Class Day 2009 - Speaker Jamie Dimon

Time to tackle the real evil: too much debt

The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option.

Our analysis is as follows. First, debt and leverage cause fragility; they leave less room for errors as the economic system loses its ability to withstand extreme variations in the prices of securities and goods. Equity, by contrast, is robust: the collapse of the technology bubble in 2000 did not have significant consequences because internet companies, while able to raise large amounts of equity, had no access to credit markets.

Second, the complexity created by globalisation and the internet causes economic and business values (such as company revenues, commodity prices or unemployment) to experience more extreme variations than ever before. Add to that the proliferation of systems that run more smoothly than before, but experience rare, but violent blow-ups.

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Berkshire Said to Be ‘Party M’ Making IPC Cash Offer

Warren Buffett’s Berkshire Hathaway Inc. offered $1.7 billion in cash to buy Bermuda-based reinsurer IPC Holdings Ltd. earlier this month, said two people with knowledge of the bid.

Berkshire is the “Party M” named in a regulatory filing today as making a July 1 bid, according to the people, who asked not to be identified because the offer wasn’t public. The bid was rejected in favor of a lower stock-and-cash offer from Validus Holdings Ltd. because Party M demanded IPC not pay a third-quarter dividend, the filing said. Party M is called “a global insurance and reinsurance company” in the document.

Buffett built Omaha, Nebraska-based Berkshire into a $140 billion company by investing premiums from insurance and reinsurance operations while waiting for claims to emerge. Berkshire’s largest acquisition was the $16 billion purchase of reinsurer General Re in 1998, and Buffett’s firm has invested more than $2 billion in Swiss Reinsurance Co. in the past year as the Zurich-based firm was hobbled by writedowns.

“A deal with IPC could have been a cost-effective way for Berkshire to spread its wings even more” in reinsurance, said Bill Bergman, an analyst at Morningstar Inc. in Chicago. “The environment for deals is getting better every day” amid the recession, he said. IPC’s book value, a measure of assets minus liabilities, was about $1.85 billion as of March 31.

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Roger Federer Netjets Commercial

Answers from Joel Greenblatt are Here!

Here are the Questions & Answers:

Question 1. While reading your biography or rather from what is available on the internet, I noticed you graduated in 1980 and founded Gotham in 1985. I was wondering what you did during that 5 year interim ? Did you work at a hedge fund or in banking, and if so in what area? (Bertrand)

Professor Joel Greenblatt (JG): After graduating Wharton with an MBA in 1980, I decided to go to Law School to avoid taking a real job. After my first year, I decided that going to law school if you didn’t want to be a lawyer was perhaps not the best idea in the world. I took a job at a start-up hedge fund at the end of 1981 doing mostly risk arbitrage and special situation investing and started Gotham Capital in 1985.

Question 2. Some notable investors such as Benjamin Graham, Philip Fisher and yourself are also well respected teachers. In your view, do good teachers and intelligent investors share any particular qualities? (batbeer2)

JG: I think to be a good teacher you need to understand your subject very well and that enables you to explain things in a simple way. I think the exercise of trying to figure out how to simplify concepts has been incredibly helpful to me over the last 13 years of teaching and I hope my students have benefited from it. I certainly have. I’m guessing that the other investors you mentioned who wrote about and taught investing felt the same way.

Question 3. In my opinion your two books are the best investing books out there. Do you have any plans to write another one? If so when and what will it be about? (djswinney, Bertrand)

JG: I do plan to write another book. It will also be about a basic framework for successful investing written in a way I hope my kids can understand. As for timing, I’ll let you know when I finish it! (I hope before they all grow up!)

Question 4. Besides your own books (which are awesome by the way) and books such as the Intelligent Investor, Security Analysis, what would you recommend reading to get a leg up in investing? Any periodicals that you think are worth perusing? (ConsumerMonopoly, AndreHeggli)

JG: A few of my favorites are: “The Essays of Warren Buffett” edited by Lawrence Cunningham, “Moneyball” by Michael Lewis and “The Invisible Heart” by Russell Roberts.

Question 5. How much of your investing success can be attributed to your uncommon emotional temperament? What are the key attributes of being a successful investor? (bart329, rajeev_agr@yahoo.com)

JG: The answer is: I’m not sure. I like to figure things out and I’ve always liked to gamble. I never bet a lot, however, unless the odds are heavily stacked in my favor. So, I guess that’s what I like about investing. It’s a fascinating “game” if you can figure things out and don’t get in over your head with the size of your bets.

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