The easy part is finding great businesses, those with high returns on equity, strong earnings growth, healthy balance sheets, and some sort of economics working in their favor. The hard part is telling if it will last and by how much. This is made easier by finding businesses with durable moats that have already delivered years of solid returns. Next comes estimating earnings growth and determining an intrinsic value. This also is the hard part. Nail down part one and refine parts two and three.
Warren Buffett is not Benjamin Graham although certainly the foundation of his investment methodology is rooted in Graham’s methodology of investing from a business perspective.
Benjamin Graham bought everything and anything as long as it was selling at a deep discount to intrinsic value providing him a margin of safety. This is analogous to walking into a Dollar Store to see what is on sale. Warren Buffett on the other hand decides what he wants to buy first – a consumer monopoly company with a durable competitive advantage with quality, rationale management – before walking into the store to see if it is on sale.
Mr. Market and the Neighborhood Farm
Benjamin Graham conceptualized the stock market as an individual, a business partner named Mr. Market who approaches the investor on a daily basis with a quote at which he can buy or sell a security. Mr. Market is a very moody individual. On some days he is very euphoric and offers a very high price. On other days he is quite depressed and quotes very low. He can be ignored routinely and without fail, he always returns. It is imperative to never heed nor fall under the spell of Mr. Market, to instead make rationale business decisions based on a company’s economic fundamentals and intrinsic value.
Be Fearful When Others are Greedy and Greedy When Others are Fearful
Warren Buffett recently analogized Mr. Market in the 2013 Berkshire Hathaway Annual Report describing a piece of farm land as the asset and the neighbor down the road as Mr. Market. The farm land in question is a great asset: it has produced a substantial yield of corn year after year despite the short-term gyrations of locusts, a drought and an early freeze and it is projected to do so well into the future. A daily quote is not needed in order to understand that the farm is an economically sound, productive asset.
On a daily basis the farmer from down the road approaches and offers to buy the farm or sell his at a quoted price. Some days he is euphoric and quotes high prices and some days he is depressed and quotes low. We can ignore him as much as we want, he always comes back.
Given that the fundamentals of our farm are economically sound – increasing revenues, a strong track record of earnings, high rates of return - and with some certainty we can predict that the farm will continue to perform well into the future, then perhaps the time to sell is never. If on the other hand we look down and determine that our farm is indeed a lemon, perhaps it is time to sell on a day of euphoria in lieu of purchasing a great farm at a good price.
On down days when the neighbor offers up his farm at a low price, a determination can be made – is his farm economically sound, will it present a substantial rate of return over time based on its intrinsic value and price offered - and perhaps a purchase is made. The depressed lows of our neighbor merely serve up the opportunity to effectuate high rates of return through the purchase of a great asset.
At no time did we come under the spell of our neighbor farmer from down the road, neither his exuberant highs nor his depressed lows. We merely rationally analyzed, from a business perspective, the assets at hand.
Do we buy great farms on days of the high bid? Perhaps, since it is better to buy a wonderful business at a good price than a good business at a wonderful price. Case in point: if you had bought Coca-Cola in 1919 at a price of $40 per share the next year would have cut you in half to $19 due to issues with bottlers and a spike in sugar prices. Even so, if you had held the asset until 2010, with reinvested dividends, the stock would be worth over $2.5 million. Time is the enemy of the mediocre business and the friend of the great business. The price paid also determines the rate of return though so it is prudent to buy wonderful businesses at good to great prices and not so much outlandishly high prices.
Do we sell a great asset at high prices in order to hold cash, wait for an anomaly and buy more of the great asset at a low price? This may appear rational at first but it opens up the psychological mine field of market timing and invites the tax man to the party.
The Economic Moat
Charlie Munger’s comments on Coca-Cola in his 1996 talk, Practical Thought on Practical Thought, illustrate the concept of a company with a durable competitive advantage or, a very strong business moat. In this talk he posits the thought process that must be undertaken in 1884 in order to start a globally successful carbonated beverage company:
“We can guess reasonably that by 2034 there will be about eight billion beverage consumers in the world. … Each consumer is composed mostly of water and must ingest about sixty-four ounces of water per day. This is eight, eight-ounce servings. Thus, if our new beverage and other imitative beverages in our market, can flavor and otherwise improve only twenty-five percent of ingested water worldwide, and we can occupy half of the new world market, we can sell 2.92 trillion eight ounce servings in 2034. And if we can then net four cents per serving, we will earn $117 billion. This will be enough, if our business is still growing at a good rate, to make it easily worth $2 trillion.”[i]
Think about it. In addition to its red trade dress and over 120 years of brand-building, Coca-Cola’s “moat” fundamentally rests on the fact that the human race is composed mostly of water and must ingest about sixty-four ounces of water per day. What better way to enhance the water-drinking experience than with a Coca-Cola. Underwear, hamburgers and razor blades tend to exhibit the same characteristics.
Investing is Most Intelligent When it is Most Business-Like
Over time, the market will weigh out the retained earnings of a business that, if reinvested successfully at high rates of return within the business, will lead to greater intrinsic value. Despite short-term gyrations, the market will recognize the weight of intrinsic value.
The key to the long-term aspect of the market as a weighing machine is predictability: it is imperative to have some degree of certainty as to what the economic characteristics of a business will look like in 10 to 20 years. Within this context, from time-to-time the market will present short-term anomalies whether it be in the form of flash crashes, Black Tuesdays, salad-oil scandals, the housing crisis or dot-com bubbles. This is the market as a voting machine and these are buying opportunities.
Why Productive Assets Matter
Businesses, Farm Land and Real Estate Versus an Infield of Gold – From the 2011 Berkshire Hathaway Annual Report
In relation to productive assets, you could take all of the world’s gold resources and fit them neatly in a cube in the infield of a minor league ball park.
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons).
The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard “cash is king” in late 2008, just when cash should have been deployed rather than held. Similarly, we heard “cash is trash” in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.
My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.
Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.
Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest. – Warren Buffett, 2011 Berkshire Hathaway Annual Report
The Lemonade Stand
Conceptually, buying a stock is no different than buying the lemonade stand down the road. In buying the lemonade stand, you look at the books, determine the earnings, return on equity, debt levels, the competitive advantages of the business, the product, the customer base, compute an intrinsic value and determine if the price paid will deliver a sufficient rate of return. The stock is partial ownership in a business whereas the lemonade stand is wholly owned.
A better example is perhaps the bowling alley down the road. If you were offered the bowling alley down the road for purchase you would spend some time reviewing the books, making a thorough analysis, talking to the customers, determining if revenues and earnings will continue, etcetera, before plopping down a lifetime’s worth of savings or taking out a huge loan. This would not be a one weekend research experience. The same mindset should be applied to the purchase of a stock.
The problem is that stocks are so liquid an investor can be part-owner of Disney at 9 am and be out by 9:15. Instead, in approaching a stock as a business investment, imagine that you have a punch card with only 10 lifetime punches to be made. Each time you make a purchase, the card gets punched. So, with each investment the question is asked, is this worthy of one of the punches?
Rooting for Lower Prices and Margin of Safety
In many ways the investor should root for lower stock market prices. As Buffett has analogized in the past, think of it this way: if you are a net consumer of $1 hamburgers - you love them, you eat them every day, you spend $100 a month eating hamburgers – and then one day, all of a sudden, you find out that hamburgers are going to be on sale at $.75 for the next few months or so, are you happy or sad? I would guess happy as you can now buy more hamburgers and most likely are devising ways to freeze a large cache of them.
The same framework applies to buying great businesses through the stock market: if you are a net consumer of great businesses that ultimately will continue to generate earnings and increase in intrinsic value year-after-year, are you happy or sad when that business goes on sale at $.75 cents on the dollar? Market lows present opportunities to buy as many of those hamburger-businesses as you can get your hands on. The trick is to be prepared for those hamburgers to go on sale and right now, according to the market cap to GDP ratio, hamburger prices are approaching a 60 year high.
The good news is that through the stock market you have access to some of the best lemonade stands in the world. A stock purchase makes you a business owner. Additionally, I think the individual investor can do better than Berkshire given its current size. It takes much to move the needle at Berkshire whereas the individual investor has "nimbleness" on their side. The individual investor has size on their side.
Just because you imitate Tiger Woods' swing doesn't mean that you will play golf like him, but it can't hurt. Also, investors don't have to depend on physical physique to make great, rationale investments. Certainly, you need smarts but you don't have to be a genius. Buffett himself has said that if you have a 160 IQ that you can give 30 pts away and still be a great investor. Temperament is just as important as IQ in the world of investing.
An important metric that Buffett uses to gauge value in the overall market is a market cap to GDP ratio. Included below is the Market Cap to GDP chart for the past 60 years. Currently, it sits at 127%. It has surpassed the housing bubble levels of 110% and is heading towards dot com bubble levels of 150%. This is a 60 year chart and this metric is at a second all-time high.
On a 50,000 foot level, using market cap to GDP, the market appears to be significantly overvalued. This is not to say that it will crash in the next few days, weeks, months or years. It could certainly trot along at an even pace for the next 2 to 3 years perhaps producing returns of 2 to 3%. What I believe it says is that there is not much value in the overall market right now and albeit an anomaly, perhaps it is best to wait for an opportunity to buy at a lower price - a Black Tuesday, Flash Crash, salad-oil scandal, etc. Of course, value can potentially be found at a singular issue level.
Mr. Market and Underlying Intrinsic Value
Truly the market offers up two potential opportunities:
1. The opportunity to sell a lemon at a high price.
2. The opportunity to buy a great business at a good to great price.
Two key dynamics are going on here in relation to the stock market and a publicly traded business:
1. The market quote or Mr. Market
2. The underlying intrinsic value of the business.
Regardless of what the market is doing, the underlying value of the business will continue on, for our interests specifically, the underlying value of the business with great economics will continue to increase. Some days the market may price fairly, some days it may price lower, much lower and on other days much higher.
The Market – Mr. Market – is erratic, moody and a separate tract. Eventually he will realize the intrinsic value of the business but on days that he does not – so what? The intrinsic value of the business will always be based on a fact – the discounted present value of future cash flows and the intrinsic value of a business with sound economic fundamentals should continue to increase in value unless its economic fundamentals change.
The market exists as an opportunity to buy great businesses at great prices on days that it is erratically low and as the fact of a businesses’’ intrinsic value begin its intrinsic value reveals itself, returns will be heightened.
Select a business that you can hold forever. Select a business that you can purchase as a stock investment, go away for five or 10 years knowing with some degree of certainty that the intrinsic value of the business will be greater. In other words, the market could shut down for five years and it wouldn’t matter. You would not need a daily quote to know that the business is doing well.
According to Warren Buffett in his 2000 annual letter to shareholders, the formula for valuing all assets was correctly identified, with some needed modifications by Aesop in 600 B.C – “a bird in the hand is worth two in the bush.” The axiom needs to be modified with four questions: how certain are you that the birds are in the bush, when will they emerge, how many will there be and what is the risk-free interest rate? (The yield on long-term U.S. bonds.) “If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.”[ii]
This law according to Buffett is immutable. It applies to the “outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. … Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.”[iii]
In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future "coupons." Furthermore, the quality of management affects the bond coupon only rarely - chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity "coupons." – 1992 Berkshire Hathaway Letter to Shareholders
Buy a simple business that is easy to understand with great, enduring underlying economics working in its favor, with rational management and buy it at a reasonable price with a margin of safety.
1. Strong EPS track record
2. High, consistent ROE
3. Low LTD
4. The ability to adjust prices with inflation
5. Share buyback
[ii] Buffett, Warren. Annual Letter to Shareholders, 2000.
[iii] Buffett, Warren. Annual Letter to Shareholders, 2000.
Reasons to sell the Theme Park or the McDonald's
In the situation of consumers switching to heads of cabbage for lunch, I would have to argue that McDonald's would adjust and accommodate and offer McCabbage. Still though, a permanent consumer taste shift could impact the business and diminish its long term prospects. In the case of a Disney theme park I would argue that Disney provides much more than a mere "theme park" experience through its established, proprietary environment of magical characters and moments establishing a deep, wide moat that is difficult for other businesses to cross.
Which leads to ...
The Erosion of Business Fundamentals
This effect will show up in the quantitative fundamentals of the company. Earnings per share will diminish over time along with return on equity. This will be a long-term, five to 10 year degradation, not an immediate microwaved result. It should be apparent that the business is not going to return to its heyday. In the case of bad management, shareholders and the board of directors should oust them but they may be around to stay.
Any of these situations, if permanent are legitimate reasons to seek higher ground.
If you conclude that you would never sell a McDonald's franchise based on one-time, anomalic events (an outbreak of mad cow disease for instance), why would you ever sell a stock position in the company for the same reason.
Stock ownership after all is business ownership. It represents a portion of the capital structure of the publicly traded business, an equity portion, which entitles the owner to a sliver of returns for the year or the earnings per share. Part of this is paid out as dividends, the rest is retained for a high ROE snowball effect in a wisely chosen business that continues to exhibit superior economics and capable management.
Why would you ever sell a portion of ownership in great businesses such as Coca-Cola, McDonald's or Wal-Mart if they continued to exude outstanding economic strength? Why would you ever sell your Disney theme park if the turnstiles continue to churn rapidly year after year?
Of course, in the McDonald's scenario, if instead of a McDonald's you owned a Rally's and Bob's McDonald's was up for sell at a discounted price, you certainly would want to consider selling the Rally's and purchasing the McDonald's if the ROE trade-off was favorable. Let's say the Rally's generates a 10% return on the invested equity in the business and McDonald's comes in at 20%. Ceteris paribus, the McDonald's franchise appears to be the better investment. The same decision methodology applies to the world of stock ownership.
On the same token, if you literally owned a Disney Theme Park, a theme park located just down the road from your house, would you consider selling the entire theme park because attendance has dropped off for one year? Would you sell after 2 years or 3 years? I believe the answer is no. If the long-term track record illustrated a superior economic power-house, I believe you would wait a number of years to see if the tide has truly turned, and for most of these powerhouses, the superior economic fundamentals will resurface and resume delivering outstanding returns.
Stock ownership under the Buffett methodology is literally the same thing except the ownership portion is fractional as opposed to owning the entire theme park. Still, the owner is entitled to his share. You might not own the entire theme park, but still owning just one ride proves to be highly profitable.
A great business and its EPS is like an equity bond with an expanding coupon. An investment in a Disney equity bond at the time of this writing will yield an approximate 5% rate of return at today's prices with a coupon that is expanding at about 19% a year.
In the example of the McDonald's franchise ownership, the assumption is that a sane rationale person would not sell the McDonald's franchise based on a one-time anomaly event such as a breakout of mad cow disease that effects earnings for one or two years. The same rationale person would conclude that the McDonald's franchise will resume and continue to deliver outstanding results year after year given quality management and barring catastrophic variables.
Furthermore, the same rationale person will realize that Bob (Mr. Market in Graham circles) is being highly irrational in putting a price tag on his business based on today's irrational prices, a low price, and will realize that the relatively predicable earnings of tomorrow can be bought at a deep discount today, thus increasing the return. It is wise to buy dollar bills for 60 cents when possible. The Bob's of the world (Mr. Market) can be a partner, one who presents future earnings at discounted prices from time to time, a servant partner, not a master. When Mr. Market is euphoric and giddy and selling at exorbiant prices, it is best to politely decline. He is never offended and will return with new offers.
In the world of Warren Buffett, a stock represents part ownership in a business. If selected wisely, it represents part ownership in a great business. Tying it back to our Disney theme park and McDonald's franchise examples, if you held ownership in each of these businesses, when would you ever sell it? I would argue never.
In general, great businesses will continue to exude outstanding financial performance and deliver substantial returns to shareholders well into the future. Even though you do not own 100% of the business under partial stock ownership, you certainly hold a fractional interest of the same great business that a McDonald's franchisee owns and thus you are entitled to a portion of the earnings of the overall business. If you owned a Disney theme park in its entirety, you would reap the rewards after expenses of the tickets sold and folks churning through the turnstiles to ride It's a Small World. With stock ownership of the business you are entitled to a "piece" of the gate as well.
A great business and its earnings per share in the world of Warren Buffett is an equity bond with an expanding coupon. In other words, the business with a consistent track record can be expected to deliver a steady "payment" that grows over time.
An investment in a Disney equity bond at the time of this writing will yield a 5.03% return (2012's EPS of $3.13 divided by the current stock price of $62.17) and this return, theoretically, will grow at a rate of 17.77% a year. (This is Disney's historic 10 year EPS growth rate which is found by using a handy dandy BI Financial calculator and computing I/Y using 2002's EPS of $.61 as the present value, 2012's EPS of $3.13 as the future value and 10 for the number of years.) This means that Disney's equity coupon of 5.03% will grow by .894% each year - in 2013 it should deliver a 5.93% return, by 2014 a 6.82% return, by 2015 a 7.72% return, so on and so forth.
For McDonald's, at today's current price of $95.03, the company will deliver an initial rate of return 5.64% that will grow at 18.28% per year, an increase of 1.03% a year. By 2013 the McDonald's equity coupon bond should deliver a 6.67% return, by 2014 a return of 7.7%, by 2015 a return of 8.73% so on and so forth. Again, this growth rate is found by calculating the company's 10-year historic earning growth rate.
Warren Buffett considers the returns of company's such as these to be "bond-like" for three chief reasons:
Because of this calculus, the investment can be considered an "equity-bond" that is much more of a "surer" thing than its weaker peers. These fundamentals allow an investor to have confidence in the Disney "equity bond" which pays a 5.03% coupon that grows 17.77% per year and the McDonald's equity bound of 5.64% that grows 18.28% a year. At the end of 10 years, at today's prices, McDonald's will pay a coupon of 15.95% coupon and Disney will pay 13.98%. A $10,000 investment in each will result in yearly earnings of $1,595 and $1,398 respectively by year 10.
What this means for you is that for each $10,000 invested in the franchise (theme park, burger stand, falafel chain), the business will generate a consistent (in theory, consistent) $2,000 in earnings or return over the log haul. A $100,000 investment would equate to a $20,000 return, so on and so forth. Let's suppose that the next best deal in town will deliver a 10% rate of return so, all things equal, the McDonald's franchise appears to be the better deal - in addition to the superior rate of return it has sold hundreds of thousands of hamburgers over the last year last year and shows no signs of slowing. (side note: Wal-Mart sells approximately $42 million worth of stuff an hour ... that is by the hour ... not by month, week or day ... $42 million an hour! That is a lot of bean bag chairs and certainly something worth owning a piece of.)
Now, back to our McDonald's stand, let's say that a breakout of mad cow disease causes sales to plummet: the global populace is now scared of all things beef. As a result, earnings tank and ROE for the year comes in at a paltry 3%. (The $10,000 investment generates $300 for the year.)
You are now faced with two options:
Can you tell which option I lean towards? Under option number two Bob fears that even though his franchise has been delivering earnings to the tune of about 20% to equity over the years, his short-sighted, panic induced behavior is causing him to act irrationally, and sell at a discount. Bob truly believes that the golden days of strong earnings will never return even though the fundamentals of the business have not changed. Either that or he is a different type of investor, one who was never truly a business owner to begin with. Bob perhaps is a speculator, one who would gamble, place money at the track or play the lottery with the ingrained belief that gambling is a legitimate way to progress economically.
Which option would you choose?
In 1919 Coca-Cola's stock was cut in half from the price of $40 a share to $19 a share. Even if an investor had bought the company at the pre-drop price of $40 a share and had held onto it through the 50% drop for the next 90 years, the investment would be worth just over $5 million.
If you owned a Disney theme park, literally owned a Disney theme park that was located just down the street from your house, and if you owned it in its entirety, the whole shebang, and you received a portion of the ticket revenue coming in everyday, can you think of a reason for why you would ever sell the park?
What about McDonald's? What if you owned a successful McDonald's franchise, one that churned thousands of cars through the drive through each and every day, breakfast lunch and dinner. If you owned this McDonald's on your own local Main Street U.S.A., why would you ever sell it?
For argument's sake, let's say the business generated strong, consistently increasing earnings year over year for the past 20 years. This means that the bottom line of the income statement has been improving either through increased sales, expense reduction or a combination over the years. Additionally, the business has turned in an excellent return on equity (the earnings return divided by the public ownership portion of the capital structure) average of 20% for the same time period and the business has little debt.
Bottom line: this business has been putting money in your pocket for some time. It has been generating healthy bottom line earnings based on the amount of equity you have put in the business, some of which you have retained in the business for further 20% ROE investments, some of which you have distributed to yourself as a dividend. (But get this: the portion you have retained in the business has added to value to the equity portion of the balance sheet, so even the portion of earnings you have not put in your pocket has essentially been reinvested in an outstanding business which has subsequently grown in value at a 20% rate of return over the years.)
The Carousel of Progress
In 1964 Walt Disney unveiled a New York City World’s Fair attraction consisting of six theaters with a fixed stage encircled by a ring of rotating seats that transported audience-members through the innovations of the 1900s, 20s, 40s and to a nondescript, future horizon. The “Carousel of Progress” served as part GE commercial but also as a panoramic view of the innovations of yester-year detailing the “towering”, 20-story buildings, moving pictures, gas lamps and soda fountains of the 1900s, the single-engine planes, sports-stadiums, radios and in-door plumbing of the 20s and the automatic dishwashers, televisions, and refrigerators of the 40s. Each “theater-era” represented a different season - spring, summer, fall and winter respectively - all transitioning to the tune of the Sherman Brothers, “There’s a Great Big Beautiful Tomorrow” and revolving to rest on a final act four: a futuristic “family of tomorrow,” on the crest of New Year’s Eve.
The Threshold of a New Year
Over the years the attraction underwent five major updates in 1967, 1975, 1981, 1985 and 1994, which chiefly focused on the family of act four and their “marvelous” technologies. As each era bore down on the animatronic family making them obsolete, it was necessary to upgrade the group with new innovations - satellite TV, the personal computer, virtual reality - in order to keep them ahead of the curve and dangle them out in the future.
The task of deciding what innovations to place in the scene would be a difficult one indeed, but it would prove interesting to be in the shoes of the Disney Imagineer tasked with updating act four of the Carousel of Progress. What representative, future innovations would you place in the final New Year’s Eve scene?
Here’s my list:
The Steve Jobs Textbook
In the fall of 2010, Steve Jobs met with President Obama and expressed his views that America’s educational system was “hopelessly antiquated” and structured to treat teachers as unionized, industrial assembly-line workers instead of professional educators. He suggested that schools should stay open longer and found it absurd that American classrooms were still based on teachers standing at a chalkboard teaching from a textbook.
He envisioned a future in which kids did not have to lug around heavy textbooks that had been filtered through a corrupt certification process and he believed that all “books, learning materials and assessments should be digital and interactive, tailored to each student and providing feedback in real-time.”
Since Jobs’ passing in October of 2011 Apple has carried forward the torch of the textbook revolution. Here’s how they have fared:
An Apple for the Teacher
In January of 2012 Apple held an education event in New York and revealed three key, iPad-centric features, that will help reinvent the old-fashioned textbook: 
1) A partnership with major, educational publishers
2) iBooks 2 and
3) iBooks Author
Although Jobs original vision was to “hire great writers” to create digital textbooks, Apple has decided to partner with the publishing houses that employ them. Apple revealed partnerships with McGraw-Hill, Pearson and Houghton Mifflin Harcourt who when combined publish about 90% of the textbooks in US schools.
In addition to providing many of the key, original iBooks app features such as pinching to zoom, page flipping and book-marking, the new, free iBooks2 app provides an enhanced interactive experience for textbooks. For example, a biology book can have animated 3D cell structure models, DNA animations, tap-on, in-text glossary terms and search features. The app also allows digital, “swipe” highlighting and simple note-taking features which can be transformed into digital index cards for study purposes. Also, in keeping with a key Jobs’ initiative, the books provide real-time, immediate feedback for end-of-chapter review questions.
The textbooks are available in Apple’s iBookstore for $14.99 a piece, an already contentious price between Apple and its partner publishers. Jobs wanted them to be free and included with the iPad. 
iBooks Author is a free, simple, drag and drop authoring and self-publishing app used to create the textbooks.
Industries Impacted: Education and Publishing
Educational publishing is an $8 billion industry and publishers seem to see the writing on the iPad and are positioning themselves ahead of the sea-change. iTunes helped to save the music industry by legitimizing the music file download process and it appears that the iPad and iBooks are poised to do the same for publishing. McGraw Hill “admitted that its business would be altered by selling directly to the students at a lower cost, but making it up on volume with non-transferable books that would need to be purchased by every student, every year.”
Item One to be Placed in The Carousel of Progress: an iPad.
The Singularity is Near
Ray Kurzweil and Nanotechnology
Ray Kurzweil is an author, inventor and “futurist” who predicts that by 2045 technologists will have recreated the full power of human intelligence in a machine, resulting in a billion-fold increase in intelligence that allows humans to transcend limitations and reach immortality. This profound change as detailed in his 2005 book The Singularity is Near, stems from a series of steps or epochs of evolution leading to the merger of technology and human intelligence, creating a universal saturation of intelligence. Ultimately, the universe will “wake up.”
Kurzweil is not completely out of left field either: he is the principal developer of the first CCD flatbed scanner, the inventor of the first print-to-speech reading machine for the blind, a member of the Inventor's Hall of Fame and a recipient of the National Medal of Technology.
Two key variables underlie Kurzweil’s theorem:
1. A Law of Accelerating Returns - essentially an enhanced version of Moore’s Law, which indicates that computing power is roughly doubling every year, leading to smarter, smaller and cost-effective technology.
2. Nanotechnology - Epoch Five in Kurzweil’s world in which technology integrates with biology and masters its methods, including human intelligence. 
In 30 or 40 years according to Kurzweil, microscopic machines called nanobots will travel throughout human bodies, repairing damaged cells and organs, effectively wiping out diseases. This technology will also be used to back up memories and personalities and ultimately, we will “replace our frail, ‘version 1.0’ bodies with a greatly enhanced version 2.0.” 
Kurzweil believes that by 2024, instead of time running out, it will be running in and humans will be adding a year to life expectancy for every year that passes, reversing the loss of remaining life expectancy.
Features of Kurzweil’s Nanotechnology
· Enhanced physical and mental capabilities
· Radical life extension through the destruction of pathogens, cancer cells, toxins and debris
· DNA error repair
· Reversal of the aging process. 
· Expanded biological intelligence 
In the Real World
Researchers at MIT are already using nanoparticles to deliver killer genes to battle late-stage cancer and claim they have killed ovarian cancer in mice. Scientists at the University of London recently reported using nanotechnology to blast cancer cells in mice and the tests have shown that the new technique leaves healthy cells undamaged. 
Industries Impacted: Healthcare and Technology
The $5 trillion, world-wide health-care industry will be decimated by a proliferation of life-sustaining, health-enhancing technology such as nanobots while the technology sector, by default, will boom. Patients will receive check-ups from nano-technology specialists instead of doctors and thus, it may be necessary for doctors to receive nanobot, skillset updgrades.
Item Two to be Placed in The Carousel of Progress: a copy of Ray Kurzweil’s The Singularity is Near. (A nanobot would be too small to see. It’s a small world after all.)
A Cure for Cancer
The Story of Steve Jobs and Molecular Targeted Therapy
In 2003 Steve Jobs learned that he had a rare form of islet cell neuroendocrine cancer which, if caught early, had a “real potential for cure.” In lieu of surgery though, Jobs treated the disease with a 9-monh regiment of alternative, dietary restrictions and juices. Subsequent scans revealed that the tumor had grown and in July 2004, Jobs underwent a modified Whipple procedure that removed the right side of his pancreas, gallbladder, parts of his stomach, bile duct and small intestine.
In 2009, Jobs received a liver transplant in Memphis, an indication that the cancer had spread beyond the digestive system. Finally, in 2011, Jobs resigned as CEO from Apple stating that “I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately that day has come.”
“Although Jobs passed away in October of 2011, a positive result emerged from his treatment: a focus on molecular targeted therapy.
Jobs was only one of 20 people in the world to have the genes of their cancer tumor and normal DNA sequenced in entirety. “By knowing the unique genetic and molecular signature of Jobs’ tumor, his doctors had been able to pick specific drugs that directly targeted the defective molecular pathways that caused his cancer cells to grow in an abnormal manner.”
This molecular targeted therapy approach allowed doctors to shed traditional chemotherapy, which attacks the division of all of the body’s cells, and instead select more effective drugs which at times, according to Job’s biographer Walter Issacson, appeared to be a silver bullet allowing them to stay ahead of the cancer.
This treatment is not new, but certainly, Job’s regimen has placed a spotlight on the treatment and created enthusiasm in the medical community: Dr. Matthew H. Kulke, a physician at Harvard-affiliated Dana-Farber Cancer Institute in Boston states that drugs such as these are “exciting alternatives to conventional chemotherapy that has been the mainstay since the early 1990s” and “they have been shown to cut the growth of metastatic pancreatic neuroendocrine cancer in half.”
It is not much of a leap to envision a time in the near future when advanced cancer treatments such as molecular targeted therapy and nanotechnology converge to effectuate a solution for cancer.
Industries Impacted: Healthcare
Healthcare will again be impacted by this innovation and as technology scales and manufacturers are able to mass-produce targeted, effective drugs, costs should diminish.
Item Three to be Placed in The Carousel of Progress:
Disney has somewhat beat me to the punch on this one. With the renovation of Epcot’s Spaceship Earth in 2007, a bearded, long-haired man who looks like Jobs working in a California garage on an early version of the personal computer, has been added to the end of the attraction. The company claims that it is not in fact Steve Jobs but a composite of all the early pioneers who worked on the first personal computers. I believe the presence of even a “composite-Jobs” in the attraction serves as a reminder of his contributions but also as a reminder that perhaps a solution to cancer lies on the near-horizon. I of course would move the figure to the Carousel of Progress.
The Bottom Line - Now is the Time
The future is difficult to predict just as it is nearly impossible to keep the Carousel of Progress’s “Family of Tomorrow” up-to-date and relevant. Although it may seem trivial to figuratively place items in the den of the New Year’s Eve family, the exercise to me seems to indicate that we stand on the precipice of extraordinary breakthroughs in science, healthcare and technology, innovations that create a gate-way to a great big beautiful tomorrow.
 http://jeffwartman.com/steve-jobs-on-education/ - from Walter Isaacson’s bio on Steve Jobs
 http://jeffwartman.com/steve-jobs-on-education/ - from Walter Isaacson’s bio on Steve Jobs
 http://jeffwartman.com/steve-jobs-on-education/ - from Walter Isaacson’s bio on Steve Jobs
 Issacson, Walther. Steve Jobs
Why Warren Buffett?
He takes partial if not whole ownership interests in consumer monopoly companies with strong and steady earnings, healthy returns and the ability to reinvest earnings for continued compounding. The bottom line is, if you invest like Buffett, you can count on capital gains with cash flow regularity, similar to a quality “rental property” with consistent returns. Dividends will serve as icing on the cake.
The recommendation then, in order to make the transition from the cash flow world to an “acceptable” world of mutual funds is to:
· Invest in mutual funds that invest like Buffett, buying into major Berkshire holdings such as Costco, Coke and Wal-Mart.
· Invest in funds that invest in Berkshire Hathaway.
· Invest in Index Funds as Warren Buffett recommends if you choose to not play the single stock game.