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.
Wednesday, March 6, 2013
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.
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