Philosophy

Shoulders of Giants – Charlie Munger & Li Lu Interview 08/2018

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Note: I have shared these videos via my Twitter account before, however may have missed readers who only follow the blog. Copyright of Weekly in Stocks, all contents are shared for non-commercial knowledge sharing purpose.

These are interviews conducted by a Chinese finance/business media called Weekly in Stocks. Overall, I really enjoyed it and think all questions are really well prepared. As expected, many questions are around China (both philosophy & capital markets).

I think this might be the first time Munger explicitly drew parallel between his & Buffett’s philosophy & practices and oriental philosophies. Quoting from Munger: “…why are these people in China so interested in Berkshire Hathaway and Charlie Munger… and why do the Chinese like the book (Poor Charlie’s Almanack), I think the answer is it sounds Confucian…”, “…If you are a better person, you are likely to be a better investor; If you are a wiser person, you are likely to be a better investor…”

The follow-up interview with Li Lu alone is also of great interest, where he, may be for the first time, talked in details about Munger’s life, their interactions & his lessons learned from Munger, as well as his unique views of Chinese capital market.

Interview with Charlie Munger along with Li Lu [3 parts]

Follow-up Interview with Li Lu [2 parts]

 

 

A Valuation Framework for Bitcoin

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There is no new thing under the sun.

– The Bible

Disclosure first: This piece might be sacrilegious to many value investors. In Nov 2013 (yes, the last Bitcoin “bubble”), I put a small percent of my net worth then into Bitcoin. I have been holding and plan to hold them until it reaches my estimated value (showed below). Please do NOT see this piece as a defense to Bitcoin critics or as investment advices (In fact, I am always ready to change my view, however I just didn’t come across convincing counter-arguments. Or put it differently, I’ve been most of the critics’ place and held similar suspicion before but changed later). I see this piece as an alternative thinking framework to a potential significant invention in human history, and I welcome any sort of comments/feedbacks/critiques.

A few lemmas I want to establish before going further:

  1. The universe we live in consists of two and only two elements: energy and information. (mass, or material, could be unified to energy by Einstein’s famous equation: E = MC^2)
  2. Bitcoin’s value is binary (i.e. it should either 0 or something very large, there is no middle ground)
  3. If “intrinsic value” is defined as “present value of expected cash flow from a value producing asset”, Bitcoin (as well as all kinds of money) has NO intrinsic value.
  4. Global governments as a whole, is not as prudent and resposible as developed counties’.
  5. I have been wrong and could be wrong on Bitcoin

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Book Notes – Big Money Thinks Small (by Joel Tillinghast)

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Joel Tillinghast is a tenured Fidelity portfolio manager for its Low-Priced fund, however his name was known by few, including me, until recently. Tillinghast recently published his first book – Big Money Thinks Small last month, and was featured in a Barron’s interview in 08/12/2017 (Link here). When I first saw his interview, I found this manager interesting for his ability to consistently beat his benchmark, Russell 2000, for years with 100+ holdings. This diversified approach is very different than the “traditional” school of value investing, who advocates concentrated bets. Another impressive trait of Tillinghast’s fund is the extreme low turnover – only 9% a year. This means he on average holds each position for over 10 years!

For the sake of these special traits, I decide to pick up his book and try to see if there is anything I could learn from him.

BigMoneyThinksSmall

Overall, I think it is a valuable book, especially for someone had some investing experiences and is eager for historical investing case studies. Here are my key thoughts/lessons:

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Great Oriental Investors – Shoucheng Zhang, a Quantum Polymath (Award Winning Physicist and VC Investor at once)

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As I mentioned in my first investor letter, my investing philosophy had deep roots in oriental philosophies. For this reason, I always find those investors who are able to master both eastern and western mental models extremely intriguing. On surface, lots of eastern mental models & philosophies resonate with well-known western principles already, but I also believe they have more unrecognized value to investing practices. I am planning to start a series to document all investors that fits this category, to document my lessons learned from them and to share with my readers their insights (many of which aren’t available in English media).

 

The first one is Shoucheng Zhang (Wikipedia Link). Zhang is an ingenious physicist, to say the least. He got admitted by one of the top universities in China purely by self-study after the Culture Revolution ended in 1978 when he was only 15, then went abroad and finished his PhD by 24. His best known finding is probably topological insulators, for which he was awarded a Dirac Medal in 2012. His work was estimated by Thompson Reuters to be able to win Nobel Prize in 2014 (Link). Zhang is also a tech VC investor. He is said to be one of the early investors of VMWare (as he’s a neighbor of the co-founder Mendel Rosenblum who is also a Stanford professor) and made hundred bagger on it. He officially started his profession investing career in 2013 by founding Danhua Capital (website link), an early/growth stage VC focusing on disruptive technologies.

 

Like Charlie Munger, Zhang also see Benjamin Franklin as an archetype. Zhang mentioned that he struggled at a young age on whether he should aspire to be a scientist or an entrepreneur, until he realized he really could be both after reading about Franklin, one of the greatest polymaths in history. Not surprisingly, he is also a fan of multi-disciplinary mental models. As a theoretical physicist, his application of quantum physics principles to investing (and life) is the most interesting insights among other thing. Additionally, contradicting to stereotype of physicists, he seems to have strong interests in Aesthetics.

 

Zhang’s key philosophy can be summarized by a quote he constantly mentioned in multiple interviews: “Complexity out of Simplicity” or “First Principle”. Before moving on, I think it would be beneficial to expand on the “First Principle” (Wikipedia link) as it initially appeared foreign to me. My understanding is that first principle is a thing/principle/notion which is in its most fundamental form and is self-evident without proof or deduction.  That is where you want to start your learning/thinking process.

 

Some of my favorite thoughts of Zhang (paraphrased) are below:

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“Sun Tzu’s Five Factors” Business Analysis Framework

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[I recently finished my first quarterly letter to my investors, who are some close family members and friends. Below is an excerpt from the investment process section, where I spent most of the time explaining my unique (at least I think) business analysis framework, which is a combination of Sun Tzu‘s Five Factors (based on the Art of War) & checklist method.]

 

Investment Approach – The Process

I will start with where I spend my resources and our capital to. It’s mainly 3 investment themes: special situations, distressed assets and great operations at reasonable price. The core idea of all three is “buy low sell high”, however the way of analysis for each is somewhat different.

  • In special situations category, I look for entities undergoing some type of corporate event that might lead to a mismatch of value and price (e.g. depressed prices due to forced sells, or under-appreciated prospect that could increase the value). Examples of special situation investments include, but are not limited to, spinoffs, corporate restructurings, mergers, liquidations, and rights
  • In distressed assets category, I look for asset that is priced well below its value due to unfavorable developments. a.k.a. “There is always a price to make a crappy business an attractive investment.” Since the risky nature of distressed assets, heavy analysis is performed on balance sheet and solvency side. It also is the most time consuming from tracking perspective as any new development and disclosure could significantly change the value evaluation outcome. I typically size ideas in this category conservatively. Examples of distressed assets investment include, but are not limited to, cigar butts, scandals and high yield corporate debts.
  • In great operations at reasonable price category, I look for, as the name itself says, great operating businesses at reasonable price. This is what Buffett does for the late part of his career, and examples include well known Berkshire Hathaway’s holdings of Coca Cola, American Express and Wells Fargo, etc. The return of this category comes not from the price/value mismatch in current day per se, rather from the compounding growth of the value in future. Thus, my research spent on this category is mainly on the industry, business model and moat of the business, which drive the value compounding ability of an entity.

Next, I will talk about the process of how I approach analyzing an opportunity. I usually start with the business itself, trying to understand the business model, industry landscape & whether there is moat around the business. Then I will move on to balance sheet, to get an idea of what assets it has, last to its profitability (i.e. income statement). There are well documented metrics and valuation methods for analyzing the latter two, but the first (also the most important, in my opinion) item – business analysis – may worth more elaboration.

I use a self-developed “Sun Tzu’s 5 factors” method to analyze businesses. Sun Tzu’s classical military treatise, The Art of War, starts with the 5 most important factors affecting wars: Tao/Dao (道), Meteorology (天), Topography (地), Commander (将), System (法).

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Long Term Management Against Long Term Investing? – Thoughts on Activism and Short-termism

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Corporate governance is complicated, and I usually don’t like to think too much about it because it’s just hard. However, I recently came across two very interesting and insightful articles, one from Harvard Business Review and the other from Atlantic with conclusion against each other on Activism. I hope this thinking process will be beneficial to me, and to my readers, in building up knowledge base and investment philosophy.

 

First, let’s go through a quick summary of the articles.

HBR, in their 2017 May-June magazine, published a package of articles titled “Managing for the long term” [link here], with a core article of “The Error at the Heart of Corporate Leadership” written by two well-regarded HBS professors Joseph Bower and Lynn Paine. The article started with the Valeant-Allergan acquisition drama involving Bill Ackman (by the way, I agree that Valeant was a questionable company which adopted questionable business practices and didn’t create social value. So I am with Allergan and this article on this point), and followed by challenges on the most widely used agency-based model in context of the corporate governance and proposed a new entity-based model which essentially proposes to gives company more discretion (i.e. power) by loosening them from the agent-principal handcuff. A quick summary chart exempted from the article below.

HBR_EntityModels

This article is thoroughly contemplated and aimed justifiably at the core issue of the capital market – Short-termism, however may have gone too far to directly link Short-termism to Activism. Thus, I have some reservation on some minor points, mainly due to this linkage (which could be a separate write-up, so I won’t elaborate here), but overall think it’s a great step to tackle such a socially important issue and think this new model may have profound impact on future corporate governance.

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How to live a playful life – Notes from The Education of a Value Investor by Guy Spier

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[Update on 4/13/2016: Thanks Mr. Spier for your reply and kind compliment on Twitter]

GuySpier_Reply_20160413

Spoiler alert: This is not a book review, instead this is more of notes for the most meaningful things (for myself) from Guy Spier’s book The Education of a Value Investor, thus it may contain details about the events described in the book.

I just finished reading this great book, following are a few sporadic things that made me thinking the most.

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