We often learn more from hearing good investors talk about their mistakes (they all make them) instead of their successes. In his latest shareholder letter to Berkshire Hathaway shareholders, Warren Buffett offers a review of his 50 years with the firm. He highlights two early mistakes that turned out to be the founding of the modern BH and led to great gains for the public shareholders.
The first mistake Buffett mentions is, surprisingly, buying Berkshire. Buffett calls the actions that led up to his purchase of Berkshire a “monumentally stupid decision.” He says he knew Berkshire was a troubled company and that he had only bought into it because he thought it was cheap. Buffett expected to make a quick profit and get out. And he almost did.
The latest annual letter from Warren Buffett to shareholders of BerkshireHathaway was posted on Saturday. It was promoted in advance as being a special letter since it is the 50th such missive from Buffett. It does contain some interesting surprises such as Buffett’s unbridled optimism about the u.S. and the U.S. economy, chastising those who become optimistic about the country’s future in the face of short-term problems. He also discusses somewhat how his and the company’s investment strategy changed over the years from buying public company stocks to buying large businesses and holding them. He also repeats his case for long-term investing, among other things in the letter.
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure). Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do.
I don’t usually cover individual companies, but I found this profile of Kellogg and its recent problems interesting. It contains an interesting history of the company but also explains how the company is hurt by its own poor management and business decisions as well as by changing consumer tastes. It’s not a pretty picture for shareholders, but the people running the company apparently are doing well.
And Kellogg faces a more ominous trend at the table. As Americans become more health-conscious, they’re shying away from the kind of processed food baked in Kellogg’s four U.S. cereal factories. They tend to be averse to carbohydrates, which is a problem for a company selling cereal derived from corn, oats, and rice. “They basically have a carb-heavy portfolio,” says Robert Dickerson, senior packaged-food analyst at Consumer Edge. If such discerning shoppers still eat cereal, they prefer the gluten-free kind, sales of which are up 22 percent, according to Nielsen. There’s also growing suspicion of packaged-food companies that fill their products with genetically modified organisms (GMOs). For these breakfast eaters, Tony the Tiger and Toucan Sam may seem less like friendly childhood avatars and more like malevolent sugar traffickers.
Bryant says Kellogg is laboring to develop cereals that will overcome these cultural shifts and end its morning misery. Some of Kellogg’s wounds, however, are self-inflicted. Its two largest competitors—General Mills, maker of Cheerios and Lucky Charms, and Post Holdings, whose brands include Grape-Nuts and Honey Bunches of Oats—are struggling with the same morning trends. Yet the decline in General Mills’ 2014 cereal sales was half as bad as Kellogg’s, and Post eked out a 2 percent increase.
Pyramid schemes are a popular way for some people to make money at the expense of others. There are many pyramid schemes underway in the U.S. at any time. Some are local or small, while others are national or international and earn the early members fortunes. Why can’t the government step in and shut down pyramid schemes soon after becoming aware of them?
This interview with the Federal Trade Commission’s retired economist who helped shut down pyramid schemes gives his view. He says there is no clear rule in the law defining pyramid schemes. Congress needs to sit down and write a law that draws a clear line so that regulators and people in business know what’s allowed. Otherwise, it takes too long to compile evidence and convince courts that an operation should be closed.
“From a policy perspective, in terms of sending clear signals to the industry, the FTC has done worse than nothing since 1979,” Keep says. “It sends confusing signals that have in no way helped us understand how to identify a multilevel marketing company that may be a pyramid scheme.”
A federal rule would create as a matter of policy the notion that pyramid schemes can exist, and that when they exist, they can do a lot of harm, Keep says.
“In advertising, we won’t tolerate it if a single source hands out a marketing message that is deceptive,” he says. “So why should we tolerate it if 10,000 people hand out marketing messages that are deceptive? We could be talking about that many or more when we look at the multilevel marketing industry as a whole. And the FTC has just been unwilling to take that on.”
While many were surprised in 2014 when Saudi Arabia decided not to support oil prices with supply cutbacks, others saw a deliberate long-term strategy that would benefit the Saudis and other OPEC members over others. The main goal is to force other producers to reduce their production because it isn’t profitable at lower prices. This Bloomberg.com piece updates the strategy and its results. The conclusion is that the strategy is working for the Saudis, but it will be a while yet before production and supplies are reduced enough globally to put the Saudis back where they want to be.
“OPEC giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York said by phone. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand. We think this change is for good.”
The number of rigs drilling for oil in the U.S. dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes Inc. showed Feb. 20. Since Dec. 5, a total of 556 have been taken out of service. Oil explorers including Royal Dutch Shell Plc and Chevron Corp. have announced spending cuts of almost $50 billion since Nov. 1.
Transocean Ltd., the world’s largest offshore driller, had its credit rating cut to junk Feb. 25 by Moody’s Investor Service on concern the company will increase debt levels while the drilling market deteriorates. It has about $9 billion of borrowings.
Oil has rebounded 10 percent in New York since Jan. 29, following a drop of more than 50 percent from June, in part because of the decline in drilling, which signaled supply growth will slow. Lower prices also spurred demand from bargain hunters, putting European benchmark Brent crude on track for its first monthly gain since June.
For years after the financial crisis, sales of existing homes were much higher than new home sales. Home builders couldn’t compete with distress sales and foreclosures. Recently, trends have reversed. Home builders are optimistic, and new home sales are generally rising. Existing home sales, however, are stagnating. This article tries to reconcile the trends.
Second, some economists and analysts note that inventory of existing homes listed for sale is low, which has aided the new-home market. The Realtors reported a 4.7-month supply of existing homes for sale in January, meaning it would take that long to burn through the available inventory at the current sales pace. The general gauge of a normal market is a six-month supply.
“If you believe the builders, it’s because there’s not a lot of inventory in the existing-home market, and that’s pushing people into the new-home market,” said David Goldberg, an analyst with UBS Securities. “But I think you have to wait and see. We don’t have a big enough data set to make a judgment on the spring season yet.”
A school of economics argues that occupational licensing doesn’t exist to protect the public or ensure that only quality professionals provide certain services. Instead, occupational licensing is a way to restrict entry, reduce competition, and produce higher profits for those who meet the hurdles to obtaining a license. The Supreme Court at least partly accepted this premise and put the first restrictions in a long time on occupational licensing. It shot down attempts by North Carolina dentists to prevent non-dentists from providing teeth whitening. The trend might not go far, however, because federal antitrust laws allow states to give licensing boards powers that violate antitrust law.
In my view, the majority deftly navigated the tradeoff. The court said that North Carolina can, without question, decide that teeth whitening is the practice of dentistry but they have to do so more or less explicitly–they can’t simply put the fox in charge of the hen-house by deferring the decision to the dentists.
In other words, the court raised the cost of rent-seeking. If the dentists want to monopolize the practice of teeth whitening they will have to make that case to the legislature and not rely on the unilateral actions of a board composed entirely of dentists and created for entirely different purposes.
The Government Accountability Office says that the way the IRS estimates and reports cases of identity theft greatly understates the amount of identity theft occurring through tax administration. The GAO also says that the methods the IRS uses to prevent identity theft are weak and easily avoided by crooks. As a result many taxpayers undergo the trauma and expense of having their identities stolen, while taxpayers foot the bill for refunds that were issued to crooks and can’t be recovered.
The IRS is only partly responsible for the high level of identity theft and false refunds occurring. Congress continues to prevent the IRS from setting up its own online tax return preparation system that could be far more secure than the patchwork system that coordinates electronic filing with outside software firms. The current system is kept in place by Congress because of the influence of lobbyists for the large software firms with financial interests in the broken system.
“IRS has poured resources into trying to clean up the tax accounts of the honest victims and is playing a losing game of ‘pay and chase’ with the thieves,” the accountability office said.
The watchdog recommended the IRS instead work “to prevent fraudulent refunds from being issued in the first place.”
IRS officials cited “resource constraints” in defense of why they didn’t conduct a more thorough analysis of how much money the agency could have lost to identity fraud.
But the accountability office suggested “better reporting of what is already known” from analyses “would not be costly.”
I don’t know if Buffett was being serious with this interviewer, but he revealed that he has a very unusual diet. Someone with this diet isn’t supposed to live to age 84. He also claimed to have deliberately chosen the diet after some research.
Asked to explain the high-sugar, high-salt diet that has somehow enabled him to remain seemingly healthy, Buffett replies: “I checked the actuarial tables, and the lowest death rate is among six-year-olds. So I decided to eat like a six-year-old.” The octogenarian adds, “It’s the safest course I can take.”
Many people don’t change their lives, even when they want to or believe they need to. This post argues that happens because people are afraid of change and focus on what could go wrong with the change. The article is focused mostly on people who are afraid to make career changes, but it is helpful for people who have been avoiding any kind of change that they’d really like to make.
How do we effectively address that “what if?” fear and move through it? These four simple strategies will help you move beyond the fear, into action:
Just do one tiny thing today (and every day) to “try on” a new direction.
Most of us have no idea how to go about exploring a new career. I know now that there are scores of ways to simply “try on” a new direction before we leap. We don’t have to reinvent completely, or chuck our old life in order to go in a new direction. We can just explore it in small, digestible, doable ways – through volunteering, interviewing, shadowing professionals, taking on a small project, talking to someone who does it, consulting, working part-time, etc. The key is to view the exploration and research as a “project” in your life, not as a wholesale life change. You don’t have to risk or lose everything to try out a new path. Just take one tiny step every day or week.