Thursday, January 28, 2010
About a 33-minute interview by James Harding from The Times with Richard Dawkins about his latest book: LINK TO VIDEO
Miguel at Simoleon Sense also made a great find a couple of days ago: Video: Richard Dawkins on the Awe of Life & Science
Wednesday, January 27, 2010
In You Haven't Taught Until They Have Learned: John Wooden's Teaching Principles and Practices, authors Swen Nater and Ronald Gallimore have written a short, easily read, deceptively simple book that draws essential lessons on pedagogy from arguably the greatest college basketball coach of all time for application in the general education classroom.
From 1970 to 1973, Swen Nater was a bench player on two NCAA champion basketball teams at
About that same time, Ronald Gallimore and Roland Tharp were young university psychologists who thought there might be lessons for all educators from the success Wooden was having as a coach. Tharp and Gallimore formally studied Wooden's coaching and teaching during the 1974-75 season, arriving empirically at many of the same conclusions that Nater was drawing from his firsthand experience (Tharp & Gallimore, 1976; Gallimore & Tharp, 2004). Are there lessons to be learned from Nater and Gallimore's collaboration for today's classroom teacher?
Related previous post: John Wooden: Coaching for people, not points
Tuesday, January 26, 2010
The tape that plays in Ben Bernanke's head appears to be a rather short phrase "We let the banks fail during the Great Depression, and look what happened." And then the tape repeats. The difficulty is that this story line ignores the distinction between a disorganized unwinding (e.g. Lehman) and a straightforward receivership process (e.g. Washington Mutual). We do not need to avoid bank "failures," nor does the public need to protect large banks under the illusion that they are "too big to fail." What we need is a well-organized capital market where individuals who accept risk actually bear the cost when those risks go awry. To create any other system is to sponsor a cycle of recklessness and constant misallocation of capital.
The only thing that the Bernanke-Geithner team has done is to defend the bondholders of mismanaged financial institutions - making them whole while ordinary citizens continue to lose their jobs and homes. This defense of bank bondholders has contributed to a $3.62 trillion increase in the quantity of government liabilities (Treasury securities and monetary base) issued to the public over the past two years. This represents a 61% addition to the entire quantity of publicly held government liabilities that the
There are far more thoughtful, principled candidates for leadership of the Federal Reserve and the U.S. Treasury. Martin Feldstein comes immediately to mind, though his conservative leanings toward tax policy may make it difficult for a Democratic administration to advance him as a choice. Paul Volcker, though perhaps not in the running himself, doubtless would be able to identify more principled leadership than Bernanke. Wall Street would survive his loss - though there are large problems in the pipeline whose effects might be mistakenly attributed to worries about Bernanke's replacement in any event (as I suspect was the case last week).
Finally, with due respect to Warren Buffett who, when asked about Bernanke's possible non-confirmation, answered "Let me know a day ahead of time so I can sell some stock," I suspect that a full completion of that sentence would have been "specifically, Wells Fargo." Without a doubt, Bernanke has been a great benefactor of bank stockholders and bondholders. This does not mean that his policy approach has been good for the country. The full assessment of Bernanke and Geithner's impact on the
Monday, January 25, 2010
My readers treat me well. They indulge my penchant for dissecting the past, and they send kind messages of encouragement. To repay their generosity, I’m going to venture into something I usually avoid: the future of the U.S. economy.
This memo won’t be about the future in general, just the elements I find worrisome. As I see it, every investor is either predominantly a worrier or predominantly a dreamer. I’ve come clean many times: I’m a worrier. By saying that, I absolve myself of having to describe the whole future. I’m going to cover the negatives, starting with the immediate and ending with the systemic (some of the latter repeats themes from “What Worries Me,” August 28, 2008). For the other side of the story, I’d suggest you consult the optimists who seem to be in charge of the markets these days.
Reduced faith in the dollar means it would take higher interest rates to attract non-U.S. buyers to dollar investments. And, even domestically, (a) one of these days the government will stop holding rates down and (b) higher inflation would require rates to rise to compensate for the fact that the dollars with which debts are repaid will buy less. For all these reasons, I think investors must consider the prospect of higher inflation, dollar weakness and higher interest rates.
What to do about them? The list of possibilities is long:
· Buy TIPS.
· Buy floating rate debt.
· Buy gold (but only at the “right” price, and what’s that?)
· Buy real assets, such as commodities, oil and real estate (ditto).
· Buy foreign currencies.
· Make investments denominated in foreign currencies.
· Buy the securities of companies that will be able to pass on increased costs.
· Buy the securities of companies that own commodities, or that own assets denominated in foreign currencies.
· Buy the securities of companies that earn their profits outside the
· Hold cash (to invest once interest rates have risen).
· Sell long-term bonds (and possibly go short).
These are the actions that can profit from – or that provide the flexibility to adjust to – increased inflation, a decline in the dollar and increased interest rates, all of which are interconnected. The most important one is the last one: long-term bonds could suffer worst in an inflationary, higher-rate environment, especially given today’s low starting yields.
One final point: When I provide this answer to the frequent question about inflation, I ask people whether they agree. Usually they do. Then I ask how much of their portfolio they’re willing to devote to protecting against these macro forces. If their answer is 5%, 10% or 15%, I point out that that’s pretty close to doing nothing. The question is whether you’re willing to devote at least 30-40%. Few people are.
But that’s the thing: It’s easy to say, “I’m worried about inflation.” It’s something very different to say, “I’m worried enough about inflation to do something meaningful about it.” Let me know when you decide how much you’re willing to devote.
Jeremy Grantham's fourth quarter letter begins with a short addendum (Stop the Presses!), which addresses two newsworthy items for Jan. 21. What a Decade! follows, providing Jeremy's thoughts on the past decade including a list of lessons learned. The Appendix is a summary of Jeremy's part in a debate entitled "Financial Innovation Boosts Economic Growth," sponsored by The Economist Magazine. (A link to a video of the debate is embedded within the document.)
2009 was the first year my full-time work was as co-chair of the foundation, along with Melinda and my dad. It’s been an incredible year and I enjoyed having lots of time to meet with the innovators working on some of the world’s most important problems. I got to go out and talk with people making progress in the field, ranging from teachers in
The global recession hit hard in 2009 and is a huge setback. The neediest suffer the most in a downturn. 2009 started with no one knowing how long the financial crisis would last and how damaging its effects would be. Looking back now, we can say that the market hit a bottom in March and that in the second half of the year the economy stopped shrinking and started to grow again. I talked to Warren Buffett, our co-trustee, more than ever this year to try to understand what was going on in the economy.
Although the acute financial crisis is over, the economy is still weak, and the world will spend a lot of years undoing the damage, which includes lingering unemployment and huge government deficits and debts at record levels. Later in the letter I’ll talk more about the effects of these deficits on governments’ foreign aid budgets. Despite the tough economy, I am still very optimistic about the progress we can make in the years ahead. A combination of scientific innovations and great leaders who are working on behalf of the world’s poorest people will continue to improve the human condition.
Friday, January 22, 2010
Great find by my friend Miguel.
Link to: Twelve Virtues of Rationality
Two of my favorite excerpts:
To be humble is to take specific actions in anticipation of your own errors. To confess your fallibility and then do nothing about it is not humble; it is boasting of your modesty. Who are most humble? Those who most skillfully prepare for the deepest and most catastrophic errors in their own beliefs and plans.
Study many sciences and absorb their power as your own. Each field that you consume makes you larger. If you swallow enough sciences the gaps between them will diminish and your knowledge will become a unified whole.
Thursday, January 21, 2010
Wednesday, January 20, 2010
Tuesday, January 19, 2010
As for the stock market, it is desirable to believe that stocks will prove to be a good hedge against inflation, since they are after all a claim on nominal cash flows which grow over time as prices increase. This was certainly the expectation in the early 1970's, when inflation risks were dismissed by investors in the belief that earnings would keep up with general prices.
Unfortunately, the view that inflation pressures are benign runs opposite to historical evidence. Specifically, there is a relatively high correlation between inflation rates and earnings yields. Investors tend to systematically elevate P/E ratios when inflation rates are low and depress P/E ratios when inflation rates are high. Which is not at all to say that this behavior is rational. To the contrary, the high P/E multiples that coincide with low inflation are also associated with unusually poor subsequent nominal and real returns. Conversely, the low multiples that coincide with high inflation tend to be associated with unusually high subsequent nominal and real returns.
The implication is that (barring actual deflation) investors view low inflation as a "feel-good" indicator and drive stock valuations excessively high in response. Conversely, they tend to punish stock valuations so much when inflation is high and variable that stocks actually tend to deliver very good subsequent returns. Transitions between low inflation to high inflation, then, tend to be quite painful for equity investors, while transitions from high inflation to low inflation tend to be unusually pleasant.
Fortunately, we have enough data both domestically and internationally to analyze inflation-prone environments with the expectation of dealing with them effectively from an investment standpoint. To understand the investment environment is to know how to respond. Presently, the greatest uncertainty for us continues to be the dichotomy between typical post-recession market dynamics and the much more difficult environment that we may very well actually be in, if previous credit crises in history are any guide. We share none of Wall Street's confidence that the more difficult possibility should be dismissed, and suspect that it is premature to declare the credit crisis over.
IS galloping inflation around the corner? Without doubt, the
Let’s start with first principles. One basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods.
A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.
Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era.
Sunday, January 17, 2010
Thanks to Lincoln for passing this along!
Smart certainly isn’t the only one noticing society’s – and industry’s – resistance to change. Recently I’ve met three investors who have taken a page from aviation to incorporate formal checklists into their work. Mohnish Pabrai is managing partner in Pabrai Investment Funds in Irvine, California, and runs a $500m portfolio; Guy Spier is head of Aquamarine Capital Management in Zurich, a $70m fund; the third did not want to be identified or to reveal the size of the fund where he is a director. But it is one of the biggest funds in the world and worth billions.
These three people are value investors, buying shares in under-recognised, undervalued companies. They don’t time the market. They don’t buy according to a computer algorithm. They do intensive research, look for good deals, and invest for the long run. Over the past 15 years, Pabrai has made a new investment or two every quarter, and he’s found that each one requires in-depth investigation of 10 or more prospects. The ideas can bubble up from anywhere but most drop away after cursory examination. Every week or so, however, he spots one that starts his pulse racing. It seems surefire. He can’t believe no one else has caught on to it yet. It could make him tens of millions of dollars if he plays it right. “You go into greed mode,” he said. (Spier called it “cocaine brain”.) And that, Pabrai said, is when serious investors try to become systematic. They focus on dispassionate analysis, on avoiding both irrational exuberance and panic. They pore over the company’s financial reports, investigate its liabilities and risks, examine its management’s track record, weigh up its competitors, consider the future of the market it is in.
The patron saint of value investors, of course, is Warren Buffett. Pabrai has studied every deal Buffett and his company, Berkshire Hathaway, have made – good and bad – and read every book he could find about them. He even pledged $650,000 at a charity auction to have lunch with Buffett. “Warren,” Pabrai said – and after a $650,000 lunch, I guess first names are in order – “Warren uses a ‘mental checklist’ process” when looking at investments. So, that’s more or less what Pabrai did from his fund’s inception. And he did very well following this method – but not always. He also made mistakes, some disastrous.
These were not mistakes merely in the sense that he lost money on his bets or missed making money on investments he’d rejected. That’s bound to happen. These were instances where he had miscalculated the risks involved, made errors of analysis. For example, looking back, Pabrai noticed that he had repeatedly erred in determining how leveraged companies were. The information was available; he just hadn’t looked for it carefully enough. In large part, he believes, the mistakes happened because he wasn’t able to damp down the cocaine brain. No matter how objective he tried to be about a potentially exciting investment, he found his brain working against him, latching on to evidence that confirmed his initial hunch and dismissing the signs of a downside. “You get seduced,” he said. “You start cutting corners.” Or, in the midst of a bear market, the opposite happens. You go into “fear mode” and overestimate the dangers.
He also found he made mistakes in handling complexity. A good decision requires consideration of so many different aspects of a company in so many ways that, even without the cocaine brain, he was missing obvious patterns. His mental checklist wasn’t good enough. “I am not Warren,” he said. “I don’t have a 300 IQ.”
. . .
Pabrai made a list of all the mistakes he’d spotted (even Buffet made them) as well as his own – about a dozen. Then, to help him guard against them, he devised a matching list of checks – about 70 in all. Similarly, the anonymous investor I spoke to – I’ll call him Cook – made a checklist. But he was even more methodical. He enumerated the errors known to occur at any point – during the research phase, during decision-making, during execution of the decision and even in the period after making an investment. He then designed detailed checklists to avoid the errors, complete with clearly identified pause points at which he and his team would stop and run through the items together. He has a Day Three Checklist, for example, by which time, the list says, the team should confirm that they have gone over the prospect’s key financial statements for the previous 10 years, including specifically checking for items in each statement and possible patterns across the statements. “It’s easy to hide in a statement. It’s hard to hide between statements,” Cook said.
One check requires the members of the team to verify that they’ve read the footnotes on the cashflow statements. Another has them confirm they’ve reviewed the statement of key management risks. A third asks them to make sure they’ve looked to see whether cashflow and costs match the reported revenue growth. “This is basic basic basic,” Cook said. “Just look! You’d be amazed by how often people don’t do it.”
The checklist doesn’t tell him what to do, he explained. It is not a formula. But it helps him be as smart as possible every step of the way, ensuring that he’s systematic about decision- making, that he’s talked to everyone he should. With a good checklist in hand, he was convinced he and his partners could make decisions as well as human beings are able. And as a result, he was also convinced they could reliably beat the market.
Cook would not discuss precise results – his fund does not disclose its earnings publicly – but he said he had already seen the checklist deliver better outcomes for him. He had put the checklist process in place at the start of 2008 and, at a minimum, it appeared that he had been able to ride out the subsequent economic collapse, avoiding disaster. Others say his fund has done far better than that, outperforming its peers.
After about a year working with a checklist, meanwhile, Pabrai’s fund was up more than 100 per cent. This could not possibly be attributed just to the checklist. With it in place, however, he observed that he could move through investment decisions far faster. As the markets plunged through late 2008 and stockholders dumped shares, there were numerous deals to be had. And in a single quarter he was able to investigate more than a hundred companies and add 10 to his funds’ portfolios. Without the checklist, Pabrai said, he couldn’t have completed a fraction of the analytical work or have had the confidence to rely on it. A year later, his investments were up more than 160 per cent on average. He’d made no mistakes at all.
In aviation, everyone wants to land safely. In the money business, everyone looks for an edge. If someone is doing well, people pounce like starved hyenas to find out how. Almost every idea for making even slightly more money – investing in internet companies, buying tranches of sliced-up mortgages – gets sucked up by the giant maw almost instantly. Every idea, that is, except one: checklists.
I asked “Cook”, our anonymous investor in Switzerland, how much interest others have had in what he has been doing these past two years. Zero, he said – or actually, that’s not quite true. People have been intensely interested in what he’s been buying and how, but the minute the word “checklist” comes out of his mouth, they disappear.
Even in his own firm, he’s found it a hard sell. “I got pushback from everyone. It took my guys months to finally see the value,” he said. To this day, his partners still don’t all go along with his approach and don’t use the checklist in their decisions when he’s not involved. “I find it amazing other investors have not even bothered to try,” he said. “Some have asked. None have done it.”
Friday, January 15, 2010
Thanks to Matt for passing this along.
Summary: Placing today’s financial market valuations in historical perspective makes clear that there are few or no bargains around. Interest rates are unsustainably low, and equities have recovered to fair value. From such levels it appears that unfortunately the best returns over the typical horizons of one to five years are likely to come from manic market behavior rather than patience.
Wednesday, January 13, 2010
Tariq at the Street Capitalist blog had a great post on a frequent topic on this blog: deliberate practice. He had some great thoughts on applying deliberate practice to investing, which are pasted below. I gave a presentation on this topic last March. Some of my thoughts on the topic from that presentation are available HERE. If you have any other thoughts on deliberate practice and investing that you’d like to share, send me an email and let me know.
For any investor seeking to become better, deliberate practice is essential. The key is figuring out what deliberate practice should consist of in investing. Most of us read newspapers and blogs daily. This helps keep up to date with what is going on in the world. But is that enough? I am not too sure.
I think that taking a more active approach with news reading would be helpful. Recently, the Wall Street Journal ran an article about how David Tepper bought Bank of America stock at its low. A good exercise would be to actually sit around and try to reverse engineer that investment. Eddie Lampert has said that in college he reverse engineered many of Warren Buffett’s investment. This kind of activity would not only increase your understanding of investing but also build a model for you to look at if you ever find a similar investment.
Other investors strive to read one 10K a day. This can help build your circle of competence, but I believe it has some shortcomings. A more targeted approach with 10Ks will be more beneficial than simply jumping from reading about Exxon to reading about Bank of America. You should define goals where you are mastering knowledge of a specific industry or area of the market.
Maybe you want to learn the billboard/outdoor advertising business. Instead of looking at just Lamar Advertising (NASDAQ:LAMR) you would look at Clear Channel Outdoors (NYSE:CCO) as well. If you want to master restaurants, you would maybe start at a fast food company like McDonalds (NYSE:MCD) which is the best in its class. Then seek out Chipotle (reputed to have the best economics in the fast food business) and branch out so that you build familiarity with the industry which will help you evaluate lesser known companies like Steak N Shake (NYSE:SNS).
Related previous post: What it takes to be great
Tuesday, January 12, 2010
Bruce Berkowitz is the founder and manager of the $11 billion Miami-based Fairholme Fund, which just celebrated its tenth anniversary. Along with Charles Fernandez, he runs the fund’s portfolio management team. Last week, Mr. Berkowitz was named
As long as we stay focused on that concept and know that was yesterday’s news and move forward, we will be okay. I’ve seen too many really good people who are killed by success; they get too big or become managers of people rather than managers of investments.
I’ve had a lot of fun and continue to enjoy myself. We expand our circle of competence - slowly. We hopefully get better and wiser and don’t make the same mistake twice. After about 30 years I’ve made my fair share of mistakes.
I’m using every device I know of to make sure we maintain a level playing field and put ourselves in the shoes of our shareholders. The only way to do that is to become as large a shareholder as possible.
What happens if a small nuclear device goes off in a city? Or what happens under extreme conditions of inflation? The idea is to think of the worst and hope for the best. That is why we hold, on average, significant cash. Cash becomes extremely valuable under extreme adversity.
Related previous post: Interview with Bruce Berkowitz
Monday, January 11, 2010
John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.
Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?
There's no denying that the beliefs of investors have been far more important, in the intermediate term, than economic realities, which are revealed more slowly and sporadically. Yet despite the high level of bullishness here, the market has gained only a few percent beyond its September highs. Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high. As I've noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, overbullish sentiment, and upward yield pressures, the market's tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere. Being defensive in that situation can make each slight new high feel excruciating, even if the market is not making much net progress. I remember that my own patience with this process was tested in mid-2007, when I quoted Wallace Stevens - "Does ripe fruit never fall? Or do the boughs hang always heavy in that perfect sky?"
Given this context, the next few months are likely to be extremely important. The present overvalued, overbought, overbullish, yields-rising conformation holds us back from accepting market risk here in any case. But the market is quite likely to clear this condition in one way or another over the next few months, most likely with an abrupt decline. Meanwhile, the next few months will also afford us better clarity with respect to the actual condition of the delinquency/foreclosure situation, as well as a look at the off-balance sheet entities that, per FASB rules, must now be disclosed on the balance sheet of financial institutions (where Freddie Mac has already warned the accounting change will significantly impair its solvency).
Related link: Ripe Fruit
Found via the Corner of Berkshire & Fairfax.
Good quote: "A good investor begins from a cautious standpoint that a good investor is not somebody who throws caution to the winds and gets on for the ride. A good investor is somebody that identifies all of the possible risks and finds ways to hedge or avoid as many of them as possible."
The historic PE of the portfolio at the year-end was 14.8, and the prospective for the current year 15.8: taken together these are comparable to the past highs of October 2007. As noted in the last report, our company mix currently includes some with temporarily-depressed earnings and losses (with the potential to recover, but no certainty as to timing), and some with high long-term growth potential (economic conditions permitting). The two writeoffs were the only two holdings for which the debt burden had seemed to pose a major risk (which we had wrongly decided to accept); less than a third of the portfolio is in companies with any significant borrowings at all. Despite our recent war-wounds, we still consider our company portfolio, as a whole, to be relatively resilient - and resilience is a quality to be prized.
Portfolio BVPS has risen 15% yoy. Book value used to be a useful yardstick, but its value under IFRS is limited. On an aggregate basis, we would not place much confidence in this measure. P/B is now 1.6: it has been much higher in the past, but portfolio ROE was then higher than the current 10%.
The current-year dividend yield is estimated at 3.1% after local taxes. The current-year estimate for portfolio DPS is 15% below its peak of March 2008. Since business conditions have rarely been tougher, this seems somewhat reassuring.
The regional MSCI index peaked in October 2007, lost 63% by November 2008, and had by Dec 2009 recovered 56% of those losses. This still looks consistent with a rally in a bear market, and a rally which could falter at any time. The world is in a mess, and while 'growth' headlines will be temporarily facilitated by the depressed comparative figures of 1H09, we are far from convinced that this growth will be sustained, or that Asian economies can make a swift and smooth transition from the export model. Since all of the world's fundamental problems have been papered over and compounded, rather than addressed, we fear that major turbulence will recur. So, apparently, do Asian companies, obliging as ever in accelerating the supply of new shares to meet demand.
However, an esteemed former colleague, now one of our valued brokers, believes we are in a new HK/China bull market. He reviews the psychological stages: "disbelief, resistance, acceptance, consensus, enthusiasm, momentum, naked 'n' crazy" - and considers that we are only on the cusp on a transition from consensus to enthusiasm, with the fireworks yet to come. Given derisory rates on bank deposits (1-10 basis points at many of the safer regional banks), the relative attractions of emerging markets to a host of newly-converted investors from the eyeball-indebted OECD, and the notorious zeal of new converts (cannon-fodder for the corporate issuers), he may well be right that there is much further to go.
As most of the world bets on
“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in
Also in the article is a quote from Jim Rogers, who disagrees with Chanos:
“I find it interesting that people who couldn’t spell
And Jim Grant is quoted as well: