Friday, November 30, 2007

Eddie Lampert Issues Letter to Sears Associates

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Arne Alsin: No pretty bow, but still a gift

Arne Alsin: The rational investor looks beyond price

The Entrepreneurial Investor

A logical investor must take irrational market behavior into account when choosing stocks to buy, sell, and hold. Fear and euphoria cannot dominate the actions of someone who really knows the companies and industries in which he or she invests, but other people’s fear and euphoria should influence one’s choices. Do not blindly follow the herd, but pay close attention to its movements. Opportunity exists in the gap between a company’s value and the herd’s perception of its value. Of course, it can take a long time for the herd to catch up, but that is how an entrepreneurial investor’s patience is rewarded.
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Thursday, November 29, 2007

Tweedy, Browne's Semi-Annual Report

In a fascinating new book, A Demon of Our Own Design, author Richard Bookstaber, a “Wall Streeter” with over 20 years of quantitative trading experience, contends that financial innovation, complexity and globalization have combined to make our markets more crisis prone. He uses biology as a frame of reference for economic behavior, and contrasts the cockroach and the furu, a small perch-like fish, in a case study of risk management. He finds the survival of the cockroach over millions of years quite remarkable, especially in light of what he describes as their “coarse and sub-optimal behavior” when it comes to risk management. In essence, the cockroach has a rather simple defense mechanism: moving away from slight puffs of air. It completely ignores a wide range of other information and risks “…that one would think an optimal risk management system would take into account.”
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He contrasts the sub-optimal behaving cockroach to the finely tuned and optimizing behavior of the furu, a once dominant, small, perch-like fish that survived in Africa’s Lake Victoria for thousands of years. The furu, over the centuries, became highly adapted to its environment, evolving into some 300 species and developing a myriad of skills, which allowed it to thrive and flourish in its habitat, rivaling “the finches that Darwin studied in the Galapagos.” It unfortunately fell victim to extinction when the Nile Perch was introduced by a Kenyan game fisheries officer into the lakes of Central Africa. Bookstaber points out that their “extinction was not the result of natural selection based on fitness in the usual sense; they were diverse and suited for almost every conceivable element of the Lake Victoria ecology.…Its path toward extinction was just a result of dumb luck that someone had introduced an alien species into its waters.”
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The furu, on the other hand, is akin to today’s highly leveraged investor seeking to eradicate risk by fine tuning portfolios using probability theory in an attempt to ferret out and nullify any and all conceivable risks. Portfolios of high alpha generating, non-correlated assets are put together in a mosaic that is supposed to enhance return and lower volatility. With risk so theoretically constrained, investors are free to use leverage to exploit small market inefficiencies, allowing them to proverbially and safely “pick up dimes in front of steamrollers.” With massive amounts of individual and institutional capital having moved into these finely-tuned and highly leveraged strategies, Bookstaber contends that our capital markets will from time to time be confronted with liquidity shocks that could accelerate into full blown crises. Such was the case with the credit crunch in August.

Annaly - Note on Freddie Mac Following Release of its 3rd Quarter Results

Another (see post below on Pzena) opinion on Freddie Mac:
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Long-Term Value in Freddie Mac

FPA Capital Fund's Semi-Annual Report

In light of the above comments, we believe the odds of a 2008 recession have increased to at least 50%, or more. Given the growing credit contraction, oil prices approaching $90 per barrel and the dollar setting new alltime lows versus a basket of currencies; future Fed policy actions may prove rather ineffectual in dealing with these challenges. We are of the opinion that the Fed will lower the Fed Funds rate into the 3.75% to 4% range next year, or lower, as housing, capital markets and consumer issues negatively affect economic and corporate earnings growth. We view consensus earnings growth expectations as being too high and believe that they will have to be lowered. Only recently have various types of financial services companies begun to recognize their problem loans and investments, with charges and provisions for future losses. Some of these stocks have responded favorably, with the belief that these companies are getting their problems behind them. Again, we believe the consensus is being too optimistic. Generally, managements are always initially optimistic, until they have to face the grim reality of the situation, and this process should extend well into 2008. The stock market appears to be ignoring these various risks since there appears to be a general belief that lower interest rates will ride to the rescue to solve these credit problems and support stock prices. We do not agree with this optimistic view and, therefore, we will continue to deploy a highly defensive portfolio strategy since we do not believe we are being appropriately compensated for these risks.

Wednesday, November 28, 2007

LeBron Inc. - The building of a billion-dollar athlete

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Wouldn't it be interesting if LeBron used LRMR (see article) the way Mr. Buffett has used the insurance business to build a diversified holding company? For LeBron, the return on capital for that business is ridiculously high while he is in his prime and if he lets all that cash build up, gets someone with capital allocating expertise to partner with, and then either invests in and/or buys businesses when they are cheap, he could have pretty sizable conglomerate by the time he retires.
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And in full disclosure, I grew up in the Cleveland area and am a big Cavs fan. That fact also makes me hope that Mr. Buffett's decision to stay in his home town of Omaha also rubs off on LeBron and he spends his entire career in Cleveland!

Another “Friendly” Deal? - by Phillip Ristau

Tuesday, November 27, 2007

What Makes Warren Buffett Successful?

Incentive-caused Bias in the Medical Profession

An excellent post from the blog of Sanjay Bakshi:
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Mr. Charlie Munger would surely have enjoyed reading this superb article in New York Times Magazine published on 25 November.
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The piece titled, "Dr. Drug Rep", is a moral story of Dr. Daniel Carlat, a medical man, who learnt how to deal with one of Mr. Munger's favorite mental models: Incentive-Caused Bias which Mr. Munger likes to describe as "whose bread I eat, his song I sing."
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Every professional should read Dr. Carlat's story. It has powerful lessons for professions outside of medicine...
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Mr. Munger likes to talk about incentive-caused bias as a very powerful psychological tendency, which makes, "a decent man, driven both consciously and subconsciously, by incentives, drift into immoral behavior in order to get what he wants."
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Its fascinating to me to see what happens once incentive-cause bias sets in.
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After his immoral behavior has started, the victim would come under the influence of several more psychological tendencies. For example, Operant Conditioning (It feels good, so I want more), Social Proof (everyone is doing it, so it must be OK), bias from Commitment and Consistency principle (I have to be consistent with my earlier, taken stand), and Low contrast effect (If I said yes to x, then saying yes to 1.01 x is no big deal) would combine together to produce rationalized immoral behavior. ("Man is not a rational animal, but a rationalizing one.")
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It takes a lot of courage for a professional to speak out against the incentive caused bias spreading like cancer in his profession, which is exactly why such stories deserve to be recommended for reading...
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For example, the accounting profession could do with more Dr. Carlats...
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Article: Dr. Drug Rep

Tuesday, November 20, 2007

Monday, November 19, 2007

Charlie Munger's Lollapalooza Effect and This Credit Fiasco

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Book with Charlie Munger's speeches and other wisdom: Poor Charlie's Almanack

Wednesday, November 14, 2007

HOW TO GET RICH - A Talk by Jared Diamond

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A printable version of Diamond's talk begins about halfway down the page HERE.
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Mind Over Money

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Combing Through the Bargain Bin

Digging for Value in the Real Estate Rubble by Zeke Ashton

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But as all value investors know, fear brings opportunity. One of the axioms of fear-based selling is that everything viewed as being in proximity to the danger gets sold. Panic selling does not lend itself to careful consideration of relative risk. The market often does not begin to discriminate between those securities with truly high risk and those with low risk until after the crisis has abated. Once time has allowed for a more appropriate discernment of value and risk, the value of those securities that were unjustly marked down inevitably recover the full measure of their value. There is opportunity in virtually any crisis for those investors willing to carefully pick through the rubble. It is never easy, and getting the timing perfect is virtually impossible, but we believe that the recent fear in the real estate sector has provided us with actionable bargains.
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How the Crunch Is Playing Out

Longleaf Partners Funds - Quarterly Report

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Tuesday, November 13, 2007

VALUE TALK: Buying at a Discount... by Charles Mizrahi

An Investment Framework by Peter Lindmark

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Whitney Tilson: Nothing to fear on the wild ride

Monday, November 12, 2007

Seduced by a Super Model

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Dallas Fed Posts Previously Unreleased Conversation with Milton Friedman

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Investment Nuggets

Video: John Bogle on Bill Moyers Journal

Friday, November 2, 2007

Legg Mason Value Trust Releases Letter to Shareholders

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The recent precipitous decline in financial stocks, especially those related to housing, which sent Countrywide Financial (CFC) to $12 last week, and led to 20 to 30% drops in financial guarantors in a day or so -- after they had already dropped between 25 and 50% this year -- is a case in point. After falling 20% in a only a few days on no news, and this after being down 50% for the year, CFC rallied over 30% in one day once they reported their results and indicated they would be profitable for the 4th quarter and expect to earn a reasonable return on equity of 10-15% for all of 2008. The price action on both sides was driven by emotion -- first fear, then relief -- and was hardly the result of a careful analysis of Countrywide's long term business value. That, by the way, we think is in the $40's compared to its current price of about $14-15.
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In Value Trust, we have been taking advantage of the market's current turmoil to make adjustments as the market misprices some securities in relation to others. Here is what you can expect: the fund will become more of what it already is, large capitalization US, as we systematically reduce our mid-cap names in favor of those with larger market values. As I noted elsewhere, I think large-cap US is the cheapest part of the equity market and so we will have more of those names. We will also extend exposure into some sectors from which we were previously absent. Inter industry valuations are pretty homogeneous and so concentration pays less than it used to. In other words, we will own more stocks, and in new industries. We will still be quite concentrated compared to the average mutual fund, just less than we have been previously.

Keep It Simple, Fool

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On the topic of Einstein, I am listening to Walter Isaacson's excellent book on him and I highly recommend it (Book, Audio Book), as did Charlie Munger at the Wesco meeting this year.
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There are also a couple of great quotes relating to Einstein that I keep in mind:
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"Everything should be made as simple as possible, but no simpler." --
Albert Einstein
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“Not everything that counts can be counted, and not everything that can be counted counts.” --sign that hung in Albert Einstein’s office at Princeton
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And the brief story mentioned by Peter Bevelin in my interview with him: When I hear them [Buffett and Munger] at the annual meeting, I am thinking about Einstein’s reply to a student. The student had challenged Einstein’s statement that the laws of physics should be simple by asking: "What if they aren’t simple?" Einstein replied, "Then I would not be interested in them."