Dah Hui Lau (David): December 2005

Thursday, December 29, 2005

What has Worked in Investing by Tweedy, Browne Company LLC

Studies of Investment Approaches and Characteristics Associated with Exceptional Returns

http://www.tweedy.com/library_docs/papers/what_has_worked_all.pdf

Great article.
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

Value Investing Presentation by Prof. Sanjay Bakshi; August 13, 2002

Prof. Sanjay Bakshi is professor of finance in India.

Here is his value investing presentation at Oxford Book Club.

http://sanjbak.com/Value_Investing_Talk.pdf

Enjoy this superb presentation.

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

The Graham and Dodd Lecture Series; Value Investing Seminar London; August 4-5, 2005

The speaker is Prof. Bruce Greenwald from Columbia University, where Benjamin Graham worked before. The 3 hours video archive is free.

Here is link for Value Investor Seminar:
http://gabelli.savvislive.com/ValueInvestingSeminar/#

Enjoy the seminar.

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

2005's Value Creators and Destroyers December 21, 2005

We've crunched the numbers and found this year's winners and losers.....

Enjoy the reading from Morningstar

Warmest regards,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

Wait for the Right Price Part 2; June 25, 2004

Despite a stellar record, Morningstar's Mark Sellers admits he's not perfect: "My timing when I sell seems always to be too early"

Enjoy reading from BusinessWeek Online

All the best,

Dah Hui Lau (David)
dahhuilaudavid@gmail.com

Wait for the Right Price Part 1; June 23, 2004

In Part 1 of a Q&A, Morningstar whiz Mark Sellers explains his basic approach to investing. "We don't do much trading," he says

Enjoy reading from BusinessWeek Online

All the best,

Dah Hui Lau (David)

dahhuilaudavid@gmail.com

Friday, December 23, 2005

Interview with Arne Alsin

TheStreet.com has posted excerpts from the latest Value Investor Insight interview with Arne Alsin

Our Favourite Stock Idea: Berkshire Hathaway

Great presentation by Glenn Tongue & Whitney Tilson at Value Investing Congress on Nov 16, 2005.

http://www.valueinvestingcongress.com/Tilson-Tongue-BRK-presentation.pdf

Thank you to T2 Partners LLC for sharing the insight.

Enjoy the presentation.

Warmest regards,

Dah Hui Lau (David)

Audio Interview of Joel Greenblatt

The Motley Fool, December 2, 2005 · David Gardner talks investing with Joel Greenblatt, the founder and managing partner of Gotham Capital, a private investment partnership that has achieved 40-percent annualized returns since its inception in 1985. Greenblatt's new book is The Little Book That Beats the Market.

http://www.npr.org/templates/story/story.php?storyId=5036846

Benjamin Graham on Fixed Income (Bond) Investing

A wonderful article on fixed income investments by Benjamin Graham

Thank you Prof Brian Zen for the link.

Thursday, December 22, 2005

Olstein Financial Alert Fund

Bob Olstein of Olstein Funds has published an ebook - "A Decade of Shareholder Letter excerpts" for Olstein Funds 10th Anniversary.

Thanks for www.Vinvesting.com for the link.

Wednesday, December 21, 2005

Cost of capital

Munger: "Obviously, consideration of costs is key, including opportunity costs. Of course capital isn't free. It's easy to figure out your cost of borrowing, but theorists went bonkers on the cost of equity capital. They say that if you're generating a 100% return on capital, then you shouldn't invest in something that generates an 80% return on capital. It's crazy." (2001 Annual Meeting)

Buffett: "A corporation's cost of capital is 1/4 of 1% below the return on capital of any deal the CEO wants to do." (2001 Annual Meeting)

"I've listened to many cost of capital discussions and they've never made much sense. It's taught in business school and consultants use it, so Board members nod their heads without any idea of what's going on." (2001 Annual Meeting)

Economic Value Added

Asked to elaborate on his comments at the Berkshire Hathaway meeting on Stern Stewart and their concept of Economic Value Added, Munger said:

"It's obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn't sell books, so there's a lot of twaddle and fuzzy concepts that have been introduced that don't add much -- like cost of capital. It's accepted because some of it is right, but like psychoanalysis, I don't think it's an admirable system in its totality." (May 15, 2000)

Be satisfied

"Here's one truth that perhaps your typical investment counselor would disagree with: if you're comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy.” by Charlie Munger (May 15, 2000)

Practice Evolution

"This is really important. For example, Hertz and Enterprise Rent-a-Car through practice evolution have developed personnel systems, etc. that work for them. They are like different species in similar ecological niches." by Charlie Munger (May 15, 2000)

"Common stock investors can make money by predicting the outcomes of practice evolution. You can't derive this by fundamental analysis -- you must think biologically.” by Charlie Munger (May 15, 2000)

"Another example is Tupperware, which developed what I believe to be a corrupt system of psychological manipulation. But the practice evolution worked and had legs. Tupperware parties sold billions of dollars of merchandise for decades.” by Charlie Munger (May 15, 2000)

"We wouldn't have bought CORT if we didn't like the culture, which resulted from long practice evolution." by Charlie Munger (May 15, 2000)

Derivatives

"Originally, there were interest rate swaps. If you did them naked, you could lose or make an enormous amount. But there wasn't enough money for traders, so they adopted mark-to-market accounting. Everyone caved, adopted loose [accounting] standards and created exotic derivatives linked to theoretical models. As a result, all kinds of earnings, blessed by accountants, are not really being earned. When you reach for the money, it melts away. It was never there." by Charlie Munger (May 15, 2002)

Expect the unexpected (Japan example)

"Warren has said that over 40 years, a lot of surprising things will happen." by Charlie Munger (May 15, 2002)

"What's interesting in Japan is that every life insurance company is essentially insolvent because they promised to pay 3%. Who'd have thought that this could lead to insolvency, but interest rates went to zero and stayed there for years. They tried to invest in equities, but got negative returns. Can you imagine 13 years with negative equity returns and interest rates below 1%?" by Charlie Munger (May 15, 2002)

"Is it inconceivable that it could ever happen here? I don't think so. Strange things happen." by Charlie Munger (May 15, 2002)

"Anyone has to be flabbergasted by Japan's recession, which has endured for 10 years, despite interest rates below 1%. The government is playing all the monetary games, but it's not working. If you had described this situation to Harvard economists, they would have said it's impossible. Yet at the same time, there's an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures. The Chinese are gamblers.” by Charlie Munger (May 15, 2000)

Risk of the unexpected

"A lot of things happen that you can't predict. Who would have predicted the war on terrorism, government spending increasing 10% each of the past two years, etc.?" by Charlie Munger (May 15, 2002)

"We try to run our companies so there's no chance of going back to Go. I think we're way more aware of that possibility [the risk of going back to Go], but that's no guarantee [that it can't happen to us]. In our insurance underwriting, we put in more clauses [limiting our risk] and are more aware of aggregate risks." by Charlie Munger (May 15, 2002)

USG

"[Our investment in] USG obviously hasn't worked out very well. It wasn't just asbestos -- the market for wallboard went to hell. We missed that too. What can I say? It reminds me of a story about a man who had a wife and three kids. He conceived an illegitimate child with a woman he'd just met. When asked why he did it, he said, 'It seemed like a good idea at the time.'" by Charlie Munger (May 15, 2002)

Financial industry

"The financial industry has become so big. We keep pushing it further and further and further. For example, we now lease new autos for 36 months and guarantee a high residual value. How much further can you push consumer credit? We don't like it. We don't like pushing credit to extremes. We don't like daisy chain stock promotion. However, one of Berkshire's largest holdings is American Express, so we think it has a great future." by Charlie Munger (May 8, 2001)

Wrigley

"Wrigley is a great business, but that doesn't solve the problem. Buying great businesses at advantageous prices is very tough." by Charlie Munger (May 8, 2001)

Insurance risk

"We write huge policies or ones with unusual limits, but never ones with unlimited liability. The biggest risks are [assumed by] those who write lots of homeowner's policies." by Charlie Munger (2001 Annual Meeting)

How to detect bad reserving

"If [an insurance company's] combined ratio is wonderfully regular, then it's probably crooked. It's also a bad sign if a company is consistently under-reserving." by Charlie Munger (May 8, 2001)

"Sometimes you can tell by the people that the numbers are good. For example, George Joseph of Mercury General is a genius and you know his numbers are right." by Charlie Munger (May 8, 2001)

State Farm

"State Farm is one of the very richest insurance companies in the world. It's an honorable, old fashioned, high-grade place. They have integrity and skill. In condominium insurance, for example, they're the best. They're in Indiana, don't have elaborate compensation schemes, no stock options, and no high-falutin' advisors -- and they've blown by competitors. We admire them." by Charlie Munger (May 8, 2001)

"They're enormously rich, so if they decide to keep a lid on auto insurance, I can't predict when they might stop. We [at GEICO] have a better model though." by Charlie Munger (May 8, 2001)

Retailing and Costco

"If I were teaching at business school, I'd take people through retailing because it's easy to understand. Retailing is pretty simple. There are four or five strategies." by Charlie Munger (May 8, 2001)

"I'm a director of Costco. It's easy to understand. In the history of the world, few companies have succeeded on a 12% mark-up. They make it up with high volume. Costco has the right culture. They promote from within. It's a wonderful place to work." by Charlie Munger (May 8, 2001)

"I think that Costco is a better operator in the warehouse club format than Sam's. Both companies will do well in the future, but I predict that Costco will do better." by Charlie Munger (May 8, 2001)

How to get rich

“A young shareholder asked Munger how to follow in his footsteps, and Munger brought down the house by saying, "We get these questions a lot from the enterprising young. It's a very intelligent question: You look at some old guy who's rich and you ask, 'How can I become like you, except faster?'" (May 9, 2003)

Munger's reply was: "Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts... Slug it out one inch at a time, day by day, at the end of the day -- if you live long enough -- most people get what they deserve." (May 9, 2003)

The importance of reading

"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero... You'd be amazed at how much Warren reads -- at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out." by Charlie Munger (May 9, 2003)

Universities

"There's a lot wrong [with American universities]. I'd remove 3/4 of the faculty -- everything but the hard sciences. But nobody's going to do that, so we'll have to live with the defects. It's amazing how wrongheaded [the teaching is]. There is fatal disconnectedness. You have these squirrelly people in each department who don't see the big picture." by Charlie Munger (May 15, 2002)

Buying into stock declines

"Over many decades, our usual practice is that if [the stock of] something we like goes down, we buy more and more. Sometimes something happens, you realize you're wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices." by Charlie Munger (May 15, 2002)

Investing mental models

"You need a different checklist and different mental models for different companies. I can never make it easy by saying, 'Here are three things.' You have to derive it yourself to ingrain it in your head for the rest of your life." by Charlie Munger (May 15, 2002)

"You must know the big ideas in the big disciplines, and use them routinely -- all of them, not just a few. Most people are trained in one model -- economics, for example -- and try to solve all problems in one way. You know the old saying: to the man with a hammer, the world looks like a nail. This is a dumb way of handling problems." by Charlie Munger (May 15, 2000)

Becoming a good investor

"If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It's like playing golf -- you have to work on it." by Charlie Munger (May 15, 2002)

Extraordinary Charges

"If it happens every year like clockwork, what's so extraordinary about it?" by Charlie Munger (May 8, 2001)

The scandal of American pension fund accounting

"IBM (NYSE: IBM) just raised its return expectations for its pension fund to 10%. [Editor's note: Companies can make adjustments to the assumptions that make up the value of their pension funds, which can affect reported earnings.] Most companies are at 9%. We think 6% is more realistic. They may believe it -- they're honest people -- but subconsciously they believe it because they WANT to believe it. It makes earnings good so they can promote the stock.” by Charlie Munger (May 8, 2001)

"The reason accountants don't say anything is best summed up by the saying, 'Whose bread I eat, his song I sing.' I think you're getting very foolish numbers in American accounting. I don't think it's willful dishonesty, but it might as well be." by Charlie Munger (May 8, 2001)

Future returns from equities

"If I'm wrong [about future stock market returns being in the mid-single digits], it could be for a bad reason. Stocks partly sell like bonds, based on expectations of future cash streams, and partly like Rembrandts, based on the fact that they've gone up in the past and are fashionable. If they trade more like Rembrandts in the future, then stocks will rise, but they will have no anchors. In this case, it's hard to predict how far, how high, and how long it will last.” by Charlie Munger (May 8, 2001)

"If stocks compound at 15% going forward, then it will be due to a big 'Rembrandt effect.' This is not good. Look at what happened in Japan, where stocks traded at 50 to 60 times earnings. This led to a 10-year depression. I think that was a special situation, though. My guess is that we won't get extreme 'Rembrandtization' and the returns will be 6%." by Charlie Munger (May 8, 2001)