Investor Education: Acid Test Ratio
The acid test ratio, also known as the quick ratio, is a financial ratio used to evaluate a company's short-term liquidity or ability to meet its short-term obligations. It measures a company's ability to pay off its current liabilities with its most liquid assets.
Learn more about Acid Test Ratio here!
A Different World
“Certainly, the odds in games where the rules are clearly and explicitly defined are computable and the risks consequently measured. But not in the real world. For mother nature did not endow us with clear rules. The game is not a deck of cards (we do not even know how many colors there are). But somehow people ‘measure’ risks, particularly if they are paid for it.” —Nassim Taleb (“Fooled by Randomness”)
Last week, the S&P 500 ended up 0.79%, and the Nasdaq was positive by 0.29%.
It was also a week in which we heard from Warren Buffett. In an interview with CNBC, Mr. Buffett pointed out that economics isn’t like physics. In the physical world, you know the speed of sound and light and how long it’ll take an apple to fall from a tree if you have the right measurements.
But in economics, to quote Buffett, “the equation changes every time because of the experience of the previous time.”
The points above were made regarding the banking issues of the last couple of months. People remember what happened in 2008-2009, and that affected how people responded in 2023. Money wasn’t “lazy,” to use Buffett’s word, when bank issues surfaced this year—people moved their cash, quickly, and that caused some banks to fail. “2023 is a different world” compared to 2008, according to Buffett.
And while the Oracle of Omaha doesn’t think any depositors will lose money during the next year—and is willing to make a $1 million bet (for charity) with anyone who thinks otherwise—he does think it’s possible that we’ll have more bank failures. Risk management was often done through the rearview mirror of low interest rates and a Fed with its finger on the ‘purchase’ button, and things have now changed.
As the tides of low rates and accommodative central banks have begun to recede over the last year, we’ve seen a few naked swimmers. It seems like we’ll see plenty more before all is said and done in this cycle.
“It’s our job at Berkshire to... take cognizance of what happened in the past, but you have to worry about things that people haven’t seen yet.” —Warren Buffett
“Unfortunately in this kind of work, where you are trying to determine relationships based upon past behavior, the almost invariable experience is that by the time you have had a long enough period to give you sufficient confidence in your form of measurement, just then new conditions supersede and the measurement is no longer dependable for the future.” —Benjamin Graham
Tweets of the Week
In Case You Missed it…
Transcript of CNBC’s interview with Berkshire Hathaway Chairman & CEO Warren Buffett
100 Baggers: Stocks that Return 100-1 w/ Chris Mayer (TIP543) (video)
Mohnish Pabrai’s Talk and Q&A session with students at the University of Texas on February 28, 2023
Conviction Investing - by Ian Cassel
Grant's Current Yield Podcast: SMALL CAP HUNTING
Founder’s Podcast: #298 I had lunch with Sam Zell
What Got You There Podcast: #341 Sean Foley- Golf’s Top Coach on Unlocking Human Performance
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