In this webcast, Jason Zweig discusses the following:
- The prediction addiction: Why do you think they call it "dopamine?"
- What happens in your brain when your expectations are confirmed — or shattered by surprise
This webcast comprises a 51-minute presentation and an 11-minute question-and-answer session.
Saturday, December 29, 2007
Friday, December 28, 2007
Warren Buffett, seizing a chance to profit from turmoil in the nation's credit markets, is starting up a bond insurer that aims to make it cheaper for local governments to borrow and promises to be a tough competitor for the industry's embattled incumbents.
The billionaire investor's Berkshire Hathaway Assurance Corp., set to open for business today in New York state, will guarantee the bonds that cities, counties and states use to finance sewer systems, schools, hospitals and other public projects.
The new venture, backed by an almost-certain triple-A credit rating, is likely to be cheered by municipalities and municipal-bond investors because it will offer them an alternative at a time when other bond insurers' ratings look wobbly.
Thursday, December 27, 2007
In a live interview this morning on CNBC's Squawk Box, Warren Buffett called his purchase of a big Marmon stake as a "bet on America over a long time." He also revealed that while he has been approached by financials companies about buying a stake, "we have not seen a deal that causes me to start salivating."
Wednesday, December 26, 2007
Berkshire Hathaway Chairman and CEO Warren Buffett and Tom Pritzker, Chairman of Marmon Holdings today announced that Berkshire will purchase 60% of Marmon Holdings, Inc., a private company owned by trusts for the benefit of members of the Pritzker Family of Chicago.
The closing is anticipated to occur in the first quarter of 2008. Prior to closing, Marmon will make a substantial distribution of cash and certain assets to the selling shareholders. At closing Berkshire will acquire 60% of Marmon for $4.5 billion. The remaining 40% will be acquired through staged acquisitions over a five to six year period for consideration to be based on the future earnings of Marmon. The transaction remains subject to customary closing conditions, including regulatory approvals.
Wednesday, December 19, 2007
Two months ago in my Financial Times column, I listed some of the things I have learnt about the stock market over the years. I likened the market to a game of online poker, with anonymous opponents and continuously evolving probabilities. I received some good reader feedback, so this month I’ve decided to revisit the topic. Here are a few more things I’ve learnt about the stock market.
1. People can’t handle high returns.
People say they want to make a lot of money in the stock market but, because of human psychology, very few can handle the volatility that comes with this pursuit. The pain of losing $1, even temporarily, is much greater than the pleasure of making $1.
The book Fortunes Formula details the origins of a formula developed by Bell Labs mathematician John Kelly. His formula allows a gambler to determine the optimal bet size if the gambler can estimate the odds of winning the bet and the pay-off for winning compared with the penalty for losing. The formula can also be modified so that it applies to multiple simultaneous bets – in other words, a stock portfolio.
By studying the Kelly formula, as I have, it becomes apparent that in order to get optimal portfolio returns, an investor has to be willing to endure a lot of volatility. That is because the Kelly formula will have you making large, concentrated bets when you find favourable risk/reward opportunities. And concentration brings volatility.
This is unacceptable to most people because they irrationally equate short-term volatility with risk. So rather than achieving optimal portfolio returns coupled with high volatility, people would rather achieve sub-optimal portfolio returns coupled with low volatility. And that’s why few funds stand out from the crowd; they’re giving their customers what they want.
Monday, December 17, 2007
A great client presentation from Arnold Van Den Berg at Century Management.It's a 2 hour webcast with associated presentation.
He talked about why inflation and interest rate would be coming down and why Talbot, Gannett, Microsoft and WP Stewart are cheap.
Thursday, December 13, 2007
1. Measure risk
All investment evaluations should begin by measuring risk, especially reputational.
It's crucially important to understand that from time to time, your investments won't turn out the way you wanted. To protect your portfolio, don't set yourself up for complete failure in the first place. Giving yourself a large margin of safety, avoiding people of questionable character, and only taking on risk when you can be sure you'll be satisfactorily rewarded are all steps in the right direction. Companies like Chipotle might have perfectly bright futures, but when their shares are priced for perfection, they might nonetheless prove too risky for savvy investors.
2. Be independent
Only in fairy tales are emperors told they're naked.
With stockbrokers often rewarded for activity, not successful investments, it's critically important to make sure you believe that what you're doing is right. Chasing others' opinions may seem logical, but investors like Munger and Buffett often succeed by going against the grain. Big
Berkshireinvestments such as Coca-Cola, and more recently Petrochina, were largely ignored by the masses when they were first made.
Our brains evolved for survival on the savannah, not the trading floor, says Mr Montier, and are maladapted to the task of investing. People are happiest in groups and feel something akin to physical pain from social exclusion. A willingness to oppose the crowd is the only way to produce superior investment results. But, Mr Montier warns, "pursuing contrarian strategies is a little bit like having your arm broken on a regular basis".
We are also hard-wired for short-term results. Research shows that immediate gains stimulate the emotional centres of our brains, releasing a chemical, dopamine, that makes us feel good about ourselves. In tests, when people are offered a choice between $10 today and $11 tomorrow, most opt for immediate gratification. JM Keynes anticipated these findings long ago, when he observed in The General Theory (1936) that "human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate".
On the eve of the 1929 Crash, Graham was managing what we, in the 21st century, would recognize as a hedge fund. He was long $2.5 million of stocks and bonds against which he was short the same amount. In addition, however, he had $4.5 million in outright long positions, and he had incurred substantial margin debt to own it. In his posthumously published reminiscences, Benjamin Graham: The Memoirs of the Dean of Wall Street (1996), the father of value investing described his state of mind this way: "We were convinced that all of our long positions were intrinsically worth their market price."
So Graham, by heavily mortgaging himself, unwittingly transformed a conservative investment strategy into a risky one. Top to bottom, 1929--32, his fund was down by 70%, a better showing than the 87% drop in the Dow but a calamity still. The once and future investment genius sorely needed income. Where could he find it?
I recently chatted with Mark Sellers, founder of Sellers Capital. The hedge fund boasts roughly $115 million in assets and annualized returns of 35% (before fees) since inception, including a 45% year-to-date return.
In the hour or so I spent on the phone, I learned a great deal about topics like measuring downside risk, evaluating management, and dealing with volatility:
Emil Lee: How does your firm go about researching an investment idea?
Mark Sellers: The first thing we do is figure out what the problem is. Ninety percent of making money in stocks is not losing money, which has to do with knowing what the problem is and how it can be solved. Every company we buy has a problem with it, otherwise it wouldn't be cheap.
We read sell-side reports, SEC filings, and talk to management. Within one or two days, we decide if we're comfortable that the company can solve the problem. Then we do another week or so of further research.
Tuesday, December 11, 2007
Two up-and-coming investment stars talk about their unusual routes to money management. Bridgeway Funds founder John Montgomery explains his quant approach and unusual corporate culture and value investor Whitney Tilson of the Tilson Funds discusses following Warren Buffett's style.
Monday, December 10, 2007
Swiss bank UBS unveiled $10 billion (4.9 billion pounds) in shock subprime writedowns on Monday and said it had obtained an emergency capital injection from the Singapore government and an unnamed Middle East investor.
UBS, which has been severely battered by the U.S. subprime mortgage meltdown, issued a profit warning and cancelled plans for a cash dividend in moves that depressed the company's shares and those of its rivals.
The $10 billion charge was one of the largest writedowns by any global bank since the subprime crisis broke and was the latest sign of the devastation wrought upon some of the world's largest financial institutions from the credit crisis.
If there's such a thing as an aristocracy of American investing, Christopher Browne is a full member.
He's one of five managing directors of Tweedy Browne, a firm co-founded by his father, who brokered stock trades for Benjamin Graham, the creator of modern securities analysis.
Later, when Graham's most illustrious pupil, Warren Buffett, wanted to take a controlling interest in a then sleepy textile company called Berkshire Hathaway, Tweedy Browne bought the stock.
Given this lineage, it's hardly a surprise that Browne would become a spokesman for Graham's and Buffett's investing philosophy.
Tuesday, December 04, 2007
Social-networking phenom Facebook has a new investor.
Hong Kongtycoon Li Ka-shing now owns 0.4% of the operation, in exchange for a $60 million wad of cash. The price is consistent with the terms of Microsoft's earlier and larger stake, valuing Facebook as a whole at $15 billion.
Emil Lee: Can you describe your thought process leading up to your purchase of Tempur-Pedic?
Joe Feshbach: I got involved in September 2005, after Tempur issued a disappointing forecast for the third quarter of that year. The bears were convinced that Tempur had a business with low barriers to entry that [competitors] Sealy (NYSE: ZZ) and Simmons would be able to threaten.
My thesis, in contrast to the bear case, was that Tempur was the leader in specialty bedding, that it was already a leading global brand, and that displacing it would be a lot harder than conventional wisdom [believed at the time].
Our lowest cost basis on the stock was $9.70. Our core position was built around an average of $11.
AutoZone said Tuesday that its first quarter earnings climbed 7.0% on sales of parts with high profit margins. For the period ending November 17, the Memphis, Tenn.-based auto parts retailer reported income of $132.5 million, or $2.02 per share, compared with $123.9 million, or $1.73 per share in the similar period a year ago.
Bill Miller, the legendary Legg Mason Value Trust fund manager, owns shares of Citigroup, the embattled financial services giant that is looking for a new chief executive officer. And Miller has a suggestion about the type of person that the bank should hire to replace the ousted Charles Prince.
He said the bank should find someone who has a similar management style to Hewlett-Packard CEO Mark Hurd. Hurd replaced Carly Fiorina in 2005 and has led a dramatic turnaround at HP, mainly by cutting costs and focusing the computer company on what it does best.
To our Associates:
Yesterday, Sears Holdings announced our results for the third quarter of 2007. While we were not pleased with these results, much of the commentary in the media and on Wall Street following the results ignores the strength of our company and the progress that we have made. In fact, over the past several years, we are one of the few retail companies that have actually reduced our overall debt levels, while at the same time investing over $1 billion on capital expenditures, making investments in inventory for our customers, contributing significantly to our pension plans for our past and future retirees and repurchasing over $3 billion of our shares.
Monday, December 03, 2007
It was Wednesday, and Mr. Ackman, a 41-year-old hedge fund manager, was in the middle of a surprisingly well-attended news conference. He had just finished an hourlong presentation at an investment conference in Midtown Manhattan, and if truth be told, the only reason it had been contained to an hour is that Mr. Ackman had rushed through it, burying his audience in a blizzard of facts, while flipping through an astonishing 145 slides.
If the presentation and ensuing news conference proved anything, it was that Mr. Ackman was incapable of giving short answers. Then again, that’s usually the way it is with obsessives.
To access Bill Ackman's presentation and supporting documentation from the 3rd Annual New York Value Investing Congress, please fill in your information below and confirm that you have read and accept the disclaimer below.
Thanks to Lincoln Minor for this link
Warren Buffett put $2 billion of Berkshire Hathaway's cash to work at the end of last week when the company purchased high-yielding bonds issued by Dallas-based power producer TXU Corp., according to a person familiar with the deal.
Wednesday, November 28, 2007
Thanks Lincoln Minor for this link:
Tuesday, November 27, 2007
I was asked this question during a job interview I had some six years ago with a St. Louis-based brokerage firm. I bombed it. And it has haunted me ever since. How could I fail to articulate a coherent response to such a simple question? Well, it’s complicated, so allow me to explain.
But first, a little background. The default-recovery process in private student lending is very, very different than it is in other types of consumer lending. The process can take years. In auto lending, by contrast, when the borrower defaults, the car gets repossessed, and the lender might sell it a few weeks later. The recovery proceeds are in hand before you know it. In mortgage lending, the process takes a bit longer, but isn’t likely to last much more than 18 months.
But student lending doesn’t work that way. In student lending (which is unsecured, don’t forget), experience shows that material recoveries take place over several years following the default. You probably don’t have trouble figuring out why, either. For starters, many delinquent borrowers will eventually apply for a mortgage—the first ones might just four or five years after they graduate--and will want to get that student loan derogatory off their credit files in order to get their loan. Or a borrower’s earnings power will eventually rise (over four or five years, say) to the point where he can service the loan without much financial strain. For whatever reason, recoveries take place over many years. Remember, the loans are not dischargeable in bankruptcy, so there’s never a time when it’s not worth the lender’s time and effort to keep dunning.
Emil Lee: Can you walk us through the economics of the Equitas deal?
Marc Mayerson: Under the deal, [Berkshire subsidiary] National Indemnity will reinsure all of Equitas' liabilities and provide a further $7 billion of reinsurance coverage for Equitas. Equitas has [loss] reserves presently of $8.7 billion (as of March 31, 2006), and National Indemnity will commit an additional $5.7 billion of reinsurance capacity.
Once Equitas pays out $8.7 billion in future losses -- which will probably take a couple of decades -- Berkshire is on the hook for an additional $7 billion of coverage.
"Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise."
-- Marty Whitman
I am a frankly worshipful admirer of Graham's. I love him for his heart as much as for his head. Between 1929 and 1932, his investment partnership lost 70% of its value. Not until 1936 did it recoup all it relinquished since the Crash. Yet Graham persevered and, along with his partner, Jerry Newman, went on to achieve a brilliant long-term investment record—not excluding those three disastrous years. We have all heard the platitude, "The first rule of investing is not to lose money and the second rule is not to forget the first." Very helpful. Well, Graham shows that a debilitating loss is no reason to give up. . . . Never quit.
Tuesday, November 20, 2007
We analyze the performance of Berkshire Hathaway's equity portfolio and explore potential explanations for its superior performance. Contrary to popular belief we show Berkshire's investment style is best characterized as a large-cap growth. We examine whether Berkshire's investment performance is due to luck and find that beating the market in 28 out of 31 years places it in the 99.99 percentile; however, incorporating the magnitude by which Berkshire beats the market makes the �luck� explanation unlikely even after taking into account ex-post selection bias. After adjusting for risk we find that Berkshire's performance cannot be explained by assuming high risk. From 1976 to 2006 Berkshire's stock portfolio beats the S&P 500 Index by 14.65%, the value-weighted index of all stocks by 10.91%, and the Fama and French characteristic portfolio by 8.56% per year. The market also appears to under-react to the news of a Berkshire stock investment since a hypothetical portfolio that mimics Berkshire's investments created the month after they are publicly disclosed earns positive abnormal returns of 14.26% per year. Overall, the Berkshire Hathaway triumvirates of Warren Buffett, Charles Munger, and Lou Simpson posses' investment skill consistent with a number of recent papers that argue investment skill is more prevalent than earlier papers suggest.
Wednesday, November 14, 2007
He has only a grade 12 education and used to labor as a Bell Canada repairman. He has never worked for a big bank or a mutual fund company. He largely shuns the Courvoisier-chugging Bay Street set. But if you're searching for the best mutual fund manager in Canada, you'll find it difficult to avoid quiet, shy Francis Chou.
Quite simply, Chou's numbers are eye-popping. His flagship, the Chou Associates Fund, has achieved compounded returns of about 16% a year for 24 years, leaving his competitors in the dust. In acknowledgment of his outstanding record, he was named the Morningstar Fund Manager of the Decade at the Canadian Investment Awards in 2004. "The reason he got the award," says Scott Mackenzie, president and CEO of mutual fund research firm Morningstar Canada, "is because he's head and shoulders above anyone else in terms of risk-adjusted performance. That means he not only achieved superior performance, he did it in a way that his results were substantially less volatile than other funds like his."
How did this immigrant from Allahabad, India, who came to Canada back in 1976, beat the best and brightest that Bay Street has to offer? It's not an easy question to answer, because Chou is a very private man. He has granted few interviews over the last 20 years and when he does talk, he avoids discussing his personal life. Chou seems to be mystified as to why anyone would care what his parents did (his father was a professor and his mother a university lecturer), how old he was when his dad died (very young), or how many brothers and sisters he has (one older brother, three younger sisters, all now living in Canada). He sees himself as a regular sort of guy who showed up in Canada at age 20 with $200 in his pocket, landed a job at Bell Canada, and proceeded to become fascinated by the writings of Benjamin Graham, the Wall Street financier widely regarded as father of value investing.
Flush with more than $45 billion in cash on its books, a triple-A credit rating and decades of experience insuring other insurers against catastrophic losses, Berkshire Hathaway is in a strong position to help provide relief to some of these companies and could get into the bond-insurance business itself, people familiar with the matter said.
"Fear has moved away from hurricanes and is now moving into the financial markets," said Glenn Tongue, a partner at T2 Partners LLC, a New York hedge fund that owns Berkshire Hathaway shares. "Warren Buffett can make a lot of money from fear," he said.
Tuesday, November 13, 2007
In Guns, Germs, and Steel I asked why history has unfolded differently over the last 13,000 years in Eurasia, in the Americas, in sub-Saharan Africa, and in Aboriginal Australia, with the result that within the last 500 years Europeans were the ones who conquered Native Americans and Aboriginal Australians and sub-Saharan Africans, rather than vice versa.
Most of that book, was concerned with comparing the peoples of different continents, but I knew that I couldn't publish a book comparing the histories of different continents and considering Eurasia as a unit without saying something about the fascinating problem of the differences of history within Eurasia. Why, within Eurasia, was it Europeans who conquered the world and colonized other people, rather than the Chinese or the people of India or the Middle East? I devoted seven pages to that subject at the end of Guns, Germs, and Steel, and I think I arrived at the correct solution. Nevertheless, since the publication of Guns, Germs, and Steel, I've received a lot of feedback, and the most interesting feedback has been about the implications of that comparative analysis of the histories of China, Europe, India, and the Middle East.
Friday, November 02, 2007
Lim Goh Tong, Malaysia's third-richest man who turned a forested hilltop into a thriving casino resort, died Oct. 23, leaving behind a diverse business empire worth $22 billion. He was 90.
Mr. Lim was the founder of Genting Group of companies. His son, Lim Kok Thay, who took over from Mr. Lim as Genting's chief executive in 2004, did not give a cause of death in his statement.
"He is also a well-known philanthropist. I believe his death is a loss not only to the nation but also to the business and entrepreneurial community in the country," Abdullah said.
If you believe that thinkers never accomplish much in the real world, you should meet Rob Morrison. He's a quiet, analytical man who started out as a competitive chess player before becoming fascinated by the world of money. Over the past 25 years, while working from his computer in his comfortable Toronto home, he has thought long and hard about how to invest well. By putting his ideas into practice, he has grown his personal portfolio from a few hundred thousand dollars to more than $10 million. During the past decade, he has achieved an amazing 38.5% annual average return—a figure that beats every mutual fund in Canada by at least 15 percentage points a year.
Tuesday, October 30, 2007
Wednesday, October 24, 2007
Ackman used seemingly conservative break-up estimates. Yet the $8.5 billion enterprise value he assigned to Sears' U.S. retail real estate both on and off the mall worked out to just $33.05 per square foot, based on an estimated 257 million square feet. The number pales beside the enterprise values per square foot of Sears' various rivals.
Target and Kohl's both boast implied real-estate values of more than $300 a square foot, or around 10 times Sears' number, despite generating cash flow per square foot less than three times that of Sears. Appliance- and tool-heavy Home Depot (HD) and soft-goods-oriented Penney also have per-square-foot numbers that are multiples of Sears', weighing in at $277 and $144 respectively. The comparison gets downright nutty when Sears is compared to, say, the retailing real-estate investment trust Simon Property (SPG), which, according to Ackman, has an implied mall value per square foot of $698.
Tuesday, October 16, 2007
Important take home messages:
- To be a successful investment firm, one has to deliver long-term superior results through constant, repeatable process that clients could understand.
- The first step towards finding potential investments is using its own proprietary screening method. For every industry, Pzena's team would rank all the companies into five quintiles. The way they do it is by using its current earning and extrapolate naively into the next few years what its earning should be. Then, they would concentrate on finding potential investments on the top quintile.
- Three most important questions they ask themselves regarding potential investments are:
a) Is this company any good? b) Are the problems temporary? c) Will its earning rebound back to normal?
- Pzena and his teams will only invest in companies that answer "Yes" to all those questions.
- Thought process: Think like a business owner rather than a stock picker.
- Pzena team thinks like a business owner and imagine that they are like private equity, buying the whole business and thinking what the companies will earn in future.
- One example that Richard Pzena used was Boeing. Post 9/11, Boeing stock took a hit, dropped from the $70s to the $20s. Through Pzena's own proprietary stock screen, it showed up on the top quintile.
- The conclusion that they made on Boeing was it is a superior company with only one competitor, it has very sticky customers as they would use the same company to service their planes to keep their costs down, it has defense business that is doing well and thus provides downside protection and they believed that its business should rebound in a few years.
- Boeing is definitely a wonderful business, clouded by temporary problems and will have higher normalised earnings in future.
- Investment decision: A team approach.
- For every portfolio, there are 3 co-portfolio managers and everyone of them would have to unanimously say "Yes" before a stock is added into the portfolio.
- Buying an selling strategy: Rigid and discipline; Pay no attention to portfolio managers' intuition.
- They would only buy companies ("Yes to all 3 important questions") that are ranked on the top quintile and sell when the prices approach the middle quintile. Period.
- Portfolio diversification: Concentrated portfolio with 25 to 30 stocks.
- Clients education: Pzena team spends good amount of time educating clients what they are doing and discourage clients who might be upset or nervous if the funds are not doing well in the next 1, 2, 3 or 4 quarters.
- This will results in highly educated and sticky clients.
- In summary: Pzena team uses old fashion, holy grail approach of investing: Buying good businesses, which are available at low prices caused by temporary problems with high likelihood that earnings will rebound in future.
To watch this excellent presentation, please visit: Retail Road Show
Tuesday, October 02, 2007
Pabrai was asked about possibility of investing in commodities, such as gold.
He responded by quoting Buffett, saying, "If Martian were to to observe the activity of human beings for many many years, they would not understand what these humans were doing. They are digging the gold out from the ground, proccess them and put them in the vaults and never touch them again."
He only wants to invest in companies with businesses that Martian could understand.
Another question was what he thought about relationship between volatility of the market to stock market valuation.
His response was.... "You have asked the wrong person, you should ask Chicago Business School." What a great response. Plenty of applause from the crowd.
Understanding his investment in Ipsco.
When he invested in Ipsco, 1/3 of its market cap was cash. It was selling at 2X free cash flow. It has high visibility of earnings for 2 years, but uncertainty after that. Mohnish's thinking was after 2 years of investment, the total amount of cash generated and those on the balance sheet would be equivalent to the total worth of the company at the time of investment. Thus, he would get the steel business for free.
Despite not knowing the intrinsic value of Ipsco at the time of purchase, it was a high uncertainty, but low risk bet. Ipsco was eventually bought out and he earned over 100% of return. Dhandho!
Understanding his investment in Lear Corp.
Duopoly business. The other automotive seat maker is Johnson Controls. High ROIC and has been growing revenue 13% per year for the last 10 years. Problems started in 2005 when commodity prices increased and they were unable to pass the costs to its clients. However, as contracts were running out, Lear could renegotiate its contracts and pass the price increases to clients.
Mohnish sold his position when Icahn offered to buy out Lear. As the deal fell through, Lear is still a listed company. Mohnish mentioned that he might be interested in buying Lear again if price falls below $25/share. So, keep an eye on Lear.
Would he ever hire an analyst?
No. Mohnish said that Buffett, despite managing billion of dollars, is basically one man business. The more brains get into investment, the worse the performance would be. He also quoted Munger for saying.."Nothing useful comes out of a committee."
I was very grateful to have the chance to ask Mohnish a few questions that are relevant to me.
One of the questions was... prior to setting up his fund, has he thought of working for anyone else besides Buffett?
His answer was no. Buffett is the best. He has not thought of working for anyone besides Buffett.
As I don't have any business background and is a self-taught value investor, I asked him what he thought of CFA?
He told me I can skip the CFA. :)
All the above are recollection from my memory, so they might not be the exact words of Mohnish.
If you are interested in seeing some of the photos I have taken at Mohnish Pabrai's meeting, please visit: Mohnish Pabrai 2007 AGM at Chicago
Thursday, September 27, 2007
We were sitting in the audience at the Berkshire Hathaway shareholder meeting in 2006 when Warren Buffett talked about his inevitable shift in deciding to buy solid companies at 90% of X (X being the company’s intrinsic or true value) as opposed to 50% or 60% of X in the past. This shift is largely a function of size as managing enormous amounts of capital usually means paying higher prices and sacrificing some margin of safety in order to “put money to work”. Buffett has in recent years bought shares of companies such as Wal-Mart, Johnson & Johnson, Procter & Gamble, Tesco, and UPS at what we feel is 90% of X.
Here's a riddle for you. Say you could own one of two companies:
- Company A, which earns $2 million with $8 million in net tangible assets, and costs $25 million to purchase.
- Company B, which earns $2 million with $18 million in net tangible assets, and costs $18 million to purchase.
Furthermore, let's assume both companies will have flat unit volume for the foreseeable future. Which one would you pick?
A value investor's dream
Hmm ... let's think about this. If you pick Company B, you get more tangible assets, the same amount of earnings, and you're buying at a multiple of earnings of 9, versus 12.5 for Company A. Not only that, but wasn't Ben Graham, the godfather of value investing, a proponent of buying stocks at a discount to asset values?
Pabrai examined this list and determined that if you had started with $10,000 invested in the most valuable businesses in 1987, when Fortune released its list, and every subsequent year reinvested the funds in what was at the time the most valuable business, in 2002 you'd have an annualized gain of 3.3%. During the same period, the S&P delivered about a 10% annualized return.
You can clearly see from the results that the maximum pessimism approach would yield a far more superior result. As the saying goes, what has risen shall fall, and what has fallen shall soon rise again. Surely not every stock that deteriorates will again rise -- it's up to you to provide the thorough analysis and determine whether or not a superior investment opportunity exists.
Mr. Buffett, in particular, reached out to Mr. Cayne about a month ago, these people said, when the stock was approaching its one-year low of $100. While he is not known to be close friends with Mr. Cayne, Mr. Buffett might find more in common with the Bear Stearns boss than other Wall Street chief executives. Both in their mid-70s, they hail from the Midwest and are passionate bridge players.
``I just talked to Mr. Buffett,'' Wilson wrote, ``and he said that he is a big fan of Joba and that the welcome mat is out here anytime!''
``It says a lot about Joba,'' Ogilvie, the golfer, wrote via e-mail. ``The amazing thing about an audience with Mr. Buffett, his advice about money is directly correlated to whatever job you are doing, whether it be golf or a pitcher. Discipline wins. And Joba and the Yanks will be better in the long run.''
An unsettling thought for hitters.
Friday, September 14, 2007
FRANCHISE PLAYER: For years, the bears’ big complaint about First
has been that that the company doesn’t contribute anything of material value the student-loan origination process. It doesn’t lend (the bank partners do); it doesn’t service (third-party servicers do); it doesn’t guarantee (TERI does), and on and on. Eventually, therefore, Marblehead will be disintermediated by its partners and its business will disappear. Simple! To back up this line of thinking, critics pointed in instructive contrast to Sallie Mae, which originates a substantial portion of its business directly, without involvement of partners, and thus has its own solid, standalone franchise. Marblehead
I happen to think that objection is nonsense, of course.
has considerable underwriting and product development expertise its competitors and partners can’t duplicate. If the company weren’t part of the lending process, its partners wouldn’t be able to originate student loans nearly as profitably as they do. Marblehead
But not so long ago you called Countrywide a prime company, with subprime accounting for only 7% of the business. You lambasted the poor underwriting standards of other lenders. And then in March, I remember you came on my show and said Countrywide would benefit from the subprime chaos as irrational lenders got blown out. Why do you think the events turned out differently?
They didn't. They have been blown out. You know, the Ameriquests, the New Centurys, the Own Its—just go through the whole list of them—are gone. So they have been blown out. And over time Countrywide will be the beneficiary.
There's been speculation that the Federal Reserve lowered the discount rate specifically to prevent Countrywide from going under after it couldn't draw on the commercial paper markets for capital. What do you think?
Absolutely not. I think that's placing an inordinate amount of importance on Countrywide. This deal [with BofA] was struck long before the discount rate was changed.
Ballmer decided he needed a new human resources chief, someone to help improve the mood. Rather than promoting an HR professional or looking outside, he turned to perhaps the most unlikely candidate on his staff, a veteran product manager named Lisa Brummel.
No one was more stunned than Brummel. The 47-year-old executive is about as un-HR as you can imagine. She shuns business books (her taste runs to historical nonfiction); she takes the bus to work (using the 20-minute ride to zone out); and her wardrobe (shorts and sneakers) is in flagrant violation of the HR fashion police.
When Ballmer floated the HR job in April, 2005, Brummel said: No way. But Ballmer wasn't about to take no for an answer. Picking up a traveling golf putter, the Microsoft chief started taking it apart as he barreled around Brummel's office, hammering home why she was the perfect candidate. As an outsider unsullied by HR dogma, he said, she'd bring a fresh approach. Besides, Ballmer argued, Brummel was hugely popular and had the people skills to get the job done. The two went back and forth, with Ballmer slapping Brummel's whiteboard for emphasis and Brummel parrying with: "But I love doing products." After more than two hours, Ballmer ended the meeting. By then the putter was in pieces. "Sorry about the golf club," he said.
It isn't often that a psychologist helps explain personal finance, but Daniel Kahneman isn't an ordinary psychologist. In 2002 he won a Nobel Prize in economics for his research into how people confront uncertainty.
Raised in France and Israel and formerly a professor at the Hebrew University of Jerusalem, UC-Berkeley and Princeton, Kahneman has spent half a century studying how the human mind works - or fails to.
Just retired at age 73, Kahneman is now writing a book about decision-making in collaboration with Money Magazine's Jason Zweig. The two recently chatted on the record.
Q. Are people rational?
A. Economists argue that people are rational - that they use all available information to make decisions and that those decisions are consistent over time. Psychologists say that is totally unrealistic. Economists think about what people ought to do. Psychologists watch what they actually do.
Q. Such as?
A. How people respond to a risk depends partly on how it is described. An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can't easily recognize that they are the same.
Fear: What are you afraid of?
Here are two questions that might, at first, seem silly.
1 Which is riskier: a nuclear reactor or sunlight?
2 Which animal is responsible for the greatest number of human deaths in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark
Now let's look at the answers. The worst nuclear accident in history occurred when the reactor at Chernobyl, Ukraine melted down in 1986. Early estimates were that tens of thousands of people might be killed by radiation poisoning. By 2006, however, fewer than 100 had died. Meanwhile, nearly 8,000 Americans are killed every year by skin cancer, commonly caused by overexposure to the sun.
In the typical year, deer are responsible for roughly 130 human fatalities - seven times more than alligators, bears, sharks and snakes combined. Deer, of course, don't attack. Instead, they step in front of cars, causing deadly collisions.
None of this means that nuclear radiation is good for you or that rattlesnakes are harmless. What it does mean is that we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost.
Most investors think too much and end up making the wrong moves. Follow these 8 guidelines and make the right ones.Avoid the "sure thing"
Your "seeking system" is especially turned on by the prospect of a big score, and that in turn will hinder your ability to calculate realistic odds for the success of an investment.
The Bank of England has offered an emergency loan to Northern Rock after the mortgage lender became the biggest British casualty of the credit squeeze sparked by the crisis in the U.S. subprime mortgage market.
The central bank's support -- the first time it has acted as lender of last resort in this way since becoming independent on interest rate policy in 1997 -- puts a prop under Northern Rock, which has been hit by a spike in the cost of borrowing from other banks as they become increasingly reluctant to lend.
The government said on Friday it had authorised the Bank to provide an unspecified amount of liquidity to Northern Rock, the country's eighth-largest listed bank, which had the biggest share of the new mortgage market in the first half of this year.
The Bank, which has come under fire from some financial institutions for its hands-off response to market turmoil, said Northern Rock was solvent and only in need of short-term help.
Thursday, September 13, 2007
JASON ZWEIG: I don't know that I'm fearful about the outlook for the markets, so much that I'm worried that investors don't really understand their own fears. I think that's the biggest issue here. The way the human brain works, it takes only 1200ths of a second, that's basically a third the length of the time it takes you to blink your eye, for people to register fear, consciously or unconsciously. The sight, the sound, the smell, red colors, arrows pointing downward, stock tickers, and charts going like this. People become fearful, and in the grip of fear, they cannot be rational. They cannot make a logical decision. And even unconscious fear can skew you're judgment and lead you to do something rash that you would never do in a calm moment.
WHITNEY TILSON: We haven't sold any Berkshire, and we continue to buy it and recommend it. It’s the only stock that’s been in their portfolio in almost nine years that we’ve been managing money professionally. So we are big fans, but recently, I'll echo exactly what Hersh said; generally speaking, stick with blue chip companies, strong balance sheets that can crank out growth even in a declining economy, that have a tail wind. Berkshire Hathaway qualifies, McDonald's, one of our top holdings, qualifies. And our largest position is now Target (TGT). It falls into the general category of very high quality, blue chip stocks, and every value guy owns some of them today, be it, Buffett has been buying Burlington Northern, and Johnson & Johnson, and Microsoft. So we think there are a lot of high quality 80-cent dollars out there. But we only own ones where we think there is a catalyst. As I mentioned before, I don't want to own 80-cent dollars --
CONSUELO MACK: And quickly the catalyst for Target is?
WHITNEY TILSON: Like Kraft, a very high quality activist involved, Pershing Square owns nearly 10% of the company. We're close to the situation, and we think there are some ways that Target can unlock some value, and Pershing Square has a great track record also.
IN THE PAST TWO YEARS, the top finisher in Barron's annual survey of the world's most respected companies was a venerable 19th-century business that solemnly had passed on management responsibility over many generations, each one steeped in the belief that the company and its culture were larger than any single leader.
This year the survey's third, America's, money managers effectively honored not a century-old management tradition or an iconic brand, but one man's extraordinary life's work. Berkshire Hathaway (ticker: BRKA), a one-time New England cotton-mill operator that Warren Buffett transformed over 40 years into a multifaceted 4185 billion colossus, has succeeded last years winner; Johnson & Johnson (JNJ), and 2005's first-place finisher, General Electric (GE), as the most respected company in the world.
It is appropriate that Buffett, known principally for his capital-allocation genius, should be held in highest esteem in the Barron's survey, the only ranking of corporate reputation based exclusively on the views of professional investors. These investors' comments about Berkshire were unanimously reverential, their tone suggesting such reverence should be obvious to all. "C'mon, it's Berkshire," wrote one money manager.
"Clearest-thinking investor of our time -- Warren Buffett," wrote another.
U.S. investor Warren Buffett's Berkshire Hathaway Inc sold more of its stake in top Chinese oil producer PetroChina Inc in late August, selling about US$136 million worth of shares, as it took profits on what has been a lucrative holding.
Wednesday, September 12, 2007
Here are some conclusions from the discussion:
- Predictions are difficult in culturally biased realms, including media and investment ideas.Through a novel experiment, researchers showed an average song can become a hit or a clunker based on the principle of cumulative advantage.
- Investors should think probabilistically. However, they must show considerable caution incounterfactual thinking, an exploration of what could have been. Further, counterfactual thinking can lead to some suboptimal behavior.
- We often make up causes for the effects we see. Management tomes are filled withadvice derived from reverse-engineering the success of leading companies without awareness of how specious the claims are. As theories become more robust, they often rely more on circumstances than attributes.
Tuesday, September 11, 2007
Love her or hate her, Body Shop founder Anita Roddick had an outsized effect on how many companies conduct business and on how many consumers view corporate power.
Much of her impact came from her way with an epigram. In person, on television, and in her many books—including her last, Business As Unusual: My Entrepreneurial Journey, Profits With Principles—she was a master of distilling her business philosophy to a pithy, memorable sound bite.
That sometimes came back to bite her, as critics scolded her for not living up to her well- and often-expressed business values. A decade ago, for example, one group asserted that so-called "fair trade" ingredients, a pillar of Roddick's "Trade Not Aid" philosophy, accounted for a tiny fraction of Body Shop's sales.
- The Essay of Warren Buffett by Lawrence Cunningham
- The Intelligent Investor by Benjamin Graham
- The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
- Poor Charlie's Almanack by Peter Kaufman
- Common Stocks and Uncommon Profits by Philip Fisher
- The Little Book That Beats the Market by Joel Greenblatt
- You Can Be a Stock Market Genius by Joel Greenblatt
- The Little Book of Value Investing by Christopher Browne
- The Dhandho Investor by Mohnish Pabrai
- Mosaic: Perspectives on Investing by Mohnish Pabrai
- Value Investing: From Graham to Buffett and Beyond by Bruce Greenwald
- Competition Demystified by Bruce Greenwald and Judd Kahn
- More Than You Know by Michael Mauboussin
- Fortune's Formula by Wiliam Poundstone
- Fooled by Randomness by Nassim Taleb
- The Black Swan by Nassim Taleb
- Blink by Malcolm Gladwell
- The Big Short: Inside the Doomsday Machine by Michael Lewis
- The Greatest Trade Ever by Gregory Zuckerman
- The Warren Buffett Way by Robert Hagstrom
- Beating the Street by Peter Lynch
- One up on Wall Street by Peter Lynch
- The Richest Man in Babylon by George Clason
- Warren Buffett Speaks by Janet Lowe
If anyone truly desires to learn the right way to live a full meaningful life... this is a great book to learn from.
It is always very important to learn the right philosophy from the right hero.
The more you read this book, the more you feel awe and amaze by how down-to-earth Warren Buffett is. He is a great example to learn from!
The human brain is inherently bad at dealing with probabilities. This is largely evident in the field of investing where investors try to handicap companies as potential investments, especially in the face of uncertainty. Investors should strive to improve their cognition of probabilities and operate with a frame of mind that helps to compensate for our wiring at birth. As well, investors need to avoid information overload, a few key variables is all one needs to handicap the odds of an investment’s success or failure.
Successful investors think in terms of probabilities, as Charles Munger noted in his 1994 lecture to the University of Southern California , “Buffett…automatically thinks in terms of decision trees and the elementary math of permutations and combinations…” Mr. Munger prescribes that everyone should understand elementary probabilities such as permutations and combinations, as well as decision trees, which are taught in middle school or earlier. For those who wish to learn more or refresh their memory there is a list of books on probabilistic thinking at the end of this article. As well, there is plenty of information available on the internet.
I was pleased that Bubba was forthright enough to e-mail me, but was struck by how weak his objections to the company are. If this is what the Marblehead bears are left with by now, they're on shakier ground than I thought. Let’s go through Bubba’s points one at a time, and you’ll see what I mean:
1. The securitization market is currently closed.
Actually, the securitization markets aren’t closed. Just last week, NelNet completed a $1.5 billion deal. And Phoenix-based NextStudent is set to come to market next week with a $1.4 billion offering. Yes, the market has been disrupted and is challenging. That happens from time to time. But the disruption won’t last forever. It never does. In fact, I expect Marblehead will come to market with a deal of its own any day.
But even if the market were frozen solid, as Bubba seems to think, I still wouldn’t be too concerned. Granted, Bubba’s and my investment time horizons are different. I am a long-term investor and can wait these things out, while Bubba’s fund has a demonstrated record of being quite short-term oriented. A frozen market could be a disaster for Bubba. But unless the freeze lasts for years, Marblehead won’t have to change its business model an iota. As long as the company keeps facilitating loan volume at its current rapid (like, 40%-plus) rate at attractive spread to Treasuries, the company is creating a huge amount of economic value.
Monday, September 10, 2007
Charlie Munger, vice chairman of Berkshire Hathaway believes that investors equipped with the right mental models can achieve long-term returns superior to their less-informed peers. One of the best mental models Fools should stick in their arsenal is the concept of backup systems.....
Final thoughtsDo your own research. Osmium Partners, a hedge fund whose flagship fund boasts 23% annual net returns since inception, requires that its investments pass a rigorous gauntlet in order to be considered a candidate. You should have your own process as well. Put together an investment thesis for yourself.
Need some ideas? Osmium's criteria include substantial net cash on the balance sheet, owner-oriented management, a dominant market share in a niche industry, and extremely low multiples of cash flow. Each additional criterion puts in place another backup system to ensure positive returns, helping to explain Osmium's ability to find multibagger opportunities in small-cap stocks. Put together an investment thesis of your own, and you'll be a better investor in the long run.
Warren Buffett is #5 on the just-released Vanity Fair 100 list, the magazine's annual "power ranking." That's up one slot from last year's #6 ranking, dislodging his good friend Bill Gates.
Saturday, September 08, 2007
Tweedy Browne is money management's equivalent of the Republican cloth coat: nothing flashy, ever dependable, transcending style. It is an organization that was founded in 1920 to deal in thinly traded stocks, and which in the 1950s realized that more money was to be made in owning such typically undervalued shares than in trading them. The firm began to take in outside funds in 1968 and has grown to manage more than $13 billion today.
Thursday, September 06, 2007
Yes, Marblehead recently received a subpoena from the New York A.G.’s office. From what I can tell, every company that’s involved in the student lending business has received a subpoena from the New York A.G.’s office. I understand the A.G. is looking into Marblehead’s GATE lending, which is a tiny (like, 2% of originations), marginally profitable part of its business that the company is in the process of winding down. The subpoena is completely immaterial; the only reason the company even disclosed it is that people in the Attorney General’s office insist on blabbing to the New York Times.
I understand why reporters start researching stories with a set of preconceived notions about what they’re going to find. That’s what I do when I look at companies! But when the facts don’t fit my initial expectations, I change my mind.
Why can’t New York Times reporters manage that? Eric Dash apparently spent months researching this story. He talked to members of the board, to former employees, to competitors, to me—to anyone who had anything of interest to say about the company. He clearly did not find anything incriminating. Is it too much to expect that the tone of his article match that fact? Instead, Dash piles insinuation on baseless allegation, and unfairly smears a company that’s actually doing a lot of good for student borrowers.
Warren Buffett's Berkshire Hathaway Inc. may raise its stake in Burlington Northern Santa Fe Corp. to at least 25 percent on speculation that railroads will haul more freight.
Burlington Northern, the second-largest U.S. rail carrier, said in an Aug. 31 filing that Berkshire disclosed the stock- purchase plan by letter last week. The Fort Worth, Texas-based railroad increased sales each quarter since the start of 2003, even as trucking companies were hindered by higher diesel fuel prices and highway congestion.
Tuesday, September 04, 2007
Gordon Brown, Prime Minister:
“The whole country will be greatly saddened by the death of Jane Tomlinson and our thoughts are with her husband, her three children and all her family and friends.
“Jane’s mission in life was a simple one: to make the most of every day and to help others, and she not only achieved that several times over, but inspired millions of others along the way.
“She fought cancer for seven years and raised £1.7 million for cancer charities.
“We will remember her amazing spirit and strength and that exceptional charity work, and she will be a daily inspiration to our generation to fight on against the terrible scourge of cancer.”
Sunday, September 02, 2007
Capt. Denny Flanagan is a rare bird in today's frustration-filled air-travel world -- a pilot who goes out of his way to make flying fun for passengers.
When pets travel in cargo compartments, the United Airlines veteran snaps pictures of them with his cellphone camera, then shows owners that their animals are on board. In the air, he has flight attendants raffle off 10% discount coupons and unopened bottles of wine. He writes notes to first-class passengers and elite-level frequent fliers on the back of his business cards, addressing them by name and thanking them for their business. If flights are delayed or diverted to other cities because of storms, Capt. Flanagan tries to find a McDonald's where he can order 200 hamburgers, or a snack shop that has apples or bananas he can hand out.
And when unaccompanied children are on his flights, he personally calls parents with reassuring updates. "I picked up the phone and he said, 'This is the captain from your son's flight,' " said Kenneth Klein, whose 12-year-old son was delayed by thunderstorms in Chicago last month on a trip from Los Angeles to see his grandfather in Toronto. "It was unbelievable. One of the big problems is kids sit on planes and no one tells you what's happening, and this was the exact opposite."
So unusual is the service that Capt. Flanagan has been a subject of discussion on FlyerTalk.com, an online community for road warriors.
One of the most successful investors to bet on a credit crunch was Jim Melcher, who has run Balestra Capital, a small New York hedge fund, for almost a decade. It has doubled so far this year. He did this by exploiting the complex new debt instruments that are now exploding in the faces of their inventors.
For example, he bought credit default swaps (CDSs) against a range of 30 collateralised debt obligations (CDOs) that were rated AA. Translated into English, he bought insurance against default by packages of loans that were not the highest quality, but were not junk either.
The cost to him, the effective premium, was 0.6 per cent per year. This was the most he could possibly lose from the strategy. The potential profit, if all the bonds issued by the CDOs were to default, was 100 per cent. He now expects to make this on about 20 of the CDOs for which he bought protection. "I've never seen a cheaper play to make where you could take less risk with more return than I was offered in this market," he says. That was a classic value investor's investment - tiny risks to the downside, with potentially huge profits. He is not waiting for the CDOs to go to zero and has taken profits on a third of these bets. In one case this involved taking $7m for an investment that had cost about $50,000 some months earlier.
Saturday, September 01, 2007
When investors experience a monetary loss or gain, what kind of physical effect does it have on the body?
The brain processes expectation in a much more intense way than it processes the actual experience. So, the hope of making money often feels better than actually making money does, and the fear of losing money often feels worse than actually losing money. And those are the two states that often drive your behavior.
Why do our brains respond so powerfully to money?
The human brain developed to solve the very simple problems of finding food and shelter, courting mates, and avoiding danger, and our ancestors had to make simple calculations about risk and reward, all in the absence of money. In the modern world, almost every risk and reward that a human being faces is either symbolized or mediated by money. Money is not a reward in itself, but there are very few rewards you can get where you don't need money. Money taps into the most ancient and powerful emotions that the human brain can experience, and because of that I think a lot of people, when they are making financial decisions, really feel they are thinking and deliberating. What they often don't realize is they are really deciding with their emotion.
Do you want greater investment returns? You need to assume more risk. So says academic finance, which rests almost entirely on the principle that reward necessarily entails and is commensurate with risk. Indeed this assumption has at least an element of truth to it, inasmuch as stocks are riskier than bonds, and also tend to deliver greater returns than bonds over longer (say, multiyear) periods of time.
Hedge fund manager and author of "The Dhandho Investor," Mohnish Pabrai, begs to differ with the academics. Like so many value investors who've come before him (and to whom he's duly deferential), Pabrai provides a framework for selecting unloved, overlooked, forgotten, and seemingly boring businesses that are selling at cheap enough prices to minimize risk and maximize returns.
Earlier this year Prem Watsa, the gunslinging chief of Fairfax Financial, had $341 million riding on a hunch that dozens of brokers, banks and insurers could struggle paying their debts. Watsa has a history of making a killing on bearish bets. He sold half the company's stock holdings before the 1987 crash and bought puts against the S&P 500 before the index fell in 2000. But as summer began, his latest wager had produced nothing but losses.
Then the credit markets seized up, and investors began clamoring for the Toronto insurer's collection of credit default swaps, basically insurance against bond defaults. Prices climbed. By the end of July Fairfax's swaps were worth $537 million, up 170% in a month.
The winners and losers from the credit crunch are still being tallied, but one thing is clear: Some smart investors won big, and suddenly.
A value-oriented investment approach in the style of Graham and Buffett does not focus on bull market performance. In fact, by definition, true value investing always focuses on weathering the bear market storms and coming out relatively unscathed. During bull markets, a lot of people are mistaken for investment geniuses when in fact it's the rising tide that's moving them up in the world. Bear markets, on the other hand, distinguish the intelligent investor from the fly-by-night speculator. My approach and the ultimate purpose of value investing is to outperform bear markets.In his 1961 letter to partners, a 31-year-old investor in Omaha named Warren Buffett told his partners that they should be judging him during times of turmoil and not times of jubilance. "I would consider a year in which we declined 15% and the [Dow Jones Industrial] Average 30%, to be much superior to a year when both we and the Average advanced 20%." Very early on in his career, Buffett was aware that performing well during market turmoil was the key to long-term success as an investor. During the 13 years that Buffett ran his partnership, not only did he destroy the Dow Jones Average during both bull and bear markets, but he also never had a down year. So while other investors have come along and produced records that outshine Buffett's, its Buffett's preservation of capital that has allowed him to compound money at such a staggering rate.
Thursday, August 30, 2007
As of 2006, Berkshire Hathaway wrote the third-largest amount of net premiums in the reinsurance industry -- an amazing feat for a firm that started out making textiles. One of the key foundations of Berkshire's reinsurance business is its super-catastrophe line, and the company's annual shareholder letters offer an incredibly valuable case study of that segment's success. Let's take a closer look at the integral components of Berkshire's reinsurance division.
Against all odds
Berkshire's success in super-cat reinsurance, which insures very large catastrophic loss events, becomes more impressive in light of the challenges it faced. Capable reinsurers such a RenaissanceRe , XL Capital, and Montpelier Re compete fiercely for market share. In addition, barriers to entry are minimal, with recently formed reinsurers such as Flagstone Re and Greenlight Re almost constantly emerging. Lastly, reinsurance is a commodity to some extent.
Thus, Berkshire boss Warren Buffett had to overcome considerable obstacles to build his reinsurance operations into the juggernaut they are today. Since day one, Buffett based his strategy on three simple strengths: speed, size, and security.
Why disciplined value investing is so difficult. Ask yourself a simple question - "If Warren Buffett is the second-richest man in the world, why aren't there more professional value investors ?" Jean-Marie Eveillard of First Eagle Funds says "If you are a value investor, every now and then you lad. It can be very painful. To be a value investor, you have to be willing suffer pain"
Wednesday, August 29, 2007
The current credit crunch is "much more serious" for the U.S. financial system than the 1987 stock market crash was, warns Legg Mason's Bill Miller in a conference call with analysts. "The mortgage market is bigger than the whole U.S. economy, and that market is effectively shut down."
But once the immediate crisis has passed, Miller thinks stocks will head higher. And he predicts that the industry sectors that have led the market in recent years, such as energy and basic materials, will become laggards. "The leadership is likely to change," says Miller, whose Legg Mason Value beat Standard & Poor's 500-stock index a record 15 straight years until 2006.
One of my favourite films is The Shawshank Redemption, based on a short story by Stephen King. It stars Tim Robbins and Morgan Freeman, and the whole thing takes place inside a prison. There is a scene where Freeman’s inmate character is talking to another inmate about a guy named Brooks who has been locked up for 40 or 50 years and has basically lived his whole life in prison. Brooks is now an old man and up for parole, and he is terrified of getting out because he does not remember how to live in the real world. My favourite line is in this scene, when Freeman says: “These prison walls are funny. First you hate ’em, then you get used to ’em. Enough time passes, you get so you depend on ‘em. That’s institutionalised.”
This notion applies to many areas of life. It is easy to resign yourself to a bad situation and accept your lot in life. After a while you do not know how to live any other way. You make up all sorts of reasons to justify why it is alright to remain in a bad situation. This can be true of jobs and relationships and other things. Like the money management business.
I think a lot of money managers are like Brooks. They have become institutionalised.
The average actively managed mutual fund in the US holds about 100 stocks. This means the managers can’t possibly be doing in-depth research on each company they hold. So how is the average fund managed, if not by researching each stock in the portfolio?
Warren Buffett has been buying Burlington Northern Santa Fe in “all you can eat” quantities at or below $80/share. Since purchases were made public months ago and some initial analysis was done in the press at that time, yet Buffett is still buying, it seems a good time to think about why he continues to buy this stock.
BNSF has had fairly soft volumes in 2007, compared with 2006, especially in intermodal (containers and trailers) and lumber/building materials. Coal and grain volumes have held up well, but Buffett is likely not buying for 2007 performance.
We know that railroads offer pricing advantages over truckers that increase with higher oil prices, and that BNSF has a network that spans from the Pacific through the heartland and to the Gulf of Mexico.
But what else is there that could make this company even more valuable over the next decade, and potentially even more valuable than Union Pacific?
Thursday, August 23, 2007
The bond market has seized up, stocks are in turmoil, private-equity funds are sidelined and hedge-fund managers and lenders are hosting fire sales.
These are happy days for Warren Buffett.
"I can spend money faster than Imelda Marcos when things are right," he says, referring to the former Philippines first lady and renowned shopper.
For the past three years, Mr. Buffett's traditional bargain-hunting investment strategy has been partly stymied as debt-fueled private-equity funds and hedge funds drove asset prices out of his value-investing orbit.
Wednesday, August 22, 2007
This summer's rumble on Wall Street doesn't faze Larry Coats, portfolio manager of the Durham (N.C.) Oak Value Fund. He has seen his share of ups and downs, and has learned to avoid companies heavily reliant on the credit markets.
Sticking to the investing principles taught by Benjamin Graham and Warren Buffett, Coats buys companies that he can understand and put a price tag on. "This is a great time to be able to say: I know what this business is worth," he says. "It makes it a lot easier to sleep at night."
Coats also likes to find companies that aren't being appreciated in the market. "Our goal is not to eliminate risk," he explains. "It's to identify and understand the pricing, and take advantage of the mispricing whenever we see it."
Sunday, August 19, 2007
Here's what I like about the so-called housing bust. Every house is for sale. It doesn't take a brain surgeon to realise this is a voyeur's dream. First off, before this creeps out, know this: I'm now in the market to buy a house.
I've been renting for the past couple of years and now is the time to buy. There's not only blood in the streets; there's full-scale haemorrhaging. I'll get to specific numbers in a second but this is the exact time you should be considering buying. There's no rush, however. You have a good year before the next stampede begins, but begin it will. So I'm taking my time checking out houses as they come up for sale.
When you go into a house that's on the market you learn a lot about the people who live there. You see the pictures on the wall, the degrees from select schools, the envelopes from the IRS on the kitchen table. You know their taste in cars, in computers, what sorts of books and videos they like.