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Warren Buffett Releases Monster 43-Page Half-Century Letter To Berkshire Faithful

  
  Education
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The day the Buffet “value-investing” fanatics have been looking forward to all year, almost as much as the annual pilgrimage to Omaha, has finally arrived – hours ago Warren Buffett released his historic, 50th annual letter to shareholders, which is extra special because as the Oracle notes in the foreword, “Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50 years and what each expects during the next 50.”

The foreword continues: “Neither changed a word of his commentary after reading what the other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39. Shareholders, particularly new ones, may find it useful to read those letters before reading the report on 2014, which begins below.” The result is the magnum opus of Berskshire letter, one which weighs in at 43 pages and a massive 25,100 words compared to “only” 24 pages and about 14,700 words last year, and 15,300 the year before. Almost as if Buffett is telegraphing that this may be his last letter and savoring the moment…

But first, some of the details of Berkshire’s performance, which was not quite the magnum opus Buffett may have expected, after Berkshire Hathaway posted lower earnings for the fourth quarter amid investment derivative gains of $192 million. (more…)

Rick Ferri’s Triangle of Investor Costs

  
  Education
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Rick Ferri has a new book coming out that I can’t wait to read. In the meantime, here’s something he put together illustrating the three costs that investors must control if they’re going to be successful…

Figure 1: The Investment Cost Triangle with Components

three costs

Some costs in Figure 1 are easy to identify and quantify while others are not. Structural costs are generally available because most fund fees and expenses are required to be disclosed by law. However, tax costs are more difficult in that they have to be extracted from tax return data. Behavioral costs are the most elusive and difficult to quantify because there’s very little data available. It also doesn’t help that human beings are overconfident and don’t want to be reminded of behavioral shortcomings.

Read the rest, this is the important stuff – much more important than the latest macro opinions on Greece or Guernica.

Loss of discipline & Failure of willpower

  
  Education

Consider the following scenarios:
*  We decide to enter a position at a particular price level, it hits that level, and we create an excuse and fail to take advantage of an opportunity;
*  We set a stop loss on a position, but rationalize staying in the position when that level is hit, creating a loss that wipes out many days of gains;
*  We establish a process for researching markets and keeping ourselves in peak condition, but become distracted by life events and fail to follow our process;
*  We take an unplanned trade after losing money and widen our losses.
In each of these cases, we have what traders commonly call a loss of discipline.  In fact, it is a failure of willpower:  an inability to sustain intention.
Our focused attention–our intentionality–is a finite resource.  It becomes fatigued with use.  When we frame trading problems as one of lack of discipline, we treat our challenges as character flaws.  When we frame trading problems as one of lack of willpower, we open the door to strategies that preserve the willpower we possess and expand our level of willpower over time.

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