Review – The Acquirer’s Multiple

The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

by Tobias Carlisle, published 2017

I received a free copy of this book from the author.

I spend a lot more time thinking about the best way to introduce people to the world of value investing than I actually get requests for such information, though I do receive occasional requests for advice. The reason is not just because I am a pedantic thinker but because I spent a very long time acquiring my own knowledge on this subject, with many wrong turns and wasted efforts and I have always wondered, “Is there a better way?”

Toby Carlisle’s “The Acquirer’s Multiple” may just be that better way.

But first, let me explain the most up-to-date advice I have been vending, and keep in mind, this advice is not intended as “how to be a good investor/make good investments” because I am not a registered investment adviser nor would I attempt to impersonate one– this is just my opinion of “how best to learn about investing”. I think I can dispense that advice as an opinion without running afoul of the authorities because I am just talking about ways to acquire certain knowledge. At least I hope so!

My suggestion is to read the following titles, in this order:

  1. The Richest Man in Babylon: Now Revised and Updated for the 21st Century (Paperback) – Common
  2. The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
  3. Buffett: The Making of an American Capitalist
  4. The Accounting Game: Basic Accounting Fresh from the Lemonade Stand
  5. The Essays of Warren Buffett: Lessons for Corporate America, Fourth Edition (or more specifically, Buffett’s Shareholder Letters from Berkshire Hathaway, and his private partnerships, available on the Berkshire website)

Perhaps at a later date I will spend some time writing a post explaining in greater detail why I recommend these resources in this order to an aspiring student of (value) investing, but for now I will simply say that the first two explain how to save and how to develop the psychological discipline and personal habits that permit one to save money, and you must have savings if you want to fuel an investment program. The second lesson is in inspiration, to study the life of the greatest master of investing in the modern era to understand both what is possible, and what it takes, to be great at investing. The third lesson is a rudimentary knowledge of accounting, “the language of business” because if you’re going to be investing in businesses you ought to have a clue what is going on.

Only then, young grasshopper, are you ready for your fourth (but not final) lesson, which is to learn the methods and principles of (value) investing itself. And I can think of no greater expositor of these principles than the great master himself once again, Warren Buffett, especially because you can read along as his company develops and see the wondrous workings of these principles in “real time”.

But even this can be an overwhelming introduction for a noobie who doesn’t realize what a deep pool they’re wading into in asking the question. For the action-oriented, then, I offer a 3-Point Plan of Investment Attack which includes:

  1. The Richest Man in Babylon
  2. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
  3. The 2013 Berkshire Hathaway Shareholder Letter, “Some Thoughts About Investing”

This short list will teach you how to save money so you have fuel for your investment machine, and then it provides the basic knowledge needed to decide if you want to be a humble Sunday-driver investor and do passive index investing, or if you want to be a more racy investor and pick your own businesses to invest in the way a true value investor would.

Pedantic as I am, where the heck does Toby’s book fit into all of this?! Well, I think now I can whittle my 3-Point Plan down to 2-Points: The Richest Man in Babylon, and The Acquirer’s Multiple. And I might be able to turn my original 5 item foundations into a 3 item list, using Richest Man, Accounting Game and The Acquirer’s Multiple as the set of texts. Here’s why.

Toby has done something incredible with this book. He has boiled a deeply studied, highly opinionated, multi-trillion dollar field of human endeavor down to its most essential, best researched and expertly practitioned concepts and he’s done it all in simple language that I am convinced even a complete neophyte would find approachable. He has included a number of delightful graphics that help to illustrate these simple concepts about how typical market participants behave and where investment value comes from that, for the first time in my life, I actually found increased my understanding of what I already knew rather than confused me (note: charts, data tables, etc., usually just distract me and I skip them, I am a mostly verbal knowledge acquirer). You really can’t go wrong jumping in this way.

The best part, however, is that he has curated some dramatic and action-packed biographical stories demonstrating how successful billionaire investors have put these ideas into practice. This checks the “inspiration” box I mentioned earlier because it helps the reader see how these ideas were translated into action and it gives confidence that you, too, could stand to benefit in this way.

And finally, he repeats (yes, the book is repetitious) all the neatly summarized concepts into one final summary list at the end of the book that involves 9 rules for a value investor to live by. I am confident that if a new investor referred to this list again and again at each point in his investment research and portfolio management process and asked himself, “Am I living true to this list?” he would be very satisfied with himself over a long period of time if his answer was “Yes”. And if the answer were “No”, then he’d understand exactly what he needed to do to get back on course.

I know Toby personally. He is a highly intelligent fellow, his passion for these ideas and the subject are intense and, if you ask me, he lands firmly in the “Graham” side of the “Graham-Fisher” spectrum of value investing (discussed a bit in the text) that all value investors and followers of Warren Buffett debate endlessly. And that is why I was so pleased that the conclusion of the book included an admonition to “check yourself before you wreck yourself”, so-to-speak. The Acquirer’s Multiple principle itself couldn’t be simpler, but Toby knows, as do all great investors in the Grahamian-tradition, that true risk lies in the behavior and biases of the investor himself, particularly an investor who can’t follow simple principles he knows to be true because he insists on trying to outsmart them.

Don’t try to outsmart what can be simple (though never easy!)… like reading 5 books on the art of investing when you could maybe get away with just two or three. And I am now convinced that Toby’s book should be one of them.

Advertisements

What I Learned Selling My Nintendo Stock

I’ve been giving some thought to what I have learned from my experience with investing in and subsequently selling Nintendo stock over the last 5 years.

The story begins in 2012, when I noticed that this beloved company, one whose products I was intimately familiar with growing up, was trading at a price that valued the company little beyond the enormous pile of cash on its balance sheet. This cash stockpile was the result of an enormous run of success with the company’s smash global hit game console, the Wii, and its conservative corporate practices. The Wii-era resulted in the coining of a new term amongst the company’s followers and managers, “Nintendo-like profits”, which translated into layman’s terms simply means “insane profitability.”

Investors came to expect “Nintendo-like profits” from Nintendo as a right, when the reality of looking at the company’s business in the past would’ve shown that it was a cylical business with unpredictable fads and discouraging failures. The Nintendo Entertainment System (or Famicom, as it was known outside the US) put the company on the map as a home gaming company, the Game Boy handheld gaming system proved to be revolutionary and a success and the follow-up 16-bit era console, the Super NES, was also commercially successful.

But the follow-on systems in the Game Boy line, while commercial successes, were not global phenomena like the original. And the home console business took it on the chin two generations in a row. While fondly remembered by fans, neither the Nintendo 64 nor the Gamecube saw wide install bases in the era of the Sony Playstation and Microsoft Xbox, an era that also saw the downfall of SEGA and other one-off competitors. Like clockwork, this led to critics and investors questioning the Nintendo model, which had emphasized creativity and pushing the cutting edge of technology whereas Sony and Microsoft competed on the basis of raw hardware power emulating a home PC and captured the coming-of-age “hardcore gamer” market demographic. Nintendo seemed like kid stuff, for people who weren’t serious about gaming.

Of course, that is precisely where Nintendo scored its home run with the Wii, a console aimed at casual players. I rehash all this history only to demonstrate that the company never was and likely never will be a “blue chip”, steady eddy company with a predictable earnings stream built on a permanent plateau. The nature of creative offerings (like a movie studio) and the insistence on being fresh, original and looking for new ways to play (“blue ocean strategy”) is inherently cyclical and prone to incredible volatility in earnings and expense.

Luckily, Nintendo has a super strong culture that knows and understands their own business strengths and weaknesses and engages in corporate planning accordingly. They don’t carry debt and, as mentioned before, they held on to their massive cash stockpile earned in the boom years, knowing it would be valuable to them in getting through the inevitable lean years. Most companies would go on an acquisition spree after this kind of “windfall”, not knowing what to do with it. And their mercenary management team would be looking for another big score to increase their glory before driving the company off a cliff– and rolling out the door of the vehicle and on to their next disaster before it plummets to its fiery death.

But Nintendo is served by extremely-long tenured managers and creative designers, many of whom have been with the company before it was a dedicated gaming company and was a purveyor of cheap toys and other mishmash business lines.

Additionally, Nintendo has built a powerful library of IP over the years with their character and game world properties, which they have done little to monetize in ways outside of traditional gaming through other creative licensing. And it wasn’t even until recent generations of their game systems, such as the Wii, where they even had the technology or willingness to monetize their own game library for nostalgic customers.

So, let’s review some items discussed so far:

  • Nintendo is a cyclical company prone to booms and busts in its fortunes
  • Nintendo has a strong culture, driven by its long history and dedicated creative and marketing strategy
  • Nintendo has long-tenured leadership with experience and comfort with the cyclical nature of its business
  • Nintendo has a pristine balance sheet driven by its conservative corporate culture
  • Nintendo has an extremely valuable IP library it has barely worked to exploit

Because the company has a cyclical model, it was available at an unreasonable price when I came upon it, trading for little more than the value of the cash on the balance sheet. While it is true that the cash is “phantom” because the company will need it to fund its continued R&D and marketing during off years, that didn’t make it a value trap but rather valuable– outsize success is as predictable as disappointing failure for this company, and over time value is accruing to stockholders on average.

This is a strong franchise business, one that will be worth more and more over long periods of time because of its IP-based business model. And when you’re able to buy it so cheaply, the Margin of Safety is enormous, because the company has so much positive optionality because of its strong culture, strong IP library which remains unexploited and its conservative corporate practices. There are so many things that can go right for it which are surprising and hard to predict, while there are relatively simple and certain threats or things that can go wrong which are already accounted for and factored into the price– a poorly-received system, a change in the industry that makes dedicated home consoles a less valuable offering, etc.

What I did wrong is I got scared and I got greedy. From the lows at which I purchased stock in Nintendo, the company rocketed upward over the next 4 years, in spite of the massive depreciation of the Yen (which actually caused major forex headaches, because a lot of the company’s cash has been repatriated and held as Yen), in spite of the sudden death of its beloved and talented president, Satoru Iwata, and in spite of the abysmal fortunes of the Wii U. The company followed its strategy very faithfully and began exploiting its IP in new ways, as predicted– movie studio partnerships, licensing to theme parks, strategic partnership with a mobile gaming company (DeNA) to release official Nintendo smartphone games, the opening up of the company’s game library IP to more “virtual console” sales, greater emphasis on digital product distribution at higher margins, renewed success with the 3DS handheld gaming platform, the rollout of the wildly popular Pokemon GO and most recently, the release of the greatly anticipated Nintendo Switch, which has met both critical and commercial acclaim during its first two, non-holiday sales period months on the market.

I decided to “take profits” during the Pokemon GO craze, thinking this bubbly atmosphere was not sustainable and people would soon come to their senses. I was worried about the Nintendo Switch (still code-named “NX”) being a flop. I was worried about a global recession taking the wind out of consumers’ sails and reducing discretionary income for gaming. I was worried about the lack of news about Nintendo’s “Quality of Life” division. I was noticing a big gap between Nintendo’s new valuation and its actual reported earnings, creating a multiple I wasn’t comfortable with.

I am not trying to engage in hindsight based off of recent price movements. While the company’s stock is off its most recent highs during the Pokemon GO craze, it is still “lofty” compared to where I bought it (as of this posting, the stock trades for about Y29,000 per 100 block unit, and I bought around Y9,800 per 100 block unit). What I am trying to do is evaluate a decision to sell a company that is just now hitting a predictable stride when I bought it at a price closer to it seeming like it was going out of business.

What I have learned from this experience is that when you buy something valuable cheaply, you can afford to wait. You can afford to be patient. You can afford to watch it run up, and potentially run back down again. It doesn’t matter. You make your money in buying it below what it’s worth, not selling it when it’s “too far gone.” That low cost basis becomes an absurd comp for future dividend streams, embedding a high cap rate in the initial purchase, and then you get whatever further corporate value the company generates in the meantime as a bonus.

I really regret selling Nintendo, not because the stock didn’t crash like I thought it would (it was silly for me to think I could “time” it, but that’s a separate issue), but because I had owned it so cheaply, it has done everything I expected it to and I could’ve afforded to be patient.

How We Plan To Develop The Confidence To Let Our Children Be Free

A friend of mine once told me that I would not know true terror until I had had a kid. And he didn’t mean that children were terrible or terrifying– he was talking about the sense of dread one carries around being responsible for another human’s life and security. You invest so much time and energy and concern into your child and it seems so very easy for something to go wrong and snuff it out in one awful instant.

That is why I read with interest a blog on “Free Range Kids” that another friend linked me to a few months ago. The premise of the blog is that helicopter parenting and other approaches to child development and risk management are grossly flawed. The author argues that the risks of accidental death, molestation by sexual predators, etc., are overblown and parents tend to do more harm than good in trying to shield their children from such threats rather than raising them to be conscious of the risks and competent to deal with them on their own. It’s another classic example of the intervention versus interdependence mindset.

Reading the blog got me thinking about my own experiences with navigating childhood risk, and how the Wolf and I might approach this subject with our Little Lion and any other issuance in our line. But first, a quick anecdote.

The Wolf and I live near the ocean, and two weeks ago we went down to an area on the water for a morning dog walk. As we passed by the various docks and inlets, we stopped to admire three young boys (probably about age 10 or 11) sitting in small motor dinghy by the shore, clearly about to begin a fishing expedition. The boys were all wearing life jackets and seemed appropriately attired for a somewhat chilly expedition on the water. One boy was working vigorously to start the uncooperative outboard motor while the other two boys chatted and gave him backseat driver advice. It was a beautiful sight!

There were no adults in sight. In fact, on our little walking path there weren’t even any other passersby at this particular moment. While I don’t KNOW that the boys arranged, dressed and transported themselves to their shared outing, it certainly didn’t look like anyone was responsible for the get together but them. And while ten year olds are not toddlers, they’re still quite immature in many ways, but they seemed to be plenty capable to handle the logistics of a fishing trip, the mechanics of motorized water conveyance and the social grace of maintaining a civil and friendly atmosphere in the confined space of a small boat. And they paid attention to safety, wearing their life jackets even on the tranquil waters of the inlet with no scolding adult nearby to remind them.

Such a sight is common where we live. Many young people enjoy surfing, sailing and other water sports and can often be seen biking themselves down to the water and conducting these kinds of outings with limited or no adult supervision. For many water-born children, especially boys, it is something like a rite of passage to either get permission to use the family watercraft, or to be given a small watercraft of one’s own at a certain stage in one’s youth. In fact, it is one of the very special things about living where we live, that this kind of activity is available to young children and that the local culture seems to support it. The harbor patrol stayed in their berths that morning, like many others, as thankfully the neighbors didn’t feel the need to call the cops on a few kids out to have a good time by themselves.

The Wolf and I were quite pleased with this entire thing and thought about it as an ideal for our Little Lion to achieve one day as well. We really admired the (unseen) parents for having the good sense and the trust in their children to simply sleep in and let them do their thing! How would children who can go on a fishing trip on their own at age 10 ever become a burden to themselves, their parents or society?

Still, so much could go wrong! The boys could scald themselves with the hot engine and its liquids. They could shred their hand on an exposed propeller. They could get a fish hook in the eye, or topple over into the water and float out to sea. They could get hit by a larger boat. They could get too cold! I’m being facetious, but it is still scary for me on some level to think about the simple things that could go wrong. Then, I started thinking about my own childhood experiences, and those of my parents.

Growing up in the same community, I didn’t spend much time on the waterfront, but I did manage to have an active and independent play life. I spent a lot of time riding my bike around the neighborhood, sometimes with friends nearby and other times by myself. I liked doing “jumps” off the curb, where a driveway sloped up to meet the angled curb in the street. I also liked riding up on steep driveways and then using the momentum to get speed on the way down, often ending in a “jump”. I played “soldier” with neighborhood kids, army crawling over people’s lawns and through their hedges, which they probably didn’t appreciate but we sure thought was a blast.

One of my best friends growing up lived about three miles away from me, in a part of town that was most easily accessed by riding one’s bike through an unpaved semi-wilderness area. Today, that area has an asphalt-paved trail with hundreds of people on it daily, but back then it was dirt (heavily irregular and eroded by rainfall and drought conditions) mixed with tall grass and flowering weeds, strewn with cactus, patrolled by skunks and other odd wildlife and not well traveled by others. Meaning, if you fell or ran into a “bad guy”, it was unlikely anyone would know about it right away. Yet, I made that 3 mile bike ride once a week, sometimes riding home before dark and other times getting picked up by my parents if it got too late. I never had any problems and they always trusted me to be careful.

In another part of town where this semi-wilderness existed, you could ride your bike around dirt jumps and giant puddles created by the high school kids, avoid homeless bums squatting out in the bush and if you wanted to, ride your bike right off a steep cliff into the ocean below. There were no fences or guardrails at the time, although today it is covered with a housing development and a proper, paved and fenced walking trail. My parents never worried I’d become a casualty, and I never heard of anyone else becoming one. The most regretful thing that happened to any young people growing up was a drunk-driving incident on prom night on the paved curve road in town in which these poor kids flipped their vehicle and many fell out and died or had severe brain trauma.

Thinking about my parents, I know Grandpa Lion was a boy scout. Although boy scouts typically go on their camping expeditions in groups, the act of camping in the wilderness itself is basically an invitation to unnecessary risks that don’t exist back in “civilization”. My dad raced dirt bikes, go carts and other motorized contraptions as a child. I don’t know what Grandma Lion did that was risky for a young girl, but I know her brother tells tales of throwing lit firecrackers at other children and shooting pellet guns across his balcony at his friend next door and vice versa. I certainly wouldn’t condone firing pellet guns, even with eye protection, but the point is that young people seemed to do all kinds of dangerous stuff back then and they managed to survive.

When the Wolf and I talk about how we hope to handle our anxiety with our Little Lion, a few themes present themselves again and again. First, the goal we have in mind, as mentioned above, is to give him the opportunity to be trusted and provided resources to explore life on his own or with friends and not to create a paradigm of control and “protection”. Second, our plan is to actively look for opportunities to build his knowledge of risk and measure his awareness and responsiveness to it. In other words, building trust in him, and competence to manage risks he will face, will be an ongoing process learned on a case-by-case basis. Finally, we do not feel comfortable just sending him off into the world and seeing what happens but rather, we will observe his level of maturity and personal capability over time and provide him exposure to settings and circumstances, with our supervision, he seems to be ready for and see how he does. If he demonstrates he’s got it, he earns more leniency, and if he demonstrates he is still figuring it out, we will keep working with him on it until both parties can feel secure that the level of responsibility involved is met by and appropriate level of mastery.

That being said, that mastery is always going to be something he will have to create for himself through a bit of his own risk-taking. He can never know HIS limits if he has ever only had the opportunity to deal with OURS. That’s a fact of life we need to be aware of and learn to accept!

Review – The Vaccine Book

The Vaccine Book: Making the Right Decision for Your Child

by Dr. Robert W. Sears, published 2011

How many people who are “pro-vaccine” have read a book about vaccines?

How many people are aware of the frequency, severity and treatability of diseases which have vaccines available before deciding to take the vaccine? How many people understand the common, rare and potentially severe side effects, the physical components in the vaccines, the method by which the vaccine is manufactured and the availability of competing vaccine brands and production methods?

How many people understand the common vectors of each vaccine treatable disease and thus how to potentially avoid exposure to it entirely?

Who is likely to be better read on the subject of vaccines (even if you argued that they are ultimately misinformed)– your average vaccine taker, or your average vaccine skeptic?

Dr. Bob Sears is “pro-vaccine”– he believes vaccines have done more good than harm in the history of medicine and that they are an important part of individual and public health practices and he believes the standard vaccine schedules for infants and adults should be followed with few exceptions. So why is he having his medical license put under review because he supposedly gave a “non-evidence based” recommendation to a family to not vaccinate their child?

Because it’s hard to imagine a world in which a doctor would come under the scrutiny of authorities for giving a pro-intervention recommendation to a patient that was “non-evidence based”, perhaps we can assume that it is because Dr. Bob has challenged the medical establishment on the most fundamental level possible by writing a book which posits that patients should be informed about their choices and should ultimately provide knowledgeable consent before proceeding with a potentially dangerous treatment regimen such as infant vaccination. Sadly, if you ask most doctors to explain why they want to treat you the way that they do, what you get is not “evidence based” dialog about your choices, but sarcastic reminders about whose medical school plaque is on the wall.

It’s sometimes more like a priesthood than a profession, even though that doesn’t necessarily mean their advice is wrong or should be ignored.

So that is the controversy, but what does Dr. Sears actually say about vaccines?

The first twelve chapters of the book are dedicated to one disease each and its respective vaccine; the remaining chapters explore vaccine research, vaccine safety, vaccine ingredients, vaccine side effects and other topics.

The disease chapters outline the common course of each disease including symptoms, severity and treatment, followed by the common vaccine options available on the market including their preparation method and ingredients and common and rare side effects. There is a “pro” and “con” section exploring reasons to consider administering the vaccine and reasons why people/parents have not wanted to take the vaccine, and then Dr. Sears weighs in with his own take on how important the vaccine is. Each chapter helpfully summarizes the information with simple boxed call outs indicating whether the disease is common, severe and treatable (without a vaccine).

The common/severe/treatable approach is interesting. I found a lot of the diseases covered not-threatening because of the various combinations they “checked” in each category: a disease might be severe and treatable, and not common, or common, but not severe and treatable. The worst combination would be common, severe and untreatable– I don’t remember any disease with that profile. Just the opposite, in fact. According to Dr. Sears, with thanks mostly to widespread vaccination, most of the diseases mentioned are not common (to the point that they’re actually or practically eradicated in the US/West) so there is almost no chance of catching it, vaccinated or not. Several others are typically so minor in their symptoms, especially in infants (versus adults), that they might be mistaken for a common cold if caught. And those that are potentially severe seem to be treatable with antibiotics in most cases, especially if diagnosed early in the course of the illness.

That being said, some of these diseases have the potential to put the victim in the hospital if the disease is not checked early, or it happens to be especially challenging to an individual’s immune system. In such a situation, even with a full recovery and no lasting damage the experience itself is likely to be stressful, costly, traumatic for the child and heartbreaking for the parents to watch– it’s not a joke as far as risks go, and it needs to be considered seriously. And a few of the diseases, if caught and if particularly intense in the course of the disease, do risk permanent neurological or organ damage even if successfully treated. That’s a terrifying possibility!

Reading between the lines a little bit here, Dr. Sears seems pretty clear that whatever risks there are for an unvaccinated child in contracting and fighting any of these diseases, they are even smaller for a child who is breastfed and avoids day care or other germ-ridden public child environments. Assuming this is the course a parent is following with their infant (as we are), it seems a lot more like a judgement call between accepting the risks of rare disease complications the child is likely never to get, or accepting the risks of vaccine side effects (short and long-term) which are inevitable and seemingly random in their frequency and severity. There are several diseases/vaccines mentioned which simply pose no risk whatsoever (chickenpox), or for which the illness can not be contracted by the infant without an infected mother who transmits it during pregnancy or birth, or for which the illness and vaccine do not become relevant until adolescence or adulthood (such as HPV, a sexually-transmitted disease). Taking what’s left, and given our commitment to breastfeeding and homecare/homeschooling, it just doesn’t look like vaccines make a lot of sense for our family.

That was the part of the book I struggled with the most, when Dr. Sears recommended a vaccine not for the infant’s safety, but for public health reasons, such as to maintain low prevalence of a disease across a population, or to protect at-risk family members or caregivers who could catch the disease from the infant and have a more difficult time fighting it (for example, Dr. Sears talks about how a pregnant school teacher could catch a disease from unvaccinated students that could harm her unborn child). This is all good information to have and consider in the event of one of these complicating circumstances actually being relevant to a family’s situation, and certainly the “moral” issues are worth considering and debating, but it seems clear that if the question is simply put as “Does this vaccine represent a worthwhile risk/reward profile to the individual being vaccinated?” the answer we arrived at was often “No.” That’s a very different question from “Is it our job to take health risks with our child to protect other people/children from health risks?”

Interestingly, smallpox has been eradicated but the vaccine is no longer given to preserve herd immunity. Instead it is controlled by the US government as a national defense reserve. In identical situations where a disease, such as polio, has been practically eradicated, Dr. Sears still recommends getting the vaccine for public health reasons, but with smallpox there is no suggestion that the public needs to keep getting vaccinated to be protected from an eradicated illness. Why the different logic?

Another item I made special note of was the relationship between traveling, domestically and internationally, and vaccination of an infant. Dr. Sears is explicit in saying that flying around on airplanes is not an easy way to catch a vaccine-preventable disease, and that there is essentially no risk of this happening for travel within the US, and there is very little chance of this happening for travel outside the US. He does suggest that people who are essentially “living in the bush”, doing missionary work in remote locations or areas where these diseases are endemic in the population, are at special risk for some of these illnesses, but again this doesn’t apply to us because we aren’t going to be traveling to poverty-ridden areas or where access to clean water might be an issue. It was comforting to know that travel as part of our lifestyle doesn’t really need to be changed because of our decision not to follow the recommended infant vaccination schedule.

The other thing I wanted to mention is Dr. Sears’s opinion about the state of vaccine safety research. In short, he says a lot of the studies are wanting. Here are some especially troubling quotes:

Some vaccines aren’t studied alone. Instead, they are given along with several other vaccines, so there is no way to know what their actual side effects may be.

[…]

Most vaccine side effects are monitored for a short time via parent questionnaires.

[…]

Out of the twenty-three major studies done to date that show no link between vaccines and autism, eighteen have some conflict of interest involving vaccine manufacturers. Similarly, the addition of the hepatitis B vaccine to the infant schedule was driven largely by research done by doctors who worked for the vaccine manufacturers.

[…]

What about the statistical chance that your child might get a severe, life-threatening case of one of these diseases? To my knowledge, that information has never been determined accurately through precise scientific statistical analysis. [… Dr. Sears estimates these risks as follows:] A very rough total of 55,000 cases of severe diseases each year in children. We know that the current US population of kids twelve and under is about 60 million. Dividing 60 million by 55,000 cases means that each child has a 1 in 1090 chance of suffering a severe case of a vaccine-preventable illness over the first twelve years of life. Note that flu and rotavirus are responsible for most of these cases. If one were to run the numbers without those two diseases, the risk of suffering a severe case of one of the uncommon disease is only about 1 in 6000. Most severe pediatric cases occur during the first two years of life. An estimation of severe cases in children two years and younger would be about 34,000 cases divided by 10 million kids, or about 1 in 300.

[…]

What is very clear, however, is that vaccines have triggered autism in a very small number of children. A phrase I recently heard sums it up very well: Vaccines don’t cause autism… except when they do.

[…]

If we were to throw out all research that has some conflict of interest, we would actually be left with very little on either side of the [vaccine-autism] debate […] the right type of research has not been done yet.

In addition, here is what Dr. Sears would consider to be the minimum standard for a valid safety research study, which might be helpful for people trying to evaluate various studies in making up their mind about the risks posed by diseases and their vaccines:

  • Prospective: the study group is selected and then followed in real time. Virtually all current research has been retrospective, looking back into the past at data on groups of children who have since grown up (for which the outcome is already known).
  • Randomized: test subjects are selected at random and placed in either the study or the placebo group in a random manner to avoid bias.
  • Placebo-controlled: a study group exists that is not receiving the treatment in question (in this case, vaccines). This is the primary way to be able to draw conclusions with a high degree of accuracy.
  • Double-blind study: the researchers and the study subjects don’t know who is receiving the test treatment (vaccines). This prevents bias as the researchers observe and collect, and the test subjects report, data.
  • Large-scale research: this is needed for a study to be considered statistically significant and to prove the findings aren’t simply due to chance.

Interestingly, he explains why these studies haven’t been performed to date, and I am not surprised to report it is not an example of “market failure”! The government, as usual, plays a big role here.

A final note: There are several instances where Dr. Sears refers to a disease which has been practically eradicated, but which in recent memory has experienced a sudden outbreak in a localized community before being contained. Aside from a generic geographic description, such as “a neighborhood in Ohio” or something like that, there is no demographic data given about these outbreaks, if it is even collected and publicly known. Wouldn’t it be interesting to know that? If these periodic outbreaks are restricted to specific socio-economic populations, wouldn’t that change the implied incidence of risk for the population as a whole? I’d want to know that information, but the current state of medical research in our country considers this unscientific and irrelevant, so much so that it is politically incorrect to wonder about it. How can facts be offensive? It seems like there is an attempt to control political dialogue here, which I find disturbing.

This book has many virtues but its greatest one is that the information is both comprehensive and well organized, while still remaining succinct. It’s very easy to approach the question of vaccination, its risks and benefits, from a number of angles and find all of them anticipated by this book, and more.

Another Story About The ER

The following is an email sent by a friend who reads the blog in response to the recent posts about my visit to the ER. It is about an experience he had with his infant daughter and I got his permission to share it as it is illustrative of many of the principles touched upon in my earlier posts:

When [my baby] was 9 days old she presented with what appeared to be an infection in her right eye (eye lid swelling, puss coming out the side, dark skin around the eye [picture attachment omitted]).

I think we waited overnight (details are a little fuzzy now that it’s been over 2 years) before doing anything because we were hoping it would resolve itself without having to go to a doctor, who might urge us to go to the ER, which we wanted to avoid if at all possible.

The next day it didn’t look better so we took her to the pediatrician, who was particularly concerned and brought another doctor into the room to examine her, we expressed our concern that we really didn’t want to go to the ER if at all possible, both doctors said we should go. They were concerned “because she’s so young” and “because the infection is so close to the brain.”

We got to the ER and it took for fucking ever to even get a room, of course you’re shoved into a massive environment of sick people dying to infect you with god knows what disease they have from living a terrible unhealthy life. It was literally like 6 hours before we finally got a room. At this point it was late at night and I kept thinking, “man, her eye looks better, if it looked like this 6 hours ago I don’t think we would’ve been sent to the ER.”

But the doctors kept saying shit like, “yeah we’ve seen things look better but actually be getting worse.”

The doctors wanted to do a blood test to see what the infection was and start her immediately on IV antibiotics. Additionally, they wanted to do a spinal tap (some advanced way of determining what the infection might be). I wanted to push the IV antibiotics back until we knew what the infection might be (as the results of a blood test might indicate), but they kept pushing and saying, “these things can move fast, we really think you should get IV antibiotics ASAP.”

Eventually we caved and agreed to the IV antibiotics (which was an awful experience in their own right because [my baby] was so small, and her veins were difficult to find, took literally 4 practitioners before they could finally access her vein — [my baby] was screaming like crazy and we were saying, “can’t you find someone else to do it?” And the girl said, “don’t feel bad, she won’t remember it.” Who says that?!) As a side note, god forbid you have to go through something like this, but if you do immediately ask for a practitioner from the neonatal intensive care unit (NICU) to insert any IV into your child, they can find a needle in a haystack.

At this point they were still pushing for a spinal tap and I said, “If the blood results come back negative, is there ANY reason to do a spinal tap?” The doctor said typically no. I said, “Well let’s see what the blood results say then.” The results came back negative, so I said I’m not doing the spinal tap. The doctor kept saying, “well, sometimes things can slip by the blood tests.” But I refused. I left to go home and get changes of clothes for me and [my wife] since we didn’t realize we’d be at the hospital for 2 days, and while I was gone [my wife] said that they sent in some other doctor (female this time) to pull at her emotions to try and get her to agree to a spinal tap, but she refused, we didn’t do it — the infection just looked so much better already (even before the god damned antibiotics).

We stayed with [my baby] in the hospital like 36 hours, during that time we were regaled with fantastical tales of babies contracting Hep B and why we should really give her the Hep B vaccine. I kept asking the doctor to give me a realistic example of how [my baby] would contract Hep B at this age. His examples were literally so absurd they’re not even worth typing them, one involved a syringe with Hep B on it being mistakenly inserted into [my baby] by someone in the hospital, it was so ridiculous I could barely listen to it. We didn’t get her a Hep B vaccine, and still haven’t, and she’s miraculously Hep B free! I also mentioned to the doctor, “even if we agreed that [my baby] should get a Hep B vaccine soon, wouldn’t this be a BAD time to give it to her given that she’s obviously fighting off some infection?” The doctor wasn’t fazed by this logic, they’re total vaccine zealots, they’d vaccinate a cadaver given the opportunity.

In any case, in thinking back on the whole situation and what I would do differently, I think I would just wait an extra few hours before going to see the doctor, and when it looked better pre-IV antibiotics, I would’ve said, “let’s wait another few hours and see how she’s doing.” I just don’t buy their insane logic that something is visibly getting better but somehow actually getting worse. I’m sure there’s some textbook case of this happening to 1 in 1,000,000 babies, but doesn’t seem worth the known risks of IV antibiotics at such a young age.

It’s so sad and frustrating that you can’t simply take a doctor’s advice and trust that he’s already thoroughly immersed himself in the risks and benefits of the trade-offs between treatment / non-treatment. All they know is how to limit their own legal liability.

Hopefully you can avoid such a mess from happening to you!

He adds in an addendum:

Since doctors in large hospitals work in shifts, you naturally see the same doctor for awhile, and then see a new doctor for awhile. When it was time for [my baby] to be released, we were given an older doctor (maybe late 50s, early 60s). Not only was he WAY more respectful than pretty much every previous doctor we had, but he literally said something to the effect of, “if you’d gotten an older doctor, you may never have been admitted to the hospital, probably would’ve suggested you wait and see how the infection progressed.”

It seems that the doctors being minted today are inculcated with one-off horror stories starting on day 1 of their education.

Why I Try To Avoid Visits To The Doctor’s Office

I don’t go to the doctor much. I think that’s a good thing, but people who believe “an ounce of prevention beats a pound of cure” might be horrified to know that I don’t even do my so-called oil changes and other regularly scheduled maintenances with regards to my body– false positives, risk of complications from the cure that are worse than the disease, etc.

Generally, if I’m not in pain, I’m not going to see a doctor. And even sometimes when I am, I think, “This too shall pass” and carry on. I pay attention to my body, I’ve gotten pretty good at knowing when I’m in trouble versus experiencing discomfort that will resolve itself over time. I have a pretty high pain threshold I think, I won’t even mention I have a headache until I’m somewhere around a migraine for someone else.

And I do believe in prevention! That’s why I eat a nutrient rich diet, exercise (weight lifting) weekly and walk my dog daily. That’s why I work hard to keep a reasonable bed time and get as much sleep as I can. That’s why I try to think happy thoughts and help others do the same. And that’s why I listen to my body and take it easy when it tells me “No!”, rather than flailing myself before the altar of No Pain, No Gain and reveling in masochistic torture.

So I do my darnedest to avoid visiting a doctor. That’s why I’m bummed I decided to go in today, and that’s why I think this decision was yet again illustrative of my principles!

You see, where I live, medicine is practiced a bit oddly– legal liability dictates that the doctor does anything he can to avoid taking responsibility for your treatments and it’s consequences, as they don’t want to be sued for malpractice. But their medical school instruction plus their ever closer relationship with the State leads them to an aggravated mindset anytime you insist on thinking for yourself and following your own judgment. Think about that, they don’t want you to make your own choice, but they don’t want to be responsible for the choice you make.

I had some kind of strange reaction to an insect bite on the back of my calf last night. I don’t know how it happened or what bit me, I’ve never seen anything like this on my leg, nor felt this kind of pain, which is severe but within my tolerance levels. Normally, I’d just keep walking around and unless it seemed to worsen or I showed other symptoms, I’d just let time work it’s magic on healing it. Painful, yes, but nothing my body can’t handle.

Unfortunately, my plan was to travel out of town for the holiday this week to spend time with family. If my condition worsened, I might end up in an ER in a strange place. I don’t want to end up in an ER, and certainly not in a strange place. As a result, I decided to visit the GP at the last minute to see if they thought it looked dangerous. If it was going to kill me or save my tissue, I’d want to intervene, but anything short of that I’d just make do.

I should’ve just kept on going and took my chances.

The doctor squeezed me in, which I’m very grateful for. But because I hadn’t seen them in over ten years, they subjected me to a battery of questions about my health, my family’s health, and so on. I spent 20 minutes talking about everything but my bite and about one minute actually discussing the course of action about the bite.

I got lectured about the need to do regular check ups. I got lectured about treatments available for some historical conditions, as if I was unaware, hadn’t tried them and was suffering needlessly (because the assumption is I don’t take care of my health). I witnessed the doctor exhibit some unhealthy conditions of her own and then was told not to worry, wasn’t contagious, etc.

The worst mistake I made was mentioning that my wife is pregnant and nearing her due date.

“When did you last get your tetanus shot?”

This is a terrifying question. Something innocuous like this, ostensibly asked our of concern for my health and the health of my family, could lead to a spiral where either the baby snatchers come for my kid, or I submit to vaccinations and other invasive treatments I don’t have any interest in.

She continued, “I don’t mean to alarm you, but EIGHT babies in the whole state died last year because of whooping cough connected to tetanus, likely contracted from a parent or relative who didn’t get their shots. I wouldn’t want you to be one of them!”

When she said 8 in the whole state, I wanted to laugh. Are you kidding? I probably have more risk driving my baby around in its car seat (don’t worry, she lectured me about that, too). And its probably not PC to say, but I doubt those babies had my socioeconomic background (ie, I’m wealthier and I don’t have relatives traveling back and forth to third world countries or other impoverished areas). It’s simply not reasonable to be worried about this risk, measured against the potential complications.

“It’s really quick and out nurse is great with shots, can I go ahead and get that taken care of for you?”

No, thanks, I’m traveling and don’t want to deal with it right now.

“Okay no problem, I’ll put a note in your file that you’re going to come back in two weeks and take care of it. Due to state mandate, they won’t let you go near your baby if you don’t have an up to date tetanus shot.”

I sure hope I don’t get that call.

Notes – Horizon Kinetics 2015 Compendium

For the last two years, Murray Stahl and Steve Bregman of Horizon Kinetics have published a “Compendium Compilation” of their various research pieces and market commentaries throughout the year. I recently requested copies of the 2014 and 2015 compendiums and just completed reading through the 2015 compendium. What follows are “stitched together” quotes from several of the essays.

The Indexation Experience

An active manager always can be found to be deficient if underperformance relative to an appropriate index is discovered. In fact, a manager can be found to be deficient if a return generated is equivalent to the appropriate index… one could always purchase the index as the less expensive investment alternative.

How does one judge an index to be deficient?

Since short-term interest rates approach zero in most regions of the world, the valuation environment is very benign… most governments during this period have embarked upon grand fiscal stimulus efforts that are now becoming unsustainable.

When one measures a manager relative to an index, is one measuring investment acumen or marketing ability?

The manager… will purchase a security until the expected excess rate of return is zero. The index… is marketed until the marginal revenue from a product is zero, which is an entirely different concept.

The index is not constrained by valuation.

Most indexes, in the fullness of time, do not earn impressive rates of return.

Problems With Indexation

When indexation excludes the so-called marginal securities, two things happen. The marginal securities are the stocks where the volatility really resides, which means the index is going to lose its volatility. Second, the marginal securities are an important contributor to what would have been the return… their negative impact gets captured on the way down– but the positive return impact does not get captured on the way up.

It is the nature of a market capitalization weighted index that it is always un-diversifying.

Diversification

The problem with such an approach [wide diversification] is that it is quite impossible for any individual, or even a team of individuals, to have a good working knowledge of the individual investments at a security level. The portfolio can only be understood in terms of its statistical attributes… CalPERS… has about 20,349 individual investments.

If a team of 10 analysts were to work eight hours a day for three months, which is 22 business days per month, with no interruptions, the team would have at its disposal 10 x 8 x 3 x 22 man-hours to read 20,349 quarterly reports. This amounts to 5,280 man-hours available to read 20,349 quarterly reports, which equates to slightly more than 15 minutes per quarterly report… It should be obvious that success or failure in this endeavor must depend upon whether the statistical attributes of the portfolio provide the data necessary to make intelligent asset allocation decisions… it is impossible to devise a simple list of fundamental statistics to be used to comprehend a portfolio… because of differences in corporate expenditure practices, depreciation policies, tax laws in various jurisdictions, and GAAP vs. IFRS accounting.

The many diversified funds that purchase the most liquid securities must by definition generally own the same securities, since there is only one set of liquid securities. If the diversified institutions, therefore, own the same securities, when studying the price behavior of those securities, those institutions are, in reality, studying themselves.

If one believes in the Efficient Markets Hypothesis, then securities prices must reflect the beliefs of the holders of the securities. Yet, as shown above, the holders of securities do not study the securities. In fact, given diversification practices, it is not possible to study the securities. It is only possible that the investors study one another. Thus, one is confronted with a feedback loop or a huge self-reference paradox, as one may see in the paintings of M.C. Escher, such as Waterfall or Drawing Hands.

Another interesting case is the Singapore Index… returned 3.2% per annum. The mere fact that the economy of Singapore grew at over 6% per annum for more than 18 years does not correlate well with the stock market return for the simple reason that the Singaporean companies in the index are global companies. These results reflect many factors apart from the economy of Singapore.

Similarly, the Swedish index does not necessarily reflect the economy of Sweden. And the UK index does not necessarily reflect the economy of the UK.

The thrust of these facts is to question, if not actually reject, the geographical form of classification as an asset allocation building block. That calls into question the entire international method of investing. The characteristics of equities have little to do with the legal place of domicile of a given firm. However, on a weekly basis the Investment Company Institute records $3 billion to $4 billion withdrawn from domestic equity funds and deposited into international equity funds in search of diversification and risk control attributes that simply do not exist. As has been the case with many widely held investment beliefs without foundation, this will not have a good outcome.

Inefficient Markets

[Fischer Black] said that there are people who are highly knowledgeable about certain companies– the information traders– and when they trade, they are very well informed. Most others, however, are not so well informed; they are the noise traders.

[Fischer Black’s concept of] efficient markets was that if the bulk of investors were in an index that, as he defined it, would include every stock out there– everything– the noise traders would go there. That would eliminate the bulk of the noise traders from the active marketplace, so only the information traders would be trading. They would not go into the index, because they are highly informed, and the market would be much more efficient in the sense that it would reflect the judgments of informed participants.

If one reflects upon this matter [Carl Icahn’s letter to Apple], one will see that Mr. Icahn has posed an exceedingly profound question to all investors, and especially academics. Apple is the largest company in the world. It is arguably the most ubiquitous company in the world. Billions of people use Apple products daily and are very familiar with those products. If there is any equity in the world that should be priced efficiently, it should be Apple.

Yet, Apple has a lower P/E than companies such as Exxon, Coca-cola, and even Philip Morris International. One might debate the future prospects for Apple, but surely these are more robust than those of Philip Morris International. Does anyone assert that demand for cigarettes will increase?

The money manager industry is not populated by Homo Economicus, carefully and rationally evaluating different investment opportunities. The money manager can only survive by attracting assets to manage for a fee.

Modern financial theory cannot explain momentum because, if the stock market is efficient, there should be no serial correlation observed in securities… momentum investing is not a new innovation. It is a concept virtually as old as the idea of a stock market, although it has not always been called “momentum.” Technical analysis is essentially a search for securities with momentum.

It is now possible to raise substantial sums for almost any index if the rate of return is sufficiently high. It is nearly impossible to raise money for any index if the rate of return is insufficiently high, let alone if that return happens to be negative. This is not the asset allocation process. This is the momentum process. The industry makes use of a substantial marketing budget, It clearly influences the valuations not only of individual securities but of entire sectors, and it dominates, for the time being, the investment process.

Other Remarks

  • Is modern risk control methodology actually serving to reduce risk or is it merely convincing professional investors to accept, perhaps unwittingly, another type of risk?
  • It should be noted that the real was not always the currency of Brazil. There were cruzeiros, there were cruzadoes, and now we have the real. That in itself should tell the reader something about the stability of the currency.
  • Historically, that is what emerging market debt was: questionable claims against governments.
  • Bonds should be thought of in the following way: they offer risk with no possibility of reward, especially if you are a taxable investor.