1. “Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.” “What matters always is dollar margins: the actual […]
1. “If you aren’t scared you probably aren’t doing anything.” Life is filled with risk, uncertainty and ignorance. If you are doing something and aren’t a little scared you are not paying attention. Ben Horowitz made the same point in his new book: “… being scared didn’t mean I was gutless. What I did mattered and would determine whether I would be a hero or a coward.” 2. “We are […]
1. “Business isn’t that complicated” and “Take sales, take costs, and try to get this big positive number at the bottom.” Many people make a living trying to make “business” sufficiently complex that you feel the need to pay for their services. Their business is to make business complex, when it is actually simple. 2. “Of my mental cycles, I devote maybe ten percent to business thinking.” and […]
Venture capitalists must deal with systems which are, in the words of Nassim Taleb, “more like a cat than a washing machine.” A start up and the markets in which they operate are quintessential complex adaptive systems. Michael Mauboussin nails the challenge here: “Increasingly, professionals are forced to confront decisions related to complex systems, which are by their very nature nonlinear…Complex adaptive systems effectively obscure cause and effect. You can’t […]
“Active management has to be seen as the search for mistakes.” Howard Marks Venture capital and value investing share many different elements but each system is based on a different mispricing. This is a critically important point for an investor to understand. If an asset is not mispriced, market outperformance is not mathematically possible. It is also important to understand that investments can be mispriced for different reasons. In venture […]
Ben Graham and his disciples like Warren Buffett, Howard Marks and Seth Klarman have developed a system called “value investing.” Eugene Fama and Ken French developed a completely different factor investing approach which identifies “value stocks.” Although Ben Graham’s system and Fama/French’s approach share the word “value,” they are vastly and fundamentally different. A very smart friend recently said to me that it is important to: “draw a clear and […]
I’ve done more than 25 of these “Dozen Things” posts now and I feel the commentary by me is getting repetitive. If you want commentary on what Mason Hawkins said below, read what I said on the other posts. I thought that instead of specific commentary on these quotations below from Mason Hawkins I would write a more general paragraph of commentary on value investing trying to “omit needless words.” […]
1. CNBC will continue to lose viewers by trying to make its programming similar to ESPN’s Sports Center, even though that approach is *exactly* what sends ordinary investors to their financial doom and *ensures* that ordinary investors will stop watching CNBC (i.e., the CNBC ratings death spiral will continue). 2. The Zero Hedge blog will continue to push people to buy precious metals even though it is particularly well […]
1. “The cheaper you buy, the greater the potential investment reward.” This is a simple idea which many investors do not understand since they are driven to buy when “Mr. Market” is euphoric since the human instinct is to follow the crowd. Fighting this herding instinct is a trained response. As James Montier of GMO said his past week: “The golden rule of investing: no asset (or strategy) is so good that you […]
1. “The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.” Value investors *price* assets based on their value *now* (based on data from the present) rather than make predictions about markets in the *future.* Value investors put predictions about the future in the “too hard” pile. 2. “A stock is not just a ticker […]