An Autonomous Agent

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Category: warren buffett (Page 1 of 2)

Brief Overview of My Experiences with Stocks

My first foray into the stock market was after reading the books of the popular writer, Jim Cramer. And it resulted in buying several penny stocks which were developing “revolutionary” new products. They did rather poorly and I decided to try buying stocks of more well-known companies, like Goldman Sachs and some others which I do not remember.¬†This was in 2007-8 and the tiny gains from my small investments were financially negligible; however, it was an experience.
My knowledge of markets began to change as 2008 progressed into 2009 and I gained experience trading stocks. I lost interest in Cramer and found the work of Benjamin Graham to be far more fascinating. While in high-school I was fascinated by Benjamin Graham’s record of success and his value investing approach to choosing investments. My interest continued as an undergrad in college; I remember reading all of Graham’s articles while sitting through accounting class. Reading Security Analysis more than twice, I attempted to put my newly learned skills to the test. The potential to find muddied gems hidden from view by the dirty coating applied by “Mr. Market” spurred my desire to master the art.
There were a few stocks which I had bought at various times during the period of 2008-9; they fell and rose with the rest of the market during the roller coaster ride from which many people still feel dizzy. One was Reddy Ice, which ended up bankrupt. However, I did not have much money to invest until after the downturn. In this favorable condition I began to search through hundreds, if not thousands of stocks. The final list of suitable candidates fitting Graham’s criteria included a steel producer called Keystone Consolidated Industries. Owned mostly by Harold Simmons’ Contran, the stock had a market value of $36 million. Having a pension fund the size of Texas and a decent sized steel operation (around $500 million of sales per year), I felt this was the best choice. It turned out to be a wise investment, as I finally liquidated my position when Contran finally purchased all the shares at around $9.00. Even at this price, the company’s market value was only around $100 million — a real bargain for Contran, since the pension fund had around $700 million in assets at the time and only $350 in NPV of pension obligations; not to mention the profitable steel company. Carl Icahn, the only other large shareholder, said not a word at the paltry price of $9. To this day, I still believe a fair price should have been at least $20 per share. Despite most of the value being reaped by Contran and Simmons on this transaction, I did benefit.
After this success (and the passing of three years), I found that I lacked the same fascination with Graham as I did a few years before. I think my interest waned as I witnessed “Mr. Market” in action and I realized first hand that market sentiment played a huge role in price determination. “How could people not see the value?” I always asked myself. “Was this a flaw in Graham’s strategy?” And it was precisely this question which led me to realize that people and markets are far from efficient. Graham’s method is only successful for a large diversified portfolio of undervalued stocks. In fact, I really think that value does not exist as an absolute quantifiable truth; value only exists as a social relationship between commodities as Marx writes in Das Kapital. And by doing so, its expression is subject to the whims of human emotion. It is with this perspective which I began reading about the behavior of traders and markets.
Today I am surprised to learn that Harold Simmons passed away in December of 2013. He was a clever man who grew a few thousand dollars into billions.

An Organization which Creates a Market for Clean Air

This post is a sequel to a previous story.

Warren, Ben, David, and Taylor meet again.  This time they are violently coughing.

Ben: Why is the air is so dirty?

Taylor: Yes, I can hardly see more than a mile through the pollution.

David: It’s sad that we have done this to our once beautiful city. Will we ever be able to clean the air?

Ben: Not sure, perhaps Warren has another great idea?

Warren: I have an idea, but I am not sure if it will work. More of hypothesis really…

David: Any idea is a good idea in these depressing times.

Taylor: Please tell us your idea Warren.

Warren: Well, it’s similar to that idea I had along time ago about pieces of the paper.

Ben: Yes! How could we forget, that idea made us very rich!

David: Make pieces of paper to clean air?

Taylor: I don’t see the point yet, but please continue.

Warren: Just think of these figures — the average human lives 67 years; this person will inhale about 11,000 to 14,000 liters of air each day; thus, in a life-time a person will inhale about 6.5 billion liters of air.

David: Wow! that seems like an enormous quantity of air.

Warren: It’s about the volume of 2,600 Olympic-size swimming pools.

Taylor: Remarkable when you put it into perspective.

Ben: What do these figures mean?

Warren: Ah, well they provide an upper estimate on the volume of air a person needs to live for a life-time. Now, we can place a value on clean-air.

Ben: With pieces of paper?

Warren: Yes, exactly.

David: Each piece of paper could be worth a life-time of clean air?

Taylor: Interesting…

Warren: Sounds like a good idea, right?

Ben: I think so, but there are some issues with this idea.

Warren: Please explain.

Ben: Well, what if a person does not own one of these pieces of paper? Do they not get to breathe? It does not seem possible to force people to buy these papers.

Warren: I would never allow that to happen! Rather, these pieces of paper are only theoretical rights to clean air. Much like the idea of paper representing the value of a company. The paper only obtains value through trading in a market.

David: I see! Through the complex interaction of market agents we will be able to establish the value of clean air.

Taylor: Not to mention the money we will intially raise by selling these pieces of paper.

Ben: Just like Warren’s other idea!

David: Ironically, people would expect the value to increase as pollution gets worse.

Warren: And, as the value increases, a larger amount of money can be raised by additional issuance of these papers. With this money we could develop sophisticated clean air technologies.

David: If the technologies work then the value of the papers should decrease.

Warren: True.

Ben: I like the idea. But I feel it would not work. An international organization would have to be responsible for issuing these pieces of paper; the organization’s sole purpose would be to clean and reduce pollution. And, as we know from history, corruption is always a problem.

Taylor: I agree. If the people running the organization don’t spend the money properly, the whole idea will crumble.

Warren: Well, like I said before, I am not sure if the idea will work.

David: I think it’s at least worth a try.

Ben: Agreed!

Taylor: So… how do we get this idea off the ground?

The Creation of Stocks

Warren, Ben, David, and Taylor are four friends who meet on weekends to discuss various ideas and have a good time. They are together one night and begin discussing a business venture.

Warren: I know a great idea!

Ben: Sure, tell us another one of your “great” ideas. I hope this one is better than that silly farming device.

David: Alright, let Warren indulge us.

Warren: Ok… so, what if we printed pieces of paper and told people that they were worth the value of a certain company?

Taylor: Is that your idea? Hahahaha, what could that possibly achieve? I am leaving.

Warren: No, wait! Just think about it. If we printed a fixed number of these papers and said that the sum of the them are worth the value of the company, then we could sell them for that value to people.

Ben: Yes, but what fool would fall for such an obvious scam.

Taylor: What value? How can pieces of paper be worth more than paper? How can we claim that they are worth the value of a certain company?

David: You know, I think Warren has a point. All we have to do is sound reputable and create a way for these pieces of paper to be traded.

Warren: See! David is following me!

David: If this were a scam, we would just sell the papers and run off with the money.

Ben: But isn’t that your plan?

Warren: Hmm… True. But in this case, the people are able to trade with each other to get their money back and possibly a profit.

Ben: In fact the potential for a profit would be the only reason for buying these pieces of paper.

Taylor: Hahahah, so this is a giant Ponzi Scheme?

David: Yes, it does seem so, now that you mention it.

Warren: No, there is a difference. We will simply be selling pieces of paper. The “Ponzi Scheme” that Taylor mentioned would be caused by the infinite self-repeating pattern of people buying the paper from each other and then selling it to other people for a return.

David: That is a very strange concept. Kinda like a strange loop.

Ben: Ok, but wouldn’t each person value the pieces of paper differently, based on their opinion on the value of the company?

Taylor: Yes, person Expensive may be willing to pay ten the piece of paper; while person Cheap may only pay ten for the same piece of paper.

David: Then this is idea is doomed. It will never work.

Ben: Too much chaos!

Warren: No! Someone, perhaps seeing an opportunity to profit will establish a definite lower bound to the value of the piece of paper. Let’s say that lower bound is ten; i.e., there is a person who believes that he can buy a piece of paper for ten and, at a later date, sell it to people for more than ten.

David: Ok. I follow.

Warren: Then, someone else, seeing that there is a potential to make money, will offer 12 for the piece of paper.

Ben: AHH! Yes, a price will dynamically form based on the interactions of all these people.

Taylor: And then?!?!

Warren: Well, then we have a way to sell these pieces of paper for more than the value of paper?

Ben: Yes, precisely.

David: So, by simply saying we have pieces of paper which represent the value of a company we have made a handsome profit?

Warren: Exactly!

Ben: And, in the process we have discovered a way to find the value of a company!

Taylor: Wow! I must say Warren, this is a brilliant idea!

David: What will we do will all this money?

Warren: I think I will buy some of these pieces of paper.

Ben: Me too! And make even more money!

The Essays of Warren Buffett: Lessons for Corporate America – Warren Buffett

To gain a better understanding of the investment philosophy and managerial skill of Warren Buffett I would suggest reading his book: The Essays of Warren Buffett : Lessons for Corporate America.

Common Stocks and Uncommon Profits – Philip A. Fisher

Common Stocks and Uncommon Profits explains the investment philosophy of Philip A. Fisher.  This book, also recommended by Warren Buffett, supplies the investor with a set of “rules” called the Fifteen Points. Fisher advises one to buy and hold a growth stock “forever” while following the Fifteen Points.

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