Links: Buffett Stock Market Predictions, Legacy vs. Reinvestment Moats and Fearon & Cannell on Short-Selling

“Spend each day trying to be a little wiser than you were when you woke up.” Charlie Munger

I wanted to share a few articles from around the interweb that I found interesting from last week.

Buffett on Stock returns from 1999.  This is one of the few articles where he makes a few predictions and comments on the level of the overall market.  Almost 17 years later (which is the time period he mentions), the S&P annualized return is 4.23%, including dividends, and 2.03% including dividends but after adjusting for inflation.  This is surprisingly accurate for a 17-year prediction.

Let me summarize what I’ve been saying about the stock market: I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like–anything like–they’ve performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate–repeat, aggregate–would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that’s 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.

Interestingly enough, the S&P returned 96% with dividends reinvested over that time period vs. Berkshire’s performance of 274%.

Connor Leonard, in a guest post at Base Hit Investing, discusses “Legacy Moats” and “Reinvestment Moats.”  He gives a great description of both.  Additionally, he outlines why most “value investors” miss out on “Reinvestment Moats.”  

Another great post, taking a look at the same subject from a different angle is Young Money (I enjoy his writing immensely).  He discusses three examples of companies we would consider “compounders” in now, but illustrates clearly how difficult it would have been to identify these companies in their early stages.

Farnam Street talks about wanting to be wrong.  As always, lots of good Charlie Munger material in this idea.

I love the Freakonomics books and the podcasts are just a weekly continuation of the pleasure of reading their books.  A few weeks ago, they did an excellent podcast focused on a new book with Anders Ericsson called Peak.  It’s a great listen.  You can find it here.

Scott Fearon and Carlo Cannell talk about a few examples from their history of short-selling.  If not educational, it is surely entertaining.  However, even if you are a long only investor, I find it incredibly helpful to understand the other side of the coin and to see if or where you might be wrong.

And finally, if you have any passing interest in Apple as a company or an investment, the website Above Avalon, is solely dedicated to analysis of Apple.  The write, Neil Cybert, provides both a business strategy emphasis while also covering underlying financial aspects.  He has a significant amount of free content on the website, or the subscription is only $100 per year.


More to Explore

Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

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