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.