βAny intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius β and a lot of courage to move in the opposite direction.β
βInvestors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesnβt count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.β
The foundation mindsets of The Buffett-Munger Profitability Investing Truism:
iγ
βInvestors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesnβt count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.β
β Warren Buffett
iiγ
βThe higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying businessβ return on invested capital.β
β Warren Buffett
iiiγ
βOver the long term, itβs hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, youβre not going to make much difference than a six percent return β even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, youβll end up with one hell of a result.β
β Charlie Munger
ivγ
The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
vγ
βOver the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The two tend to really converge pretty closely.β
β Li Lu
viγ
βIn short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.β
β Joel Greenblatt
viiγ
βIt is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens.β
Complex systems can only be forced to be linear for a limited time period.
Of course, as you say, who knows when the system will break, but it eventually will.
Most likely, in my view, is that it breaks when those areas of the economy that have been capital starved for over a decade become critically undersupplied. These are sectors with long lags between capital investment and increased output.
Despite what many think, we can't survive without energy and other commodities.
Simply put - calling the break in US stock market exceptionlism is calling for substantially higher oil. I can hypothesize when that happens but it would be a waste of our time.
AAPL/ XOM is the stoat. You kill it with the numerator up or the denominator down (or, in all practicality, both).
I think youβre spot on Bob. Iβve heard this thesis applied to the power transmission and distribution industry. But Iβm sure there are 1000 different ones lurking beneath the surface that have been starved for decades because of the much sexier industries.
Thanks for resurfacing that Chris Begg interview I had heard that a while back but lost the who/where! Was fascinated with how he spent his time. I see the Rick Rubin book breakthrough as a signpost towards new outliers in thinking, and Brunello and Ho-shi as tapping into more classical thinking rather than new sages. Much to learn looking back, though.
Nice piece! A while back I had an idea of Jungian Financial Analysts who would analyze collective symbolism, dreams, and the character of the zeitgeist to make investment plays. This piece reminded me of that.
Luckily we have a wide range of harebrained thinkers and even stoat like thinkers in our midst. The variability in cognition and intuition will likely serve us well.
Seems like for this to work you will need investors who willing to tolerate an extended downturn and not sell to PE if thereβs a hostile takeover offer. Hard to do in a public company.
Little confidence in this working within the current system at scale. But definitely a good approach to life in general. And perhaps startups and holdcos
Is it possible that quality, although is extremely important, isnt the root word we should be shooting for? Its extremely hard to grab onto, and 1 persons quality is different than another. However, timeless has a connection with everyone, along with describing what to shoot for in anything.
-To be timeless, one must be resilient. To be resilient, one must be able to maintain that to a high standard and with ease. So, with premium materials and ease of Maintenace one makes quality and luxury.
The reason Rolex/Rolls Royce Engines/Gold?/Japanese temples/Ralph Lauren is timeless isnt that it has the highest quality parts, I mean it may have high quality parts in them, but never such a high quality to take away the ease of maintenance. Japanese temples were and are timeless because their ease of maintaining them. It was a joy to maintain them. The Japanese temples that have been around for 1000's of years are not the same wood that it was built with. It was maintained, it was cared for. The same goes for everything above. The reason things are thrown away these days isnt because every engineer is designing poor parts. Its that we have lost the complete and elegant art of maintaining. Kintsugi or the art of repairing a broken cup and putting gold in the cracks isnt elegant because of the gold. The gold adds a nice touch, but to the one who repairs it has an indescribable feeling when done.
The same applies to fatherhood, or as a husband. As a father it is NOT to shoot for being a perfect father. Bonds have to grow AND be repaired. It isnt about being so strong as to never allowing the bond to bend and grow. Sometimes the "material" of the bond has to be stainless steel and other times it has to be plastic. If its to hard to repair or maintain then you miss out on the luxury of being a father. The luxury in fatherhood is not material wealth but the richness of a bond that lasts beyond childhood. Itβs in the moments of effortless laughter, shared lessons, and a silent understanding that no matter what happens, he is always there. All of this can be said for mothers as well.
The quality Persig talks about is important, sure, enjoying the moment is how he defines this moving dynamic quality. He even wrote a book about motorcylce maintenance. However, and i do have a big however, he shut is wife and kids out of his life to write the book about quality. He missed the whole point of it all and he was the one writing about it. This isnt my opinon, he talks about this in his classes/interviews (youtube) about how he had to get this idea out hell or high water and there was nothing the family could do or say to change it. Edward Deming (pioneer of quality control) Said βTo optimize the whole, we must sub-optimize the parts.β
Like you said, Rory talks about having time to do nothing that really sparks great ideas. He came out with the speedometer time and MPH picture that was truly a game changer for me. However, what that graph doesnt show is RISK. First off, If you try to go faster in the 0-30 mph range to "make up time" You RISK hitting a person/child/Car/running a stop sign. All the risk is in that low MPH range. In the upper MPH range you are on the highway, the only thing you need to look out for is animals (usually). To relate this, to what we are talking about. That LOW MPH is what we all tend to try to skip, its the boredom/day dreaming/Family moments, that we try to skip in the pursuit for "high speed"/"Make up time" that ends up getting us into a metaphorical accident.
So, to be timeless you have to be resilient to wear and tear of life. To be resilient you have to have premium materials where it matters but not wasteful, and most importantly ease of maintaining all of those parts. When you have premium materials and make it easy to maintain, you end up with quality, which usually ends of being luxury.
βAny intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius β and a lot of courage to move in the opposite direction.β
The simplicty beyond complexity
βInvestors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesnβt count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.β
β Warren Buffett
Did you investigate and get what Warren Buffet have hinted about the the single key factor?
The single key factor is Return One Capital, it has evolved from ROE of the old time to ROIC of the 21st century.
The foundation mindsets of The Buffett-Munger Profitability Investing Truism:
iγ
βInvestors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesnβt count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.β
β Warren Buffett
iiγ
βThe higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying businessβ return on invested capital.β
β Warren Buffett
iiiγ
βOver the long term, itβs hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, youβre not going to make much difference than a six percent return β even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, youβll end up with one hell of a result.β
β Charlie Munger
ivγ
The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
vγ
βOver the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The two tend to really converge pretty closely.β
β Li Lu
viγ
βIn short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.β
β Joel Greenblatt
viiγ
βIt is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens.β
β Warren Buffett
Amazing stuff sir. I was happy to see Cucinelli mentioned, I re read his conversation "On My Om" every quarter.
Complex systems can only be forced to be linear for a limited time period.
Of course, as you say, who knows when the system will break, but it eventually will.
Most likely, in my view, is that it breaks when those areas of the economy that have been capital starved for over a decade become critically undersupplied. These are sectors with long lags between capital investment and increased output.
Despite what many think, we can't survive without energy and other commodities.
Simply put - calling the break in US stock market exceptionlism is calling for substantially higher oil. I can hypothesize when that happens but it would be a waste of our time.
AAPL/ XOM is the stoat. You kill it with the numerator up or the denominator down (or, in all practicality, both).
I think youβre spot on Bob. Iβve heard this thesis applied to the power transmission and distribution industry. But Iβm sure there are 1000 different ones lurking beneath the surface that have been starved for decades because of the much sexier industries.
Thanks for resurfacing that Chris Begg interview I had heard that a while back but lost the who/where! Was fascinated with how he spent his time. I see the Rick Rubin book breakthrough as a signpost towards new outliers in thinking, and Brunello and Ho-shi as tapping into more classical thinking rather than new sages. Much to learn looking back, though.
Thanks man- it's super exciting when you see another modern sage carrying the light like Rory or Rubin.
Nice piece! A while back I had an idea of Jungian Financial Analysts who would analyze collective symbolism, dreams, and the character of the zeitgeist to make investment plays. This piece reminded me of that.
Dan Lawrence our resident dream expert used to be a futures trader!
Oh wow interesting, would love to know if and how he leveraged dreams in futures trading and how it worked for him.
Luckily we have a wide range of harebrained thinkers and even stoat like thinkers in our midst. The variability in cognition and intuition will likely serve us well.
Excellent work, as always.
Thank you. On reflection Iβm disappointed I didnβt make more obvious warren puns.
Seems like for this to work you will need investors who willing to tolerate an extended downturn and not sell to PE if thereβs a hostile takeover offer. Hard to do in a public company.
Little confidence in this working within the current system at scale. But definitely a good approach to life in general. And perhaps startups and holdcos
Got to have a goal no goal results in no actions then no progress, reality will help you adjust your goals to fit reality..,
Beauty and profitability is a better goal than just the latter too.
Charlie Munger has passed the baton to Mr. Li Lu.
Mr. Li Lu manages the private investment of Charlie Munger.
Is it possible that quality, although is extremely important, isnt the root word we should be shooting for? Its extremely hard to grab onto, and 1 persons quality is different than another. However, timeless has a connection with everyone, along with describing what to shoot for in anything.
-To be timeless, one must be resilient. To be resilient, one must be able to maintain that to a high standard and with ease. So, with premium materials and ease of Maintenace one makes quality and luxury.
The reason Rolex/Rolls Royce Engines/Gold?/Japanese temples/Ralph Lauren is timeless isnt that it has the highest quality parts, I mean it may have high quality parts in them, but never such a high quality to take away the ease of maintenance. Japanese temples were and are timeless because their ease of maintaining them. It was a joy to maintain them. The Japanese temples that have been around for 1000's of years are not the same wood that it was built with. It was maintained, it was cared for. The same goes for everything above. The reason things are thrown away these days isnt because every engineer is designing poor parts. Its that we have lost the complete and elegant art of maintaining. Kintsugi or the art of repairing a broken cup and putting gold in the cracks isnt elegant because of the gold. The gold adds a nice touch, but to the one who repairs it has an indescribable feeling when done.
The same applies to fatherhood, or as a husband. As a father it is NOT to shoot for being a perfect father. Bonds have to grow AND be repaired. It isnt about being so strong as to never allowing the bond to bend and grow. Sometimes the "material" of the bond has to be stainless steel and other times it has to be plastic. If its to hard to repair or maintain then you miss out on the luxury of being a father. The luxury in fatherhood is not material wealth but the richness of a bond that lasts beyond childhood. Itβs in the moments of effortless laughter, shared lessons, and a silent understanding that no matter what happens, he is always there. All of this can be said for mothers as well.
The quality Persig talks about is important, sure, enjoying the moment is how he defines this moving dynamic quality. He even wrote a book about motorcylce maintenance. However, and i do have a big however, he shut is wife and kids out of his life to write the book about quality. He missed the whole point of it all and he was the one writing about it. This isnt my opinon, he talks about this in his classes/interviews (youtube) about how he had to get this idea out hell or high water and there was nothing the family could do or say to change it. Edward Deming (pioneer of quality control) Said βTo optimize the whole, we must sub-optimize the parts.β
Like you said, Rory talks about having time to do nothing that really sparks great ideas. He came out with the speedometer time and MPH picture that was truly a game changer for me. However, what that graph doesnt show is RISK. First off, If you try to go faster in the 0-30 mph range to "make up time" You RISK hitting a person/child/Car/running a stop sign. All the risk is in that low MPH range. In the upper MPH range you are on the highway, the only thing you need to look out for is animals (usually). To relate this, to what we are talking about. That LOW MPH is what we all tend to try to skip, its the boredom/day dreaming/Family moments, that we try to skip in the pursuit for "high speed"/"Make up time" that ends up getting us into a metaphorical accident.
So, to be timeless you have to be resilient to wear and tear of life. To be resilient you have to have premium materials where it matters but not wasteful, and most importantly ease of maintaining all of those parts. When you have premium materials and make it easy to maintain, you end up with quality, which usually ends of being luxury.