Hi T,

Thanks, I’m doing quite fine. I’m building a house in the woods just out of town. I’m quite entertained and busy doing that. I lately do not feel like dedicating all day to investing. Therefore I seized the chance to invest in building a country house for me and my family. I dedicate some hours to that, at least to supervise the construction. It has been a very valuable experience and I’m enjoying it a lot. It is also a great physical exercise. We have had to shape the natural surroundings in order to adapt the house to the wild topography. I am more and more sure that the final result will be very nice. If you want to come, or know anyone who does, and help build it you’re invited to stay in my house. It’s hard work but it will let you be in one of the most beautiful natural places on earth and we might have fun talking about investing.

Besides that I’ve been reading several books, lots about human action and economy. The most interesting ones about Ludwig Von Mises. I also read some other good books, from David Einhorn and Roger Lowenstein. I even found an interesting one about Buffett’s sister (Giving it all away).

I here send you Buffett’s partnership shareholder letters. It’s another very interesting compilation book I have read lately. You could say that it’s about portfolio tactics. I would indeed classify those letters as giving a big insight into learning tactical portfolio management. You learn a lot about that subject by reading them, just by seeing how Buffett acted back then. But its also teaches much more than that. I’ve learned a lot more with them than with the “modern” ones. You see very clearly how he managed his portfolios in the early days and I find it much instructive for little guys like us. He had quite a fast turnover and talks very personally about his investing philosophy and portfolio management techniques. In those days he seemed to buy and sell a lot. He concentrated more than anything in cheapness and was deeply value oriented. His strategy was to find and buy undervalued companies and sell them when the undervaluation corrected. He also sold fast if he needed money for a better idea. It is interesting to contrast this early strategy with how his portfolio management evolved. In his more mature phase he would concentrate more on great companies, as opposed to undervalued companies. Therefore he would not be too eager to sell just because the undervaluation corrected. He evolved to mainly focus on outstanding businesses and great companies at a fair prices are still great investments.

The value to us is that we can learn a lot from what he did back then, it’s more akin to our reality and portfolio size. I also realized that he addressed his partners at a higher intellectual level back then than how he addresses his shareholders now which is one more reason to learn from those letters. Those early letter have been one of the most, or the most, practical investment learning sources that I’ve ever read about. It gives a lot of insight into practical portfolio management tactics.

Thanks for you analysis about Tesco taking into account that Asian competitor DF. It’s a very interesting observation to see how undervalued Tesco ex/Asia would be if you value it’s Asian operations based on its Asian competitors. Then again the apparent cheapness might be inflated if you consider that there are some serious bubbles in some parts of Asia, specifically in retailers. There are indeed probably some serious market inefficiencies world wide.

I have hardly written in the blog because I have more than anything been busy reading. I have not felt the urge to write. This year I have just bought a Spanish train builder (CAF), both for me as well as some family members. I also sold out a small position (XHB). I could write a lot about why I liked that Spanish company but I felt too lazy to do it and invested my time instead in studying it more. My time is split between reading books / building a house / and following my companies, also reading a bit about new ones.

The only company that interests me a bit more now is NOV aka “No Other Vendor”, all the rest I’ve seen does not seem attractive enough. So meanwhile I keep observing, studying and having fun.

Best wishes to you and S.
jrv

In March, I attended the Applied Materials investor meeting in New York along with my colleague Yang Lie, who has followed Applied Materials and other technology
stocks since joining the firm in 1996. Applied Materials’ Chairman and CEO Mike Splinter, along with several other members of the senior management team, presented a compelling long-term investment case for the company, which is the leading global provider of semiconductor capital equipment, driven by increasing consumer demand for mobility. While it is difficult to predict who will produce the next top-selling consumer electronics gadget (although the odds appear to favor Apple at the moment), it seems to be a safe bet that the demand for equipment and services provided by Applied Materials should increase, given its market dominance in many areas of semiconductor equipment, as semiconductor chips become more ubiquitous and more complex, necessitating a greater number and more advanced tools.

This favorable longer-term outlook seems to have been lost on many, as the company’s modest reduction in 2012 earnings guidance triggered a 3% decline in the stock price that day and a subsequent 4% decline through quarter end. Specifically, owing primarily to weak demand for solar power capital equipment, the company projected fiscal 2012 earnings of $0.85 to $0.95 per share, compared to the previous Wall Street consensus forecast of $0.96 per share. As a result, we added to our position in Applied Common at very attractive multiples of about 9 and 13 times 2011 and expected 2012 earnings, respectively. Importantly, we believe that earnings are likely to exceed recent peak 2011 earnings of $1.30 per share in the next few years, driven by the favorable dynamics noted above, as well as an increase in addressable market from the recent acquisition of Varian Semiconductor. Although Applied Materials paid a rich price for Varian ($4.2 billion; 18 times earnings), the transaction was financed with excess cash and very low cost debt and should be accretive next year. Varian is the market leader in the ion implant market, a critical step in semiconductor chip manufacturing, which enables the manufacturing of high performance chips, e.g., for applications requiring faster speeds and longer battery lives. Even after the Varian acquisition, Applied Materials has a very strong financial position, with about $3 billion of cash and $2 billion of debt consisting of senior unsecured notes due from 2016 to 2041 at rates ranging from 2.7% to 7.1%. Applied Common accounted for 1.3% of the Fund’s net assets at quarter end, and we have been increasing our position on further share price weakness this quarter.

I also read the investor presentation and saw its webcast. I was deeply impressed by it. Mostly due to its comprehensibility and above all because I agreed with the idea that whoever wins on the new computing gadgets race (be it Apple, Intel, ARM, Microsoft, Google, Nokia, Blackberry… ?), Amat will keep on selling their machines to build semiconductors. It seems to offers a safe way to invest in the mobility and computing trend without betting for the winner.

I liked to read about someone who basically invested in Applied Materials for exactly the same reasons as I did.

Besides the top quality of their machines and technological moat I would also highlight their strong free cash flows and point out the reduction in shares as well as the stability of it’s dividend as signs of shareholder friendliness.

While Applied Materials had worse earnings than expected in 2012 Ian Lapey had the conviction and seized the opportunity to keep on substantially increasing his positions both in the 3rd and 4th quarters of 2012. Applied Materials’ worse earnings were mostly due to the low capital expenditures from their clients as well as a write down in their solar business. Capital expenditures in the semiconductor industry is generally hard to predict and is very lumpy. This makes Applied Materials earnings very unstable. Personally I do not care about that, on the contrary, that generates volatility on the stock, which makes it ideal for long term holders to build a position at good entry points. It might explain why Ian Lapey kept on adding.

Cheers!
jrv

Cheers!
jrv

Father Forgets
by W. Livingston Larned
________________________________________

Listen, son:
I am saying this as you lie asleep,
one little paw crumpled under your cheek and
the blond curls stickily wet on your damp forehead.
I have stolen into your room alone.
Just a few minutes ago,
as I sat reading my paper in the library,
a stifling wave of remorse swept over me.
Guiltily I came to your bedside.

These are the things I was thinking,
son: I had been cross to you.
I scolded you as you were dressing for school
because you gave your face merely a dab with a towel.
I took you to task for not cleaning your shoes.
I called out angrily
when you threw some of your things on the floor.

At breakfast I found fault, too.
You spilled things.
You gulped down your food.
You put your elbows on the table.
You spread butter too thick on your bread.
And as you started off to play
and I made for my train,
you turned and waved a hand
and called, ‘Goodbye, Daddy!’
and I frowned, and said in reply,
‘Hold your shoulders back!’

Then it began all over again in the late afternoon.
As I came up the road I spied you,
down on your knees, playing marbles.
There were holes in your stockings.
I humiliated you before your boyfriends
by marching you ahead of me to the house.
Stockings were expensive -
and if you had to buy them you would be more careful!
Imagine that, son, from a father!

Do you remember,
later, when I was reading in the library,
how you came in timidly,
with a sort of hurt look in your eyes?
When I glanced up over my paper,
impatient at the interruption,
you hesitated at the door.
‘What is it you want?’ I snapped.
You said nothing,
but ran across in one tempestuous plunge,
and threw your arms around my neck
and kissed me,
and your small arms tightened
with an affection that God had set blooming in your heart
and which even neglect could not wither.
And then you were gone,
pattering up the stairs.

Well, son,
it was shortly afterwards
that my paper slipped from my hands
and a terrible sickening fear came over me.
What has habit been doing to me?
The habit of finding fault, of reprimanding
- this was my reward to you for being a boy.
It was not that I did not love you;
it was that I expected too much of youth.
I was measuring you
by the yardstick of my own years.

And there was so much that was good and fine
and true in your character.
The little heart of you
was as big as the dawn itself
over the wide hills.
This was shown by your spontaneous impulse
to rush in and kiss me good night.
Nothing else matters tonight, son.
I have come to your bedside in the darkness,
and I have knelt there, ashamed!

It is a feeble atonement;
I know you would not understand these things
if I told them to you during your waking hours.
But tomorrow
I will be a real daddy!
I will chum with you,
and suffer when you suffer,
and laugh when you laugh.
I will bite my tongue
when impatient words come.
I will keep saying as if it were a ritual:
‘He is nothing but a boy – a little boy!’

I am afraid I have visualized you as a man.
Yet as I see you now, son,
crumpled and weary in your cot,
I see that you are still a baby.
Yesterday you were in your mother’s arms,
your head on her shoulder.
I have asked too much, too much.

I liked the poem a lot, here below is a modern youtube video version. Apparently the voice is the same from the book’s audio version.

Here is what Dale Carnegie said about criticism:

Instead of condemning people, let’s try to understand them. Let’s try to figure out why they do what they do. That’s a lot more profitable and intriguing than criticism; and it breeds sympathy, tolerance and kindness.

After several interesting historical examples about the negativeness of criticizing that poem marks the end of part 1. It concludes with the first principle: Principle 1 – Don’t criticize, condemn or complain.

Dale Carnegie had a huge influence on Buffett. He said that his course was the most important he ever took and changed him the most.

I think that today, when lots of communications are indirectly done online, in a written way that can easily be misinterpreted, Dale Carnegie’s practical advice is worth as much as ever.

I’m sure that the young Warren Buffett saw fast how immensely profitable, in every sense, that advice could be. Since that moment he started to live by the wise principles learned from Carnegie and to practice them in order to improve his behavior towards people and himself.

Being eager to see what other principles influenced Warren Buffett’s behavior I’ll go back to my reading now

Cheers!
jrv

Regarding Intel I want to be prepared to add more. I love the company. It does have a lot of competition with ARM based computers. They will most probably keep on taking away customers from Intel. Now customers have ARM based computer options that they simply did not have before, and those alternatives just keep getting better. But then again Intel has an advantage in the fact that it has its own foundries and very advanced knowledge and control in all aspects of processor manufacturing. They will indeed spend a lot to make new 14 nanometer production plants and getting them ready to use 450 mm silicon wafers. Capital spending to build those plants will flow to semiconductor machinery companies such as Applied Materials, which I proudly own. Such plants have a high cost, comparable to nuclear plants. The advantage is that only companies as big as Intel, with its cash flows, capital and knowledge, can spend such amount of money, and enjoy the benefits. Such investment is necessary to keep them on the leading edge. It is important though to realize that others are catching up. It’s not easy to say when Intel will be really cheap but it starts to get quite interesting. The more I focus on Intel the higher the chances are that I value it correctly and that I am prepared to buy it (or let it pass) at the right price.

I let the Berkshire Hathaway strike 62.5 and 65 jan 2013 puts expire worthless. I was short those puts since a bit more than a year I think. I basically made 700 dollars with each. It’s one of the few times that I have let puts expire worthless. I hardly thought of covering them. The reason being that Buffett and his company gives me a lot of confidence.

Besides that I have been reading about some of my companies, specially focusing on the ones whose future I doubt more about. I also read a bit over a couple of others the seemed interesting, but given the market prices I do not find any company, that I do not already have, interesting enough.

In December I added 3 more shares of a Spanish train builder. At around 335 euros/share. The company is called Construcciones y Auxiliar de Ferrocarriles. I think it’s a good and cheap company expanding very successfully all over the world. I like investing in Spain now that everyone is running away from it.

I have been reading some books. One of them is The Buffett Portfolio, it’s mostly a bit basic but with some very interesting specific points about the strategy of focus investing and optimal portfolio weighting. It also added some bits and pieces complementing what I already knew. Overall I recommend it due to that. I also read the Aggressive Conservative Investor. That’s a much more advanced book. There are many things worth learning from it, specially the subject about a company’s capital allocation activities and it’s very important impact on value.

I feel Okay and spend my time mostly as always, adding knowledge to my circle of confidence, observing and studying. Like that I am prepared to detect future opportunities.

I have not spend as many hours on investing activities as I used to do when my kids were on school. Basically because now that they are on vacation I dedicate more time to them. But sometimes I think that that’s one of the best investments possible . Here’s a recent picture of them:

Cheers!
jrv

Who Is Interested In Dell Going Private ?

Cheers!
jrv

When I found about it last week it was trading at a bit over 8 (it just went up 11% to 9.28 today !)

Here are some points that drew my attention :

- Almost 4 cash/share
- No debt
- Cyclical business
- Just paid 2 dollars per share in dividends
- Fixed 4% cash dividends
- Cash flows not bad at all
- Just last year it returned 25% of its market cap in dividends
- It had recently around 50% of its market capitalization in cash. Now that the stock run up a bit it is lower.
- It also bought almost 10% of its shares since the end of 2010. For example in 2011 it bought 3.6 million shares for 32.6 millions , that’s just 8.97 per share, very close to the year low, in 2012 they also bought smaller amounts on the low side of the year, I would not be surprised if they keep buying at current levels.
- The company originally was a spin off from IBM (and makes sure that it’s known).

It’s a small cap, mainly an unknown company. No problem with that, even better.

I came to know it thanks to Western Digital, one of their clients and at the same time suppliers.

I decided to study it more to expand my circle of knowledge and who knows maybe buy… I thought it could make for a nice acquisition target.

One thing worth noting is that their share price was cut in half in 2012, it has been trading at low levels in comparison to it’s tangible assets but its earnings have been very volatile. In 2004 it lost $120 million, after a look at their annual report that year I saw it was mainly due to non cash charges related to their IPO that forced them to record under GAAP equity compensation expenses of $168.1 million.

After the superficial initial look at the numbers and year reports I read during the weekend 10Ks from companies that are supplied directly by hard disk drive manufacturers, specifically NetApp, EMC, XRTX and VMWare. All of them are pure play storage solutions suppliers. One of the biggest cost (or the biggest) of those companies are HDD drives. I know a about that sector because Western Digital has been in my portfolio several times (including a moderate position now).

I have a hard time to see how sustainable pure play storage supplier companies are. They rely on hard drives which become costlier due to the consolidation of their manufacturers (just 3 are left and 2 have 90% of the market). Even several of their customers are selling good storage solutions made by themselves with added functionality: several companies such as Dell, Cisco, Hewlett are offering unified solutions to storage which include networking and server. It’s an area that is doing pretty well.

So even though EMC has done OK up until 2011, I do not see clearly what will happen to those companies from here on, I have an even bigger doubt with Xyratex due to their much smaller size.

That said I keep studying it since as a Western Digital, Cisco and Dell investor it is essential that I understand the economics of the HDD customers and OEMs and who knows if maybe one day I buy one of them.

Xyratex (XRTX) could seem cheap in the Walter Schloss / Benjamin Graham sense. But it worries me that Dell (another company I own) and NetApp are already dropping XRTX as they simply build their own storage solutions directly buying to HDD manufacturers. Dell even dropped EMC which is a gigantic company compared to XRTX. Dell now makes their own storage boxes along with networking, all are directly build in their blade servers. Even Cisco, which I also own, has a very good integrated solution that includes storage, server and networking. Even the troubled Hewlett Packard is providing a unified solution and eating into the supply chain provided by Xyratex, EMC+VMWare and NetApp.

XRTX is not an HDD manufacturer as might be believed but an assembler and provider of storage solutions. Quite a few companies are positioned to do that and bypass XRTX altogether. I do not see strong barriers of entry to their business.

The long term position of Xyratex is not clear and could even be destroy value. Then again it also could be bought out. That’s maybe why the price went up when there was so much M&A activity going on with storage solution providers a few semesters ago. Xyratex is undeniably a good cash generator until now but from what I know it feels too much of a gamble. Just imagine what would happen if NetApp, their biggest customer, is successful at making the solutions provided by XRTX ? It would simply drop them as a supplier and buy directly from the HDD makers. Actually NetApp has been dropping them already since the last 2 years. That is mentioned by Xyratex in their SEC fillings and conference calls and reflected on their financial results.

My point is that I do not like the place where they stand at in the supply chain. They are under bigger storage suppliers such as EMC and NetApp, Dell, HPQ and Cisco but above HDD manufacturers such as Seagate and Western Digital. The risk I see is that they get squeezed out.

They could save themselves by being bought out but even the CEO in a conference call said no one is interested in them so that is not a bet I would like to take. They could make top products and grow their business, but that also does not seem clear to me. Their R&D spending is high and has produced no earnings. On the contrary it is burning most of them. In other words, I cannot see clear their competitive advantages or how sustainable they are. That said I might have made a nice 11% in a day if I had bought it last Friday, but given what I now know it would have felt too much of a gamble and as such I would have probably sold it out by now.

It is interesting to see what Xyratex’s largest shareholder declared today by reading the following letter delivered to the board of directors and available as a SEC filling.

In that letter Baker Street Capital Management LLC has declared on Monday that Xyratex Ltd. (NASDAQ:XRTX) should reflect strategic alternates, noting that the firm’s present market price is intensely lesser than its intrinsic value.

It states that the company is deeply undervalued due to excessive R&D spending and flawed strategic direction, calls for a fair and thorough review of strategic alternatives to maximize shareholder value, urges board to immediately add three highly-qualified independent candidates that it believes should be immediately added to the Board. Baker Street concluded that it hopes to work constructively with the Board and management to explore ways to unlock value at Xyratex for the benefit of all shareholders.

Baker, which owns about 23 percent of Xyratex’s shares declared the firm’s valuation inconsistency is mainly due to the flawed strategy of investing substantial profits from the firm’s mature core businesses in loss-making and unverified HPC (High-Performance Computing) and Cloud initiatives.

Baker stated that Xyratex is infected by excessive and unnecessary research and growth spending on speculative non-core initiatives that have unsuccessful to generate optimistic returns and have cruelly hurt the firm’s profitability.

Here are some interesting extracts from the letter:

Instead of focusing on creating value for the benefit of all stockholders, this Board has chosen the short-sighted approach of stalling, defending its flawed strategy, and offering excuses for why it is not able to have substantive discussions with us, including making troubling statements that “it’s not a priority for [them].” This reinforces our view that Xyratex’ Board is in critical and urgent need of new directors with a fresh perspective who will be dedicated to unlocking the significant upside embedded in Xyratex shares. We believe the Board should immediately appoint three new directors we have identified, who are committed to working with the Board to rigorously re-examine the current capital allocation and R&D strategy, aggressively focus on maximizing profitability, and engage a reputable investment bank to explore strategic alternatives.
…..
When Baker Street began to aggressively acquire Xyratex shares in early October, the stock price implied a market value that represented just 55% of Tangible Book Value and a discount of over 37% to the Company’s Net Current Asset Value (used by many investors as a proxy for a company’s liquidation value). Adjusted for cash and net receivables, the market ascribed almost no value to the Company’s operating business, its inventory, or its intellectual property.

DESPITE LARGE LOSSES FROM NON-CORE GROWTH INITIATIVES XYRATEX HAS VALUABLE CORE ASSETS PRODUCING SIGNIFICANT PROFITS AND FREE CASH FLOWS
….
Xyratex is expected to have $90 million of net cash at the end of the current quarter. This implies that at the January 12, 2013 closing price of $8.37 per share, Xyratex is currently trading at an adjusted enterprise value of only $137 million. As shown in the table below, we believe that this represents only 2.2x the EBITDA produced by its market leading core business segments. Xyratex also trades at discounts to its Tangible Book Value per share of $10.29 and even its Net Current Asset Value of $8.81 per share, a valuation that implies the Company is worth less as a going concern than its net current assets, despite the significant value of its businesses and the $470 million spent on R&D in the past five years.
….
We were disappointed that the Board very recently failed to capitalize on a highly accretive opportunity to repurchase a significant amount of Xyratex stock at a deep discount to Tangible Book Value, and an even deeper discount to intrinsic value. A Board member explicitly told us that the Board decided to forgo this attractive transaction to avoid increasing Baker Street’s percentage ownership in the Company. This decision was made even after we had clearly communicated our willingness to limit our voting rights if it would allow the Company to proceed with this value-enhancing transaction. Instead, the Board declared a special dividend returning only 37% of the current quarter’s projected net cash to keep shareholders at bay and put in place a “poison pill” shareholder rights plan to entrench itself and buy more time for its flawed R&D strategy.
….
As the largest shareholder of Xyratex, our interests and incentives are directly aligned with those of all shareholders. We are deeply cognizant of our right and responsibility to step in where we feel shareholder value is at risk. Accordingly, we once again request that the Board immediately appoint our three highly-qualified candidates who will provide immediate and fresh perspective and represent the interests of all shareholders in the boardroom. Our relentless focus remains on ensuring that necessary steps are taken to build and maximize shareholder value. The first and indispensable step is vesting the power to govern the Company in a Board that has the confidence and support of the true owners of Xyratex.

Rather than stalling and continuing to make excuses, we urge the Board to immediately engage with us and look forward to a constructive dialogue to reconstitute the Board.

As implied by that letter some activism might be needed to unlock it’s value and push up the stock price. That possibility alone might explain today’s stock price increase.

The positive thing is that studying Xyratex and its eco-system reaffirmed my faith on hard drive manufacturers, specifically Western Digital (WDC), and on diversified IT suppliers such as Dell (up 15% now due to buy out talks). I like better their position in the supply chain. I just realized that Robert Rodriguez one of the few investors I sometimes look at now has WDC as it’s number one holding. And Lou Simpson, another investor I like, might be happier today with his Dell stocks.

Cheers!
jrv

Hi G.,

My workday is dedicated mostly to read. Mainly information about the companies I own: SEC fillings; conference calls; investors presentations; company reports; news; blogs… I sometimes email with a group of other investors and friends with whom we once in a while share ideas and information. I also monitor what other relatively famous investors I admire are doing. But there are just a handful I take seriously and I never make investing decisions without investigating by myself.

I mostly focus on the companies I own and where I have more doubts and continually reassess if I should keep on holding them. The good companies I have take care of themselves alone so I mostly focus on the ones that have the higher probability of having permanent capital losses.

I pass quite some time on companies that have had decreases in their share price. If I see that the company is doing Okay and the price fall is not justified I generally add, specially if I consider it to be quite undervalued. That’s the way I have added or bought several of the companies I have. A good company with good return on equity, financially solid and with honest management will probably do well in the future no matter how cheap you bought it. Since I focus on quality companies I do not spend much time thinking about what to sell, if a good company does not get grossly overvalued I just keep it. That saves me time. I don’t have to think so much about what to sell as about what to buy. I therefore focus on trying to find good value and trying to eliminate the positions that are at risk.

I pass long periods of time reading books. Mostly related to economy or investing. That entertains me a lot and makes me improve by leveraging on the experience of others.

I do not dedicate all my time only to investing activities. I sometimes pass days away from investing. In some periods like now after new year, when my kids are in vacation and the river and the weather is great I go swimming with them. Or I just lay on the garden in a hammock and look at the sky and the trees and sleep. Or I cook, or I make jewelry, a new hobby I have, or I play chess (seldom lately because I have the tendency to get addicted by it), write on the blog, etc… I never leave investing completely alone, at minimum I dedicate 3 hours a day to it, it just comes natural, I can not help it nor want to.

Then again most other weeks I pass the whole day just reading about investing with small breaks to the kitchen to eat. Specially during market extremes or when I get obsessed with a company I like. Fortunately my wife supports me with all the practical daily activities. If I did not have her it would be much more difficult to dedicate as much time to it.

Finally I also read about companies I do not have, in part because I enjoy it and also in order to be prepared to buy them if one day they get cheap enough. If you get a couple of good companies a year at good entry points you should do Okay. Companies in average have a lot of volatility in a given year. The difference between the year high and year low is around 50% or more. Therefore if you regularly study and are patient; reasonable; well informed and keep some cash available then you should be able to spot nice companies at good prices, at least sometimes a year, unless the market is too overvalued.

Cheers!
jrv

That’s because the debt is huge and must be paid by companies and common citizens because government members produce no economic goods and are the biggest consumer. It’s easy to make common citizens pay, the government either taxes them or prints money. Many have no idea that by printing money their savings are getting diluted and they are therefore getting poorer. It is worthwhile to read what Warren Buffett thinks of inflation:

The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent. — Warren Buffett

Common citizens mostly think taxes are the problem. In either case by printing or taxing or a combination of both they are transferring money to the government. Monetary and price inflation is the probable outcome and people get poorer because they hold less money in relation to the total amount. That said, the long term situation is not healthy, and the government should cut their expenses drastically in order to reduce their ever growing costs that just accumulates debt and takes a toll on the whole economy.

For the case of companies, they are also penalized by the printing of money (monetary inflation, not to be confused with price inflation). But the government can not suffocate companies via taxes because otherwise they will receive less by choking their total profits and risks having companies gone out of the country and establishing themselves in friendlier tax regimes or keeping their cash outside. Ensco, Rowan and Nalco Holdings, three companies I’ve bought moved to the UK, due to that I pay no taxes on the dividends received anymore. Also many of the companies I have maintain a huge cash hoard outside and if taxes get heavier they will try to make even more business outside or move altogether. Unfortunately US citizens cannot hide anywhere in the world because as long as they are US citizens they have to pay taxes to the USA and to the country they live too (double tax). That’s why some persons make the extreme choice to adopt another nationality. That has not happened yet much but what has drastically fallen is the immigration to the USA. Fewer immigrants is also a reason why the housing market took such a long time to recover. Unlike previous housing crises immigrants have not strongly supported the housing market this time. Back to companies: the government does everything possible to create an environment where companies are able to pay them well. The best environment is when they are internationally competitive and have big benefits. At least, like that, companies keep up with inflation and have decent profits from which the government and stock holders get benefited.

In simple words, money is transferred to the government or the benefited companies from common workers. So a good place to keep money is invested, better not too much cash due to the inflationary risk associated with the government debt; low interest rates; and treasury bonds bubble. That combined with the quality and strong balance sheet of US companies makes me think they have still a lot of potential to keep growing.

Risk is that US companies lose competitiveness. In many cases international companies are catching up, but in several sectors US companies are still top class, so a good investment choice should help.

Cheers!
jrv

It comes down to this: time is a limited asset.

I think that in practical terms it’s extremely difficult to work in a fixed job and invest well simultaneously. To have good results investing on long periods of time you need to be fully focused on it. When I worked my results were very mediocre or worse than that because I had no time to learn and practice investing. Investing takes too much time to do it well. It’s a huge advantage to dedicate, whenever you like, 60 hours a week to it.

A benefit of working is when you have small amounts of money saved. Then working gives a lot of income in proportion to your savings. For example if you have 50K saved and have a 50K per year job then you make a lot with your work in relation to your savings.

But if you live with low costs or have one million saved then making 10% average a year on the stock market beats most works. So it all depends on how much money you have and how much you need to maintain yourself.

My problem with working is mainly that:

1) I mostly disliked working for clients or bosses. Even as an independent or with my own company.
2) Working took time away to find out what I really liked.
3) Once I had an idea of what I liked working took most of the time I had to concentrate on learning and getting better at it.

As I see it very few people with jobs do well investing on stocks. They basically lose their hard earned money on the market. Others save their whole life and when they start investing they are old and unprepared risking their life savings due to that.

I was not one of the few lucky ones that knew soon what he liked. If you are fortunate to know it, whatever it is, then it’s a sin not to be doing it already. And working for money on something you do not like takes a toll on you, if you value yourself and your time you should really ask yourself if it’s worth it. Think about what Warren Buffett said:

If you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don’t have to do anything I don’t want to do.

The ideal with investing or any job you really like is to start as soon as possible, seriously, full time and most importantly: really loving it. It’s hard to compete with someone who does what he loves. Keeping pace with someone passionate about his job is tough. Loving your professions will make you advance fast and do it the best you can. Chances are high that you become an expert at it. The sooner you start what you like the better for your well being, health, and happiness.

Cheers!
jrv