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.
Thursday, September 27, 2007
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.