In Today’s Issue:
- Farnam Street’s Great Mental Models – Volume 1
- Morgan Housel Interviews Brent Beshore
- Getting in on the 50th Floor
To read last week’s newsletter about Berkshire Hathaway’s culture of trust, the narrative fallacy, and Howard Marks, please click here.
Farnam Street’s Great Mental Models – Volume 1
Farnam Street, founded by Shane Parrish, contains a wealth of information that has proven useful and popular for decision makers from Wall Street to the NFL. Heavily influenced by Charlie Munger’s concept of a “latticework of mental models”, Parrish has embarked on an ambitious effort to distill this information into a series of volumes called “The Great Mental Models”.
In The Rational Walk’s review of the first volume of this work, we provide an overview of the “general thinking concepts” that are covered in the book. While it is true that material on many of these concepts are available on Farnam Street and elsewhere, the aesthetic design of the book adds to the value of having this information in a concise format. We eagerly anticipate future volumes in this series which are sure to perfectly compliment Charlie Munger’s philosophy presented by Peter Kaufman in Poor Charlie’s Almanack.
Morgan Housel Interviews Brent Beshore
In the world of private equity, funds generally invest in businesses with a defined timeframe before a “liquidity event” is expected to occur, and significant debt is usually utilized to fund acquisitions. As a result, many private equity firms have a reputation for making decisions that are short sighted and painful, often involving layoffs and cost control measures that might make the numbers look good in an IPO but could be inadvisable from a long term perspective.
Given this overall reputation of private equity, it was interesting to listen to Morgan Housel’s recent interview of Brent Beshore who is the CEO of adventur.es, a private equity firm based in Columbia, Missouri. Beshore seeks to invest in “boring businesses” on a value basis funded with equity and he has raised a fund with an almost unheard of 27 year timeframe. The compensation arrangement is even more unusual with zero expenses coming from limited partners. Beshore’s firm and LPs split cash flow above a hurdle level which should provide strong alignment of incentives.
Both Brent Beshore (@brentbeshore) and Morgan Housel (@morganhousel) are good follows on Twitter and their conversation was an interesting look into an unusual private equity model.
Getting in on the 50th Floor
Berkshire Hathaway traded for $18 per share on May 10, 1965 when Warren Buffett took control of the firm. With shares recently trading at around $345,000, this represents a compounded annual return of approximately 19.7 percent. The median income of American families in 1965 was $6,900. A family who saved 10 percent of that income, or $690, could have purchased 38 shares of Berkshire that year which would today be worth $13.1 million.
If you’re thinking that this is an exercise in absurdity, you would be right because no investor in their right mind in 1965 would have invested ten percent of their income in Berkshire Hathaway, a failing textile mill run by an unknown 35 year old operating in Omaha, Nebraska. That is, unless you personally knew Buffett and his amazing partnership record, and few people did.
Yet despite the absurdity, steeped in hindsight bias, we often read media reports of how much $1 invested in various successful firms would be worth today, ignoring the fact that, at the time these firms went public, it would have been virtually impossible for most investors to predict the future course of events, or to avoid investing in losers as well as in winners. Additionally, even those who did have foresight to invest in successful firms would likely have taken money off the table along the way or lacked the intestinal fortitude to hold through massive short term declines in the stock price (look at Amazon’s chart in the early 2000s for a good example of this).
Most of us might not be able to get in on the ground floor of explosive growth stories, but it is often possible to get in on a “higher floor”. For example, Berkshire traded at $11,750 at the end of 1992 at a time when Buffett was already a household name. The investor with the foresight to buy at that time would have turned $11,750 into $345,000, a compounded annual return of 13.3 percent. Not as spectacular, but still meaningful.
The idea of “Getting in on the 50th Floor”, a topic discussed on The Rational Walk a few years ago, might be an approach more conducive to success for most investors. By the time a rising business is on the 50th floor, much more is known about the business and its managers but the story is not yet over. Many investors regard Markel Corporation as a “mini-Berkshire”, smaller in size but similar in philosophy, and we discuss Markel briefly in the article as well.
That’s all for this week. The next issue of Rational Reflections will be sent out on Wednesday, January 29. Do you have any feedback regarding the contents of the first four issues of the newsletter? Any feedback is welcome and can be sent to administrator@rationalwalk.com. Thanks for subscribing!
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Copyright and Disclosures
Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.