Tiger Woods, Warren Buffett and Lolapolooza

Sam Houlie takes a look at the similarities between these people and the notion of extreme

• 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

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The Alpha Hedge Fund Hall of Fame

Fourteen men whose power and influence have helped to create a $2 trillion industry.

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

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.

The Interview and Transcript

Your Money & Your Brain

In the Mesopotamian galleries of the British Museum in London sits one of the most startling relics of the ancient world: a life-size clay model of a sheep's liver, which served as a training tool for a specialized Babylonian priest known as a baru, who made predictions about the future by studying the guts of a freshly slaughtered sheep. The model is a catalog of the blemishes, colors, and differences in size or shape that a real sheep's liver might display. The baru and his followers believed that each of these variables could help foretell what was about to happen, so the clay model is painstakingly subdivided into sixty-three areas, each marked with cuneiform writing and other symbols describing its predictive powers.

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:

1. 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?
2. 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?
3. 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.)

Researchers Schultz and Read Montague, along with Peter Dayan, now at University College London, have made three profound discoveries about dopamine and reward:

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.

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An Interview With Jason Zweig

Bentley College Commencement Speech by John Mackey, CEO of Whole Foods

Honor Your Parents
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.

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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.

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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."

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Buffett's big bet

Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?

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.

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Nassim Nicholas Taleb: the prophet of boom and doom

Taleb's top life tips

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.

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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.

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