Money and Finance

Reddit AMAs...

I don't think I ever posted the Alice Schroeder one. And Malcolm Gladwell did a new one today.

Link to: Alice Schroeder's reddit AMA

Warren is a master of time management. He knows how to ease people off the phone without making them feel dismissed. He is great at saying no and I learned a lot about saying no tactfully. That's an important time management technique. Also, he manages his energy, reading when it's optimal, talking on the phone when he's got the right energy for that and so forth. It's fairly compartmentalized and he does not multitask through his day. That was a useful lesson.

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How Warren values a company. Someone could write a book on this subject and in fact, many have. :-)

For a Q&A format like this, here are some thoughts. Correct, Warren does not use DCF. Implicitly, he does think in terms of compounding, always, so when he comments on DCF as a method of valuation that's consistent even though he does not do the calculation. Hopefully that resolves this particular mystery.

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How Warren would value a company. First let me just start by saying that all value investing works. If you buy a dollar bill for sixty cents over time you will make money. So the search for a single method is to some extent a chimera. Warren's way is very simple. I have copies of an envelope or two where he did his calculation on the back - literally. If the margin of safety is wide enough, it almost doesn't matter what method you choose.

I know you want something more specific. I have to generalize, a lot, but hopefully this is helpful. Essentially it's a three step process. 1) Is it an addressable investment? He rules out a lot of stuff that has too much tail risk, or he has no edge on the market. For example, thinking you can be smarter at buying Johnson & Johnson than everyone is essentially market timing. Warren rules that out unless he has some insight he is convinced no one else has. He may not always be right but it's the right approach and works over time. 2) Downside protection. He looks for multiple ways to avoid losing money. If you look at the preferred stock deals he did after the financial crisis, he fenced in these companies and built in so many ways to avoid losing money it was almost funny. He will pass on huge upside opportunities if he can't get downside protection when its an investment as opposed to a bet such as March Madness deal. 3) Capital generating power. His focus is on how much capital an investment can produce that can be reinvested either within the business or elsewhere. He prefers the easy route (reinvestment) however, ultimately he's agnostic, money is money and for a dollar he puts out he wants x% back. The x% has declined over the years with Berkshire's size and falling interest rates.

There are many wrinkles and specifics to how you apply these ideas, it's difficult to cover in a short form.

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Link to: Malcolm Gladwell's reddit AMA

A lot of people wondered why I went on Glenn Beck's show. I don't agree with a lot of what he says. But i was curious to meet him. And my basic position in the world is that the most interesting thing you can do is to talk to someone who you think is different from you and try and find common ground. And what happened! We did. We actually had a great conversation. Unlike most of the people who interviewed me for David and Goliath, he had read the whole book and thought about it a lot. My lesson from the experience: If you never leave the small comfortable ideological circle that you belong to, you'll never develop as a human being.

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There is a lot of confusion about the 10,000 rule that I talk about in Outliers. It doesn't apply to sports. And practice isn't a SUFFICIENT condition for success. I could play chess for 100 years and I'll never be a grandmaster. The point is simply that natural ability requires a huge investment of time in order to be made manifest. Unfortunately, sometimes complex ideas get oversimplified in translation.

- Links
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