Friday, November 30, 2007

Simons at Renaissance Cracks Code, Doubling Assets

On a hot afternoon in September, Renaissance Technologies LLC founder Jim Simons is too busy to take a phone call. It is, he says, from Cumrun Vafa, a preeminent Harvard University professor and expert on string theory, which describes the building blocks of the universe as extended one-dimensional filaments.


"Get another time when I can talk to him,'' Simons tells his assistant.

Then he mentions that the next day, he'll be meeting with Thomas Insel, director of the National Institute of Mental Health, to discuss autism research. And he's slated that Saturday to host a gala honoring Math for America, or MFA, a four-year-old nonprofit he started that provides stipends to New York City math teachers.

"I'm undoubtedly involved in too many things at the same time,'' Simons says in his 35th-floor office in midtown Manhattan. "But you make your life interesting.''
String theory, autism, math education: It's fair to ask how Simons, 69, manages his day job overseeing the world's biggest hedge fund firm. The answer, judging from the numbers, is very well.


Renaissance is on fire: Its Medallion Fund -- which uses computers and trading algorithms to invest in world markets -- returned more than 50 percent in the first three quarters of 2007. It had about $6 billion in assets as of July 1.

Beware our shadow banking system

The tangled web of subprimes has claimed more than its share of victims in recent months: homeowners by the hundreds of thousands, to be sure, but also those who created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages" but which by a masterstroke of marketing genius received a more respectable imprimatur.

"Skim milk masquerades as cream," warned Gilbert and Sullivan over a century ago, and sure enough, today's subprimes, packaged into financial conduits with monikers such as SIVs and CDOs, pretended to be AAA-rated cubes of butter.

Financial institutions fell for the ruse, and now we all suffer the consequences. Defaults are rising, the dollar's sinking, and -- good Lord! -- even Google's (Charts, Fortune 500) stock price is going down. Something must really be wrong.

Tuesday, November 27, 2007

Low-risk trades put all others in the shade

Within the hedge fund industry there are some trades that are destined to live on in legend: Jessie Livermore’s claimed $100m profit from shorting the 1929 crash, Paul Tudor Jones’ prediction of the 1987 crash, from which he doubled his money in a month, or the $1bn profit George Soros reputedly made when sterling was forced out of the exchange rate mechanism.

But the forecast last year by a select group of hedge funds of a crisis in subprime mortgages has put even the most spectacular trades in history in the shade.

Leading the pack of hedge funds which benefited from the subprime fallout is John Paulson’s New York-based Paulson & Co. Last year, it raised $2bn for two funds betting on falls in subprime mortgage-linked securities and they are now worth more than $8bn. By the end of October, the first of these funds was up 550.8 per cent, even after fees which included a quarter of profits.

Breaking Down Berkshire's Equitas Deal

In October 2006, National Indemnity, a unit of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), signed a landmark deal to assume the assets, liabilities, and operations of Equitas, formed by Lloyds of London to assume its liabilities on policies written prior to 1992. As part of the deal, Berkshire agreed to provide Equitas as much as $7 billion in reinsurance coverage.
Figuring out how Berkshire makes money on these types of deals could help Fools understand Berkshire's insurance business better -- and gain insight into Buffett's and Berkshire reinsurance chief Ajit Jain's methods.

To provide some illumination, I contacted Marc Mayerson, a Harvard Law graduate and partner of Washington, D.C., law firm Spriggs & Hollingsworth. Mayerson also leads several national American Bar Association seminars devoted to Equitas, and provides analysis of Equitas' financial reports on his blog, InsuranceScrawl. The following is an email interview conducted with Marc; notes in italics are my comments.

Prem Watsa: He has never been more bearish

The head of Fairfax Financial had a front-row seat when the Japanese market began its 15-year retreat. And he thinks the U.S. indexes might be about to do the same.

The global credit squeeze is in its "early days," says investor Prem Watsa, who is so bearish that his insurance company has stashed the bulk of its $18-billion investment portfolio into ultrasafe government bonds.


In a rare interview, the chairman of Fairfax Financial Holdings Ltd. said he thinks it's possible the United States is on the cusp of a prolonged market slide, similar to the one endured by Japan between 1990 and 2003, when the Nikkei index plunged 80 per cent.

Full Article

Monday, November 26, 2007

A Time for Bold Thinking on Housing

WE have to consider the possibility that the housing price downturn will eventually be as big as that of the last truly big decline, from 1925 to 1933, when prices fell by a total of 30 percent.

As of this August, domestic home prices were already down 5 percent from their peak 14 months earlier, according to the S.& P./Case-Shiller Composite Home Price Index, and prices were falling at a faster rate in the months leading up to August. (Updated data will appear on Tuesday.)

This crisis should be an occasion for some inspired thinking about fundamental changes in our real estate institutions. The actions that have already been taken are not impressive. The housing market is worsening, and more and more home owners are getting into trouble with their mortgages.

Imagining Recession

The world’s housing, oil, and stock markets have been plunged into turmoil in recent months. Yet consumer confidence, capital expenditure, and hiring have yet to take a sharp hit. Why?

Ultimately, consumer and business confidence are mostly irrational. The psychology of the markets is dominated by the public images that we have in mind from day to day, and that form the basis of our imaginations and of the stories we tell each other.

Popular images of past disasters are part of our folklore, often buried in the dim reaches of our memory, but re-emerging to trouble us from time to time. Like traditional myths, such graphic, shared images embody fears that are deeply entrenched in our psyche. The images that have accompanied past episodes of market turmoil are largely absent today.

Anatomy Of A Market Crash

When markets go sharply south, investors often act shocked and bewildered. Allusions to "perfect storms" and hundred-year floods parade through the financial headlines as if the market gods were acting on a vendetta. The only problem is these market swoons happen a lot more frequently than weather metaphors suggest: Hundred-year floods seem to appear every three to five years. Scorched investors may be perpetually surprised, but periodic crashes are as old as the markets themselves.


While market history tracks when these crashes happen, the trickier question is what causes them. External shocks--events like Sept. 11, or Hurricane Katrina--are a logical suspect. But it turns out external events are rarely the culprit for big market downdrafts. External factors are responsible for less than 20% of the stock market's biggest moves in the past 50 years.

Full Article

Friday, November 23, 2007

The Berkshire Hathaway Portfolio

In Berkshire Hathaway's (BRK.B) 2004 annual shareholder letter, chairman and CEO Warren Buffett wrote, "…be fearful when others are greedy, and greedy only when others are fearful," when explaining his investment philosophy. Now, as the stock market remains jittery as investors worry about the stability of the credit markets, an analysis of Berkshire's form 13-F indicates that the conglomerate has indeed been getting a little greedy as of late.

While managing Morningstar's Ultimate Stock-Picker's Portfolio, I routinely scan the holdings of Berkshire, which is essentially the stock picks of Warren Buffett and Lou Simpson, his colleague at auto insurer GEICO, for enticing ideas. As I've said many times, both have impressive investment track records, and I believe that investors can often find some attractive investment bargains by using the stocks in their portfolio as a starting point for research. To continue receiving my analysis of these ideas, please be sure to sign up for my free e-mail alerts if you haven't already done so.

My Hero, Benjamin Grossbaum

Benjamin Graham was born Benjamin Grossbaum on May 9, 1894, in London, and sailed to New York with his family before he was two. He attended New York City public schools and excelled at every subject except gym. He read constantly and forgot nothing—the kind of child we wish we had, or, indeed, had been ourselves. With the untimely death of his father, young Benjamin early learned to do without and to work. He entered Columbia College at 17 in the Class of 1914 and majored in mathematics.

For Graham, the life of the mind was inseparable from the life of finance. He was a fluent and adventurous writer. At one time or another, he tried his hand at poetry, playwrighting, translations, textbook writing and—the highest form of literature—financial journalism. In 1915, the New York Times published a letter to the editor under his name. The subject was the city's sinking fund, for which Graham had no use. He was 20 years old at the time and was posting quotations by hand on the chalk board of the New York Stock Exchange member firm of Newberger, Henderson & Loeb. Graham wrote not only for money—which he could certainly use at that stage of his career—but also for glory, such glory, for example, as a signed piece in the Magazine of Wall Street might afford.

The modern journalistic convention calls for an author on an investment subject to sprinkle his article with validating quotations from acknowledged authorities—brokerage-house analysts, for instance. There was none of that in Graham's pieces. He himself was the authority, and his topics ranged from bankruptcies and arbitrage to orphaned value stocks. In the summer of 1924, on the eve of the great Coolidge bull market, he identified eight stocks that, seemingly for no good reason, were quoted in the market at less than their pro rata share of net current assets. Then there were eight—in less than a decade, there would be hundreds.


Disclosure: Thanks to Sanjeev from MSN BRK shareholders board for the original reference.

Thursday, November 22, 2007

The Future of Reading

"Technology," computer pioneer Alan Kay once said, "is anything that was invented after you were born." So it's not surprising, when making mental lists of the most whiz-bangy technological creations in our lives, that we may overlook an object that is superbly designed, wickedly functional, infinitely useful and beloved more passionately than any gadget in a Best Buy: the book. It is a more reliable storage device than a hard disk drive, and it sports a killer user interface. (No instruction manual or "For Dummies" guide needed.) And, it is instant-on and requires no batteries. Many people think it is so perfect an invention that it can't be improved upon, and react with indignation at any implication to the contrary.

"The book," says Jeff Bezos, 43, the CEO of Internet commerce giant Amazon.com, "just turns out to be an incredible device." Then he uncorks one of his trademark laughs.

Tuesday, November 20, 2007

Interview with Jeremy Siegel, author of Stocks for the Long Run

The Wealthy Boomer column in this edition of FP Weekend highlights an interview I conducted last week with Jeremy Siegel, author of the bestselling book, Stocks for the Long Run. As the column notes, a new 4th edition is about to come out. This book has long been a favorite of the investment industry because it supports the case for investors buying their favorite asset class: stocks. (in the long run of course).

Charlie Munger's Lollapalooza Effect and This Credit Fiasco

Charlie Munger, Warren Buffett's brilliant sidekick, has expounded many times on innate human biases and incentive effects. For anyone interested in this topic, I highly recommend you read the transcript of an amazing speech he delivered in 1995, called The Psychology of Human Misjudgement. I have read this speech at least a dozen times and each time I glean something new and valuable. At first it may seem somewhat rambling and confusing, but I think anyone who can get a grip on this material will have a leg up in life on the average Joe who has no idea about these important concepts.

Mr. Munger's treatise is clearly directed towards understanding how biases and incentive effects drive much of human behavior, and are not directed specifically at investing. However, the field of behavioral finance has grown to study many of these same concepts as they apply to financial decisions.

Wednesday, November 14, 2007

Oak Value Interview: Meet the Managers

Learning to Invest David Meier: Tell us a little bit about yourselves, how you got interested in investing, and when you realized that value investing was the right thing for you?


David Carr: I was fortunate to meet one of my former partners in high school. His uncle had been a classmate of Warren Buffett's at Columbia and studied under Benjamin Graham. So early on, he took us under his tutelage and began to teach us a bit about value investing. Fortunately, our first exposure was to Buffett and to thinking about investing in that format.


In the early years, we began to wonder if there was a magic formula somewhere and how it worked. Our dream was to one day manage money and to put into play some of the beliefs and theories that we had learned. Over time, we began to do that and eventually realized there wasn't a magic formula and instead concentrated on business models and companies. The rest is history.

The Prince and His Palace: A 6,400-Square-Foot Getaway That Flies

He may be only the world’s 13th-richest man, but Prince Walid bin Talal of Saudi Arabia will soon be able to claim the bragging rights to the world’s largest private jet.

Putting an end to months of speculation, Airbus announced Monday that the Saudi billionaire had become the first V.I.P. customer for the A380 superjumbo jet, the winged colossus that the European plane maker prices at just over $300 million.

Prince Walid, who currently makes do with a customized Boeing 747-400, signed the contract for a new flying palace at a ceremony with senior Airbus executives at the Dubai air show.

He expects to take delivery in 2010.

The Golden Haves

Lately, I have been trying to explain to my eleven-year-old son Gabriel the astronomical differences between people’s income.


Microsoft founder Bill Gates first penetrated Gabriel’s consciousness a couple of years ago, when his father served as a warm-up act to Gates at a large conference sponsored by the Danish government. Ever since, Gabriel has been fascinated by the seemingly infinite possibilities of having $60 billion.


For example, whenever I tell Gabriel that something is unbelievably valuable (even, say, a great painting in a museum), he invariably says, “But Bill Gates could buy it, right?” Yes, Gates could buy the whole museum. But then he would just turn around and give it back so everyone else can see it, so there is no point. Gabriel is not entirely convinced.

Citigroup’s Next CEO

As regards who Citigroup’s next CEO should be, I was going to post one of our “Questions of the Week,” and ask what you think--but then decided that, this time, I want first crack. So here goes.
My first choice: Wells Fargo Chairman Dick Kovacevich. Dick is by just about all accounts the most effective, well-respected, banking executive in the business. He has a proven track record running a large, diversified organization--and he gets results. To put a number on it, Wells has earned more than 16% on its equity, on average, over the past 10 years. Over that period, the company’s earnings per share grew at an average annual rate of 14%. Dick even knows how to do deals and make them work. Plus, he should have no trouble attracting and retaining top talent, and can motivate individuals up and down the organization.

Tuesday, November 13, 2007

Buffett could reap gains from credit turmoil: report

Warren Buffett, chairman of Berkshire Hathaway Inc., may cash in from the credit market turmoil and worries surrounding the financial strength of bond insurers, including Ambac Financial Group Inc. and MBIA Inc (MBI.N: Quote, Profile, Research), the Wall Street Journal said in its online edition on Monday.


With more than $45 billion in cash on its books, a triple-A credit rating and years of experience insuring other insurers against catastrophic losses, Berkshire Hathaway (BRKa.N: Quote, Profile, Research) is in a position to provide relief to some of these companies and could get into the bond-insurance business itself, the Journal said citing people familiar with the matter.

Full Article

Monday, November 12, 2007

How Long Should Gifts Just Grow?

AS nonprofit institutions have seen donations and investments grow spectacularly in recent years, the urge to keep the money rolling in is being supplemented by a new pressure: make it flow out faster.

Politicians, consultants, watchdog groups and even some philanthropists say that foundations, universities, museums and other charitable institutions often spend only what they must while their coffers expand, partly because of double-digit returns on investments. These “spend it sooner” proponents say that the minimum that private foundations are required to give — 5 percent of their assets each year — has in many cases become the maximum. To really attack social problems, they say, foundations and other nonprofits need to open their spigots much wider.

“There are certain dynamics that take over in terms of behavior, and one of those forces is usually the drive to perpetuate institutions,” said Warren E. Buffett, who is giving more than $30 billion to the Bill and Melinda Gates Foundation with the stipulation that it be spent promptly. “That dynamic — though undoubtedly subconscious — sometimes takes precedence over considering what might be best for society.”

An Investment Framework

Investors should develop an investment framework which they make their decisions around. They should have tenets by which they abide in order to avoid permanent impairment of capital, while generating above average returns. Below are ideas from various others frameworks that are useful.

“Charlie (Munger) realizes that it is difficult to find something that is really good. So, if you say ‘No’ ninety percent of the time, you’re not missing much in the world.” – Otis Booth

Buy good businesses, which are easy to understand. Investors should look for businesses they would feel comfortable with if the markets were to close for ten years. One needs to understand how a business works and where the company’s earnings power is headed over the long-term. Good businesses generate their earnings in cash; have strong balance sheets, and few competitors. When analyzing a strong balance sheet, make sure to watch for liabilities not on the balance sheet as well.

Sunday, November 11, 2007

Prince Alwaleed: Why Chuck had to go

In the midst of staggering losses and intense public scrutiny, former Citigroup CEO Charles O. Prince III could always count on the support of the company's biggest individual shareholder: Prince Alwaleed bin Talal bin Abdul Aziz al Saud. Less than a month ago, the Saudi prince, who owns 3.6% of the company, even dismissed a sharp drop in earnings as a "mere hiccup."

But Fortune has learned that Prince Alwaleed and other major shareholders agreed last week that, if Chuck Prince didn't offer his resignation after the news of the additional $8 billion to $11 billion writedowns, they would publicly call for his ouster. In an exclusive interview, Prince Alwaleed, speaking by phone from the desert outside Riyadh, talked with Fortune's Andy Serwer and Barney Gimbel about the final days of Chuck Prince's tenure at Citigroup.

Tuesday, November 6, 2007

Legg Mason Value Trust Releases Letter to Shareholders

On the 20th anniversary of the Crash of '87, the US stock market took a drubbing, falling 2.56%. In a curious parallel, the woes that are besetting the market are the result of a crash in the credit markets every bit as severe as that which hit equities back then, but which threatens to have more impact on the US and the global economy.

The stock market can close down for a while and it really doesn't matter all that much. The primary function of the stock market is not to finance company operations, it is to price assets. Companies go public once, and most come to the equity market for capital sporadically, and then typically to finance long-lived projects or acquisitions.

Soros Forecasts 'Serious' US Economic Correction

Billionaire investor George Soros forecast on Monday that the U.S. economy is "on the verge of a very serious economic correction" after decades of overspending.

"We have borrowed an awful lot of money and now the bill is oming to us," he said during a lecture at the New York University, also adding that the war on terror "has thrown America out of the rails."

Pimco's Gross: Subprime Crisis Is Far From Over

Credit markets face another $250 billion in defaults over the next two years, indicating that the worst of the subprime crisis is yet to come, the head of the world's biggest bond fund told CNBC on Monday.

"We've only begun to see the pain from the standpoint of the homeowner in terms of those monthly payments," said Bill Gross, chief investment officer of Pacific Investment Management or Pimco. "Defaults and delinquencies will increase as we extend throughout 2007 and into 2008."

Friday, November 2, 2007

Transcript: Jeffrey Immelt of GE

Jeffrey Immelt, chairman and chief executive of General Electric, discussed the company’s prospects with Peter Marsh of the FT. The following is an edited version of the interview.

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