Buffett’s most important original book “Tap Dancing to Work”

Tap Dancing to Work

Introduction

“Tap Dancing to Work” is a book that has been published for a long time, and many Buffett fans know the existence of this book. But I’m surprised that unless you’re a Buffett fan, not many people know about this book, and the book doesn’t seem to have a high rating on Amazon–I personally think it’s well written.

All in all, I personally rate this book very highly. I myself always re-read this book every once in a while, because there are many contents in the book that can fully explain and make people understand why Buffett’s many investment views come and go.

Reasons for recommendation

  • The author of this book originally wanted to publish a biography of Buffett, but due to some reasons, the biography of Buffett was not published. Instead, he compiled the materials for the original biography of Buffett into a book, which is the protagonist of this article.
  • The author of this book is Kailo. Carol J. Loomis, chief writer of “Fortune Magazine”, has known Buffett for more than sixty years. No wonder she is qualified to write such a book describing Buffett’s career and thoughts.
  • Loomis was a reporter and senior contributing editor for Fortune magazine, and he was also the creator of the financial term “hedge fund.”

Different from other Buffett books

The arrangement of this book is very special. The author will explain before each topic, and then the article will quote Buffett’s original words or his original contributions to express his views on many important investment topics──This is my personal opinion. I think the greatest value of this book lies.

Financial crisis

Salomon brothers

The author of this book has a profound description of the crisis caused by Salomon’s illegal treasury bond trading. Berkshire Hathaway is Salomon’s major shareholder. Therefore, Buffett personally took action during this crisis and served as Salomon’s chairman for ten months. .

Long term capital management corp.

Probably very few people will know that Buffett was involved in the famous incident that almost caused the US financial crisis in 1998. The rescue of Long-Term Capital Management (LTCM). Regarding this case, Buffett has several views:

  • “What that tells you is that underneath the mathematical elegance—underneath all those betas and sigmas—there was quicksand.”
  • “10 or 15 guys with an average IQ of maybe 170 getting themselves into a position where they can lose all their money.”
  • “You never know who’s swimming naked until the tide goes out.”
  • The vignette Buffett liked best: Congressman James Leach’s memory that his father had told him to avoid anyone doing business out of the Cayman Islands.

Persons in this books

Paul Tudor Jones

Paul Tudor Jones is regarded by the financial community as the ancestor of modern hedge funds (or hedge funds). While studying for a doctoral degree in sociology at Columbia University, he also served as the director of the Institute for Applied Social Analysis at Columbia University. Many research topics during this period became the basis for his doctoral thesis.

In 1949, he published an article on stock market technical analysis in “Fortune Magazine” and established a partnership with others, which he has made a living from. His hedge fund beat Buffett at the same time as him, and Fidelity Investments’ famous investment returns attracted the attention of Wall Street.

In the articles related to Jones in this book, the commission sharing method of Jones Hedge Fund Company, the rate of return, and most importantly, the basic short selling operation techniques of Jones Hedge Fund are discussed.

John Merriweather

John Meriwether is known as the father of Wall Street bond arbitrage and an important figure on contemporary Wall Street. There are many financial events or famous financial books related to him, including the book of the same name “Liar’s Poker” written by Michael Lewis in 1989, and the following two financial crises, which are worth reading by interested readers. learn.

In 1991, Salomon Brothers was involved in the Treasury securities trading scandal perpetrated by Paul Moser. The man who caused the disaster, Paul Moser, was a subordinate of Merryweather, and Merryweather was fined $50,000 in civil penalties.

Later, this person started a new venture and founded Long-Term Capital Management (LTCM) with several Nobel Prize winners. In 1998, Long-Term Capital Management almost caused another financial crisis. Buffett participated in the rescue operations for both crises he caused. The two are really destined.

David Sokol

David Sokol is the most powerful and most trusted executive by Buffett in Berkshire. If he had not been involved in the insider trading case before the Lubrizol merger, the outside world speculated that he might be a candidate to compete for Buffett’s successor. Buffett’s investment in BYD has a lot to do with him.

In 2008, he wrote and self-published the book “Pleased But Not Satisfied“, describing his business philosophy, and distributed the book to his subordinates and colleagues in Berkshire.

Andrew Tobias

Andrew Tobias, author of the famous investment book “The Only Investment Guide You’ll Ever Need“, wrote a book for Fortune Magazine in his early years. An introduction to Buffett’s annual shareholder letter is included in this book. Andrew Tobias joked that he regretted it at the time. With the royalties and a little money, he could buy two shares of Berkshire Hathaway stock, otherwise he would have stopped working.

Speech

Lecture at the University of Washington

The original content of the speech delivered by Buffett and Bill Gates at the University of Washington in 1998 is published in this book. The two men spoke in the form of a dialogue. The discussion was all-encompassing and is worth reading.

Speech at Columbia University

In 1984, Buffett, as the descendant of Graham value investors, started a debate with scholars who supported efficient markets at Columbia University. This book does not include the complete debate, but it collects many related articles. It is recommended that interested investors read the complete debate (easily found on the Internet) and combine it with these articles in this book.

Investment

Investment primers

  • Buffett: Let’s start by defining “investing.” The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future—more money in real terms, after taking inflation into account.
  • “Even if currency holders continue to collect interest and recover principal, the loss cannot be permanent.”
  • “Gold, however, has two significant shortcomings, being neither of much use nor procreative.”

Risk

  • “In stating this opinion, we define risk, using dictionary terms, as the possibility of loss or injury.”
  • Academics, however, like to define investment “risk” differently, averring that it is the relative volatility of a stock or a portfolio of stocks —that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the “beta” of a stock—its relative volatility in the past—and then build arcane capital investment and capital allocation theories around this calculation.
  • In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.

How to invest?

  • Buffett adds, rather proudly, that his Omaha headquarters has no computers and that his analyses are based on no electronic data. Says he: “We read—that’s about it.”
  • Before pushing ahead, Buffett says, he carefully surveyed the hazards. “We don’t make judgments based on ratings,” he adds. “If we wanted Moody’s and Standard & Poor’s to run our money, we’d give it to them.”
  • “This is the cornerstone of our investment philosophy. Never expect to sell at a high point. When you buy at such a low price, you can still make a lot of money by selling at an ordinary price when you sell.”

Shareholder

  • “The only reason for a com-pany to repurchase its stock,” Buf ett has ot en said, “is because it is selling for less than it’s worth.”
  • The corollary, he says, is a markup in prices for companies that do repurchase shares, because investors identify the buybacks as a sign that management will be consistently inclined to act in the interests of shareholders. “All managements say they’re acting in the shareholders’ interests,” he observes. “What you’d like to do as an investor is hook them up to a machine and run a polygraph to see whether it’s true.

Investment principles

  • Buffett said: “That method of valuation is exactly what should be
  • used whether you’re in 1974 or you’re in 1998. If I can’t do that, then I
  • don’t buy. So I’ll wait.”
  • Would you look for a higher price-to-earnings ratio at this point than you did in 1969? Buffett: “The price-to-earnings ratio would be affected by interest rates. The difference between now and 1969 or any other time, in terms of calculating a valuation, wouldn’t be affected by anything else.”

Recency bias

  • Buffett said: “Man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience—a l aw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation.”
  • “The typical behavior of investors is to project what they see in front of them into the future. They have a habit that is difficult to change: they like to look in the rearview mirror instead of looking at the windshield in front of them.”

Industry

  • Just because an industry has prospects does not mean that investment will be profitable.
  • Cars and airplanes are representatives of technology industries that are subversive and impact human beings. However, when investing in these two industries, experience tells us that investors cannot make money.

Moat

  • Buffett said: “The key to investing is not to assess the impact of an industry on society, nor to estimate its future growth; it is to infer the competitive advantages of a specific company.”
  • Buffett specifically pointed out: “The key to investing is to determine the competitive advantage of a specific company, and more importantly, how long can that advantage be maintained?”

Think

  • Buffett: “Unless you can think for yourself, you will never invest well.”
  • “But 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.”

Read

Buffett: “I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report.”

Markets and Economy

Economy

  • “If you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market.”
  • “An investor can’t pick stocks that are better than average.”

Market

  • “I always say you should get greedy when others are fearful and fearful when others are greedy. But that’s too much to expect. Of course, you shouldn’t get greedy when others get greedy and fearful when others get fearful. At a mini-mum, try to stay away from that.”
  • “The only way for investors to get ripped off is to bear high friction costs or to try to beat the market.”

Long term holding

Stocks are a good thing to own over time. There’s only two things
you can do wrong: You can buy the wrong ones, and you can buy or sell
them at the wrong time. And the truth is you never need to sell them,
basically.

Markets and indices

Buffett pointed out:

  • The Dow Jones Industrial Average was 874.12 points on December 31, 1964, 875.00 points on December 31, 1981, and 9181.43 points on December 31, 1998.
  • The U.S. government bond interest rate ranged from 4.2% on December 31, 1964 to 13.65% on December 31, 1981, and to 5.09% on December 31, 1998.
  • The U.S. GNP growth rate: the first 17-year period from 1964 to 1981 was 373%, and the second 17-year period from 1981 to 1998 was 177%.
  • GNP growth rate does not affect the stock market, interest rates do.
  • “Under the triple pull of interest rate gravity, we find the main explanation for the high economic growth but the stagnant stock market.”
  • Corporate profits account for an increasing proportion of U.S. GDP, and investment in talent may yield substantial returns. The first 17-year period, from 1964 to 1981, saw poor corporate profits and lower investor expectations. During the second 17-year period from 1981 to 1998, the Federal Reserve took a heavy hand at the economy, allowing corporate profits to rise to their highest level since the 1930s.
  • In 1999, Buffett believed that in the 17 years from 1999 to 2016, a reasonable estimate of investors’ total return was 7%, including the inflation rate; but commissions, handling fees, management fees and other friction costs need to be deducted. After deduction, it should be It is around 6% per year. In 2012, when this book was completed, from 1999 to 2012, the annualized return of the Dow Jones Industrial Index was only 3.32%, and the S&P 500 Index was only 1.26%!

Buffett Indicator

The market value of all publicly listed company stocks as a proportion of the national GDP output value: if it falls to 70% or 80%, buying stocks will make a good profit. If it’s close to 200%, such as in 1999 and 2000, buying stocks would be a recipe for disaster.

Interest rate

  • As mentioned before: Buffett believes that “The price-to-earnings ratio would be affected by interest rates. The difference between now and 1969 or any other time, in terms of calculating a valuation, wouldn’t be affected by anything else.”
  • Buffett believes that the two major variables that affect investment performance are “interest rates and corporate after-tax profits.” Among them, “Interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull.”

Who steals your profits?

  • In addition to interest rates and corporate after-tax profits, investors’ psychology towards the market and friction costs are the other two major factors that affect stock prices. In 1998, Wall Street took away one-third of the total profits of the top 500 companies!
  • “In addition to the overall profits of the company, investors cannot obtain additional wealth from the company stocks in which they invest.”
  • Buffett believes that friction costs may have accounted for 20% of U.S. corporate earnings in 2005
  • Buffett believes that “investor returns will decrease with the number of movements (transactions).”

Index fund

  • Buffett recommends that “most retail investors buy low-cost index funds.”
  • “Buying an index fund over a long period of time makes the most sense.”
  • “If they’re not going to be an active investor—and very few should try to do that—then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.”

Inflation

Buffett personally wrote an article in Fortune Magazine in 1977 that will go down in history as “Buffett: How inflation swindles the equity investor.” In the article, he explains it in depth! This article expresses his views on the subject of inflation and is a must-read article for all investors and financial professionals who want to have a deeper understanding of this field.

But he said that due to inflation, the company’s return on equity (ROE) will be locked at 12%. But now it seems that his view is wrong, because companies can still use the following financial operations to increase the return on shareholders’ equity:

  • Increase financial leverage
  • Reduction in corporate tax rates
  • Improve pre-tax profit margins through management

Management and daily life

Make mistakes

  • “The biggest mistake is not doing something wrong, but not doing it and missing a good opportunity.”
  • “I missed some investment opportunities that I knew were promising, and I missed out on at least $10 billion in profit.”

Management

“It is very, very difficult to regulate people.”

Buffett only requires three things for the management of his companies:

  • Capital allocation
  • Regularly obtain information that he cares about to measure the performance of the company
  • Price products when necessary

Buffett also stated in the book that basically he believes that Berkshire’s leaders only need to do two things: allocate capital and motivate the leaders of their companies and departments.

Lucky

  • Buffett believes, In my case, unless I lived in a rich country with a large population, large enough domestic securities trading volume, and occasionally the price was ridiculously wrong, my capital allocation ability would be of no use.
  • “In a society that values ​​elite education, the children of these wealthy families are already far ahead of others when they start.”

Philanthropism

  • “No matter what kind of job you want to accomplish, isn’t the most logical thing to do is to find someone more qualified than yourself to do the job?”
  • “Charity is slow to reciprocate, and that bothers me. I have to deal with a lot of people I don’t want to be around.”
  • The book mentions that it is not easy for rich people to do charity in China. The main reason is that Chinese people tend to donate their property to the next generation, and China’s charitable foundations have long been ineffective, and the shadow of corruption lingers. The management fees of charitable foundations in the United States are about 3% of the fund’s total income, but in China they are about 10%.

Investment experience

Buffett Partnership

This book mentions the partnership founded by Buffett in his early days, including its operating performance, investment methods, and most importantly, its differences from other hedge fund operations, investments, and commission-sharing methods.

A post I wrote three years ago, “The Chronicle of Buffett Partners “Warren Buffett’s Ground Rules”,” is the best book for readers to gain an in-depth understanding of Buffett Partners.

Important cases

Disney

Berkshire once became a major shareholder of Disney because it owned Capital Communications Company and sold it to Disney. However, it sold out after three years because it was not optimistic about Disney’s management team during the period of ownership. Although he made a lot of money from the exit at the time, Disney’s stock price was very low at the time, and he also recognized Disney’s moat and the ability of the business to generate cash, but he did not stick to it. This case has also become one of several famous cases that Buffett later often brought up for review and ridiculed by himself from time to time.

Freddie Mac

Freddie Mac’s compliance adjustments and revisions to the company’s financial report numbers alerted Buffett and he sold all of his holdings. Later it turned out that Buffett’s worries were not unfounded, and it just confirmed Buffett’s own famous saying: “There’s never just one cockroach in the kitchen.”

American Express

It describes that Buffett took advantage of the crisis of American Express and the lack of interest in the stock price to enter the market to gain bargains during the two eras with a huge gap. The important thing is why he dares to be different and stake a lot of his money. This is the key point.

American Airlines

Many people know that Buffett’s several investments in American airline stocks in the United States ended with heavy losses, but this is not true. He revealed in 2007 that he actually made a lot of money from his previous investment in American Airlines. The story is described in the book.

Coca Cola

Buffett holds a large stake in Coca-Cola and has been a director of Coca-Cola for a long time. Moreover, he once used the authority of directors and major shareholders to replace the CEO of Coca-Cola who performed extremely poorly.

PetroChina

The timing of Buffett’s buying and selling of PetroChina was perfect. They were almost the best time to make profits. But all the money he earned from PetroChina was lost in ConocoPhillips, which he bought a few years later.

BYD

This book fully introduces why Buffett invested in BYD. Buffett was actually very reluctant at first, and even sent his most trusted assistant to China to verify whether BYD was a good company worthy of investment as recommended by Munger. Now it seems that Munger’s insistence was right.

Buffett’s investment in BYD broke two of his long-standing principles: he invested in an area he was unfamiliar with. Originally, he wanted to buy 25% of the shares, but Wang Chuanfu was only willing to sell him 10%.

Tap Dancing to Work
Credit: amazon.com

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Author: Andy Lin

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