Mike Lipper’s Monday Morning Musings
This Weekend’s Learning Sources
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Identifying sources of learning
One of the main differences between us and most animals is
that our brains are larger, which hopefully means we can learn more. The end of
this week supplied three sources of learning. The three teams of instructors
were: Tim Cook (Steve Jobs), Berkshire Hathaway’s Annual Meeting with
shareholders (Warren Buffett/Charlie Munger and Greg Able), and the Bettors and
Horses at the Kentucky Derby. From each I can learn a lot. Matter of fact, each
could be a whole semester at Business Schools instead of what they are currently
teaching.
Tim Cook (Steve Jobs)
At the end of the so-called work week Tim Cook conducted
what was his last quarterly meeting for shareholders and analysts of Apple (*).
He focused on the company’s critical relationships with customers and what is owed
to them. He stressed what Steve Jobs taught, the betterment of the users’
lives. These were the critical thoughts passed onto the oncoming new President
of Apple. We should pass these views onto all we deal with, focusing less on what
they paid us and more on what we did for them.
* Owned in personal and client accounts.
Warren Buffett/ Charlie Munger & Greg Able
Mr. Buffett spoke to many of the shareholders attending the
annual Berkshire Hathaway (*) meeting, both in person and electronically. His advice
for people reaching 50 years or older was to switch their primary investment focus
from making money to capital preservation. He emphasized saying no,
particularly to not well understood new investments. (I do not own any “AI”
stocks directly, but there are many in mutual funds I own. The key to their
future is what they have yet to produce, not what they are selling today.) He
believes investors in retirement should prune their holdings and try to explain
what they own to their heirs, feeling it is more beneficial to focus on how the
inheritance should be used rather than the intricacies of what is owned.
* Owned in personal and client accounts.
Greg Able is the new President of the company and is focused
on improving the operations of the company. When the talented Chief Financial
Officer transitions into retirement, he will be replaced with both a CFO and a
new lawyer. Furthermore, for the 31 private companies owned by Berkshire, he
has appointed a trusted internal executive as leader. Instead of doing just financial
oversight, he will be reviewing the operations of the formerly private
companies. Good policies of the past will be reviewed to see if they are right
for now.
My personal view is that there are two major trends which we
did not have to deal with in the past, but which could be much more important
in the future. The first is one of the causes of financial and economic
cyclicality resulting from not repaying debt on time and at full value. Defaults
on debt have led to depressions in the past and have been the cause of unplanned
contractions.
In the decade of the 1920s into the early 1930s society encouraged
the global extension of debt at the retail level, including its use as a defense
against tariffs (Smoot Hawley).
Currently, we have an expanded federal debt led by someone who needed to
renegotiate his own debt. Our government encourages investing retirement
capital in debt. The national debt is larger than the GNP. (Old debt has a due
date, while GNP is produced each year.)
The second dangerous trend is the value of the dollar in
world trade. As debt grows, overseas investors value it less. Meaning, it not
only becomes more expensive for funding our debt, but also for paying for imports
of food, clothing, and raw materials. We are better positioned than many other
countries who are in worst shape, but not all. Asia, which has a younger
population and a disciplined workforce, is in better shape. Higher inflation leads
to lower long-term value of the currency. One measure of inflation not issued by
our overworked government is the ECRI Index of Industrial Prices, which was up 140.35%
this week for the last 52 weeks.
Kentucky Derby
I brought this on myself by stating that I learned the basic
tenants of analysis at the New York Racetracks. A subscriber asked who I was
betting on in the race. Where do I begin? Perhaps with two axioms. First, as with
most things in life, short answers are often wrong. The short answers are wrong
because they are stated without limits and conditions. That brings us to the
second axiom, I don’t like losing. I don’t like losing because it is a double
loss. The first loss is the sum wagered, and the second is the loss of funds necessary
for future betting and other things.
There are two negatives against betting at the track. First,
the track takes a cut of all bets and there are personal expenses of travel,
admissions, and food. Second, as a game of chance it is rigged because of the
track’s take. Additionally, winnings are taxable at federal and state levels.
There is still another drawback, about 30% to 50% of the time the lowest
yielding horse wins. Most of the time those winnings are not large enough to
offset losses and expenses incurred. I address this problem by limiting the
number of times I bet, usually 3 out of 9 races and rarely at the lowest odds.
The advantage of this approach is staying away from betting at the lowest odds,
which are the most popular horses.
If these issues did not cause you to find other things to
bet on, the elements of the Derby might. First, the race is only for
three-year-old horses. While horses are born for the record throughout the year,
under racing law all horses are born on January 1st. Some horses start their
racing history at 2 years old, but many do not. By the time they are three
years old they are adolescent. (From a scientific standpoint it would be useful
to know the actual date of birth. There is poor but available information as to
the number of official races the horse has run. In terms of the Derby, the
range I heard was 1 to 4 races.) For those of my age, I am reluctant to take adolescent
horses and most humans seriously.
So, after all this I did not place a bet on this year’s
Derby. Most of the time I am not interested in races for three-year olds that are
run any earlier than June, which starts with the Belmont Stakes race. These races
are also a bit suspect because the course has been altered.
I would not have bet on the winner this year. However, the trainer
deserves to be congratulated as she was the first woman trainer to win the
Derby. The night before she had a dam which won the Kentucky Oaks with the same
jockey who won the Kentucky Derby. Quite an accomplishment.
All of this shows I am still a student and hope you are as
well.
Did you miss my blog last week? Click here to read.
Mike
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