Books Read Flashcards
Walmart Book
- Pass along any and all savings to the customer (parellels with AMZN), customer always wants good quality at lower prices - ALWAYS. every $ you spend takes from the customer. EDLP paralyzes competition as consumer wants lower priced items. They will always choose Walmart if they know they are getting the best deal.
- Innovate faster than peers Examples: Self-service checkout
- Always act and think like you are small, and that is how you become and stay a larger business.
- Hire good talent from great other stores (steal from competition and make it better), you don’t have to come up with your own ideas
- Offer equity rather than salary – this is actually selfish rather than generous. Have to ensure employee buyin so they treat customers better. 80% of associates own stock
- Big stores in small towns - no competition (kills small business) – huge edge and an obvious one
- Cut losses quickly but tried a lot of concepts - drug store
- Distribution/transportation huge edge – boring part of the business but they focused on it while others didn’t.
- Can these people help themselves or would they be doing this job on their deathbed? Almost always a good thing.
- Huge focus on unit economics - how each store does rather than the business as a whole. Start bottoms up.
- Love your work and commit, share your profits and treat employees as partners, motivate partners, communicate everything, appreciate employees, celebrate successes, listen to everyone, exceed expectations from the customer, control expenses, and always swim upstream
Nike Book
o Go after a calling, but remember life is full of randomness and luck. Entrepreneurs have to be prepared to have a north star, but then constantly adapt. relentless pursuit of goal
o Doing bold things can pay-off, i.e. showing up in Japan as a 20 something
o Ask for help! father, coach, friends all helped Nike massively
o If a career feels like a business/job, that is not good for the business
o He knew growth was the key to his business when everyone else was saying to have cash/equity and be conservative, but he always optimized for growth. However, several times this did almost cost him his business
When Genius Failed
- The Risks of Excessive Leverage
- Past is Not Always Prologue for the Future: Just because a strategy works now or in the past, does not mean that same strategy will work in the future. Hubris will kill you, thinking you KNOW will kill you.
- Winning Strategies Eventually Get Competed Away:
- Academics are Not Practitioners: Theory does not always translate into reality, OVERCONFIDENCE KILLS
- Size Matters: Capital is the enemy of excess returns
- Stick to Your Knitting: Because competitors caught onto their strategies, LTCM felt compelled to branch out. Meriwether and LTCM had an edge trading bonds but not in stocks which cost them as they exited their circle of competence
Buffett Letters
H. H. Brown, instead of managers getting stock options or guaranteed bonuses, every manager got paid $7,800 a year (the equivalent of about $14,500 today), plus “a designated percentage of the profits of the company after these are reduced by a charge for capital employed.”
Each manager, in other words, received a portion of the company’s profits minus the amount that they spent, in terms of capital, to generate those profits. The result was that each manager at H. H. Brown had to “stand in the shoes of owners” and truly weigh whether the cost of a project was worth the potential results.
Nebraska Furniture Mart - Cheaper (pass on scale benefits to consumer), wider variety, trustworthy management. owner/operator, workaholics. Accept lower gross margins to increase sales
Buffalo News - more news and less addds = higher penetration rates. monopoly due to local news, targeted advertising was valuable,economies of scale - incremental paper is very low cost
Sees - Seasonality risk, all profit in December, pricing power raises utility for customer (better gift). made profits in bad industry. Relentless focus on quality of product and customer experince. Great brand value
insurance - edge is pricing/volume discipline, write less when combined ratio is higher, properly retain and incentivize employees for the long-term. no moat, customer doesnt care where insurance comes from, perverse inventives in industry
Geico - Edge was low cost operators, good management and good investing
Commodities: Textile industry illustrates in textbook fashion how undifferentiated goods in capital intensive sectors must earn inadquate returns unless under conditions of tight supply and real shortages. As long as capacity exists, prices reflect operating costs rather than capital employed. Need to be lowest cost operator always in normal times.
Public securities - business, value, people
The Outsiders
Your CEO should lead the process for capital allocation - don’t delegate
Determine your hurdle rate. This is the minimum acceptable return for investment projects. It should be in reference to a set of opportunities available to the company. It should exceed the blended cost of equity and debt.
Calculate the expected returns on all internal and external investment alternatives. Rank them by return and risk. Be conservative. Higher risk require higher expected returns.
Calculate the return for stock repurchases. Returns from acquisitions must exceed this benchmark. Repurchases can destroy value
Focus on after-tax returns and run all transactions by your tax counsel.
Determine the acceptable levels for debt and cash.
Consider a decentralised organisational model. This is the ratio of corporate to total employees relative to your peer group average.
Retain capital in the business when you have confidence that you can generate returns that exceed your hurdle rate over time.
Consider paying a dividend when you do not have high return investment projects. Dividend decisions can be hard to reverse and sometimes tax inefficient.
When company prices are high, it is okay to consider selling your business, divisions and/or stock. It is also okay to close-under performing business units when they can no longer generate returns at acceptable levels.
Berkshire Hathaway’s Warren Buffett
Capital Cities Communications’ Thomas Murphy
General Cinema Corporation’s Richard Smith
General Dynamics’ Bill Anders
Ralston Purina’s Bill Stiritz
Tele-Communications Inc.’s John Malone
Teledyne’s Henry Earl Singleton
The Washington Post’s Katharine Graham
Amazon (The Everything Store)
1) Main Flywheel: lower prices –> increases number of customers/better experience –> more leverage with/attractiveness to sellers increases selection and gives AMZN more $ to invest –> lower prices.
2) Amazon’s unwavering commitment to pass any cost savings to the customer much like Walmart
- Selling goods at losses to gain loyalty/put pressure on competition. Lower advertising expense and put savings into lower price. low prices = best advertising
3) The commitment to innovation, unique ideas, and “Always Day 1 mentality”
4) Bezos was relentless in his pursuit of success and ruthless in how he achieved it
- Toys R’ Us Inventory story, Lovefilm forced acquisition story
5) The ability to think long-term was critical at AMZN, Nike, and WMT - 10k year clock, managing to grow free cash flow rather than profits. being okay losing money for several years on an investment - AWS
6) “If you want to get to the truth about what makes us different, it’s this,” Bezos says, “We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent.”
Blink
(lots of overlap with Thinking Fast and Slow – especially “System 1 Thinking” and “What you see is all there is”)
- Thin-slicing, our natural instincts/reactions to limited available data in short lengths of time, can be more valuable than doing months of research
- Our unconscious is a giant computer processing each interaction based on its understanding of the world and in most cases, it is very accurate.
- However, thin-slicing can also be based on inaccurate/incomplete data and have little value – thin-slicing’s value depends often on the expertise of the person on that specific issue and whether the parameters around the situation are accurate. Untrained intuition may lead to poor decision making or lead to solving the wrong problem.
- Oftentimes information is interpreted incorrectly – Example is Coke/Pepsi blind taste test where Pepsi won the taste test, but relative to the important issue (what do people like to drink more of?), Coke was the winner. However, Coke used the results of the experiment and changed the formula of their drink to win taste tests. A “take-home test” was the better option.
- Thin-slicing can be learned/controlled over time and you can train yourself to be comfortable in certain areas where it is likely to be extremely positive to follow your instincts
Investing Lessons for Me:
- I need more reps over time to get to reliable level of confidence in my intuition
- Doing more work to find confirming evidence could be futile – i.e. statue at Getty.
- Humans have a storytelling problem (come up too quick with explanations we don’t know the answers for). Initial unconscious takes can be fragile, and not properly based in fact/research
- When to trust intuition, vs when to think things through? How to best combine gut with research
o When selecting managers at NGC I had a framework of what I was looking for which was pretty consistent (6-8 variables) that I had committed to memory
o After several hundred meetings, I could often tell within 5 minutes whether the manager would even have a chance of getting into our portfolio – hopefully, over time, I get this way with stocks/businesses.
The Cable Cowboy
- Tax deferment and lack of paying of taxes can create tremendous value. When you can buy appreciating assets with secular tailwinds buy as much as possible, increases cash flows, operating leverage, and capacity to borrow - like a flywheel.
- Being a deal-maker and cooperating with others can be more fruitful than being overcompetitive. Turned the tables on programmers
Expectations Investing
Expectations investing is a stock-selection process that uses the market’s own pricing model, the DCF, except rather than forecast cash flows, expectations investing starts by reading the expectations implied by a company’s stock price. Superior returns are only generated if you correctly anticipate revisions in price-implied expectations.
Main factors are Sales which effects volume, price, operating leverage and economies of scale. Others are operating margins/cost efficiencies and investments/investment efficiencies
Common Stocks and Uncommon Profits
Scuttlebutt research, 15 points. Buy during temporary dislocations and try to never sell. Very focused on real research, on thr ground, make calls, etc…
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? All markets eventually mature, and to maintain above-average growth over a period of decades, a company must continually develop new products to either expand existing markets or enter new ones.
- How effective are the company’s research-and-development efforts in relation to its size? To develop new products, a company’s research-and-development (R&D) effort must be both efficient and effective.
- Does the company have an above-average sales organization? Fisher wrote that in a competitive environment, few products or services are so compelling that they will sell to their maximum potential without expert merchandising.
- Does the company have a worthwhile profit margin? Berkshire Hathaway’s BRK.B vice-chairman Charlie Munger is fond of saying that if something is not worth doing, it is not worth doing well. Similarly, a company can show tremendous growth, but the growth must bring worthwhile profits to reward investors.
- What is the company doing to maintain or improve profit margins? Fisher stated, “It is not the profit margin of the past but those of the future that are basically important to the investor.” Because inflation increases a company’s expenses and competitors will pressure profit margins, you should pay attention to a company’s strategy for reducing costs and improving profit margins over the long haul. This is where the moat framework we’ve spoken about throughout the Investing Classroom series can be a big help.
- Does the company have outstanding labor and personnel relations? According to Fisher, a company with good labor relations tends to be more profitable than one with mediocre relations because happy employees are likely to be more productive. There is no single yardstick to measure the state of a company’s labor relations, but there are a few items investors should investigate. First, companies with good labor relations usually make every effort to settle employee grievances quickly. In addition, a company that makes above-average profits, even while paying above-average wages to its employees is likely to have good labor relations. Finally, investors should pay attention to the attitude of top management toward employees.
- Does the company have outstanding executive relations? Just as having good employee relations is important, a company must also cultivate the right atmosphere in its executive suite. Fisher noted that in companies where the founding family retains control, family members should not be promoted ahead of more able executives. In addition, executive salaries should be at least in line with industry norms. Salaries should also be reviewed regularly so that merited pay increases are given without having to be demanded.
- Does the company have depth to its management? As a company continues to grow over a span of decades, it is vital that a deep pool of management talent be properly developed. Fisher warned investors to avoid companies where top management is reluctant to delegate significant authority to lower-level managers.
- How good are the company’s cost analysis and accounting controls? A company cannot deliver outstanding results over the long term if it is unable to closely track costs in each step of its operations. Fisher stated that getting a precise handle on a company’s cost analysis is difficult, but an investor can discern which companies are exceptionally deficient–these are the companies to avoid.
- Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? Fisher described this point as a catch-all because the “important clues” will vary widely among industries. The skill with which a retailer, like Wal-Mart WMT or Costco COST, handles its merchandising and inventory is of paramount importance. However, in an industry such as insurance, a completely different set of business factors is important. It is critical for an investor to understand which industry factors determine the success of a company and how that company stacks up in relation to its rivals.
- Does the company have a short-range or long-range outlook in regard to profits? Fisher argued that investors should take a long-range view, and thus should favor companies that take a long-range view on profits. In addition, companies focused on meeting Wall Street’s quarterly earnings estimates may forgo beneficial long-term actions if they cause a short-term hit to earnings. Even worse, management may be tempted to make aggressive accounting assumptions in order to report an acceptable quarterly profit number.
- In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth? As an investor, you should seek companies with sufficient cash or borrowing capacity to fund growth without diluting the interests of its current owners with follow-on equity offerings.
- Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur? Every business, no matter how wonderful, will occasionally face disappointments. Investors should seek out management that reports candidly to shareholders all aspects of the business, good or bad.
- Does the company have a management of unquestionable integrity? The accounting scandals that led to the bankruptcies of Enron and WorldCom should highlight the importance of investing only with management teams of unquestionable integrity. Investors will be well-served by following Fisher’s warning that regardless of how highly a company rates on the other 14 points, “If there is a serious question of the lack of a strong management sense of trusteeship for shareholders, the investor should never seriously consider participating in such an enterprise.”
Damn Right Munger
- Life lessons:
o “The tradition of always looking for the answer in the most fundamental way available—that is a great tradition, and it saves a lot of time in the world.”
o Munger believes that by coping the best he could with the tragedy of Teddys’s death, he was doing the only rational thing. “You should never, when facing some unbelievable tragedy, let one tragedy increase to two or three through your failure of will.”
o “To those whom much is given, much is expected. Always live below your financial means so that you will have money to invest. Invest in such a way so as to avoid the possibility of falling into a negative position – primarily, by limiting the amount of debt you use…If you want to get smart, the question you have to keep asking is “why, why, why?” And you have to relate the answers to a structure of deep theory. You’ve got to know the main theories. And it’s mildly laborious, but it’s also a lot of fun…From physics, Munger has learned to solve a problem by seeking the simplest, most direct answer. The easiest way invariably is the best way. From mathematics Munger learned to turn problems upside down or to look at them backward – invert, always invert.” - Pilot training should be implemented into different fields
o Formal education wide enough to cover practically everything useful
o Wide base of knowledge raised to practical fluency
o Ability to think forwards and backwards (concentrate on what you want to avoid as much as what you want to happen)
o What is most important gets the most attention
o Checklist routines are always used
o Forced into a special knowledge maintenance routine - Investing Related:
o “Playing poker in the Army and as a young lawyer honed my business skills,” said Charlie. “What you have to do is learn to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often. Opportunity comes, but it doesn’t come often, so seize it when it does come.”
o “It’s not that much fun to buy a company that you hope liquidates at a profit just before it is destined to go broke.”
o “He tries to find the best technique day in and day out and will stick with that lure, or whatever, even if others on the boat are having better success with something else.”
o “People underrate the importance of a few simple big ideas. And I think to the extent Berkshire Hathaway is a didactic enterprise teaching the right systems of thought, the chief lesson is that a few big ideas really work. I think these filters of ours have worked pretty well because they are so simple.”
o Wheeler & Munger performed greatly from 1962 to 1969 but did badly the next few years when Warren Buffett hat already closed his partnership. Munger dissolved the partnership in 1976 but still had a track record of making ~24% p.a.against 6% p.a. fr the Dow Jones - Business:
o Sees Candies tought them it was reasonable to pay higher prices if they were getting a better business and led to the Coca cola purchase. Easier and more pleasant
o Blue Chip Stamps:
Business went to zero, but float allowed them to buy businesses
Buffalo news, Sees
o Read post-script again and take notes
o DJCO
Did well by monopolizing geographic areas and defending themselves against lawsuits
Writing with Malcolm Gladwell
- Can number sections to allow for transitioning language. Gladwell does do it - starts with new number. Reader is fine without transition language – waste of space, no purpose
- Give them story piece meal, one part and another part. Ask how the first makes you feel, then show next, then show whole thing. Let data tell the story rather than be the story – don’t have to give them all the answers, lead them to it themselves
- Always invite reader into the thought process in order to allow them to be interested. allow them to react to the data or story before delivering the punch-line
- Writing in first person is much harder - people used to reading about great people in the 1st person. Automatically self-indulgent which raises peoples suspicion. Avoid if you can, put onus of information on others
- Keeps sentences very short, writes at a lower level (Malcolm writes at 8th grade level). long sentences therefore stand out
- Writing should never defeat the reader - should ALWAYS be easy.
- Keeps sentences very short, writes at a lower level (Malcolm writes at 8th grade level). long sentences therefore stand out
- Use Jargon to your advantage - helps people understand secrets of certain experts and shows knowledge to reader. Most people are really just looking for the punchline when diving into things they don’t understand
- If someone is a jerk you can pick it up in the writing - don’t insert yourself in writing, don’t talk about your own experience.
- Title is very important - own the frame in capturing people’s attention. All great book titles are generally two words and in competition with each other. (Speed/Safety) (Silent Spring)
- what is your edge? what is your competitive advantage? why are you different than others?
- Malcolm represents something different and unique, and a perspective which may differ from their own. that is his reputation and expected in his work
- what is your edge? what is your competitive advantage? why are you different than others?
Chris Voss Negotiation
- The Pinocchio Effect People who are being dishonest tend to use more words and effort than necessary to communicate their point.
- The 7-38-55 Rule In interpersonal communications, 7 percent of a person’s effort is conveyed via spoken words, 38 percent by tone of voice, and 55 percent through body language. All of which is to say, your tone of voice is more than five times as important as what you’re actually saying
- ACCUSATIONS AUDIT An exhaustive list of all the negative things the other side may think, feel, or say about your side. Compiling an accusations audit helps you get ahead of the types of negativity and objections that could hinder the successful completion of your deal.
- BLACK SWAN A piece of innocuous information that, once revealed, changes the course of the entire negotiation. Negotiation is, in many ways, all about finding black swans and using them strategically.
- CALIBRATED QUESTION A how or what question calibrated more for emotional impact than for conveying information. The calibrated question can lead to increased empathy for your position and give the other side the illusion of control.
- FORCED EMPATHY Making your counterpart see the situation from your vantage point, often through the use of calibrated questions.
- LABELING Verbally acknowledging the other side’s feelings and positions. Labels are powerful tools for reinforcing positive feelings and deactivating negative ones.
- DYNAMIC SILENCE Silence employed for effect. Dynamic silence may follow a mirror or a label, or it can create space to let something you’ve just said sink in (like “no”).
- MISLABELING Intentionally misidentifying the position of the people you’re negotiating with, giving them the opportunity to correct you, and, in so doing, getting them to reveal new information.
- THE PINOCCHIO EFFECT The idea that people’s sentences and explanations grow longer as they lie—like Pinocchio’s nose.
- TRUST-BASED INFLUENCE The type of positive, collaborative atmosphere you aim to establish during your negotiations. Trust-based influence is durable and low maintenance, and it leads to great deals.
- TACTICAL EMPATHY The deliberate influencing of your negotiating counterpart’s emotions for the ultimate purpose of building trust-based influence and securing deals. The ways you employ your voice, labels, mirrors, and dynamic silence all contribute to tactical empathy
Investigative Journalism with Bob Woodward
- Go into areas you don’t know and may do better.
- Separate facts from opinion.
- Anyone can be a journalist - assessing information from data
- you may find one story your looking for isnt the real story - keep open mind. You never know what you may find out
- don’t talk to your best source first. make lists of people to talk to - 20 people. Build a matrix - someone who is a witness. Internet will not replace human sources.
- I need your help to find the facts, can you please help me. people will help
- don’t worry about awkwardness - just ask your questions. its okay to do so.
- reminder to shut up and listen as well - let other people talk
- Tough question in the middle, not at beginning or right at the end - don’t want to convey hostility.
- Ensure silence is okay - don’t try to fill the void. don’t pile on questions - sit and wait and see if long answers are given
- Be an active listener to have follow ups
- make sure you start anything with the main takeaway. Don’t waste readers time
- Detail establishes credibility allows readers to get into your head. go to a certain specific date or time frame, or statistic.
Investing the Last Liberal Art
Think of markets like common liberal arts. I.e. Biology = evolution = flywheel. Physics = equilibrium. think about complex areas with fundamental truths - same in investing. find patterns and experience over time
