I’m excited to announce the release of a book I’ve been working on for about 6 months now, and first started in 2010.
It’s a compilation of every letter Warren Buffett wrote to the shareholders of Berkshire Hathaway. I first created it a few years ago for myself and friends. Last year I got Buffett’s endorsement — plus a few non-public letters — to publish the book for the benefit of fans and shareholders of Berkshire.
Here is the official page with all the details. There you can find a more detailed description, plus some sample pages and a chart detailing the performance of Berkshire’s insurance operations. (For any programmers out there, the chart was created with D3. You can check out the development version on GitHub.)
Features of the book:
- Berkshire Hathaway annual shareholder letters from 1965 to 2012 (706 pages), including the 11 earliest letters not available on Berkshire’s website
- Tabulated letter years so you can easily flip to the desired letter
- Topics index
- Company index
- Person index
- Charts of:
- The growth in Berkshire’s book value and market price relative to benchmarks
- Insurance float and performance
- The operating businesses of Berkshire
The entire book is paginated, and has easy-to-flip-to labels for each letter’s year.
It is available for pre-order now. The first batch will be sold at the Berkshire Hathaway Annual Meeting on May 4 in the convention center. The rest of the copies will be available on Amazon on May 7.
- The obvious next step is to publish a digital version, easily readable on iPads or potentially Kindles. This is normally an easy transfer, but that’s not the case with this book due to the many tables that have to be converted. So no timeline on this but it will be forthcoming.
- A book of letters to the partners of Buffett Partnership, Ltd., Buffett’s hedge fund he ran from 1957 to 1970. This will be a similar format to the Berkshire book, with indexes, page numbers, etc.
These are some of my notes from the book “The Success Equation” by Michael Mauboussin. This book was spotted on Warren Buffett’s desk in this tour of his office. There’s lots more interesting stuff in the book, but these notes in particular answer the question “How do you separate luck and skill?” We’ll start off with some definitions:
Luck is a chance occurrence that affects a person or a group (e.g., a sports team or a company). Luck can be good or bad. Furthermore, if it is reasonable to assume that another outcome was possible, then a certain amount of luck is involved. In this sense, luck is out of one’s control and unpredictable. Randomness and luck are related, but there is a useful distinction between the two. You can think of randomness as operating at the level of a system and luck operating at the level of the individual. Luck is a residual: it’s what is left over after you’ve subtracted skill from an outcome.
The definition of skill depends on how much luck there is in the activity. In activities allowing little luck, you acquire skill through practice of physical or cognitive tasks. In activities incorporating a large dose of luck, skill is best defined as a process of making decisions. Here, a good process will have a good outcome but only over time. Patience, persistence, and resilience are all elements of skill.
Separating luck and skill
At the heart of making this distinction lays the issue of feedback. On the skill side, feedback is clear and accurate, because there is a close relationship between cause and effect. Feedback on the luck side is often misleading because cause and effect are poorly correlated in the short run.
In most cases, characterizing what’s going on at the extremes is not too hard. As an example, you can’t predict the outcome of a specific fair coin toss or payoff from a slot machine. They are entirely dependent on chance. On the other hand, the fastest swimmer will almost always win the race. The outcome is determined by skill, with luck playing only a vanishingly small role.
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The Visible Hand: The Managerial Revolution in American Business was written by Alfred Chandler and released in 1977. It’s a great history and study on business and why it exists the way it does today. For some books I read, I transcribe and summarize my highlights/notes in order to better learn the material and for future reference. Below you’ll find my (very long) summary of The Visible Hand. Some passages are direct quotes and others are my own paraphrasing/summaries. So if you’re interested in this sort of topic, send this baby to Instapaper, plop down on the couch, and enjoy.
The Visible Hand
Modern business enterprise is easily defined, having two specific characteristics: (1) it contains many distinct operating units and (2) it is managed by a hierarchy of salaried executives. Each unit has its own administrative office, set of books and accounts. Each could theoretically operate as an independent business enterprise. Such enterprises did not exist in the U.S. in 1840. By World War I this type of firm had become the dominant business institution. It was the institutional response to the rapid pace of technological innovation and increasing consumer demand.
This study is a history, moving chronologically. Before entering the historical experience, here is a list of general propositions to make more precise the primary concerns of the study:
The initial appearance of modern business enterprise:
- Modern multiunit business enterprise replaced small traditional enterprise when administrative coordination permitted greater productivity, lower costs, and higher profits than coordination by marker mechanisms. [This was due to both corporate efficiency and economies of scale.]
- The advantages of internalizing the activities of many business units within a single enterprise could not be realized until a managerial hierarchy had been created. An enterprise without such managers remains little more than a federation of autonomous offices.
- Modern business enterprise appeared for the first time in history when the volume of economic activities reached a level that made administrative coordination more efficient and more profitable than market coordination. It came with new technology and expanding markets.
Growth of the modern business enterprise:
- The hierarchy itself became a source of permanence, power, and continued growth.
- The careers of the salaried managers who directed these hierarchies became increasingly technical and professional. Training became longer and more formalized.
- The management of the enterprise became separated from its ownership. Stockholders didn’t have the influence, knowledge, experience, or commitment to take part in the high command.
- Career managers preferred policies that favored the long-term stability and growth of their enterprises to those that maximized current profits. For salaried managers the continuing existence of their enterprises was essential to their lifetime careers.
- As the large enterprises grew and dominated major sectors of the economy, they altered the basic structure of these sectors and of the economy as a whole.
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Out of the many books I’ve read in different subjects, below is a list of some of my favorites with some brief commentary for some of them. There are a few other “Mental Model” categories (psychology, history, economics, ecology, etc.) that I left out — hopefull they’ll be the subject of another post.
- The Origin and Evolution of New Businesses, Amar Bhide — extensive study of startups of all kinds, how they grow, what makes them successful (this is not a “help” book it is mainly observational)
- Innovation & Entrepreneurship, Peter Drucker — how companies should systematically innovate — lots of good startup/innovation strategies (it’s not random)
- The Innovator’s Dilemma, Clayton Christensen — every businessperson or investor needs to read this (and the one below) — every industry’s value chain is disrupted at some point
- The Innovator’s Solution, Clayton Christensen — expands on “Dilemma” with better explanations and examples — I think the “jobs to be done” concept is one of the most important in business
- Competition Demystified, Greenwald + Kahn — how businesses capture value by building a moat, and what strategies to use if you have or don’t have one
- The Halo Effect, Phil Rosonzweig — the anti-business-book — but still has great insights on how businesses work and how best to run them
- Built to Last, Jim Collins — read this with The Halo Effect in mind — lots of good advice & stories (I like this much better than “Good to Great”)
- The Strategy Paradox, Michael Raynor — dense at times but a great theory on why strategy is so hard
- Hidden Champions, Hermann Simon
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Christmas comes but once a year.
This year, it comes three months early for those in the world of value investing. The following two books will be released at the end of September:
September 26 — ::amazon(“0071592539″,”Security Analysis: Sixth Edition”)::
After a 20 year hiatus, McGraw-Hill is releasing the latest updated edition of Ben Graham’s original Security Analysis. The update includes: a forward by Warren Buffett; a chapter by James Grant; introductions by Howard Marks, Bruce Berkowitz, and Bruce Greenwald; and commentary from Seth Klarman, Roger Lowenstein, and Glenn Greenberg. An impressive lineup. New subjects will include international investing, hedge funds, absolute return strategies, and the efficient market hypothesis.
September 30 — ::amazon(“0553805096″,”The Snowball: Warren Buffett and the Business of Life”)::
The definitive, nearly 1,000 page biography on Warren Buffett. Written by Alice Schroeder, the insurance analyst who caught Buffett’s eye after her report on Berkshire Hathaway. Much has been written about Buffett’s life, but never from his perspective. My guess is that many details will emerge about Buffett’s personality and the mindset that makes him the greatest investor of all time.
The cover story of the May edition of the Bloomberg Markets magazine discusses Nassim Nicholas Taleb’s affect on Wall Street:
On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley’s Manhattan offices on 47th Street and Broadway to address a group of the firm’s risk managers. His message: Your models don’t work.
Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests–Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said.
See the Full Article here
It’s always interesting to see what other investors or thinkers have on their bookshelf. In the introduction to the article, there’s a picture of Nassim Taleb in his library. Using the hard copy, I picked out a few books that Taleb has read (or hasn’t read, by Umberto Eco standards). These should be useful for expanding one’s network of mental models:
- Darwin’s Dangerous Idea, by Daniel Dennett
- Collapse, by Jared Diamond
- Guns, Germs and Steel, by Jared Diamond
- The Selfish Gene, by Richard Dawkins
- Rational Herds, by Christophe Chamley
- The Perception of Risk, by Paul Slovic
- Knowledge and Decisions, by Thomas Sowell
- Serendipity, by Royston Roberts
- The Construction of Preference, by Sarah Lichtenstein and Paul Slovic
- Evolutionary Dynamics, by Martin Nowak
- The Quark and the Jaguar, by Murray Gell-Mann
- Why Beauty is Truth, by Ian Stewart
- The Eastern Origins of Western Civilization, by John Hobson
- For and Against Method, by Imre Lakatos and Paul Feyerabend
- Probability via Expectation, by Peter Whittle
- Probability Theory, by E. T. Jaynes
- Plight of the Fortune Tellers, by Riccardo Rebonato
- Imperfect Knowledge Economics, by Roman Frydman and Michael Goldberg
- The Business of Options, by Martin O’Connell
- The Logic of Scientific Discovery, by Karl Popper
- Unmaking the West, by Philip Tetlock
On another note, I have joined the team of authors at Reflections on Value Investing. If you haven’t already, head over and subscribe to the RSS feed. It’s a must for any value investor. Although this was posted at both sites, for the most part, my occasional posts at Reflections will have different content than FutureBlind.