Review – Common Stocks And Uncommon Profits

Common Stocks and Uncommon Profits: And other writings by Philip A. Fisher

by Philip A. Fisher, published 1996, 2003

Stock market investors who have studied Warren Buffett in detail know that he has cited two “philosophers” of investment theory more than anyone else in being influential in the formation of his own investment approach: Benjamin Graham and Phil Fisher. Graham represents the cautious, conservative, balance sheet-driven Buffett, while Fisher represents the future-oriented, growth-focused, income statement-driven Buffett. If you ask Buffett, while Graham got him started and taught him key lessons in risk management (Margin of Safety and the Mr. Market metaphor), Fisher was the thinker who proved to have the biggest impact in both time and total dollars accumulated. Buffett today, whether by choice or by default due to his massive scale, is primarily a Phil Fisher-style investor.

And yet, in my own investment study and practice, I have dwelled deeply on Graham and did little if anything with Fisher. I tried to read Fisher’s book years ago when I was first starting out and threw my hands up in disgust. It seemed too qualitative, too abstract and frankly for a person of my disposition, too hopeful about the future and the endless parade of growth we’ve witnessed in the markets for several decades since the early 1980s. Surely there would be a time where the Fisher folks would hang their heads in shame and the Grahamites would rise again in the fires of oblivion! After all, “Many shall be restored that are now fallen and many shall fall that are now in honor.”

As my professional career wore on, however, I found there was less and less I could do with Graham and more and more of what Fisher had said that made sense. And if you’re in business, you can’t help but be growth oriented– buying cheap balance sheets isn’t really the way the world works for the private investor. So, I decided it was time to take another look at Fisher’s book and see what I could derive from it as an “older and wiser” fellow. What follows is a review of Part I of the book; I plan to read and review Part II, which is a collection of essays entitled “The Conservative Investor Sleeps Well At Night”, separately.

Keep Your Eye On The Future

One thing I noticed right away is the consistent theme of future-orientation throughout Fisher’s book. Whereas balance sheets and the Graham approach look at what has happened and what is, Fisher is always emphasizing a technique that involves conceptualizing the state of the future. For example, in the Preface he states that one of the most significant influences on his own investment results and those of other successful investors he was aware of was,

the need for patience if big profits are to be made from investment.

“Patience” is a reference to time preference, and time preference implies an ability to envision future states and how they differ from the present and therein see the arbitrage available between the two states. The other key he mentions is being a contrarian in the market place, which sounds a lot to me like the lesson of Mr. Market.

Fisher also says that market timing is not a necessary ingredient for long-term investment success,

These opportunities did not require purchasing on a particular day at the bottom of a great panic. The shares of these companies were available year after year at prices that were to make this kind of profit possible.

While he cites the structural inflationary dynamic of the modern US economy and seems to suggest the federal government’s commitment to responding to business cycle depressions with fiscal stimulus puts some kind of ultimate floor under US public company earnings (unlike in Ben Graham’s time where large companies actually faced the threat of extinction if they were caught overextended in the wrong part of the cycle, Fisher suggests the federal government stands ready to create conditions through which they can extend their debt liabilities and soldier on), he says that the name of the game over the long-term is to find companies with remarkable upside potential which are, regardless of size, managed by a determined group of people who have a unique ability to envision this potential and create and execute a plan for realizing it. In other words, the problem of investing is recognizing strong, determined management teams for what they are, that is, choosing superior business organizations in industries with long runways.

Getting the Goods: The Scuttlebutt Approach

People who know about Fisher typically identify him with the “scuttlebutt approach”. Fisher says scuttlebutt can be generated from:

  • competitors
  • vendors
  • customers
  • research scientists in universities, governments and competitive companies
  • trade association executives
  • former employees (with caveats)

Before one can do the scuttlebutt, however, one has to know where to look. Fisher says that “doing these things [scuttlebutt] takes a great deal of time, as well as skill and alertness […] I strongly doubt that [some easy, quick way] exists.” So, you don’t want to waste your time by going to all the trouble for the wrong idea. He says that 4/5 of his best ideas and 5/6 of the total gains generated over time that he could identify originated as ideas he gleaned from other talented investors first, which he subsequently investigated himself and found they fit the bill. Now, this is not the same thing as saying 4/5 ideas he got from others were worth investing in– the proportion of “good” ideas of the “total” he heard about is probably quite low, but the point again is not quantitative, but qualitative. He’s talking about where to fish for ideas, not how successful this source was.

When I thought about this section, I realized the modern day equivalent was investment bloggers. There are many out there, and while some are utter shit (why does this guy keep kidding himself?) some are quite amazing as thinkers, business analysts and generators of potential ideas. I have too many personal examples of my own here to make mention of them all. But I really liked this idea, cultivating a list of outstanding investment bloggers and using that as your primary jumping off point for finding great companies. The only problem for me in this regard is most of my blogroll are “value guys” that are digging in the trash bins (as my old boss sarcastically put it), whereas to find a Fisher-style company I would need to find a different kind of blogger interested in different kind of companies. But that’s a great to-do item for me to work on in this regard and should prove to be highly educational to boot!

So, assuming you’ve got a top notch idea, what’s next? Fisher is pretty clear here: do not conduct an exhaustive study of the company in question just yet. (In other words, don’t do this just yet, though I loved SoH’s follow-up where he explained what kind of things would get him to do that.) What he does do is worth quoting at length:

glance over the balance sheet to determine the general nature of the capitalization and financial position […] I will read with care those parts covering breakdown of total sales by product lines, competition, degree of officer or other major ownership of common stock […] all earning statement figures throwing light on depreciation, profit margins, extent of research activity, and abnormal or non-recurring costs in prior years’ operations

Then, if you like what you see, conduct your scuttlebutt, because,

only by having what “scuttlebutt” can give you before you approach management, can you know what you should attempt to learn when you visit a company […] never visit the management of a company [you are] considering for investment until [you have] first gathered together at least 50 per cent of all knowledge [you] would need to make the investment

This is the part that really gives a lot of investors pause about Phil Fisher’s approach, including me. Can you really do scuttlebutt, as he envisions it, in the modern era? Can the average investor get the ear of management? Does any of this stuff still apply?

First, some skepticism. Buffett’s biographer Alice Schroeder has said in interviews that much of what made Buffett successful early on in his career is now illegal and would amount to insider trading. The famous conversation with the GEICO chief is one of many that come to mind. This was classic scuttlebutt, and it worked amazingly well for Buffett. And even if it wasn’t illegal, most individual investors are so insignificant to a company’s capital base that they can’t expect nor will they ever receive the ear of management (unless they specialize in microcap companies, but even then management may be disinterested in them, even with significant stakes in their company!) And, assuming they DO somehow get management’s ear, they aren’t liable to learn much of value or interest specifically because most managements today are not only intellectually and politically sophisticated, but legally sophisticated and they are well aware that if they say anything more general than “We feel positive about our company” they’re liable to exposure under Reg FD. This seems like a dead end.

But let me try to tease the idea out a little more optimistically. Managements do provide guidance and color commentary on quarterly earnings calls, and if you are already dealing with a trustworthy, capable management (according to the 15 points outlined below), then there is opportunity to read between the lines here, even while acknowledging that there are many other people doing the same with this info. And people who do get managements’ ear are professional analysts employed by major banks. Again, lots of people read these reports, but there is some info here and it adds color and sometimes offers some “between the lines” information some might miss. And while the information you can get from any one company may be limited, by performing this analysis on several related companies you might be able to fill in some gaps here and there to the point that you can get a pretty fair picture of how the target company stacks up in various ways.

I hesitate a little, but I think the approach can be simulated to a fair degree even today. It’s still hard work. It can’t be done completely, or perhaps as Fisher imagined it. But I think it can be done. And it still comes down to the fact that, even with all this info that is out there, few will actually get this up close and personal with it. So, call it an elbow-grease edge.

After all,

Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers’ free circulars in the comfort of an armchair one evening a week? […] great effort combined with ability and enriched by both judgment and vision [are the keys to unlocking these great investing opportunities] they cannot be found without hard work and they cannot be found every day.

The Fisher 15

Fisher also is known for his famous 15 item investment checklist, a checklist which at heart searches for the competitive advantage of the business in question as rooted in the capability of its management team to recognize markets, develop products and plans for exploiting them, execute a sales assault and finally keep everything bundled together along the way while being honest business partners to the minority investors in the company. Here was Fisher’s 15 point checklist for identifying companies that were highly likely to experience massive growth over decades:

  1. Does the company have sufficient market scale to grow sales for years?
  2. Is management determined to expand the market by developing new products and services to continue increasing sales?
  3. How effective is the firm’s R&D spending relative to its size?
  4. Is the sales organization above-average?
  5. Does the company have a strong profit margin?
  6. What is being done to maintain or improve margins? (special emphasis on probable future margins)
  7. What is the company’s relationship with employees?
  8. What is the company’s relationship with its executives?
  9. Is the management team experienced and talented?
  10. How strong is the company’s cost and accounting controls? (assume they’re okay unless you find evidence they are not)
  11. Are there industry specific indications that point to a competitive advantage?
  12. Is the company focused on short or long-term profits?
  13. Can the company grow with its own capital or will it have to continually increase leverage or dilute shareholders to do it?
  14. Does the management share info even when business is going poorly?
  15. Is the integrity of the management beyond reproach? (never seriously consider an investment where this is in question)

What I found interesting about these questions is they’re not just good as an investment checklist, but as an operational checklist for a corporate manager. If you can run down this list and find things to work on, you probably have defined your best business opportunities right there.

In the chapter “What to Buy: Applying This to Your Own Needs”, Fisher attempts to philosophically explore the value of the growth company approach. First, he tries to dispel the myth that this approach is only going to serve

an introverted, bookish individual with an accounting-type mind. This scholastic-like investment expert would sit all day in undisturbed isolation poring over vast quantities of balance sheets, corporate earning statements and trade statistics.

Now, this is ironic because this is actually exactly how Buffett is described, and describes himself. But Fisher insists it is not true because the person who is good at spotting growth stocks is not quantitatively-minded but qualitatively-minded; the quantitative person often walks into value traps which look good statistically but have a glaring flaw in the model, whereas it is the qualitative person who has enough creative thinking power to see the brilliant future for the company in question that will exist but does not quite yet, a future which they are able to see by assembling the known qualitative facts into a decisive narrative of unimpeded growth.

Once a person can spot growth opportunities, they quantitatively have to believe in the strategy because

the reason why growth stocks do so much better is that they seem to show gains in value in the hundreds of percent each decade. In contrast, it is an unusual bargain that is as much as 50 per cent undervalued. The cumulative effect of this simple arithmetic should be obvious.

And indeed, it is. While great growth stocks might be a rarer find, they return a lot more and over a longer period of time. To show equivalent returns, one would have to turnover many multiples of incredibly cheap bargain stocks. So this is the philosophical dilemma– fewer quality companies, fewer decisions, and less room for error in your decisions with greater return potential over time, or many bargains, many decisions, many opportunities to make mistakes but also less chance that any one is critical, with the concomitant result that your upside is limited so you must keep churning your portfolio to generate great long-term results.

Rather than being bookish and mathematically inclined (today we have spreadsheets for that stuff anyway), Fisher says that

the successful investor is usually an individual who is inherently interested in business problems. This results in his discussing such matters in a way that will arouse the interest of those from whom he is seeking data.

And this still jives with Buffett– it’s hard to imagine him boring his conversation partner.

Timing Is Everything?

So you’ve got a scoop on a hot stock, you run it through your checklist and you conduct thorough scuttlebutt-driven due diligence on it. When do you buy it, and why?

to produce close to the maximum profit […] some consideration must be given to timing

Oh no! “Timing”. So Fisher turns out to be a macro-driven market timer then, huh? “Blood in the streets”-panic kind of thing, right?

Wrong.

the economics which deal with forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages.

So what kind of timing are we talking about then? To Fisher, the kind of timing that counts is individualistic, idiosyncratic and tied to what is being qualitatively derived from one’s scuttlebutt. Timing one’s purchases is not about market crashes in general, but in corporate missteps in particular. Fisher says:

the company into which the investor should be buying is the company which is doing things under the guidance of exceptionally able management. A few of these things are bound to fail. Others will from time to time produce unexpected troubles before they succeed. The investor should be thoroughly sure in his own mind that these troubles are temporary rather than permanent. Then if these troubles have produced a significant decline in the price of the affected stock and give promise of being solved in a matter of months rather than years, he will probably be on pretty safe ground in considering that this is a time when the stock may be bought.

He continues,

[the common denominator in several outstanding purchasing opportunities was that ] a worthwhile improvement in earnings is coming in the right sort of company, but that this particular increase in earnings has not yet produced an upward move in the price of that company’s shares

I think this example with Bank of America (which I could never replicate because I can’t see myself buying black boxes like this financial monstrosity) at Base Hit Investing is a really good practical example of the kind of individual company pessimism Phil Fisher would say you should try to bank on. (Duh duh chhhhh.)

He talks about macro-driven risk and says it should largely be ignored, with the caveat of the investor already having a substantial part of his total investment invested in years prior to some kind of obvious mania. He emphasizes,

He is making his bet upon something which he knows to be the case [a coming increase in earnings power for a specific company] rather than upon something about which he is largely guessing [the trend of the general economy]

and adds that if he makes a bad bet in terms of macro-dynamics, if he is right about the earnings picture it should give support to the stock price even in that environment.

He concludes,

the business cycle is but one of at least five powerful forces [along with] the trend of interest rates, the over-all government attitude toward investment and private enterprise [quoting this in January, 2017, one must wonder about the impact of Trump in terms of domestic regulation and taxation, and external trade affairs], the long-range trend to more and more inflation and — possibly most powerful of all — new inventions and techniques as they affect old industries.

Set all the crystal ball stuff aside– take meaningful action when you have meaningful information about specific companies.

Managing Risk

Fisher also gives some ideas about how to structure a portfolio of growth stocks to permit adequate diversification in light of the risk of making a mistake in one’s choices (“making at least an occasional investment mistake is inevitable even for the most skilled investor”). His example recommendation is:

  • 5 A-type, established, large, conservative growth companies (20% each) -or-
  • 10 B-type, medium, younger and more aggressive growth companies (10% each) -or-
  • 20 C-type, small, young and extremely aggressive/unproven growth companies (5% each)

But it is not enough to simply have a certain number of different kinds of stocks, which would be a purely quantitative approach along the lines of Ben Graham’s famous dictums about diversification. Instead, Fisher’s approach is again highly qualitative, that is, context dependent– choices you make about balancing your portfolio with one type of stock require complimentary additions of other kinds of stocks that he deems to offset the inherent risks of each. We can see how Buffett was inspired in the construction of his early Buffett Partnership portfolio weightings here.

For example, he suggests that one A-type at 20% might be balanced off with 2 B-type at 10% each, or 6 C-type at 5% each balanced off against 1 A-type and 1 B-type. He extends the qualitative diversification to industry types and product line overlaps– you haven’t achieved diversification with 5 A-types that are all in the chemical industry, nor would you achieve diversification by having some A, B and C-types who happen to have competing product lines in some market or industry. For the purposes of constructing a portfolio, part of your exposure should be considered unitary in that regard. Other important factors include things like the breadth and depth of a company’s management, exposure to cyclical industries, etc. One might also find that one significant A-type holding has such broadly diversified product lines on its own that it represents substantially greater diversification than the 20% portfolio weighting it might represent on paper. (With regards to indexation as a strategy, this is why many critics say buying the S&P 500 is enough without buying “international stock indexes” as well, because a large portion of S&P 500 earnings is derived from international operations.)

While he promotes a modicum of diversification, “concentration” is clearly the watchword Fisher leans toward:

the disadvantage of having eggs in so many baskets [is] that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them […] own not the most, but the best […] a little bit of a great many can never be more than a poor substitute for a few of the outstanding.

Tortured egg basket metaphors aside (why on earth do people care what their egg baskets look like?!), Fisher is saying that the first mistake one can make is to spread your bets so thin that they don’t matter and you can’t efficiently manage them even if they did.

Aside from portfolio construction, another source of risk is the commission of errors of judgment.

when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is, by a significant margin, less favorable than originally believed

one should sell their holdings, lick their wounds and move on. This needs to be done as soon as the error is recognized, no matter what the price may be:

More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.

Further,

Sales should always be made of the stock of a company which, because of changes resulting from the passage of time, no longer qualifies in regard to the fifteen points… to about the same degree it qualified at the time of purchase […] keep at all times in close contact with the affairs of companies whose shares are held.

One vogue amongst certain investors is to be continually churning the portfolio from old positions to the latest and greatest idea, with the assumption being that time has largely run its course on the earlier idea and the upside-basis of the new idea is so much larger that liquidity should be generated to get into the new one. Fisher advises only using new capital to pursue new ideas rather than giving in to this vanity because,

once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all

The concept of “investment” implies committing one’s resources for long periods of time. You can’t emulate this kind of trading activity in the private market, which is a very strong indication that you should try to avoid this behavior in public markets. A particularly costly form of this error is introducing macro-market timing into one’s portfolio management, ie, this stock has had a big run up along with the rest of the market, things are getting heady, I will sell and get back in at a lower cost. I’ve done this myself, most recently with Nintendo ($NTDOY) and even earlier with Dreamworks ($DWA). Fisher says it’s a mistake:

postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly […] if the growth rate is so good that in another ten years the company might well have quadrupled, is it really of such great concern whether at the moment the stock might or might not be 35 per cent overpriced? That which really matters is not to disturb a position that is going to be worth a great deal more later.

It plays to a logical fallacy that a company that has run up has “expended” its price momentum, while a company that has not had a run-up has something “due” to it. On the contrary, Fisher points out that many times the material facts about a company’s future earnings prospects change significantly over time from the original purchase, often to the good, such that even with a big run-up, even more is in the offing because the future is even brighter than before– remember, always keep an eye on the future, not the present or the past!

And similarly, if one has an extremely cheap cost basis in a company, one has an enormous margin of safety that should give further heed to trying to jump in and out of the stock when it is deemed to be overvalued.

He adds that, like wines, well-selected portfolio holdings get better with age because,

an alert investor who has held a good stock for some time usually gets to know its less desirable as well as more desirable characteristics

and through this process comes to develop even more confidence in his holdings.

If you’ve read some of my thinking about the philosophy of building multi-generational wealth through a family business, you’ll see once again the direct parallel to private market investing in Fisher’s conclusion:

If the job has been correctly done when a common stock is purchased, the time to sell it is– almost never.

Conclusion

Distilling Part I down to its essence, I concluded that the most important skill for generating long-term gains from one’s investing is still about having a disciplined and consistent investment program followed without interruption and in the face of constantly nagging self-doubt (“In the stock market a good nervous system is even more important than a good head.”) The particular program that Fisher recommends be followed is to:

  1. Create a network of intelligent investors (bloggers) from which to source ideas
  2. Develop a strong scuttlebutt skill/network to develop superior investment background
  3. Check with management to confirm remaining questions generated from the 15 step list
  4. With the conviction to buy, persevere in holding over a long period of time

If you can’t do this, you probably shouldn’t bother with the Fisher approach. Whether it can be done at all is an entirely separate matter.

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Review – The Millionaire Next Door

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

by Thomas Stanley, PhD and William Danko, PhD, published 1996, 2010

One out of ten Americans has a net worth of $1,000,000 or more, but how did they get that way (and more puzzling, what is going on with the one in ten Americans who have a negative net worth)? According to Stanley and Danko, accumulating a million dollar net worth has less to do with luck and inheritance and more to do with simple behavioral habits. The wealthy tend to be good at generating income, sure, but they’re even better at saving it, that is, spending far less than what they take in over any given period of time. As they put it, it’s no use having a good financial offense if you don’t know how to play defense and thus give up too many financial goals.

The authors recommend running your household like a small business– creating budgets, tracking expenses, reviewing your actual versus expected financial results, etc. They focus on the spending habits of the affluent decile to illustrate the surprising (for some) fact that those who have accumulated a million dollars or more in net worth typically don’t spend as if they have done so, highlighting tastes in clothing and automobiles (“purchasing vehicles by the pound”) amongst a few others. I expected the book to highlight more domestic life decisions, such as millionaire households doing home cooking versus eating out, and I was also expecting to see a lengthier investigation into housing accommodations and finance given that 97% of millionaires own their own homes or carry a mortgage rather than rent, an impactful statistic.

Thankfully, the authors spent a significant amount of time discussing the intergenerational wealth dynamic amongst the affluent which is a particular interest of mine. Highly affluent individuals tend to be less-educated than their children and are typically self-employed business owners, whereas their children tend to be more-educated (masters and even doctoral degrees) and employed as professionals (doctors, lawyers, engineers, accountants, etc.) It seems affluent people attribute a lot of their success to non-repeatable luck, and/or believe it’s possible to insulate their children from the volatility and vicissitudes of a more competitive life by encouraging them to obtain more education to enter cartelized industries with licensing or other legal obstacles to entry. The expectation (in terms of probability) is that these people will obtain less total wealth than their parents, but also experience greater security in their incomes and more stability in their long-term earnings path. As they say,

the relationship between education and wealth accumulation is negative… the longer one stays in school, the longer one postpones producing an income and building wealth

It would seem that regardless of the level of education our professional status of an affluent person’s children, the most important thing they need to learn is the same expense-control habits as their parents. Can that be taught in higher education? What happens if you become a stable doctor with a local practice and a strong propensity to consume all you earn? This isn’t exactly a profound point, but I was a bit astonished to see how little emphasis appears to be given amongst affluent families to instructing their children about how to manage accumulated wealth. One noted habit of the affluent is to avoid talking about receiving money that hasn’t been individually earned with their young children, the goal appears to be to avoid a sense of entitlement and get them to think about establishing their own financial position. But if they’re eventually due an inheritance (or manage to accumulate their own stack), why reinvent the wealth management wheel intergenerationally? Why aren’t more affluent people or families talking about how to responsibly manage, ie, grow, a starting base of capital accumulated in prior generations?

The book doesn’t explore the differences in behaviors between the merely wealthy ($1M+ net worth) and the significantly wealthy (say, $10M+) or the incredibly wealthy ($100M+), and while there are undoubtedly exceptions to the rule, my hunch is that any family that manages to sustain a fortune over subsequent generations ($100M+>$100M+) or grow it ($100M+>$200M+) is spending a lot of time talking with their children about how to handle this responsibility. The decision to have these conversations or avoid them is likely the tipping point between clearly defined social classes. Some people can’t imagine being anything but comfortably upper middle-class and glory in such identity, while others can’t imagine being anything but the cream of the crop.

Here are some other interesting ideas from the book:

  • Self-employment is a major positive correlate of wealth
  • “Employment-postponing” via higher levels of education has a meaningful impact on lifetime wealth accumulation
  • Is your spouse more frugal than you are? Millionaire households would answer “yes”
  • Most wealthy people feel that you get what you pay for in the realm of financial advice
  • Millionaires know how to play both sides of the wonder of interest– small expenses become big expenses over time; small amounts invested become big investments over time
  • The higher one’s net worth, the better off they are at minimizing realized income
  • Begin earning and investing early in your adult life; the longer your runway, the higher chance you have of becoming a millionaire
  • Under-Accumulators of Wealth (UAWs) usually think they have more wealth than their neighbors
  • The more dollars adult children receive, the fewer they accumulate
  • Good gifts for affluent parents to give their children:
    • subsidizing education
    • earmarking gifts so they can start or enhance a business
    • prefer to give their offspring private stock
    • Ask permission when contemplating giving significant gifts to your children
    • cash gifts are the single most significant factor for explaining the lack of productivity of adult children of the affluent
  • A typical behavioral mistake of affluent parents is to “strengthen the strong child, weaken the weak child”
  • Discipline and initiative can’t be purchased like automobiles or clothing off the rack
  • Courage can be developed, but it can not be nurtured in an environment that eliminates all risks, all difficulty, all dangers.
  • The sales profession is good exposure for the children of affluent; retail sales jobs provide children with objective third parties to evaluate their behavior
  • One of the proven ways that domineering parents control their children is by living close to them
  • Most spouses feel that charity begins at home
  • At least one outsider should be co-executor of an estate

Review – Your Self-Confident Baby

Your Self-Confident Baby: How to Encourage Your Child’s Natural Abilities

by Magda Gerber, Allison Johnson, published 1998

I read YSCB and Janet Lansbury’s Elevating Child Care in rapid succession; while this review will focus on the original work by Magda Gerber (founder of RIE in Los Angeles, CA), I may touch upon a few thoughts and ideas from Lansbury’s book as well.

The advice and ideas espoused in this book rest on two central premises:

  • Major premise; your baby comes built in with the tools it needs to learn and navigate its environment, and will create its own learning problems and discover its own solutions when given freedom to explore the world at its own pace
  • Minor premise; good parenting is less about what you put in early on and more about what you don’t, especially with regards to worry, anxiety and active interventionism

This doesn’t seem that controversial, but if you ask me it flies directly in the face of what I have routinely observed in both American parenting and Asian parenting, for example:

  • American parenting; your baby may be capable of great and wonderful things (which you implicitly choose for it), but like a Calvinist, you will only know for sure if you actively work to develop these talents and capabilities in your child. Failing to do so means risking that your child will turn out to be not one of the Elect, but a poor loser, or worse, quite average and content
  • Asian parenting; babies are stupid and a constant and confusing source of pride and worry for their parents, and if they are not condescended constantly almost from the moment they are born, they risk becoming ingrates, drug users, or worse, free thinkers, rather than guided automatons with eternal respect for their revered elders

American parents spend a lot of time getting wrapped up in the competition of their lives, which they impart to their children. Infant development is like a race– how quickly can the child progress from one stage to the next? And what burdens of guilt, anxiety, anger and frustration can the parents-as-pit-crew take on along the way to ensure the process is stressful and obsessive without wasting time reflecting about the race and why it must be won?

So this Resources for Infant Educarers (RIE) approach, developed by the Hungarian Magda Gerber after a chance encounter with a pediatrician named Dr. Emmi Pikler in 1950s Hungary, is not just an antidote, but a holistic approach for individuals and families looking to foster authentic self-discovery in their children and connection built on mutual respect amongst kin.

But it is NOT a silver bullet! Raising children is still a real challenge, it still involves difficulty and even moments of self-doubt.

Gerber offers these basic principles:

  • basic trust in the child to be an initiator, an explorer and a self-learner
  • an environment for the child that is physically safe, cognitively challenging, and emotionally nurturing
  • time for uninterrupted play
  • freedom to explore and interact with other infants
  • involvement of the child in all care-giving activities to allow them to become an active participant rather than a passive recipient
  • sensitive observation of the child to understand their needs
  • consistency and clearly defined limits and expectations to develop discipline

Gerber cautions parents to slow down, to develop the habit of observing before intervening. Many child troubles — frustration during playtime, an unintentional fall, conflict over a piece of property with another infant — can be resolved by the child on its own if they’re given the opportunity and support to meet the challenge with their own solution. Similarly, it is not the parent’s duty to entertain or preoccupy the child, children become present-oriented and externally directed primarily through the influence of their anxious parents. If left to their own devices to play and explore at their own pace in a safe environment, they will learn to focus and entertain themselves through their own creativity and exploration at length.

Another suggestion is to “sportscast” the infant’s life during caregiving activities such as feeding, diaper changes, bath time or preparation for bed. By narrating what is happening to the child and why, and what will happen next, the child learns about the meaningful sequence of events in its life and can begin to build expectations about the future and acquire a measure of predictability about its life and routines which creates security, comfort and trust in the parents and caregivers. Young children’s minds are “scientific”, they’re always trying to understand the cause-effect relationships behind observed phenomena and one of the primary cause-effect relationships they are exploring as they develop is the sequence of activities across time. Much like raising a dog, following a predictable routine reduces stress in the infant’s life and allows them to focus their attention and learning on other things than the fear of what might happen next to them.

According to Gerber, quality time means total attention and focus on your child. Holding your baby while you watch TV, or read, or run an errand, is not quality time and the child can sense that it’s not the priority. Quality time is watching your child play, uninterrupted, or reading to him, or giving sole focus to feeding him, or diapering or bathing him. Because of this, Gerber encourages parents to reflect on even the routine caregiving moments, because over thousands of repetitions over an infant’s life they will leave an indelible mark on the relationship and come to represent a sizable proportion of the total “quality” time spent together– do you want your child, even in their limited perceptual state during infancy, to see their diapering as a disgusting task you as a parent have to get over with as quickly and cleanly as possible several times a day, or do you want your child to see that you love them and are interested in them even when doing mundane things like changing their diapers?

Further, this approach has a transformative effect on the parent, as well. By treating the relationship respectfully and seeking to include the child in caregiving activities by narrating what is occurring and being present in the moment, the parent is slowly but surely training themselves to see their child not as an obligation to which things must be done, but as another person like themselves with needs and values and a personhood just like other adults they interact with. They will be modeling for their child the very behaviors they wish for them to adopt in how the child is expected to behave toward others.

This book is chock full of so much wonderful, important information for parents, caregivers and anyone interested in the world of small children. It’s too hard to try to summarize all the advice and concepts and it wouldn’t be worthy to try. Instead, I will simply observe that this is another philosophical work that goes much beyond how to put on a diaper or how to create a safe playspace, and instead says much more about how we can build a peaceful and encouraging society for all people to live in, adults and children (future adults) alike. And to the extent this approach is not recognized and its advice goes unheard and unheeded, it explains clearly why we witness the social problems and family and individual dysfunctions we do!

Here is a brief list of some of the more pithy wisdom I enjoyed from Lansbury’s “Elevating”:

  • As parents, our role in our baby’s development is primarily trust
  • Our relationship will be forever embedded in our child’s psyche as her model of love and the ideal she’ll seek for future intimate bonds
  • The secret to connecting is to meet children where they are
  • Grieving people want and need to be heard, not fixed
  • A nice bedtime habit to start with your child is to recapture the day… You can also mention what will happen tomorrow. This connects the past, present and future and gives her life a connected flow
  • Since our lifespan is getting longer, why not slow down?
  • We don’t think twice about interrupting infants and toddlers, mostly because we don’t think to value what they are doing
  • Babies are dependent, not helpless
  • “Readiness is when they [the baby] do it.” “When you teach a child something, you take away forever his chance of discovering it himself.”
  • Instead of teaching words, use them
  • “Don’t ask children a question you know the answer to”
  • Purposefully inflicting pain on a child can not be done with love

Sorry, The Economy Is Officially Closed

One way to describe what I do for a living is “capital allocation.” Really, I am like an internal strategic consultant to a family business (a family of which I am a part) so there is more to it than that, but thinking about where to put our capital is one of the primary functions I serve.

One interesting problem to have when one owns things of value is receiving bids on those things from people interested in buying them when you’re not sure you want to sell. The further above your own estimate of “fair value” their bid goes, the stronger the temptation to take advantage and sell your asset. It seems like a pretty straight forward problem to solve.

The only problem is the market context of the potential sale. Generally, if you’re in a position to get more than fair value for what you’re selling, you’re going to have a hard time finding another asset to buy where the seller isn’t facing the same dynamic. In other words, you can potentially sell one asset at an inflated price and buy another at an inflated price– you’re probably better off just holding on to what you have because there’s no arbitrage in that and it could very well cost you money in terms of frictional costs like brokerage commissions and taxes on imaginary capital gains.

One thing you could do is sell your asset at an inflated value and sit and wait in cash for a better buying opportunity. The problem with that is that cash is, currently, a seemingly barren asset. If you stuff your haul into T-Bills, you’re lucky to earn a few basis points every 90 days– it might as well be zero, and when you factor in the effect of inflation and those damned capital gains taxes once again, it probably is. You could go further out on the yield curve and buy some 10YR Treasury notes, but then you’re exposing yourself to substantial interest rate risk with yields flirting with historic lows.

Meanwhile, most asset owners are earning strong internal returns on their invested capital right now. Say you’re earning 20% a year on your investments, why would you sell them to collect 1.5% over the next 10 years while taking enormous interest rate risk? Or to collect zero for some unknown amount of time sitting in T-bills or cash in a savings account? Every year you stay invested, you get ahead by almost 20% more. Could the value of your investment really drop by that much?

The business cycle is an inevitable fact of owning and operating a business in a modern economy. The question is not could it, but when will it drop by that much, or more? For many business owners and investors, the waiting is the hardest part. Giving up 20% a year for some period of time and avoiding the risk of a 50-60% or greater decline in asset values just isn’t attractive. It isn’t even attractive when thinking about the fact that buying back those same assets at half price could potentially double your return on invested capital during the next boom, an interesting strategy for shortening the compounding time necessary to achieve legendary riches.

For many, this inevitable decline in asset prices is inconceivable. It’s embedded deeply in the fear of selling and going to cash. The implication of this premise is that the economy is officially closed to additional investment. Those who invested earlier in the cycle can stay inside and watch a magnificent show as they earn outstanding returns on their capital while the boom goes on. But for everyone who sold too early, or never bought in, they have to wait outside, indefinitely, and wonder what it’s like– the cost of admission is just too high.

What makes this a stable equilibrium? By what logic has a competitive market economy become permanently closed to new investment, or a change in asset values, or a change in ownership of assets? Under what set of premises could this condition last for a meaningful amount of time and leave people who sell now out in the cold, starving and bitter for returns on capital, forever, or for so long that they would be losing in real terms over time in making such a decision?

To me, this “new normal” is absurd. It is juvenile to believe that the economy is closed and no one else is getting in. It’s silly to think that the people willing to pay those astronomical prices for admission are making a good decision, that they’re going to have a comfy seat and years of entertainment, rather than paying more than full price for a show that’s about to come to an abrupt end. It’s a topsy-turvy world in which the reckless and courageous high-bidders are the ones who get rich. If paying too much for things was the path to riches, we’d all be there by now. I think when everyone’s perception of reality and value skews toward a logical extreme like this, we’re closer to the show being over than the show must go on.

In the meantime, sorry, the economy is officially closed.

Review – Liberty Defined

Liberty Defined: 50 Essential Issues That Affect Our Freedom

by Ron Paul, published 2012

I have severely underestimated Ron Paul. When I was first learning about the philosophy of freedom over a decade ago, I jumped right into the enormous tomes on economic theory and moral philosophy and skipped the “practical politician” phase. It was only after I had immersed myself deeply in the theory that I became aware of Ron Paul and at that point I was such a purist intellectually that I felt affronted by a guy trying to get his hands dirty in politics. What was the point?

As I came to learn, the point, at least with Ron Paul, is simply to educate and better market liberty via a public platform. And while Ron Paul isn’t intellectually perfect, he’s pretty close. He writes readable and well-argued books on popular economic and political issues (I’ve read End the Fed and recommend it, I have not read The Revolution: A Manifesto) and since leaving public office he has started a Monday through Friday YouTube show, the Ron Paul Liberty Report, where he really pulls no punches in analyzing headline news issues and is even willing to delve into “conspiracy theories” and point out the activity of the Deep State. I’ve learned a lot in keeping up with the show not only in terms of what’s going on and how different events are connected but in how to better form arguments about the principles involved. My esteem for the man has risen, greatly.

I read Liberty Defined with interest. I have been working on my own “elevator pitch” delivery for basic economic and political ideas I consider important and I am always looking for resources which might provide examples of how to convey complex ideas in simple forms. I think this is where Liberty defined excels. The book is 328 pages long, with 50 topics covered, that is an average of 6.5 pages per topic in 12 point font in a medium sized paperback– these are not treatises, they’re more like brief essays. The topics are organized alphabetically and range from Abortion, Assassination and Austrian Economics, through Lobbying, Marriage and Medical Care and end with Trade Policies, Unionism and Zionism. It’s a mix of stuff Americans are always fighting about that they shouldn’t be (Abortion, Marriage), stuff Americans have been fighting about since the founding (Lobbying, Trade Policies), stuff Americans are super confused about (Medical Care, Unionism), stuff Ron Paul thinks its important people understand better (Austrian Economics) and stuff that people think it’s impolite to discuss (Zionism).

While I found many of Ron Paul’s views “predictable” simply because I am well-versed in them, I find his argumentation and simple explanations were always new and surprising to me and his ability to draw metaphors and analogies is outstanding (I particularly liked his discussion of medical insurance and car insurance and what we could expect to happen to car insurance if it was regulated the same way medical insurance is regulated). At the root of his approach is a desire to unmask political cliches — for example, insurance is no longer insurance when you force the providers to cover higher risk individuals at the same rate that they cover low risk individuals, which transforms it into a welfare policy that redistributes wealth — and then follow the inevitable logic and consequence of these policies laid bare. Through this method there turn out to be no real surprises in the economic and political arena, the problems we face are the end result of following flawed premises blindly. A unifying theme that runs through out is that the will to exercise power has historically been combined with the need to confuse and delude the powerless about how and why that power is being exercised because there is no logically defensible argument for exercising the power in the first place– all power concentrated in the hands of political representatives is power taken from the hands of individual people. The meta struggle of history in society is the attempt by individuals to resist the tyranny of political structures. This is the prism through which Ron Paul analyzes all of these issues.

By his definition,

Liberty means to exercise human rights in any manner a person chooses so long as it does not interfere with the exercise of the rights of others.

And so, “only liberty can ward off tyranny, the great and eternal foe of mankind.”

This is a hopeful book, also. While Ron Paul is forceful in his views and is not afraid to call a spade a spade, this is not a polemical work seeking to cast blame and aspersions at political enemies. Instead, Ron Paul says

I do hope that I can inspire serious, fundamental and independent-minded thinking and debate

To me, this is key and what is so lacking from political discourse in this country presently. The way things are, the spending, the wars, the massive social programs, are taken as given. There is no fundamental consideration of these issues, no attempt to forge a new society despite clearly being at a political dead-end. And not only are people not thinking creatively, they aren’t discussing it peaceably. Political discourse is about questioning motives and demagoguing the issues. Creating an environment of open discussion and debate would be a humongous step for social progress even if it leads to no immediate political change. This is a long-term project,

To love liberty requires an act of the intellect… Our job in this generation is to prepare the way.

We may not and likely will not see meaningful political reforms in our own lifetimes, but we could lay the seeds that will germinate in our children’s lifetimes by trying to change the context of the discourse today. That’s a goal worth fighting for in my mind.

I ended up highlighting many ideas and short passages throughout this book. I had hoped to capture a few here but I realize I will just be re-typing too much of the book. This work is not a classic, but it is worth reading, for the liberty-minded and the unfamiliar (or even skeptical!) alike, if only to further the discourse. I think this book will be one I’ll recommend to people asking for a place to start in understanding our topsy-turvy political environment and I plan to keep my copy in my library for future reference. Ron Paul has created a “popular”, everyman’s version of Murray Rothbard’s outstanding For A New Liberty. (I’m also now very excited to move Paul’s The School Revolution higher up on my reading list.)

John Chew of “csinvesting” Responds

John Chew, publisher of “csinvesting“, which it only took me about two weeks to realize stood for “Case Study Investing”, was kind enough to respond to a personal e-mail I sent him by publishing his reply on his blog.

The post itself is a great reference, like everything on John’s blog, and I wanted to link to it here to make sure I always can find the link again for future review. A few of my favorite sentiments are below:

You never “master” investing which is why the journey is fascinating.

Rational humility, the moment you think you know it all, you learn about a shortcoming you never knew you had.

Investing really is constant applied learning which is cumulative.

“Compounding” returns to one’s investment of time and energy in learning the trade!

Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach.

Don’t box yourself in with silly mandates or addiction/devotion to one strategy or style. Markets are dynamic and the best strategy is not the same at all times and in all places. The natural laws of reality dictate that basic truths and financial mechanics will always be active and provide general boundaries within which a rational, conservative investor must operate (such as margin of safety and the principle of buying value at a discount), but even Ben Graham in The Intelligent Investor clearly demonstrated that different markets provide different opportunities: sometimes it is the opportunity to buy outstanding businesses at a discount, sometimes it is the opportunity to buy certain businesses for less than their liquidation values, sometimes it is the opportunity to take advantage of special situation arbitrage, etc.

Few great investors are overnight successes. Many have to overcome failure.

It’s unreasonable to expect perfection because we are not omniscient. We will misstep and occasionally even fall. The art is in finding ways to take tumbles that do not break your leg, back or skull, and learning to pick yourself up again.

Money is about freedom, not consumption.

Money is the ultimate form of potential opportunity. It helps us with, “What can I do?” and not, “How much can I have?” Life is dynamic and it is lived best through abundant action, not abundant accumulation (static).

[Great investors] enjoy the process, not the proceeds.

We have a relative great deal of control over the process we employ, but relatively less control over the proceeds that result from that process. We are not omnipotent– life is volatile. There will be disappointments. Self-esteem and self-satisfaction are built on acting the best way we know how, not achieving the best we know of at any given moment. In life, a journey is guaranteed, a destination is not. Best to learn to savor the ride as it’s all you’ve ever got until it’s over.

Ever wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials.

A great application of Austrian economics to investment analysis!

Good reminders, all.