A country that can control waterways anywhere in the world will have a great strategic advantage. Three years ago, you could find a number of companies in [South] Korea with strong balance sheets trading at three times earnings. I know the American investor will not be better off if volume doubles on the NYSE, and I know the NYSE will be trying to figure out how to do that if it is trying to maximize its own earnings per share. They are the product of fantasy, not strategy. When somebody sticks a ton of debt into a business, if there's a hiccup in the business, then the lenders foreclose.
The insistence on operationally planning based on enemy capabilities, while tactically prudent, is the antithesis of strategic thinking, which should concentrate on enemy vulnerabilities. In my estimation, we are drifting off course, and if uncorrected, our marked advantage in the intellectual capital of warfare, in the face of an increasingly uncertain future, is at risk.
Thus, for almost all senior officers -- all our generals and admirals -- the final fifteen to twenty years of their career is almost entirely largely lacking in extended developmental experiences.
This fact becomes more troubling when correlated with the reality that decision-making and complexity at the senior levels -- especially regarding strategic and grand strategic issues -- is immensely more complex and uncertain than the relatively simpler worlds of tactics and operations.
So-called "wicked problems" unresponsive to set-piece solutions abound. Williamson Murray - Senior Fellow, Institute for Defense Analyses The cost of the wars in Iraq and Afghanistan suggests that the United States can no longer afford an approach resting on the comfortable assumption that commanders can acquire skills on the fly to deal with the new and different complexities that each conflict will bring in its wake. One should note that these are not quite the same thing.
Only a small number of officers will develop into strategists of the first rank, but these are so important that the PME system must do as much as it can to encourage them to develop their talents to the maximum degree possible. Unless changed, the current time and resource constraints will likely frustrate deep thinkers, stifle the creative and hinder the process of organizational learning and adaptation.
The goal of achieving advantage through transformational processes is at risk. Learning from the Stones: It is through learning the Chinese board game called go. This game is a living reflection of Chinese philosophy, culture, strategic thinking, warfare, military tactics, and diplomatic bargaining. A modest claim is made in this writing that a little knowledge of go will take U. Strategic Thinking chapter from Strategic Leadership and Decision Making , from National Defense University A leader can develop more effective strategic thinking skills.
This is done by exploiting any opportunity to better understand yourself, how you think about complex problems, and how to go about making decisions. This understanding of yourself is critical, since this information that forms the foundation for developing your strategic thinking capabilities necessary in the strategic environment.
The more you understand yourself, the more control you have over both the process, and the products you produce. Virtually all of you will be required to serve in strategic environments. This means there will be many opportunities for you to function as a strategic thinker or advisor. You must, therefore, continue to develop a new and broader set of thinking skills. The SLDM course, and the overall ICAF experience have been designed to help you understand and develop effective strategic thinking skills to solve the complex, fast changing, unstructured problems you will soon encounter.
Attack by Stratagem , from The Art of War , by Sun Tzu Hence to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting.
If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle. We as Marines, especially the Staff NCOs and company grade officers, need to do better at taking responsibility for our own organization.
The following are some ideas of how Disruptive Thinkers can be more effective. Be ready for a bureaucratic knife fight. Sometimes you can do more good outside of the military. We do a very poor job at leveraging our best minds and our most talented leaders.
The Marine Corps leadership can change this in several different ways: Innovation is often a bottom up process, where those closest to the fight have the best solutions. Giving subordinate commanders flexibility to make these decisions will allow the most creative junior leaders to develop innovative solutions to existing problems. If you want effective Colonels and Generals you need to keep effective Lieutenants and Captains. It's not important how clever individuals are, he says; what really matters is how smart the collective brain is.
Matt Ridley argues that, through history, the engine of human progress and prosperity has been, and is, "ideas having sex with each other.
Four days, eight hours, and 52 minutes later his team had won the competition. Watch him talk about how they did it and the challenges they encountered in the process.
He also talks about other uses of the techniques - including rescues in Haiti - and about how our communication paradigms are broken and how they need to change. Outliers are data and hypotheses that analysts may too quickly dismiss. They may be the imaginative, even prescient analyses policymakers cannot bring themselves to believe. Intelligence analysts generally possess healthy doses of skepticism to help them avoid the pitfalls of hubris and self-delusion, but, sadly, this is insufficient, for the outliers that ultimately prove to be the seeds of surprise are outlandish, unthinkable, and wholly anomalous.
Building a Wise Crowd local copy , based on James Surowiecki's bestseller The Wisdom of Crowds , from "Ask the Academy" at NASA Academy, 24 Feb - showing how a group of people's diverse answers to a question, when put together, can be better than the expert's - in some cases, not all Surowiecki identifies four characteristics of wise crowds: The crowd must be diverse, which allows the individual members to bring different pieces of relevant information to the table.
It needs to be decentralized so that no individual member is dictating what the answer should be. The individual crowd members have to be independent, so they remain true to their own information and perspective while not worrying about what the other members of the group think of them. According to UC Berkeley School of Information we produce more than , Terabytes of data each year and our current adversaries are leveraging this wealth of information into concrete operational advantages better then we can.
By shying away from traditional operational security principles and moving to what could be described as open source warfare, they can adapt more quickly to a given situation.
A striking example of open source can be found in the Iraqi insurgency. First of all, we will look where this concept can be employed and why it would work.
Having identified where open source can be useful for the military, we will turn our attention to the need of changing our understanding of OPSEC. Finally, we will propose an open source planning model which will allow us to better leverage information during campaign design and execution. Universal Access to and Use of Information local copy , from FEMA-sponsored Strategic Foresight Initiative , May In the last decade, technological advances in both computer hardware and software have greatly enhanced people?
Based on this capability and access, the following trends and drivers have the potential to impact emergency management activities: Internet access expansion People as both producers and consumers of information Spontaneous reporting Crowdsourcing Increased emergency management use of the internet and social media Hunting for Foxes: Our interest in outliers was born out of Internet-based surveying that Clint Watts undertook on 2 January Would you like to play a game?
Solving real problems using game mechanics. Instead of doing each of these activities in isolation, these elements were brought together as a powerful tool to solve a real world problem. Their results indicate the potential for integrating online video games into real-world science.
Not only can we apply the idea of gaming to our citizen engagement strategies on the communications level, but perhaps we can pave the way in helping others see the value in applying game mechanics to their own areas of responsibility.
Using still photos culled from the Web, Photosynth builds breathtaking dreamscapes and lets us navigate them. Clay Shirky on institutions vs. Wikis work best when they solve a problem that is evident to most of a group. Wiki use needs to replace an existing work process, not add to work.
Wikis need advocates and advertising. Seeding the wiki with valuable content helps jump-start the process; with a blank page, no one knows where to start. Gradual growth is fine, and starting small helps a core group of users become accustomed to the wiki think pilot study.
A wiki that serves a niche need is okay; it does not need to be all things to all people. Elements of IBL, including characterization of the orienting problem, learner support by the instructor, and assessment of learner outcomes are outlined.
Considerations for developing an IBL curriculum are addressed, and details of an example of an Army IBL course of instruction are provided. In short, it does not greatly respect a traditional distinction between such things as physical movements, perceptions, and cognitions when it comes to training, rather treats these all as behaviors that are amenable to the same training methods and principles.
Deliberate practice techniques were applied to develop exercises to train the task of adaptive thinking in tactical situations. Developing Leaders to Adapt and Dominate for the Army of Today and Tomorrow local copy , by Davis and Martin, Military Review , Sep-Oct Change in the College comes in how we accomplish our educational mission, as well as within the content of our courses.
This change is an active, evolutionary educational process that drives the institution to reexamine itself on a frequent basis. The operational environment is dramatically different than in previous times. Additionally, there has been a tremendous growth in understanding of adult learning and professional education, and CGSC is leveraging this new science.
We are educating a different generation of emerging leaders who bring incredible experience to the classroom to share. The most obvious difference over the previous 30 years is that more than 90 percent of our Army students have recent combat experience and nearly 70 percent have multiple combat tours.
Based on this background, and the ever-changing operating environment that is our world, it is easy to see that change remains a constant in the process of leader development and education for the Army. Creativity and Innovation Logic will get you from A to B. Imagination will take you everywhere. Unreasonable people attempt to adapt the world to themselves.
All progress, therefore, depends on unreasonable people. A great hockey player plays where the puck is going to be. Innovation is doing new things. Eliot The foolish and the dead alone never change their opinions. The happy man inevitably confines himself within ancient limits. Out on the edge you see all kinds of things you can't see from the center. In the age of information sciences, the most valuable asset is knowledge, which is a creation of human imagination and creativity.
We were among the last to comprehend this truth and we will be paying for this oversight for many years to come. It takes repeated attempts, endless demonstrations, monotonous rehearsals before innovation can be accepted and internalized by an organization. This requires 'courageous patience'. Ecologist Eric Berlow and physicist Sean Gourley apply algorithms to the entire archive of TEDx Talks, taking us on a stimulating visual tour to show how ideas connect globally.
Through a process of strategic innovation we can transition from "doing things right" to "doing the right thing," a shift which will ultimately result in organizational efficiencies and increased job satisfaction.
The 3 Habits of Great Creative Teams , a 99 u video "When the your team is faced with adversity does it stand strong and act boldly or does it crumble under pressure? Based on his work with over teams, Keith Yamashita shares his insights about great collaborative environments including: An essay on creative thinking for military professionals local copy , by Allen, U.
An essay on creative thinking for military professionals , by Allen, U. Our choice is quite clear: Failure means death and destruction for ourselves, our comrades, and all that we cherish. Especially at the strategic level, the ability to think creatively and adapt to changing circumstances is often the difference between life and death, victory and defeat.
And despite general agreement to this fact by most senior leaders, the military on the whole is ill-equipped for producing leaders who are adaptable, flexible, and who can think creatively. Rather, its personnel makeup, focus on operations, and sheer bureaucracy all combine to create and reward leaders who are risk-averse, conformists, and good at maintaining the status quo.
The CoECI provides guidance to other federal agencies and NASA centers on implementing open innovation initiatives from problem definition, to incentive design, to post- submission evaluation of solutions. This paper examines current conditions, introduces an approach, identifies themes, and proposes actions to build momentum for the concept. As the Navy Center for Innovation , NWDC is spearheading a campaign to reinvigorate a culture of innovation within the Navy, and the guide is an important component of that endeavor.
In addition to defining innovation and why it is important, the guide provides advice on how to identify and define problems that need solving, proven techniques for finding creative solutions, and how to move these ideas through a large organization to drive towards implementation.
It's up to us to give them the tools and the open channels to be successful," said Rear Adm. In his introduction, Kraft challenges the junior leaders to think deeply, question continuously, debate vigorously, read broadly, write boldly and never give up on a good idea. To download The Innovator's Guide, visit https: This thesis uses a historical overview of military innovation among great powers throughout history to draw lessons for the U. Finally, and most importantly, this study finds it essential to foster a climate and institutional culture receptive to innovation.
A true meritocracy would allow leaders to promote the most promising soldiers and officers despite their inability to meet any time-in-service requirements. The "year-group" promotion system codifies a rigid bureaucratic structure that ensures slow change and little innovation.
How PowerPoint Stifles Understanding, Creativity, and Innovation Within Your Organization , by Zweibelson, in Small Wars Journal , 4 Sep - includes eight recommendations at the end, to "restore the briefer as a critical thinker" PowerPoint provides a useful vehicle for sharing and developing concepts among military professionals in a variety of venues.
Rarely do we conduct a meeting without the ever-present bright projection of PowerPoint upon a screen.
When you attend a briefing and the majority of slides and material attempt to reduce, measure, categorize, or describe something, we are often merely admiring the problem. Instead of thinking about why something is occurring, we are usually required to answer precise information that satisfies a descriptive WHAT-centric procedure instead of a critical line of inquiry. If descriptive thinking blinds your organization to critical and creative thinking, then PowerPoint is the drug of choice for continuing the reductionist and highly tacticized mentality across an organization that fears uncertainty.
This recent staff technique defeats the purpose of a quadrant chart that uses two separate tensions in an overlapping geometric structure to demonstrate patterns and explore complex relationships. Each quadrant in a quad chart should systemically relate to the other quadrants in terms of context.
If you are only removing one component while the three remaining quadrants maintain their coherence, your staff has merely shoved ten pounds of dirt into a five pound bag for you, by condensing four slides into one. This reduces total slide numbers, but does little to improve organizational learning.
Customs Service Dogs U. Useful Birds of America 2nd Ser. Useful Birds of America 3rd Ser. Useful Birds of America 4th Ser. Useful Birds of America 5th Ser. Useful Birds of America 6th Ser. Useful Birds of America 7th Ser. Useful Birds of America 8th Ser.
Useful Birds of America 9th Ser. Useful Birds of America 10th Ser. Headlights Cars Promo Cards: Chicle Famous Aircraft Wings, Canad. Field Force 1 Hot.. Justin Bieber Limited Signature Edn. MTV Raps Series 2.
Mardi Gras D. Clark Mardi Gras J. Fleer Believe It or Not! Set Do You Know? Fire Department F. Fire Department B. GeoWoodstock XI P.
Model Kit Cards Mars Attacks! Find one; get rich. Most people think that what the stock does from day to day contains information, but it doesn't.
It isn't just something that wiggles around. The stock market is the best game in the world. You can take advantage of people who have no morals. Businesses don't change in value that much. That is simply crazy. There are extreme degrees of fluctuation, and Mr. Market will call out the prices.
Wait until he is nutty in one direction or the other. Put in a margin of safety. Don't find a bridge that says no more than 10, pounds when you have a pound vehicle. It isn't a function of IQ, but receptivity of the mind.
When investing you don't have to invest in all 10, companies available, you just have to find the one that is out of line. Market is your servant. Market is your partner and wants to sell the business to you everyday. Some days he is very optimistic and wants a high price, others he is pessimistic and will sell at a low price. You have to use this to your advantage.
The market is the greatest game in the world. There is nothing else that can, at times, get this far out of line with reality. Negotiated transactions are less volatile.
Some get this; others don't. Just keep your wits about you and you can make a lot of money in the market. I had 49 university groups, in clumps of six, [visit me] last year. Start with a small circle of competence, things you can understand. You need to understand accounting, which has enormous limitations.
Learn that the market is there to serve you, not instruct you. In the investing business, if you have an IQ of , sell 30 points to someone else. You do not need to be a genius. Reducing the nonsense would be a good goal.
Efficient market theory—that everything is priced appropriately—is bunk. Max Planck [remarked about] the resistance of the human mind to new ideas: I think there's something to be said for developing the disposition to own stocks without fretting.
I think it's almost impossible to do well investing over time without this. If the market closed for years, we wouldn't care. Would still keep making Sees candy, Dilly bars, etc. If you focus on the price, you're assuming that the market knows more than you do. That may be the truth, but in that case you shouldn't own it. The stock market is there to serve you, not to instruct you. Focus on price and value.
If a stock gets cheaper and you have some cash, buy more. We sometimes stop buying when prices goes up. When we're buying something, we want the price to go down and down and down. You only have to be right one or two times a year. I used to handicap horses. You can come up with a very profitable decision on a single company. You only have to be right a few times in your lifetime, as long as you don't make any big mistakes.
What's funny is that most big investment organizations don't think like this. They hire lots of people, evaluate Merck vs. You can't do it. Very few people have adopted our approach. Ted Williams, in his book The Science of Hitting, talked about how he carved up the strike zone into different zones and only swung at pitches that were in his sweet spot.
Investing is the same way. We read a lot. You have to have a temperament to grab ideas and do sensible things. Charlie and I have seen it. The whole world in the late s went a little mad in terms of investments.
How could that happen? Temperament is the ability to not be swayed by the market. See what you are supposed to see. To sell the business is written in the ground rules.
Never going to be a takeover or sell business because street thinks unfocused. I don't quite agree with Fisher, think can ride some stocks forever. Better off when you had 50 years ahead of you. Almost never sell operating businesses, and if we do, we do so because they can't fix their problem. There could be something that happens by I think the chances are almost nil.
So what we really want to do is buy businesses that we would be happy to own forever. It is the same way I fell about people who buy Berkshire. I want people who buy Berkshire to plan to hold it forever. They may not for one reason or the other but I want them at the time they buy it to think they are buying a business they are going to want to own forever. I measure Berkshire by how little activity there is in it. If I had a church and I was the preacher and half the congregation left every Sunday.
I would rather go to church where all the seats are filled every Sunday by the same people. Well that is the way we look at the businesses we buy. We want to buy something virtually forever. And back when I started, I had way more ideas than money so I was just constantly having to sell what was the least attractive stock in order to buy something I just discovered that looked even cheaper. But that is not our problem really now. So we hope we are buying businesses that we are just as happy holding five years from now as now.
And if we ever found a huge acquisition, then maybe we would have to sell something. Maybe to make that acquisition but that would be a very pleasant problem to have. We never buy something with a price target in mind. That is not the way to look at a business. The way to look at a business is this going to keep producing more and more money over time?
We are best at evaluating businesses where we can come to a judgment that they will look a lot like they do now in five years. Iscar will be better — maybe a lot bigger — in five years, but the fundamentals will be the same.
Charlie says we have three boxes: In, Out and Too Hard. I was virtually there at the birth of Intel. Some businesses are very, very hard to predict. A foreign correspondent, after talking to me for a while, once said: Do you have an explanation? Look for simple businesses. They have share of mind. Investment knowledge is cumulative, and things you learn will make you better in the future. Stick to things you understand. How do you beat Bobby Fisher?
Play him in anything except chess. Charlie and I went to Memphis to look at a chewing tobacco company. My view is that energy production should move to nuclear. Berkshire Hathaway has and will buy what trades, but will not buy companies that engage in certain behaviors.
If they did not own it, someone else would. They protest investment in Chinese companies though. We just finished looking for someone. The Board has 3 candidates to replace me as CEO and 4 candidates to replace me as investor. In , I wound up my partnership and I had to help people find someone to manage their money.
The problem with guys that do well is they attract so much money that it neutralizes their advantage. All investing is laying out cash now to get some more back in the future. He knew a lot, but not that [he lived in] BC. What is the discount rate? It should be obvious. It should shout at you, without all the spreadsheets. We see something better. The higher math was false precision. The markets saw it in the Long-Term Capital Management [hedge fund] in It only happens to people with high IQs.
Opportunity costs have been in the forefront of our minds during the last 18 months. Tougher and possibly more profitable. We got lots of calls [for potential investments]—most we ignored.
We never want to get dependent on banks. Our definition of comfortable is very comfortable. I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration.
The economy will do fine over time. If you have a harem of 40 women, you never really get to know any of them well. Charlie and I operated mostly with 5 positions. I told investors they could pull their money out.
Later in , LTCM was in trouble. If I like a business, then it makes sense to buy more at 20 than at The question is about diversification. I have a dual answer to that. If you are not a professional investor. If your goal is not to manage money to earn a significantly better return than the world, then I believe in extreme diversification.
All they are going to do is own part of America. And they have made a decision that owning a part of America is worthwhile. That is the way they should approach it unless they want to bring an intensity to the game to make a decision and start evaluating businesses. Once you are in the businesses of evaluating businesses and you decide that you are going to bring the effort and intensity and time involved to get that job done, then I think diversification is a terrible mistake to any degree.
I got asked that question the other day at SunTrust. If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake.
Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best.
I call him Noah, he has two of everything. You will see things where it would be a mistake not to act.
You just had a good banker. I saw things in in junk bonds that would have been worth going heavily into. You could have bought Cap Cities in — selling for one-third the property value, with the best manager, and in a good business.
Students learn corporate finance at business schools. They are taught that the whole secret is diversification.
But the exact rule is the opposite. The goal of investment is to find situations where it is safe not to diversify. Very seldom do we get to buy as much of any good idea as we would like to. We will not be spinning off any companies. We have a real advantage in allocating capital—moving money around.
When we buy companies from people, we buy them for keeps. People can trust us to keep our word on this. Wall Street sells that stuff [spin-offs] for fees. We have listened to presentation after presentation by investment bankers, but there is always a fee.
A similar question was asked and addressed earlier in the meeting. If we lose confidence or conditions change, we sell. When in doubt, we keep holding. If we were wrong, we sell. Our peculiarity is our commitment to buy for keeps.
I asked Graham the same question. Graham lived a life of sharing. He may have had more money hoarding, but lived happier because of it. At age 11 I started investing, purchasing three shares of Cities Service Preferred. I was really into charting and technical analysis. Did Ben lose because I read his book? The reason gets down to temperament. Charlie and I have educated competitors. GEICO still has enormous possibilities for growth.
That being said, I advise you to pay off your credit card. The search expenses that brought us Ajit Jain — I cannot think of a better investment. This is a good life lesson: We think first in terms of business risk. The key to Graham's approach to investing is not thinking of stocks as stocks or part of the stock market.
Stocks are part of a business. People in this room own a piece of a business. If the business does well, they're going to do all right as long as long as they don't pay way too much to join in to that business. So we're thinking about business risk.
Business risk can arise in various ways. It can arise from the capital structure. When somebody sticks a ton of debt into a business, if there's a hiccup in the business, then the lenders foreclose. It can come about by their nature--there are just certain businesses that are very risky. There are certain businesses that inherently, because of long lead time, because of heavy capital investment, basically have a lot of risk.
Commodity businesses have a lot of risk unless you're a low-cost producer, because the low-cost producer can put you out of business. Our textile business was not the low-cost producer. We had fine management, everybody worked hard, we had cooperative unions, all kinds of things. But we weren't the low-cost producers so it was a risky business. The guy who could sell it cheaper than we could made it risky for us.
We tend to go into businesses that are inherently low risk and are capitalized in a way that that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses, you pay too much for them.
That risk is usually a risk of time rather than principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you yourself--whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market.
The stock market is there to serve you and not to instruct you. That's a key to owning a good business and getting rid of the risk that would otherwise exist in the market. You mention volatility--it doesn't make any difference to us whether the volatility of the stock market is a half a percentage of a point a day, or a quarter percent a day, or five percent a day. In fact, we'd probably make a lot more money if volatility was higher because it would create more mistakes in the market.
Volatility is a huge plus to the real investor. Ben Graham used the example of Mr. Ben said that just imagine that when you bought a stock you in effect bought into a business where you have this obliging partner who comes around every day and offers you a price at which he'll either buy or sell and that price is identical.
No one ever gets that in a private business, where daily you get a buy-sell offer by a party. But you get that in the stock market, and that's a huge advantage. And it's a bigger advantage if this partner of yours is a heavy-drinking manic depressive. So, as an investor, you love volatility. Not if you're on margin, but if you're an investor you're not on margin, and if you're an investor you love to get these wild swings because it means more things are going to get mispriced.
Actually, volatility in recent years has dampened from what it used to be. It looks bigger because people think in terms of Dow points, but volatility was much higher many years ago than it is now. The amplitude of the swings used to be really wild and that gave you more opportunity. Well it came to be that corporate finance departments at universities developed the notion of risk-adjusted returns. My best advice to all of you would be to totally ignore this development.
Risk had a very good colloquial meaning, meaning a substantial chance that something could go horribly wrong, and the finance professors sort of got volatility mixed up with a bunch of foolish mathematics and to me it's less rational than what we do.
And I don't think we're going to change. Finance departments believe that volatility equals risk. They want to measure risk, and they don't know how to do it, basically. So they said volatility measures risk. I've often used the example of the Washington Post's stock. That's something I've thought about ever since they told me that 25 years ago and I still haven't figured it out.
One key aspect to risk is how long you expect to hold an investment, i. But, over a 5 or 10 year period it probably has almost no risk at all. The myth that volatility of a stock somehow equates to risk was discussed.
In fact, volatility often creates great opportunity, in Buffett's view. The following comments on risk in investments were in the Annual Report, on page That judgment became ever more compelling as Berkshire's capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart- and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year.
Charlie says it's my turn. The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.
In stating this opinion, we define risk, using dictionary terms, as "the possibility of loss or injury". Academics, however, like to define investment "risk" differently, averring that it is the relative volatility of a stock or portfolio of stocks - that is, their volatility as compared to that of a large universe of stocks.
Employing data bases and statistical skills, these academics compute with precision the "beta" of a stock - its relative volatility in the past - and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong".
For owners of a business - and that's the way we think of shareholders - the academics' definition of risk is far off the mark, so much so that it produces absurdities. For example, under beta-based theory, a stock that has dropped very sharply compared to the market - as had Washington Post when we bought it in - becomes "riskier" at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly-reduced price?
Risk to us is 1 the risk of permanent loss of capital, or 2 the risk of inadequate return. Some great businesses have very volatile returns -- for example, See's usually loses money in two quarters of each year -- and some terrible businesses can have steady results. I've been waiting for this craziness to end for decades.
It's been dented, but it's still out there. We think the best way to minimize risk is to think. Our default is [to have our capital] in short-term instruments and only do something when it makes sense.
Volatility does not measure risk. The problem is that the people who have written about and taught volatility do not understand risk. Past volatility does not determine risk. Take farmland here in Nebraska: But stocks are traded and jiggle around and so people who study markets translate past volatility into all kinds of measures of risk.
The whole concept of volatility is useful for people whose career is teaching, but useless to us. We recognized early on that very smart people do very dumb things, and we wanted to know why and who, so we could avoid them.
We would love to own a lot of roulette wheels. In general, emerging markets are not great for me because I need to put a lot of money to work. Risk does not equal beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now.
I might be risk averse but I am not action adverse. B took cash and not Berkshire stock. She understood cash and that is what she took. I need only need to be right a few times and can let thousands of ideas go by. You have to know your sweet spot. I like to play from a position of strength. I always try to have the odds in my favor.
I like those odds better. It breaks down into two periods of my life: We think about adding more to certain stocks and have done so. We add to ones that look attractive and that we can buy. When I closed the Buffett Partnership, I felt and wrote to my investors that the prospective return was about the same for equities and municipal bonds over the next decade, and I was roughly right.
Of course, you could have said that and have been right at any point in the past century — there are always disruptions — but stocks have still done well. Buffett on the Stock Market , what would you be writing? You talked about year periods. In , people were extrapolating from the experience of the previous 17 years and had unrealistic expectations. They were bound to be disappointed. I would not have high expectations for equities, but better than for bonds. But every now and then, things really get out of whack.
But the gradations in between are too tough. If you own great businesses, you should just hold on most of the time, maybe sell if the valuations get extremely high and buy more if they get really cheap like in the early s. I don't think that the stock market will return 6. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so.
Risk premiums are mostly nonsense. The world isn't calculating risk premiums. It was a study that evaluated how bonds compared to stocks in various decades of the past. There weren't a whole lot of publicly traded companies back then. He thought he knew what he was going to find. He thought that he'd find that bonds outperformed stocks during periods of deflation, and stocks outperformed during inflationary times.
But what he found was that stocks outperformed the bonds in nearly all cases. Keynes then enumerated the reasons that this was so. He said that over time you have more capital working for you, and thus dividends would grow higher. This was novel information back then and investors then went crazy and started buying stocks for these higher returns.
But then they started to get crazy, and no longer really applied the sound tactics that made the reasons given in the book true. Be careful that when you buy something for a sound reason, make sure that the reason stays sound.
If you buy GM, you need to write the price and the respective market valuation. Then write down why you are buying the business. If you can't, then you have no business doing it. Quote from Ben Graham: The questioner is Jon Brandt, the son of a very good friend of mine for many years. This should be shown as an expense in the income statement.
I think a number of auditors believed it should be a cost but their clients pressured them and caved, and then Congress got called in. The accounting in America is corrupt. It is not a good idea to have corrupt accounting. They could make sense here at some point, but not with Charlie and me. I don't know if we'll ever see stocks in general at mouthwatering levels that we saw in or even. I think there's a very excellent chance that neither Warren or I will see those opportunities again, but that's not all bad.
We'll just keep plugging away. It's not out of [the realm of] possibility though. You can never predict what markets will do. If that could happen in Japan, something much less bad could happen in the US. We could be in for a period in which the average fancy paid investment advisor just won't do very well.
There were some great opportunities in junk bonds last year and we invested in a few. The world hasn't changed that much. The problem is the starting point in predicting modest returns for equity investors.
In a low inflation environment, how much will GDP grow? It provides a pretty decent real return in a period of low inflation. If you get high inflation, you could get very low real returns, even negative. I don't you'll get real help from me or from economists either. If an economist saw a job going to China, he doesn't care -- it saves costs.
But if all the jobs go to China, what then? People actually get paid to say things like this. I personally think it would be better if the NYSE remained as a neutral, not-for-big-profit institution.
The exchange has done a very good job over the centuries. The enemy of investment success is activity. The exchange of yesterday will be better for the American investor. I know the American investor will not be better off if volume doubles on the NYSE, and I know the NYSE will be trying to figure out how to do that if it is trying to maximize its own earnings per share.
Trading is the frictional cost of capitalism. I feel the same, only more strongly. I think we have lost our way when people like the [board of] governors and the CEO of the NYSE fail to realize they have a duty to the rest of us to act as exemplars.
You do not want your first-grade school teacher to be fornicating on the floor or drinking booze in the classroom; similarly you do not want your stock exchange to be setting the wrong moral example.
We're guessing at our future opportunity cost. Our hurdles reflect our estimate of future opportunity costs. Berkshire has previously said that they would prefer more private investments but have trouble finding suitable ones.