Tag: investing

“Clearly there was a lot of voting going on in the boom year of ’99 – and much less weighing.”

Jeff Bezos, writing in his 2001 letter to Amazon shareholders:

Ouch. It’s been a brutal year for many in the capital markets and certainly for Amazon.com shareholders. As of this writing, our shares are down more than 80% from when I wrote you last year. Nevertheless, by almost any measure, Amazon.com the company is in a stronger position now than at any time in its past.

– We served 20 million customers in 2000, up from 14 million in 1999.

– Sales grew to $2.76 billion in 2000 from $1.64 billion in 1999.

– Pro forma operating loss shrank to 6% of sales in Q4 2000, from 26% of sales in Q4 1999.

– Pro forma operating loss in the U.S. shrank to 2% of sales in Q4 2000, from 24% of sales in Q4 1999.

– Average spend per customer in 2000 was $134, up 19%.

– Gross profit grew to $656 million in 2000, from $291 million in 1999, up 125%.

– Almost 36% of Q4 2000 U.S. customers purchased from one of our “non-BMV” stores such as electronics, tools, and kitchen.

– International sales grew to $381 million in 2000, from $168 million in 1999.

– We helped our partner Toysrus.com sell more than $125 million of toys and video games in Q4 2000.

– We ended 2000 with cash and marketable securities of $1.1 billion, up from $706 million at the end of 1999, thanks to our early 2000 euroconvert financing.

– And, most importantly, our heads-down focus on the customer was reflected in a score of 84 on the American Customer Satisfaction Index. We are told this is the highest score ever recorded for a service company in any industry.

So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” Clearly there was a lot of voting going on in the boom year of ’99 – and much less weighing. We’re a company that wants to be weighed, and over time, we will be — over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.

Amazon market cap today, March 22, 2022: USD $1.64 trillion.

“The goal of the non-professional should not be to pick winners.”

Warren Buffett, writing in his 2013 letter to Berkshire Hathaway shareholders:

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

“Taking temporarily high rates of annual exponential growth as indicators of future long-term developments is a fundamental mistake.”

Vaclav Smil, writing in Growth: From Microorganisms to Megacities:

Taking temporarily high rates of annual exponential growth as indicators of future long-term developments is a fundamental mistake — but also an enduring habit that is especially favored by uncritical promoters of new devices, designs, or practices: they take early-stage growth rates, often impressively exponential, and use them to forecast an imminent dominance of emerging phenomena.

Many recent examples can illustrate this error, and I have chosen the capacity growth of Vestas wind turbines, machines leading the shift toward the de-carbonization of global electricity generation. This Danish maker began its sales with a 55 kW machine in 1981; by 1989 it had a turbine capable of 225 kW; a 600 kW machine was introduced in 1995; and a 2 MW unit followed in 1999. The best-fit curve for this rapid growth trajectory of the last two decades of the 20th century (five-parameter logistic fit with R2 of 0.978) would have predicted designs with capacity of nearly 10 MW in 2005 and in excess of 100 MW by 2015. But in 2018 the largest Vestas unit available for onshore installations was 4.2 MW and the largest unit suitable for offshore wind farms was 8 MW that could be upgraded to 9 MW (Vestas 2017a), and it is most unlikely that a 100 MW machine will be ever built.

This example of a sobering contrast between early rapid advances of a technical innovation followed by inevitable formation of sigmoid curves should be recalled whenever you see news reports about all cars becoming electric by 2025 or new batteries having impressively higher energy densities by 2030.

But the final, inescapable power of this reality may seem inapplicable in those cases where exponential growth has been underway for an extended period of time and when it keeps setting new record levels. More than a few normally rational people have been able to convince themselves — by repeating the mantra “this time it is different” — that performances will keep on multiplying for a long time to come.

“If the shoe shine boys are buying stocks, who else is left?”

Jason Alan Jankovsky, writing in Time Compression Trading:

J. P. Morgan tells the story of how he would get his shoes shined every Wednesday at the same shop around the corner from his office. One day the shoe shine attendant asked him if he and his friends could buy some stock through Morgan’s brokerage. The three friends had about $40—a lot of money in 1929. Morgan politely refused, hurried back to his office, and ordered that his company was not to have a single share of stock on its books by the end of the day. Morgan simply asked, “If the shoe shine boys are buying stocks, who else is left?” Of course, the 1929 stock market crash was only a few days away, and Morgan looked like a genius. He was not a genius; he noted that the order flow was likely running out on the buy side. It wasn’t his army of analysts that showed him that. It was a public investor.

Robinhood day traders are the new shoe shine boys.

“Forecasts are the real fluff and history is where the meat is.”

Morgan Housel, via Collaborative Fund:

Studying history can feel like intellectual candy that offers no practical use to investors who are paid to foresee the future. But once you accept how fragile our assumptions of the future are, you realize that forecasts are the real fluff and history is where the meat is.

Accepting that forecasts have little use doesn’t mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which – given how stable behavior is over time – is the next best thing to knowing what will happen next.

Forecasts rely on knowing when something will occur. Expectations are an acknowledgment of what’s likely to occur without professing insight into when it will happen.

Expectations are healthier than forecasts because they provide a vision of the future stripped of all false precision. If you know a recession will occur at some point, you won’t be that surprised whenever it arrives – which is a huge benefit. But if you assume you know exactly when it will occur you’ll be tempted into all kinds of dangerous behavior, leveraged with overconfidence. And you’ll be shocked when time passes and what you thought would occur hasn’t happened (yet).

“Since 1929, the S&P 500 has suffered 14 bear markets.”

Jason Zweig, via WSJ:

Since 1929, the S&P 500 has suffered 14 bear markets, defined by S&P Dow Jones Indices as losses of at least 20%. The shortest and shallowest was the 20% drop that lasted less than three months in late 1990. The deepest was the 86.2% collapse from September 1929 to June 1932; the longest, the 60% plunge from March 1937 to April 1942. On average, bear markets lasted 19 months and dealt a 39% loss.

“Mr. Market is there to serve you, not to guide you.”

Warren Buffett, writing in his 1987 letter to Berkshire Hathaway shareholders

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins?”

The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.