Steven McIntyre & Todd Stein: Railroads, Following Buffett's Lastest Move

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.

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Source: Lincoln Minor

Emil Lee: Buffett's Capital Riddle

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?

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Sham Gad: Don't Invest in the Most Valuable Business

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.

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Buffett: Bear Stake

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.

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Buffett All-Stars Welcome Yankees' Chamberlain

``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.

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Tom Brown: Thoughts on FMD

FRANCHISE PLAYER: For years, the bears’ big complaint about First Marblehead 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.

I happen to think that objection is nonsense, of course. Marblehead 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.

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The Heat On Countrywide

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.

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How To Make A Microserf Smile

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.

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Daniel Kahneman: Master of the imperfect mind

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.

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Jason Zweig: Your money and your brain

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.

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Source: BRKNews