Author Topic: what are your thoughts on Joshua Kennon's blog?  (Read 12827 times)

anisotropy

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what are your thoughts on Joshua Kennon's blog?
« on: February 05, 2015, 06:03:46 PM »
Just curious, what do you guys think of the info on his blog?

I used to think his blog contained a lot of useful and factual information but now I am not so sure. I am not dismissing his blog entirely, just that I had discovered some of his numbers are out by a factor of 3 or 4, and when it comes to personal finance that's a huge error.

At the very least, I found some of the numbers he used/provided needed to be taken with a huge grain of salt.

Thoughts?

gecko10x

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #1 on: February 05, 2015, 06:21:10 PM »
I feel kind of the same as you. And I don't really read it anymore because of that, and the fact that I disagree with a lot of what he writes.

nanu

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #2 on: February 05, 2015, 07:40:34 PM »
I've been following it for the past month or so, and I think it contains some interesting stuff (though I'm new to this whole financial blogging and such, so maybe not).

However, I get the sense that if I met the guy in real life, I would think he's a complete ass-hat, and he could certainly use a sip from the MMM kool-aid:
Quote
There were no restraints on the Apple budget.  Everyone want 2 or 3 of the 30″ monitors that cost $2,000 a pop to go with their PowerMacs?  Sure!  They are so awesome, I’ll buy them.  Want new iMacs?  Of course.  You can have those.

pbkmaine

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #3 on: February 05, 2015, 10:14:39 PM »
It holds no value for me.

PEIslander

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #4 on: February 06, 2015, 04:06:32 AM »
I liked reading his stories about Cadbury, Coca Cola, & McCormick (the spice company). Where the numbers wrong?

arebelspy

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #5 on: February 06, 2015, 12:02:20 PM »
I love almost everything he writes.

The investing stuff, the recipes, the personal stuff.

I am a huge Joshua Kennon fan.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

joshuakennon

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #6 on: February 28, 2015, 07:19:44 PM »
Just curious, what do you guys think of the info on his blog?

I used to think his blog contained a lot of useful and factual information but now I am not so sure. I am not dismissing his blog entirely, just that I had discovered some of his numbers are out by a factor of 3 or 4, and when it comes to personal finance that's a huge error.

At the very least, I found some of the numbers he used/provided needed to be taken with a huge grain of salt.

Thoughts?

Howdy!  Usually, I'm a lurker behind a proxy but accuracy is so important, I'll come out of the shadows for a bit to try and assuage some of your concerns (it's a really good question and if you ever have issue with a specific example, send me a message and I'll try to address it).  At the very least, I hope I can give you a better idea of what is probably going on in most cases.

A lot of the stuff I write on my personal blog is looking at very long histories of different portfolio constructions, individual securities, or basket of securities.  When you get into multi-decade periods, there are all sorts of variables and assumptions you have to make that can result in an ending figure being significantly different because a tiny shift in any one of them is amplified by the geometric growth occurring prior to terminal value.

An actual example might help.  You mention "a factor of 3 or 4" so I'll give you a link to a post where a differential somewhere along those lines happened so you can sort of see the reasons it might appear that way.

Last year, I published a piece on The Walt Disney Company, detailing how Warren Buffett had mentioned one of the biggest mistakes of his life was selling it for a roughly $1 million profit back in the 1960's, rather than hanging on to his shares.  At that time, I estimated the ending value of the position would have been $7 to $12 billion.  This was significantly different than the $2.4 billion estimate that another investor calculated, which made him upset as he thought I had made an miscalculation.  To his credit, at first glance, that seems to be - as you say - a significant error.  He wanted to know why my numbers appeared so different from what Yahoo Finance and other portals showed the historical stock price was on the date in question relative to the current market price; how they could be seemingly off by such a staggering amount.

In this case, I had rejected the historical data tables because the methodology wasn't going to lead to an accurate reflection of what might have happened in the real world, to a real investor, who had actually bought and held the stock.  As the data provider for Yahoo explains, it uses two multipliers to adjust the historical price. The first, a split multiplier, is fairly straight forward. The second, a dividend multiplier, involves a quick "cheat" for the Yahoo programmers to guesstimate by taking (1-D/P), where "D" is the cash dividend amount and "P" is the previous day closing price.  As I said to him, it's a very good system for what it is but the dividend is based on a historical percentage rather than an actual amount. Yahoo is doing nothing wrong and this is a standard way to estimate historical prices despite its flaws. Those flaws grow over time and include the fact that the model does not account for 1.) the reinvested value of any dividends, or 2.) the reinvested value of any spin-offs or subsequent performance of any spin-offs (including their own dividends / reinvested dividends) held past the separation date. For some companies, this is considerable.  Disney, for example, had two such spin-offs in its corporate history.  Given its growth rate, the dividend reinvestment assumptions also change the outcome considerably.

With spin-offs, which come in and out of vogue so you always need to be aware of them when looking at companies that have been in business a long time, a price adjustment factor is applied equal to P(t-1) / P(t), which has the effect of "freezing the performance of the security on the ex-date". That is, the net value of the newly spun-off company is deducted proportionately from the cost basis of the former, with all subsequent results excluded.  Depending on what you do with that assumption - Were the shares of the spin-off held?  Were they sold and reinvested into the parent company? - the terminal value will be significantly different.  An extreme example is the old Philip Morris.  If you go back and pull the historical stock quote for it in an attempt to estimate the ending terminal value, the numbers at which you arrive are going to understate your actual real-world wealth creation by many, many fold.  It's a methodology problem and the financial portals, including many very expensive, professional pay subscription services, are practically useless at correcting for it because they aren't designed for long-term investors.  They're designed for stock traders.  You have to take a big chunk out of your day and do it by hand yourself.  (Even then, that can be impossible.  If, for example, I asked you to calculate the historical performance of Wendy's stock, you'd probably pull up the stock quote and do a backdate test, right?  Only it would be useless.  Wendy's was acquired by Triarc and the values you see for the Wendy's Corporation would not in any way reflect the wealth creation experienced by a person who bought Dave Thomas's hamburger chain on the date of the IPO.)

McDonald's Corporation is a modern day illustration.  The split-off of Chipotle, which required investors to tender shares in exchange for the burrito chain, will vary wildly depending upon how many shares you assume the hypothetical investor swapped.  The effect of this over time is so enormous, if someone asked you about the end value of a $100,000 investment in McDonald's Corporation ~25 years ago, your answer could accurately be either "$1,839,033" or "$5,547,089".  Neither is an error.  Both reflect reality.  It depends on the assumptions you put into the model about the behavior of the investor, as well as where he or she held the shares and the tax bracket he or she was in during those years.

Sears Holdings is another example.  If you try to check the numbers by looking up a historical Sears stock quote, your precisely calculated answer is going to be wrong.  By the time you hand-run the spin-offs, dividends, reinvested dividends, dividends on the spin-off shares, reinvested dividends on the spin-off shares, you're going to see an ending value many, many times higher - again, it looks like it is off by several factors - than what the data portals tell you.  The data portals are wrong.  The historical stock tables are wrong.  It's a tremendous amount of work to do those sort of back tests, which is why Dr. Jeremy Siegel at Wharton Business School has such a devoted following.  He and his research assistants calculated the subsequent performance of the original S&P 500, which was one of the most ambitious projects I've ever seen.  He's one of the only people who has attempted to prove what real-world investors actually lived through had they bought and held. 

Whenever I'm writing something like this I try hard to be at least somewhat detailed about the inputs I'm using so people can check it themselves if they are familiar with finance; e.g., ignoring taxes for the sake of simplicity or not.  That way, if they want to re-calculate it themselves using other inputs or assumptions, they can.  Other times, I don't say it outright but it should be evident to the sort of audience that makes up my blog, which is demographically unique in that it is much higher educated, and much higher income, than the Internet average (e.g., if I say, "You have $x to invest and put it in [y] for 10 years at [z]%", I'm going to be using the so-called "due" CAGR formula since you're using an upfront lump sum, whereas if I say, "You work all year and at the end of the period, you have $x to invest.  You put it in [y] for the rest of the decade at [z]%", I'm going to be using the adjusted formula, which will give you only 9 compounding periods, not 10, since you didn't actually outlay the money in year one and therefore earn no return on it.  That goes without saying because it's freshman-level college finance, which most of the people reading that sort of thing are probably going to know.)  If I were using a 25 year period, which I tend to do a lot, that small difference is going to result in a huge differential in what you think the proper final number should be.

All of this is to say if something on my blog looks like it is off by that much relative to your calculations, there is almost always a reason it is that way.  Look at my historical case study of Nestle, for example.  You could easily get differing ending values if you redid the math by hand and modified the way you treated the currency translations between the Swiss Franc and U.S. dollar.  That matters.  It matters a lot over two or three decades.  Tiny differences in compounding result in wildly different outcomes (which is, for what it's worth, the appeal of index funds - saving a percentage point or two can result in a heck of a lot more wealth for your family than paying high fee advisors).

In other cases, there are situations where there is just a typo.  They don't happen terribly often but over the past decade and a half, I've published over 10,000 pages of content between the About.com site and my personal blog alone.  Awhile ago, I looked at Coca-Cola over 50 years, for example, and one of the cells in the Excel chart had moved the decimal the wrong way.  I disclaimed it in the text but it still isn't corrected in the graphic and it changes the ending value.  Whenever something like that happens - and it will from time to time as I'm only human - send me a quick note and I'll have it looked into as soon as possible.  I don't want inaccurate things out there by any means.  You'd be doing me a huge favor as there is only so much I can physically keep up with given that it is largely a side project that has sort of evolved into this time beast that competes for my free moments.

Finally, in other cases, if I'm referencing some throw-away line, I might mention rough estimates calling them "back of the envelope" to get you right around where we need to be for the sake of whatever conversation we're having.  For example, if we were talking about some business, I might say, "roughly $12 billion in sales" rather than $12.4 billion in sales.  I do this frequently as the minutia isn't particularly helpful to a lot of people and, if it were, they're going to know that $400 million difference exists, anyway.

I hope that helps or, at the very least, gives you some insight into why the numbers might counter-intuitively appear to be wildly off from what you'd expect or calculate yourself.  I really do mean it, too: If you have any specific questions about a particular case study or other post where my conclusions don't match the results you think you should be getting, send me a private message and I'll do my best to forward you the assumptions so you can reconstruct them yourself.  I think it's fantastic you are attempting to check them in the first place as I think it's a great rule in life to, as a former American President famously said, "Trust, but verify".

P.S. I hope I don't double post this.  I tried to send it to you but can't seem to get it to go through.  If I do, I apologize =)

References:
1. http://www.joshuakennon.com/warren-buffetts-12-billion-disney-mistake/
2. https://help.yahoo.com/kb/finance/historical-prices-sln2311.html?impressions=true
3. http://www.joshuakennon.com/a-25-year-case-study-of-an-investment-in-mcdonalds-corporation/
4. http://www.joshuakennon.com/a-case-study-of-nestle-sa-shareholder-returns-with-and-without-dividends-reinvested/

MDM

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #7 on: February 28, 2015, 08:23:31 PM »
Joshua, thanks - if this is indicative of your typical blog entry I ought to spend some time looking over there.

Ynari

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #8 on: February 28, 2015, 11:06:56 PM »
So cool to hear from you, Joshua!

I love the blog and all the information I've gleaned. Also, the change in attitude and perspective - thinking of holding companies and learning how to analyze things like performance and value of an actual business (even if I'm still going to stick with index funds for the time being) has given me a more solid foundation in investing.

I also appreciate questioning things on the internet, so this thread is great, too. :)

TheBuddha

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #9 on: February 28, 2015, 11:33:11 PM »
Thanks to the OP for introducing me to such an informative blog, I've spent the last couple hours reading it. It's good stuff.

Dimitri

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #10 on: March 01, 2015, 12:35:29 AM »
Never heard of Joshua before.  No knowledge of his blog.  That said, the post was a wonderful read.  Thank you for posting.  I may very well start to follow your blog.

Blindsquirrel

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #11 on: March 01, 2015, 08:54:25 PM »
   I enjoy his blog quite a bit. Genuinely learned something on his article on the destruction of black Wall street.

dragoncar

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #12 on: March 05, 2015, 03:16:33 PM »
Joshua, thanks - if this is indicative of your typical blog entry I ought to spend some time looking over there.

No kidding

mjs111

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #13 on: March 05, 2015, 07:48:11 PM »
Really great post, Joshua.

Mike
also a fan of your blog

Thegoblinchief

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #14 on: March 05, 2015, 09:08:26 PM »
I love almost everything he writes.

The investing stuff, the recipes, the personal stuff.

I am a huge Joshua Kennon fan.

+1

The Disney and Coke fandom is a bit much for me, but I can very easily gloss over those posts :) Every few months I get it in me to tackle more of his backlog. One of these days I'll read it all.

It is hilarious to see how casually he is dismissed by the hardcore bogleheads, however.

arebelspy

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #15 on: March 06, 2015, 11:54:24 AM »
It is hilarious to see how casually he is dismissed by the hardcore bogleheads, however.

Oh yeah?  I haven't seen that, but I haven't spent a ton of time on BH lately.  Links?

I'm just hoping he starts a fund one day for his blog readers (with stipulations that it's a long term thing, i.e. money is committed for 10+ years, etc).   ;)
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Thegoblinchief

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #16 on: March 06, 2015, 12:40:28 PM »
It is hilarious to see how casually he is dismissed by the hardcore bogleheads, however.

Oh yeah?  I haven't seen that, but I haven't spent a ton of time on BH lately.  Links?

I'm just hoping he starts a fund one day for his blog readers (with stipulations that it's a long term thing, i.e. money is committed for 10+ years, etc).   ;)

I don't spend much time there either, I just remember a few threads where they were ripping into him as "just another stock picker".

Yeah, I'd definitely invest in a fund run by him. I totally understand why he doesn't do this, but it'd also be neat if he gave rough proportions of his holdings in the KRIP so people could do a shadow portfolio modeled on it. Obviously you get the sense of roughly what companies he likes from various posts but I'm lazy :P

This is also why I'm still in index funds despite ultimately being more attracted to some form of buy-and-hold dividend investing, ideally with some sort of socially responsible correction (which is really hard to evaluate). Once dept repayment stops being the clear priority I will do more research, but I've got $4K more SLs at 6.5, and then ~$50K of mortgage at 6.5 plus PMI to prepay (heavily underwater, nor HARP eligible for a negative equity refi) before I need to research non-index investing more heavily.

I'm definitely taking notes on the way he evaluates companies.

anisotropy

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Re: what are your thoughts on Joshua Kennon's blog?
« Reply #17 on: March 14, 2015, 06:26:36 AM »
Wow a response from Joshua himself! I wasn't expecting that at all.

I meant no disrespect and appreciate your attention to details and the effort that went into your analysis. After reading your post I have a clearer understanding where the differences came from, as you said, a tiny variation in the initial conditions/assumptions can lead to very different results 30 years down the line.

Thank you.