I had a brief fling with technical analysis, much to the misguided trust in someone who swore by it. My lesson learned, "never trust a cooking class teacher who has never run a restaurant." Pure technical analysis has many flaws. They are:
1. Sometimes markets trend, sometimes sideways. different indicators work for different situations. If you use trend following indicators in a sideways market, you get whip lashed. If you use sideways indicators for a trending market, you miss out a lot of the gain or you lose a lot.
2. TA cannot tell you how much upside or downside a stock has. As a result you could end up chasing after small trends and trade too much, as a result trading costs wipe out your returns.
3. TA cannot tell you which stock to choose, which relates to point 2. Only fundamental analysis using valuation techniques can highlight the upside and downside risks.
I've instead switched to using simple methods, such as Benjamin Graham's gauge of cheapness, and Warren Buffett's focus on quality of earnings to choose stocks and funds. So far, it's worked a charm. I've identified stocks such as Dutech, HK Clearing & Exchange, and Chicago Bridge & Iron. All of them have since shot up. For funds, I've identified Fidelity America, First State Regional China, First State Bridge, First State Dividend Advantage, which enabled me to achieve about 3% upside year-to-date and around 11% in 14 months.
Anyway, here's my tribute to the great Warren Buffett and Charlie Munger.
Buffett Says Next Berkshire CEO Must Fight Arrogance, Decay
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Berkshire Hathaway Inc. Chairman Warren Buffett took control of Berkshire five decades ago and transformed it from a struggling textile maker into a sprawling business empire. Photographer: Daniel Acker/Bloomberg
(Bloomberg) -- Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc., said his successor will need to avoid traps that have hindered companies in the past.
The next Berkshire CEO will need “the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency,” Buffett, 84, wrote in his annual letter to Berkshire shareholders posted online Saturday. “When these corporate cancers metastasize, even the strongest of companies can falter.”
Buffett took over Berkshire in 1965 and transformed the struggling textile maker into the fourth-biggest company in the world. Its operations now span the insurance, transportation, energy, manufacturing and retail industries.
For years, the billionaire has avoided disclosing who might replace him as chief. He again stopped short of identifying the individual, reiterating that the Omaha, Nebraska-based company’s board has the “right person” to succeed him after he dies or steps down, and believes that future CEOs should come from Berkshire’s internal ranks.
“In certain important respects, this person will do a better job than I am doing,” he wrote.
He also affirmed that his son Howard, a Berkshire director since 1993, could be the company’s non-executive chairman once he’s gone. That arrangement will allow for a continuation of Berkshire’s culture and will provide a stopgap should the next CEO need to be replaced, Buffett wrote.
‘All In’
The primary job of his successor will be to allocate capital and to keep outstanding managers running each of its businesses, Buffett wrote. The person will also need to have a good character, which he defined as being “‘all in’ for the company, not for himself.”
Buffett relies on the CEOs of Berkshire’s dozens of operating businesses to handle day-to-day decisions, leaving him time to pursue takeovers and invest in stocks and bonds. The billionaire frequently uses his letter to praise the work of the company’s managers, a group that he calls “all-stars.”
That structure is “the ideal antidote to bureaucracy,” Buffett wrote. “In an operating sense, Berkshire is not a giant company but rather a collection of large companies.”
Some of Buffett’s comments over the years have led investors to guess that potential successors include Ajit Jain, the head of Berkshire’s namesake reinsurer; Greg Abel, who leads the energy-utility business; and Matthew Rose, executive chairman of BNSF railroad.
Munger Letter
In a separate letter discussing Berkshire’s past and future, Vice Chairman Charles Munger specifically praised Jain and Abel. The two managers are proof that Berkshire would continue to thrive if Buffett departed soon, Munger wrote. Neither would leave Berkshire for a competitor and both believe in the company’s unique system, he said.
“Ajit Jain and Greg Abel are proven performers who would probably be under-described as ‘world-class,’” the Berkshire vice chairman wrote. “‘World-leading’ would be the description I would choose. In some important ways, each is a better business executive than Buffett.”
Charlie Munger: These Four Factors Explain Why Berkshire Hathaway Has Done So Well
A combination of "constructive peculiarities" and luck helped turn Berkshire into such a huge success.
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Berkshire Vice-Chairman Charles Munger.
Jonathan Alcorn/Bloomberg
Warren Buffett's latest annual letter to Berkshire Hathaway shareholders is out, and because it's the 50th anniversary, the letter offers a little something extra. Both Buffett and his second-in-command Vice-Chairman Charlie Munger have sections about what they think the next 50 years of Berkshire are going to look like.
Munger's section (which starts on page 39) goes into detail about the Buffett method for running a company. He focuses a lot on Berkshire Hathaway's willingness to let the various CEOs of its subsidiaries to operate with autonomy. Munger also describes what he sees as the four factors that allowed Berkshire Hathaway to boom under Buffett.
Munger writes:
Why did Berkshire under Buffett do so well?Only four large factors occur to me:(1) The constructive peculiarities of Buffett,(2) The constructive peculiarities of the Berkshire system,(3) Good luck, and(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.I believe all four factors were present and helpful. But the heavy freight was carried by the constructive peculiarities, the weird devotion, and their interactions.
Munger follows that up with an explanation of how the "constructive peculiarities" of Buffett and the Berkshire System created a "virtuous circle" that allowed the company to thrive. The idea, essentially, is that letting great companies and great CEOs thrive independently within Berkshire made more great companies, and CEOs want to join in.
Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents always faced his best players, instead of his second best. And, with the extra playing time, the best players improved more than was normal.And Buffett much out-Woodened Wooden, because in his case the exercise of skill was concentrated in one person, not seven, and his skill improved and improved as he got older and older during 50 years, instead of deteriorating like the skill of a basketball player does.Moreover, by concentrating so much power and authority in the often-long-serving CEOs of important subsidiaries, Buffett was also creating strong Wooden-type effects there. And such effects enhanced the skills of the CEOs and the achievements of the subsidiaries.Then, as the Berkshire system bestowed much-desired autonomy on many subsidiaries and their CEOs, and Berkshire became successful and well known, these outcomes attracted both more and better subsidiaries into Berkshire, and better CEOs as well.And the better subsidiaries and CEOs then required less attention from headquarters, creating what is often called a “virtuous circle.”
For more from the letter, read Buffett on how the next CEO needs to fight complacency.
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