Elon Musk Interview @ Khan Academy

Warren Buffett attributes his success to choosing the right heroes. There aren't many people who better qualify as modern day heroes than Musk and Khan, so this conversation is a must watch.

Buffett's Appearance on CNBC 10/16/2013

Valuewalk.com has compiled segments of Buffett on CNBC this morning. The main takeaways are the stock market is not overly valued at this level (SP 1700), and that Congress would be insane to ruin the faith of the world in US debt, which has taken 237 years to build.

Scientific Data Has Become So Complex, We Have to Invent New Math to Deal With It

Big Data's increasingly complexity is making it necessary for a "Newtonian revolution, on par with the 17th century invention of calculus". The article in Wired presents some of the most promising mathematical developments to help us better analyze the flood of information.

Ray Dalio on How The Economy Works

Agenda: Thursday, Sept 25th 2013

Economic Calendar : GDP 6:30am - Jobless Claims 6:30am (MST)

Deadlines
Intro to Programming - Week 6 Videos, Homework, Assignment - Monday Sep 30th - 3 days
Web Intelligence and Big Data - Week 4 Videos and Homework - Thursday Oct 3rd - 7 days
Intro to Financial Accounting - Week 1 & 2 videos, 2 Homework - Monday Sept 30th - 3 days
Computing for Data Analysis - Week 1 complete

Books
The Essays of Warren Buffett - 30 pgs remaining in first reading.
How to Read a Book - Review and summarize
Confidence - Review and summarize
Buffett: The Making of an American Capitalist - Begin

Agenda
Morning

1. Finish first reading of The Essays of Warren Buffett
2. Complete videos and homework for Web Intelligence and Big Data

Afternoon

1. Complete videos, homework, assignment for Intro to Programming.
2. Review and summarize Confidence
3. P90x

Night

1. Finish tile cuts for sink installation
2. Begin Buffett: The Making of an American Capitalist by Roger Lowenstein

The Buyer of Choice

What do Warren Buffett and the coaching staff at University of Miami have in common? They hold onto underperformers.  

"We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations." - Warren Buffett  

"If we recruited you, and you're going to class, lifting weights, are on time, giving your best and you're still not good enough to play, then it's our fault and we'll stick with you because you're part of our team."  - Art Kehoe, University of Miami Hurricanes

​Why would these titans in their fields both go against the most prevalent investing advice there is, sell losers?

The main goal for Buffett is to get great investment performance from his core holdings. This requires acquiring the best companies. LSU wants to be the best in college football, requiring them to recruit the best talent. 

If investees and recruits are doing everything asked of them to perform and they can still not achieve acceptable levels, both Buffett and LSU know this is only their fault. They did the due diligence and were mistaken. Now they must simply accept the underperformers as part of the family, treat them as well as possible and hope the most attractive businesses and best athletes see this and make these institutions their destinations of choice. 

​

Potential sellers of companies and athletes want to know they are going to be treated well, and therefore seek out suitors who treat their current holdings and players fairly. 

Warren Buffett's Rules For Corporate Governance

Warren Buffett focuses on buying companies "any idiot could run, because sooner or later one will." What company has the type of structure in place to survive and possibly thrive during such a period? A company with strong corporate governance. 

If we are searching for a company with strong corporate governance we must agree on what problems lead to weak corporate governance. In The Essays of Warren Buffett, editor Lawrence A. Cunningham lays out Buffett's main frustrations as: 

1. Communication - managers' inability to "tell it like it is" and tell it in simple language.
2. Chain of Command - collaboration of able, hard-working and honest workers is all that is necessary for projects, chain of command impedes the process.

CEO's reliability - finding a CEO of high integrity is of the utmost importance. This is because a) standards for measuring a CEO's performance are inadequate and easily manipulated. b) No one is senior to the CEO and therefore cannot have their performance measured. c) The board of directors has similar interests as the CEO and cannot provide an unbiased assessment, hence they cannot serve a senior to the CEO. 

Now that we have identified the problems leading to weak corporate governance, we need a plan for prevention.  Again, before we can have a plan that works, we need to look at what won't work according to Buffett.  

1. Stock Options for management -  Many companies provide their management with rewards of stock options for increasing earnings rather than superior deployment of capital. However, by simply reinvesting earnings managers can report annual earnings increases and can receive rewards for doing nothing to improve real returns. Stock options lead to executives manipulating the system for their benefit at the expense of the shareholders. If stock options must be given, they should be awarded based on the return of capital investments after taking out interest for the use of that capital. 
2. Separating the identities and functions of the Chairman of the Board and the CEO - Separation does not lead to better oversight as the interests of the two are still aligned. This simply creates conflict of chain of command. 
3. Standing Audit, Nominating and Compensation committees - Decisions are too arbitrary if not based on performance of real capital returns.
4. Independent directors - Selecting directors for diversity and independence does not compare to directors who have the owner-orientation. 
   
   

Having examined the failed concepts of corporate governance, Buffett builds his ideal list of the structure in place for companies he looks to acquire. 

​

1. CEOs who are reliable and perform well with weak constraints - CEO's who take an owner-orientation , see themselves as the sole-proprietor of the business, view their business as the only asset they hold, are "all-in" on the company and do not need direction from the owners, but can take advice from a well put together board. Buffet prefers his CEOs to imagine they cannot sell or merge their company for 100 years to take a long term view.
2. Board of Directors who have business savvy, keen interest and owner-orientation - By being well educated and "all-in" such as the CEO, the directors can best provide support and advice to the CEO. The best case scenario is a well put together board and an owner who does not manage the company. This allows the directors to take matters to the owner when issues arise with the manager. The opposite of this is when the owner is the manager, therefore the directors have little influence and can only threaten to quit to get their way. Management issues are most prevalent though in companies without a major shareholder (most companies), where directors struggle to provide discipline to managers and once again can only threaten to quit.  To remedy this, Buffett suggests having a small board of outside directors and to evaluate the C-level executives without the executives in the room. Holding regular meetings without the chief executive to review his/her performance is the leads to a large improvement in corporate governance.
3. CEO performance pay - Stock options should not be allowed. CEOs should be paid based on the profitability of capital investments after taking out the interest for using the capital. The award should be a cash bonus which can be used to purchase common stock of the company. This builds owner-orientation by allowing the CEO to "truly walk in the shoes of the owner".  

By having a CEO who sees the company as his or her own and focuses on the long term horizon , as well as directors who are business savvy and have high interest in the company, Buffett believes corporate governance issues will be minimized.