Thursday, March 29, 2012

The Big Bang Theory (TV Show): Sheldon's Greatest Christmas (minisode)

A little comic relief, courtesy of my wife.

Link to video (about 9 minutes): Sheldon's Greatest Christmas

Demand for U.S. Debt Is Not Limitless - By Lawrence Goodman

Thanks to Will for passing this along.

The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance.

The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

Geneticist's 'personalized medicine' study focuses on himself

Michael Snyder let colleagues sequence his DNA and track analyses of his blood to further his study of 'personalized medicine' — tailoring therapies to a patient's unique circumstances.

Self-experimentation is a venerable tradition in science.

London surgeon John Hunter deliberately gave himself gonorrhea (and inadvertently, syphilis) in 1767 — and suffered from effects of the diseases in his old age.

Jonas Salk dosed himself with his new polio vaccine in 1952 before testing it on anyone else. Down the years, scientists have inhaled poisonous gases, swallowed possible treatments for worms and detonated bombs at close range to assess the effects on their own bodies.

Now Michael Snyder has joined their ranks.

The geneticist didn't risk life and limb, but he did sacrifice his privacy — inviting colleagues to sequence his DNA and track tens of thousands of markers in his blood over a period of 14 months, when he was sick and when he was well, ultimately crunching billions of measurements on the molecular details of his body.


Related link: Maybe There is Such a Thing as Too Much Information – By Mark Sisson

Related previous posts:

Steve Jobs quote about biology and technology

Playing God (BBC Documentary)

Cost of Gene Sequencing Falls, Raising Hopes for Medical Advances

Related books:

Genome: The Autobiography of a Species in 23 Chapters

The Genome War: How Craig Venter Tried to Capture the Code of Life and Save the World

Chaos Over a Plunging Note

Regulators are examining volatile trading in a complex exchange-traded note that caused it to lose 60% of its value in the past week.

The Securities and Exchange Commission is looking into the VelocityShares 2x Long VIX Short Term Exchange note, managed by Credit Suisse Group AG, which had about $700 million in assets before the decline, according to people familiar with the matter. The SEC review is preliminary, the people said.

The scrutiny comes amid rising investor alarm and confusion over trading in exchange-traded notes. The Credit Suisse note, which trades as TVIX and is designed to track stock-market volatility, plunged 29% on Thursday last week and then another 30% on Friday, even though market volatility was little changed. Another exchange-traded note, a Barclays Capital product designed to track natural gas, plunged this week for reasons that investors say remain unclear.

Spokeswomen for Credit Suisse and Barclays declined to comment.

Market observers say the confusion underscores the risky nature of exchange-traded notes. While hedge funds are usually the most active traders of the securities, the notes have become more popular with smaller investors, in part because they are low cost and easy to trade.

New Congress Act Allows Hedge Funds To Advertise Freely

A new act passed by the Senate and House of Representatives is expected to be signed into law by President Obama within days. The Jumpstart Our Business Startups, known as The Jobs Act, will eliminate a longstanding ban on general solicitation and advertising by hedge funds.

Hedge Fund Review Magazine reports that US hedge funds will, for the first time, be able to solicit investors freely and advertise their funds through mass media channels, from television adverts to newspapers articles and websites.

TEDxVancouver - Nolan Watson - Compassion Kills

Thanks to Shai for passing this along.

After becoming the youngest CFO (age 26) of Silver Wheaton, a multi-billion dollar public company, Watson went on to build Silver Wheaton into the largest metal streaming company in the world. Today, as Chief Executive Officer and President of Sandstorm Gold Ltd. (a $280-million dollar company) and one of Canada's top 40 under 40, Nolan Watson has balanced his time by pursuing both business and humanitarian efforts. In 2004, he founded Nations Cry, an international organization building schools in Sierra Leone, Africa.


Berkshire Annual Meeting Event: Yellow BRK'ers

As described by my friend Alex:

The Yellow BRK'ers Meet and Greet is a great event for a first timer and anyone else:

Berkshire Hathaway shareholders from all online communities are welcome to an unofficial gathering on Friday, May 4th, 2012.

You are invited to join as fellow shareholders unofficially gather on Friday, May 4th, 2012 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:00 or 5:30.

This is a casual atmosphere, with light snacks available. It's a "happy hour" type of gathering - not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.

To register for the event:

Notes from the CIMA Conference

From Market Folly:

David Einhorn

Bruce Greenwald

Bruce Berkowitz

Dan Loeb


Loeb excerpt (reminded me of THIS previous quote):

Areas of focus and interest: if spending all your time reading research reports and only looking at screen, you will fail. Be well-rounded, travel, study things outside of the narrow topics of finance. If investing was just about numbers, any young accountant could do this. More than industry analysis, need to understand why you make decision, when it’s right to be contrary, when its not. Santa Fe institute has good ideas.

Wednesday, March 28, 2012

A Few Lessons for Investors and Managers

I had a chance to start reading some of Peter Bevelin’s new book, A Few Lessons for Investors and Managers, last night. Peter has done an excellent job combining Warren Buffett’s words over the years into a simple, easy-to-read structure, and then added his own comments to clarify the ideas even further. As Warren Buffett wrote in his annual letter, “I think you’ll also like a short book that Peter Bevelin has put together explaining Berkshire’s investment and operating principles. It sums up what Charlie and I have been saying over the years in annual reports and at annual meetings.”

I think it is brilliantly done and will be a must-have for every value investor’s bookshelf. The book will be publicly released at the Berkshire Hathaway Annual Meeting, but you can pre-order a copy HERE.


Related previous post: A Few Lessons for Investors and Managers - By Peter Bevelin

Fidelity gets its own Buffett Day

Thanks to Will for passing this along.

At the Berkshire Hathaway shareholder meeting last year, Fidelity investment pros gamed the system and threw an outsized number of questions at Warren Buffett. Instead of getting even, Buffett invited them to Omaha for their own private party.

Chanticleer Letter: The 4 Gs of Investing

My latest commentary has been posted on the Chanticleer Investment Partners website. To read this letter, please click on the link below.

Link to: The 4 Gs of Investing

Wisdom From Jason Zweig

Found via Market Folly.

Members often tell me about the books they find most helpful. As you know, there’s a lot out there to read if you so desire about just about every topic you can think about regarding investing, trading and the markets.

Recently a member expressed appreciation for my prior recommendation of Jason Zweig’s Your Money & Your Brain. I recommended the book after he told me about several situations over the past few years where he seemed to mentally work against himself and his performance in the markets.

With my member’s expressed permission, here are some of key points of Zweig’s book many of which are true gems for both traders and investors alike:


Related book: Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich

Chris Mayer on Capital Account



Related book: World Right Side Up

How to Prevent Other Financial Crises – By Nassim Nicholas Taleb and George A. Martin

This article argues that the crisis of 2007–2008 happened because of an explosive combination of agency problems, moral hazard, and “scientism”—the illusion that ostensibly scientific techniques would manage risks and predict rare events in spite of the stark empirical and theoretical realities that suggested otherwise. The authors analyze the varied behaviors, ideas and effects that in combination created a financial meltdown, and discuss the players responsible for the consequences. In formulating a set of expectations for future financial management, they suggest that financial agents need more “skin in the game” to prevent irresponsible risk-taking from continuing.

Neil deGrasse Tyson - We Stopped Dreaming

Found via The Big Picture.



Chou Funds: 2011 Annual Report

Found via The Corner of Berkshire & Fairfax.

In equities, we believe the financial, retail and pharmaceutical sectors are undervalued. Thus, as the prices of financial and retail sector equities fell during 2011, we added to our positions. We favour a basket approach versus concentrating on one or two stocks in any sector.

Investing in U.S. Financial Institutions

We continue to believe that most financial institutions are undervalued and present excellent, long-term investment opportunities.

Since 2010, we have invested in the common stocks of banks and in their TARP warrants. The latter are stock warrants that were issued to the U.S. Treasury by the banks when they received funds under TARP. These stock warrants give the holder the right to buy the bank's stock at a specific price. When the banks repaid TARP funds to the U.S. Treasury, the U.S. Treasury either sold the stock warrants back to the banks or auctioned them to the public.

In 2011, stock prices and their associated TARP warrants declined further, giving us the opportunity to buy more of them. In a letter I wrote two years ago, I explained our rationale for buying them. Those reasons are still valid and I’d like to revisit them.

Tuesday, March 27, 2012

Robert Shiller on housing (video)

Robert Shiller, a professor of economics at Yale University and co-creator of the Standard & Poor's/Case-Shiller Index, says the market has "a chance" of rebounding even though the downward momentum in the real estate market has accelerated in the past five years.

GMO: Two Questions We Can't Answer - By Robert Huebscher

The last part below is an important point when thinking about investing in mining companies. While eating lunch, I was watching Bloomberg and they showed a chart going back to 2006 showing Newmont Mining versus the price of gold, in which gold was up quite a bit and Newmont was almost flat. It could mean that Newmont is undervalued, or it could also be a result of what Inker describes below, where the cost of production and energy required to mine the commodity went up as much as the commodity itself.

Its reputation was built on stellar returns achieved with long-term bets on undervalued asset classes. Current market conditions, however, pose two unanswerable questions for Grantham, Mayo, van Otterloo (GMO) – leaving the firm with an uncertain strategy for its equities and fixed-income allocations.

Those questions have arisen because GMO foresees unattractive performance from both stocks and bonds in the next seven years, the time horizon over which the firm has traditionally forecast asset class performance. Ben Inker, the head of asset allocation at the Boston-based GMO, spoke at a Boston Security Analyst Society seminar on trends in asset allocation last Tuesday.

Given negative real interest rates, Inker said the first of those two questions is that it is not clear what role bonds should play in a portfolio. Second, is not clear that investors should overweight stocks, just because bonds are unattractive.

As a result, he said, GMO has upped its allocation to cash.

Let’s look at GMO’s outlook for bonds and stocks and at the reasons Inker cited for increasing its cash position. I’ll also review why there is only one commodity resource in which GMO is willing to invest.


Owning commodities, in other words, is possible if you own the asset directly, as GMO does with its timber assets. But if the asset is “in the ground,” then Inker said you want to own the companies that own those assets.

But GMO has found it exceedingly difficult to forecast returns for those companies. The problem is that one must forecast the price of the resource, and the cost of extracting it. Inker said that the reason gold mining companies have not appreciated in price during the recent bull market in gold is because the cost of the energy required to mine gold has also gone up.

“The cost of production rose apparently every bit as fast as the price of what they were getting paid for their production,” Inker said. “We haven't figured out exactly what to do about that.”

It’s even more complex today because China, he said, has an incredibly resource-intensive approach to growth. That will have to stop, he said, as the returns on Chinese investments diminish, and their economy will become less resource intensive.

Uncertainty about commodities mirrored Inker’s larger lack of confidence about the prospects for returns in virtually all asset classes. Value-oriented asset allocators, like GMO, will need to wait to find an opportunity that presents a sufficient margin of safety.

The Million Year Meal

My friends Ian and Chris have written a new book to help introduce children (of all ages!) to Paleolithic Nutrition. Click on the link below to check it out.

In The Million Year Meal, Grandpa Jones teaches his grandkids the secret to his health. Follow along with Landon and Reese as they learn about the difference between modern and traditional food chains. When you're done, you'll be ready to make your own "million year meal."

Bill Gross – April 2012 Investment Outlook: The Great Escape: Delivering in a Delevering World

When interest rates cannot be dramatically lowered further or risk spreads significantly compressed, the momentum begins to shift, not necessarily suddenly, but gradually – yields moving mildly higher and spreads stabilizing or moving slightly wider.

In such a mildly reflating world, unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form.

We favor high quality, shorter duration and inflation-protected bonds; dividend paying stocks with a preference for developing over developed markets; and inflation-sensitive, supply-constrained commodity products.

TED Talk - Donald Sadoway: The missing link to renewable energy


Warren Buffett's $50 Billion Decision – By Warren Buffett

Benjamin Graham had been my idol ever since I read his book The Intelligent Investor. I had wanted to go to Columbia Business School because he was a professor there, and after I got out of Columbia, returned to Omaha, and started selling securities, I didn’t forget about him. Between 1951 and 1954, I made a pest of myself, sending him frequent securities ideas. Then I got a letter back: “Next time you’re in New York, come and see me.”

So there I went, and he offered me a job at Graham-Newman Corp., which he ran with Jerry Newman. Everyone says that A.W. Jones started the hedge fund industry, but Graham-Newman’s sister partnership, Newman and Graham, was actually an earlier fund. I moved to White Plains, New York, with my wife, Susie, who was four months pregnant, and my daughter. Every morning, I got on a train to Grand Central and went to work.

It was a short-lived position: The next year, when I was 25, Mr. Graham—that’s what I called him then—gave me a heads-up that he was going to retire. Actually, he did more than that: He offered me the chance to replace him, with Jerry’s son Mickey as the new senior partner and me as the new junior partner. It was a very tiny fund—$6 million or $7 million—but it was a famous fund.

This was a traumatic decision. Here was my chance to step into the shoes of my hero—I even named my first son Howard Graham Buffett. (Howard was for my father.) But I also wanted to come back to Omaha. I probably went to work for a month thinking every morning that I would tell Mr. Graham I was going to leave. But it was hard to do.

Monday, March 26, 2012

Paul Volcker Interview with CBS News

Found via The Big Picture.


Spurred by love and fear, memory champ aims to inspire

Thanks to Will for passing this along.

Nelson Dellis might be able to memorize the order of a full deck of shuffled cards faster than you can thumb through and read it, let alone burn it in your mind.

In the five minutes it might take you to leave bed after smashing the alarm, he can memorize more than 300 digits -- the equivalent of roughly 42 seven-digit phone numbers -- and be ready to recite them in the order given.

Dellis, the current record-holding competitive recall king in the United States, says he has no special or photographic inherent memory, claiming he's more than capable of misplacing his keys or forgetting whether he's showered.

The 28-year-old Miami resident has been doing this seriously for only three years, and his success is like that of no other American. And he's on a mission -- only part of which is to defend his 2011 title. Dellis and 50 other mental athletes will compete in the 2012 USA Memory Championship on Saturday in New York City.

One of Dellis' other goals is to convince people that, with training, they can do the kinds of things he does. Still another is to raise money and literally climb mountains for Alzheimer's disease research.

And this is where you realize that if you ever decide to exercise your mind like him, you'll prefer not to have had experienced what he did to be motivated.


Related book: Moonwalking with Einstein: The Art and Science of Remembering Everything

Related previous posts:

Joshua Foer: Moonwalking with Einstein

The Secret of Memory

60 Minutes: India's love affair with gold

From mid-February. I was a little late in getting around to watching it, so I thought I'd post it in case anyone else was as well.


Alleghany Annual Letter

Found via the Santangel's Review ‘Value Links’ email. If you would like to be added to that mailing list, please email Steve at

Investors are faced with an unattractive array of investment options today, ranging from no return on short-term investments to a likely mid-single-digit long-term return on equities. Moreover, the equity markets have been characterized by unusually high correlations of returns for most stocks, with a handful of large companies producing double-digit returns to their shareholders. If the returns on these large companies are excluded from the S&P 500 total return in 2011, equity returns were negative.

If we are correct in projecting that equities will return only mid-single digits over the next 5-10 years, it is unlikely that “buy and hold” investing will produce satisfactory returns. Moreover, in today’s economy, there are very few companies whose securities are capable of producing 10+% returns for their shareholders on a sustained basis; either competitive pressure will erode returns, or the external environment will throw them a curve ball. Our approach in this environment is to be more willing to take short-term profits, especially if they appear to be largely macro-induced. In addition, we have an increasingly healthy respect for the option-value of cash.

Leithner Letter No. 148-150

Link to: Leithner Letter No. 148-150, 26 April - 26 June 2012

Bridgewater March 2012 -- How the Machine Works and How It Is Reflected Now

Updated template from Ray Dalio. Found via the Santangel's Review ‘Value Links’ email. If you would like to be added to that mailing list, please email Steve at

Link to: Bridgewater March 2012 -- How the Machine Works and How It Is Reflected Now

Hussman Weekly Market Comment: A False Sense of Security

One of the aspects of the market that is most likely to confuse investors here is the wide range of opinions about valuation, with some analysts arguing that stocks are cheap or fairly valued, and others - including Jeremy Grantham, Albert Edwards, and of course us - arguing that valuations are very rich.

The following chart may help to bridge that gulf. Essentially, analysts who view stocks as "cheap" here are invariably basing that conclusion on current and year-ahead forecasts for earnings. In contrast, analysts who view stocks as richly valued are typically those who view stocks as a claim not on this years' or next years' earnings, but instead are a claim on a long-term stream of deliverable cash flows. Simply put, there is presently a massive difference between short-horizon earnings measures and longer-term, normalized earnings measures.

What's going on here is that profit margins have never been wider in history. But profit margins are also highly cyclical over time. The wide margins at present are partly the result of deficit spending amounting to more than 8% of GDP - where government transfer payments are still holding up nearly 20% of total consumer spending, and partly the result of foreign labor outsourcing (directly, and also indirectly through imported intermediate goods) which has held down wage and salary payouts. Indeed, the ratio of corporate profits to GDP is now close to 70% above its long-term norm.

Now, if you look at the red line (right scale, inverted), you'll notice that unusually high profit shares are invariably correlated with unusually low growth in corporate profits over the following 5-year period. Thanks to continuing deficits and extraordinary monetary interventions, this effect has been largely postponed in recent years, allowing profits to expand to present extremes. We are not arguing that profit margins necessarily have to decline over the near-term, and our concerns don't rest on the assumption that they will. It is sufficient to recognize that the bulk of the value of any stock is not in the early years of earnings, but in the long tail of future cash flows - especially if payouts are low. Stocks are essentially 50-year instruments here in terms of the cash flows that are relevant to their valuation. There are a lot of factors and quiet math that affect the P/E multiple that can be appropriately applied to earnings. Slapping an arbitrary multiple onto elevated earnings reflecting extraordinarily inflated profit margins ignores all of it.

John Mauldin: A Random Walk Through the Data Minefields

This Friday finds me sleeping later than I planned … in the lounge at the airport in Stockholm, on my way to Paris. To the great applause of readers all over the world this may be the shortest letter in 12 years. I will write here and on the plane and quit when I land so I can be with friends this evening. No time for exhaustive research, so we will march through random topics that caught my attention this week until it is time to hit the send button. In no particular order, let's jump in.

Sunday, March 25, 2012

Burton Malkiel quote (and reading history)

Bob Rodriguez has often told the story about meeting Charlie Munger while at USC. He asked Munger what one thing he could do to become a better investment professional, and Munger replied "Read history! Read history! Read history!"

Our stated goal at Chanticleer Investment Partners is to grow our clients' capital and maintain their purchasing power over time by earning returns significantly better than the rate of inflation. Although we don't claim to have any predictive power as to when inflation may become a significant issue or if deflationary forces will once again rule the headlines first, we think it is a risk worth preparing for ahead of time. Besides reading more current books about the history of the market and inflationary times, we also find it interesting to go back and read things written as those events were happening (if you have any good recommendations, feel free to pass them along!).

One book written during an interesting time is Burton Malkiel's The Inflation-Beater's Investment Guide: Winning Strategies for the 1980s, which Malkiel finished writing in January 1980 (ironically, the same month gold reached its peak). He makes the case in the book that stocks would be the best investment (15%+ per year) for the years ahead and the best hedge for the inflation that may continue to be an issue. As a reference to valuations then compared to today, the Graham-Dodd-Shiller PE ratio (10-year trailing earnings) in January 1980 was just below 9, compared to about 23 today. And profit margins were about half in 1980 what they are today, so you had a low PE on low profits versus a high PE and record profit margins today.

So the valuation winds for the market as a whole are NOT at one's back today like they were in 1980. As Ed Easterling shows in his books, the main driver of overvalued markets getting re-rated to lower a lower PE ratio is a change from relatively stable inflation levels to either inflation or deflation. It may sound a little counter-intuitive to hold a lot of cash when one is concerned about the eventual erosion of the dollar's purchasing power, but in a period when inflation is still fairly stable and the risks to that changing--whether towards deflation or inflation--over the next few years may be nearly as high as they have ever been, I think a high level of cash, patience, and a diligent effort preparing to put that cash to work when the opportunities present themselves is the prudent course of action in today's market.

If the governments and central banks of the world are able handle the storms better than I expect, maybe high cash balances will just be awaiting opportunities that will never come. But if the opportunities we can find today perform as we hope and the main cost of holding a lot of cash is the cost of missed opportunity by having that cash yielding close to nothing, that is a cost I think is worth taking compared to being too fully invested as stocks get re-rated when price stability moves towards instability.

Below are the last few paragraphs of Chapter 1 of Malkiel's book that I thought were of interest and worth posting here.

"It is very difficult to be neutral about things so difficult to forecast as the future earnings prospects of corporations (or other investors' hopes and fears). Moreover, there are styles and fashions in investors' evaluations of securities. As I shall indicate in Chapter 5, this extreme overreaction to growth stocks following the collapse of the Nifty Fifty in the 1970s has created excellent opportunities for investors in the 1980s.

The Practical Theories for Investors

This chapter began with a description of the firm-foundation theory of stock values which indicated that "fundamental" considerations such as earnings and growth do influence the prices of common stocks. There is a yardstick for value, but we have seen that it is a most flexible and undependable instrument. To change the metaphor, stock prices are in a sense anchored to certain "fundamentals" but the anchor is easily pulled up and then dropped in another place. For the standards of value, we have found, are not the fixed and immutable standards that characterize the laws of physics, but rather the more flexible and fickle relationships that are consistent with a marketplace heavily influenced by mass psychology.

Not only does the market change the values it puts on the various fundamental determinants of stock prices, but the most important of these fundamentals are themselves liable to change depending on the state of market psychology. Stocks are bought on expectations--not on facts. Future earnings growth is not easily estimated, even by market professionals. In times of great optimism it is very easy for investors to convince themselves that their favorite corporations can enjoy substantial and persistent growth over an extended period of time. By raising his estimates of growth, even the most sober firm-foundation theorist can convince himself to pay any price whatever for a share.

During periods of extreme pessimism, many security analysts will not project any growth that is not "visible" to them over the very short run and hence will estimate only the most modest of growth rates for the corporations they follow. But if expected growth rates themselves and the price the market is willing to pay for this growth can both change rapidly on the basis of market psychology, then it is clear that the concept of a firm intrinsic value for shares must be an elusive will-o'-the-wisp. As an old Wall Street proverb runs: No price is too high for a bull or too low for a bear.

Dreams of castles in the air, of getting rich quick, do play a role--at times a dominant one--in determining actual stock prices. In this chapter I have documented several examples from both the distant and the recent past. Why are memories so short? Why do speculative crazes seem so isolated from the lessons of history? I have no apt answer to offer, but I am convinced that Bernard Baruch was correct in suggesting that a study of these events can help equip investors for survival. The consistent losers in the market, from my personal experience, are those who are unable to resist being swept up in some kind of tulip-bulb craze. It is not hard, really, to make money in the market. What is hard is to avoid the alluring temptation to throw money away on short, get-rich-quick speculative binges.

And yet the melody lingers on. While common stocks are virtually ignored, gold has recently been advancing toward $1000 an ounce. At the end of the 1970s, eager real estate speculators in places like California were turning properties around with profits of 25 percent in a matter of days. The notion is always the same: there will always be some greater fool to pay an even greater price. Will the music stop again?

Markets, whether for common stocks, real properties, or precious metals, will not be a perpetual tulip-bulb craze. The existence of some generally accepted principles of valuation does serve as a kind of balance wheel. For the castle-in-the-air investor might well consider that if prices get too far out of line with normal valuation standards, the average opinion may soon expect that others will anticipate a reaction. There is, after all, a firm foundation of value, albeit a very loose and flexible one. Sooner or later, however, all skyrocketing investments must measure up to this basic foundation of value. The ability to avoid being swept up in some frenzy of speculative enthusiasm is probably the most important factor in preserving the real value of one's capital and allowing it to grow. The lesson is so obvious and yet so easy to ignore."

Saturday, March 24, 2012

Sustainable Energy - Without the Hot Air with David MacKay

In the interview in the previous post, Bill Gates called Sustainable Energy - Without the Hot Air a must-read book when it comes to thinking about energy issues.


Thursday, March 22, 2012

Cultivating Genius - By Jonah Lehrer

Most economic growth has a very simple source: new ideas. It is our creativity that generates wealth. So how can we increase the pace of innovation? Is it possible to inspire more Picassos and Steve Jobses?

The answer to that question is hidden in history books. Several years ago, statistician David Banks wrote a short paper on what he called the problem of excess genius: It turns out that human geniuses aren’t scattered randomly across time and space. Instead, they tend to arrive in tight clusters. (As Banks put it, talent “clots inhomogeneously.”) In his paper, Banks cites the example of Athens between 440 and 380 BC. He writes that the ancient city was home to an astonishing number of geniuses, including Plato, Socrates, Thucydides, Herodotus, Euripides, Aeschylus, and Aristophanes. These thinkers essentially invented Western civilization, and yet they all lived in the same place at the same time. Or look at Florence, Italy, between 1440 and 1490. In a mere half century, a city of fewer than 70,000 people gave rise to a staggering number of immortal artists, like Michelangelo, da Vinci, Ghiberti, Botticelli, and Donatello.

What causes such outpourings of creativity? Banks quickly dismissed the usual historical explanations, such as the importance of peace and prosperity. (In Plato’s day, Athens was engaged in a vicious war with Sparta.) The academic paper ends on a somber note, with Banks concluding that the phenomenon of pockets of genius remains a mystery.

And yet it’s not a total mystery: We can begin to make sense of the “clotting” of creative talent. The secret, it turns out, is the presence of particular meta-ideas, which support the spread of other ideas. First proposed by economist Paul Romer, meta-ideas include concepts like the patent system, public libraries, and universal education. Furthermore, by looking at what various ages of excess genius had in common, it’s possible to come up with a creativity blueprint for the 21st century.


Related book: Imagine

Corruption threatens China’s future – By Edward Chancellor

Widespread corruption at the local government level remains a threat to China’s economic development. If stories are to be believed, Chongqing’s disgraced party boss Bo Xilai even used an anti-corruption drive to put the squeeze on local business people. Beijing faces more immediate problems, however. Recent policies have pushed the country’s well-known macroeconomic imbalances to extreme levels, its real estate market is glutted and its credit system appears increasingly vulnerable.

Premier Wen Jiabao has talked repeatedly of the need to address China’s “imbalanced, uncoordinated, and unsustainable development”. Yet its growth continues to depend on increasing amounts of investment. Last year fixed-asset investment accounted for 90 per cent of economic growth. The trouble is that much of the money has been frittered away on trophy infrastructure projects, such as the country’s expensive high-speed rail network, with low prospective returns. Mr Wen may fret but if investment were to stop expanding, China’s growth rate would slow dramatically. Beijing is holding a tiger by the tail and doesn’t dare let go.

One area of particular concern is the residential real-estate market. After years of overbuilding, tens of millions of apartments sit empty. In 2011 housing supply exceeded demand by about 50 per cent, according to UBS. For two years, Beijing has acted to damp speculation in the housing market. In January home prices fell in the majority of the 70 mainland cities surveyed by the National Bureau of Statistics. Most people believe that real estate will rebound as soon as policy is loosened, but recent experience from the US, Spain and Ireland suggests that overbuilt housing markets take years to correct. This could spell bad news for China, where residential construction accounts for about 13 per cent of gross domestic product.

Charles Duhigg on Charlie Rose

Thanks to Barry for passing this along.

Wednesday, March 21, 2012

Steve Keen paper: "Instability in Financial Markets: Sources and Remedies"


In the seemingly never-ending aftermath to the economic crisis that began in 2007, there is little disagreement that financial markets are characterized by instability rather than stability. Even Eugene Fama, the most influential proponent of the Capital Assets Pricing Model (CAPM; Fama 1970), now acknowledges that CAPM is strongly contradicted by the data:

The attraction of the CAPM is that it offers powerful and intuitively pleasing predictions about how to measure risk and the relation between expected return and risk. Unfortunately, the empirical record of the model is poor—poor enough to invalidate the way it is used in applications… whether the model's problems reflect weaknesses in the theory or in its empirical implementation, the failure of the CAPM in empirical tests implies that most applications of the model are invalid. (Fama and French 2004, p. 25)

CAPM’s empirical demise as a theory of finance has been accompanied by the rise of behavioural finance, which attributes much of the instability of finance markets to the limited and heuristically oriented cognitive capacities of actual traders (Kahneman and Tversky 1979; Kahneman 2003). While this is clearly an important aspect of instability, I will take a different tack and situate my explanation in the integrated macro-financial vision of Hyman Minsky’s Financial Instability Hypothesis (FIH). Previous papers have applied Minsky’s vision to macroeconomics (Keen 1995; Keen 1997; Keen 2000; Keen 2011); in this paper I will focus on the implications of Minsky’s analysis for the behaviour of financial markets.

A lengthy prelude is necessary before I consider Minsky’s analysis of financial markets, since past experience has shown that a neoclassical perspective on economics (which the vast majority of policy makers have, as well as most economists) obstructs comprehension of the link Minsky postulates between debt and asset prices.


The Real Leadership Lessons of Steve Jobs - by Walter Isaacson

Found via The Big Picture.

His saga is the entrepreneurial creation myth writ large: Steve Jobs cofounded Apple in his parents’ garage in 1976, was ousted in 1985, returned to rescue it from near bankruptcy in 1997, and by the time he died, in October 2011, had built it into the world’s most valuable company. Along the way he helped to transform seven industries: personal computing, animated movies, music, phones, tablet computing, retail stores, and digital publishing. He thus belongs in the pantheon of America’s great innovators, along with Thomas Edison, Henry Ford, and Walt Disney. None of these men was a saint, but long after their personalities are forgotten, history will remember how they applied imagination to technology and business.

In the months since my biography of Jobs came out, countless commentators have tried to draw management lessons from it. Some of those readers have been insightful, but I think that many of them (especially those with no experience in entrepreneurship) fixate too much on the rough edges of his personality. The essence of Jobs, I think, is that his personality was integral to his way of doing business. He acted as if the normal rules didn’t apply to him, and the passion, intensity, and extreme emotionalism he brought to everyday life were things he also poured into the products he made. His petulance and impatience were part and parcel of his perfectionism.

One of the last times I saw him, after I had finished writing most of the book, I asked him again about his tendency to be rough on people. “Look at the results,” he replied. “These are all smart people I work with, and any of them could get a top job at another place if they were truly feeling brutalized. But they don’t.” Then he paused for a few moments and said, almost wistfully, “And we got some amazing things done.” Indeed, he and Apple had had a string of hits over the past dozen years that was greater than that of any other innovative company in modern times: iMac, iPod, iPod nano, iTunes Store, Apple Stores, MacBook, iPhone, iPad, App Store, OS X Lion—not to mention every Pixar film. And as he battled his final illness, Jobs was surrounded by an intensely loyal cadre of colleagues who had been inspired by him for years and a very loving wife, sister, and four children.

So I think the real lessons from Steve Jobs have to be drawn from looking at what he actually accomplished. I once asked him what he thought was his most important creation, thinking he would answer the iPad or the Macintosh. Instead he said it was Apple the company. Making an enduring company, he said, was both far harder and more important than making a great product. How did he do it? Business schools will be studying that question a century from now. Here are what I consider the keys to his success.


Related book: Steve Jobs

Related link: Isaacson on Charlie Rose discussing this article

TED Talk - Rob Reid: The $8 billion iPod

This talk reminded me of the book How to Lie with Statistics, which has been recommended by Jason Zweig (HERE).


China's Economy Likely to Grow 4%, Ferguson Says (video)

March 21 (Bloomberg) -- Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor, talks about the outlook for China's economy. He speaks with Sara Eisen and Scarlet Fu on Bloomberg Television's "InsideTrack."

Buffett Seizes Lead in Bet Against Protege (video)

March 21 (Bloomberg) -- Warren Buffett made a friendly bet four years ago that funds that invest in hedge funds for their clients couldn’t beat the stock market over a decade. So far he’s winning. The wager that began on Jan. 1, 2008, pits Buffett against Protege Partners LLC, which built an index of five funds that invest in hedge funds to compete against a Vanguard mutual fund that tracks the Standard & Poor’s 500 Index. The winner’s charity of choice gets $1 million when the bet ends on Dec. 31, 2017. Betty Liu reports on Bloomberg Television's "In the Loop."

Wilbur Ross on CNBC


Howard Marks Memo: Déjà Vu All Over Again

Tuesday, March 20, 2012

Daniel Simons on the dangers of only focusing on what's at hand

A quote from Daniel Simons during the great interview that my friend Miguel did with him (HERE). They were discussing the difficulty of seeing and paying attention to other things around you when you’re so focused on doing something else.

“Let’s say you’re reviewing a prospectus and they’re throwing lots and lots of data at you. You’ll get this impression that you really understand the company really well, but you’re not thinking about what data is missing from that prospectus. So you don’t notice the risks that are not highlighted in that prospectus. That’s a real danger.”


I had a checklist item that went at follows:

- Is my information Accurate AND Complete?

o Do I really know what I think I know?

o Do I really know what I don’t know?

§ “We work really hard never to get confused with what we know from what we think or hope or wish.” –Seth Klarman

I’m now also going to add the Simons quote below the Klarman quote on the checklist.

TED Talk - Jonathan Haidt: Religion, evolution, and the ecstasy of self-transcendence


GMO whitepaper: What Goes Up Must Come Down - By James Montier

Howard Marks on “Playing Within Yourself”

“An expression from the broadcasting booth that’s relevant to investing relates to the need to avoid pushing too hard. “Playing within yourself,” they call it. It means not trying to do things you’re not capable of, or things that can’t be accomplished within the environment as it exists….We simply cannot create investment opportunities when they’re not there…. If it’s not there, hoping won’t make it so. All we ever can do is take what they give us.” –Howard Marks, “What’s Your Game Plan?” (September 2003)


Another quote from the same Memo that I liked (comparing Warren Buffett and Ted Williams): “Buffett’s approach, like that of Williams, rewards patience, selectivity and a superior understanding of the underlying process.


Over the years, I've found it useful when James Montier (writing from wherever he was at the time) would run a value screen and show the number of names that came up. It gave another data point to compare the attractiveness of ideas in the market at any given time. He often used a screen run by Ben Graham, which he described in his March 2011 paper “The Seven Immutable Laws of Investing”:

"These projections are reinforced for equities when we investigate the number of stocks able to pass a deep value screen designed by Ben Graham. In order to pass this screen, stocks are required to have an earnings yield of twice the AAA bond yield, a dividend yield of at least two-thirds of the AAA bond yield, and total debt less then two-thirds of the tangible book value. I’ve added one extra criterion, which is that the stocks passing must have a Graham and Dodd P/E of less than 16.5x."

I often run screens similar to this, and decided to start running a certain version of it periodically and post the number of results that show up. I’m not going to add the Graham and Dodd P/E to this particular version, but I will add a pre-tax return on capital criteria (to try and find at least decent businesses) using the formula from Joel Greenblatt’s books, and a cash flow from operations criteria (to try and weed out where accounting earnings may not translate into free cash flow). Here are the summary metrics I will use for now:

  • Market Cap over $10 million
  • Industry: NOT Utilities or Investment Funds
  • Geographic Locations: USA, Canada, UK, Australia
  • TEV/LTM EBIT under 8.34x
  • Dividend yield greater than 2.6%
  • TD/TBV less than 67%
  • EBIT/(NWC+NFA) greater than 12%
  • CF from ops greater than 67% of NI

I decided to use 12% as the pre-tax hurdle, which would translate into about 7-9% after tax (depending on the tax rate) for a minimum return on capital and earnings yield. This screen today turns up 208 results. I’m not going to list all of the names here, but here are a few to give an example of the things that turned up:

Intel Corporation (NasdaqGS:INTC), Walgreen Co. (NYSE:WAG), Newmont Mining Corp. (NYSE:NEM), Kohl's Corp. (NYSE:KSS), London Stock Exchange Group plc (LSE:LSE), Corby Distilleries Ltd. (TSX:CDL.A), STW Communications Group Ltd. (ASX:SGN), Calamos Asset Management Inc. (NasdaqGS:CLMS).

Disclosure: This article is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by Chanticleer Investment Partners ("CIP") or any other entities related to or owned by CIP's parent company, Chanticleer Holdings, Inc. Neither I nor any investment product I co-manage at Chanticleer have an investment in the stock(s) mentioned in this article at the time of posting.

Monday, March 19, 2012

TED Talk - T. Boone Pickens: Let's transform energy -- with natural gas


Bridgewater: An In-Depth Look at Deleveragings - By Ray Dalio

Found via the Santangel's Review ‘Value Links’ email. If you would like to be added to that mailing list, please email Steve at

The purpose of this paper is to show the compositions of past deleveragings and, through this process, to convey in-depth, how the deleveraging process works.

The deleveraging process reduces debt/income ratios. When debt burdens become too large, deleveragings must happen. These deleveragings can be well managed or badly managed. Some have been very ugly (causing great economic pain, social upheaval and sometimes wars, while failing to bring down the debt/income ratio), while others have been quite beautiful (causing orderly adjustments to healthy production-consumption balances in debt/income ratios). In this study, we are going to review the mechanics of deleveragings by showing how a number of past deleveragings transpired in order to convey that some are ugly and some are beautiful. What you will see is that beautiful deleveragings are well balanced and ugly ones are badly imbalanced. The differences between how deleveragings are resolved depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots and 4) debt monetization. What we are saying is that beautiful ones balance these well and ugly ones don’t and what we will show below is how.

Before we examine these, we will review the typical deleveraging process.