Here’s a short list of modern companies I admire, in no particular order:
- Berkshire Hathaway
- Bridgewater Associates
- W.L. Gore & Associates
- The Baupost Group (see here)
- Valve Corporation
Here’s a short list of modern companies I admire, in no particular order:
UPDATE: All stats and figures below have been updated with the final medal counts as of August 12, 2012. Prior medal equation had population weighted at 1x and GDP/cap weighted at 1.85x.
I was watching the Olympics with my brother last week, and we were discussing what the best way to rank countries is. Some media outlets rank by number of Gold medals and others by number of total medals (Gold + Silver + Bronze). I think total medals is better because it takes a little bit of luck out of the equation (i.e. in some competitions, amongst 3 very good athletes, luck is more likely to be involved in determining who is the best among the 3).
But total medal count doesn’t take into account factors that are “outside” short-term control. Total population is what first comes to mind, but also GDP. If there are a lot more people in the country it’s more likely there will be more Olympic athletes and thus more medals. If GDP per capita is high, athletes would presumably have more resources and better opportunities for training.
This link I found on Hacker News shows adjusted medal counts for both population and total GDP.
I think a better way of adjusting the rank is by using both population and GDP/capita and doing a regression analysis to find each country’s “Expected Medals”. The countries would then be ranked on the difference between their expected and actual medals.
It’s been a while since my college stat class, but here we go. The equation for Expected Medals based on the final medal count is:
Total medals = 4.4 + population / 21,610,238 + GDP per cap / $5,364
According to Excel these variables account for 28% of the difference in medal count. So you could say that 72% of the factors that go into a country’s medal count are unrelated to population or GDP/cap.
But this equation is a little off from reality because it would mean countries with very low populations would be expected to get at least 4 medals. So after fiddling with the equation a bit, I got rid of the “4.4” base and overweighted GDP/cap by 2x and population by 1.1x to zero-out the excess medal count for all countries. Why overweight GDP more than population? Because I personally think that variable matters more. Here’s the new equation:
Total medals = 1.1 * population / 21,610,238 + 2.0 * GDP per cap / $5,364
This gives a little more credit to the smaller countries and countries with low GDP/cap. So without further adieu, here are the final rankings:
|Rank||Country||Total medals||Expected medals||Excess medals|
|5||Republic of Korea||28||10.3||18|
The U.S. still wins! Lest you think I’m biased, the only adjustments I made actually favored most other countries in the ranking (those with lower GDP/cap, like Russia and China). If you see any flaws here or think there’s a better way please comment.
If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people… Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. — Jeff Bezos
A mistake is an event, the full benefit of which has not yet been turned to your advantage. — Ed Land, Polaroid
Do not imagine that you have to know everything before you can do anything. My own best work was done when I was most ignorant. — Freeman Dyson
Those who dream by night in the dusty recesses of their minds awake to find that all was vanity; But the dreamers of day are dangerous men, That they may act their dreams with open eyes to make it possible. — T. E. Lawrence
Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past. — Charlie Munger
The world’s biggest problem is that not enough people are working on the world’s biggest problems. — Max Marmer, Student of Life, January, 2011
After posting “The Restaurant Investor” earlier this week, I realized that some of my older articles were now gone (they used to be up on the Gannon on Investing blog, which has been taken down). So, I re-posted them on this site, and you can see both through the links below. Enjoy!
Quality Without Compromise
September 12, 2007–See’s Candies, Warren Buffett and the perfect investment.
Warren Buffett & The Washington Post
December 12, 2006
This is a long-form article about the restaurant industry and the turnaround of Steak-n-Shake in 2008–2009. It tells the stories of how McDonalds, In-N-Out Burger, and Steak n Shake were founded and have stayed successful for so long. A PDF of the article can be found here. Please enjoy, and checkout the update at the end regarding the Biglari story.
In March, 2008, Sardar Biglari won the most important victory of his life. In an activist campaign to gain control of the board of directors of The Steak n Shake Company, Biglari and his partner received nearly triple the number of votes of the directors they were replacing.
It hadn’t been easy—their proxy fight with incumbent management had been going on for more than six months. Biglari and the entities he controlled first purchased seven percent of Steak n Shake during the summer of 2007. In August, the initial filing was made with the S.E.C. stating that Biglari had been in discussions with management. At this point, as with many activist investors, Biglari hoped that management would be open to his suggestions and criticisms of the company. He was the third largest owner of Steak n Shake at the time, holding more shares than all executive officers and directors combined. Only days earlier, C.E.O. Peter Dunn had unexpectedly resigned, stating his intent to “pursue other interests.” It seemed like the perfect time to reform the faltering restaurant chain.
Yet, after Biglari’s initial meeting with the Board and interim C.E.O., he was denied representation and otherwise rebuffed from any involvement with the company. To management, he was as a nuisance—one that if ignored, would go away. But Biglari was not the kind of investor to be ignored. While continuing to accumulate shares, he launched the first blow in the proxy fight on October 1. Along with an official solicitation to shareholders, Biglari wrote a brief letter outlining his intentions and frustration with the performance of Steak n Shake.Continue reading “The Restaurant Investor”
In one of the best TED talks I’ve seen, here is Barry Schwartz:
The talk applies to everything we do but (staying on subject) I’m going to talk about its relation to business.
In my post The Real Causes of the Financial Crisis, I talked about how misaligned incentives led the system astray. But even if you properly incentivize people to do the right thing, that doesn’t mean everything is going to work out. In my previous post, I left it at “However, there’s no perfect solution.” But now I’d like to elaborate.
Dick Fuld, Jimmy Cayne and other financial execs had significant share ownership relative to their personal net worth. In other words, their interests were strongly aligned with shareholders. But that didn’t stop them from making bad decisions that were not only harmful to their company, but bad for society as a whole.
Optimally, you want management that doesn’t need incentives to do the right thing. Good incentives can help, but they aren’t going to cut it. Financial managers in particular need risk aversion ingrained in their personality. They need to be willing to stray from the herd and not follow the crowd. They need to have the wisdom, as Barry Schwartz described it, to do the right thing.
In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you. … If you hire somebody without the first, you really want them to be dumb and lazy.
— Warren Buffett
In terms of business and finance, you can’t find a better example of a wise person than Warren Buffett.
As an investor or an employee, you want a business leader who is passionate about their company and the product they are selling—not about the money.* Qualities like this can be very difficult to determine. Buffett not only shares them, but he’s good at seeing them in others (one of the major reasons he is so successful).
In business school, you’re not taught to have character. You’re given the numbers, the statistics, the “how to” in a step-by-step fashion. But sometimes, its better to focus on common sense instead of what the figures say. Wisdom, virtue and common sense: all things that can’t be taught, no matter how prestigious the school.
* One last note — if I were the shareholder of a company that has received TARP funds, and will now have salary/bonus caps at $500k, here’s what I’d think: 1) if management gets paid a little less while we’re receiving a safety net from our government, that’s fine. 2) If one of my managers wants to jump ship so he can get paid more somewhere else, then great. It turns out I didn’t want him at the company in the first place.
The New York Times, 11/4/1907
In October of 1907, financial markets in the United States came to a complete halt. Credit markets froze, major banks collapsed, and the stock market plunged. Heads of industry, like J. P. Morgan, were forced to inject massive amounts of capital to prevent a complete collapse.
The circumstances of the Panic of 1907 are very similar to our current crisis. In both, the economy had experienced huge growth over the preceding decade. Banks lowered lending standards, which led people to take on more and more debt. When bank assets began to decline, depositors panicked, and there was a run on the financial system.
But for the rest of this post, I’d like to focus on the period that follows a financial crisis—not on the crisis itself. (Keep in mind that although I speak in terms of American progress, my point applies to any country around the world.)
* * *
The period following 1907 was monumental in American history. Continue reading “1908 – 2008 – 2108”
Before I finish up with a longer post I’ll get to tomorrow, I thought I’d relay a few good articles on the financial crises:
And this: (not too far from the truth)
Forget about Mr. Market’s terrible mood swing. He is there to serve you, not to guide you. Why would he be offering such low prices for the businesses he owns? Who knows. Take advantage of his irrationality. If hearing it from me isn’t enough, listen to John Bogle. (Image credit: The Principles of Uncertainty)
Berkshire Hathaway Letters (1983-1987)
A word cloud is a visual representation of a group of words, with the size of each word weighted to how many times it appears. The above two examples use the Berkshire Hathaway shareholder letters for the 5-year periods ending in 1987 and 2007. You can see some often-used words between the 20-year period: business, earnings, value, company, insurance. Word clouds are a good representation of what subjects the author is focusing on.
Below are a few more examples: (all created at Wordle) Continue reading “Value Investing Word Clouds”