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The Digest #38
Stock Splits, The Illusion of Control, Buffett at 90
An investor contemplating the purchase of a gas station or an apartment building would consider cash flow and other attributes of the entire business when deciding how much to offer for the enterprise. However, for some reason, most investors in common stocks do not approach public companies in the same way. Instead of asking whether Apple is worth $2 trillion, an investor last week might have asked whether Apple is worth $468 per share.
Historically, companies have attempted to keep share prices low enough to allow a typical retail investor to acquire at least a 100 share "round lot". In practical terms, this has usually meant a share price in the double digits. In recent years, commission rates steadily fell and today zero commission trading is the norm. The visible costs of transacting in "odd lots" have diminished but many investors still prefer to acquire "more" shares in a company.
Of course, stock splits change nothing in terms of intrinsic value. When Apple split its stock 4-for-1 on Monday, investors continued to own the same percentage interest in the company as they did on Friday. While it is true that stock splits can sometimes signal whether management believes that a recent run-up in price is sustainable, the fact is that no rational investor would choose to buy or sell a security based on whether the share price is $500 on Friday or $125 on Monday after a 4-for-1 split.
Market commentators who suggest that stock splits have an actual economic meaning do a real disservice to unsophisticated retail investors. Warren Buffett always says that one should praise by name but criticize by category. However, the following video by a very well known commentator seems worth calling out.
"You want one of these hammers or two of these hammers?"
Dave Portnoy has 1.7 million followers on Twitter and many people listen to what he has to say. True, he is an entertainer and a trader, not an investor, but in an age of rampant speculation, it seems irresponsible to encourage people to gamble their money on something as silly as whether a pizza is sliced into four slices or eight or sixteen or thirty-two.
The Illusion of Control
Nearly three-quarters of Americans believe that they are above average drivers which is obviously not possible, except possibly at Lake Wobegon. This is merely one example of how human beings have a tendency to overestimate their own capabilities and to underestimate risk.
Recently, I chose to drive over two thousand miles rather than take a short flight. The motivation was to avoid potential COVID-19 exposure on a commercial flight. Although I successfully avoided that risk, I did not eliminate or reduce overall risk. I merely traded one form of risk for another and it wasn't a particularly rational trade.
We have much less control in life than we would like to believe but that is no excuse for not carefully assessing all available evidence and making decisions to put the odds in our favor. I'll be flying to the same destination next week instead of driving.
Berkshire Hathaway Buys Stakes Valued at $6 Billion in Five Japanese Companies by Kosaku Narioka, August 31, 2020. Berkshire announced investments in Mitsubishi, Mitsui, Sumitomo, Itochu, and Marubeni on Monday. The value of the stakes in these Japanese "trading companies" was about $6 billion at the time of Berkshire's announcement. According to Berkshire's latest quarterly report, the company had $5.8 billion of Yen denominated debt outstanding as of June 30 with a weighted average interest rate of 0.6%. (WSJ)
Happy 90th, Warren! by Bill Gates, August 30, 2020. Gates writes about his longtime friend on his 90th birthday. Jason Zweig's column, Warren Buffett and the $300,000 haircut, also commemorates Buffett's milestone. The Omaha World Herald published a long article with quotes from many of Buffett's family and friends commenting on his remarkable health. Buffett has run Berkshire for 55 years and 25 of those years have been as a senior citizen. Amazing!
So You Think New York Is ‘Dead’ (It's not) by Jerry Seinfeld, August 24, 2020. I remember my first trip to Manhattan and thinking that New York is unlike any other place in the United States. The city has bounced back from countless crises and will bounce back from COVID-19. But that's not just my opinion. Jerry Seinfeld makes the same case, only he makes it funny. (New York Times)
The Proper Safe Withdrawal Rate: 4 Percent Rule is Outdated by Financial Samurai, August 18, 2020. In June, I wrote What's Your Magic Number which covers some of the same ground as this article. The fact is that the old rule of thumb that investors can safely withdraw 4 percent per year from a diversified portfolio is obsolete in an era of miniscule yields on bonds. But what is the correct rate? I don't necessarily agree with Financial Samurai's extreme conservatism but, directionally, his concerns have merit. Caution is called for.
Pender Podcast with John Mihaljevic, August 13, 2020. David Barr chats with John Mihaljevic, chairman of MOI Global and managing editor of The Manual of Ideas. They discuss value investing, the history of MOI Global, technology businesses and small and micro-cap investing.
When The Magic Happens by Morgan Housel, August 20, 2020. How do big innovations happen? Are they planned in advance or do they happen in unexpected ways with a healthy dose of serendipity? Housel takes us through a number of interesting examples of how change happens. (Collaborative Fund)
Financially Vulnerable, Independent Music Venues Worry Of Having To Sell by Marissa R. Moss, August 27, 2020. Few industries have faced more catastrophic impacts from COVID-19 than entertainment venues. Small venues, in particular, have been hard hit and many may not survive. This interesting article documents the challenges facing the industry. (NPR)
How Many Music Streams Does it Take to Earn a Dollar? by Nick Routley, September 12, 2019. With venues shut down, many musicians have turned to streaming to earn a living but the economics of streaming are terrible for lesser known artists, as this article written before the pandemic documents. A group of musicians in New Orleans is trying to change this with a musician-owned cooperative called Feendo. Their goal is to direct a greater percentage of the economics of streaming media to artists, a difficult goal to accomplish.
Quote of the Week
"To be completely cured of newspapers, spend a year reading the previous week’s newspapers."
-- Nassim Nicholas Taleb
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