Thursday, December 29, 2011
Warren Buffett has stated that throughout his and Charlie Munger’s long relationship, they’ve had disagreements but have never had an argument. In How To Win Friends and Influence People, Dale Carnegie made the case that disagreement is good because it allows one to get at the truth and maybe find errors, while argumentation usually results in one becoming more adamant and entrenched in his or her beliefs. The objective way in which Charles Darwin worked – where he paid special attention to disconfirming evidence and then worked to find the truth – is also a good example of the progress that can be made by paying attention to opinions that contradict one’s beliefs. And Mr. Munger has also discussed the benefits of being willing to change one’s mind and destroy one’s best-loved ideas. As his Investing Principles Checklist says: Continually challenge and willingly amend your “best-loved ideas”
Some Suggestions from Dale Carnegie on
How to Keep a Disagreement from Becoming an Argument
from How To Win Friends and Influence People
Welcome the disagreement. Remember the slogan “When two partners always agree, one of them is not necessary.” If there is some point you haven’t thought about, be thankful if it is brought to your attention. Perhaps this disagreement is your opportunity to be corrected before you make a serious mistake.
Distrust your first instinctive impression. Our first natural reaction in a disagreeable situation is to be defensive. Be careful. Keep calm and watch out for your first reaction. It maybe you at your worst, not your best.
Control your temper. Remember, you can measure the size of person by what makes him or her angry.
Listen first. Give your opponents a chance to talk. Let them finish. Do not resist, defend or debate. This only raises barriers. Try to build bridges of understanding. Don’t build higher barriers of misunderstanding.
Look for areas of agreement. When you have heard your opponents out, dwell first on the points and areas on which you agree.
Be honest. Look for areas where you can admit error and say so. Apologize for your mistakes. It will help disarm your opponents and reduce defensiveness.
Promise to think over your opponents’ ideas and study them carefully. And mean it. Your opponents may be right. It is a lot easier at this stage to agree to think about their points than to move rapidly ahead and find yourself in a position where your opponents can say: “We tried to tell you, but you wouldn’t listen.”
Thank opponents sincerely for their interest. Anyone who takes the time to disagree with you is interested in the same things you are. Think of them as people who really want to help you, and you may turn your opponents into friends.
Postpone action to give both sides time to think through the problem. Suggest that a new meeting be held later that day or the next day, when all the facts may be brought to bear. In preparation for this meeting, ask yourself some hard questions: Could my opponents be right? Partly right? Is there truth or merit in their position or argument? Is my reaction one that will relieve the problem, or will it just relieve my frustration? Will my reaction drive my opponents further away or draw them closer to me? Will my reaction elevate the estimation good people have of me? Will I win or lose? What price will I have to pay if I win? If I am quiet about it, will the disagreement blow over? Is this difficult situation an opportunity for me?
And some related advice from Ben Franklin:
I made it a rule to forbear all direct contradiction to the sentiments of others, and all positive assertion of my own. I even forbid myself, agreeably to the old laws of our Junto, the use of every word or expression in the language that imported a fix'd opinion, such as certainly, undoubtedly, etc., and I adopted, instead of them, I conceive, I apprehend, or I imagine a thing to be so or so; or it so appears to me at present. When another asserted something that I thought an error, I deny'd myself the pleasure of contradicting him abruptly, and of showing immediately some absurdity in his proposition; and in answering I began by observing that in certain cases or circumstances his opinion would be right, but in the present case there appear'd or seem'd to me some difference, etc. I soon found the advantage of this change in my manner; the conversations I engag'd in went on more pleasantly. The modest way in which I propos'd my opinions procur'd them a readier reception and less contradiction; I had less mortification when I was found to be in the wrong, and I more easily prevail'd with others to give up their mistakes and join with me when I happened to be in the right.
And this mode, which I at first put on with some violence to natural inclination, became at length so easy, and so habitual to me, that perhaps for these fifty years past no one has ever heard a dogmatical expression escape me. And to this habit (after my character of integrity) I think it principally owing that I had early so much weight with my fellow-citizens when I proposed new institutions, or alterations in the old, and so much influence in public councils when I became a member; for I was but a bad speaker, never eloquent, subject to much hesitation in my choice of words, hardly correct in language, and yet I generally carried my points.In reality, there is, perhaps, no one of our natural passions so hard to subdue as pride. Disguise it, struggle with it, beat it down, stifle it, mortify it as much as one pleases, it is still alive, and will every now and then peep out and show itself; you will see it, perhaps, often in this history; for, even if I could conceive that I had completely overcome it, I should probably be proud of my humility.
"Look, every success story after the fact makes sense, that's the problem. There's something I'd like to add about hindsight, just to strengthen the point. It's something that many of us are thinking about. You hear some people say that so-and-so knew that the crisis was going to happen. Some people have read Michael Lewis' The Big Short, and they say there were those people, and they knew the crisis was going to happen. I think that's a scandal.The scandal is the use of the word "know." They didn't know the crisis was going to happen, they thought the crisis would happen. Very different. When we use the word "know," we use the word "know" on something that is true. It wasn't true before it happened, it was just a thought that they had with a certain amount of confidence.What makes it a scandal? When we use the word "know," we create the illusion that it was knowable. See, they knew, so it was knowable. No, it was not knowable. Equally intelligent people didn't know that.And Michael Lewis, I don't think, makes that mistake. "The Big Short" is about a few people who got rich, because they thought that and, indeed, it happened. It doesn't make them smarter than the rest of the world that didn't know it. It makes them, in my opinion, luckier. They happened to be right in a way that paid off in a big way."
Wednesday, December 28, 2011
To the readers (and potential readers) of Grant’s:
This compilation of recent articles, the second annual Grant’s Holiday e-issue, is for you—and for your friends, co-workers, clients, classmates, shipmates, brothers-in-law and maids-of-honor, too. Please pass it along, with our compliments, to any and all prospective members of the greater Grant’s family.
Yes. You can draw a lot of parallels between the Japanese and US real estate bubbles. But China’s bubble is much larger; it spreads beyond residential real estate to commercial real estate, the industrial sector, and infrastructure. Also, though there were government fingerprints on the US and Japanese real estate bubbles, the Chinese real estate bubble was directly and entirely caused by the Chinese government.
The Chinese bubble has been inflating for years. It should have popped during 2008 recession. But China fire-hosed a stimulus equal to 12% of its GDP into its economy and was able to keep the bubble growing.
When is it going to pop? It has already begun. You see sales volumes and prices plummeting at double-digit rates in second-tier cities.
I agree with Krugman’s assessment. What perplexes me is why the Nobel Prize-winning economist wrote this column now, when the problems he describes are plain for all to see, and not a few years ago. You’d think he would have been alarmed over the consequences of monstrous government intervention in an economy the size of China’s. But perhaps Krugman, who describes himself as a liberal economist, secretly hoped that the Chinese government would be able to manage the economy better than the free market.
Selling puts on stocks can be a good way to either gain some yield and/or try and buy a stock you'd like to own at a lower price. I prefer cash-secured puts so that if the stock gets put to you, there is cash available to buy the stock. So when looking at the attractiveness of selling cash-secured puts, I view my outcome as either: 1) the yield I gain on the cash I'm reserving in case the stock gets put to me; or 2) buying the stock at the net price (exercise price per share minus premium received per share). Below are a few examples of stocks that value managers own today where it may be worthwhile to sell the puts for those interested in establishing positions (a mid-range between the bid/ask on the puts at the time of this post was used in the calculations).
Sears Holdings (SHLD) - January 2013, $30.00 strike puts: Sell for $11.00 per share.
- About a 58% total return ($11 received per share in premium / $19 per share reserved in case the stock gets put to you) if the stock expires without getting put to you over about a 13 month holding period.
- You buy the stock (if it gets put to you) for a net $19 per share.
The price below which you'd start to lose money on this trade would be $19 per share. At this point, the stock could get put to you and you'd have to buy it at a net price above where the stock would be trading.
- About a 12% total return if the stock expires without getting put to you over about a 5 month holding period.
- You buy the stock (if it gets put to you) for a net $4.45 per share.
Berkshire Hathaway B (BRK/B) - January 2013, $75.00 strike puts: Sell for $7.05 per share.
- About a 10% total return if the stock expires without getting put to you over about a 13 month holding period.
- You buy the stock (if it gets put to you) for a net $67.95 per share (below where Buffett is buying back shares)
- About a 30% total return if the stock expires without getting put to you over about a 6 month holding period.
- You buy the stock (if it gets put to you) for a net $5.75 per share.
It is worth keeping in mind that selling puts is usually much more attractive when the VIX is a lot higher than it is now, as the formulas that (non-value) investors use to value puts include volatility as a variable in that calculation. As an example, puts that expired 13 months out on Sears during the 2008 crisis yielded about 100% on the secured cash towards the end of 2008 and early into 2009 when the stock was at a similar price to its current one.
Neither I nor any investment product I co-manage have sold puts on the stocks mentioned in this article. The company where I work - Chanticleer Holdings, Inc. - has just launched a registered investment advisor, Chanticleer Investment Partners, LLC. This entity will start accepting outside capital next month and at least one of the strategies will consider selling puts when the situation is attractive. More details on this entity will follow within a couple of weeks.
At the heart of the clouded-title problem is a Virginia-based company, recently much in the national news, called Mortgage Electronic Registration Systems. MERS was created in 1995 as a privately held venture of the major mortgage-finance operators, chief among them the government-sponsored mortgaging entities Fannie Mae and Freddie Mac. Its stated purpose was to manage a confidential electronic registry for the tracking of the sale of mortgage loans between lenders, which could now place loans under MERS’s name to avoid filing the paperwork normally required whenever mortgage assignments changed hands. No longer would the traffickers in mortgages have to document their transactions with county clerks, nor would they have to pay the many and varied courthouse fees for such transactions. Instead, MERS was listed in local recording offices as the “mortgagee of record,” the in-name-only owner, a so-called nominee for the lender, so that MERS would effectively “own” the loan where the public record was concerned, while the lenders traded it back and forth.
This centralized database facilitated the buying and selling of mortgage debt at great speed and greatly reduced cost. It was a key innovation in expediting the packaging of mortgage-backed securities. Soon after the registry launched, in 1999, the Wall Street ratings agencies pronounced the system sound. “The legal mechanism set up to put creditors on notice of a mortgage is valid,” as was “the ability to foreclose,” assured Moody’s. That same year, Lehman Brothers issued the first AAA-rated mortgage-backed security built out of MERS mortgages. By the end of 2002, MERS was registering itself as the owner of 21,000 loans every day. Five years later, at the peak of the housing bubble, MERS registered some two thirds of all home loans in the United States.
Without the efficiencies of MERS there probably would never have been a mortgage-finance bubble.
After the housing market collapsed, however, MERS found itself under attack in courts across the country. MERS had singlehandedly unraveled centuries of precedent in property titling and mortgage recordation, and judges in state appellate and federal bankruptcy courts in more than a dozen jurisdictions—the primary venues where real estate cases are decided— determined that the company did not have the right to foreclose on the mortgages it held.
“I expect further dividend cuts in the quarters ahead and would avoid MBS REITS for the time being,” Gundlach, who heads the $21 billion Los Angeles-based money manager, said in an e- mailed statement.
Mortgage REITs including Annaly Capital Management Inc. (NLY), Hatteras Financial Corp. (HTR) and Capstead Mortgage Corp. announced dividend reductions this month, while rivals American Capital Agency Corp. (AGNC), Two Harbors Investment Corp. (TWO) and MFA Financial Inc. maintained their quarterly payouts. The industry’s shares have returned 0.65 percent over the past 12 months, assuming reinvested dividends, declining 5.7 percent since mid-year as loan rates fell to record lows, according to a Bloomberg index. (BBREMTG)
“I sold all MBS REITS a few months back,” said Gundlach, whose main bond fund has beaten 99 percent of rivals this year, according to data compiled by Bloomberg. “I figured the dividends were going to be cut.”
The trusts are lowering payouts because prepayments are increasing on government-backed securities, most of which are carried by REITs above 100 cents on the dollar, which means “their yields are going lower,” Gundlach said.
Tuesday, December 27, 2011
In an exclusive interview with Reuters, Einhorn said he still doubts sales figures and spending plans at the company, which saw its stock soar to $110 in August on the rapid growth of its individual coffee servings or K-cups. When Einhorn revealed in October that he had been building a short position in shares of the company for weeks, the stock tanked and it effectively turned things around for his $8 billion Greenlight Capital fund this year.
"I think everything we said in the presentation is right now as it was then -- and in many cases even more so," said the 43-year-old manager, who runs one of $2 trillion hedge fund industry's better-known long/short funds and also is an accomplished poker player.
In the interview with Reuters, Einhorn blasted the company's audit committee for conducting a "whitewash" review of the concerns he raised in an October 17 presentation entitled, "GAAP-uccino." That presentation hit Green Mountain like a tidal wave, and has sliced the stock's value in half to around $46 as of Tuesday trading.
Monday, December 26, 2011
Related book: Drive: The Surprising Truth About What Motivates Us
Related previous posts:
TED Talk - Dan Pink on the surprising science of motivation
Daniel Pink - Motivation 3.0
There are so many competing philosophies in the world of investing that most people learn to tune out any conversations on the topic.
This turns out to be a pretty good instinct. After all, people consistently brag about their winning bets without disclosing their losers. They also tend to obsess over whatever’s happened in the markets most recently, assuming things will be that way forever.
But the one thing that we all ought to be able to agree on is this: The point of any long-term portfolio for the vast majority of investors is to earn whatever return you need to meet your goals while taking the least amount of risk.
I recalled this first principle of investing when I heard about something called the Larry Portfolio earlier this year.
Named for Larry Swedroe, the director of research and a principal at BAM, a wealth management firm in Clayton, Mo., the portfolio tracks indexes that achieved nearly the same 10 percent annual return between 1970 and 2010 as a portfolio invested entirely in the Standard & Poor’s 500-stock index. And here’s the Larry Portfolio’s trick: It did so with less than a third of its money in stocks, with the rest in one-year Treasury bills.
So how does it work?
Related book: Investment Mistakes Even Smart Investors Make and How to Avoid Them
Related book: Obliquity: Why Our Goals Are Best Achieved Indirectly
Saturday, December 24, 2011
The most influential thinker there, arguably, was a scruffily bearded fellow, wearing sunglasses and a knitted cap, who never gave a talk. He lurked around the margins of the conference; at one point I spotted him puffing a joint outside a meeting hall. This, at any rate, is how I remember Robert Trivers, although as he points out in “The Folly of Fools,” memory often tricks us. He also confesses to being a pothead, so I’m pretty sure my recollection is accurate.
As a Harvard graduate student in the 1970s, Trivers wrote a handful of papers showing how our genes’ relentless drive to self-replicate underpins even our most apparently magnanimous impulses. According to his theory of reciprocal altruism, we occasionally act kindly toward strangers because our ancestors — over time and in the aggregate — received a quid pro quo benefit from acts of generosity. In other papers, Trivers proposed that families roil with conflict because parents share no genes with each other and only half of their genes with children, who unless they are identical twins also have divergent genetic interests.
These concepts were popularized by others, notably Edward O. Wilson in “Sociobiology,” Dawkins in “The Selfish Gene” and Pinker in “How the Mind Works.” All have credited Trivers, whom Pinker has called “an underappreciated genius, and one of history’s greatest thinkers in the analysis of behavior and emotion.” If Trivers is not better known, that may be because he has struggled with bipolar disorder since his youth. He is also, by his own admission, an irascible anti-authoritarian, whose sharp tongue often gets him into trouble. He left Harvard in the late 1970s, eventually ending up at Rutgers. He also has a home in Jamaica.
No doubt tired of seeing others crank out well-received elaborations of his work, Trivers has finally produced a popularization of his own. His topic is deceit, with which by his own admission he has wrestled — on a personal as well as professional level — throughout his adult life. Trivers’s scope is vast, ranging from the fibs parents and children tell to manipulate one another to the “false historical narratives” political leaders foist on their citizens and the rest of the world.
Book: The Folly of Fools: The Logic of Deceit and Self-Deception in Human Life
The first is Mr. Market himself. He is, as Benjamin Graham described him, your eternal partner in investing. He is a patient if somewhat bipolar fellow. Subject to wild mood swings, he is always willing to offer you a bid or an ask. If you are a buyer, he is a seller – and vice versa. But do not mistake this for generosity: he is your opponent. He likes to make you look a fool. Sell him shares at a nice profit, and he happily takes their prices so much higher you are embarrassed to even mention them again. Buy something from him on the cheap, and he will show you exactly what cheap is. And perhaps most frustrating of all, Mr. Market has no ego – he does not care about being right or wrong; he only exists to separate the rubes from their money.
Yes, Mr. Market is a difficult opponent. But your next rivals are nearly as tough: they are everyone else buying or selling stocks.
Friday, December 23, 2011
The ubiquitous greenery of the season has me thinking conifers and stock market crashes. There is much to be learned from the coned evergreen trees that form vast forests across the Northern Hemisphere. As the oldest trees on the planet, the mighty conifers have survived threats of catastrophic extinction since the time of the hungry herbivorous dinosaurs.
The conifer's secret to longevity lies in a paradox: Their conquest has been largely the result of episodes of massive forest destruction. When virtually all else is gone, conifers show their strength and prowess as nature's opportunists. How? They have adapted to evade competitors by out-surviving them and then occupying their real estate after catastrophic fires.
First, the conifer takes root where no one else will go (think cold, short growing seasons and rocky, nutrient-poor soil). Here, they find the time, space and much-needed sunlight to thrive early on and build their defenses (such as height, canopy and thick bark). When fire hits, those hardy few conifers that survive can throw their seeds onto newly cleared, sunlit and nutrient-released space. For them, fire is not foe but friend. In fact, the seed-loaded cones of many conifers open only in extreme heat.
This is nature's model: overgrowth, followed by destruction of the overgrowth, and then the subsequent new growth of the healthiest and most robust, which ultimately leaves the forest and the entire ecosystem better off than they were before.
Pondering these trees, it is not too much of a stretch to consider the financial forests of our own making, where excess credit and malinvestment thrive for a time, only to be destroyed—and then the releasing of capital into markets where competition has been wiped out. The Austrian school economists understood this well, basing a whole theory around this investment cycle.
After the purge, great investment opportunities are created, from which prolific periods of growth emanate—provided that sufficient capital remains to reinvest into the fertile and now-open landscape.
Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction.
(Reuters) - Four years after the banking system nearly collapsed from reckless mortgage lending, federal prosecutors have stayed on the sidelines, even as judges around the country are pointing fingers at possible wrongdoing.
The federal government, as has been widely noted, has pressed few criminal cases against major lenders or senior executives for the events that led to the meltdown of 2007. Finding hard evidence has proved difficult, the Justice Department has said.
The government also hasn't brought any prosecutions for dubious foreclosure practices deployed since 2007 by big banks and other mortgage-servicing companies.
But this part of the financial system, a Reuters examination shows, is filled with potential leads.
Foreclosure-related case files in just one New York federal bankruptcy court, for example, hold at least a dozen mortgage documents known as promissory notes bearing evidence of recently forged signatures and illegal alterations, according to a judge's rulings and records reviewed by Reuters. Similarly altered notes have appeared in courts around the country.
Banks in the past two years have foreclosed on the houses of thousands of active-duty U.S. soldiers who are legally eligible to have foreclosures halted. Refusing to grant foreclosure stays is a misdemeanor under federal law.
The U.S. Treasury confirmed in November that it is conducting a civil investigation of 4,500 such foreclosures. Attorneys representing service members estimate banks have foreclosed on up to 30,000 military personnel in potential violation of the law.
In Alabama, a federal bankruptcy judge ruled last month that Wells Fargo & Co. had filed at least 630 sworn affidavits containing false "facts," including claims that homeowners were in arrears for amounts not yet due.
Wells Fargo "took the law into its own hands" and disregarded laws banning perjury, Judge Margaret A. Mahoney declared.
And in thousands of cases, documents required to transfer ownership of mortgages have been falsified. Lacking originals needed to foreclose, mortgage servicers drew up new ones, falsely signed by their own staff as employees of the original lenders - many of which no longer exist.
But the mortgage-foreclosure mess has yet to yield any federal prosecution against the big banks that are the major servicers of home loans.
Thursday, December 22, 2011
Chinese deleveraging and rebalancing could mean much slower Chinese growth and a smaller impact of Chinese aggregate demand on the global economy.
We expect the global economy to grow by 1% to 1.5% in 2012. This is significantly slower than the 2.5% growth rate achieved in 2011 and the 4.1% rate achieved in 2010.
Martin Patience reports from Beijing where he speaks to Hu Jin Hui, head of one of the biggest real estate agents in China and Dylan Grice, Research Analyst at Societe Generale analyses what it could mean for China's economy.
Business as usual ends at the gates of Ray Dalio’s Bridgewater Associates. Inside the $125 billion hedge fund’s Westport, Connecticut-based headquarters, radically different behavior at an individual and corporate level rarely ceases to astonish. Cameras rest in every cranny; almost all meetings are recorded. Meetings are nasty, brutish, and long. One individual casts a long shadow over every decision, large or small. The question of the day is—always—What Would Ray Do?
This question is now asked outside Westport as well. Dalio has willed into existence an asset manager that has changed the industry, radically altering the way assets are managed for the world’s most sophisticated institutional investors. From client service to asset allocation to economic research to client communication to returning capital, Bridgewater has set a new bar. It is a safe bet to assume that the asset managers that dominate the institutional scene going forward are going to resemble Bridgewater more than the behemoth asset-gatherers that have reigned since the passage of the Employee Retirement Income Security Act—ERISA—almost four decades ago.
It is all too reminiscent of another company on the opposite end of America—Apple. We now have an overabundance of analysis on the impact that Apple and its recently departed prime mover Steve Jobs had on the industries they touched. To most, he was an innovator. To others, a prophet. To others still, he was but a driven and secretive executive intent on shielding his firm from outside eyes and willing to crush anyone who threatened Apple’s secrets.
The similarities are profound. From management style to product development to their founder’s legacies, Apple and Bridgewater mirror each other. Thus, it must be asked: Is Ray Dalio—philosopher, market savant, outdoorsman, and billionaire—the Steve Jobs of investing?
Wednesday, December 21, 2011
The ingredients in defensive investing include (a) insistence on solid, identifiable value at a bargain price, (b) diversification rather than concentration, and (c) avoidance of reliance on macro-forecasts and market timing.
“Defensive investing” sounds very erudite, but I can simplify it: Invest scared! Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing does go wrong, surely the winners will take care of themselves.
On New Year's Eve, Costco Wholesale co-founder Jim Sinegal will step down as CEO.
He will hand off the job he loves and his open-walled office to Craig Jelinek, a veteran Costco executive whom Sinegal considers "almost a founder."
He will turn 76 on New Year's Day and stay for a yearlong transition before retiring to just the board of directors.
As Sinegal's days of wearing the silver ID badge reserved for 25-year employees wane, he talks about how it all started, companies staying true to themselves and why he was willing to spend $19 million to kick the state out of the liquor business.
Tuesday, December 20, 2011
One reason “dismal science” aptly describes economics is that it so often winds up in a zero-sum trade-off of diminishing returns. That gets depressing when the global economy is in a sorry state, as it is now.
Most economists gloomily advise us to just tough it out. No magical solution can save us.
I submit that the situation is not as bleak as it seems. Yes, Virginia, there is a magical engine for economic growth. It is invention -- the process by which the human mind creates new ideas with practical consequences. Invention is magical because the magnitude of the output can exceed by almost infinite measure the magnitude of the inputs. A single great idea can generate enormous transformations, economic and otherwise.