Memo Thoughts – The Illusion of Knowledge

Dear Readers,

Let me confess and say that I am a huge fan of Howard Marks’s writings. For those of you who have never heard of him, Howard Marks is the co-founder and co-chairman of the Oaktree Capital, a firm that is considered to be one of the largest investors in distressed securities worldwide. Marks is famous for his expertise in investing in high-yielding bonds and, through Oaktree, made a name for himself by generating stellar returns during the Great Financial Crisis (GFC) in 2008-09.

Marks is famous for his memos that he publishes for free on Oaktree’s website. In the investing community, his memos are considered to be a must read. I have heeded to this advice and been binge-reading his memos for the past several weeks. In a world that is so focused on news/ breaking news/ current affairs, his memos help me take a step back and deeply introspect about my own investing strategy and mindset. This is such a crucial aspect of investing that, unfortunately, receives so little attention in the community that I am a part of.

Each memo is a treasure trove of information and there is a lot to unpack. Therefore, to reinforce the learnings, I thought of creating a new series on my blog that would be dedicated to my reflections from reading these memos. I may or may not choose each and every single memo, but instead choose the ones that really resonated with me.

To kick things off, I will start with the most recent memo titled The Illusion of Knowledge(published Sep 8. 2022).

All Economic Forecasting is Flawed

The memo starts off by discussing how there is a strong human tendency to attempt to forecast about just about any subject. Marks argues that the premise of forecasting itself is flawed. According to Marks, all forecasting assumes that the environment around us can be modeled, in some shape or form, with some notion of deterministic behavior i.e. for a given set of inputs, these are going to be outputs.

Marks states that modeling an economy is simply impossible. He writes:

The U.S., for example, has a population of around 330 million.  All but the very youngest and perhaps the very oldest are participants in the economy.  Thus, there are hundreds of millions of consumers, plus millions of workers, producers, and intermediaries (many people fall into more than one category).  To predict the path of the economy, you have to forecast the behavior of these people – if not for every participant, then at least for group aggregates.

Is it possible to do this?  Is it possible, for example, to predict how consumers will behave (a) if they receive an additional dollar of income (what will be the “marginal propensity to consume”?); (b) if energy prices rise, squeezing other household budget categories; (c) if the price for one good rises relative to others (will there be a “substitution effect”?); or (d) if the geopolitical arena is roiled by events continents away? 

This is a sound argument with some merit. If an economy could be modeled as a mathematical model, the richest people on the planet would have been statisticians and mathematicians. And while the community at large is obsessed with questions about “Will there be a recession? Has inflation peaked? What will be the course of the Ukraine war?”, the truth of the matter is that none of these are predictable because the number of variables involved is far too large to account for in a simplistic model.

So why do people forecast then?

Clearly, forecasting is futile. Forecasting about economy is even more sillier. And yet if you browse around the CNBC, social media and/or your favorite news medium, these avenues are full of people making bold predictions.

To give an example:

Here is a certain famous YouTuber who shall not be named (but you can easily figure out who he is) who goes on to predict how “China’s ENTIRE Economy Is About to Collapse”. And what is better is he has even given a time frame that this is going to happen within 29 days. Now how on earth can someone predict this with such precision? Consider some other factors: we are talking about the collapse of one of the largest economies of the world with a incredibly complex political structure, predictions being made by someone who is NOT a reputed economist, or political strategist, or an expert in China, and someone who is sitting in some other corner of the globe with no sense of ground realities in China.

I could this dismiss this as laughable buffoonery, but when I actually see the number of people following this account and taking this as serious advice and consider this as part of their “research” to base their financial decisions, I SHUDDER to think of the consequences.

What is worse is that this does not appear to be a one-off and we have such predictions being made from this account and other such similar accounts with such regularity and at around the same time. One cannot help but think that there is something else at play here.

Enough about YouTubers. Lets get back to the topic of forecasting.

I somehow get a sense that these forecasters are enamored with the thought of getting one of these predictions right, so this could be their “Haha, I told you so.” moment. Or maybe it is our society’s craze with placing such forecasters at a higher pedestal if they happen to get one prediction right. For instance, the media is obsessed with following Michael Burry’s stock market moves, especially given that he was one of the first forecasters of the GFC and subprime mortgage crisis. Thoughts being: surely Michael Burry knows what he is doing, he got it right once, and he might get it right again. Right? I really don’t know. But there is one glaringly obvious flaw in this reasoning: it makes the assumption that all previous recessions or bear markets have some common characteristics making it easy to predict its onset. Again it is the falling into the same trap of trying to predict the onset of a complex situation through a simplistic model.

Do we really need to care?

Marks ends his memo with the question of what should the average investor focus on as far as forecasting. I share his opinion in that the average investor will be better served by resigning to the notion that all forecasting in general, and economic forecasting in particular, is futile and more importantly unnecessary.

Instead, it is far better to play this game by working out the probabilities. In my valuations, I use a standard project management technique called building a three-point estimate. This is a fancy name to a rather simple concept. The idea to come up with three scenarios: best-case, worst-case and most-likely estimate and work out our valuations based on these estimates. Of course, fundamentals with each business could change depending on new inputs at which point we may have to re-asses our valuations accordingly. In summary, it is better to be reactionary than to speculate (with some false notion of certainty).

What are your thoughts on forecasting? I am really curious to know.


Lets talk about : 3M

In my last post, I mentioned that I was closely looking at my position in 3M especially in light of all the negative news surrounding the company. I had a similar post last month about another company, Intel, whose stock has been slaughtered after a disastrous earnings report. In fact, I am planning to make both these articles part of a series called “Lets talk about”, with the general theme being discussions around what is going wrong with the companies being discussed and how that impacts my outlook for them.

While I would always like to own companies that would be high-flying winners with no negative news, this is simply not practical. In fact, the bigger the company, the greater the risks as they always seem to have a target on their back for one or the other reasons.

3M at a glance

I have not had an opportunity to do a deep dive post on 3M on this blog as yet. But this is a well-known company to the general public and one of the darlings of the dividend investing community. The origins of the company can be traced back to five businessmen who started this company as a mining venture to mine corundum in Minnesota back in 1902 (hence the name Minnesota Mining and Manufacturing Company, and hence 3M). Since then, the company has grown leaps and bounds and expanded into so many fields that it is impossible to keep track of the progress. Per 3M’s website, they have a portfolio that is more than 60,000 products and acquire more than 3000 new patents annually on an average!

As far as dividends, the company has been paying a dividend since the last 100 years, of which they have managed to increase their quarterly dividend for 64 years!! No wonder this dividend king is a darling of the investing community!

I remember reading a quote somewhere (could not trace the source for this) that stated that you are never more than 10 minutes away from a product manufactured by 3M. It would be hard for me to dispute this given their vast portfolio.

My first introduction to 3M was oddly through a floppy disk. There is a good chance some of you may be wondering what does a floppy disk mean? Looking at this image here:

Remember these? Yes! this were not “3D printed Save Icons”, these were actually a thing! Back in the mid 90s, some of the kids from my generation used to use floppy drives to save files and carry computer data. Yes, the capacity was just 1.44MB. If you are laughing, I don’t blame you. Computers and storage media have come a LONG way since then.

Recent trends

Unfortunately, since about 2019, 3M has been struggling to record meaningful growth. The pandemic kind of threw a spanner in the wheels as Industrials as a sector has been struggling since then. Supply chain issues have not helped them as well. This is further evidenced in the dividend increases for the last two years, which have been lousy 1c increases, much to the disappointment of several dividend investors who have invested in this company.

In my case, although I was disappointed with the dividend increases, I had faith in this company and my investment. As far as fundamentals, the company, even during these times, was generating enough free cash flow. Here is the FCF/share for the last 5 years:

FCF dividend payout %57%65%61%51%58%

As one can observe, aside from 2021, 3M managed to increase its FCF/share and the dividend payout w.r.t FCF was also hovering around the 50-60% mark. This ensures that the dividend is safe and that management could slow down increases in what is a very difficult economic environment.

Also, if one were to look at the company’s R&D expenses for the last few years:

R&D expenses (in mill)18701821191118781994
% of net sales5.

Here again, the company was spending a fairly significant portion of their revenue towards R&D. This is a pretty important consideration to retain competitive advantage.

While all of this was good, I wanted to see something more from the management as far as company direction in what they were anticipating to be turbulent times. While they were silent for most of 2021, to their credit, they announced their decision to spin-off their food safety business towards the tail end of 2021.

The “Sh*t hitting the fan” moments

As 3M were navigating these uncertain waters, they are now also facing legal trouble from two different lawsuits:

  1. 3M’s PFAS chemical production allegedly leading to ground water contamination: While there have been cases related to these in the US, these have now also been reported in parts of Belgium.
  2. Allegedly defective ear plugs produced by Aearo Technologies, a 3M subsidiary.

The second litigation has received a lot of coverage in the news since it involves nearly 230,000 separate cases from affected army veterans. 3M, in response, has since decided to also spin-off its health care business, while also placing Aearo Technologies under bankruptcy per Chapter 11. This is eerily similar to a strategy J&J used to deal with their talc powder lawsuits. Unfortunately for 3M, the bankruptcy judge has struck down the case and refused to temporarily halt the ear-plug lawsuits. 3M and Aearo have since claimed that they will appeal this decision.

So what does all this mean?

Well, there is a lot to unpack here. Firstly, if the earplug litigation goes through, 3M is believed to be facing up to $100 bill in damages. And this is just with the defective earplugs lawsuit. I am still not sure what the PFAS related lawsuits would result in, in terms of damages.

At the time of writing this, 3M has a market cap of $68 bill.

I do not foresee 3M being able to raise their dividends by any meaningful margin. Add to this, the economic environment that we are in and the possibility of a recession, this is not looking good at all!


Phew!! Well this is looking horrible for 3M. But I wanted to take a step back and see what this means to me and my portfolio:

  • 3M is listed as one of my Core positions with a target allocation of 4%. While the stock has tanked, I am not selling at this time. I am instead choosing to hold and watch this situation to see how it evolves. I will also need to go ahead and downgrade this to one of the lower tiers during these times. I will not be buying at this time as I see better opportunities elsewhere.
  • I have written previously about the importance of diversification and this situation reemphasizes that notion. If I had a concentrated portfolio with 3 stocks like Warren Buffett and/or Charlie Munger recommend, with one of them being 3M, that would be a disastrous situation. No matter how well I know the company, I simply could NOT have seen these lawsuits coming.
  • These are testing times for both me and the businesses I own. It is easy to own stocks when life is all song-and-dance and the stock price can only go upwards. The real test of patience as an investor is when the businesses you own are navigating troubled waters.

3M has been an iconic company, one that has rewarded its shareholders for several decades. Its consumer products have been used the world over. I genuinely hope this is nowhere near the end of the road for this great company. We shall see how this situation evolves in the months ahead.

Monthly Income Report – August 2022

Dear Readers,

Everything in the world around my family seems expensive, right from buying a some good take-out dinner to shopping for daily groceries to paying for gas. The finance community may argue about whether we are in a recession or not, but one sure sign that something in the economy is not quite right is when you start seeing big companies either announce hiring freezes or announce layoffs. Well, I saw news flashes that both Google and Microsoft were in the process of laying off some of their workforce. That is never good news.

In the midst of all this negativity, the “ka-ching” sound of dividend checks hitting my mailbox is one that will allow me to rest easy. Let us get into the numbers to see how this month went.

Dividend Income Received

Sl. No.Company / ETF (ticker)Amount
1Apple (AAPL)$2.54
2AbbVie (ABBV)$20.34
3Albertsons (ACI)$1.21
4Caterpillar (CAT)$1.22
5Clorox (CLX)$52.46
6Costco (COST)$2.71
7Procter & Gamble (PG)$12.03
8AT&T (T)$1.17
9Texas Instruments (TXN)$78.86
10Verizon (VZ)$28.7
11Realty Income (O)$15.91
12JP Morgan Equity Premium ETF (JEPI)$3.48
13STAG Industrial (STAG) $3.79

So a total of 13 companies/ETFs contributing a total of $224.42 towards the monthly income. I did not write any option contracts for this month, as I was expecting wild swings in the market for the positions where I typically sell covered calls. At this same time last year, I had earned a total of $61.23 in monthly income. While I have been aggressively buying during this year, I have had meaningful increases from most of my dividend payers in the list above, except for T.

Buys and Sells in this month

It was generally a quite month for me as far as investment activity. I don’t know about you guys, but I was struggling to make up my mind about what to buy during this time. I did do some cursory “staying in the game” purchases, especially for positions where I had exceeded a pre-determined threshold since my last buy. This resulted purchasing small tranches in JEPI, PG, SCHD and O. While I was at it, I also decided to add to my VZ position. VZ’s stock dropped after its last earnings report and is currently yielding above 6% in dividends. While I am expecting very slow growth with this telecom giant, I see this as a safe bet and consider this as a good time to add to what is essentially a “bond-like” position in my portfolio.

No sells again during this month.

Even though I was quiet as far as investment activity, I spent most of time deeply contemplating about my MMM position. 3M has been in the news a lot, and that is generally never a good sign for any company. They are being sued by military veterans who claim to have suffered hearing impairment due to the use of faulty earplugs manufactured by Aearo Technologies, a 3M subsidiary. And if that was not bad news as it is, they are also being dragged to court for another lawsuit surrounding harmful chemicals (called PFAS) contaminating ground water.

I think this subject deserves its own post as there is a lot to say here and learn from this experience. So I’ll reserve my thoughts for now.


We are into the last quarter of the year already! And while work has been hectic, I have been trying to focus some of my time towards my health as well, going out on regular walks/runs, spending some more time looking after my yard etc. It has actually helped me stay away from all the negativity in the news and keep my head space clear.

Until next time…