On Returns on Invested capital & Company size :
As a high-return company amasses more equity capital ( say $1 billion or more ) , it is difficult to maintain a high return on invested capital ( 20% or more ) while reinvesting all or substantial portion of it’s earnings. Instead to maintain their high-returns such companies have needed to shed a lot of capital by way of dividends or repurchase of stocks. However in these circumstances, thats the right thing to do.
Leaving aside oil companies only about 15 U.S businesses have managed to earn over $5.7 billion dollars in the past ten years
Berkshire moat :
- We don’t have to worry about quarterly or annual numbers / performance
- We can expand the business into any area that make sense. We are not limited by history, structure or concept
- We have a management ( Buffet & Charlie ) who love their work
On Institutional Investors ( Mutual funds ) :
Institutional investors ( i.e. Mutual funds and the likes ) possess an advantage in terms of (1) analysis horse power (2) Ability to influence managements and markets with their large holdings. However majority of them have underperformed the market due to the following reasons (1) Short-term focus, due to the annual / quarterly evaluation of funds (2) herd mentality – due to the inherent competition among the fund managers. An intelligent but individual investors has not such completion if he is rational.
About Corporate behavior :
You can get much further with a kind word and gun than with a kind word alone – Al Capone
Buying common Stocks :
In selecting common stocks we devote our attention to attractive purchases, not to the possibility of attractive sale. – Warren Buffet
Inverted thinking :
Charlie Munger is famous for popularizing the concept of inverted thinking first discovered by the 19th century mathematician Carl Jacoby. get closer to the right answer, scholars should “invert, always invert.” For Munger as an investor, this means stacking up all the reasons you like a stock. But then, before considering purchase, invert — list all of the reasons to dislike that same stock. Munger believes this more scientific approach will force you to see things as they really are. – See more at:
Charlie summarizes this by the following, which is applicable to life as much as investing
All I want to know is where I am going to die, so I will never go there
Comte’s Advice :
The Intellect should be the servant of the heart, not its slave – Auguste Comte
Red Queen Effect :
In many commoditized industries, investments in new technologies with a promise to improve productivity and costs prove illusory. Viewed individually each company’s capital investment is effective and rational, but collectively the decisions neutralize each other and are irrational. The customers get a better deal while the businesses are left with below average returns. Textiles in 1985 was one such industry
When a management with good reputation for brilliance tackles a business with reputation for poor fundamental economics, it’s the reputation of the business that sticks – Warren Buffet
About Book Value :
Many investors and academics/economists focus on book value ( net value of assets of a company carried in the book ) and replacement value ( cost of replacing existing assets in today’s dollars ) for calculating the price of stocks or stock market as a whole, however when Berkshire’s textile business was liquidated, the machinery that were carried at millions of dollars in the book had no buyers, and eventually were sold less than disposal cost. If a business is in a bad industry the book value is of no consequence.