Tag Archives: Common Stocks and Uncommon Profits

My 2015 reading list

In this post I wanted to share the list of books I read along the year (1) with a small comment for each one (2), links to Wikipedia articles about the book (if available) and to the authors (in case you want to read about them). I have also included a small rating from one to three “+” depending on how much do I recommend its reading:

  1. DSC_0342Profiles in Courage (by John F. Kennedy) (++): written by then senator Kennedy when he was convalescent from a back surgery in the 1950s, this book analyzes the context, figures and controvert decisions made by 8 different US senators mainly from the XIX century (from John Quincy Adams, Daniel Webster… to Robert A. Taft), decisions that were not popular at the time in their constituencies but the politicians understood were needed to be taken and demanded courage to do so. For this book Kennedy obtained a Pulitzer prize in 1957. From the analysis, Kennedy extracts some lessons in the last chapter that are well encapsulated in the following dilemma: “[…] the loyalties of every Senator are distributed among his party, his state and section, his country and his conscience. On party issues his party loyalties are normally controlling. In regional disputes, his regional responsibilities will likely guide his course. It is on national issues, on matters of conscience which challenge party and regional loyalties, that the test of courage is presented.” 
  2. “El arte de ser padres” (by Fitzhugh Dodson) (++): a loan from my parents to help us in the quest of upbringing our daughter, the book, written in the late 1970s, did help in removing weight from some situations when the child was at the turn of being 2 years old. Among other things, it teaches you to get more relaxed, laid-back, not to enter into conflict trying to impose things, etc. It was also interesting to see how society and some social conventions have changed from the 1970s to today (e.g. drinking and smoking during pregnancy).
  3. TheSpiritOfStLouisThe Spirit of Saint Louis (by Charles A. Lindbergh) (++): this autobiographic book describes one of the great adventures of the XX century, the first non-stop flight across the Atlantic ocean in May 1927. For this book Lindbergh received a Pulitzer prize in 1954. The beginning of the book covers the days of Lindbergh working for the postal service of Robertson Aircraft Corporation and how he gets engaged into the race of who would be the first pilot(s) to cross the ocean. He later describes the conception, development and testing of the Ryan aircraft he flew for the feat. He finally gives a detailed account of the 33h30′ flight; hour by hour, alone, squeezed in his seat, with scarce food and water supplies, cold, flying day (within the clouds at times) and night, thrilling and semi-unconscious (asleep) at times, until he lands in Le Bourget. I wrote a post review the book, find it here.
  4. El General en su Laberinto (by Gabriel García Márquez) (+): this book is a novel trying to figure out how the last days of the Venezuelan revolutionary Simon Bolivar were. The characters, trips, locations, etc., are real. The dialogues, thoughts, feelings, are the work of Garcia Marquez. As always with Garcia Marquez, there are very vivid dialogues and reflections in the book by way of its characters, however this wasn’t the book I liked the most from him. On the hand, to get a better feeling and description of the last days of a person I very much preferred for the uneasiness it puts you as a reader The Death of Ivan Ilyich by Tolstoy.
  5. Pensar con Arte (by Manuel Conthe) (++): this book shows how our minds work in their way of thinking with their biases and the situations that may arise. The concepts covered are similar to other books that I have read in the past (Thinking Fast and Slow, Seeking Wisdom: From Darwin to Munger or Poor Charlie’s Almanack), the originality here comes from the parallels and connections that the author brings and offers with the arts (literature, paint, cinema, music…), showing examples from different art craft.
  6. España 3.0: Necesitamos resetear el pais (by Javier Santiso) (+++): this book is call for action, for change, for resetting Spain into a country which bases its economy and growth on innovation, education and technology. It starts by offering a rather harsh and in my opinion good diagnostic of many of the ailments of the country. Then shows how several things do work in the country and how in previous occasions the country has raised up to similar challenges and it can and has to do so again. The sooner the better.
  7. The Diary of a young Girl (by Anne Frank) (++): the diary of a 13-year-old girl when she starts writing it and 15-year-old when it finishes, Anne Frank describes how she, her family and some others live day by day in hiding from the Nazis. Throughout the book there are many comments, appreciations, worries, misunderstandings, etc., very typical of that age. Despite of that, at some points of the book Anne provides a great example of resilience, attitude and hope: e.g. at times she reflects that all in all she cannot complain, she doesn’t lose time and imposes onto herself a rigorous studying and reading time schedules, etc. In that extent, her attitude and the diary reminded me of another book I have often seen recommended that I must read, “Man’s Search for Meaning” by Viktor Frankl, a jew imprisoned at a concentration camp.
  8. LeeLee (by Douglas Southall Freeman abridged version by Richard Harwell) (++): this is the biography of Rober E. Lee the general of the Army of Northern Virginia on the Confederate side during the US civil war. The book covers from the origins of the family, the birth and early education of Lee, his days at West Point where he specialized as an US army engineer, and how as the different states start seceding and viewing that his allegiance shall remain to Virginia he resigns from the US army. The book then describes the different battles, the style of Lee during the war and the surrender at Appomattox. Then it covers his final years as president of the Washington college in Lexington. For the extended version of this biography, Douglas Southall Freeman received a Pulitzer prize in 1935.
  9. commonstocksCommon stocks and uncommon profits and Other Writings (by Philip A. Fisher) (++): a classic book about investing strongly recommended by many, among others Warren Buffett. The first edition was written in 1950s, the edition I read dates from the 1970s and includes some reflections of what he wrote in the first one. The main contribution of the book is what the author calls the scuttlebutt (rumor, gossip) technique, that is the thorough research ground work an
    investor must make before investing in any stock by way of talking to sales men of competitor companies, customers, experts on the field, academics, management of the company, etc., and which he summarizes in 15 points. A quick takeaway from the book is that, if you lack the time to thoroughly proceed with the scuttlebutt, it might be better to leave for others, who have, the task of picking your stocks. The Other Writings included in the book relate to what is and how it was developed his investment philosophy and on whether the markets are efficient.
  10. The gospel of wealth and other timely essays (by Andrew Carnegie) (++): In the main essay of the book (The Gospel of Wealth), Carnegie, discusses the moral obligation of the wealthy to redistribute their wealth in life back to the society. He positions himself against charity and offers several options that would have a great impact in lifting those among the poor willing to work in their own progress: funding of educational institutions, hospitals, libraries, parks, monuments, etc. Other essays relate to whether the United States (the Republic) should or not follow the path of Britain in having colonies and dependencies (in relation to the Philippines), a speech explaining the arrangements of the American constitution, critiques on proposals for free trade agreements between Britain and its colonies, etc. A good review of business and politics at the end of the XIX century.
  11. Vol de nuit (“Night Flight”, by Antoine de Saint-Exupéry) (++):  in Saint-Exupéry’s second novel he describes the operations of an air mail business based in Buenos Aires and with aircraft incoming from different locations in South America. The book describes the difficulties of night flight at the time and of developing this new type of service. One particular flight under cyclonic conditions will put into question the whole operation and the different characters, the pilot, her wife, the line operations’ chief, radio operators, etc.

(1) You can find here: my 2012 reading list, 2013 (embedded in my summary of 2013) and 2014 ones.

(2) In this 2015 I have not written many dedicated posts about the books I have read (just one about the The Spirit of St. Louis), but I do not discard making a review of some of them in the future.

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Warren Buffett’s 2012 letter to the shareholders of Berkshire Hathaway: dividends, books and sport

Last Saturday Warren Buffett’s 2012 letter to the shareholders of Berkshire Hathaway [PDF, 155 KB] was released. As always, I strongly encourage you to read it (23 pages).

From this year’s letter, I wanted to comment on 3 things:

  • Lesson on dividends’ policy
  • Books
  • Running

****

Dividends’ Policy

In my opinion the great lesson from this letter starts at page 18, when Warren explains the different ways a company has to allocate earnings. He makes a comparison between dividends and what he calls the “sell-off” scenario, where a shareholder can be better off when the company is not paying dividends and instead reinvesting all earnings while the shareholder sells part of his shares to obtain some cash.

See the explanation below (bit long):

“We’ll start by assuming that you and I are the equal owners of a business with $2 million of net worth. The business earns 12% on tangible net worth – $240,000 – and can reasonably expect to earn the same 12% on reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 125% of net worth. Therefore, the value of what we each own is now $1.25 million.

You would like to have the two of us shareholders receive one-third of our company’s annual earnings and have two-thirds be reinvested. That plan, you feel, will nicely balance your needs for both current income and capital growth. So you suggest that we pay out $80,000 of current earnings and retain $160,000 to increase the future earnings of the business. In the first year, your dividend would be $40,000, and as earnings grew and the onethird payout was maintained, so too would your dividend. In total, dividends and stock value would increase 8% each year (12% earned on net worth less 4% of net worth paid out).

After ten years our company would have a net worth of $4,317,850 (the original $2 million compounded at 8%) and your dividend in the upcoming year would be $86,357. Each of us would have shares worth $2,698,656 (125% of our half of the company’s net worth). And we would live happily ever after – with dividends and the value of our stock continuing to grow at 8% annually.

There is an alternative approach, however, that would leave us even happier. Under this scenario, we would leave all earnings in the company and each sell 3.2% of our shares annually. Since the shares would be sold at 125% of book value, this approach would produce the same $40,000 of cash initially, a sum that would grow annually. Call this option the “sell-off” approach.

Under this “sell-off” scenario, the net worth of our company increases to $6,211,696 after ten years ($2 million compounded at 12%). Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own 36.12% of the business. Even so, your share of the net worth of the company at that time would be $2,243,540. And, remember, every dollar of net worth attributable to each of us can be sold for $1.25. Therefore, the market value of your remaining shares would be $2,804,425, about 4% greater than the value of your shares if we had followed the dividend approach.

Moreover, your annual cash receipts from the sell-off policy would now be running 4% more than you would have received under the dividend scenario. Voila! – you would have both more cash to spend annually and more capital value.”

As always, I believe that the best way is to make (play with) the numbers yourself, so you get to understand it once and for all. I paste here the numbers for those not being number-crunchers:

Buffett's sell-off case vs. dividends.

Buffett’s sell-off case vs. dividends.

Books

Over 2 years ago, I read Buffett’s biography “The Snowball: Warren Buffett and the Business of Life“, by Alice Schroeder (of which I wrote a post); it seems that I will have to get the newest one by Carol Loomis, “Tap Dancing to Work: Warren Buffett on Practically Everything“.

There is another book that I should read, according to the following passage in the letter:

“Above all, dividend policy should always be clear, consistent and rational. A capricious policy will confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can’t switch capriciously between the two and retain the fans of either.”

I’ve got all three books in the shelf since 5 years ago, it’s a shame that I have not yet read or gone through the first one!

Running

I found one final surprising and hilarious passage at the end of the letter embedded in the information related to the shareholders meeting:

“On Sunday at 8 a.m., we will initiate the “Berkshire 5K,” a race starting at the CenturyLink. Full details for participating will be included in the Visitor’s Guide that you will receive with your credentials for the meeting. We will have plenty of categories for competition, including one for the media. (It will be fun to report on their performance.) Regretfully, I will forego running; someone has to man the starting gun.

I should warn you that we have a lot of home-grown talent. Ted Weschler has run the marathon in 3:01. Jim Weber, Brooks’ dynamic CEO, is another speedster with a 3:31 best. Todd Combs specializes in the triathlon, but has been clocked at 22 minutes in the 5K.
That, however, is just the beginning: Our directors are also fleet of foot (that is, some of our directors are).

Steve Burke has run an amazing 2:39 Boston marathon. (It’s a family thing; his wife, Gretchen, finished the New York marathon in 3:25.) Charlotte Guyman’s best is 3:37, and Sue Decker crossed the tape in New York in 3:36. Charlie did not return his questionnaire.”

I would have loved to take part in that race. I will probably do so in some other year :-).

Final confession

Luca and I went a couple of years ago to Berkshire Shareholder meeting. This year’s meeting will take place on May 4th.

This year, Luca and I will get married on May 11th, but one of the dates we considered was April 27th, and one of the drivers behind it was to be able to attend 2013 BRK meeting during the honeymoon…

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