Archives for May 2019

Investing and the Art of Due Diligence

In the 2008 shareholder meeting of Berkshire Hathaway, a shareholder asked Warren Buffett and Charlie Munger –

“If you could not talk with management, could not read the annual report, and did not know the stock price of the company, but were only allowed to look at its financial statements, what metric would you look at to help you determine whether you should buy the company?”

They replied –

Buffett: Well, what we’re doing in investment – and what everybody does – is we’re laying out money now to get more money back later on.

Now, let’s leave the market aspect of the asset out of it. When you buy a farm, you really aren’t thinking about what the market on it is going to be tomorrow, next week, or next month. You’re thinking about how many bushels of beans or corn per acre you can get, and what the price is likely to be. You’re looking to the asset itself.

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The Risk of Worrying About the Non-Risk

On December 24, 2014, AirAsia Flight 8501 took off from Surabaya (Indonesia) at 5.30 am local time. With 155 passengers and 7 crew members onboard, the flight was headed to Singapore. About 43 minutes into its flight, the Airbus A320 disappeared from the radar. The worst had come to pass. Two days later, the rescue team discovered the plane wreckage in Java sea. All 162 people onboard perished in the crash.

The crash investigation revealed that it was a pilot error. The in command Captain Iriyanto — a 53-year old former Indonesian Air Force pilot — performed a non-standard reset of the onboard flight control computers. Which means he did something which was not mentioned anywhere in any of the operating manuals. Why would someone with an experience of more than 20,000 flight hours do such a thing?
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The Risks of Speculating During Rising Markets

It was sometime during late 1999 through early 2000, near the peak of the dot-com bubble, the legendary George Soros and his hedge-fund team were working on how to prepare for the inevitable sell-off in technology stocks.

The man in charge of Soros’ high profile technology funds was Stanley Druckenmiller – one of the best-performing hedge fund managers of all time, till date – and he was busy warning his team that the sell-off could be near and could be brutal.

As the markets soared further in March 2000, Druckenmiller was quoted as saying, “I don’t like this market. I think we should probably lighten up.” Soros himself would regularly warn his team that tech stocks were a bubble set to burst.

Despite this, when the sell-off finally did begin in mid-March 2000, Soros Fund Management wasn’t ready for it. His funds were still loaded with high-tech and biotech stocks. Just in five days, starting 15th March, Soros’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss. By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%.

Post that, in April 2000, Soros said at a conference, “Maybe I don’t understand the market. Maybe the music has stopped, but people are still dancing.”