The Digest #149
Investment Report Cards, Damodaran's Free Courses, Iger's Reluctant Retirement, National Indemnity's Unique History, Isadore Sharp
Quote of the Week
“Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths.”
— Peter Cundill, January 1, 1990
Investment Report Cards
Highly intelligent people have always been drawn to investing.
In addition to the obvious motive of getting rich, a surface level exposure to financial markets makes it seem as though beating Mr. Market should be easy. After all, short term market moves often seem absurdly ridiculous. Individual securities do trade on real news, of course, by they also regularly gyrate around for no discernible reason or for dubious reasons that market participants construct to build their narratives.
Of course, beating the market is not easy precisely because highly intelligent people are all trying to do the same thing. As Howard Marks has written, to outperform the market requires doing something different than other investors and being right.
Outperforming Mr. Market is rare because it is actually very difficult.
Individual investors might have certain advantages over professional investors in the long run, but it is naive to think that beating Mr. Market should ever be easy. Most individuals are better off spending their time on other endeavors and thanking Jack Bogle for his pivotal role in making passive investing nearly free.
As the end of the year approaches, investors who actively manage their funds should take stock of how their decisions measure up against an appropriate passive strategy. Starting the new year with an investment report card is a good practice. Otherwise, you will have no way to measure whether your efforts create any value.
In addition to comparing results to a passive index, I measure my portfolio against what I call a “do nothing” portfolio. This is the portfolio that I started the year with. The “do nothing” portfolio’s performance is the result I would have achieved if I had made no changes all year. Even for those of us who make very few trades in any given year, it is important to know if we are adding or destroying value over time.1
One objection to benchmarking against a “do nothing” portfolio is that sometimes you can make a decision that looks bad in the short run but will play out well in the long run. A single year is not enough time to measure performance.
Just as it is not useful to measure yourself against a passive index over a single year, it is not that useful to benchmark against a “do nothing” portfolio for a single year. These measures are best reviewed over a three to five year period.
Investors who underperform an appropriate passive index over three to five years should strongly consider indexing. Investors who underperform their own “do nothing” portfolio over three to five years while beating a passive index should consider trading less often.
We all know about the physical benefits of moving our bodies more often, but there are also important psychological reasons to get out and walk or run every day:
In Praise of Walking: A Poetic Manifesto for Our Simplest Instrument of Discovery, Transformation, and Transcendence by Maria Popova, December 18, 2022. “When you walk, you move more than the body — you move the mind, the spirit, the entire system of being. As you traverse spatial distance, you gain vital spiritual distance with which to see afresh the problems that haunt your day, your work, your life. Ideas collide and connect in ways they never would have on the static plane. Pains are left behind in the forward motion. Doubts fall away by the footfall.” (The Marginalian)
The Emotional Benefits of Wandering by Alison Gopnik, December 15, 2022. “One of my greatest pleasures is to be what the French call a ‘flâneur’—someone who wanders randomly through a big city, stumbling on new scenes. The flâneur has a long and honored literary history. The surrealists used to choose a Paris streetcar at random, ride to the end of the line and then walk around.” (WSJ)
Can running actually help you think creatively? by Annalise Mantz, November 28, 2022. I often come up with ideas for new articles while running which reliably creates a flow state. “Runners in particular often cite the mind-clearing, meditative aspect of hitting the pavement as one of the reasons why they love to run. And in fact, some research does indicate a link between exercise and creative thought.” (Vox)
Bob Iger vs. Bob Chapek: Inside the Disney Coup by Joe Flint, Robbie Whelan, Erich Schwartzel, Emily Glazer and Jessica Toonkel, December 17, 2022. When I read Bob Iger’s book three years ago, I got the sense that he loved his job and that he might not be ready for retirement. This article is a lengthy account of Iger’s “retirement” and how he insisted on remaining involved long after turning over the CEO role to Bob Chapek. It seems to me that many CEOs in their late 60s or 70s should just keep running their companies if they like their jobs and are in good health. (WSJ)
A Return to Teaching: The Spring 2023 Edition by Aswath Damodaran, December 22, 2022. Professor Damodaran is again offering his courses free of charge to anyone with an internet connection. It’s amazing that this type of content is being given away for free and that anyone in the world can access it. (Musings on Markets), December 19, 2022. "Anne Scheiber’s story sounds almost too good to be true: A retired IRS auditor, who came from nothing and never made more than a few thousand dollars per year, turned her $5,000 nest egg into a $22 million fortune through decades of prudent saving and investing." (Kingswell), December 19, 2022. This article provides an account of how Berkshire Hathaway's National Indemnity subsidiary evolved over time. Warren Buffett's willingness to refrain from writing insurance when pricing is inadequate while also being cognizant of ensuring that management's incentives are properly aligned is very rare in the insurance industry. As Charlie Munger said: “The main thing is that practically nobody else does it - and yet to me it’s obvious it’s the way to go. There’s a lot in Berkshire like that. It’s just a little different from the way other people do it.” (The Science of Hitting), December 17, 2022. The story of Lt. Col. Ralph Noonan's letter to his son, Tommy, while serving in the Solomon Islands in 1943. "This is the second Christmas that I have had to be away from you and mother and I don’t like it, Tommy. More than anything else in the world I would like to be with you and mother today. But I know that it is impossible. Let’s hope that there will be lots of other Christmas Days when we can be together, when we can decorate your Christmas tree and set up a nice, big electric train right in the middle of the living room floor..." (Letters of Note)
Michael Mauboussin - Sharpening Investor & Executive Toolkits, December 20, 2022. 1 hour, 6 minutes. Michael Mauboussin and Patrick O'Shaughnessy discuss Mauboussin’s recent research on market share and capital allocation, examples of the relationship between value creation and market power, and which recent market phenomena have provided the biggest surprises. (Invest Like the Best)
Capital Allocation: Results, Analysis, and Assessment by Michael J. Mauboussin and Dan Callahan, December 15, 2022. This is a lengthy study on capital allocation which was mentioned in the podcast. (Morgan Stanley)
I continue to work my way through the back catalog of the Founders podcast. This week, I listened to a new episode on Jeff Bezos and two older episodes:
Jeff Bezos’s Shareholder Letters, December 19, 2022. 1 hour, 19 minutes. The Bezos letters are available for free on Amazon’s website, but apparently there is a book that includes the letters as well as other writings, with a preface by Walter Isaacson. This podcast covers some of the highlights from the book.
Beyond Possible: One Man, Fourteen Peaks, and the Mountaineering Achievement of a Lifetime, March 11, 2022. 1 hour, 5 minutes. This episode covers the amazing story of Nims Purja, a man who summited the fourteen highest peaks in the world in a record time of six months and six days.
The Autobiography of The Founder of Four Seasons, June 6, 2022. 1 hour, 18 minutes. I’ve owned a copy of Isadore Sharp’s book for a couple of years but have yet to read it. This episode inspired me to move the book up in the queue. I’m not a fan of high end hotels, but I am an admirer of great business accomplishments.
Year in Review: Why 2022 Was a Year to Remember and Possibly a Turning Point, December 18, 2022. 55 minutes. “In this episode, co-hosts Phil Ordway, Elliot Turner, and John Mihaljevic discuss some of the highlights of 2022, why it was a year to remember, and why it may have been a turning point for investors.” (This Week in Intelligent Investing)
The ancients, at least some of them, knew that the earth is round! The method that Eratosthenes used, explained briefly in this thread, is ingenious and impressive.
Fall has long been my favorite season, but winter is a close second. While fall features ever shorter days and is conducive to reflection as the year comes to a close, winter brings longer days as the season progresses which encourages optimism about the year to come. These are some great paintings featuring winter scenes:
Landscape with Snow
From The Guggenheim Museum:
“Disillusioned with Parisian artists’ café society and the oppressive gloom of the urban winter, Vincent van Gogh left Paris in mid-February 1888 to find rejuvenation in the healthy atmosphere of sun-drenched Arles. When he stepped off the train in the southern city, however, he was confronted by a snowy landscape, the result of a record cold spell…”
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It appears that I will beat my “do nothing” portfolio in 2022, but I am not patting myself on the back. Early in the year, I sold a stock that I had held for over a decade for reasons that appear dubious in retrospect. The stock had somewhat exceeded my estimate of intrinsic value but the company still has a bright future. I soon realized my error and repurchased the shares at a price approximately 9% lower than where I had sold. I don’t deserve any accolades for making a poorly thought out decision just because I was able to reverse it advantageously later in the year. The tax bill will be my penalty!