Thursday, December 18, 2008
Tuesday, December 16, 2008
Monday, December 1, 2008
Tuesday, November 25, 2008
Thursday, November 13, 2008
Wednesday, November 5, 2008
Interview with Vitaliy Katsenelson (Oct2008)
What do you see as the likely scenario for the economy?
First, a Great Depression of the 1930s is not in the cards. The world will not suddenly lose its color and turn black and white (the colors that come to mind when we think about 1929 Great Depression, as there were not color cinemas then). No, we won’t have food lines, our kids will not start playing with bricks and sticks instead of toys and they will not be wearing handed down clothes several sizes their senior. Their collection of toys rotting in the attic may shrink and - I have to warn you – you may still see kids wearing torn jeans with holes that are too big for them. But don’t blame the economy, blame the latest fad. Our economy is stronger, more diversified, and far more developed than in the 1930s. It is unlikely our government will repeat the mistakes it made then. We also have a system of social nets, such as unemployment insurance (which will probably be extended, like it was in 2001 and 2002) and welfare.
I see three possible scenarios for the economy: (1) a Great Recession (2); a (semi-normal) recession; and (3) a quick recession leading to growth.
Our problems today stem from two sources (here I am oversimplifying a bit): an abundance of bad debt and a loss of trust in the financial system. Banks don’t trust their current or potential customers; investors and depositors don’t trust banks; and banks don’t trust each other. The government is trying to restore this circle of trust. Two months ago, socializing the financial system would have seemed preposterous. Now there is no way around this, at least temporarily. The Fed and Treasury are trying to restore trust by shoring up banks’ balance sheets and by stamping government guarantees on otherwise risky loans, and they will likely succeed.
The next step is dealing with the bad debt. Some of it will be socialized (paid for by the taxpayers). Some of the bailout programs will cost money, and some won’t. Warren Buffett says the government will make money on the CDO auction program, but I think this will depend on the price the government will pay for this debt.
The possibility of a Great Recession (which would be a steep decline in GDP growth and a sharp rise in unemployment, lasting a long time) is higher than in the past. The only reason a Great Depression would happen is if the “circle of trust: not restored.
The bottom line is, if the Fed is successful at restoring the circle of trust, a Great Recession is avoided.
We are very likely to be in a semi-normal recession. How long and deep will the recession be? We really don’t have a good benchmark to forecast the level of unemployment, nor the level of growth or decline in GDP, nor the duration of the recession. This is a consumer-driven recession and the consumer is two thirds of the economy. The last recession of 2001 was led by corporate slowdown; the 1991 recession was a consumer recession, but it was very different from current one. Housing prices did not decline nationwide; the consumer was not as leveraged and the global economy was in different shape. And yes, we are in a recession, no matter if it fits into traditional definitions. Growth is down and unemployment is up. The definition of a recession doesn’t matter.
A possibility of the third scenario – a quick and shallow recession leading to growth – is not high but it is there. For this scenario to play out the bulk of losses in financial sector need to be behind us.
What is your forecast for other world economies?
In looking at the external consequences of a global recession, I prefer to divide the world into four broad categories of countries: the US, Europe (and other developed countries), emerging markets, and commodity exporting nations (Russia and the Mideast).
As I mentioned before, the US will fare the best on a relative scale, because we are diversified. Despite the socialism which has transpired through the various bailout initiatives, we are still a capitalistic economy. Our capitalistic DNA will be only slightly (and hopefully only temporarily) diluted with socialism.
Europe is in a very interesting situation, one which will test the stability of the European Union (EU) and the long-term survivability of the euro. The EU consists of countries with strikingly different histories. Some have experienced runaway inflation and, for this reason, countries like Germany are very cautious about increasing monetary supply. To fight today’s financial crisis some countries will want to increase the money supply, and this will pit countries against one another. This also makes me less bullish on the euro.
Russia and the Middle East benefited from high commodity prices. If you look at Russia, for instance, the return on capital in oil- and commodity-related industries was much higher than in any other industry. This siphoned capital from other industries, which caused investments in these industries to decline. To make things worse, the rise of commodity exports drove up the Russian currency, making non-commodity industries even less competitive in the world market. Once you take high commodity prices away, Russia is worse off than it was before. On top of this, when Russia did well, it acceded to pressures to increase social programs. (In case of Middle East, they embarked on ambitious construction projects, like building a brand new city with a zero carbon footprint in the United Arab Emirates). Russia has created a stabilization fund (a super savings account), but I am not sure how long this fund will last. Russia is strong on a balance sheet basis, but that is a reflection of the past. The future, as reflected in its future income statements, looks horrible. To some degree it is almost a mirror image of the US – our balance sheet is weaker but our earnings power is strong.
The Middle East is a very similar story to Russia - with a twist. It benefited from oil prices and spent a lot on infrastructure, like building out new cities. My concern is that terrorism came mostly from the Middle East, and I am unsure what will happen when poverty levels go up in these countries.
Are there any foreign markets that look attractive now?
It comes down to stock selection. For example, we are concerned about Europe, but we own a British liquor company that has better fundamentals, a lower valuation and higher yield than its American counterparts. It is likely to do better in this environment. Our biggest concern is the “stuff” stocks (industrials, energy, and materials). They were responsible for a good chunk of excess in corporate profit margins. The analysts’ earnings assumptions are way too optimistic. The only question about the recession is how big it will be and how long it will last.
As I mentioned before, it is a stock picker’s environment. We don’t know how long this drama will last, and thus we are not trying to be heroes.
Monday, October 20, 2008
Reaping the Whirlwind(Part 1 & 2) -- Jeremy Grantham
Friday, October 17, 2008
Buy American. I Am. -- By WARREN E. BUFFETT
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Thursday, October 2, 2008
Interview with Warren Buffett
Here is a complete transcript of tonight's Warren Buffett interview with Charlie Rose, airing on PBS. It was provided to CNBC by the Charlie Rose program.
Monday, September 29, 2008
Warren Buffett lifts the lid on his secrets
Warren Buffett always had spectacular timing. As Wall Street burns, the billionaire investor is the hero of the hour after predicting the financial meltdown and riding to the rescue — $5 billion (£2.7 billion) in hand — of Goldman Sachs.
Tomorrow marks the release of The Snowball, the first and only, Buffett says, biography to be written with his co-operation. The book’s author is Alice Schroeder, a former analyst who spent “literally thousands” of hours with Buffett and his family.
“Invaluable” hardly describes Schroeder’s access to the world’s richest man when you consider that lunch with Buffett recently fetched $2.1m in a charity auction.
Such is Buffett’s reputation that last week, when he snapped up his stake in Goldman, the bank’s shares rose $8 as investors who had wondered if it would survive the credit crunch reacted positively.
Schroeder said: “Around the time Bear Stearns was being taken over, he talked about the domino effect to me. He said to me first Bear, then Lehman, then Merrill. He saw this coming and he talked about a crisis of a magnitude that we had not seen before.”
Thursday, September 25, 2008
CNBC INTERVIEW : Warren Buffett Explains His $5B Goldman Investment
WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.
BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?
BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.
BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?
BUFFETT: Well, there's just no telling what would happen. Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.
Thursday, September 18, 2008
THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS
The current subprime crisis has been doing wonders for the reception of any ideas about probability-driven claims in science, particularly in social science, economics, and "econometrics" (quantitative economics). Clearly, with current International Monetary Fund estimates of the costs of the 2007-2008 subprime crisis, the banking system seems to have lost more on risk taking (from the failures of quantitative risk management) than every penny banks ever earned taking risks. But it was easy to see from the past that the pilot did not have the qualifications to fly the plane and was using the wrong navigation tools: The same happened in 1983 with money center banks losing cumulatively every penny ever made, and in 1991-1992 when the Savings and Loans industry became history.
Note: Thanks to agatesystems from MSN BRK Shareholders Board for the original reference
Sunday, September 14, 2008
Confessions of a risk manager
IN JANUARY 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.
As risk managers we were responsible for approving credit requests and transactions submitted to us by the bankers and traders in the front-line. We also monitored and reported the level of risk across the bank’s portfolio and set limits for overall credit and market-risk positions.
The possibility that liquidity could suddenly dry up was always a topic high on our list but we could only see more liquidity coming into the market—not going out of it. Institutional investors, hedge funds, private-equity firms and sovereign-wealth funds were all looking to invest in assets. This was why credit spreads were narrowing, especially in emerging markets, and debt-to-earnings ratios on private-equity financings were increasing. “Where is the liquidity crisis supposed to come from?” somebody asked in the meeting. No one could give a good answer.
Thursday, September 4, 2008
Tuesday, August 19, 2008
The Elusive Bottom
My sense is that we probably aren't even past the halfway point yet of this recession, the credit losses or the house price deflation. Looking at whether equities may have bottomed or not on an intermediate basis, maybe the recent action to the negative side was an important inflection. In terms of what I do, which is trying to tie the macro into the markets, I have a very tough time believing that we have reached anything close to a fundamental low, either in the S&P 500 or in the long-bond yield, for that matter.
300-point rallies in the Dow happen in bear markets
We're in a very confusing atmosphere. People didn't really know what to make of a 300-point rally in the Dow the other day, but my main message was that 300point rallies from the Dow don't happen in bull markets. In fact, they never happened in the bull market from October '02 to October '07, but it has happened 6 times in this bear market and happened 12 times in the last bear market. You don't get moves like that in bull markets. As Rich Bernstein has said time and again, "This is the hallmark of a recession and a hallmark of a bear market."
Profit as a share of GDP was at unheard of levels
The next question, of course, is what levels are we talking about? Again, I'm going to take what I do, which is earnings, and then talk about the appropriate multiple. What is the appropriate multiple at the low in a recession? In terms of earnings, I think that we have to understand where we're coming from in this cycle. We're coming from a situation where, because of all the leverage in the system, profits in the share of GDP went into this recession and bear market at 14% of GDP, which is unheard of. That's never happened before. A lot of the reason why profits soared was because everybody turned to financials. There was this tremendous amount of leverage, and that accounted for half of just about everything in the cycle from GDP growth to employment to profits.
The profits share of GDP, again, as a proxy for margins, is now down to 12%. Think about that for a second. This terrible earnings recession so far has taken the share of profits from 14% down to 12%. The question is, if I'm right on a recession, where does the profit share of GDP go to at a recession trough? Well, consistently it goes to 7%.
Monday, August 18, 2008
Aspects of Investor Psychology
Decision theorist Howard Raiffa [1968] introduces useful distinctions among three approaches to the analysis of decisions. Normative analysis is concerned with the rational solution to the decision problem. It defines the ideal that actual decisions should strive to approximate. Descriptive analysis is concerned with the manner in which real people actually make decisions. Prescriptive analysis is concerned with practical advice and help that people could use to make more rational decisions.
Financial advising is a prescriptive activity whose main objective should be to guide investors to make decisions that best serve their interests. To advise effectively, advisors must be guided by an accurate picture of the cognitive and emotional weaknesses of investors that relate to making investment decisions: their occasionally faulty assessment of their own interests and true wishes, the relevant facts that they tend to ignore, and the limits of their ability to accept advice and to live with the decisions they make. Our article sketches some parts of that picture, as they have emerged from research on judgment, decisionmaking and regret over the last three decades. The biases of judgment and decision making have sometimes been called cognitive illusions. Like visual illusions, the mistakes of intuitive reasoning are not easily eliminated. Consider the example of Exhibit 1. Although you can use a ruler to convince yourself that the two horizontal lines are of equal length, you will continue to see the second line as much longer than the other. Merely learning about illusions does not eliminate them.
The goal of learning about cognitive illusions and decision-making is to develop the skill of recognizing situations in which a particular error is likely. In such situations, as in the case of Exhibit 1, intuition cannot be trusted and it must be supplemented or replaced by more critical or analytical thinking – the equivalent of using a ruler to avoid a visual illusion.
Providing timely warnings about the pitfalls of intuition should be one of the responsibilities of financial advisors. More generally, an ability to recognize situations in which one is likely to make large errors is a useful skill for any decision-maker.
We follow a long tradition in discussions of decision-making, which distinguishes two elements: beliefs and preferences. Decisions theorists argue that any significant decision can be described as a choice between gambles, because the outcomes of possible options are not fully known in advance. A gamble is characterized by the range of its possible outcomes and by the probabilities of these outcomes. People make judgments about the probabilities; they assign values (sometimes called utilities) to outcomes; and they combine these beliefs and values in forming preferences about risky options.
Judgments can be systematically wrong in various ways. Systematic errors of judgment are called biases. We start by dealing with a selection of judgment biases. Then we discuss errors of preference, which arise either from mistakes that people make in assigning values to future outcomes or from improper combinations of probabilities and values. In both cases, we introduce each bias with a question that illustrates the bias and conclude with recommendations for financial advisors to help mitigate the harmful effects of these biases.
We conclude the article with a checklist that advisors can use to measure their effectiveness at dealing with these biases.
Friday, August 15, 2008
Bruce Berkowitz Stays In The Sunshine
Berkowitz is CEO of Fairholme Capital Management in Miami, which oversees about $9 billion, most of it in the value-oriented no-load Fairholme Fund (FAIRX), of which Berkowitz himself is lead manager.
The 50-year-old Berkowitz started Fairholme Fund in December 1999, and he's consistently crushed the competition. The five-star, large-blend fund has clinched the No. 1 spot in its Morningstar category for the one, three and five-year periods. Through Aug. 12, Fairholme's five-year annualized return of 16.51% bests its peers by 7.54 percentage points.
Forbes.com recently checked in with Berkowitz to talk about his take on the market, his strategy and his top stock picks.
Saturday, August 2, 2008
Korea's No. 1 Money Manager Says Genghis Khan Model for Funds
Park, founder and chairman of Seoul-based Mirae Asset Financial Group, the biggest mutual fund company in South Korea, has just given up on his plan to open a branch of Mirae in Los Angeles despite its large Korean-American community.
He's seen firsthand the swoon in U.S. markets triggered by the subprime mortgage crisis. Recalling the flight, he says he took out his laptop and spent the next three hours writing a somber memo to his 16,900 employees.
``We may be passing through the darkest point of the tunnel right now,'' Park, 49, wrote. ``We must have the insight to anticipate the future with long-term perspective and strategy.''
Friday, August 1, 2008
GMO Quarterly Letter (Jeremy Grantham)
I thought things would be bad enough but they turned out to be a lot worse. I thought a year ago we were looking at the “fi rst truly global bubble” in asset prices. The credit crisis looked to be so predictably powerful and unstoppable then that I likened the experience to “watching a slow
motion train wreck,” and I predicted that “one major bank (broadly defi ned) will fail within 5 years,” for which I got considerable grief as a doomsayer, as the less optimistic strategists usually do. Well a year later one bank failure looks positively quaint as a prediction. Ironically for a “perma bear,” I underestimated in almost every way how badly economic and fi nancial fundamentals would turn out. Events must now be disturbing to everyone, and I for one am offi cially scared!
Living Beyond Our Means: Entering the Age of Limitations
How many times over the last 200 years have gloomy economists predicted limitations to growth? And always they were wrong. Science and human ingenuity always came to the rescue. Instead of rising steadily in price, raw materials and food fell in real terms. And since hourly
income rose, raw materials became ever more affordable as the specter of starvation, although always around, steadily retreated. Food, for example, fell from 70% of a typical American’s budget 200 years ago to about 10% today. And, every time a warning was redundant, the idea
that science always wins and that the human brain and talent are boundless and can conquer all took deeper root. We have learned in the stock market not to underestimate the power of repeated events to create a consensus. Humans are just plain eager to see patterns, and 200 years of increasing plenty in the face of recurrent pessimism is serious reinforcement indeed. It is hardly surprising, therefore, to fi nd ourselves in a position where faith in our ability to rise above the planet’s limitations is complete.
Thanks to Vinod from MSN BRK Shareholders Board
Monday, July 21, 2008
The Sociology of Markets (Mauboussin on Strategy)
The sociology of markets is an important yet largely unexamined issue for financial market participants. By sociology, we mean the role of financial institutions in asset price setting. Traditional finance theory posits that investors directly buy assets in the market, with the relationship between risk and return guiding their decisions. A sociological examination moves beyond this narrow focus and asks whether the rise and fall of financial institutions, and their associated incentives, has an impact on asset prices.
This report has three parts. First, we ask whether financial institutions matter. The theoretical answer is no but the practical answer is yes. Second, we explore three case studies that show how institutions matter. Finally, we consider where we might go from here—that is, where the money flows are, what the incentives look like, and what those two drivers may mean for asset prices.
Friday, July 18, 2008
Inflation Not The Problem
In the cacophony that is global investment strategy research, Albert Edwards and James Montier stand out as clearly distinctive voices. And not merely because of their British accents or because they’ve tended to the decidedly bearish side of the scale over the last decade or so. Despite long tenure in the rarified top echelons of the investment banking world, for many years with Dresdner Kleinwort and more recently at Societe Generale (where they are co-heads of global cross asset strategy) both have managed to retain a natural plain-spoken bluntness. Also large dollops of common sense and strong streaks of reflexive independence, which they employ in conveying their often invaluable insights on investment strategy. In Albert’s case, those spring mostly from his long experience in the dismal science of economics and in James’, from his explorations of the equally mysterious realms of behavioral neuroscience. They are, in a word, skeptics, and at this juncture most deeply skeptical of any and all notions that “the worst is over.” The recession, which has barely begun, is more likely to be deep than shallow, market valuations are hideously expensive and the -flation policymakers should be worried about starts with de-, not in-. For their reasons, keep reading, if you dare.
Yet I hear people all the time comparing valuations to the tech bubble and declaring stocks, “Cheap.” Isn’t there a neuroscience explanation for that behavior?
James: Absolutely. It’s classic anchoring. This whole habit of hanging onto irrelevant benchmarks. That’s exactly what you’re seeing. People say things like, “Well, 24-25 times Ford’s
earnings is perfectly reasonable.” That was the peak they reached in the bubble. Today, at 13
times, even if I believed the Ford earnings forecasts, which clearly we don’t, you’d have to
question whether those numbers are actually cheap. Relative to the peak in the bubble, yes.
Relative to a decent long-run history, clearly, no. That’s the problem. People have very, very
short-term memories here. We’ve got a serious myopia problem within the markets. The analysts are just in cloud cuckoo land. They keep telling us that things are going up. I do a chart
of actual earnings and forecasts, which shows that the analysts very clearly lack reality. They
only ever change their minds when there is irrefutable proof they are wrong, and then they
only change it slowly. It’s a classic pattern of anchoring and slow adjustment that we see.
Not to mention, demolish decoupling.
James: I actually have come up with a wee bit of data that shows, even if you somehow still believe in decoupling, that the emerging markets still have a huge problem: There’s an inverse relationship, historically, between economic growth and stock returns in emerging
markets. The slowest-growing emerging markets have generally generated the best stock
market returns for investors, while returns from the fastest-growth emerging markets have
lagged, because people overpaid for growth. Yet the whole reason, today, for buying into the
emerging markets and commodities seems to hinge on rapid growth in China, India, Brazil and
Russia — which I think is utter madness.
One thing I hear constantly, so you must, too, is that there’s still so much liquidity
looking for a home that the markets have to be sitting pretty.
James: We definitely hear a lot about liquidity and a lot about sovereign wealth funds. But along time ago I wrote that liquidity is the name that investors give to their ignorance, and I continue
to stand by that. When you can’t find anything else to explain what’s happening, you say it’s liquidity. You might as well say there are more buyers than sellers because it is at least as true, scientifically. A lot of what we see here is just excuses being made. A lot of it isn’t genuine monetary creation like Albert was talking about earlier is in the emerging markets context. A lot
of what you’re referring to is really the fallacy of liquidity, this idea that there’s a lot of money
sloshing around and it’s got to find a home. As our mutual friend John Hussman always points out, all you’ve got is really Paul selling to Peter. It doesn’t alter a damn thing if I buy a stock and
someone else sells it. The net amount of money entering or leaving the market is essentially zero.
Albert: What the “liquidity” everyone talks about really is, is leverage. If there’s price momentum, you want to borrow and play that price momentum — often in cyclical risk assets.
But as soon as that momentum turns, like the Roadrunner, liquidity may continue running off
the cliff for awhile, but eventually gravity takes hold. Prices re-couple with the cycle. And as
we’ve seen with CDOs, liquidity just evaporates overnight. That’s the problem with relying on
liquidity as an investment tool. It’s just basically a leveraged momentum trade, which can
explode in your face. Now, some of these private equity people are still able to raise money —
that’s what’s so amazing. But liquidity essentially can evaporate overnight, as we’ve seen with the CDO market.
Tuesday, July 15, 2008
Should You Invest in the Long Tail?
It was a compelling idea: In the digitized world, there’s more money to be made in niche offerings than in blockbusters. The data tell a different story.
Psychology's ambassador to economics
A bat and a ball together cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?
Did you say 10 cents?
More than half of a Princeton University economics class gave the same answer (as did most of my friends), and it is wrong.
'If I offer you a deal: I toss a coin and if it's heads, you will win $200, but if it's tails you will lose $100. Will you take the bet?
'The majority of people say no. They don't consider it attractive. They weigh pleasure against pain, and for most people, the pain of losing $100 outweighs the pleasure of winning $200. Losses are given a weight of more than 2:1 compared with gains. This is loss aversion.
Distressed-debt opportunities appear on investment horizon
Distressed debt is about to have its day, according to some prominent investment managers.
"A lot of money has been raised in anticipation" of a bull market in distressed debt, said Martin Fridson, chief executive of Fridson Investment Advisors LLC and former head of high-yield strategy at Merrill Lynch & Co. Inc. Both firms are based in New York.
That money is sitting on the sidelines, but it won't be sitting there much longer, Mr. Fridson said.
"The time is not yet; we're just waiting," said Bruce Berkowitz, founder of Fairholme Capital Management LLC of Miami, adviser to the $8.4 billion Fairholme Fund.
But it is almost here, said Mr. Berkowitz, whose investing acumen is so well respected that he is mentioned by some industry experts as a possible successor to Warren E. Buffett at Berkshire Hathaway Inc. of Omaha, Neb.
According to James Keenan, co-manager of the $1.7 billion BlackRock High Yield Fund, offered by BlackRock Inc. of New York, opportunities in distressed debt are already starting to pop up.
Thursday, July 10, 2008
Low-Tech Warren Buffett "Probably" Getting Amazon's High-Tech E-Book Reader
Buffett: I probably will, after hearing about it today. And I ran into a number of people that have Kindles and who are just in love with them. In fact, a woman that is the wife of another attendee here, came in on the plane with us, and she was using a Kindle and was wildly enthusiastic about it.
Julia: What's your sense in terms of the economy?
Buffett: Well, I can tell you that from a certain amount of real-time information that I get from our businesses and elsewhere, things have, the decline has accelerated in the last, I would say, six weeks. So things are getting worse at a more rapid rate than they were two or three months ago.
Ken Heebner casts an optimistic eye on economy
My view of the world is quite different. I think people are very concerned about our economy, they're starting to realize there could be higher inflation to come. The consensus is that we'll bring the rest of the world into our recession. But my view is we've probably seen the weakest period of economic activity. The economy may not be robust in the next year, but it's seen its low point and at some point will move higher.
That's reassuring, but how can this be?
I understand how serious the housing problem is. But it's not as broad a problem as widely perceived. It's reduced everyone's sense of financial well-being, but a third of homeowners don't have a mortgage, and the vast majority of people made down payments and have fixed-rate mortgages, so there's no financial strain. For them, the only impact is the psychological impact of declining housing prices. So therefore I don't think this is as big a deal as everyone else does. We've passed the point of maximum distress.
What evidence is there for that?
First, on manufacturing, the Institute for Supply Management's index seems to have reached a low of 49, and when this gets to 45, that's a recession. Additionally, the Fed started aggressive ly easing interest rates, and the impact of those eases will start to be felt. But I think the driver of the global economy is the developing countries, with a population of 3 billion. China, Russia, India, Brazil, and a lot of smaller countries. If you add up Japan, Europe, and the US, you're talking about a little less than 1 billion people, and you have 3 billion people going strong.
Thursday, July 3, 2008
I Am CNBC Wilbur Ross Transcript
CNBC: Why did you decide to specialize in bankruptcy?
WILBUR ROSS: It was happenstance. After Harvard Business School and the army, I went to the street. The firm I was with, Wood, Struthers, and Winthrop is a very conservative firm, so they fired the guy who was running the venture fund. I was the newest kid and they gave it to me to liquidate.
CNBC: So, it was just luck that you got involved bankruptcy?
WILBUR ROSS: Yes, back then a lot of those companies weren't so good so I started doing that. Then later on I went to work for the Rothschild family. The first thing they gave me to do was; Federal Express was about to go bankrupt. It was one of their big investments. I had to convince Citibank not to do it and a year later it went public, so it was serendipitous.
CNBC: That was quite a turnaround, Federal Express.
WILBUR ROSS: Yes, it became a wonderful company. Then I just started doing it more and more.
Pricing Terrorism: Insurers Gauge Risks, Costs
In the Aftermath of the September 11, 2001, attacks, Congress passed a law requiring commercial and casualty insurance companies to offer terrorism coverage. That was reassuring to jittery business owners but a major hassle for insurers, who, after all, are in the business of predicting risk. They might not know when something like a hurricane or earthquake will hit, but decades of data tell them where and how hard such an event is likely to be. But terrorists try to do the unexpected, and the range of what they might attempt is vast. A recent study published by the American Academy of Actuaries estimated that a truck bomb going off in Des Moines, Iowa, could cost insurers $3 billion; a major anthrax attack on New York City could cost $778 billion.
How do you predict a threat that's unpredictable by design? By marshaling trainloads of data on every part of the equation that is knowable. Then you make highly educated guesses about the rest.
But Dr. Woo doesn't work at the Defense Department. He consults for insurance companies, and is currently putting his mind to work on the problem of how to price insurance policies covering terrorist acts. Among his tools: game theory, the statistical approach made famous in the recent movie "A Beautiful Mind" about the life of mathematician John Forbes Nash Jr.
In a paper on the subject, Dr. Woo predicted that the frequency and severity of future attacks would be influenced by the structure of terrorist networks, which he compares to insect swarms and German U-boat fleets. This perspective helps "get under the skin of these groups and figure out what their strategies will be," he explains. Gathering enough information on terrorists' swarmlike behavior, the nature of past attacks and the goals of al Qaeda will provide parameters for models to price insurance, he adds, though such modeling is in its early stages and remains a formidable task.
The Art of Management (Li Ka Shing)
Art is defined as the creation, production, principle, method or expression of a human endeavor, generally considered beautiful, and is capable of transcendence and has a unifying effect. It is also a branch of learning that can be gained through learning, imitation, practice and observation. On the basis of this definition, art and management appear to share many common aspects.
Are you a boss or a leader?
I often ask myself: Would I rather be the boss or the leader of an organization? Generally speaking, being the boss is much simpler. Your authority is derived from your position of power, which may be granted to you through destiny or hard work and professional knowledge. Being a leader is more complicated. Your authority is derived from your expert power and charismatic power. To be a successful manager, attitude and ability are equally important ingredients. A leader inspires others to greatness. A boss dominates his subordinates and makes them feel small.
Wednesday, July 2, 2008
Bill Miller finds opportunities in battered financials
What is your assessment of valuations of US shares at the moment?
Equity valuations in general are not demanding, interest rates are low, and corporate balance sheets, especially in the US, are in excellent shape. That sets the stage for what should be an improving environment for investors in stocks and in spread credit products. Our valuation work indicates that the S&P500 Index is currently worth about 17 times earnings versus a current market P/E of about 14.5 times on 2008 consensus estimates, suggesting that the upside return to fair value for US equities is in the high-teens.
What is the appropriate strategy to take when investing in US stocks now, with a long-term investment horizon in mind?
We believe the new market leadership will come from the same place it usually does: the old laggards. The new leadership will be what no one wants to own today, especially large and mega-cap stocks which have lagged the market most of the last five years. We believe that the greatest gains over the next five years will be made in those securities people are panicked about today. We believe the US market offers attractive investment opportunities for long-term investors whose strategy is valuation-driven, patient and contrarian in nature.
What is the greatest challenge you are facing in investing in the US?
The greatest challenge for investing in the US is coming from the global commodity markets. Oil has supplanted credit as the driver for the markets. Through oil’s impact on US consumer spending and corporate input costs, the recent run-up in oil prices is causing credit spreads to widen, destruction in demand and changes in consumer behaviour. Since oil went above $120 in early May, credit spreads have reversed their improving trend. If commodities break, or even just stop rising, equity markets should do well.
Monday, June 30, 2008
Tiger Woods, Warren Buffett and Lolapolooza
- an intense focus on your area of talent and passion
- Starting early in life
- Concentration of power and execution in the hands of the most talented individual
- The power of re-inforcement
- Life-long learner (constant improvement)
- and finally Lolapolooza
The Alpha Hedge Fund Hall of Fame
When it comes to sheer financial power and influence, the hedge fund industry has few rivals. Since 1990, hedge funds have grown from a $40 billion cottage business into a nearly $2 trillion global industry. Rarely does a day pass without a hedge fund manager or two making headlines for their latest exploits.
To honor the people behind this phenomenon, we have created the Alpha Hedge Fund Hall of Fame. The first 14 inductees have all had an outsize impact on the hedge fund industry, enjoyed spectacular long-term success and displayed tremendous originality, starting with Alfred Winslow Jones, the inventor of the modern hedge fund. James Simons is on a 20-year roll of 40 percent returns. Bruce Kovner made commodities trading a hot pursuit. George Soros’ larger-than-life adventures put hedge funds on the map, and Kenneth Griffin intends to ensure they stay there. Michael Steinhardt and Steven Cohen brought credibility to short-term trading. Paul Tudor Jones II is the macro trader writ large, Seth Klarman is the premier value sleuth, Leon Levy and Jack Nash pioneered the modern multistrategy fund, and Louis Bacon is the risk manager’s risk manager. Where they blazed trails, others followed — not least the “cubs” sent skittering into the investment world by Tiger Management Corp.’s Julian Robertson Jr. Some of the most influential figures aren’t managers at all, like Yale University’s David Swensen, who made the road less traveled acceptable.
Interview Transcripts:
June 24: Bruce Kovner, James Simons
June 25: Julian Robertson, George Soros, Michael Steinhardt
June 26: Kenneth Griffin, Seth Klarman, David Swensen
June 27: Steven Cohen, Leon Levy, Jack Nash
June 30: Louis Bacon, Alfred Winslow Jones, Paul Tudor Jones
Thursday, June 26, 2008
Warren Buffett's Power Lunch Interview on "Exploding" Inflation
Becky: You mentioned oil prices, and there's been a huge debate we've been having on our show, and throughout the day, where people are trying to figure out, is this supply and demand picture or to the idea that there's speculation going on in these markets. That there's a lot more money in these markets than there used to be, say three years ago.
Buffett: It's supply and demand. I mean, if somebody buys a thousand forward oil contracts and somebody sells a thousand forward oil contracts, somebody's speculating on the downside and somebody's speculating on the upside. The only way you could have speculators having a big impact is if you had a huge amount of storage where they started actually withdrawing actual, physical oil from the system. But it's not speculation, it's supply and demand and the situation is that in my adult lifetime, up until the last year or two, there's always been a huge amount of excess supply available. There's been reserve capacity. And that goes back 30 years ago, in this country we produced way more oil than we needed here and we had something called the Texas Railroad Commission that shut down wells. And a matter of fact, we got down to where they would only let wells operate in Texas for eight days, we had so much extra capacity. We don't have excess capacity in the world anymore, and that's what you're seeing in oil prices.
Saturday, June 14, 2008
Your Money & Your Brain
What makes this artifact so astounding is that it is as contemporary as today's coverage of the financial news. More than 3,700 years after this clay model was first baked in Mesopotamia, the liver-reading Babylonian barus are still with us—except now they are called market strategists, financial analysts, and investment experts. The latest unemployment report is ''a clear sign'' that interest rates will rise. This month's news about inflation means it's ''a sure thing'' that the stock market will go down. This new product or that new boss is ''a good omen'' for a company's stock.
Just like an ancient baru massaging the meanings out of a bloody liver, today's market forecasters sometimes get the future right—if only by luck alone. But when the ''experts'' are wrong, as they are about as often as a flipped coin comes up tails, their forecasts read like a roster of folly.
What Are The Odds?
It took two psychologists, Daniel Kahneman and Amos Tversky, to deal a death blow to the traditional view that people are always ''rational.''
Consider these examples:
- Two bowls, hidden from view, each contain a mix of balls, of which two-thirds must be one color and one-third must be another. One person has taken 5 balls out of Bowl A; 4 were white, 1 was red. A second person drew twenty balls out of Bowl B; twelve were red, 8 were white. Now it's your turn to be blindfolded, but you can take out only one ball. If you guess the right color in advance, you will win $5. Should you bet that you will draw a white ball from Bowl A, or a red ball from Bowl B?Many people bet on getting a white ball, since the first person's draw from Bowl A was 80 percent white, while the second person drew only 60 percent red from Bowl B. But the sample from Bowl B was four times larger. That bigger drawing means that Bowl B is more likely to be mostly red than Bowl A is to be mostly white. Most of us know that large samples of data are more reliable, but we get distracted by small samples nevertheless. Why?
- A nationwide survey obtains brief personality descriptions of 100 young women, of whom 90 are professional athletes and 10 are librarians. Here are two personality profiles drawn from this group of 100:Lisa is outgoing and lively, with long hair and a tan. She is sometimes undisciplined and messy, but she has an active social life. She is married but has no children.Mildred is quiet, with eyeglasses and short hair. She smiles often but seldom laughs. She is a hard worker, extremely orderly, and has only a few close friends. She is single. What are the odds that Lisa is a librarian? What are the odds that Mildred is a professional athlete? Most people think Lisa must be an athlete, and Mildred must be a librarian. While it seems obvious from the descriptions that Lisa is more likely than Mildred to be a jock, Mildred is probably a professional athlete, too. After all, we've already been told that 90 percent of these women are. Often, when we are asked to judge how likely things are, we instead judge how alike they are. Why?
- Imagine that you and I are flipping a coin. (Let's flip six times and track the outcomes by recording heads as an H and tails as a T.) You go first and flip H T T H T H: a 50/50 result that looks exactly like what you should get by random chance. Then I toss and get H H H H H H: a perfect streak of heads that makes us both gasp and makes me feel like a coin-flipping genius.But the truth is more mundane: In six coin flips, the odds of getting H H H H H H are identical to the odds of getting H T T H T H. Both sequences have a one-in-64, or 1.6 percent, chance of occurring. Yet we think nothing of it if one of us flips H T T H T H, while we both are astounded when H H H H H H comes up. Why?
It's vital to recognize the basic realities of pattern recognition in your investing brain:
- It leaps to conclusions. Two in a row of almost anything—rising or falling stock prices, high or low mutual fund returns—will make you expect a third.
- It is unconscious. Even if you think you are fully engaged in some kind of sophisticated analysis, your pattern-seeking machinery may well guide you to a much more instinctive solution.
- It is automatic. Whenever you are confronted with anything random, you will search for patterns within it. It's how your brain is built.
It is uncontrollable. You can't turn this kind of processing off or make it go away. (Fortunately, as we'll see, you can take steps to counteract it.)
1) Getting what you expected produces no dopamine kick.
2) An unexpected gain fires up the brain.
3) If a reward you expected fails to materialize, then dopamine dries up.
Bentley College Commencement Speech by John Mackey, CEO of Whole Foods
My first message to the Bentley students today then is to truly honor and appreciate your parents. No one will ever love you quite like your parents do, and although they have no doubt made plenty of mistakes in helping you to grow up, they’ve also done the very best job that they knew how to do. They’ve also made far more sacrifices on your behalf than you will ever really know. Please forgive them for their mistakes and imperfections and fully love them and honor them while you can, because the simple truth is that you won’t always have them with you as you move further along your life journey.
Follow Your Heart
We should commit ourselves to following our hearts and doing what we most love and what we most want to do in life.
The Cardinal Virtue of Love
My third message to the Bentley graduates today is to emphasize the absolute importance of love as the cardinal virtue to nurture and cultivate in your lives. I don’t believe there is anything more important in life than love. I’m not talking about romantic love here, or “eros”, which is a very wonderful state of intoxication, but which also tends to fade over time. Rather, I’m talking about love as care and compassion, which actively flows out of our hearts toward other people and sentient beings through empathy and appreciation. This type of love need not fade over time, but is capable of continued growth all our lives if we will consciously nurture it. When we are truly following our hearts we are very likely tapped into the flow of love as well. But love is also a virtue that we can consciously develop in our lives to higher and higher levels. Such efforts are well worth making for nothing enriches us, teaches us, or makes life more rewarding than developing our capacity for love. In cultivating love in my own life I’ve found practicing three other related virtues to be essential.
Overcoming Life’s Challenges
My fourth message to the Bentley graduates today is that life has many, many difficulties and challenges—it isn’t easy. We all will face many disappointments, frustrations, losses, and injustices, as well as inevitable illness, aging, and eventually death. I believe the best way to deal with most of the difficulties and challenges that come our way are to see them as opportunities to help us grow—lessons that are presented to us to help us go further than we have gone before. I have not found it to be useful to ever see myself as a victim of either circumstances or of other people. Self-pity is a remarkably self-destructive emotion, which you should consciously work to eliminate from your emotional life because it dis-empowers you and moves you away from being able to follow your heart.
Conscious Capitalism
My final message to the Bentley graduates today has to do with the type of business organizations that we need to create in the 21st century. I believe that the 20th century will eventually be seen by historians as the great contest between capitalism and socialism with capitalism scoring a decisive victory. Capitalism may have won the war, but it has not captured the hearts of the people. Most people don’t love or trust corporations, who they often see as uncaring, greedy, selfish, dishonest, and concerned only with maximizing profits.
Two Images of China
The Olympic torch's journey has set the western media ablaze, giving it the opportunity to rake China over the coals for its policies on Tibet and human rights. The most vigorous protests, in London and Paris, were played out for prime-time newscasts. The more the police, motorcycle outriders and Chinese guards closed ranks, the more protesters clashed with them for the benefit of the cameras. In San Francisco the mayor had to change the torch route at the last moment to avoid assembled protesters. China's image in the West is poor.
On May 12 a devastating earthquake hit Sichuan Province, killing more than 55,000 people and leaving 25,000 missing and 5 million homeless. Government response was swift. Vivid scenes of the devastation and suffering, with a tearful Premier Wen Jiabao hugging children and babies and assuring people in his soft manner that they would receive help in rebuilding their lives and homes, changed the world's mood toward China. President Hu Jintao and other top leaders went to the sites to bring relief and lend support. In stark contrast, Myanmar's leaders were passive and rejected foreign aid for many weeks while their people suffered. China mobilized all its resources; appealed to the world for tents; accepted help from Japan, Russia, the U.S. and others; and collected donations from its people. Hundreds of millions of Chinese across this vast land and in their embassies abroad observed three minutes of silence on May 19, the first of three days of mourning. The national solidarity, discipline, organization and capability have been impressive. The world has seen a China never seen before.
But this moment of world sympathy will pass, and concerns over China's future role will remain. The West is uncertain whether this huge nation will be good or bad for the world. This tension will only be resolved when both sides approximate each other's worldviews and accept that they will never have identical cultural values.
Tuesday, June 10, 2008
Market Wisdom from Bernard Baruch
- Don't underestimate the power of thinking. "During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think."
- If your stocks are keeping you awake a night worrying about them, you should sell them to a "sleeping point."
- Never take stock tips from others. Self-reliance and "doing one's own thinking" is a must.
- The stock market does not determine the health of the economy but "rather reflects it." The ability to understand this is an important skill.
- "There is no investment which does not involve some risk and is not something of a gamble." Moreover, "what we can try to do perhaps is to come to a better understanding of how to reduce the element of risk in whatever we undertake."
- "Better to have a few stocks and to watch them carefully."
- Having a "good supply of cash on hand at all times in reserve is important" to take advantage of market declines and major crashes.
- No one could be an expert at too many things. He liked to focus on "one thing at a time, perfect it, and do it well."
- What drives stock prices are human reactions. Ironically, the key to successful speculation is to remove our decisions from our emotions. "Without control over your emotions, there is very little chance for profitable success in the stock market."
- Baruch often described the market as a thermometer and the economic environment as the fever. "The market does not cause economic cycles but merely reflects them and the judgments of what traders believe business and the future will be like."
- "Don't try to buy at the bottom and sell at the top. It can't be done except by liars."
- "It is much harder to sell stocks correctly than to buy them correctly." Because of the emotional aspect of trading, if a "stock went up, the average investor would hold because he wants more gains - he's exhibiting greed. If the stock declines, he also holds on and hopes the stock will come back so he can at least sell and break even - he's hoping against hope."
- "Do not blame anybody for your mistakes and failures."
- It is important to "follow what the market is currently doing as opposed to following what one might personally think the market should do." As he said, "Every man has a right to his opinion, but no man has a right to be wrong in his facts."
- Knowing your biases and weakness are important. "Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions, and prejudices so you can separate them from what you see."
- "The main purpose of the stock market is to make fools of as many men as possible."
Buffett's big bet
That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers.
You can guess which party is taking which side.
Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.
On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.
Monday, June 9, 2008
Nassim Nicholas Taleb: the prophet of boom and doom
1 Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
2 Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.
3 It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.
4 Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.
5 Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.
6 Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
7 Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).
8 Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.
9 Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.
10 Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.
People vs. Dinosaurs
Question: What do America’s premier investor, Warren Buffett, and Iran’s toxic president, Mahmoud Ahmadinejad, have in common? Answer: They’ve both made a bet about Israel’s future.
Ahmadinejad declared on Monday that Israel “has reached its final phase and will soon be wiped out from the geographic scene.”
By coincidence, I heard the Iranian leader’s statement on Israel Radio just as I was leaving the headquarters of Iscar, Israel’s famous precision tool company, headquartered in the Western Galilee, near the Lebanon border. Iscar is known for many things, most of all for being the first enterprise that Buffett bought overseas for his holding company, Berkshire Hathaway.
Buffett paid $4 billion for 80 percent of Iscar and the deal just happened to close a few days before Hezbollah, a key part of Iran’s holding company, attacked Israel in July 2006, triggering a monthlong war. I asked Iscar’s chairman, Eitan Wertheimer, what was Buffett’s reaction when he found out that he had just paid $4 billion for an Israeli company and a few days later Hezbollah rockets were landing outside its parking lot.
Buffett just brushed it off with a wave, recalled Wertheimer: “He said, ‘I’m not interested in the next quarter. I’m interested in the next 20 years.’ ” Wertheimer repaid that confidence by telling half his employees to stay home during the war and using the other half to keep the factory from not missing a day of work and setting a production record for the month. It helps when many of your “employees” are robots that move around the buildings, beeping humans out of the way.
So who would you put your money on? Buffett or Ahmadinejad? I’d short Ahmadinejad and go long Warren Buffett.
Wednesday, May 28, 2008
The next Buffetts
- Prem Watsa Fairfax Financial Toronto
Who is he?: The 56-year-old CEO of Fairfax Financial Holdings has often been called the Buffett of the North. He’s run his insurance holding company since 1985 and has grown its share price by an average of 26% a year during that time.
- Tim McElvaine McElvaine Investment Trust Vancouver
Who is he?: McElvaine, 44, is a native of Kingston, Ont., and a graduate of Queen’s University. He qualified as a chartered accountant and earned his Chartered Financial Analyst designation before going to work for Peter Cundill, the famed value investor and fund manager, in 1991. Five years later, McElvaine set up the McElvaine Investment Trust.
- Dr. Michael Burry Scion Capital Cupertino, Calif.
Who is he?: Burry, 36, studied economics at UCLA, but despite a long-standing fascination with the stock market, stuck to his original plan of becoming a doctor. In 1995, as he was finishing his training at Vanderbilt Medical School, his father died and Burry began investing a small amount of trust money. Two years later, he launched his own website and began to write about stocks in the only time he had free — between midnight and three in the morning. His dissections of value stocks attracted a following and in 2000, Forbes magazine named his hobby site as one of the top investing destinations on the web. By then Burry was in the third year of a residency in neurology at Stanford University Medical Center and he figured it was time to choose between medicine and money management. He set up a hedge fund, named it Scion Capital, and became a full-time investor.
- Ian Cumming Leucadia National New York
Who is he?: Cumming is a decade younger than Buffett, which puts him at a sprightly 67. He’s a Harvard MBA who has been chairman of Leucadia since 1978. Together with partner Joe Steinberg, who serves as Leucadia’s president, Cumming has built a long-term track record of investor returns that is actually slightly better than Buffett’s. He does it primarily by looking for broken down, unwanted companies that he can fix and sell for a profit.
Thanks to Sanjeev from MSN BRK Board for the original reference
Monday, May 26, 2008
Commodities Prices
Direct Link
Another article about commodities prices.
Link to the article
Testimony of Michael W. Masters before the Committee on Homeland Security and Governmental Affairs United States Senate
Link to the Presentation
Wednesday, May 21, 2008
Warren Buffett's European Tour
Warren Buffett held a news conference in Switzerland today on the second stop of his 4-day European tour.
Most of the questions were about the trip itself, which is designed to raise Berkshire Hathaway's profile among large family-owned businesses that might be looking for a buyer who won't make a lot of changes. Buffett told reporters he doesn't expect to go home with a done deal in his pocket.
Monday, May 12, 2008
Managing Mindset Articles by MARTEN LUNDAL
What I will aim to do in these articles is to try to unmask some of the hype and illusion surrounding management, point to some of the vast dysfunctionality so prevalent in modern business life and also dare to give my own two cents’ worth of advice to the reader.
I will try to avoid management jargon, lingua and slogans, and I will try hard to not give you the five-step roadmap to anything.
In the space of this column, I will explore some of the most established truths of business life, hopefully challenging some of the assumptions we all live and work in, all-too-often unaware.
I will travel into many broad and narrow topics and, hopefully, some will end up with a slightly renewed perspective on business life and maybe even some aspects of life in general.
Saturday, May 10, 2008
Why Investors Fail
- "Fear of Regret - An inability to accept that you've made a wrong decision, which leads to holding onto losers too long or selling winners too soon." This is part of a whole cycle of denial, anxiety, and depression. As with any difficult situation, we first deny there is a problem, and then get anxious as the problem does not go away or gets worse. Then we go into depression because we didn't take action earlier, and hope that something will come along and rescue us from the situation.
- "Myopic loss aversion (a.k.a. as 'short-sightedness') - A fear of losing money and the subsequent inability to withstand short-term events and maintain a long-term perspective." Basically, this means we attach too much importance to day-to-day events, rather than looking at the big picture. Behavioral psychologists have determined that the fear of loss is the most important emotional factor in investor behavior. Like investors chasing the latest hot fund, a news story or a bad day in the market becomes enough for the investor to extrapolate the recent event as the new trend which will stretch far into the future. In reality, most events are unimportant, and have little effect on the overall economy.
- "Cognitive dissonance - The inability to change your opinion after new evidence contradicts your baseline assumption." Dissonance, whether musical or emotional, is uncomfortable. It is often easier to ignore the event or fact producing the dissonance rather than deal with it. We tell ourselves it is not meaningful, and go on our way. This is especially easy if our view is the accepted view. "Herd mentality" is a big force in the market.
- "Overconfidence - People's tendency to overestimate their abilities relative to individuals possessing greater expertise." Professionals beat amateurs 99% of the time. The other 1% is luck. The famous Clint Eastwood line, "Do you feel lucky, punk? Well, do you?" comes to mind. In sports, most of us know when we are outclassed. But as investors, we somehow think we can beat the pros, will always be in the top 10%, and any time we win it is because of our skills and good judgement. It is bad luck when we lose. Commodity brokers know that the best customers are those who strike it rich in their first few trades. They are now convinced they possess the gift or the Holy Grail of trading systems. These are the people who will spend all their money trying to duplicate their initial success, in an effort to validate their obvious abilities. They also generate large commissions for their brokers.
- "Anchoring - People's tendency to give too much credence to their most recent experience and to show reluctance to adjust their current beliefs." If you believe that NASDAQ stocks are the place to be, that becomes your anchor. No matter what new information comes your way, you are anchored in your belief. Your experience in 1999 shows you were right. As Lord Keynes said so eloquently when forced to acknowledge a shift in a previous position he had taken, "Sir, the fact have changed, and when the facts change, I change. What do you do, sir?" We expect the current trend to continue forever, and forget that all trends eventually regress to the mean. That is why investors still plunge into index funds, believing that stocks will go up over the long term. They think long term is two years. They do not understand that it will take years - maybe even a decade - for the process of reversion to the mean to complete its work.
- "Representativeness - The tendency of people to see patterns within random events." Eric Frye did a great tongue-in-cheek article in The Daily Reckoning, a daily investment letter (www.dailyreckoning.com). He documented that each time Sports Illustrated used a model for the cover of their swimsuit issue who came from a new country that had never been represented on the cover before, the stock market of that country had always risen over a four-year period. This year, it is time to buy Argentinian stocks. Frye evidently did not do a correlation study on the size of the swimsuit against the eventual rise in the market. However, I am sure some statistician with more time on his hands than I do will brave that analysis. Investors assume that items with a few similar traits are likely to be associated or identical, and start to see a pattern. McQuill gives us an example. Suzy is an English and environmental studies major. Most people, when asked if it is more likely that Suzy will become a librarian or work in the financial services industry, will choose librarian. They will be wrong. There are vastly more workers in the financial industry than there are librarians. Statistically, the probability is that she will work in the financial services industry, even though librarians are likely to be English majors.
Monday, May 5, 2008
Thursday, May 1, 2008
One on One with Carl Icahn, Chairman, Icahn Enterprises
I sat down recently with Carl Icahn and began by asking him how he rates his chances of success in proxy fights over the next couple of months, now that hedge funds and mutual funds are joining with him.
One Guy Who Has Seen It All Doesn't Like What He Sees Now
As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.
Mr. Bernstein, whose books include "Against the Gods: The Remarkable Story of Risk," sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike.
Mr. Bernstein is hopeful that Federal Reserve intervention will prevent deflation and depression, but he says there is no guarantee.
Tuesday, April 29, 2008
Warren Buffett Finances Mars-Wrigley Deal: The Complete CNBC Interview
Warren Buffett spoke live this morning (Monday) with CNBC's Squawk Box about his role in today's $23 billion Mars acquisition of Wrigley.
Here is the complete interview
Thursday, April 24, 2008
Transcript: Wal-Mart’s Lee Scott
Lee Scott, chief executive officer of Wal-Mart since 2000, spoke to Jonathan Birchall, the FT’s US retail correspondent, about the state of the world’s largest retailer.
Tuesday, April 22, 2008
Betting on a Market
Looking Up to Warren Buffett
Tuesday, April 15, 2008
Lessons from the Best-Ever Hedge Fund Manager
That person was of the great Munehisa Honma who managed a long/short commodities hedge fund during the 18th century. His house is well designed and much larger than most hedge fund managers, but his book "Fountain of Gold" is brilliant. Probably the best investment book ever written. His trading ability enabled the Honma family to go on to become the largest land owner in Japan for over a century. In today's money, his likely net worth was much more than $100 billion. Some years he would have "taken home" the equivalent of $10 billion so it is curious that there are those excited about John Paulson's "record" pay of $3 billion; fair compensation for the $12 billion absolute alpha he generated for investors that they would not otherwise have.
But Honma's returns were higher. Back in 1755 he knew that it was psychology and the irrational actions of market participants, not economic logic that drove markets. The study of behavioral finance isn't new, it's over 253 years old. Also he didn't buy and hold rice and wait to be compensated for its high risk. He did not "expect" a commodity risk premium. And even though rice futures were heavily traded and analyzed back then, the liquidity did not produce an efficient market. Like good traders today, he worked out that if he worked hard to develop competitive informational and analytical advantages, he could extract absolute alpha out of other rice traders, regardless of whether rice prices themselves were rising or falling.
Homma ran the family rice trading business and rice was the lifeblood of Japan. More than a food, rice was a culture, Rice growing villages lived their whole lives around the rice planting, growing and harvesting cycle. Various parts of this cycle were celebrated with festivals and formal ceremonies. Rice was a precious commodity. Rice was more than a commodity; rice was a culture central to Japanese life. From rice came Sake the famous Japanese rice wine, rice cakes, rice flour, rice vinegar and much more. The rice plant produced not only its precious grains but a large amount of lush green foliage which when dry became straw. Rice straw too was an essential part of Japanese life. From straw, traditional villagers in the north made hats, clothes, utensils and the exquisitely fine rice paper. They made important religious figures, masks, decorations and a hundred other everyday items