Nassim Taleb quote

“…invest in preparedness, not in prediction.” –Nassim Taleb, The Black Swan

Look to the east for cheap yield – By Merryn Somerset Webb

This brings me to one of my favourite long-term investments – what many readers insist is my “blind spot” and a market that no one has used the word “bubble” to describe for over two decades. I’m talking about Japan, of course (full disclosure: I am on the board of BG Shin Nippon, a Japan-focused investment trust). We know Japan is cheap on all sorts of levels. Paul Bennett of Walker Crips puts it on a price-to-book ratio of about 1. That’s a 40 per cent discount to the average price-to-book of the stocks in the MSCI world index. At the same time, 40 per cent of companies listed in Japan have net cash equal to their stock market value (so there is some real protection on the downside!).

There’s more. Price-to-cash flow is about six times – so much lower than the current p/e, something that suggests to Bennett that “large corporates in Japan might still low ball profits to avoid high corporate tax levels.”

Still, given that all anyone cares about these days is yield, let’s just look at that. No one considers Japan to be a market worth investing in for the dividends. But that might be a mistake.

Over the past decade or so, dividends in Japan have risen faster than in any other market and the nominal yield on equities is about 2.6 per cent. Pah, you might say – that’s less than the yield in China. But add back in Japan’s deflation at say 0.5-1 per cent and you get a real (inflation-adjusted) yield of 3 per cent plus. In the US you are getting a real yield of about zero. In the UK you are getting around 1 per cent; in Europe around 2 per cent; and in China something negative – how negative depends on what you think inflation is.

I’d like to say that this puts investors in a win-win situation. Long term, the Japanese market looks like a steal. If the market as a whole doesn’t rise, dividend stocks still should – from 1989, notes a report from Allianz Global Investors, the equity market in Japan lost 50 per cent of its value but anyone investing just in high dividend payers would have “managed to achieve a positive return”. And if that doesn’t happen, domestic investors will at least have their 3 per cent and foreign investors should see the real bit of their income return in relative currency strength and (as they long have) make a turn on the strong yen.

Given Japan’s history of false dawns, I’m not going to say the win-win words. But I will end by pointing out that across the world, Japan is the only market giving investors what they insist they want – cheap yield. One day, investors will get around to buying it. If you want to be in the vanguard, there are several good Japan equity funds, but for an income-focused one, you could consider Jupiter Japan Income.

"We are all atomic beings..."

From the book Cracking the Code:

“We are all atomic beings, made up of molecules and cells. The processes by which our cells operate and interact make us who we are. Once we understand that we are biochemical beings, albeit incredibly complex ones, it becomes easier to see how the fusion of computing power and chemistry will take humankind way beyond the somewhat crude medical practices that have been in operation to date.”

Bill Gates: Big History Project Update

The Big History Project began a few years ago after I took an online version of the college-level Big History course. I was so impressed with the structure and approach of big history that I got excited by the opportunity to offer it to a broader audience.

Big history is different from other history courses in that it covers our complete 13.7 billion years of shared history – going all the way back to the Big Bang.  The course then progresses to cover the development of stars, elements, plants, life, humans and our modern-day civilization. These “threshold moments” all share common themes and patterns that are the foundation for the course. To understand the similarities, differences and implications of these thresholds, students have to use many different disciplines spanning cosmology, physics, chemistry, biology, anthropology and social studies.

By connecting different areas of knowledge into one unified story, big history provides a framework for learning about anything and everything. I really like how the course challenges students to wrestle with big questions – questions like how different time scales affect our perspective on history, how language transformed humanity, and what it means to be human. It’s a course I believe everyone should take.

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Related previous post: TED Talk - David Christian: Big history

Link to The Great Courses: Big History: The Big Bang, Life on Earth, and the Rise of Humanity (not on sale now, but all courses go on sale for at least 70% off at least once a year).

Chou Funds: 2012 Semi-Annual Report

Found via the Corner of Berkshire & Fairfax.

Following up on a past letter, we continue to believe U.S. financial institutions are very cheap and TARP warrants associated with these companies are an attractive way to invest in them. Depending on the price, TARP warrants have several characteristics that make them appealing long-term investments. Specifically, they are long dated, with most expiring around 2018-2019. This time frame of six-plus years allows banks to grow their intrinsic value to a high enough level to have an appreciable impact on the strike price of the stock warrant. In addition, we believe the strike price will be adjusted downward for any quarterly dividend that exceeds a set price. This is rarely seen in a stock warrant. An example: for Bank of America, class 'A' warrants, the strike price is adjusted downward for any quarterly dividend paid exceeding one cent a share.

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It’s been over three years since the European crisis began and we’re still unable to predict what will happen to the Euro and the 17 Eurozone countries that have adopted the Euro as their national currency. While most believe that to solve its problems the Eurozone must undergo deep structural reform, to date no one has devised a solution that all 17 disparate Eurozone nations can agree on. If the ramifications of Euro crisis on the world economy weren’t so serious, we could all get a good laugh at the comical way the Eurozone club was set up and how that has played out. Nigel Farage, leader of the UK Independent Party, captured the humor in a speech he gave in June 2012.

“I remember being here ten years ago, hearing the launch of the Lisbon Agenda. We were told that with the Euro, by 2010 we would have full employment and indeed that Europe would be the competitive and dynamic powerhouse of the world. By any objective criteria the Euro has failed, and in fact there is a looming, impending disaster. You know, this deal makes things worse not better. A hundred billion [Euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It's genius isn't it. It really is brilliant.”

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Based on ratios such as rent-to-house-price, disposable-income-to-house-price, Canadian house prices are out of line with historical standards. In addition, household debt as a percentage of disposable income is unprecedentedly high. This does not mean that real estate prices will decline soon, but it does indicate that valuations are stretched.

A few months ago, Richie Boucher, who is the CEO of Bank of Ireland, was discussing real estate prices in Canada. As we know, real estate prices in Ireland have dropped by 50% from its peak. In contrast, Canada is experiencing a building boom and Toronto is said to have more condominiums under construction than any other city in the world. He joked that he has been hearing that lots of Irish guys are emigrating to Canada to work in real estate construction trade, and cautioned: “Watch out Canada if Irish pubs start sprouting in Canada”.

Zicom Group update

I linked to a great write-up and mentioned Zicom in a post here before (HERE). It remains one of our favorite ideas at Chanticleer. For those that are following it, they filed their Preliminary Final Report.

Link to: Zicom Group Limited (ASX:ZGL) - Preliminary Final Report

I recommend reading the Kelpie Capital write-up for more background, but here’s a summary of the valuation using the fiscal year-end numbers (the stock closed in Australia today at 0.18 AUD):

P/E: 6.3x

P/TBV: 0.68

Dividend Yield: 5.56%

Disclosure: I am a portfolio manager at Chanticleer Advisors and Chanticleer Investment Partners and the fund and separate accounts Chanticleer manages own shares in Zicom Group. We may in the future buy or sell shares and are under no obligation to update our activities. This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

Carl Sagan’s last interview (on Charlie Rose)

Link to: Carl Sagan’s last interview (May 27, 1996)

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Related book: The Demon-Haunted World: Science as a Candle in the Dark

Related previous post: The Full Sagan Series

Related videos: Carl Sagan's Cosmos (13 Episodes)

Warren Buffett gives 'reverse birthday gift' to children's foundations

The letter to his kids is also posted HERE.

Warren Buffett is celebrating his 82nd birthday today by doubling what remains of his original pledge of stock shares to the three foundations run by his children, Susan, Howard and Peter.

That means he will donate about $100 million a year to each foundation, up from an average of $64 million annually. By the time his pledge is fulfilled, the three foundations will receive what, at today's share price, amounts to $2.08 billion.

Over the past six years, the foundations already have received $1.16 billion.

“What a wonderful thing to do on his birthday,” said Peter, a New York musician and co-chairman of the Novo Foundation with his wife, Jennifer. “When he thinks about doing something, he gets excited about it. It's sort of a reverse birthday gift.”

Susan Buffett, whose Sherwood Foundation supports educational and anti-poverty programs in the Omaha area and nationally, said her father can be sentimental about birthdays. “I love that — ‘Happy birthday to his kids.' It's so sweet that he did that.”

The Full Sagan Series

Link

THE FEYNMAN SERIES

Link to Part 1 - Beauty


Link to Part 2 - Honours


Link to Part 3 - Curiousity


Link to Part 4 - The Key to Science

How I learnt the power of checklists – By John Kay

Found via Abnormal Returns.

Mr Gawande discovered that the good checklist is short but not too short. If the list is long, none of the items on it are taken very seriously. You can easily persuade people to agree to things when you ask them to mechanically click or tick their way through a list of questions. Consider the lack of attention you give to the many privacy questions asked by websitesor questions on an immigration form. It turns out you can easily persuade people to declare their involvement in genocide or intention to subvert the constitution of the US by inserting the relevant question in a long list of immigration queries, all of which expect the answer yes.

So the good checklist is selective – it doesn’t cover mistakes that are rarely made; no one goes on holiday without their suitcase. Or mistakes that don’t matter – toothpaste is available almost everywhere.

Flying – and surgery – lend themselves to checklists because there is a large element of routine, and because the consequences of an elementary error can be devastating. The first factor makes it possible to compile a useful list, the second encourages people to use it.

But Mr Gawande’s most important discovery was that the power of the checklist came from a less obvious source. The list empowers members of a team to monitor each other. Adherence to the list allows the nurse to correct the surgeon, the co-pilot to review the captain.

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Related book: The Checklist Manifesto: How to Get Things Right

Related previous posts:

THE CHECKLIST - by Atul Gawande

‘Airline pilot’ protocols in finance - By Atul Gawande

James Grant on Markets, Fed Policy, Gold Standard

Link

Bill Gross on CNBC

Link

Notes from the John Paulson Call - by Joshua Brown

Using my advanced ninja skills I got myself onto the Bank of America Wealth Management-hosted conference call starring John Paulson of Paulson & Co this evening.

The notoriously press- and attention-shy Paulson agreed to be on the call a week after Citigroup pulled $410 million from the hedge fund manager and so at least some part of this was about damage control.  Paulson was quick to point out that Citi's financial advisors had not pulled their support for him directly, rather it was Citi's feeder fund.  He also expressed gratitude to the BAML advisors for their longstanding relationship with Paulson & Co.

And then it was game on.

I have a few observations I'd like to make, in no particular order...

Richard Feynman quote

“I believe, therefore, that although it is not the case today, that there may some day come a time, I should hope, when it will be fully appreciated that the power of government should be limited; that governments ought not to be empowered to decide the validity of scientific theories, that that is a ridiculous thing for them to try to do; that they are not to decide the various descriptions of history or of economic theory or of philosophy. Only in this way can the real possibilities of the future human race be ultimately developed.”

The Billion-Dollar Coach

Another article on my Alma Mater’s new football coach.

Former Fortune 500 CEO Joe Moglia has never led a major football program — so why is Coastal Carolina finally giving him a chance?

Out beyond the water parks and seafood buffets of Myrtle Beach, South Carolina, off a four-lane highway studded with gentlemen's clubs and discount fireworks outlets and beauty school billboards, a multimillionaire sat in a Hampton Inn and waited for his pizza to arrive. The multimillionaire did not want to go to bed without eating something, but the pizza did not show, and the multimillionaire grew agitated and rang the front desk and ordered the clerk to turn away the delivery man if and when he arrived. Then he purchased two bags of potato chips from a hallway vending machine, ate his dinner, and fell asleep.

Last fall, on a college campus in Conway, South Carolina, a university president made the decision to fire the only football coach his school had ever known. Until 1993, the school had been an offshoot of the University of South Carolina, but now it had its own identity and its own team colors and its own nearly decade-old Football Championship Subdivision program, not to mention a rapidly expanding campus of more than 9,000 students. The university president, having generated his own ideas about what makes a successful coach, and having read media reports about a retired chief executive officer turned United Football League coach named Joe Moglia, and having heard that Moglia recently moved into his community — a prosperous subdivision of Pawleys Island known as Prince George — sent Moglia an e-mail.

"Hello from a Neighbor in Prince George," the university president wrote in the subject line.

Two weeks later, the university president and the multimillionaire met for breakfast at a restaurant called the Eggs Up Grill. Afterward, the university president seemed convinced he had found his man. Three weeks later, the school held a press conference at which it announced the firing of David Bennett, who had gone 63-39 in nine seasons at Coastal Carolina University.1 Eleven days after that, Joe Moglia, ex-CEO of TD Ameritrade, who has a career college and pro record of one win and four losses, was introduced as the second football coach in school history.

Stripped of context, Moglia's hiring seems unorthodox at best, and an outrageous display of cronyism at worst. In this moment, in the midst of a national argument about the role of money in society and the fitness of a CEO to translate his skills into other fields — not to mention the cloud of ethical lapses in both industries Moglia is associated with — here is a story that sweeps everything into a single narrative. It is only natural to raise questions about how this happened, which is why I showed up on campus in early August, and which is why there are people with ties to Coastal Carolina University (and those with ties to David Bennett especially) who have translated Coastal Carolina president David DeCenzo's unorthodox change of direction into something dark and suspicious. These people have made the presumption that Moglia was hired in order to pay for a new baseball field or a new Astroturf practice field on campus, that he was hired because he is rich and not because of the way he got rich.

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Related book: 4th and Goal: One Man's Quest to Recapture His Dream

Active in Cloud, Amazon Reshapes Computing

Within a few years, Amazon.com’s creative destruction of both traditional book publishing and retailing may be footnotes to the company’s larger and more secretive goal: giving anyone on the planet access to an almost unimaginable amount of computing power.

Every day, a start-up called the Climate Corporation performs over 10,000 simulations of the next two years’ weather for more than one million locations in the United States. It then combines that with data on root structure and soil porosity to write crop insurance for thousands of farmers.

Another start-up, called Cue, scans up to 500 million e-mails, Facebook updates and corporate documents to create a service that can outline the biography of a given person you meet, warn you to be home to receive a package or text a lunch guest that you are running late.

Each of these start-ups carries out computing tasks that a decade ago would have been impossible without a major investment in computers. Both of these companies, however, own little besides a few desktop computers. They and thousands of other companies now rent data storage and computer server time from Amazon, through its Amazon Web Services division, for what they say is a fraction of the cost of owning and running their own computers.

“I have 10 engineers, but without A.W.S. I guarantee I’d need 60,” said Daniel Gross, Cue’s 20-year-old co-founder. “It just gets cheaper, and cheaper, and cheaper.” He figures Cue spends something under $100,000 a month with Amazon but would spend “probably $2 million to do it ourselves, without the speed and flexibility.”

He conceded that “I don’t even know what the ballpark number for a server is — for me, it would be like knowing what the price of a sword is.”

Cloud computing has been around for years, but it is now powering all kinds of new businesses around the globe, quickly and with less capital.

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Related video (CNBC): Amazon's Battle in the 'Cloud'

Mark Hanson On Case Shiller

In sum, today’s CS is disappointing…a YoY 15% increase in purchasing power and 25% decrease in foreclosure resales and still the CS-20 NSA only managed a 0.5% gain over last year.  To me, normalized, that means real house prices are still falling.

The Secret Of Bridgewater's Success Is In Its Understanding Of The Recession

Found via Canadian Value Investor.

The Bridgewater view may be summarized like this:

1. Business and market cycles occur every 5 to 8 years, and may be addressed by policy makers with a typical mix of fiscal and monetary policy.
2. What Bridgewater calls Long Wave Debt or Deleveraging Cycles occur once in a lifetime, every 50 to 70 years, and do not typically respond to existing fiscal and monetary policies.
3. On the contrary, Deleveraging Cycles are characterized by massive wealth destruction and shifts, dramatic changes in monetary regimes, and unsettled political environments, including wars.  They tend to have very slow recoveries (about 10 years) and end with debt restructuring and repudiation, inflationary policies, and substantial increases in risk premiums.
4. The Great Recession that began in 2008 is the first US Deleveraging Cycle since the Great Depression.  As such, it is immune to the usual policy responses, and can be expected to continue its path of wealth destruction through debt restructuring and inflationary redistribution of wealth up to 2018!

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Related links:

An In-Depth Look at Deleveragings

How the Economic Machine Works

“Nonsense Economics” and the Deepening Greek Crisis

Found via Naked Capitalism.

Link

Who’s Fooling Whom? – By Michael Lewitt

“Recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested element of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead.” - Joseph Schumpeter

Equity markets are exhibiting a remarkable degree of complacency. The VIX has rarely traded below 15 since the financial crisis, although it traded at an average of 13.6 during the 2004-early 2007 period. What that tells us is that the VIX is currently at extremely low levels and that it can maintain those levels for a long period of time. The recent rally is a great example of the Wall Street adage that markets climb a wall of worry. In fact, the worse things get in terms of the economic data, the higher the market goes on hopes of central bank stimulus. At this rate, the Dow will peak just as the world is coming to an end! The level of the VIX may not worry the markets but it worries me. It tells me that markets are counting on a degree of central bank support that may not be forthcoming.

IBM's Watson and the healthcare industry

From the book Cracking the Code:

“One such application for Watson could be in the field of medicine; Watson’s virtually limitless data storage capability combined with its incredible recall ability makes it a natural diagnostician. Imagine if Watson’s memory contained the medical history of every patient, as well as all medical knowledge known to humans so far, including experimental treatments. If provided with all the symptoms of a patient with a disease that doctors have been unable to diagnose correctly, Watson could come up with a few likely diagnoses as well as suggest the best course of action given the results from thousands of previous cases.

Better still, if Watson had an additional module installed that allowed it to extract all the information it needs from a patient’s blood or tissue sample, it could be an all-in-one medical provider. Taking it one step further, Watson could also be programmed to find certain patterns in disease and treatment. Its vast database would be able to pick up trends and patterns that may be too subtle for humans to detect.

In fact, IBM has already entered into a research agreement with a company called Nuance Communications, to explore, develop and commercialize Watson’s advanced analytical capabilities in the healthcare industry. Nuance Communications (NASDAQ: NUAN) has a market capitalization of over US$7 billion at the time of writing and is trading at almost 50 times its trailing earnings, so clearly the market strongly believes in the huge commercial opportunity that lies ahead in this sector. The law would be another wonderfully powerful application for Watson. Totally impartial, Watson the lawyer, or perhaps more controversially, the judge would have access to every case in history as well as all the world’s laws and legal systems. Think of how quickly and efficiently cases could be heard and resolved. Most of all, think about the potential billions of dollars saved in legal fees that would otherwise be racked up by using human lawyers!”

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Related articles:

Watson in healthcare (Thanks to Andrew for passing this link along.)

IBM Creating Pocket-Sized Watson in $16 Billion Sales Push

Related previous posts:

Britain's answer to Warren Buffett backs the biotech sector in new investing book

Quote on the life sciences industry

Far From Wall Street and Silicon Valley, a Focus on Family Ties

When the hedge fund manager David Einhorn was just another investment analyst in the mid-1990s, his family gave him $500,000 to get his fund, Greenlight Capital, off the ground. Now that he is a billionaire after a career of doing battle with large corporations, he has returned the favor.

A world away from Wall Street and the tech money culture of Silicon Valley, the Einhorn family started a venture capital firm here, which raised a $40 million fund last year.

David Einhorn is the largest investor in the fund, run by his brother, Daniel, and their father, Stephen. The firm, Capital Midwest Fund, also led by another partner, Alvin Vitangcol, aims to tap the Midwestern work ethic and has ambitions of changing the way early stage investments are run.

Are Retail Investors ‘Fleeing’ Stocks? – By Jason Zweig

Make no mistake: Individual investors are selling more U.S. stocks than they are buying, as my colleague Jack Hough pointed out this weekend. But it’s wrong to rely on mutual funds as the sole or primary indicator of retail flows into or out of U.S. stocks.

Many of the redemptions seem, instead, to be exchanges – from mutual funds to exchange-traded funds.

Financial advisers love ETFs, partly because they tend to be more predictable and tax-efficient than mutual funds, partly because the lower fees on ETFs remove some of the pressure that advisers might otherwise feel to cut their own fees. Naturally, financial advisers are counseling their clients to shift from mutual funds to ETFs.

So far this year, U.S. stock ETFs have taken in approximately $22.5 billion in net inflows.

When you add those net ETF inflows to the net outflows from U.S. stock mutual funds, the $68 billion in fund-flight cited by most of the commentariat drops to less than $46 billion.

Then consider that “balanced” mutual funds – those hybrid portfolios of stocks and bonds – have attracted more than $20 billion in net inflows so far this year.

According to Morningstar analyst Annette Larson, the average balanced mutual fund (weighted by the size of assets) has 57% of its portfolio in stocks.

That means that the inflows into balanced mutual funds are the equivalent of another $12 billion in equity purchases. That, in turn, would take the effective net outflows from U.S. stocks down to $34 billion.

Mind you, we’re not saying that $34 billion in outflows isn’t real money. But it’s half the number that the experts usually cite as evidence that small investors are fleeing U.S. stocks.

And if you throw in the net inflows that international stock portfolios — mutual funds and ETFs alike — have attracted so far this year, the overall net redemptions from stock funds shrink to just about zero.

Yes, people have been cutting their exposure to U.S. stocks for years. And yes, there are plenty of reasons, old and new, for retail investors to be furious at the stock market.

But, so far at least, retail isn’t abandoning the stock market wholesale.

John Mauldin’s Outside The Box: Australia: Running Out of Luck Down Under

While it is summer in the Northern Hemisphere, it is winter "down under." Today we turn our attention to Australia. In Endgame, Jonathan Tepper and I devoted a full chapter to talking about the problems we saw looming in Australia, and for that we have taken some heat! What's not to like about the Land of Oz? In our view, it might be the bubbles that are building. I asked Jonathan to update us on Australia, and in today's Outside the Box he gives us an in-depth look. Let me quote from a point near the end, in case you might decide to look just at the summary:

"The search for yield and essentially diversification out of sovereign debt markets in distress has led to a surge in the foreign holdings of Australian government bonds. According to the latest data from the Australian Office of Financial Management, the total foreign ownership of Australian government bonds now stands at 80% of the total outstanding debt, up from 60% in 2006.

"Although this may sound high, government debt to GDP in Australia is low, at 30% (although is up from 16% in 2008). This low ratio is a result of running a budget surplus for most of the last 15 years. But, even though the situation looks good optically, the fact of the matter is Australia would have to backstop its banks in the event of a crisis, and this low number masks the real debt burden. Two countries that also had low debt burdens before banking crises were Spain and Ireland. They've both required bailouts, so Australian politicians and economists should not be complacent about their public debt levels."

The trouble with freedom – By John Gray

Found via Farnam Street.

Not long after the start of the 21st Century, we like to tell ourselves an uplifting story in which freedom expands whenever tyranny is overthrown.

We believe that freedom and democracy are inseparable, so that when a dictator is toppled the result is not only a more accountable type of government but also greater liberty throughout society.

This belief forms the justification of the repeated attempts by Western governments to export their own political model to countries such as Iraq, Afghanistan and Libya. In this simple and seemingly compelling story, freedom and democracy are a package that can be delivered anywhere in the world.

An older generation of thinkers recognised that freedom and democracy don't always go hand in hand. The 19th Century liberal John Stuart Mill was a life-long campaigner for greater democracy, but he also worried that personal liberty would shrink once governments could claim to express the will of the majority.

Born in 1872 and dying in 1970 at the age of 98, Mill's godson Bertrand Russell agreed and shocked many people when he observed that while Britain after World War II was a more democratic society than the one he'd grown up in, it was also in some ways less free. For Russell, as for Mill, liberty was one thing, democracy another. It's a deeply unfashionable view, but I think essentially correct.

Focus Media - my new obsession – By John Hempton

The announced "go-private" transaction for Focus Media has me obsessed. It seems to cover a whole gamut of my interests, Asian private equity, alleged Chinese fraud, connections with major property developers and numbers and accounts I find surprising. The whole works! It may not be the most important thing in financial markets this year - but it is one of the most interesting.

The World's Richest Restaurateur Has A Secret: It's Not About The Food

Thanks to Mike for passing this along.

Tilman Fertitta is barely past the first of his many morning cups of coffee and the first ten minutes of our meeting when he decides, as is his wont, to take control. As soon as I break out my tape recorder, he picks it up and places it on top of a paper cup, within wrist-snapping distance, turning it off and on during our discussion as he deems fit. Having noticed poor lighting on another floor, he dispatches a passing employee to fix it. When I ask the 55-year-old to tell me about how he got started, he admonishes me in his thick Texas twang: “I’ve overread that story. I just hate to go that far back.” So we don’t, for now, because as Fertitta later tells me, laughing, “I do whatever the f–k I want.”

Most of the time Fertitta, the 100% owner of Landry’s, wants to gobble up hospitality businesses: specifically, poorly managed, out-of-date and distressed restaurants, hotels, casinos and boardwalks that he can buy on the cheap, often right out of bankruptcy court. Fertitta then cleans house. He fires top executives, closes failing locations, revamps existing ones and moves management to Landry’s headquarters in Houston, where he can keep an eye on everyone. “When we buy somebody, we cut the head off,” he says. “We keep the operators who are looking–I hate to use this term–they’re looking for a leader. We lead very well. And we immediately spend money on them and make them better. Everybody wants to be led.

“Except for me,” he adds. “I want to lead.”

We’re having coffee at Michael Patrick’s Brasserie, a 24-hour restaurant (named after his two eldest sons) housed inside the Golden Nugget Atlantic City, one of the latest turnarounds he’s leading. Throughout the weekend Fertitta, who is bunking on his 164-foot yacht, the appropriately named Boardwalk, will oversee the property’s grand reopening, featuring a value-oriented talent roster, including Whoopi Goldberg, the Cake Boss and the Real Housewives of New Jersey. It was a typical Fertitta deal: He bought the waterfront casino and hotel from bankrupt Trump Entertainment Resorts for $38 million in February 2011, less than one-tenth a recent offer and $282 million less than what Trump paid in 1985.

Inside Warren Buffett's Private Poker Game

Found via the Corner of Berkshire and Fairfax.

Warren Buffett is a famously world-class bridge player, putting in 12 hours a week at the table, often with Bill Gates, and sponsoring the Buffett Cup, which mimics golf’s Ryder Cup, except with cards. “Every hand fascinates me,” he recently told me, in explaining this obsession. But relatively quietly, over the past seven years he’s emerged as the host of one of the planet’s most exclusive poker games.

While the World Series of Poker Main Event remains the most famous and prestigious tournament, a ten-day-long bacchanal that satisfies ESPN’s late-night programming needs for months, it’s also open to anyone with $10,000 and a dream. The NetJets Poker Invitational, run by Berkshire Hathaway‘s private-jet subsidiary, has a much steeper hurdle: Players must be a NetJets fractional owner (minimum cost: $200,000), with a select few heavy Marquis Jet Card owners sprinkled in.

However enticing the $500,000 prize pool–the big winner has the option of ten hours of time on a Bombardier Global 5000, worth $150,000, and the top ten all get something heady–the true stakes are measured in ego. As at the World Series of Poker, Texas Hold ‘Em is nothing more than a betting and bluffing game, and tournaments like this appeal to the same primal instincts as in an ancient battle royale, combated via brains and daring. Because the player pool is exclusively comprised of people successful for reasons other than cards, bragging rights feel as tangible as a Main Event winner’s bracelet. Plus Buffett lords over all of it, as host, mascot and, most notably, target. Knocking the Oracle of Omaha out of the tournament is the poker equivalent of beating Jack Nicklaus at a charity closest-to-the-hole contest.

It's More Important to Be Kind than Clever – By Bill Taylor

Found via @HowardSchilit.

One of the more heart-warming stories to zoom around the Internet lately involves a young man, his dying grandmother, and a bowl of clam chowder from Panera Bread. It's a little story that offers big lessons about service, brands, and the human side of business — a story that underscores why efficiency should never come at the expense of humanity.

The story, as told in AdWeek, goes like this: Brandon Cook, from Wilton, New Hampshire, was visiting his grandmother in the hospital. Terribly ill with cancer, she complained to her grandson that she desperately wanted a bowl of soup, and that the hospital's soup was inedible (she used saltier language). If only she could get a bowl of her favorite clam chowder from Panera Bread! Trouble was, Panera only sells clam chowder on Friday. So Brandon called the nearby Panera and talked to store manager Suzanne Fortier. Not only did Sue make clam chowder specially for Brandon's grandmother, she included a box of cookies as a gift from the staff.

It was a small act of kindness that would not normally make headlines. Except that Brandon told the story on his Facebook page, and Brandon's mother, Gail Cook, retold the story on Panera's fan page. The rest, as they say, is social-media history. Gail's post generated 500,000 (and counting) "likes" and more than 22,000 comments on Panera's Facebook page. Panera, meanwhile, got something that no amount of traditional advertising can buy — a genuine sense of affiliation and appreciation from customers around the world.

Marketing types have latched on to this story as an example of the power of social media and "virtual word-of-mouth" to boost a company's reputation. But I see the reaction to Sue Fortier's gesture as an example of something else — the hunger among customers, employees, and all of us to engage with companies on more than just dollars-and-cents terms. In a world that is being reshaped by the relentless advance of technology, what stands out are acts of compassion and connection that remind us what it means to be human.

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Related previous post: "We are What We Choose" (Jeff Bezos speech mentioned in the article)

Related link: Why Is it So Hard to Be Kind?

Mauboussin on Strategy: The Importance of Expectations

In his latest strategy piece, The Importance of Expectations – The Question that Bears Repeating: What’s Priced In, Michael Mauboussin discusses the key to successful investing which is to systematically distinguish between price and value – two very distinct concepts – and walks through a case study to highlight the distinction between fundamentals and expectations as represented by the asset price.

King World News Interviews from this weekend

Links to interviews with:

John Mauldin

Jean-Marie Eveillard

Eric Sprott

One Giant Leap: A Minute to Remember Neil Armstrong (video)

(Bloomberg) -- Neil Armstrong, the first man to walk on the moon, passed away on August 25 at the age of 82. Here are a handful or important facts about his life and career.

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Related previous post: Neil deGrasse Tyson - We Stopped Dreaming

Sen. Rand Paul Speaks Out Against Senators Voting without Reading the Bills - 6/29/12

Found via Mish.

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Will These Royal Yields Rule? – By Jason Zweig

Investors reaching for yield should always bear in mind the warning label on stepladders: "DANGER. DO NOT STAND ON TOP STEP."

Just look at what happened this past week to investors in several so-called royalty trusts. These instruments, which collect and distribute income from oil and gas or mining properties, are among the highest-yielding in the stock market, with payouts averaging 9%.

But last Wednesday, the "unit," or share, price of Hugoton Royalty Trust fell 8% after it announced a cut in its dividend; on Tuesday, San Juan Basin Royalty Trust also cut it payout, knocking its shares down 5%. And Dominion Resources Black Warrior Trust fell 6% this past week after it declared a dividend cut the previous Friday.

Many people—especially older, conservative investors hoping to rejuvenate their shriveled bond portfolios—might not realize what they are buying when they invest in these rare, peculiar and suddenly popular instruments.

There are some 30 royalty trusts, with a combined market value of roughly $12 billion; at least seven have sold their shares to the public for the first time in the past year.

By design, they have no employees or physical assets, and most will cease to exist in 20 years or less. Their only value consists in the income they distribute. But their future payouts may well be a ghost of the yields that appear so attractive to today's investors.

Why are the yields on royalty trusts all but doomed to dwindle?

Unlike the more-familiar master limited partnerships, which often own or operate energy, mining or other assets, the typical royalty trust holds only the right to receive income from a fixed number of properties.

Once the trusts are set up, they are frozen and can't acquire any new interests to replenish their stream of income.

When their share prices are cheap, as many were in early 2009, royalty trusts can be a great investment.

But timing is everything, and many of these trusts are far from bargains today. Wells and mines tend to become depleted with each passing year, making a decline in yield almost inevitable unless commodity prices boom.

When there is no money left to pay out, most of the trusts will disappear—and, unlike bonds, they won't give investors their original principal back at the end.

Warren and Charlie and the chocolate factory

FORTUNE -- In response to a formal email about setting up a sit-down interview with Charlie Munger, his assistant simply wrote: "Charlie says to come over tomorrow at 8:30."

It wasn't what I had expected. And it was a bit early for me, being new to Los Angeles traffic and tired from the long previous day of touring the See's Candies plant in L.A. (it was a grueling task, but some intrepid writer had to do it.) Being told to simply show up at Munger's private home in Los Angeles on a Wednesday morning in May felt starkly casual compared to my meeting with Warren Buffett, which would be the next day and had been scheduled far in advance. I would be flying to Omaha for it that night.

Arnott: Emerging Markets Still Look Good

Rob Arnott’s Research Affiliates can now boast about $60 billion in assets that use “fundamental” indexes from his Newport Beach, Calif.-based company that screens stocks based on book value, cash flow, sales and dividends. One wonders if the future of indexing will feature Arnott more and more. When IndexUniverse.com Managing Editor Olly Ludwig sat down with Arnott in his office, they talked about his disagreement with indexing legend John Bogle, the state of the ETF industry and the allure of investing in relatively debt-free emerging markets countries.

Bill Nye: Creationism Is Not Appropriate For Children

Found via The Big Picture.


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Related previous post: Theocracy in America, Ten Point Vision Finalist

Related article: The God of Independent Minds

Marc Faber's forecasts for the global economy

Found via Santangel’s Review.

Link

Hussman Weekly Market Comment: The Trend is Your Fickle Friend

My concern is that in the face of very widespread complacency about global economic recession, and the nearly infinite faith in the redemptive capacity of monetary policy, investors have neither taken an inventory of their risks, nor have any sense of the low prospective long-term returns (and potentially awful intermediate-term returns) that are presently associated with those risks.

John Mauldin: Boomers Are Breaking the Deal

There is something missing from this thing we are calling a recovery. For most in the US it does not feel like a recovery, and for good reason: the jobs aren’t there. But for some groups it is a recovery, and more. And that reveals an even bigger problem. Today, in a summer-shortened Thoughts from the Frontline, we look at the trends in employment as well as take note of a signpost we passed on the way to finding out that we can’t pay for all the future entitlements we have been promised. It’s a short letter but hopefully thought-provoking.

Competitive Advantages

These quotes are from the book The Investment Checklist by Michael Shearn.

"Competitive advantages are less sustainable when they are affected by changes in technology or if they are in rapidly emerging industries. Changes in technology threaten a competitive advantage when they expand customer choice, whether by offering the same product for less or by offering greater benefits for the same price or less."

"The greatest gains in a stock are usually made as a business is developing its competitive advantage rather than after it already has developed one."

"Do not confuse a competitive strength or a business that is successful because it is in the right place at the right time with having a competitive advantage."

Becoming Human (NOVA Documentary)

Link

Sex, Lies and Julian Assange

Found via Naked Capitalism. This aired at the end of July.

When Julian Assange arrived in Sweden in August 2010 he was greeted like a conquering hero. But within weeks there was a warrant out for his arrest and he was being investigated for rape and sexual molestation. Today he is taking sanctuary in the Ecuadorean Embassy in London, arguing he won't receive justice if he's taken to Sweden and that US authorities are building a case for his extradition.

Next, Four Corners reporter Andrew Fowler examines in detail what happened in those crucial weeks while Julian Assange was in Sweden. What was the nature of his relationship with the two women who claim he assaulted them? And what did they tell police that led the authorities to seek his arrest?

Theocracy in America, Ten Point Vision Finalist

Link

Mohnish Pabrai on position sizing

In the UC Davis class discussion, Mohnish Pabrai mentioned how he switched from a 10x10 model of position sizing (10 positions of about 10% each) to a more diversified model after the 2008-2009 crisis. He then went on to discuss how he has switched back and what he thinks the real lesson to learn was (the quote is my transcription and not an exact quotation, so errors are mine….the discussion on position sizing began at the 42:40 mark of the video):

“In hindsight, I think the correct lesson to learn from 2008-2009 was to hold cash. And I didn’t have cash at the time….I have now gone back to the 10% allocations that I had done for most of my investing career, with the caveat that I always want—except in times of extremely severe distress—to [not] be fully invested. And so for example, as I talk to you today, I’m sitting on plenty of cash….It is an interesting market right now. There are very few bargains around, but the bargains we have been able to find are wildly undervalued, so it actually lends itself very well to be a concentrated investor. I could not today come up with 20 stocks that I thought were undervalued, but I could easily come up with 5 or 6…I think the game is just perfect for me to play with a concentrated portfolio and holding cash. So that’s where we are, and I think it’s the way to go. I think Munger always says that a well diversified portfolio just needs 4 stocks.”

Guy Spier mentioned that he thinks Mohnish is right, but that there are two good reasons to be less concentrated: 1) being congenitally more fearful and risk averse (i.e. internal comfort); and 2) having a relationship set up with your investors that makes it proper to be more diversified.

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Related: For Seth Klarman’s thoughts on position sizing, see the bottom paragraph HERE.

Michael Burry's 2008 1st Quarter Letter

Thanks to Dang for reminding me about these letters being online, which prompted me to go back and read this one, which is full of great insights.

Earlier this month, I took my family on our first extended vacation far away from California, and we ran headlong into a flock of black swans. Real, breathing black swans. You’ve got to be kidding me. One cannot make this stuff up. Or so I thought.

But, of course, this was indeed predictable. We were visiting Leeds Castle in Kent, England, and if I had done the work, I would have known about the flock of black swans that reside at this castle. And that is about how I view Mr. Taleb’s premise of the Black Swan. I have found markets to be anything but random, and I find many of the future events that are bound to be dismissed as random or explainable only in hindsight in fact can be foretold in time with the rhythm of history. If one does the work.

My father, a mechanical engineer, used to dismiss random chance. The harder you work, the luckier you get, he’d say. I am convinced there is hardly a better rule by which to live.

Walter Schloss quote

A quote from the book The Value Investors (which I was lucky enough to receive an early copy of, and which I highly recommend) with some good advice from the late Walter Schloss:

“When it comes to investing,” Schloss advised, “my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night! Remember that a share of stock represents a part of a business, and so you need to understand its financials before making a judgment. When you have made a sound decision, make sure you have the courage to stay true to your convictions and not let the market affect your emotions. After all, investing should be fun and challenging, not stressful and worrying.”

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Book (comes out next month, but you can pre-order now): The Value Investors: Lessons from the World's Top Fund Managers - By Ronald Chan

Mohnish Pabrai & Guy Spier at UC Davis

Found via the Corner of Berkshire & Fairfax.


Link

Seneca quote

“Do you ask me what you should regard as especially to be avoided? I say, crowds; for as yet you cannot trust yourself to them with safety.” –Seneca, Letters from a Stoic

Australia’s Mining Bonanza Is Over, Resources Minister Says

Found via Naked Capitalism.

Australian Resources Minister Martin Ferguson said the nation’s mining boom has ended as BHP Billiton Ltd. (BHP) delayed approval of its Olympic Dam expansion that Deutsche Bank AG estimated at A$33 billion ($34.7 billion).

“You’ve got to understand, the resources boom is over,” Ferguson told Australian Broadcasting Corp. radio today. “It has got tougher in the last six to 12 months.”

Australia’s economy has been powered by the biggest resource bonanza since a gold rush in the 1850s as Chinese-led demand for iron ore, coal and natural gas brought investment projects the government estimated to be worth A$500 billion. BHP, the world’s biggest mining company, said yesterday it doesn’t expect to approve any spending on major projects this fiscal year as metal prices decline amid sluggish global growth.

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Related link: Australians be worried: someone is calling your country a miracle! (Dylan Grice – April 2012)

TED Talk - Avi Rubin: All your devices can be hacked

Link

Grant's Interest Rate Observer: Summer Break Issue

This anthology of Grant's pieces, both ancient and modern, is not only for you, but also for your friends--and 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.

Nassim Taleb quote

“Don’t look for the precise and the local. Simply, do not be narrow-minded. The great discoverer Pasteur, who came up with the notion that chance favors the prepared, understood that you do not look for something particular every morning but work hard to let contingency enter your working life. As Yogi Berra, another great thinker, said, “You got to be very careful if you don’t know where you’re going, because you might not get there.” Likewise, do not try to predict precise Black Swans—it tends to make you more vulnerable to the ones you did not predict.” –Nassim Taleb, The Black Swan

Star is caught devouring planet

Found via Naked Capitalism.

Astronomers have found evidence for a planet being devoured by its star, yielding insights into the fate that will befall Earth in billions of years.

The team uncovered the signature of a planet that had been "eaten" by looking at the chemistry of the host star.

They also think a surviving planet around this star may have been kicked into its unusual orbit by the destruction of a neighbouring world.

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"A similar fate may await the inner planets in our solar system, when the Sun becomes a red giant and expands all the way out to Earth's orbit some five billion years from now," said co-author Prof Alexander Wolszczan from Pennsylvania State University in the US.

Contracts For Difference (CFDs)

I had never heard of these before until yesterday, but it seems they are essentially a way for smaller investors to make extremely leveraged bets by putting up very little margin (hence the bucket shop reference).

In finance, a contract for difference (or CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead to the seller.) In effect CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.

For example, when applied to equities, such a contract is an equity derivative that allows traders to speculate on share price movements, without the need for ownership of the underlying shares.

CFDs are currently available in the United Kingdom, Hong Kong, The Netherlands, Poland, Portugal, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, Norway, France, Ireland, Japan and Spain. They are not permitted in the United States, due to restrictions by the U.S. Securities and Exchange Commission on over-the-counter (OTC) financial instruments.

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CFDs, when offered by providers under the market maker model, have been compared to the bets sold by bucket shops, which flourished in the United States at the turn of the 20th century. These allowed speculators to place highly leveraged bets on stocks generally not backed or hedged by actual trades on an exchange, so the speculator was in effect betting against the house. Bucket shops, colorfully described in Jesse Livermore's semi-autobiographical "Reminiscences of a Stock Operator", are illegal in the United States according to criminal as well as securities law.