"Tomorrow, do thy worst, for I have prepared for you today..."
The best way to deal with fear and worry about uncertainties of tomorrow is to focus on what you can do today. Gather the facts about the current problems and situation, figure out possible solutions, analyze likely outcomes for each solution, decide and act on a solution today. If you have prepared for the worst likely outcomes of tomorrow, why have fear and worry at all?
Wednesday, December 4, 2013
Sunday, September 1, 2013
Being Fundamentally Sound
It is possible for fundamentally sound sports teams to lose a few games here and there. The ups and downs of normal course of events pretty much guarantee that.
However, fundamentally sound teams give themselves the best chance to win games. They work relentlessly on their fundamentals, which allow them to minimize mistakes and to stay calm in difficult times. To a casual observer, it may look like they tend to get luckier or be at the right place at the right time more than other teams, but in truth, it is just the law of large numbers working in their favor. If you do the right things over and over again, good things are bound to happen to you.
However, fundamentally sound teams give themselves the best chance to win games. They work relentlessly on their fundamentals, which allow them to minimize mistakes and to stay calm in difficult times. To a casual observer, it may look like they tend to get luckier or be at the right place at the right time more than other teams, but in truth, it is just the law of large numbers working in their favor. If you do the right things over and over again, good things are bound to happen to you.
Saturday, June 29, 2013
Creating Wealth for Our Investment Partnership
I recognize that the conditions for creating wealth for our partnership are always there. Here are the causes that will effect wealth creation:
1. We will identify and continue to accumulate great financial assets over time. As long as they continue to be judged great financial assets, we will be unwilling to ever sell them. Then, we will accumulate more and more of the great financial assets over time. In addition, the value of the financial assets will grow over time. They become a good foundation for our trading strategy in step #2.
2. The financial assets in step #1 will make cash dividends. We can utilize this cash as well as prudent amount of borrowing against our financial assets to execute our trading strategy to generate additional cash. Then, we will use the cash to accumulate more of the great financial assets in step #1.
Repeat steps 1 and 2, and we will create wealth for our partnership given sufficient amount of time.
1. We will identify and continue to accumulate great financial assets over time. As long as they continue to be judged great financial assets, we will be unwilling to ever sell them. Then, we will accumulate more and more of the great financial assets over time. In addition, the value of the financial assets will grow over time. They become a good foundation for our trading strategy in step #2.
2. The financial assets in step #1 will make cash dividends. We can utilize this cash as well as prudent amount of borrowing against our financial assets to execute our trading strategy to generate additional cash. Then, we will use the cash to accumulate more of the great financial assets in step #1.
Repeat steps 1 and 2, and we will create wealth for our partnership given sufficient amount of time.
Monday, June 17, 2013
Long-term Thinking
It is wise to look at things in terms of eternity. When you produce a car, you should build it like it's going to last forever. When you form a relationship with someone, you should treat that person as if you are going to know him (her) forever. If you want to build wealth for yourself, you should structure your investments like they will provide you with wealth forever.
You know that the car you build, the relationship you make and even you won't last forever, but long-term thinking forces you to think and act in your best form.
You know that the car you build, the relationship you make and even you won't last forever, but long-term thinking forces you to think and act in your best form.
Monday, June 3, 2013
On Inspiration
in·spire
(
n-sp
r
)
n-spr)
v. in·spired, in·spir·ing, in·spires
v.tr.
1. To affect, guide, or arouse by divine
influence.
When you feel inspired with a thought, pay special attention and act upon it right away. If you think about it too much, your mind may get in the way and eventually dissuade you from taking action.
Facing Challenges in Life
Don't be afraid. Let the drama play out.
Life is unpredictable, and uncertainties make us feel uncomfortable. If we just take the right steps each way, the desired outcome is assured by the universal law of cause and effect.
Life is unpredictable, and uncertainties make us feel uncomfortable. If we just take the right steps each way, the desired outcome is assured by the universal law of cause and effect.
Monday, April 22, 2013
Volume Precedes Price
Selling climax is often accompanied with extremely high volume and sharp declines in price. Everyone who is in fear has given up and is selling in capitulation. Once everyone who wants to sell has already sold, who is left to sell? Price often rebounds thereafter in the short to mid term.
Best Way to Improve Life
We often think about what we can do to improve our lives. However, sometimes the simplest ways to improve our lives are about what we don't do or what we avoid to do that can make a big difference. The same can be said for investing, health, relationships and many other things in life.
Wednesday, March 6, 2013
Secret of Happiness
Dan Gilbert, the author of "Stumbling on Happiness", wrote the following article. I personally became a lot more stress-free after shifting to investment strategies with limited decision making process. For example, although I don't limit myself with different companies I look at for potential investments, I limit myself to invest for the long term only and to not dance in and out of investments. For short-term trading, I pretty much follow our trading algorithm and don't allow myself much freedom to deviate from the algorithm. As a result, I get to think about the things I enjoy the most (like what makes a company a better investment than others), and I do not spend a lot of time with other things, especially things beyond my control (like what the market is going to do in the near future).
Sharing One Secret to Happiness
All Things Considered, May 12, 2006
Maybe it’s because I’m a psychology professor, or maybe it’s because I wrote a book on happiness. But at least twice a week someone asks me for the secret of happiness, which they evidently think I know but have been keeping to myself. They’re surprised when I tell them that the secret of happiness is fresh tortillas and raw jalapenos for breakfast every Sunday.
I moved to Massachusetts from Texas about a decade ago, and the New Englanders who ask me this question are surprised to learn that anyone actually eats raw jalapenos, and much less for breakfast. But what surprises them most isn’t what I eat, but that I eat the same thing every Sunday. Jalapenos may be the spice of Texas, but don’t I know that variety is the spice of life?
Of course I do. But I also know that variety has costs. First, variety requires choice and choice requires time, and I’d rather spend my time writing a book or tickling my granddaughter than deciding what to eat every Sunday morning. I eat the same breakfast every Sunday for the same reason that I own 15 pairs of cargo pants in just two colors. We should only want variety among things that we enjoy thinking about, and I just don’t get much pleasure out of thinking about my breakfast or my trousers.
But there is a second and better reason to be skeptical about variety. Human beings adapt to any pleasure that’s repeated too quickly, which is why the tenth bite of pancakes and syrup is never as good as the first. Variety is a trick we use to circumvent this fact. Instead of taking ten bites of pancake, we take three—taste the hash browns, sample the sausage, sip the orange juice—and then go back for another bite of pancake, which having been ignored for just a few minutes is once again delightful. Variety is a clever way to spice up experiences which—like bites of pancake—occur in rapid succession.
But the same trick backfires when we use it to spice up experiences that are separated by weeks rather than by seconds. My wife sings “Happy Birthday” to me exactly once a year, so I never get tired of hearing it. If just for the sake of variety she were to switch to the national anthem, I’d be less happy, not more. Valentine’s Day is hearts and flowers, New Year’s Eve is champagne and paper hats, and anyone who thinks these holidays would benefit from an infusion of variety is simply missing the point. Variety improves the things that we do too often, but it ruins the things that we don’t do often enough. I have Sunday breakfast just once a week, and it would make me far less happy if just for the sake of variety I occasionally substituted a bowl of New England oatmeal for a plate of those little green jewels, filled with the glorious fire no Yankee can comprehend.
The secret of happiness is variety. But the secret of variety, like the secret of all spices, is knowing when to use it.
Sharing One Secret to Happiness
All Things Considered, May 12, 2006
Maybe it’s because I’m a psychology professor, or maybe it’s because I wrote a book on happiness. But at least twice a week someone asks me for the secret of happiness, which they evidently think I know but have been keeping to myself. They’re surprised when I tell them that the secret of happiness is fresh tortillas and raw jalapenos for breakfast every Sunday.
I moved to Massachusetts from Texas about a decade ago, and the New Englanders who ask me this question are surprised to learn that anyone actually eats raw jalapenos, and much less for breakfast. But what surprises them most isn’t what I eat, but that I eat the same thing every Sunday. Jalapenos may be the spice of Texas, but don’t I know that variety is the spice of life?
Of course I do. But I also know that variety has costs. First, variety requires choice and choice requires time, and I’d rather spend my time writing a book or tickling my granddaughter than deciding what to eat every Sunday morning. I eat the same breakfast every Sunday for the same reason that I own 15 pairs of cargo pants in just two colors. We should only want variety among things that we enjoy thinking about, and I just don’t get much pleasure out of thinking about my breakfast or my trousers.
But there is a second and better reason to be skeptical about variety. Human beings adapt to any pleasure that’s repeated too quickly, which is why the tenth bite of pancakes and syrup is never as good as the first. Variety is a trick we use to circumvent this fact. Instead of taking ten bites of pancake, we take three—taste the hash browns, sample the sausage, sip the orange juice—and then go back for another bite of pancake, which having been ignored for just a few minutes is once again delightful. Variety is a clever way to spice up experiences which—like bites of pancake—occur in rapid succession.
But the same trick backfires when we use it to spice up experiences that are separated by weeks rather than by seconds. My wife sings “Happy Birthday” to me exactly once a year, so I never get tired of hearing it. If just for the sake of variety she were to switch to the national anthem, I’d be less happy, not more. Valentine’s Day is hearts and flowers, New Year’s Eve is champagne and paper hats, and anyone who thinks these holidays would benefit from an infusion of variety is simply missing the point. Variety improves the things that we do too often, but it ruins the things that we don’t do often enough. I have Sunday breakfast just once a week, and it would make me far less happy if just for the sake of variety I occasionally substituted a bowl of New England oatmeal for a plate of those little green jewels, filled with the glorious fire no Yankee can comprehend.
The secret of happiness is variety. But the secret of variety, like the secret of all spices, is knowing when to use it.
Tuesday, March 5, 2013
My Favorite Investment Story from Warren Buffett
When we purchased See’s in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill.
A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.
To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.
But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.
Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital.
After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)
See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested.
Remember, even so, that the owners of the See’s kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.
And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets ("In Goods We Trust"). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.
In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment – yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.”
In 1972
Sales- 16 million pounds of candy worth $30 million i.e $1.8 /lb of candy
Purchase price – $ 25 million
After-tax earnings – $2 million
Invested capital - $8 million
Return on invested capital – 25%
In 2006
Sales 33 million pounds of candy worth $ 383 million i.e $11.6 / lb of candy
Pre-tax earnings – $ 80 million
After- tax earnings – $ 60 million
Invested capital - $ 40 million
Reinvested capital - $ 32 million
Cumulative profit before tax sent to Berkshire – $ 1.35 billion
So Berkshire invested only $ 32 million and earned $ 1.35 billion dollars over a period of 34 years.
See’s strengths are many and important. In our primary marketing area, the West, our candy is preferred by an enormous margin to that of any competitor. In fact, we believe most lovers of chocolate prefer it to candy costing two or three times as much. (In candy, as in stocks, price and value can differ; price is what you give, value is what you get.) The quality of customer service in our shops – operated throughout the country by us and not by franchisees is every bit as good as the product. Cheerful, helpful personnel are as much a trademark of See’s as is the logo on the box. That’s no small achievement in a business that requires us to hire about 2000 seasonal workers. We know of no comparably-sized organization that betters the quality of customer service delivered by Chuck Huggins and his associates.
A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.
To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.
But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.
Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital.
After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)
See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested.
Remember, even so, that the owners of the See’s kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.
And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets ("In Goods We Trust"). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.
In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment – yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.”
In 1972
Sales- 16 million pounds of candy worth $30 million i.e $1.8 /lb of candy
Purchase price – $ 25 million
After-tax earnings – $2 million
Invested capital - $8 million
Return on invested capital – 25%
In 2006
Sales 33 million pounds of candy worth $ 383 million i.e $11.6 / lb of candy
Pre-tax earnings – $ 80 million
After- tax earnings – $ 60 million
Invested capital - $ 40 million
Reinvested capital - $ 32 million
Cumulative profit before tax sent to Berkshire – $ 1.35 billion
So Berkshire invested only $ 32 million and earned $ 1.35 billion dollars over a period of 34 years.
See’s strengths are many and important. In our primary marketing area, the West, our candy is preferred by an enormous margin to that of any competitor. In fact, we believe most lovers of chocolate prefer it to candy costing two or three times as much. (In candy, as in stocks, price and value can differ; price is what you give, value is what you get.) The quality of customer service in our shops – operated throughout the country by us and not by franchisees is every bit as good as the product. Cheerful, helpful personnel are as much a trademark of See’s as is the logo on the box. That’s no small achievement in a business that requires us to hire about 2000 seasonal workers. We know of no comparably-sized organization that betters the quality of customer service delivered by Chuck Huggins and his associates.
Thursday, February 28, 2013
Importance of Having a Clear and Calm Mind
A clear and calm mind is like a clear pond you can see through. When the water is agitated, the mud from the bottom of the pond springs up and the water becomes murky.
A clear and calm mind beats a murky and agitated mind any day. The more agitated the market becomes, the easier it is to beat the market as long as you can keep a clear and calm mind yourself. When the market is calm, perhaps the best thing to do is to not do anything.
A clear and calm mind beats a murky and agitated mind any day. The more agitated the market becomes, the easier it is to beat the market as long as you can keep a clear and calm mind yourself. When the market is calm, perhaps the best thing to do is to not do anything.
Tuesday, February 26, 2013
Managing Risk
Bad events, however unlikely they are perceived to be in the short run, will eventually happen given a sufficient amount of time. Trouble is a series of good events makes us believe we are immunized from the bad events or we will be able to somehow avoid them.
Be prepared at all times for the eventual occurrence of bad events. It is not a question of whether they will happen or not. It is about how well we are prepared to limit the magnitude of the negative consequences when they do happen.
Be prepared at all times for the eventual occurrence of bad events. It is not a question of whether they will happen or not. It is about how well we are prepared to limit the magnitude of the negative consequences when they do happen.
Sunday, February 10, 2013
Go with the Flow
Row, row, row your boat
Gently down the stream
Merrily, merrily, merrily, merrily
Life is but a dream...
Gently down the stream
Merrily, merrily, merrily, merrily
Life is but a dream...
Wednesday, February 6, 2013
My Job as a Hedge Fund Manager
Money is probably one of the biggest motivators for people's behavior. People cook food, clean homes, make goods and provide services for others in exchange for money.
My job is to create financial abundance for my clients. It is a very important, noble and gratifying work for me.
My job is to create financial abundance for my clients. It is a very important, noble and gratifying work for me.
Sunday, January 27, 2013
Feeling Grateful
I am at a place I am because of all the people I have relationships with. I am forever grateful to them.
Tuesday, January 15, 2013
How to Spot Potential Investment Bubbles
Take a look at the areas where investment brokers are currently focusing on the most.
They could be technology stock IPOs, mining companies, oil & gas exploration companies, CDOs, Chinese reverse mergers or anything else. They tend to be in the areas where investors are eager to buy without much skepticism. Why wouldn't investment brokers want to focus on the areas where it takes the least effort for them to persuade potential investors to buy? These are the areas where smart investors want to stay away from.
They could be technology stock IPOs, mining companies, oil & gas exploration companies, CDOs, Chinese reverse mergers or anything else. They tend to be in the areas where investors are eager to buy without much skepticism. Why wouldn't investment brokers want to focus on the areas where it takes the least effort for them to persuade potential investors to buy? These are the areas where smart investors want to stay away from.
Sunday, January 13, 2013
How to Avoid Problems
Avoid working with people, businesses or partners with problems. Their problems will eventually come and haunt you, no matter how much you believe you have control over them.
Associate yourself with some of the best in class, and the rest will be taken care of.
Associate yourself with some of the best in class, and the rest will be taken care of.
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