“…generally, if you have done good valuation work, 98 percent of the time, two or three years is enough time for the market to agree with you. That is a very powerful concept. It gives you patience. Of course, if you do poor valuation work, you can get into trouble. But if you stick to things you understand well, do good valuation work, give yourself a wide margin of safety, and have confidence in your work, eventually, you will end up doing quite well.” –Joel Greenblatt (as quoted in the book Hedge Fund Market Wizards)
Friday, June 29, 2012
“Below is the talk I gave to the Canadian Centre for Policy Alternatives on the Debt Bubble and its implications for Canada. I cover my Minskian analysis of the Depression in general, and conclude with data on the Canadian economy. The mortgage acceleration data in particular implies that the Canadian house price bubble–which is not as big as those in Australia, the USA or the UK–is close to being over.”
Debt reduction in advanced economies will persist for years, but is underway in a number of cases. The latest data on the U.S. household sector confirms our long standing assessment that growth is essential to reducing debt loads relative to incomes. Most of the delevering of the U.S. household sector is occurring through growth of the denominator in the debt to GDP ratio, with the numerator--actual debt reduction--playing a minor role.
John Paulson, founder of Paulson & Co., one of the world’s largest hedge funds, has close-cut black hair, dark eyes and a soft voice. There’s a fuss when he arrives, befitting a man who made one of the biggest fortunes in Wall Street history, as his general counsel and PR consultant jostle for seats next to him.
Thursday, June 28, 2012
“Adding insult to injury” sounds like a lawyerly phrase compared to its painfully evocative Japanese equivalent 泣面に蜂 nakitsura ni hachi -- literally “a bee to a crying face”. But even that stinging proverb fails to convey what Japan has been through during the recent past. In March 2011 its economy, slowly recovering from the worst global post-World War II downturn, was hit by a powerful earthquake followed by a massive tsunami. That twin disaster disrupted many supply chains of Japan’s important manufacturing sector and caused a catastrophic failure of the Fukushima nuclear power plant; the ensuing fears led to the eventual shut-down of all of the country’s nuclear generating stations, limited electricity supply, increased imports of fossil energies and the first annual foreign trade deficit in a generation.
Thanks to Will for passing this along. [Update: The letter is posted HERE.]
Wednesday, June 27, 2012
From the book The Alpha Masters:
“Chanos thinks pattern recognition is important and something that simply takes experience, which is one reason why he tasks the firm’s partners with originating the ideas. The partners have extensive experience in seeing patterns in odd-looking financial or press statements, for example. Through their mosaic of experience and wisdom, they are in the strongest position to decide what strategies to explore and not get distracted by the markets’ daily vagaries. Once a partner identifies an idea to pursue, the analysts process the idea, compiling the research to validate or disprove the thesis.”
In opting to become the nation's largest city to seek federal bankruptcy protection, this river port of 290,000 took a rare financial step of last resort after struggling with the economic downturn, soaring pension costs and contractual obligations.
Tuesday, June 26, 2012
“I think the difference between those who succeed and those that fail is how they think about the market. Everyone is bombarded every day with price movements, explanations for those price movements, macro events, and lots of other information. You need a methodology to cut through all that information and see things as they are.” –Joel Greenblatt (as quoted in the book Hedge Fund Market Wizards)
I am often asked whether I agree with the new group selectionists, and the questioners are always surprised when I say I do not. After all, group selection sounds like a reasonable extension of evolutionary theory and a plausible explanation of the social nature of humans. Also, the group selectionists tend to declare victory, and write as if their theory has already superseded a narrow, reductionist dogma that selection acts only at the level of genes. In this essay, I'll explain why I think that this reasonableness is an illusion. The more carefully you think about group selection, the less sense it makes, and the more poorly it fits the facts of human psychology and history.
Art De Vany also thought it was a great article, and gave a few thoughts and passages on it in a public post on his site:
Unconditional self-sacrifice for a group does not exist, nor could it have evolved. Yet, self-sacrifice and appeals to altruism or fairness are the primary themes of our present political debate. Group selection cannot explain fairness as a basis for human society and self-sacrifice.
Consider Pinker's discussion of individual sacrifice. It is manipulation of one member of the group by others. And it relies on a false or manipulated conception of a group of "us" versus "those".
"What about the ultimate in individual sacrifice, suicide attacks? Military history would have unfolded very differently if this was a readily available tactic, and studies of contemporary suicide terrorists have shown that special circumstances have to be engineered to entice men into it. Scott Atran, Larry Sugiyama, Valerie Hudson, Jessica Stern, and Bradley Thayer have documented that suicide terrorists are generally recruited from the ranks of men with poor reproductive prospects, and they are attracted and egged on by some combination of peer pressure, kinship illusions, material and reputational incentives to blood relatives, and indoctrination into the theory of eternal rewards in an afterlife (the proverbial seventy-two virgins). These manipulations are necessary to overcome a strong inclination not to commit suicide for the benefit of the group."
Then, to conclude, consider Pinker's discussion of how powerful individuals use compensation, coercion and indoctrination in group-against-group competition, which perfectly describes the present political strategy of incentivizing and manipulating groups used by our politicians.
"The historical importance of compensation, coercion, and indoctrination in group-against-group competition should not come as a surprise, because the very idea that group combat selects for individual altruism deserves a closer look. Wilson's dictum that groups of altruistic individuals beat groups of selfish individuals is true only if one classifies slaves, serfs, conscripts, and mercenaries as "altruistic." It's more accurate to say that groups of individuals that are organized beat groups of selfish individuals. And effective organization for group conflict is more likely to consist of more powerful individuals incentivizing and manipulating the rest of their groups than of spontaneous individual self-sacrifice."
Jeremy Grantham, who has consistently identified overpricing in the US equity markets – he flagged both the Dot Com bubble and the irrational pricing that preceded the financial crisis, for instance – said last week that US stocks are “a little expensive” and bonds are “disgusting.” But his sternest warning to investors concerned the longer-term threat posed by global resource constraints.
Monday, June 25, 2012
“I always assume that my minimum bogie is at least a 6 percent return, even if interest rates are near zero, as they are now. Moreover, I have to beat 6 percent by a measurable amount because the assumption is that the 6 percent is risk-free. So I wouldn’t take 8 percent, unless I have high confidence that it will grow over time. I need a “margin of safety,” as Graham would say. I compare normalized earnings to the risk-free rate or 6 percent, whichever is higher.” –Joel Greenblatt (as quoted in the book Hedge Fund Market Wizards)
Some light reading…
Critics of Western democracy are right to discern that something is amiss with our political institutions. The most obvious symptom of the malaise is the huge debts we have managed to accumulate in recent decades, which (unlike in the past) cannot largely be blamed on wars.
I have often said that when someone is appointed to be a member of the Federal Reserve, they are taken into a back room and given a complete DNA change. They simply are not like you and me once they step out of that room, with the exception of Fisher and Lacker and a few colleagues who seem to be able to resist the infection. This week we will look at the recent action of the Fed and use that as a springboard to think about how effective Fed policy can be in an age of deleveraging. And if there is time, we simply must look at Europe. I started this letter in Texas and will finish it this morning in Spain.
In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession. Our view is based on the analysis of leading/coincident/lagging indicators (see Leading Indicators and the Risk of a Blindside Recession) as well as more statistical signal processing methods that extract "unobserved components" from noisy data (see the note on extracting economic signals in Do I Feel Lucky?). As Lakshman Achuthan at the ECRI has noted on the basis of different but related evidence, the verdict has been in for a while. The interim has been little more than waiting for the coincident data to catch up to the leading evidence that is already in place.
June 25 (Bloomberg) -- Billionaire investor George Soros speaks about Europe's sovereign-debt crisis. Soros called on Europe to start a fund to buy Italian and Spanish bonds, warning that a failure by leaders meeting this week to produce drastic measures could spell the demise of the currency. He spoke yesterday with Bloomberg Television's Francine Lacqua in London.
Related article: How to shift Germany out of ‘can’t do’ mode
Friday, June 22, 2012
“Value investing doesn’t always work. The market doesn’t always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn’t work. And that is a very good thing. The fact that our value approach doesn’t work over periods of time is precisely the reason why it continues to work over the long term.” –Joel Greenblatt (as quoted in the book Hedge Fund Market Wizards)
Thursday, June 21, 2012
As some readers have noticed, Chanticleer Holdings (my employer) had an S-1 outstanding to raise capital to pursue some of the things we have on the table. Some have also noticed the connection between this and our response to an interview question we gave last year to the publication The Manual of Ideas, which is pasted below:
MOI: As a publicly traded company, Chanticleer Holdings is on the radar screen of many value investors. However, the company’s small size makes it difficult to get involved in a meaningful way. Have you considered raising additional equity within Holdings, or are you focused primarily on expanding the assets managed by your Advisors subsidiary?
Chanticleer: We think about this quite a bit and have raised a little additional equity along the way. We can’t get into too many details being that we are public, but we’d be willing to raise more equity if we can find the right things to put that equity into. In 2008 we actually had an opportunity to acquire two Hooters franchisees that was disrupted by the financial crisis. We are always looking and, as one might imagine, some new opportunities have come up with the name recognition that came with having our name attached to the Hooters of America deal. But as for specifics, we can’t really go into much more.
I’m pleased to announce that the raise has been completed. For those that have been following Chanticleer, the ticker symbol for the units is HOTRU. The units will eventually split and the stock and warrants will trade separately. The new ticker symbol for the stock by itself is HOTR. Mike Pruitt, Chanticleer’s CEO, will be ringing the closing bell at the Nasdaq on Tuesday of next week, along with a few special guests. A full press release announcing the offering is available HERE. The prospectus is available HERE.
Disclosure: This post 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 Chanticleer Holdings, Inc.
Mistakes are a frequent topic of discussion in our world. It’s not unusual to see investors criticized for errors that resulted in poor performance. But rarely do we hear about mistakes as an indispensible component of the investment process. I’m writing now to point out that mistakes are all that superior investing is about. In short, in order for one side of a transaction to turn out to be a major success, the other side has to have been a big mistake.
Wednesday, June 20, 2012
“The power of value investing flies in the face of anything taught in academics. Value is the way stocks are eventually priced. It requires the perspective of patience because the market will eventually gravitate toward value.” –Joel Greenblatt (as quoted in the book Hedge Fund Market Wizards)
This article was mentioned in the book The Creative Destruction of Medicine. The book also mentioned the article “Why Most Published Research Findings Are False”, which Peter Bevelin brought up in my 2009 interview with him.
Before the effectiveness of a drug can be confirmed, it must be tested and tested again. Different scientists in different labs need to repeat the protocols and publish their results. The test of replicability, as it’s known, is the foundation of modern research. Replicability is how the community enforces itself. It’s a safeguard for the creep of subjectivity. Most of the time, scientists know what results they want, and that can influence the results they get. The premise of replicability is that the scientific community can correct for these flaws.
Related article: Lies, Damned Lies, and Medical Science
Tuesday, June 19, 2012
From the Graham and Doddsville Newsletter - Spring 2012, in response to a question about mistakes analysts make:
“One of the biggest things I see quite often is getting too close to management. We never meet with management. For all of the bad asymmetries of being on the short side, one of the good asymmetries is that we don’t rely on the company. We can get information from the company if we want to, as we can go through the sellside. Those that are long the stock and are close to the company almost never hear the negative side in any detail. The biggest mistake people make is to be co-opted by management. The CFO will always have an answer for you as to why a certain number that looks odd really is normal, and why some development that looks negative is actually positive.” –Jim Chanos
Excerpt from the book The Alpha Masters (the Ray Dalio chapter of that book is also available HERE).
"We certainly weren't the first on this idea," Chanos tells me at his offices in April of 2011 about the biggest short position of his life: The People's Republic of China. Chanos first spoke publicly about his grand stake in China over a year and a half ago on CNBC's Squawk Box in December 2009. "Right now, we're as bearish on China as we've ever been," he says. He followed that with a presentation at St. Hilda's College, Oxford in January 2010, "The China Syndrome: Warning signs ahead for the global economy."
Found via @farnamstreet.
Related article: “In the Air” – By Malcolm Gladwell
Thanks to Shai for passing this along.
No one in the entire world is as good at summarizing the state of the technology business through slideshow presentations as Kleiner Perkins partner Mary Meeker.
June 19 (Bloomberg) -- Meredith Whitney, founder and chief executive officer of Meredith Whitney Advisory Group, talks about the outlook for financials, the U.S. economy and JPMorgan Chase & Co.'s trading loss. Whitney speaks with Tom Keene, Ken Prewitt, Sara Eisen and Scarlet Fu on Bloomberg Television's "Surveillance."
Found via The Big Picture.
Found via csinvesting.
Book: Why Nations Fail: The Origins of Power, Prosperity, and Poverty
Book: Why Nations Fail: The Origins of Power, Prosperity, and Poverty
Monday, June 18, 2012
Thanks to Will for passing this along.
Found via the Corner of Berkshire and Fairfax.
Link to: Interview with Bob Rodriguez
Related previous posts:
John Mauldin's Outside the Box: Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now
With regard to the problems in Europe, investors have taken a great deal of hope from the promise of coordinated central bank "liquidity" operations in the event of deterioration. The problem here, in my view, is that whatever amount of liquidity central banks create, it cannot address the structural problem, which is insolvency and the need to restructure debt of peripheral European governments and the European banking system. Even if liquidity operations help to stabilize the markets, we will quickly return to a pattern of recurring strains. Make no mistake, Europe is in a solvency crisis. Central bank liquidity, coordinated or not, will not solve this problem.
Share Repurchase from All Angles: Assessing Buybacks, No Matter Where You Sit - By Michael Mauboussin
In his latest strategy piece, Share Repurchase from All Angles: Assessing Buybacks, No Matter Where You Sit, Michael Mauboussin discusses the sometimes misused and misunderstood importance of share buybacks to maximize long-term value for shareholders from four distinct points of view: companies, shareholders, prospective shareholders, and the media.
We know that money is simply flying out of Greek banks. A number of them are clearly insolvent, yet they are meeting demands for withdrawals. Where is the cash coming from? The answer is in the form of yet another acronym from Europe, called the ELA. Is there a limit to this largesse? And politicians are becoming rather snarky (short-tempered, critical, testy, irritable, freaked-out – you fill in the word) with each other. This is what happens when crisis-weary politicians face yet another Greek tragedy, but this time perhaps it will hit even closer to home. Is there anyone left anywhere who has not grown tired of reading about Greece? I am tired of writing about them, yet if we are to understand the sturm und drang, the storm and stress, of Europe, we must begin there. Because, unlike Las Vegas, what happens in Greece most definitely does not stay in Greece.
Sunday, June 17, 2012
“While forecast errors have always been entertaining, commodity prices have been a great trap for suckers. Consider this 1970 forecast by U.S. officials (signed by the U.S. Secretaries of the Treasury, State, Interior, and Defense): “the standard price of foreign crude oil by 1980 may well decline and will in any event not experience a substantial increase.” Oil prices went up tenfold by 1980. I just wonder if current forecasters lack in intellectual curiosity or if they are intentionally ignoring forecast errors.” –Nassim Taleb, The Black Swan
Friday, June 15, 2012
Howard Marks, chairman of alternative asset manager Oaktree Capital, is pessimistic about European economic prospects, but believes the turmoil could throw up some "very exciting" opportunities in real estate.
Thursday, June 14, 2012
Thanks to Andrew for passing this along.
When I met for lunch with Dr. Phil Zimbardo, the former president of the American Psychological Association, I knew him primarily as the mastermind behind The Stanford Prison Experiment. In the summer of 1971, Zimbardo took healthy Stanford students, gave them roles as either guards or inmates, and placed them in a makeshift prison in the basement of Stanford University. In just days, the prisoners demonstrated symptoms of depression and extreme stress and the guards had become sadistic. The experiment was stopped early. The lesson? As W. Edwards Deming wrote: "A bad system will defeat a good person, every time." But is the opposite true? I asked Zimbardo, "Can you reverse the Stanford Prison Experiment?"
Found via Zero Hedge.
There is too much debt in the industrialized world and the financial system is virtually bust. Real disposable income is stagnating or declining. Employment participation keeps heading south. This produces a chain reaction: Weaker consumer demand in the West weakens manufacturing in places like Asia, which weakens natural-resource producers such as Austrailia or Brazil.
The global economy is weakening cyclically on top of a highly fragile credit system. It is an explosive cocktail. The tower of debt is compounded by the gigantic over-the-counter derivatives market. In the past 10 years the notional value of derivatives worldwide has grown from $100 trillion to almost $800 trillion. The numbers are mind-boggling. If something goes wrong in the real economy, it could shake the whole credit system dramatically. It is a dangerous situation.
Elkhart, Indiana-based Martin Capital Management, LLC, has launched its maiden mutual fund, the Martin Focused Value Fund (MFVRX/MFVIX), which will bet undervalued shares of publicly traded U.S. companies.
Related previous posts:
Martin Capital Management - 2011 Annual Report
Germany is indirectly exposed through its support of various official institutions like the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF) and special bail-out funds. As of April 2012, the exposure of ECB alone to Greece, Portugal, Ireland, Spain and Italy is euro 918 billion and rising rapidly, driven by capital flight out of these countries.