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Good Lord, I guess it’s time I did a post since Chaos is my thing.  For those who don’t know me, my last big flurry was March 2009 (maybe the 11th?) and here we are again.  It’s all doom and gloom and people, me included, are questioning Berkshire Hathaway and wondering what they should do.  For the record, I’ve been intensely attracted to this stock for over 20 years and began investing in earnest in 1998 holding a minimum 50% BRK portfolio position during that time.  It now represents about 90% of my liquid net worth after some major buys on the Monday after the “annual meeting”.  As a military officer (now retired) I’ve been wired to prepare to deal with uncertainty and chaos and strive to prepare for such times in perhaps a vain, arrogant attempt to add stability and certainty upon the scene.  

IT’s A GAME OF 4D CHESS NOW REQUIRING A MULTIDISCIPLINARY PERSPECTIVE MORE THAN EVER BEFORE

Now from out of nowhere we have COVID 19 though Nassim Taleb will certainly argue that this was no “surprise.”  Quite a few people predicted this event and Buffett and Munger certainly thought it through. You mean to tell me that Berkshire didn’t find ANYTHING to buy in the last month?  What the hell is going on here!?  Not even JP Morgan Chase? So obviously what looks cheap may not be so cheap IF CERTAIN EXTREME OUTCOMES HAPPEN which sort of leads us towards more macro analysis which Buffett isn’t exactly known for as an investment factor.  He mentioned “you’d better be careful how you bet.”  He also said, “We don't prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum."  Sound like they’re focused on microeconomics?  Nope.  At least not to me though I certainly welcome a counter view.

Which brings us to where Multi-disciplinary decision-making and investment analysis converge.  Ever see a professional reading list?  The Generals I worked with in the Army all had their professional reading lists that everybody down the chain was to immerse themselves with and deepen their professional knowledge.  Every reading list I saw was comprised of countless books on military history and strategy and international affairs and political factors.  I never once saw a book on economics or human psychology or physics or biology.  I suspect that most investment professionals are no different than the Army Generals I worked with.  For investment knowledge we need to read about markets and business!  This is not meant to criticize anybody in particular as it’s standard professional practice.  Yet this sort of narrow specialization often results in a stove-piped, myopic view of the world that can be woefully inadequate in dealing with complex adaptive systems and asymmetric, dynamic problems.  Generally speaking, many go through their analytical life as a one-legged-man in an ass kicking contest as my main man Munger might say.  The market just fell 20%.  Time to buy!

Not so fast.  If one thinks this virus through we already see significant second and third order effects.  Certainly the realm of biology is a lot more significant today than it was in 2009.  Who would have ever thought that biology of all things would have such a significant impact on finance?  I bet they didn’t teach that in MBA programs - not a single MBA program in the country?  Yet here we are.  We now daily search for data and flattening curves related to pathological outcomes.  That MUST be the key!  Yet let’s even forget the pathological impacts for a second and yes I’m cognizant of Bill Gates’ you can’t just “ignore that pile of bodies in the corner” comment.  

Take, for example, the discipline of human psychology and we are just getting started.  We have shut down major swaths of the American economy and human beings are responding and will continue to respond in the future.  Those combined responses, in aggregate, are going to impact each business and some of those businesses may be profoundly impacted - positively or negatively.  As those mass psychological impacts unfold in the months or years ahead it may quite likely change our investment ecosystem.  I happen to think that one big difference between this event and the 2008/2009 Great Recession is the introduction of deep FEAR.  Not just fear of losing money as was the environment deep in 2009, but now fear at the personal level which is an incredibly powerful emotion that can have profound impact on human behavior.  All of these impacts on human psychology brings a lot more uncertainty than what we just had a short while ago.  When will consumers feel safe?  We need a vaccine!  Uh, what if it mutates?  “The world changed.”  

Might these aggregate psychological factors impact say Micro-Economics?  Now we’re in another discipline!  Just maybe I might want to do far fewer shopping trips to multiple stores with different risk profiles in each and instead do bulk purchases that will last me for months in one well run store that knows how to handle shoppers and staff.  Maybe my personal demand for germ killing cleaning agents is permanently increased.  Maybe when I dine out at a fine restaurant I see risks all around me - a permanent feature that causes me to do this pleasant activity far less often.  Maybe I can run virtual meetings at 90% efficiency of face-to-face while substantially cutting overhead costs. Maybe I can have workers work from home and substantially reduce my commercial real estate costs. On and on. 

We haven’t even gotten into the impacts of physics (critical mass and equilibrium) and history or considerations of autocatalysis to borrow a theme from Chemistry.  What about math?  Damn!  Almost forgot but thank goodness I have my Munger checklist!  What are my probabilities of contracting the virus each time I walk into a public place?  Hmmmmmmm.... Add it to the list in our rapidly changing economic goo.  Whether they know it or not, each person is doing some similar thought process in their attempt to put order in their new environment.  Except maybe when they reach into their mental tool box the math or the biology or the economics just aren’t there. The response in this new realm may not be so predictable just yet. That leads to erratic, unpredictable outcomes does it not?  In a linear world, things seem simple.  The market dropped, it’s cheaper, I buy, and it goes back up thus rewarding me.  I’m so smart!  Except this is not linear.  At least I don’t think so.  It feels a lot more like 4D chess that brings in many of the multi-disciplinary factors above.  

HOW DO WE PREPARE FOR A DEEP GAME OF 4D CHESS WITH EXTREME POSSIBLE OUTCOMES?

Buffett spent quite a bit of time going over the history of the stock market during the Great Depression.  He showed, quite clearly, how the market tanked in 1929 then rebounded in 1930 and the participants didn’t even know they were in a Great Depression.  Then within two years they were essentially wiped out.  There’s a nice, uplifting history lesson for ya!  He didn’t tell us that story for nothing.  He was telling us what COULD happen and I know it sure made me feel a bit like the dumb sap in 1930 who thought it was smooth sailing ahead...  it’s all baked in right? We take a big hit 2nd quarter (which we have). It gets worse third quarter. Then starts to recover 4th quarter and we’re on our merry way to prosperity! All so simple even a monkey can see it!

Buffett bought Delta one month and turned on a dime weeks later and sold all four airline stocks.  THAT is radical.  It’s not like we didn’t all know about the virus when he bought more Delta!  Yet, obviously an extreme macro environment will affect those businesses as millions of people consider their individual responses going forward.  Snap the fingers right this second and tell everybody to get back to “normal” life. You’d have to be a fool to think they would.  The fundamentals of that business in particular just radically changed due to micro factors caused by a macro event.  The entire sector is now in a Depression.  Are they solvent? Buffett’s response?  Get OUT! Obviously airlines are on the extreme end but hardly alone when it comes to extreme outcomes - what we don’t yet know is where the line between temporary and permanent outcomes diverges.

Lesson:  Effects of the response to the virus may lead to extreme, unforeseen outcomes both at the macro and micro level. We have a lot of new variables that may have severe depressive effects on economic activity. Choose your investments wisely.

Munger once mentioned canoeists in Scandinavia who were attracted to an uber large whirlpool - trying to navigate it in a thrill-seeking dare.  The death rate of those risk taking canoeists was 100%.  Munger - “I regard that as a normal result.” and,  “My attitude when I see something big and dangerous is to stay a long way away from it.  Other people want to come as close as possible without going in.  That’s too tricky for me, I don’t like it.”  Munger said those quotes before the COVID crisis in talking about massive government spending and unforeseen consequences.  

Lesson:  Although micro-economic factors are paramount we must be wary of macro economic repercussions that government responses may cause. Hyperinflation would be a terrible outcome and if we take government responses to excess and we just might get it.  We are not immune. Choose your investments wisely.

CAUGHT BETWEEN EXTREMES

What are the “whirlpools” today?  Between the government response to shut down vast swaths of economic activity and  millions of consumers maybe permanently changing their patterns, the oil shock and huge demographic forces in Europe and Asia there are obvious and massive deflationary forces.  The supply/demand balance of oil and transport and labor and airplanes to name several is significantly out of equilibrium with way too much supply chasing way too little demand.  Prices for each are gonna drop.  Negative interest rates across the world attest to this.  In a depressed environment what’s the most valuable asset??  Say hello to $140 billion.  Do I think that’s a deliberate position based on a macroeconomic call?  No of course not, it’s probably best viewed as a by-product of circumstance.  And on the flip side the main reason why that cash hasn’t been deployed is extreme intervention by world Central Banks who are now even buying junk assets with the US Federal Reserve now throwing around trillions of dollars as if it’s nothing.  That all inflates asset values.  You can say all of that is helpful and necessary but it also most certainly adds another extreme outcome.  And now that everybody has seen us grab trillions from out of thin air can anyone imagine future policymakers acting with spending restraint?  Munger - “We are using methods today that are so extreme that maybe we can’t use a lot more of them.”  That’s not to say that they won’t try.  

As a brief history lesson.  Munger often refers to Weimar Germany.  History rhymes no?  During WWI Weimar Germany was in a depressive spiral as prices kept dropping due to impacts of WWI.  Born savers, German citizens hoarded PapierMarks and hunkered down.  In response, the Republic quadrupled the amount of PapierMarks in circulation to stave off depression.  And they printed Marks to finance the war.  Yet despite the massive printing, Weimar Germany had no inflation.  None.  Germany got away with printing Marks to pay for the war.  It’s a miracle!  Sort of sounds familiar doesn’t it?

Yet, under the surface, at the micro level individual German citizens were saving every Mark they could.  It’s quite natural for individual human beings to behave that way when scared.  How many people here who just got stimulus checks rushed out to spend them?  Yet by War’s end, consumer confidence returned and suddenly German citizenry started to spend all of those accumulated Marks and consumer prices quickly rose to match the previous monetary increase.  In essence, consumer behavior literally FLIPPED ON A DIME once the war was over.  In gold terms, 1oz went from about 100 Marks at the end of the War to 2,000 Marks by 1920.  Retail prices soon followed gold and rose 10x to 20x.  All that saved cash?  In 1919 it only bought 10% of what it would have one year earlier.  Pretty sudden and extreme and certainly hard to control in such a short timeframe.  Then in 1921 inflation leveled off, the economy began to recover, citizens adapted and Germany seemed to be in recovery.  

But large government expenses loomed just over the horizon.  Enter War reparations.  The reparations mandated by the Treaty of Versailles amounted to about 83% of German GDP. By way of contrast, at the end of 2019, before all of this recent largesse occurred, US debt was about 107% of GDP. Which gets to Buffett’s point that unfortunately for Weimar Germany their debts were not in the home country fiat currency.  Not wanting to tax their citizenry and go for austerity, the printing presses went full steam ahead and by July 1922 consumer prices in Germany rose another 700%.  Imagine being on a fixed income.  Having watched their currency depreciate by 90% in 1919, this time German citizens were determined not to let the same thing happen to their savings and a nation of savers started spending as fast as they could.  The ensuing hyperinflation ruin was soon in the history books and Weimar collapsed.  We here in the US can get away with a lot more due to debt being in our own currency but to Munger’s point, it’s best to stay far clear of a whirlpool and we seem to be taking our dare.

Weimar is Exhibit A of micro human psychology manifested on a national scale.  Rome fell in similar fashion.  And as we see in the Weimar example, the central authorities aren’t necessarily as in charge of outcomes as they may assume.  It ultimately comes down to millions of individuals and you can give them all the stimulus money you want, and all the free stuff you want, but if fear predominates then the money just won’t be spent.  And what’s the response to that?  Maybe give them MORE?  Pushing on a string?  Meanwhile, pension funds, municipalities and states may literally go bankrupt en masse as markets fall and consumers either can’t or won’t spend.  How do you compensate for that?  Raise taxes?  History is pretty clear on what happens next.  And history shows that you can go from one extreme to the next - literally in the blink of an eye once the dry kindling is thrown all over a society.  Munger has REPEATEDLY said the word “extreme” and people are surprised?  You can count me as one, it took this meeting before I realized the gravity of our situation and one outcome of our list of hypothetical end games. And Weimar is of course only ONE of many possible outcomes. But make no mistake, EXTREME is definitely on the table.

So put all of that together and we are standing at home plate in Nationals Park.   If you hit the ball to Left it’s a Depression.  Hit it to Right and it massive inflation.  Hit it to center and maybe it’s Stagflation.  The days of benign and “normal” may well be past for quite some time. What are you gonna do?  Even if you focus on the micro as you want to do you have to be very very careful that what you pick can do well in all of the above.  That might argue for high return on net tangible asset businesses which we love.  Does anybody see a cheap one of sufficient size?  I Know! Berkshire could buy all of capital intensive Boeing! 🤔🤔

With such extremes on either end of the spectrum and so many unknowns it strikes me as a time for extreme caution which is exactly what we see in Omaha.  Recall that Munger in particular grew up in the Great Depression.  For those of us with parents who grew up during that time we well know how deeply traumatic it must have been.  My mother saved EVERYTHING of any potential use to include envelopes which could be sliced open, folded over, taped and reused.  “Anything can happen in markets” and economies.  Munger’s approach to this I see as three fold...  So let’s INVERT using some of his previous commentary.

1.  Avoid activity and maintain your ability to adapt
2.  Reduce your wants
3.  Suck it up and cope

All three work equally well on either end of the extreme economic spectrum. It screams at me that if you’re an individual investor you should probably view all of this holistically.  I get that professional money managers can’t tell their clients to “suck it up and cope” though that sentence might do a lot more good than moving clients around in stocks or asset allocation changes between stocks and bonds.  If you told a client to “reduce your wants” they’d fire you on the spot for cause.  Yet I can think of no more powerful response at the individual or corporate level than living well within your means, reduction in consumption and downsizing of wants while maintaining agility. The root problem of both deflation and rapid inflation is that you don’t have enough money.  I guess Berkshire doesn’t have that problem at least not at the moment anyway.... and that cash gives Berkshire enormous optionality whether as cash ballast in one scenario or as a means to help adapt itself in another. Sun Tzu talks a lot about strategic patience as we wait for opportune times to unleash accumulated strength. Is NOW that time? Certainly not at the micro-economic level. Certainly not at the macro-economic level. As a strategist I say NO. So suck it up and cope.

HB
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No. of Recommendations: 1
One hopes that the inflationary and deflationary forces cancel each other out.

But one of the possible scenarios that you cited was massive deflation followed by a sudden pivot towards hyperinflation. That's quite a challenge for investors. Bonds will look good and then suddenly be wiped out. Other assets (perhaps gold) could fall sharply during the deflation and then suddenly skyrocket during the hyperinflation.

Another reason for owning international investments is to hedge against the risk of hyperinflation in your home country. If international stocks were as expensive as large cap US stocks, I'm not sure what I'd invest in.
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“I'm not sure what I'd invest in.”

Hard to say for sure thus optionality of cash is important. I think the low-asset-base/high returns businesses are probably the best place to be and BRK certainly has a few..But in public markets they ain’t cheap. Now that Gates has left maybe that opens Microsoft at some point but heck if I know.
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The situation is further complicated by the recent politicization of the Federal Reserve as their actions, while directionally predictable, can distort the fabric of the economy - say backing up of bonds which otherwise might fail.

Jeff
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I missed you.

Good Lord, I guess it’s time I did a post since Chaos is my thing. For those who don’t know me, my last big flurry was March 2009 (maybe the 11th?) and here we are again. It’s all doom and gloom and people, me included, are questioning Berkshire Hathaway and wondering what they should do...
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No. of Recommendations: 12
Welcome back, HB (I think!). Thank you for just putting up one of the top 5 posts I have ever seen on The Fool, and I've been here for well over 20 years.
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“I missed you.”

Very kind. Thanks!
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“Thank you for just putting up one of the top 5 posts I have ever seen on The Fool”

Thanks for the kind words. I know it was a bit wordy so sorry about that... we do live in fascinating if not scary times don’t we!
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No. of Recommendations: 7
So put all of that together and we are standing at home plate in Nationals Park. If you hit the ball to Left it’s a Depression. Hit it to Right and it massive inflation. Hit it to center and maybe it’s Stagflation.

Yes, WEB is frozen.
BRK is now under performing for a short(1,3,5) and long (10,12,15 year timelines) and hoarding resources.

The future is bright not dark. Trillions of dollars will be made investing in companies that solve the worlds problems.
If BRK does not participate and hoards resources, it will continue to under perform.

Virus will be a blip in long march of progress. Even uber cautious Dr. Fauci is more optimistic.
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No. of Recommendations: 7
HB:

Thanks so much for this! It's been way too long. Ever since the meeting many people have tried to make sense of what they saw and heard. You've done it better than any I've read. Your writing took me back to what I consider the "original documents." For so many who have come along since you were really active here, I wish you had footnotes or "the general's reading list" to amplify the thoughts you expressed so well. Stay well and don't be a stranger here! We're going to need you.
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“I wish you had the generals reading list to amplify the thoughts”

I’ll try. If I go way back to when I first joined the Army our most senior leaders had just come out of Vietnam and were hellbent on both restoring a broken Army. The lists at the time were quite mundane and focused on what I’ll call Cold War Strategy - winning a major war against the Soviet Union. The absolute essential book at the time was Clauswitcz’s “On War” and Jomini’s “Art of War” to name two. These were books on military strategy. On down the lists would be more tactical flair with books on say Joshua Chamberlain’s defense at Little Roundtop or Custer’s Last Stand. We did thorough reading on the Task Force Smith debacle at the beginning of the Korean War. It wasn’t until a little later that books on Vietnam began to dot the lists. Sun Tzu finally became a major theme along with Clausewitz and Jomini and Guderian... I can tell you that it was every young officer’s duty to immerse themselves in that stuff (while “off duty”) which after 60-80 hour work weeks is less than joyful. LOL! I worked at one time or other with two of the Army’s better minds - General Dempsey and General McMaster... Both voracious readers. Their lists were far more eclectic and broad but by then the Army was being stretched and challenged in unconventional, asymmetric ways. General Mattis was a walking pile of books as well though I never worked closely with him. I would say that overall, most of the reading lists prepared you pretty well to be a military professional. It’s your duty to be prepared for come what may and you don’t want to be surprised by some circumstance you’ve never thought of before. It’s malpractice if you make a preventable mistake and get people killed because of it. Ignorance is stupidity. My main lament with all of this is that though a more narrow list may prepare you for a lot of situations, it can’t prepare you for ALL situations. It struck me that it might be smarter to teach oneself better ways of thinking and decision-making. Then I discovered Munger’s multi-disciplinary approach. The main problem really boils down to one’s available time. Unless you want to essentially neglect your family in what little free time you have then you have to sneak in time (say during lunch) but that’s hard to do. Military culture doesn’t take too kindly to reading at one’s desk. LOL! I did have one General who caught me and shouted, “Are YOU a thinker or are you a Do’er?!” Knowing that he hated lazy “thinkers” I threw a curveball answer, “Sir! I’m a thinking Do’er!” Well, that went over about like sand in the gears but at least I got a chuckle out of myself... He wasn’t one of the smarter, strategic ones but was tall and had gone to West Point so looked the part. Guys like that I refer to as institutional failures and there’s still too many - One of the weaknesses of any large bureaucracy... Below is a list from about 9-10 years or so ago just to give you a flavor...

John M. Schofield and the Politics of Generalship
Donald B. Connelly // Chapel Hill: University of North Carolina Press, 2006

The Red Badge of Courage
Stephen Crane // New York: Tor Classics, 1990

This Kind of War: A Study in Unpreparedness
T. R. Fehrenbach // Washington, D.C.: Potomac Books, 2001

America’s First Battles: 1776–1965
Charles E. Heller and William A. Stofft, eds. // Lawrence: University Press of Kansas, 1986

We Were Soldiers Once . . . and Young: Ia Drang—the Battle That Changed the War in Vietnam
Harold G. Moore and Joseph L. Galloway // New York: Presidio Press, 2004

Between War and Peace: How America Ends Its Wars
Matthew Moten, ed. // New York: Simon and Schuster, 2011

Once an Eagle
Anton Myrer // New York: HarperTorch, 2001

The Last Stand: Custer, Sitting Bull, and the Battle of the Little Bighorn
Nathaniel Philbrick // New York: Viking Adult, 2010

Gates of Fire: An Epic Novel of Thermopylae
Steven Pressfield // New York: Bantam Books, 1999

The Killer Angels
Michael Shaara // New York: Modern Library, 2004

The Art of War
Sun Tzu // Boston: Shambhala, 2005

April 1865: The Month That Saved America
Jay Winik // New York: Harper Perennial, 2006

Click: The Forces Behind How We Fully Engage with People, Work, and Everything We Do
Ori and Rom Brafman // New York: Crown, 2010

The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations
Ori and Rom Brafman // New York: Penguin Books, 2006

Outliers: The Story of Success
Malcolm Gladwell // New York: Little, Brown, 2011

Switch: How to Change Things When Change Is Hard
Chip and Dan Heath // New York: Random House, 2010

War
Sebastian Junger // New York: Twelve, 2010

The Defence of Duffer’s Drift
E. D. Swinton // United States Infantry Association, 1916

Managing the Unexpected: Resilient Performance in an Age of Uncertainty
Karl E. Weick and Kathleen M. Sutcliffe // San Francisco, Calif.: Jossey-Bass, 2007

On War
Carl von Clausewitz // Ed. and trans. by Michael Howard and Peter Paret // 1832; repr. Princeton, New Jersey: Princeton University Press, 1989

The World Is Flat: A Brief History of the Twenty-first Century
Thomas Friedman // New York: Farrar, Straus and Giroux, 2005

The Lexus and the Olive Tree: Understanding Globalization
Thomas Friedman // New York: Anchor Books, 2000

Monsoon: The Indian Ocean and the Future of American Power
Robert D. Kaplan // New York: Random House, 2010

The Age of the Unthinkable: Why the New World Disorder Constantly Surprises Us and What We Can Do About It
Joshua C. Ramo // New York: Little, Brown, 2009

Soldier’s Heart: Reading Literature Through Peace and War at West Point
Elizabeth D. Samet // New York: Farrar, Straus and Giroux, 2007

The Global Achievement Gap: Why Even Our Best Schools Don’t Teach the New Survival Skills Our Children Need—and What We Can Do About It Tony Wagner // New York: Basic Books, 2008

HB
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So suck it up and cope.

Thank you for your return and the entertaining post. I am particularly drawn to those with historical references and especially those taken from extreme moments in human and economic history. That said, I find “suck it up and cope” not particularly helpful. What does that mean? Do nothing? Be on standby, waiting for the red flash? Then what?

You outline a time when money was money, then during devaluation it lost purchasing power, then during hyperinflation lost all meaning. Each of those phases, presumably, should have been met on an individual level with some sort of action. When “money was money” I’ll skip, since that’s where we’ve been living right up until February, or in an earlier example until 2008. Then suddenly...

The Fed floods the economy with billions (2008, with slow but positive results) and now trillions of dollars created out of thin air, and little has happened as a result so far. It’s impossible to believe that this fantasy money, amounting to 1/3 or more of GDP created within a few weeks time won’t have *some* unintended consequences, so what are they? And more to the point, what is a reasonable defensive strategy for us individual investors - particularly those with BRK holdings (which indicates to me a considerable net worth sort of individual) to do?

Does that point someone toward real estate? Holding Berkshire because of its asset rich portfolio? Gold? Metals? Foreign markets? Beans and Rice in the basement? And should the economy shift towards inflation, perhaps even hyperinflation (not outside the realm of possibility anymore) what might protect the individual’s station in that event?

Understand I’m not looking for specifics in minutiae (On June 23rd buy 1,000,000 forward contracts of...) but rather general directional advice, perhaps based on which strategies proved successful in Germany or other places. After all, when it was all over *some* people still had money and capital to carry on, while others lost everything. What were the hallmarks of success?

The essence of gaming theory (war and otherwise) is to examine multiple outcomes based on various strategies, so as the future lets itself be known we will have multiple options to discuss, debate, and implement.

Personally I’m “coping” fine; I am wondering about what’s coming. Or, as in a lesser known quote from Yogi, “if you don’t know where you’re going, you might end up somewhere.”
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It’s impossible to believe that this fantasy money, amounting to 1/3 or more of GDP created within a few weeks time won’t have *some* unintended consequences, so what are they?

It's a huge jump, to be sure.
But a comparison of a money quantity to to GDP (which is an annual rate) probably isn't the most useful yardstick.

There are two potentially good US money supply numbers to keep an eye on.
In each case, the thing that matters is the rate of growth.

For the strict "in or out" counting methods, money of zero maturity (MZM) is allegedly the best predictor of inflation.
It has jumped about 17% lately. (up about 10.9% in Q1, and more since end March)
https://fred.stlouisfed.org/series/MZM
That's big jump, but perhaps not "break the world" big.

The other is divisia M4, which I prefer.
This is based on the notion that different instruments are cash-like to differing degrees, so it counts them all, but with low weights for things progressively less like cash.
Say, a 30 day time deposit or a banker's acceptance.
That was up about 4.3% in Q1, up 10.0% in the year to end March.
http://www.centerforfinancialstability.org/amfm_data.php


what is a reasonable defensive strategy for us individual investors - particularly those with BRK holdings (which indicates to me a considerable net worth sort of individual) to do?

Some thoughts---

Ensure you have no debts that might come due.
Holding more than the minimum amount of cash is always nice.
While trying to avoid selling things that are currently underpriced or buying things that are currently overpriced,
shift your holdings towards things that will be more resilient given the change of landscape.
(different economic activity level, different monetary situation, different currency situation, different consumer behaviour, different geopolitical situation...)
Usually that means things with lots of solid cash earnings even in a wide variety of economic situations, and strong balance sheets.
Preferably not too exposed to the likelihood of big change in their industries, for whatever reason.

Those things are not wildly different from holding Berkshire.
The main difference is that some other business models will be more resilient to physical barriers than Berkshire's: lockdowns, broken supply chains, physical shortages.
My pick has been Alphabet for that, though it's not cheap on conventional metrics.
Around the start of the year I was looking for a good moment to increase my allocation. Dang.
Their main weak spot is a susceptibility to a downturn in ad budgets along with the economy, but I would see that as purely cyclical and certainly not a big problem even during the dip.

Jim
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No. of Recommendations: 21
Hi Goofy. Thanks for reply and good to hear from you! Well I’ve given all of this a lot of thought.. What should I DO as an individual???? And THAT question is front and center in my nexus. I’m personally SICK (Pun) of hearing about the damn virus. And I’m sick of hearing about the Fed. And I’m sick of hearing about government... I KNOW things ain’t right. What I want to figure out is what IT MEANS FOR ME THE INDIVIDUAL..so I share your quest.

I can go down through investment after investment and punch gaping holes in it... Was talking to a Private Equity manager out in California a few months ago who said, “If you’re going to hedge then the thing you choose damn well better work when it’s supposed to.” Take precious metals as one example. What happens in a depressive sell-off? I’m quite dubious that they zig when the market zags. Buffett mentions correctly that gold underperforms as an inflation hedge. Yet I thought that was a “safe haven.” I guess compared to the purchasing power of fiat currency over time it is... and maybe that's where we are now..In a game of preserving what purchasing power we’ve accumulated over the years.

What about Real Estate? That usually means two variables - leverage snd incoming payments. Now we have counter-party risk. It’s also extremely illiquid - not exactly a place I want to be when one of my core tenets in conflict is Agility.

Cash? Loses value every day... piece by piece. Buffett obviously prefers this to all the other alternatives. I mentioned optionality it provides.

Bonds? Hey Ray Dalio’s “all weather portfolio” has I think it’s 52% bonds. So there ya go! Maybe the most over-valued asset class in the world? Not where I want to be.

Stocks? Index funds? I’m not so convinced that the broad indexes will do so well if about 1/3 of the companies in said index might go bankrupt. If I’m going to do stocks then I prefer to take my shots on better business models. Just hard to find cheap ones.

I HAVE toyed with idea of buying land and planting walnut trees. About as beguiling of a thought as I’ve had... The land would actually PRODUCE something unlike say precious metals and cash.. But it ain’t without its own headaches. You could get taxed to death... infestations... poachers.. etc. There are well known Timber Reits of course and this may be a part of my future... I’m thinking some mix of:

1. Berkshire
2. Short term CASH
3. Mid to long term “cash” in case fiat currency rapidly depreciates (gold/silver)
4. Timber

Thats just the investment half... The other half is as I described... lowered wants is a huge concept and I’ve studied MrMoneyMustache snd EarlyRetirementExtreme to name two better known people who have mastered it. I’ve personally done more DIY last decade than all decades combined. I can cut my own hair (Costco haircut kit)..change car filters.., fix all sorts of stuff around the house... and I now cook a lot.. more resilient and self sufficient. My garage looks like an Army supply depot.

I don’t know what else I can do but I’m always thinking about it.

HB
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No. of Recommendations: 3
4. Timber

One thought:
Don't do this unless you're geographically diversified.
Bugs. Fires.

Jim
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One thought:
Don't do this unless you're geographically diversified.
Bugs. Fires.

And drought. Water supply issues.
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No. of Recommendations: 3
I HAVE toyed with idea of buying land and planting walnut trees. About as beguiling of a thought as I’ve had... The land would actually PRODUCE something unlike say precious metals and cash.. But it ain’t without its own headaches.

There is an old story about a man who accidentally offended the king, and the king said "Off with his head." The man said he had a wife who was with child, and could the king postpone the sentence until he could plant and harvest one last crop so she would have a way to support herself for a while. The king granted his request. The man then planted trees.

In addition to the depredations of droughts, fires, floods, insects, and tax collectors, labor strikes, ... .
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No. of Recommendations: 6
mungofitch: "Ensure you have no debts that might come due.
Holding more than the minimum amount of cash is always nice.
While trying to avoid selling things that are currently underpriced or buying things that are currently overpriced,
shift your holdings towards things that will be more resilient given the change of landscape.
(different economic activity level, different monetary situation, different currency situation, different consumer behaviour, different geopolitical situation...)
Usually that means things with lots of solid cash earnings even in a wide variety of economic situations, and strong balance sheets.
Preferably not too exposed to the likelihood of big change in their industries, for whatever reason."

That is a fairly accurate description of what Ispouse and I are doing. We have kept most of the excess cash that we spent the last couple of years accumulating. The plan was to deploy it during a down turn like this. Until we are confident that our country understands the health aspects of this virus and takes them as seriously as the economic impacts, we are remaining very conservative with health and our savings.

We have even spent a fair amount of time volunteering at our daughter's small farm - weeding the berry patch, planting additional berry bushes and fruit trees and spring greens, etc., while banking our cruise and vacation refunds (we are recently retired and had booked some cruises and holidays which were canceled and from which we took refunds rather than 125% vouchers).

In our case that is really battening down the hatches because my daughter and son-in-law purchased the farm with money borrowed from the Bank of Mom and Dad and secured by a mortgage by Mom and Dad a couple of years ago. If they fall on hard times and have trouble selling the fruits and veggies, we can eat them ourselves and trade/sell them to local farmers who produce milk, eggs, bread and locally grown beef and pork.

But if we are typical of recently retired baby boomers who had some money to spend that we are now accumulating and saving instead, that seems to me to be a recipe for disinflation no matter what the Fed does with money creation.

If too many of us engage in individual behavior that appears to be rational under the circumstances, we contribute to the deflationary forces. Human nature vs. the Fed. The Battle of the Titans.
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No. of Recommendations: 2
I can superficially talk about the timber/farming aspects of your ideas if you live in the u.s.

Our daughter's little farm (12.5 acres) has found ways to benefit from policies that were passed to bail out the big farms that comprise a powerful political force in the U.S.

No property tax for productive farms in VA.

A large deer fence built with a zero interest govt loan.

A $10,000 grant to cover the cost of a large hoop house. If you are familiar with the government, you should be able to find incentives like this to make your start up costs less daunting.

You may not have a recently retired father (me) who wants to volunteer free labor because slopping pigs and planting trees is consistent with his retirement dreams.
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I don’t know what else I can do but I’m always thinking about it.

HB: Don't over think, over analyze and stay invested in S&P. It is simple but hard to do.
Today is best time to dollar cost average.

Here is your impressive post from March 2009 (174 recos).
https://boards.fool.com/the-way-it-was-meant-to-be-27512095....

However, since your post in March 2009, BRK has returned 204% and S&P has returned 358% cumulative 14.7% cagr.
The long march of progress will continue and in coming decades.
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How is their farm business going in these times?

I started farming last year (after 15 years in online media) and simply can‘t keep up with the demand.
Sure, I could invest more and faster but being new to farming I am forcing myself to take one step at a time.

The surprising thing is that I can probably achieve a 50-60 pct gross margin before investments.
Right now I am reinvesting every € that comes in. Growth is above 100 pct yoy and without doing any marketing I could double sales immediately again if I was able to produce that - which would take me close to 150k in annual revenues. That‘s the goal for 2021 which would then provide a decent income to our family.
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No. of Recommendations: 11
HB: Don't over think, over analyze and stay invested in S&P. It is simple but hard to do.
...
However, since your post in March 2009, BRK has returned 204% and S&P has returned 358% cumulative 14.7% cagr.
The long march of progress will continue and in coming decades.


I appreciate the merits of that sentiment, but I would add the following notes for colour:

The S&P 500 has done very well in this stretch, but a whole lot of that has been accomplished by getting very expensive in the last few years.
That portion of the retrospective price gain suggests some correspondingly poorer returns are coming in future, even if prices remain high.

If you're going to do a long hold index thing, I think the Nasdaq 100 is a much better choice.
In particular, the equally weighted version.
It has historically had (and so far still has) a much higher rate of growth in value per share each year.
It's not more expensive than usual at the moment.
Safer...much less company-specific risk.
The largest allocation in the S&P 500 is 5.66% of the total, but only 1% of the Nasdaq 100 equal weight.
Arguably cheaper at the moment, higher growth, higher returns, lower risk. Not such a bad combo.

Figures for fun
In those 11.17 years ending right now, which started right at the bottom of the credit crunch bear

SPY 15.4%/year
QQQ 21.7% (bizarre concentrated weighting)
QQEW 18.7% (same 100 companies but equal weight)
Berkshire stock 10.7%
Berkshire book/share 11.1%

The better result from the Nasdaq 100 choices is particularly impressive given that, as mentioned, they aren't expensive right now relative to their own history.
Unlike the S&P 500.

Trend earnings for the S&P 500 have risen at around inflation+ 2.66%/year in those 11 years.
Trend earning for the Nasdaq 100 equal weight have risen at about inflation+ 6.68%/year.
That's an equal weighting of 100 companies, so it's not just the luck of Apple and Google.
It's roughly the same trend of Nasdaq earnings growth has been going on since 1997 or since 2002.

Jim
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I started farming last year (after 15 years in online media) and simply can‘t keep up with the demand.

Wonderful to hear.
May we ask where and what you're growing?

Jim
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I appreciate the merits of that sentiment, but I would add the following notes for colour:

The S&P 500 has done very well in this stretch, but a whole lot of that has been accomplished by getting very expensive in the last few years.


You have shared this sentiment for a while now. I disagree.

I would argue that BRK has gotten pricey and stale, not S&P.
WEB has been holding on to a large unproductive asset that is dismal at compounding (see his fortune gold oped).

S&P has been deploying the assets in productive areas which will compound over long term. Some results you can see today and more in the future.

BRK's $130B+ cash under the mattress is not creating a product or curing a disease or growing a farm products.
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No. of Recommendations: 5
On my beguiling Walnut Trees idea
Xxxxxxxxxxxxx

4. Timber

One thought:
Don't do this unless you're geographically diversified.
Bugs. Fires.

LOL! Yes...

Xxxxxxxxxx
And drought. Water supply issues.

Xxxxxxxxxxxx

The man then planted trees.

In addition to the depredations of droughts, fires, floods, insects, and tax collectors, labor strikes, ... .

Xxxxxxxxxxx
Answer: Exactly! But it’s “tangible” and beguiling... then my wife said, “We’re NOT farmers”... and she’s right... so that led me to REITS... but not exactly thrilled at the moment with my choices. I am attracted to hands on aspects and a smug satisfaction of watching the fruits of my labor...

Xxxxxxxxxxx

“But if we are typical of recently retired baby boomers who had some money to spend that we are now accumulating and saving instead, that seems to me to be a recipe for disinflation no matter what the Fed does with money creation. “

“If too many of us engage in individual behavior that appears to be rational under the circumstances, we contribute to the deflationary forces. Human nature vs. the Fed. The Battle of the Titans.”

Answer: Bingo. And I almost NEVER want to be doing the same thing as the herd. It’s never worked out very well for me. I’m not so sure that the herd is YET doing as you say though one can sure see it coming because it’s fundamental to human nature. It’s going to happen. And the cause and effect will no doubt mirror the initial Weimar fiasco... Millions of individuals will hunker down as humans will do... the Fed will push and get minimal response.... so they’ll push even more.... what I’m less certain about is what happens as a result of all of that... Americans have a lot of personal debt that can absorb an awful lot of stimulus as but one critical difference been us and Weimar... so we are now circling the Whirlpool in La La land wondering if we’re all gonna go in.

Xxxxxxxxx

“HB: Don't over think, over analyze and stay invested in S&P. It is simple but hard to do. Today is best time to dollar cost average.

However, since your post in March 2009, BRK has returned 204% and S&P has returned 358% cumulative 14.7% cagr.
The long march of progress will continue and in coming decades.”

Answer: Yes. But I still like Berkshire better than the S&P for a lot of reasons and maybe just maybe that’s due to cognitive bias so I keep attacking it. I can make compelling arguments for both... and I can make compelling arguments against both. If I switched I think I prefer the high dividend yield indexes (like SCHD) for my IRAs.... Mungo mentioned the unconcentrated NASDAQ which certainly has appeal with exposure to exciting sectors of the American economy. When you’re cursed with an active mind one gets these dilemmas and I know in my case I walk around every day thinking of trade offs.. My main reasons for BRK compared to S&P are better aggregate businesses.... less debt.... more cash generation.... more cash on balance sheet... much lower valuation.... better pricing power and deeper moats.... better, more honest management. I could flip it and argue that the cash has been a performance curse and that Buffett has been extremely hypocritical and that two of the main reasons why I own it (buybacks and buying in chaos) have been taken off the table... and there is still single stock risk due to things like unforeseen regulatory reform etc etc... aye there’s the rub...

HB
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SPY 15.4%/year
QQQ 21.7% (bizarre concentrated weighting)
QQEW 18.7% (same 100 companies but equal weight)
Berkshire stock 10.7%
Berkshire book/share 11.1%



QQQ:RSP pairs trade working well
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No. of Recommendations: 3
Interesting conversation. Thanks for starting it, hartmanbirge. And your story about thinkers and doers made me chuckle, because that's pretty much how I ended up choosing my name.

Many have opined on how to position oneself for an impending, and possibly prolonged, economic debacle. It's more than a platitude to say that the best investment one can make is in oneself. Knowledge is power, and always will be. It's mobile and productive and, if not left unattended, usually doesn't deteriorate.

Aside from that, the idea of owning land, or productive land, is appealing because it's not going anywhere, but as has been pointed out, it's not mobile and its productive potential can be impaired.

No one seems to have mentioned technology, possibly because it depends on so many factors that are vulnerable to disruption. But let's consider solar farms. Fits nicely with owning land, especially land that would otherwise be unproductive. And, no matter how bad things get, we'll always need cheap, clean energy.

Another nice fit with land is vertical agriculture, perhaps in greenhouses, which would fit with owning land. If the greenhouses are well sealed, perhaps this could even be made to work in areas with little water.

Mars is looking better every day! lol

FWIW
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No. of Recommendations: 6
The S&P 500 has done very well in this stretch, but a whole lot of that has been accomplished by getting very expensive in the last few years.
...
You have shared this sentiment for a while now. I disagree.


I agree that the S&P 500 as a whole isn't that bad because of the extraordinary earning power of a few gigantic firms that pack the top slots.
Apple, Microsoft, Alphabet, Facebook, Intel, and (easily forgotten) the big banks.
I estimate maybe only 12-15% more expensive than the average in the last 25 years based on smoothed real earnings.

But I don't think there is any doubt that the typical S&P 500 firm is still very expensive compared to its long run average on almost any metric.
Or even its short run average.
e.g., the median firm is more than 50% more expensive on price to sales than it was at the absolute peak during the credit bubble top, and 75% above the average since '97.
(price to sales is not a great metric for a single firm, but the median P/S is surprisingly solid as a metric for a collection of firms)
It seems unlikely in the extreme that a dollar of sales at a middle-of-the-pack firm will forever give 75% more future earnings than it used to.
Thus, it seems unlikely in the extreme that *paying* 75% more will give market returns as high as they used to be.
Especially as the world economy has just attempted to fly using the Thelma and Louise technique.

High valuation multiples are easy to understand with low interest rates, but it doesn't justify the high valuations.
The stocks aren't worth more because of that, you just get low earnings yields when you pay more for the same future earnings.

Jim
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"How is their farm business going in these times?"

Work in progress at this point since they bought the land in 2017 and finished building the house in early 2018.

But they are not afraid of hard work and they are giving it good thought. I would invest in them even if they weren't family. I loaned the money to buy the land because it was surrounded by large beef and poultry farms interspersed with rising land values due to money coming in from the cities and buying the spare land. And also because the bank was charging them 4.4% for the loan, paying us .7% for our savings, asking for a 20% down payment, and also a signature from me.

I have talked in the past about the banks forcing us into becoming bankers against our will by charging too much and paying too little as compared to the old 3% rule.

I also talk about it because I think it highlights the flexibility that cash gives you to change your mind. In deflationary spirals it has higher purchasing power. In inflationary spirals it gives you the option to take advantage of rising rates or buy stocks or land when they come available. You come to appreciate the advantage of having cash as an insurance policy after a lifetime of relative poverty and the desire to keep what you worked for when you are older and retired.

There is still one huge infrastructure problem that holds the area back. Smart young entrepeneurs cannot plan on telecommuting because of terrible internet connections in the foothills and big scale farmers who could care less about attracting educated professionals to help with the tax base.

My daughter and her husband can overcome that at the moment during quarantine by telecommuting to day jobs from separate rooms upstairs and using Mom and Dad Daycare Inc. to watch the 22 month old.

We planted about 50 additional trees and maybe a hundred additional berry bushes this spring and they are healthy and getting productive (bushes - trees need a few more years).

And we are already eating fresh greens from personal consumption patch, with summer veggies, blackberries and raspberries on the horizon.
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QQQ:RSP pairs trade working well

Pairs trade in what way?

Tails
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May we ask where and what you're growing?

Sure, we are in Southern Germany - close to the French Border. Karlsruhe is the nearest city; 20km away.

We are still in the phase of trying different things out to see what we like and where we have a good market - but the concept is to sell (1) pastured eggs, (2) lettuce/veggies produced without agro-chemicals and (3) meat chickens.

Pastured eggs
We now have close to 350 birds - at which point regulations change. We have yet to decide whether to cross that mark. So far, this is a very profitable business. Each hen costs 4 Euros per month to feed (with high quality feed) and produces 10 Euros in revenue. While mortality in the industry is somewhere between 10 and 25 pct per year, we are closer to 5 pct.
If you buy mobile coops for 200 hens, you pay 25.000€ - we built ours for 5.000€ and can move it by hand and don't require heavy machinery. Egg profits are currently paying for the expenditures in other areas

Lettuce/Veggies
Focus this year is to perfect lettuce production. We sell all-year round and the produce is so fresh you can keep it in your fridge for 10-14 days, which is unheard of. As we are ramping-up lettuce production we are testing complimentary products like arugula, spinach, pak choi, radishes, etc.
So far, whatever we produce gets sold almost instantly. We need to improve consistency of production and the washing is still taking to much time, which is why we are building a washstation this week to improve throughput

Meat Chickens
The product is of incredible quality as the meat birds are raised on fresh grass as well and we did our own slaughtering (interesting experience as I had never done that before). As there is no transport/slaughtering stress the meat is amazing. Biggest challenge is to have our own processing room so we can butcher commercially. At the moment we don't have space to build that and the upfront cost would only be justified if we planned to process 1.000 birds or more per year - which I am not sure I am mentally prepared for

When I started this I wasn't overly worried about production - after all, I am working WITH nature and if I don't figure it out the first time, I would iterate, improve and get it done eventually. My worries were mostly around the ability to sell enough produce to make this a financially worthwhile endeavor. I had no idea how desperate people are for real food - and you really taste the difference with every one of our products.
To give you an idea: at this week's farmers market I sold out after 15 minutes - and that's been happening every week since beginning of this year.

When I started this, the intention was to improve our own nutrition and create a small side-income to our investment income. Right now I am thinking bigger (much bigger) - but before going all in, I need to see how well I can standardize the procedures and workflows so I can leverage external labor to scale profitably.

Sorry for the long post - and to come back on-point - I do believe that agricultural land might be an interesting investment for some of you. One of the highest hurdles for people looking at starting their own farm is access to land. You might be enablers for those young farmers without having to do the hard work yourselves and you'd make your contribution to improving our food system. How's that for purposeful investing ;-)
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Thanks for elaborating!
Sounds like you are enjoying your retirement with family and nature.
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My pick has been Alphabet for that, though it's not cheap on conventional metrics.
Around the start of the year I was looking for a good moment to increase my allocation. Dang.


I had a limit order in at $1000. Oh well.
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No. of Recommendations: 4
I fear HB is correct about worst case scenarios, and he's right about there being no where to hide. Eliminating debt, including your mortgage if you can afford to, having an adequate cash cushion, filling the pantry, stopping the Amazon addiction, and learning to garden. I regret not getting the chickens my cousin recommended buying.

I rewatched Buffett at the AM and he is clearly thinking the same as HB. It's good to remember that Ben Graham's investing theory came out of the great depression. The safest investment is still a financially sound company that produces socially necessary goods and that is selling at a reasonable price. I think Berkshire Hathaway is at the top of that list, but the reality is that decades of asset price inflation due to gaping wealth and income inequality has led us to a point where no investment is safe from devaluation.

I would say at this point a safe investment is one that will decline less than the average asset through any of the possible scenarios outlined by HB and Goofy.
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Just remember Munger’s nice quote:

“If Argentina happens we can’t save you..”
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No. of Recommendations: 6
HB -I think you eloquently said what was in WEB's head.
Also, you rightly say: " My main lament with all of this is that though a more narrow list may
prepare you for a lot of situations, it can’t prepare you for ALL situations."

The problem is, nothing can prepare you fully. Yes, broadening your outlook
can definitely improve your preparedness, but realize the scale for most important real
world situations is a continuum, not a "ready or not" state.

I learned a long time ago that thinking through most complex real-world situations,
be they a business contract, a long-term investment decision, political outcome forecasts, predicting
human behavior, etc., however good a job you think you have done, you still risk having
gotten it wrong. For the mathematically inclined, I tell them:
Godel's "Incompleteness Theorem" goes way beyond arithmetic and can bite you all the time.
Be humble.
As I have aged, I have grown less confident and more humble in my own ability to anticipate complicated outcomes.
Carl
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No. of Recommendations: 2
I'll never forget the day that I introduced my father to the CEO of an unbelievable business. The CEO is also a prolific writer and deep thinker. He sits only several steps removed from the 'great ones.' The CEO, who's a bit of a provocateur, decided to challenge my father in the first moments of their meeting. The CEO was in his early 60s, perhaps younger. My father was in his late 70s and long retired.

So there we stood shaking hands and the CEO was right at it... "Now, [name], I'd like you to tell me the only type of relationship that last forever."

The clear answer being sought was "win-win", as any half decent MBA would bark.

My father (not being an MBA, but a cranky old litigator) replied, "None." My father, being a religious man, kept his lengthier reply to himself (primarily out of respect for not potentially aggravating the CEO)-- yet his message was clearly in line with those shared here.

It's amazing what you can learn if you just listen.
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We have even spent a fair amount of time volunteering at our daughter's small farm - weeding the berry patch, planting additional berry bushes and fruit trees and spring greens

Not possible. You post far too frequently to have time for that kind of labor.
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<<< If you're going to do a long hold index thing, I think the Nasdaq 100 is a much better choice.
In particular, the equally weighted version.>>>

According to Mr. Google QQQ looks much, much better than QQEW.  Especially over the past decade.

                  QQEW	        QQQ
Net Assets	$723.83M     $100.02B
Expense Ratio	0.59%   	0.20%
Dividend Yield	0.56%	        0.74%
YTD Return     -1.59%         	5.99%
1-Year Return	11.18%         22.08%
3-Year Return	11.90%         18.74%
5-Year Return	10.90%	       16.74%
10-Year Return	14.60%         18.56%

Norm
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No. of Recommendations: 10
According to Mr. Google QQQ looks much, much better than QQEW. Especially over the past decade.

Sure, but the recent investment performance isn't my point.
The good figures are really just saying that a couple of firms have done very very well in recent years, which doesn't tell us much about the future.

QQQ is kind of a dumb investment. It's not cap weight, and it's not NOT cap weight.
Its holdings are so skewed that your money is really a wager on a very small number of firms. Just three firms make up over a third of it.
If you know and like the prospects of those top few firms, you should just buy them.
If you don't have a knowledgeable view about their individual prospects, the vastly lower concentration risk of the equal weight version is more sensible.
(top three firms at 3% of your money is much less risky than top three firms at 34%)
So, that leaves QQQ an appropriate investment choice for pretty much nobody.

Secondarily, because of the weighting skew, the performance of QQQ can't support any attempt at extrapolation.
Individual firms are not nearly as predictable as broad classes of firms.
The equally weighted set is broad enough that we at least have some clue that its aggregate economic
characteristics are statistical rather than idiosyncratic, and so might (might) tell us something useful about the future.

Here's an approximation of the inflation-adjusted earnings per "share" of the equal weight Nasdaq 100 set.
It's not really right, but it's close enough to give a good idea.
(each figure is actually the daily average through the year, itself calculated is a slightly roundabout way)
1997   $24.52
1998 24.20
1999 27.58
2000 29.10
2001 13.43
2002 5.74
2003 16.17
2004 22.34
2005 28.80
2006 30.43
2007 36.83
2008 37.29
2009 33.20
2010 42.12
2011 54.58
2012 57.14
2013 58.19
2014 63.46
2015 69.47
2016 64.58
2017 74.93
2018 77.87
2019 89.61

There is obviously a big dip in the bust after the tech bubble.
The index rules requires that they include the largest non-financial Nasdaq firms by market cap, which for a while was a set of firms untethered from any notion of profit prospects.
Consequently if you build a trend line through this table it's too optimistic because of the very low figures way back then.
For conservatism, if you zap out 2001-2004, what remains is a remarkably steady trend line rising at inflation+6.15%/year.
Extrapolation is not entirely reliable, but it has been going on for a while, and that figure dwarfs what the S&P 500 can manage.

Jim
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Given the increased unknowns, does it still make sense to own any of these Berkshire Calls:

1/21/22 205
1/21/22 120
6/17/22 160
6/17/22 190

They dropped so much since before the Annual Meeting I hate to sell them now. Should I look at the losses as sunk costs?
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I think that, despite the dire economic outlook, the prospects for Berkshire's stock remain very good in the next couple of years.
Not certain, of course, but the bell curve is skewed far to the good side.
In pre-market the last BRK/B trade was $169.15, equating to $253725 per share.
That's 97% of peak book per share and 1.106 times of last-published book per share.
Book is imperfect, but it's still a darned useful rule of thumb.
I'm pretty confident that Berkshire will trade at at least 1.4 times book again at some point, being the "normal" in the last 15 years.
Even if book value never again rises from its end March level, that's up 26.5% from here to $214 per B.
Timeframe unknown : )

You have the advantage that there is a lot of time left on your calls.
A lot can happen in the next 617-764 days, and much of it might be good.
I'd sit tight.


If you want to actually profit from the price drop, and have spare cash, there is a great trade you can do.
Pick a calm day on the markets, and roll your highest strike calls down to a lower strike, longest expiry.
Even if the implied interest rate is fairly high on the ones you're buying, you'll probably find that it's extremely profitable.
The amount of improvement in your breakeven price is probably a big percentage of the amount of cash you'll tie up.
Random example: a June 2022 $190 can probable be sold for about $18.33 right now.
That's like selling stock at a price of $208.33 ($312495).
You could probably buy June $100 for $78.95, equating to a breakeven of $178.95 per B or $268425.
This ties up $60.62 more in cash, but improves your breakeven by $29.38.
So, that's a profit of 48.5% on the incremental cash tied up, or 23%/year compounded.
Pretty good for a "guaranteed" profit, provided only that Berkshire's price isn't much lower in 764 days.

Of course, if you think the price of Berkshire is going to just keep on dropping and stay down there indefinitely, your optimal action would be to sell.
I don't think that's a defensible view, but opinions can differ.

Jim
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“If you don't have a knowledgeable view about their individual prospects, the vastly lower concentration risk of the equal weight version is more sensible.“

A huge negative of the equally weighted index is that they have to re-balance it every Quarter. That drives portfolio turnover through the roof... so we have to subtract from our returns the corresponding tax hit. We also have to subtract the slightly higher annual fee... Obviously the turnover taxes are moot in a tax sheltered account. All else being equal I would prefer the Equal Weight index but it’s not equal... we have a cost drag to consider.

HB
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I wonder if buying the 100 components of the QQQE yourself and not rebalancing for, say, 5 years may be a better trade. You get the diversification but do not chop down winners with every rebalance. This can probably be backtested on the MI board.
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A huge negative of the equally weighted index is that they have to re-balance it every Quarter.
That drives portfolio turnover through the roof... so we have to subtract from our returns the
corresponding tax hit. We also have to subtract the slightly higher annual fee...
Obviously the turnover taxes are moot in a tax sheltered account. All else being equal I would
prefer the Equal Weight index but it’s not equal... we have a cost drag to consider.


All true, but in my view worth it.
Except in stretches that very large firms are ourperformers, equal weight products outperform equivalent cap weight products by a meaningful amount. And safer.
For most equal weight funds, the cost of the rebalancing is more than made up for by the extra profit from the rebalancing.
(rebalancing is, in and of itself, very slightly profitable, by trading short term noise.
Not a big number, but hey, it's something).
But more importantly, I'd consider QQQE a viable investment alternative and QQQ not.

As for tax due to churn...I guess.
But remember that your extra cost isn't the tax, but only the time value of the tax.
Most investments do ultimately get sold at some future date.
Sometimes the tax rate is lower in future, sometimes not.
First order effect is the return on the portfolio.
Second order effect is the churn on the portfolio.
Third order effect is the portion of that churn which is net realized profit above realized loss.
Fourth order effect is the tax on that net profit.
Fifth order effect is the time value of that tax.
I'm in an unusually lucky situation tax wise, but I suspect it's rare for a fifth order effect to be a determining factor in investment selection...

Jim
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I wonder if buying the 100 components of the QQQE yourself and not rebalancing for, say, 5 years may be a better trade.

But it doesn't much affect returns...0.34% worse before trading costs and fees.
(your trading costs will be higher than those of the folks running the fund, but you skip the fees)
Probably pretty close to a wash.
It has the advantage of letting you skip a firm you find odious.

Interestingly, if you *never* rebalance, the result is about 2.5%/year worse.
A lot of firms go generally up then go bust.
But because the "up" part usually takes much longer than the "bust" part, rather counterintuitively
holding a portfolio of random stocks for a fixed period of time works quite well but holding every stock forever doesn't.

Jim
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As to QQQ vs QQQE I'm confused then as to which one you feel is a better investment? Looking for a way to avoid owning so many volatile growth stocks....drive a person nuts the ups and downs.
thanks!
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As to QQQ vs QQQE I'm confused then as to which one you feel is a better investment?
Looking for a way to avoid owning so many volatile growth stocks....drive a person nuts the ups and downs.
thanks!



QQQ has done somewhat better in recent years but is *extremely* concentrated in just a few stocks.
I see no reason for anybody to want to buy it.

I prefer QQQE. It's just a bet on a broad set of stocks that historically have had rapidly rising earnings.
Since each stock is only 1% of the weight, it will trend more smoothly. (business results much more smoothly, and price a tiny bit more smoothly)
Still volatile, of course, compared to other things.
But long run returns matter, and short term volatility doesn't.

Jim
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Bugs. Fires.

Fire is not protected, but here is a statistic, more than 90% of fire damage had happened only on public forest holding, and private Timber had encountered very little fire damage. Think about that..

On bugs, Canadian beetles infestation had devastated Canadian Timber industry, but modern silviculture practices by Timber companies mostly mitigate the risks.

The bigger risks of Timber companies are new home construction. Over a very long period provides somewhat decent hedge against inflation.
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The S&P 500 has done very well in this stretch, but a whole lot of that has been accomplished by getting very expensive in the last few years.

You can count on broken record and clocks to be consistent, they don't change the tune nor change the time.
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Two NASDAQ equal weighted index ETFs are available. First Trust's previously cited QQEW has an expense ratio of 0.59%. Direxion's QQQE has an expense ratio of 0.35%. What are the pros of QQEW that would justify the additional 24 basis points? Thank you.
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