Investment Theory #16: Berkshire Hathaway’s 1977 Letter

In 1962, Warren Buffett began purchasing shares of Berkshire Hathaway – a textile manufacturing company in the process of downsizing. In 1965, after feeling slighted by management, Buffett acquired control of Berkshire. In 1967, Berkshire purchased an insurance company and began using its float to fund investments. Through acquisitions and investments, Berkshire’s share prices would appreciate from $8 in 1962 to $276,800 in 2017 (20% annualized).

This post begins my series on Berkshire Hathaway. The goal is to gain some insight into one of the most successful companies in modern history. We will be looking at Warren Buffett’s shareholder letters which can be found here.

Links to Buffett’s partnership years: 1957, 1958, 1959, 1960, 1961, 1962, 1963, 1964, 1965, 1966, 1967, 1968

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Investment Theory #19: Klarman’s 1997 Letter

Lately, it appears a fresh wave of animal spirits has gripped the markets — just look at the post-election rally in equities. Investors seem to have bought into the narrative that tax cuts and deregulation will jump-start the economy, while at the same time ignoring the risks inherent in an “America-First” protectionist agenda.

In times of market loftiness, it serves us well to reexamine how similar cycles have played out in the past, and there is probably no better case study than Seth Klarman’s handling of the late 1990s. Klarman is a well-respected value investor who founded the Baupost Group in 1982. Since then he has generated an average annual return of 19%. Klarman’s investing philosophy can be summed up by the title of his book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.

This series of posts will reflect on Klarman’s activity during the period 1995 to 2001. Links to past posts: 1995, 1996

Continue reading “Investment Theory #19: Klarman’s 1997 Letter”

Investment Theory #18: Klarman’s 1996 Letter

Lately it appears that a fresh wave of animal spirits has gripped the markets — just look at the post-election rally in equities. Investors seem to have bought into the hype that tax cuts and deregulation will jump-start the economy, while at the same time ignoring the risks inherent in an “American-First” protectionist agenda.

In times of market loftiness it serves us well to reexamine how similar cycles have played out in the past — and there is probably no better case study than Seth Klarman’s handling of the late 1990s. Klarman is a well-respected value investor who founded the Baupost Group in 1982. Since then he has generated an average annual return of 19%. Klarman’s investing philosophy can be summed up by the title of his hard to find book: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor (plenty of pdfs floating around the internet though).

This series of posts will reflect on Klarman’s activity throughout 1995-2001. Links to past posts: 1995

Continue reading “Investment Theory #18: Klarman’s 1996 Letter”

Investment Theory #17: Klarman’s 1995 Letter

Lately it appears that a fresh wave of animal spirits has gripped the markets — just look at the post-election rally in equities. Investors seem to have bought into the hype that tax cuts and deregulation will jump-start economic growth, while at the same time ignoring the risks inherent in an “American-First” protectionist agenda.

In times of market loftiness it serves us well to reexamine how similar cycles have played out in the past — and there is probably no better case study than Seth Klarman’s handling of the late 1990s. Klarman is a well-respected value investor who founded the Baupost Group in 1982. Since then he has generated an average annual return of 19%. Klarman’s investing philosophy can be summed up by the title of his hard to find book: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.

This series of posts will reflect on Klarman’s thinking throughout the period 1995-2001.

Continue reading “Investment Theory #17: Klarman’s 1995 Letter”

Investment Theory #16: Performance Appraisal

This is the last post in a three-part series on investment performance evaluation. The series explores: 1) Performance Measurement, 2) Performance Attribution, and 3) Performance Appraisal. In other words, how much we made, how much we made compared to a benchmark, and how much we made adjusted for the amount of risk we took on.

Performance evaluation allows us to examine the effectiveness of our investment process. It provides us with a systematic way of judging our decision-making process and improving on it, which is what investment theory is all about.

Today’s post deals with performance appraisal, which is a technique used to compare returns with an account’s corresponding risk. Risk is a hard thing to pin down, but for our purposes we will stick with two typical measures: systemic risk, measured by beta, and total risk, measured by the standard deviation of returns.

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Investment Theory #15: Performance Attribution

This is the second in a three-part series on investment performance evaluation. The series explores: 1) Performance Measurement, 2) Performance Attribution, and 3) Performance Appraisal. In other words, how much we made, how much we made compared to a benchmark, and how much we made adjusted for the amount of risk we took on.

Performance evaluation allows us to examine the effectiveness of our investment process. It provides us with a systematic way of judging our decision-making process and improving on it, which is what investment theory is all about.

Today’s post deals with performance attribution, which is a technique used to explain why a portfolio’s performance differed from a benchmark. That difference is known as active return. For example, if our portfolio returned 10% while the S&P500 returned 20%. Our active return would be -10%.

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Investment Theory #7: Michael Mauboussin

Michael J. Mauboussin is managing director and head of Global Financial Strategies at Credit Suisse, where he advises clients on valuation and portfolio positioning, capital markets theory, competitive strategy analysis, and decision-making. He is also an adjunct professor of finance at the Columbia Business School and chairman of the Board of Trustees at Santa Fe Institute.

Mauboussin started his career at Drexel Burnham Lambert of Michael Milken fame. He was trained to be a financial advisor and in his own words was an abject failure. Armed with the knowledge of what he wasn’t good at, he set out to find a job in equity research. He eventually landed a job as a packaged food analyst at First Boston, which later merged with Credit Suisse. He has been there ever since.

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