About Significance? – Farnam Street, August 11, 2016 | The phrase “statistically significant” is one of the more unfortunately misleading ones of our time. The word significant in the statistical sense — meaning distinguishable from random chance — does not carry the same meaning in common parlance, in which we mean distinguishable from something that does not matterWe’ll get to what that means.

Sweden Heads The Best Countries For Business For 2017 – Fortune, December 21, 2016 | One country headed in the opposite direction is Sweden, which moves up four spots to the top of the charts for the first time (Sweden ranked No. 17 in 2006). Over the past two decades the country has undergone a transformation built on deregulation and budget self-restraint with cuts to Sweden’s welfare state.

Your social media addiction is giving you depression – New York Post, December 22, 2016 | The study found that people who use anywhere from seven to 10 social-media platforms are three times more likely to be depressed or anxious, compared to those using no more than two. Those who reported such symptoms were overwhelmed by the multitasking needed to manage their profiles — and the more profiles they had, the more the pressure added up. Though it’s on the high end, maintaining seven social-media profiles is possible with the bevy of options available to users today.

What I learned about Exxon CEO Rex Tillerson after spending a week on jury duty with him – Dallas News, December 23, 2016 | One of our first tasks was to choose our jury foreman. Perhaps it was his business suit, his impressive stature, or his charisma, but almost everyone in that jury room suggested that this middle-aged man with graying hair was likely the most fit for the task. Thanks, but I decline. I’m not interested in the spotlight, he told us. I didn’t think anything of it.

Nike Stock Increasingly Becomes A Long-Term Buy – The Conservative Income Investor, December 19, 2016 | Rather than fixate on price, I recommend that investors actually look at what the business itself is doing. In the case of Nike, it is doing what it nearly always does. And that is, deliver double-digit annual per share earnings growth to shareholders. It made $1.85 per share in profits last year. It is going to make around $2.15 per share in profits this year. That is annual earnings per share growth of 16%.

A new industry has sprung up selling “indoor-location” services to retailers – The Economist, December 24, 2016 | There is money to be made in tracking shoppers’ paths inside stores.

The Pot-Belly of Ignorance – Farnam Street, October 4, 2016 | What you eat makes a huge difference in how optimally your body operates. And what you spend time reading and learning equally affects how effectively your mind operates. Increasingly, we’re filling our heads with soundbites, the mental equivalent of junk. Over a day or even a week, the changes, like those to our belly, are barely noticeable. However, if we extend the timeline to months and years, we face a worrying reality and may find ourselves looking down at the pot-belly of ignorance.

JACK BOGLE: ‘Main Street hasn’t been taking its fair share’ – Business Insider, December 21, 2016 | “Main Street hasn’t been taking its fair share.” That’s according to Jack Bogle, the founder of the $3.5 trillion fund behemoth Vanguard.

The World’s Largest Hedge Fund Is Building an Algorithmic Model From its Employees’ Brains – Wall Street Journal, December 22, 2016 | Bridgewater wants day-to-day management—hiring, firing, decision-making—to be guided by software that doles out instructions.

Jamie Dimon on Trump, Taxes, and a U.S. Renaissance – Bloomberg, December 14, 2016 | The CEO of JPMorgan Chase talks about Detroit’s revival and his views on the incoming administration.

Inside Amazon’s clickworker platform: How half a million people are being paid pennies to train AI – TechRepublic, December 14, 2016 | Internet platforms like Amazon Mechanical Turk let companies break jobs into smaller tasks and offer them to people across the globe. But, do they democratize work or exploit the disempowered?

The Most Informative Posts on Important Financial Topics – Fortune Financial, December 10, 2016 | The financial blogosphere has become a tremendous resource for anyone who has an interest in investing.  The information available is close to infinite, and much of it is free.  Being a beneficiary of this resource, I have long felt that the major improvement to be made would be an index of sorts, in which the best posts were categorized by topic.  Unfortunately, that is a herculean task, so I am going to attempt what i consider to be the next best thing:  a decent-sized selection of the posts from 2016 that I have found to be the most useful in both my practice as a financial advisor, and in my avocation as an investor.

Nate Silver Interviews Michael Lewis About His New Book, ‘The Undoing Project’ – Atlas Obscura, December 14, 2016 | This week on Sparks, FiveThirtyEight’s monthly science podcast that runs in the What’s The Point feed, our science roundtable discussed Michael Lewis’s new book “The Undoing Project,” about two Israeli psychologists who created the field of behavioral economics. After that discussion, FiveThirtyEight editor-in-chief Nate Silver spoke with Lewis about the book, what it has to say about the 2016 U.S. election and Lewis’s writing process. You can listen to that interview above, watch a segment of the interview below, or read an abridged, lightly edited transcript below the video.

Article in Swedish

Portföljarkeologi – Lundaluppen, 25 December, 2016 | Om man liksom jag tycker att Twitter är ett trevligt tidsfördriv så får man vara beredd på att skåda en flod av portföljrapporter med årlig avkastning på 50 % eller mer (långt mer) så här års. Individer med lägre avkastning än så skriver hellre blogginlägg så de kan komma med lite mer utförliga ursäkter… Om du, liksom jag, fått väsentligt lägre avkastning än dessa stjärnor och dessutom äger ett visst mått av självkritik så inställer sig förmodligen följande frågor: (1) vad håller jag på med? och (2) vad vet dessa människor som inte jag vet?

#WeeklyInvestorReader | wk. 50

Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles that may not have been included. 

How Autonomy Fooled Hewlett-Packard – Forbes, December 14, 2016 | This could happen to any company.

Why you should turn off push notifications right now – Wired, December 4, 2016 | The cost of being distracted is much higher than we realise.

Tesla’s First Real Competition Just Hit the Road – Barron’s Next, December 14, 2016 | Chevrolet delivered its first three Bolt vehicles on Wednesday. The $35,000 car is the first affordable electric vehicle with Tesla-like battery range.

Venture Capitalists, Cognitive Bias, And The Dangers Of Learning From The Past – Mattermark, November 17, 2016 | Venture capital is a tricky thing. Especially if you are lying to yourself.

Is the Bond Market Crashing? – Morningstar, November 17, 2016 | The Federal Reserve’s Federal Open Market Committee met on Dec. 13 and 14, with bond markets fully expecting the group to raise short-term interest rates by 0.25% to a targeted range of 0.50% to 0.75%, and that’s exactly what it did.

7-Year Forecasts – Pension Partners, December 12, 2016 | Seven years ago, one of the largest and most respected investment managers, GMO, presented their widely-followed 7-year asset class return forecasts.

The Irrationality Within Us – American Scientific, December 12, 2016 | Why we are not as rational as we think, and why that matters.

Twelve Books Everyone in Finance Will Be Talking About in 2017 – bps and pieces, December 12, 2016 | 2016 brought us some awesome new additions to the libraries of investing and business book junkies.  Next year will be no different with what appear to be some early contenders for instant classic status.

Learning from Dr. Michael J. Burry’s Investment Philosophy – Panda Agriculture & Water Fund, December 15, 2016 | By watching this movie, not only did we, the Panda Agriculture & Water Fund team, rediscover the book, which we had read, it also prompted us to delve further into Dr. Burry’s investment philosophy. This document humbly seeks to be the most complete compilation of Dr. Michael J. Burry thoughts.

Brooks CEO shares the best business advice Warren Buffett ever gave him – Yahoo! Finance, December 13, 2016 | Brooks Running CEO Jim Weber has been reading Warren Buffett’s annual letters to Berkshire Hathaway shareholders since 1984. In 2006, the running shoe and apparel company became part of Berkshire Hathaway, when its then parent company, Russell Athletic, was sold to the Omaha-based holding company. In 2012, Berkshire made Brooks a separate business unit. Weber now reports directly to Buffett.

Thinking about thinking – The Economist, December 17, 2016 | Michael Lewis dissects the enduring friendship between Daniel Kahneman and Amos Tversky.

Wall Street’s Annual Stock Forecasts: Bullish, and Often Wrong – The New York Times, December 16, 2016 | Don’t expect Wall Street investment houses to predict a stock market decline in 2017. That’s just not what they usually do.

Half of people “remember” events that never happened – CBS News, December 9, 2016 | Ever find yourself caught up in a vivid memory of an event that, you later realize with confusion, didn’t really happen the way you thought? According to new research by psychologists at the University of Warwick in the U.K., you are far from alone. The study demonstrated that about half of individuals will come to believe a fictional event occurred if they are told about that event and then repeatedly imagine it happening.

The Inside Story of Apple’s $14 Billion Tax Bill  – Bloomberg Technology, December 16, 2016 | The iPhone came out in 2007. So why was Apple still paying taxes like it was 1990?

When Fees Destroy Diversification – Peter Lazaroff, December 12, 2016 | Diversification is said to be the only free lunch in investing, but that’s not entirely true because the extra fees associated with more exotic asset classes frequently offset the benefits of otherwise attractive diversifiers.

Forget AT&T. The Real Monopolies Are Google and Facebook – The New York TImes, December 13, 2016 | The proposed merger of AT&T and Time Warner has drawn censure from both sides of the political aisle, as well as a Senate hearing that looked into the potential for the combined company to become a monopoly. But if we are going to examine media monopolies, we should look first at Silicon Valley, not the fading phone business.

What we can learn from Phil Fisher – Forbes, October 19, 1987 | On turning 80 last month the eminent San Francisco investment counselor Philip Fisher was in a valedictory mood. Rarely interviewed, he sat for a long chat with FORBES. He is one of the seminal figures of modern investment thinking–one of the first, if not the first, to develop the thesis that growth stocks have identifiable characteristics that make them different from ordinary stocks.

Moody’s slashed its outlook for the global asset management industry – Business Insider, October 15, 2016 | The global asset management industry has been disrupted, according to a new report by Moody’s Investor Services. In the report, Moody’s downgraded the industry to negative.

Can $300 Billion Make Companies Behave? – Bloomberg Law, November 14, 2016 | Are U.S. authorities being overzealous in their efforts to extract money from corporate miscreants? Actually, the right question might be why, despite the advent of multi-billion-dollar penalties, companies keep breaking the law.

Let’s Be Honest: Are You an Investor or a Speculator? – Wall Street Journal, December 9, 2016 | With the stock market seemingly setting all-time highs every day even as bond prices crumple, this is a crucial time to clarify the difference between investing and speculating.

Articles in Swedish

Jan Wallander in memoriam – Ekonomisk debatt, nr 8 2016 | I september 2016 avled Jan Wallander vid en ålder av 96 år. Det markerar slutet på en lång och rik levnadsbana. Mycket har redan skrivits – och kommer även framdeles att skrivas – om Jan Wallanders banbrytande insatser inom svenskt bankväsende. Mindre allmänt känt är att Wallander hade en högst respektingivande bakgrund som akademiker innan han övergick till bankbanan.

Carlström mörkar Fingerprintaffär – Dagens Industri, 15 december 2016 | Den storpost i Fingerprint Cards, som är förvaltarregistrerad på Clearstream i Luxemburg har minskat kraftigt i november. Det är minst sagt anmärkningsvärt eftersom det gäller storägaren Johan Carlströms aktier.

Book Review: Book of Value – The Fine Art of Investing Wisely

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.

#WeeklyInvestorReader | wk. 49

Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles not included. If any of the articles are behind paywalls it may be possible to read them by searching for the article’s title via Google News.

Why Mohnish Pabrai Likes GM, Fiat, and Southwest Air – Barron’s, December 10, 2016 | Pabrai finally embraces auto and airline stocks. What the stock market doesn’t understand.

This Warren Buffett Quote Describes Twitter Perfectly – Fool, November 30, 2016 | Throwing good management at a bad company doesn’t solve any problems.

Warren Buffett Says Donald Trump Won’t Derail the Economy – Fortune, December 5, 2016 | In an interview with Fortune, Buffett talks about the election, wind energy, and Jeff Bezos.

Just How Much Do the Top Private Equity Earners Make? – The New York Times, December 10, 2016 | There is C.E.O. pay. Then there is private equity C.E.O. pay.

My Favorite Books of 2016 – Bill Gates, December 5, 2016 | Never before have I felt so empowered to learn as I do today. I’ve been reading about a book a week on average since I was a kid. Even when my schedule is out of control, I carve out a lot of time for reading.

One of Disney’s most popular brands has investors really worried – The Washington Post, December 9, 2016 | ESPN was thrust into the spotlight in November when the ratings company Nielsen predicted the sports juggernaut would lose 621,000 cable subscribers that month. Nielsen estimated the sports network would lose another 555,000 subscribers in December. The staggering losses have led to calls by analysts for Disney to spin off or sell the beleaguered network, which has lost 9 million subscribers in three years, according to company filings.

Insiders Send Wrong Signal on Bank Stocks – Wall Street Journal, December 8, 2016 | Rally in bank shares has coincided with insider selling that is on pace to set a record.

Why is Customer Acquisition Cost (CAC) like a Belly Button? – Tren Griffin, December 9, 2016 | CAC is a key element in the unit economics of a business, which can tell the owner whether the business is healthy. Unit economics are determined by understanding the direct revenues and costs associated with a business model expressed on a per unit basis.

The rise of Live Nation and the fear of an emerging music monopoly – ABC, December 5, 2016 | Live Nation, the world’s largest events promoter, and the owner of the world’s largest ticketing company, has bought a controlling stake in two of Australia’s largest music festivals – Splendour and Falls.

Chipotle Plunges After Saying That Customer Service Has Slipped– Bloomberg Markets, December 6, 2016 | Company says it’s ‘nervous’ about chain meeting guidance. Slow service has undermined efforts to win back customers.

JPMorgan CEO says bank may look to pay special dividend – CNBC, December 6, 2016 | The stock of JPMorgan Chase has been climbing so much that “at a certain price,” the company may consider issuing a special dividend to distribute excess capital rather than buying back additional stock, chief executive Jamie Dimon said on Tuesday.

American psyche: Michael Lewis on the triumph of irrational thinking – Financial Times, December 9, 2016 | The writer talks about how ‘the marketplace for politicians did something as weird as the marketplace for securities’

Better Stewardship Creates Opportunity for AIG – Morningstar, December 5, 2016 | American International Group’s (AIG) problems during the financial crisis primarily related to its financial products division, and all of the issues that led to its blowup have been reduced to a point of immateriality, in our view. But the years since have shown that AIG would have destroyed substantial shareholder value even if it had never written a single credit default swap, that noncore businesses needed to be shed, and that the operational issues in the core operations need to be remedied.

What a Dividend Payout Ratio Can (and Can’t) Tell You – Morningstar, December 6, 2016 | Question: In a recent article exploring the valuations of stocks in the Morningstar Dividend Yield Focus Index, a few readers wondered whether Pfizer’s (PFE) seemingly very high payout ratio signals danger for the company’s dividend. Answer: The payout ratio is a very useful metric for evaluating a dividend-paying stock. The calculation is simple enough: It’s the proportion of a company’s earnings paid out as dividends. A lower payout ratio can sometimes indicate that the dividend is “healthy”; in other words, there is a margin of safety that would allow a company to miss its earnings target and still be able to pay out its dividend, and there may also be room for management to increase the dividend over time. A payout ratio over 100 may indicate that the dividend is in jeopardy, because no company can continue pay out more than it earns indefinitely.

Michael Lewis’ Portrait of Two Men Who Changed the World – Bloomberg View, December 5, 2016 | Michael Lewis is the poet laureate of the financial world. Each of his deeply researched, beautifully composed books causes a stir when published. Lewis’ newest book, “The Undoing Project: A Friendship That Changed Our Minds,” is a very different work from earlier Lewis writings.

The seven excuses of highly paid chief executives – Financial Times, December 7, 2016 | I have been writing about executive remuneration for 30 years and have seen the best-paid bosses resist nearly every proposal aimed at slowing the upward movement in their pay. I have counted seven ways highly paid chief executives try to keep their critics away from intervening to limit their earnings.

Is dividend investing dangerous? – Nefound Research, December X, 2016 | In a persistent, low interest rate environment, dividend strategies have rapidly increased in popularity. In theory, investors should be indifferent to dividends.  In practice, they are not. As a strategy, a focus on high dividend yield may simply be a (poor) value strategy in drag. A focus on dividend payers and growers may give investors the ability to tap into the reinvestment premium and create a quality tilt in their portfolio.

Basketball’s Nerd King – Michael Lewis, December 6, 2016 | How Daryl Morey used behavioral economics to revolutionize the art of NBA draft picks. Reprinted from The Undoing Project: A Friendship That Changed Our Minds.

2016 Is on Track to Be Hollywood’s Worst Year for Ticket Sales in a Century – Vanity Fair, June 13, 2016 | Not even Captain America can save this industry in crisis.

Investing 101: A reading list – James Montier, December X, 2016 | One of the questions I am regularly asked is which books do I consider the best investment reads.

The 22 Most Important Finance Books Ever Written – Business Insider, December 3, 2013 | In case you missed them, we’ve compiled a list of 22 classic works. These are the books that show up time and again in lists of books recommended by the pros themselves.

Apple Music Hits 20 Million Subscribers; Execs Want ‘More, Faster — We’re Hungry!’ – Billboard, December 6, 2016 | Apple has released the latest numbers for the music subscription service Apple Music. In the 18 months since the service was launched, the tech giant reveals that it has just crossed the 20 million paid subscribers mark. It last reported 17 million subscribers in September, marking a 15 percent jump in three months.

When the Checkout Lines Go Away – Bloomberg View, December 6, 2016 | The gist of it, in case you don’t feel like watching right now, is that you scan in with an app on your phone as you walk into the store, grab whatever you want — and leave. “Computer vision,” “deep learning algorithms” and “sensor fusion” figure out what you’ve taken and charge you for it.

Starbucks’s $10 Cup of Coffee Is Priced Just Right – Bloomberg Gadfly, December 8, 2016 | It’s not about the $10 cup of coffee. Critics have derided Starbucks Corp.’s push into higher-end coffee bars, which the chain discussed in detail on Thursday, at an all-day confab with Wall Street investors and analysts. Skeptics questioned whether millennials would pony up for pricey drinks such as the $10 Nitro cold-brew coffee, which is infused with nitrogen gas. Others poked fun at descriptions of exotic beans small-batch roasted in Seattle. They are missing the point.

Case Study: Warren Buffett’s Yield-On-Cost For Coca-Cola – Fool, December 8, 2016 | Coca-Cola currently pays $1.40 per-share in annualized dividends, which means Berkshire will receive $560 million in annual dividends. Berkshire is a long-term investor. Buffett first purchased shares of Coca-Cola in 1988. That year, Coca-Cola paid $0.075 per share in dividends. The stock traded for approximately $2.50 per share, after adjusting for stock splits along the way. Based on Buffett’s original purchase price and the current annual dividend payout, Berkshire will receive 56% of its original investment in dividends this year alone. This is called ‘yield on cost’, and it explains the awesome power of dividend growth investing.

What business models have float? – S&C Messina Capital Management, December 7, 2016 | Most people know Warren Buffett as a stock picker but few understand his deep affinity for businesses that have float. Below, we will look at some businesses that have access to float.

Bell Industries: Warren Buffett’s Fountain of Youth – Latticework, November 25, 2016 | If you started with $1 million today, how would you invest it?

The Man Who Saved Floundering Geico – Wall Street Journal, March 11, 2013 | In 1976, Jack Byrne rescued Geico as it teetered on the edge of bankruptcy, kicking off a career as one of the most storied turnaround artists in insurance.

Geico Chief May Be Heir to an Legend – New York Times, April 29, 1997 | Yet as Berkshire investors prepare to gather in Omaha next week for the company’s annual meeting, the question remains: Louis Who? The answer is that the man who apparently will take over investing for one of history’s remarkable investment vehicles is as private and low key as Mr. Buffett is iconic. But more important for Berkshire shareholders, Mr. Simpson is just as iconoclastic.

Becoming Wareen Buffett, candid documentary chronicling the life of the billionaire investor, debuts Jan. 30 on HBO – HBO PR, December 7, 2016 | With unprecedented access to his day-to-day personal life, BECOMING WARREN BUFFETT tells the improbable story of how an ambitious, numbers-obsessed boy from Nebraska became one of the richest, most-respected men in the world. The definitive documentary on Buffett, this candid portrait sheds new light on a man who has helped shape the way Americans view capitalism and, more recently, philanthropy. Told primarily in Buffett’s own words, the film features never-before-released home videos, family photographs, archival footage and interviews with family and friends.

Google Makes So Much Money, It Never Had to Worry About Financial Discipline—Until Now – Bloomberg Businessweek, December 8, 2016 | Alphabet’s CFO Ruth Porat wants to bring focus to Mountain View. Can the moonshot factory adapt?

Mutual Fund Giant Vanguard Flexes Its Muscles – Fortune, December 8, 2016 | The index-investing pioneer now has $3.8 trillion in assets. How will it use the clout that comes with all that money?

With LinkedIn, Microsoft Looks to Avoid Past Acquisition Busts – The New York Times, December 8, 2016 | Microsoft announced on Thursday that it had completed its $26.2 billion acquisition of LinkedIn, the social network for professionals. There are ample reasons to be skeptical that the deal, the biggest by far in Microsoft’s history, will pay off.

From the archives: Daniel Kahneman – Jason Zweig, November 25, 2014 | I first met Danny Kahneman at a conference on behavioral finance at Harvard University in 1996. I wasn’t struck by his ideas; I was stricken with them. They took me over like an infection; for months, I could think of little else, and for years I pursued more of their implications in the financial world than I could possibly count.

Inside Cotsco: The Magic in the Warehouse – Fortune, December 15, 2016 | Costco became a phenomenon by doing things its own way. But with Amazon ever more powerful, millennial shoppers burgeoning, and a new generation of leaders awaiting its turn, can the company preserve its edge?

The Maxim For Every Successful Person; ‘Always Stay A Student’ – Ryan Holiday, June 21, 2016 | It is not enough only to be a student at the beginning. It is a position that one has to assume for life. Learn from everyone and everything. From the people you beat, and the people who beat you, from the people you dislike, even from your supposed enemies. At every step and every juncture in life, there is the opportunity to learn — and even if the lesson is purely remedial, we must not let ego block us from hearing it again.

The Used-Car Pile Up – Bloomberg Gadfly, December 7, 2016 | 2017 is shaping up to be an excellent year to purchase a used car. That’s great news for consumers — but a big worry for auto manufacturers, rental companies and auto finance groups.

Brace yourself: the most disruptive phase of globalization is just beginning – Quartz, December 7, 2016 | To properly understand globalization, you need to start 200,000 years ago.

I’m not biased, am I? – Journal of Accountancy, February 1, 2015 | Avoid 5 common judgment biases that can affect accounting and auditing decisions.

How Jack Bogle’s Long-Game Investment Strategy Beat Wall Street Every Time – NYMag, November 7, 2016 |People believed Earth was flat long after Pythagoras and Aristotle made the case for a spherical planet. How else to explain why a ship would disappear hull-to-topmast as it reached the horizon? Still, the flat-earthers, a little like today’s climate-change deniers, lingered until explorers including Columbus poured so much water on that fallacy that it dissolved.

Coca-Cola’s CEO Transition Not a Surprise, and Highlights the Firm’s Deep Bench; Shares Undervalued – Morningstar, December 9, 2016 | We’re not making any changes to our $44.50 fair value estimate for wide-moat Coca-Cola following the company’s announcement that CEO Muhtar Kent will step down in May 2017, making way for COO James Quincey to take the top spot. We remain comfortable with our long-term forecasts for rebounding top-line growth–driven largely by rising international per capita consumption rates, as well as further penetration of noncarbonated beverages – and improved profitability.

Speaking Truth to Power: An Interview With Peter Buffett – Psychology Today, December 3, 2016 | The philanthropist musician talks about the antidote to greed.

The next chapter for Starbucks? Getting fancier. – The Washington Post, December 7, 2016 | For years now, Starbucks has been dipping a toe into more luxe offerings.

McDonald’s Wants to Be the New Starbucks – Fortune, December 5, 2016 | The fast food company is investing in $12,000 espresso machines McDonald’s is challenging Starbucks and Dunkin’ Donuts in the coffee business as part of an effort to attract more customers.

8 reasons why Google’s Pixel is better than the iPhone – Business Insider, December 4, 2016 | Damn, the Pixel is good.

Cloud computing titans battle for AI supremacy – Financial Times, December 5, 2016 | Amazon boosts artificial intelligence focus as it challenges Microsoft and Google

Google, democracy and the truth about internet search – The Guardian, December 4, 2016 | Tech-savvy rightwingers have been able to ‘game’ the algorithms of internet giants and create a new reality where Hitler is a good guy, Jews are evil and… Donald Trump becomes president

Articles in Swedish

Fingerprint cementerar bilden av opålitlighet – Dagens Industri, 8 december, 2016 | Fingerprint Cards kapitalmarknadsdag hamnar i skuggan av bolagets blodiga vinstvarning för fjärde kvartalet. Det sätter stora frågetecken för trovärdigheten i bolagets prognos för 2017.

“Fingerprint är nästan riskfri” – Privata Affärer, 29 februari, 2016 | Förra veckan bjöd på en extrem hyllning av Fingerprint från Handelsbanken Fonder som bedömde aktien som mer eller mindre riskfri. “Här kan man sova gott om natten, menar fondförvaltaren Oscar Karlsson.

Peter van Berlekom: ”Sålt Hexagon och Assa” – Affärsvärlden, 6 december, 2016 | Peter van Berlekom förvaltar Alfred Bergs Sverige Plus: ”Det som står högst på min önskelista är att H&M håller en kapitalmarknadsdag”.

Kommentar: Nya frågetecken kring Fingerprint – Privata Affärer, 8 december, 2016 | Kapitalmarknadsdagen för Fingerprint blev ingen klang- och jubelföreställning. Framtiden för biometri är spännande, men bolaget underpresterar när det gäller informationsgivningen till marknaden. Och styrelsen har gjort bort sig igen.

Kommentar: Förtroendet faller för Fingerprint – Privata Affärer, 8 december, 2016 | Analytiker som haft säljrekommendationer på Fingerprint har haft rätt. Bolaget har försökt att framstå som förtroendeingivande, men dagens vinstvarning innebär att blankarna nu kan fira en tidig julafton.

Jens Engwall blir kvar som vd – Realtid, 9 december, 2016 | Jens Engwall avgår inte som vd som planerat före utgången av 2017. Som en konsekvens av detta lämnar vice vd Joacim Sjöberg Hemfosa.

Book Review: The Little Book of Common Sense Investing

“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


Source: Facts About Vanguard, December 9, 2016

The Little Book of Common Sense Investing

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


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 Eight: Selecting Long-Term Winners.

Chapter Nine: Yesterday’s Winners, Tomorrow’s Losers.

Chapter Ten: Seeking Advice to Select Funds?

Chapter Eleven: Focus on the Lowest-Cost Funds.

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?


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.