Investment Theory #6: Buffett’s 1962 Letter

In 1956, Warren Buffett concluded his work for Benjamin Graham and returned to Omaha, where he started an investment partnership. This partnership was formed with seven limited partners, made up of family and friends, contributing $105,000, and Warren Buffet contributing $100. Over time it grew.

This post continues my series about that partnership. The goal is to gain some insight into one of the most successful investment vehicles in modern history.

Links to past years can be found here: 1957, 1958, 1959, 1960, 1961

Continue reading “Investment Theory #6: Buffett’s 1962 Letter”

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Natural Science #6: Heredity & Genetics

About 2000 years ago, Aristotle claimed:

We’re each a mixture of our parents’ traits, with the father supplying life force and the mother supplying the building blocks.

Over the next 2000 years, our understanding of heredity didn’t change much. We had a general understanding that if two parents had blonde hair, their offspring would probably have blonde hair. We took this concept and applied it to the breeding of livestock, to the glorification of royal bloodlines, and to the subjugation of entire ethnic groups.

It wasn’t until the mid 20th century that we discovered the role chromosomes, DNA, and genes played in heredity. This post will explore how our understanding of heredity and genetics has developed over time. We will start with the father of genetics, Gregor Mendel.

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History #6: The Big Bang

This post marks the beginning of an ongoing series that explores big history. It follows the structure of the college-level course developed by historian David Christian. Bill Gates describes the course this way:

Big history is different from other history courses in that it covers our complete 13.7 billion years of shared history – going all the way back to the Big Bang.  The course then progresses to cover the development of stars, elements, plants, life, humans and our modern-day civilization. These “threshold moments” all share common themes and patterns that are the foundation for the course. To understand the similarities, differences and implications of these thresholds, students have to use many different disciplines spanning cosmology, physics, chemistry, biology, anthropology and social studies.

By connecting different areas of knowledge into one unified story, big history provides a framework for learning about anything and everything. I really like how the course challenges students to wrestle with big questions – questions like how different time scales affect our perspective on history, how language transformed humanity, and what it means to be human. It’s a course I believe everyone should take.

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Human Nature #6: Envy and Jealousy

Aristotle, the classical Greek philosopher, once said:

Envy is pain at the good fortunes of others.

According to Bertrand Russell, envy is one of the fundamental causes of human suffering. This is because we tend to compare our situation to that of other people in our peer group and no matter how well we are doing, if other people are doing better, we feel discomfort.

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Numeracy #6: Kelly Criterion

Imagine we are given the opportunity to bet on a fair coin flip. If heads, we get 2 dollars for every dollar bet. If tails, we lose our bet. We can easily work out the expected value of a 1 dollar bet.

EV = 0.5($2) – 10.5($1)
EV = $0.50

On average, we can expect to make 50 cents per bet. How could we possibly lose? Now, imagine that we have a bankroll (investable capital) of 10 dollars. We take our 10 dollars, bet it all on heads, and lose it all. We broke the first rule of gambling, don’t get wiped out.

The solution seems obvious: never bet your whole bankroll. But how much should we bet? 9 dollars, 7 dollars, 4 dollars, 0 dollars? This is where the Kelly Criterion comes into play. The Kelly Criterion, or Kelly Optimization Model, is a formula used for determining the optimal size of a series of bets. It other words, it tell us how much of our bankroll to bet given a chance of winning and a payout.

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Investment Theory #5: Buffett’s 1961 Letter

In 1956, Warren Buffett concluded his work for Benjamin Graham and returned to Omaha, where he started an investment partnership. This partnership was formed with seven limited partners, made up of family and friends, contributing $105,000, and Warren Buffet contributing $100. Over time it grew.

This post continues my series about that partnership. The goal is to gain some insight into one of the most successful investment vehicles in modern history.

Links to past years can be found here: 1957, 1958, 1959, 1960

Continue reading “Investment Theory #5: Buffett’s 1961 Letter”

Natural Science #5: Uncertainty Principle

In the last natural science post, we briefly discussed the Heisenberg uncertainty principle. Considering that this principle laid the foundation for all of modern quantum mechanics, we could spend a little more time on it.

Simply put, the uncertainty principle states that there is a built-in limit to what one can know about a quantum system. For example, the more we know about a particle’s position, the less we can know about its momentum or speed, and vice versa. In the past, this has been confused with the observer effect, which states that the measurement of a system cannot be made without affecting the system. For example, the light photons that need to bounce off of an electron, for us to be able to see it, will actually change the momentum of the electron.

In reality, the uncertainty principle is a fundamental property of all wave-like systems and has nothing to do with the observer effect. If interested, an experiment showing this can be found here.

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