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.