Mike Lipper’s Monday Morning Musings
2nd of May’s Good Lessons
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
The inestimable Charlie Munger has labeled Warren Buffett a learning machine, someone who is always learning from his own and other’s mistakes. This is a good model to follow. The first couple days of May provided some good classrooms, the Berkshire Hathaway annual meeting and The Kentucky Derby, both on Saturday, May 4th.
The Annual Meeting/ Investment School
While many attended the meeting to gather bits of information to help guide their views as to Berkshire’s earnings and/or near-term stock price, I view it as an opportunity to learn about the art of investing. For me this is a linear progression from my Introduction to Securities Analysis course under Professor David Dodd at Columbia University. Dave Dodd was both a teaching and investment partner with Ben Graham, Warren Buffett’s first mentor. The following are the nuggets gathered from the meeting which can be applied to investing in general:
- Paying too much makes it very tough to make money on an investment. (They did for Kraft.)
- Intrinsic value is a range not a specific point. This range could be 10% plus or minus. (This is the fulcrum point for their buybacks.)
- Individual Investors are their preferred owners rather than bureaucratic institutions.
- They have a desire that their heirs hold onto their shares long after Charlie and Warren are gone. That is why they are developing the next tier of management, which will be different and better.
- A large opportunity reserve has two values, it cushions periodic declines and creates bargain opportunities.
- The allocation of resources allows them to shift capital to where it is most productive long-term.
The Kentucky Derby
I have written about “racing luck” or surprises in the past. At this year’s running of “The Derby” we witnessed a classic example of “racing luck”. With far too many horses on a rain-soaked track there was at least one bumping incident, which the three racing stewards felt impacted the order of the finish. After reviewing many films of the race and a call to the two leading jockeys, they disqualified the winner and gave the victory to the horse that came in second. The level of surprise can be gleaned from the betting odds. The first horse to finish was the second favorite at $9 to $2. The declared winner was a $63 to $1 long-shot. This is the first time in the history of this race that they have disqualified the winner for an on-track violation.
The investment lesson from this experience is to avoid putting too much faith in the “inevitable conclusions”. Surprises do happen, even those that are the first in more than one hundred years.
The Mixed Current Picture
Change Signs?
- While the NASDAQ composite has gained the most since its January low, +26% compared to +17% for the Dow Jones Industrial Average and +20% for the S&P 500, this past week the 420 new highs on the NYSE exceeded the 305 new highs on the NASDAQ. Have traders shifted their focus to more industrial and seasoned companies from growth and tech?
- Of the 72 price indicators tracked by the WSJ covering securities, commodities and currencies, only 30 are rising, Recently, the number of gainers were in the majority.
- Both High quality bonds and intermediate quality bonds gained in price, showing some shift in demand away from stocks.
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/04/value-investing-will-be-superior-but-it.html
https://mikelipper.blogspot.com/2019/04/contrarian-observations-not-predictions.html
https://mikelipper.blogspot.com/2019/04/not-yet-peak-luck-lessons-weekly-blog.html
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