Rooted in Thought Newsletter

At Banyan Capital Management we constantly strive to learn more about the companies and mutual funds we own, economics, history, business management, and investing in general. About every four to six weeks we send to our clients and friends, via our newsletter Rooted in Thought, several hand-picked links to online articles or videos that we feel are interesting, educational or provocative.

Volume 5 – Number 2

A Good Reminder From Mr. Buffett

Please enjoy this excerpt from the recent Berkshire annual report.  While he has explained these investment ideas many times before, repetition can be an excellent method in driving home important concepts.  Why just last weekend my wife asked me to take out the trash for the third time when suddenly it dawned on me that she must mean to do it today.

Berkshire’s Letter to Shareholders

On the other hand, reading the entire Berkshire letter to shareholders is most worthwhile.

Coca-Cola Proposal Is Not Shareholder Friendly

In this video, our friend David Winters explains what every Coke shareholder should understand about the compensation plan management is asking shareholders to approve.  Imagine for every 100 fully paid-for shares of KO you hold, upon approving this plan, 14 shares are taken from you and awarded to management.  I doubt many shareholders would approve.  Yet, this is precisely the effect of the plan only by means of newly issued shares.

Stanford Research: The Meaningful Life Is A Road Worth Traveling

According to this summary of a recent study headed by Stanford Business School professor Jennifer Aaker, lives that are considered meaningful are often distinctly different from those that are considered happy.  Is your life meaningful or happy or both?  Let us go no further in the only life we have without at least pondering the question.

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Volume 4 – Number 2

Goodbye, Mail Carrier; Hello, Cluster Mailboxes

With the U.S. Postal Service losing billions of dollars, mail carrier service may become a thing of the past.  Read more

 Business Book Review: The Outsiders

This recently published volume is easily among the top ten investment books I know of.  Read more

How the Economic Machine Works

This thirty minute illustrated video is created and narrated by Ray Dalio, the founder and guiding principal of Bridgewater Associates.  Bridgewater is manager of the largest hedge fund organization in the world with approximately $130 billion in assets.  Understand this presentation and you will know more about how the economy works than most anyone you will ever meet including many who call themselves economists.  Read more

IF by Rudyard Kipling

Take a moment to reflect on the words in this classic by one of the best-known of the late Victorian poets.  Herein power, truth and wisdom can be found.  Read more

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Volume 4 – Number 1

How to Improve Your Child’s Financial Literacy

We’d like to inform you of a great educational opportunity for any young person. Warren Buffett, the Chairman and CEO of Berkshire Hathaway and one of the world’s wealthiest individuals, has leant his voice-acting talents and his sage wisdom to an online animated series called the Secret Millionaires Club. Buffett stars as a mentor to a group of entrepreneurial kids whose adventures lead them to encounter financial and business problems to solve. Each episode teaches a different lesson such as the importance of location to the success of a business, the value of saving money, and the value of one’s personal reputation.

Because financial literacy is usually not part of the school curriculum for young children, we think these online videos are a great tool for parents to help fill this gap in a child’s education. We strongly feel that even a marginal improvement in financial literacy of young children (we think age 7–14 is the target audience for this series) will reduce the odds of financial hardship and increase the odds of financial security later in their adult lives.

All 26 episodes are available for free on the Secret Millionaires Club website. Furthermore, parents can download activities associated with each of the episodes that will help their children better understand and process the lessons of the episode. We don’t think educating a child on this subject could have been made any easier for parents or grandparents!

All episodes are just three and a half minutes long and we think an investment of time in this activity is one that bears no risk and has enormous upside. We encourage you to view some or all of these episodes with any young children who are a part of your life. If you don’t have children or grandchildren, but know someone who does, please forward this message to them.

On Being Wrong

We’ve sent this video to you before, but we think it is so important that we are doing it again. “Wrongologist” Kathryn Schulz says most of us will do anything to avoid being wrong. But what if we’re wrong about that? In this video, Schulz makes a compelling case for not just admitting but embracing our fallibility. Read more

What 5 Counterintuitive Things Can Help You Make Better Choices?

Having lots of choices isn’t necessarily a good thing. Just think of the cumulative hours wasted in our lifetime trying to figure out which tube of toothpaste is the best deal. However, there several things we can do when faced with a deluge of options that can improve the odds of making a better choice as well as a choice that makes us happier. Read more

Updates on America’s Booming Energy Sector

America’s energy industry continues to be one of the strongest engines of growth for the U.S. economy, thanks to the advanced drilling technologies that have given energy companies access to oil and gas saturated shale rock formations from Texas to North Dakota to Pennsylvania. The news coming from the U.S. oil and gas industry continues to be incredibly positive and provides one of the best reasons to be optimistic about the future of America’s economy. Read more

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Volume 3 – Number 6

Oil is Not in Short Supply

“Oil is not in short supply” is the conclusion of a recent report authored by Leonardo Maugeri of the Harvard Kennedy School. What’s even more surprising is that Maugeri thinks “oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption”, which could lead to a steep drop in oil prices in the near future. Despite the contrarian view, Maugeri’s conclusions are based on what seems to be carefully reasoned analysis: Maugeri took a bottom-up approach and analyzed a majority of the individual oil exploration and development projects around the world, something which has not been done before.

In addition to the excellent overviews of the history of estimating oil supplies and the production revolution in U.S. shale and tight oil formations, there were numerous, fascinating data points. However, the report is long at over 70 pages. Thus, we present to you our summary of what we felt was most interesting.

First and most important is the U.S. has the ability to become the second largest producer of oil in the world (after Saudi Arabia) by 2020. This is primarily a result of price and technology aligning to allow companies to extract oil from tight oil formations in North Dakota, Montana and twenty other large shale formations across the country. With oil prices above $50 to $65 per barrel and technological innovations such as hydraulic fracturing and horizontal drilling, the U.S. has a huge amount of energy resources. The only factors that can limit this potential are the political and regulatory decisions that happen above the ground.

Secondly, there still exists a huge potential for other major producing countries around the world to improve their oil recovery rates (the recovery rate is simply the percent of oil that can be extracted from the estimated oil in the field) with investments in technology and better practices. For example, the current leading producers—the Russian Federation, Iran, Venezuela, Kuwait, and others—have a 20% recovery rate compared to a 35% worldwide average and rates of 45% for countries like the U.S., Canada, Norway, and the U.K.

Iraq in particular is a stark example of how politics can hold back huge potential. Since the dawn of the 20th century, only 2,300 wells have been drilled in Iraq compared to about one million in Texas. With a chronic state of underdevelopment (Iraq’s recovery rate is roughly 15%), Iraq likely has 200 billion barrels more of reserves than currently documented.

Thirdly, the history of estimating reserves in the U.S. is a fascinating subject. For example, the Kern River Field in California is instructive in how price and technology can extend the life of a property far into the future. First discovered in 1899, analysts thought only 10 percent could be recovered from the Kern River. In 1942, it was estimated the field still held 54 million barrels, a fraction of the 278 million already recovered. Then, over the next 44 years, it produced 736 million barrels, almost 14 times greater than the 1942 estimate. The Kern River is not an isolated example—this has happened with many other geographies and will continue to happen for decades to come.

Finally, the most important conclusion in Maugeri’s summary is that although the age of “cheap oil” is probably behind us, technology will allow humanity to continue to extract vast amounts of conventional and unconventional oil. Another conclusion is the possibility there will be major overproduction in the world after 2015 which could lead to a significant decline in oil prices should demand not grow at a rate of at least 1.6% yearly.

If you are interested in reading the full report, you can download it by clicking here.

The 11 Ways Consumers Are Hopeless at Math

If you’re a consumer, read up on these to better avoid making a mistake at the cash register. If you’re a business person, read up for ideas on how to increase sales! Read more

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Volume 3 – Number 3

Economic Ideas of the World’s Most Successful Hedge Fund Manager

Ray Dalio, founder of Bridgewater Associates, the most successful hedge fund in the world’s history, talks about some economic principles that he considers timeless and universal.

A Look at the Global One Percent

This WSJ op-ed considers the more likely reasons for the widening income gap between the rich and poor in America.

Main Street’s $100 Billion Stock-Market Blunder

By selling stocks at the wrong time and failing to jump back in, investors have lost out on almost $100 billion.

Learning to Mistrust Your Financial Instincts

This article reviews some of the cognitive biases that can lead to bad investing decisions.

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Volume 2 – Number 3

Towards a Healthy News Diet

Swiss novelist and entrepreneur Rolph Dobelli summarizes why what we call “news” is unhealthy and offers some recommendations on how to deal with it. Though this article is longer than usual, we urge you to read it. We fully agree with nearly all the points the author makes and we also feel that if we follow Dobelli’s recommendations, the benefits will be substantial for all.

Seeing the World As It Isn’t

Dan Simons explains how our assumptions about and perceptions of the world can be easily fooled. By understanding and recognizing the limitations of the human mind, we at Banyan Capital hope to be more vigilant in avoiding dangerous assumptions. Also, as Simons suggests, we constantly strive to test our knowledge to see the world as it actually is.

Why You Shouldn’t Quit

This author takes a look at the early life of Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, and sees it as an example of why you shouldn’t quit.

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Volume 2 – Number 1

Why This Time is Never Different

We’ve recently finished reading a very illuminating book on financial history titled This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff. Collecting undiscovered data covering sixty-six countries across five continents, the authors present a comprehensive look at the varieties of financial crises from medieval currency debasements to the recent subprime catastrophe. The most striking lessons we learned is that financial crises are much more common throughout the world than we originally thought and that all crises share a surprising amount of characteristics.

We’ve written a short review of This Time is Different that we hope you find interesting.

An Intelligent Investor on CNBC

It is a rare occasion when CNBC devotes a significant amount of time to an intelligent value investor. Most of the time, the business news network’s commentators have nothing of substance to say and instead spend most of the time sensationalizing news events and trying to predict the unpredictable. We don’t fault CNBC for this—after all, instilling fear and anxiety in viewers is the best way to keep them tuned in through advertising breaks—but we do feel that watching CNBC can be hazardous to your financial and psychological health. Especially during periods of crisis.

Thus when David Einhorn, a value investor and hedge fund manager whom we hold in very high regard, was a guest host on CNBC’s Squawk Box on December 6, 2010, we were extremely pleased. We’ve compiled a list of links to the four videos with Einhorn for your viewing pleasure. In the future we will notify you when there is anything worth watching on CNBC.

 

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  • He who stops being better stops being good. — Oliver Cromwell