Wednesday, July 31, 2013

Market Mood Swings: Facebook Euphoria – by Aswath Damodaran

On the intrinsic value of gold, and how not to be a turkey - by Dylan Grice

Uralkali Opens $20B Freely Traded Potash Market (video)


This is the news that caused the potash suppliers (e.g. POT, MOS) to get beaten down yesterday. As such, it may be a good time to read-up on some history and the possible long-term trends driving the industry. Some suggestions:

Jeremy Grantham’s 2011 letters:

U.S. Recession Began in 2012, ECRI's Achuthan Says (video)

Found via Zero Hedge. Still being bold and sticking with his recession call.

The Manual of Ideas: Interview with Hasbro ex-CEO Alan Hassenfeld


Atul Gawande on The Colbert Report

Atul Gawande discusses his New Yorker article, "Slow Ideas: Some ideas spread fast. How do you speed the ones that don't?"



Related previous post: Atul Gawande: How Do Good Ideas Spread?

Tuesday, July 30, 2013

Nate Silver on Charlie Rose

Paul Tough: How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

Paul Tough: How Children Succeed: Grit, Curiosity, and the Hidden Power of Character


Related book: How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

Harvey Firestone quote

"The test of a business man is not whether he can make money in one or two boom years, or can make money through the luck of getting into the field first, but whether in a highly competitive field, without having any initial advantage over his competitors, he can outdistance them in a perfectly honourable way and keep the respect of himself and of his community." –Harvey Firestone, Men and Rubber: The Story of Business


Related quotes:

Monday, July 29, 2013

Harvard Business School Case Study on Coors (1992)

Book TV 2013 Book Expo America: Malcolm Gladwell, "David and Goliath"


Evernote Wants to Become the Nike for Your Brain

Hussman Weekly Market Comment: Baked In The Cake

Sunday, July 28, 2013

Henry David Thoreau quote

“Public opinion is a weak tyrant compared with our own private opinion. What a man thinks of himself, that it is which determines, or rather indicates, his fate.” –Henry David Thoreau, Walden

Steve Romick's Q2 Commentary

Found via ValueWalk.

Our views on the economy are not terribly original and have not changed significantly in the past six months. It’s a challenge finding new ways to say the same thing. So we won’t. We think our past commentaries effectively communicate our longstanding view that as we exited the 2008-9 financial crisis, the average Joe on the street was left with less in his bank account, a diminished home value, and what stocks he did own weren’t worth as much. When Joe could afford less, the U.S. government stepped in and spent in his place, and hasn’t stopped spending since. What the Joes of the world can’t afford, the U.S. government apparently can – but don’t ask us to explain that “new” math. The recovery has been disappointing and largely ngineered by central bank policy. We worry that low interest rates and novel and theoretical Fed policy could lead to unintended consequences.

The past quarter included a brief hiccup when investors considered their exposure to low interest rates in the event the Fed allows rates to normalize. There was a lot of discussion in the media during the past quarter regarding how and when Ben Bernanke intends to taper the purchase of bonds by the Federal Reserve. Interestingly, we can’t recall having a single conversation internally about the taper, as this simply isn’t how we look at the world. We are worried about how a business and the world might look three to five years from now, not next quarter. In fact, if one thinks back five years, the world has dealt with a great financial crisis, potential currency collapse and fears of sovereign liquidity, just to name some of what we have seen. Through it all, we invested with a long-term strategy dependent on patience, discipline and a focus on long-term value. With an average holding period of roughly five years, we strive to add value over a full business cycle rather than try to guess where central bankers may move interest rates.

The Charitable-Industrial Complex - By Peter Buffett

Greenlight Capital Q2 2013 Letter

Via ValueWalk:

Marks Takes the Market's Temperature

John Mauldin: A Lost Generation

It is pretty well established that a tax increase, especially an income tax increase, will have an immediate negative effect on the economy, with a multiplier of between 1 and 3 depending upon whose research you accept. As far as I am aware, no peer-reviewed study exists that concludes there will be no negative effects. The US economy is soft; employment growth is weak – and yet we are about to see a significant middle-class tax increase, albeit a stealth one, passed by the current administration. I will acknowledge that dealing a blow to the economy was not the actual plan, but that is what is happening in the real world where you and I live. This week we will briefly look at why weak consumer spending is going to become an even greater problem in the coming years, and we will continue to look at some disturbing trends in employment.

The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full-time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 – three million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

Thursday, July 25, 2013

Boyles Asset Management - Q2 2013 Letter Excerpt

Below are a couple of sections (slightly edited for public viewing) from a letter just sent to the investors of the fund I help manage.

Disclosure: I am a portfolio manager at Boyles Asset Management, LLC ("Boyles") and the fund managed by Boyles owns shares of stock in a company or companies mentioned in the excerpt below.  We may in the future buy or sell shares in the fund and are under no obligation to update our activities. This is for information purposes only and is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.


July 25, 2013

When one discovers a bargain asset whose owner might find it unimportant or inconsequential, the potential exists for a highly profitable transaction.

It Matters to Me

Classic economic thinking might suggest otherwise, but there are times when a seller of a financial asset cares little about what price he or she receives.  Perhaps there is a need for immediate liquidity at any price or perhaps the goal of the seller is social rather than economic.  We suspect there are other reasons (which we hope to take advantage of in due course), but we would like to highlight one relevant additional example from our first two months of operation.

In the prior fund we managed, we owned a small UK software company named Electronic Data Processing (LSE: EDP).  The company is small and its stock relatively illiquid.  With our increased capital base at Boyles, we were unsure if we’d be able to meaningfully participate in a company that we believed was materially mispriced in the marketplace.  When we began operations at Boyles, one of your intrepid managing partners began cold-calling some of EDP’s large stockholders, which were primarily listed trusts in the UK that operate like closed-end funds.  One such owner of a large block was an entity with nearly £525 million in equity.  When it was clear that the chief investment officer of that organization knew very little about the current circumstances surrounding its £1.11 million position in EDP—representing a mere 0.21% of the organization’s equity—the conversation shifted to one about Boyles acquiring the firm’s stake.  It was agreed that two days later Boyles would have a bid prepared.

During this period the stock had traded as high as 64p per share and was generally in a range of 60p to 64p.  The potential seller recommended to us that the deal be done at the mid-point of the bid/ask at the time or perhaps even higher than the ask, given the large nature of the block.  After we indicated our bid was 55p we received a verbal accosting about our unreasonableness, our poor conduct, and our general approach to dealmaking.  After we reiterated that it was our best and final offer, the conversation came to an abrupt close.  The story naturally didn’t finish there, as just 24 hours later the firm came back to us “with their tail between their legs” and asked if the offer was still on the table.  We closed the block transaction at 55p later that week.

The moral of the story, of course, is to acquire assets from folks that ultimately care very little if they get “X” or “0.8X” because it won’t ultimately affect their net worth and the position may just be a nuisance for them to own.  Buy small operating units or assets of large organizations; or small holdings of large investment firms.

Shortly after our transaction, the company announced updated results and declared a special 5p dividend.

Discipline and Patience

“If we are to hit the bull’s-eye, we will need markets that allow the purchase of businesses and securities on sensible terms. Right now, markets are difficult, but they can - and will - change in unexpected ways and at unexpected times.  In the meantime, we’ll try to resist the temptation to do something marginal simply because we are long on cash.  There’s no use running if you’re on the wrong road.” -Warren Buffett, 1993 Letter to Shareholders

Do-something syndrome is a disease that infects many investors, both professional and amateur.  Professional investors feel they need to do something to earn their fees; and both professionals and non-professionals alike feel the urge to “get in on the action.”

The human psyche is made to fall for stories and when added to the do-something syndrome the resulting combination can be a potent detriment to one’s investment objective.  The mind likes a good narrative, and it is easy to fall into the trap of mistaking a good narrative for a good investment, perhaps especially when you feel you need to do something.  Whether it’s internet stocks, residential real estate, tulip bulbs, or something less euphoric, a good story can compel people to do something—anything—and break away from their discipline (if they had one to begin with).

If we are to be successful over a long period of time, we must be disciplined in waiting for the combination of the right businesses and right prices before putting capital to work.  At times, this philosophy may dictate more investing and less waiting; and at other times, there may be a lot of waiting with very little investing.

Our goals are capital preservation and long-term (five years or more) outperformance, not just to invest for the sake of investing or to satisfy an urge to do something.  But we remind partners and readers that there is plenty of activity going on behind the scenes: looking for businesses we’d like to own and thinking about the prices at which we’d like to buy shares in those businesses, improving our process, developing specific industry knowledge and growing our network of industry contacts.  Much is happening even if we are doing more waiting.

Just as we need to be disciplined in our waiting, we also need to be ready to act decisively when the opportunity to take the bat off the shoulder and swing at a fat pitch presents itself.  To use another Buffett quote: “In the search, we adopt the same attitude one might find appropriate in looking for a spouse:  It pays to be active, interested and open-minded, but it does not pay to be in a hurry.”

Roumell Q2 2013 Letter: Price Trumps Economic Forecasting

Nassim Taleb quotes (prediction)

I had this quote saved to post later, but it seemed to go well with the Tetlock article, so here it is now. THIS paper written by Taleb and Tetlock may also be worth reading (or re-reading)

"I insist on the via negativa method of prophecy as being the only valid one: there is no other way to produce a forecast without being a turkey somewhere, particularly in the complex environment in which we live today. Now, I am not saying that new technologies will not emerge—something new will rule its day, for a while. What is currently fragile will be replaced by something else, of course. But this “something else” is unpredictable. In all likelihood, the technologies you have in your mind are not the ones that will make it, no matter your perception of their fitness and applicability—with all due respect to your imagination.
An interesting apparent paradox is that, according to these principles, longer-term predictions are more reliable than short-term ones, given that one can be quite certain that what is Black Swan–prone will be eventually swallowed by history since time augments the probability of such an event. On the other hand, typical predictions (not involving the currently fragile) degrade with time; in the presence of nonlinearities, the longer the forecast the worse its accuracy. Your error rate for a ten-year forecast of, say, the sales of a computer plant or the profits of a commodity vendor can be a thousand times that of a one-year projection."

-Nassim Taleb, Antifragile

The Quixotic Quest to Make Pundits Suck Less

Thanks to Sean for passing this along.


There's No Formula for Fixing Detroit, and That's a Good Thing – by Justin Fox

Detroit aftershocks will be staggering – By Meredith Whitney

She was also on CNBC yesterday discussing this topic HERE.

Whitman, Diz on net-nets

Our definition of net nets is taken from Graham and Dodd’s Security Analysis, but with a few twists. Graham and Dodd relied on a GAAP classified balance sheet to definite current assets in order to ascertain if a common stock was a net net. We use our own judgment rather than GAAP classification to definite current assets in order to decide what is a liquid, that is, a current asset. 
While Graham and Dodd seem to have invented the idea of net nets, we use that idea with a number of modifications based on our discussion earlier in this chapter. 
First, we are not interested in net nets unless the company is extremely well financed. A large quantity of current assets, especially if they consist of inventories, costs in excess of billings, or receivables from less than creditworthy customers, probably cannot help the common stock of a company that cannot meet its obligations to its creditors. Second, many current assets classified as current assets under GAAP are really fixed assets of the worst sort. Take department store merchandise inventories. If the department store is to be liquidated, merchandise inventories are indeed a current asset, convertible to cash within 12 months at prices that conceivably could be close to NAV, although much less than NAV may be realized if the merchandise is disposed of in a GOB (going out of business) sale. On the other hand, if the department store is a going concern, merchandise inventories are a fixed asset of the worst sort. The merchandise inventories have to be replaced, are hard to value, and are subject to markdowns, obsolescence, shrinkage, seasonality and misallocation. The Toyota Industries portfolio of marketable securities seems to be much more of a current asset than department store merchandise inventories even though, for GAAP or IFRS purposes, Toyota Industries’ marketable securities are not considered a current asset. Third, the Graham and Dodd formulation does not account for off-balance-sheet liabilities that  may, or may not, be disclosed in footnotes, nor do Graham and Dodd take into account excessive expenses or losses. We capitalize such expenses or losses, and we add them to liabilities. Fourth, Graham and Dodd only seem to recognize partially that certain fixed assets, such as property, plant and equipment, can sometimes create cash. For example, under Section 1231 of the U.S. Internal Revenue Code, the sale at a loss of such assets used in a trade or business, usually gives rise to an ordinary loss for income tax purposes. In that case, a corporation may be able to apply the loss first to reduce current year taxes and any excess loss might be used to get quickie cash refunds from the IRS with regard to taxes paid in the prior two years. 
The identification of net nets does not appear to be difficult. Cheung Kong Holdings, The Wharf Holdings, and Capital Southwest, discussed earlier in this chapter, are clear examples of Graham and Dodd net nets. The toughest problem by far, is to identify managements and control groups of these net nets who are both able and conscious of the interests of outside, passive, minority investors. This problem notwithstanding, the investor using a fundamental finance approach can obtain large margins of safety by restricting his purchases to issues selling at steep discounts from readily ascertainable NAVs from highly creditworthy issuers with good prospects for increasing NAV in the future at rates of 10 percent per annum or larger. 
When all is said and done, however, we owe an enormous debt of gratitude to Graham and Dodd for introducing the concept of net nets.

Wednesday, July 24, 2013

Horizon Kinetics: Q2 2013 Commentary

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

Via csinvesting. It looks like an updated version of a paper Mauboussin was also a co-author on that was published several years ago.

Klarman: Economy ‘House of Cards’, ‘Will Eventually Implode’

Via ValueWalk. The full text of this speech is apparently available somewhere, but I (unfortunately!) have yet to see a copy.

Hoisington Q2 2013 Letter

The latest from Frank Martin...

Found via Santangel's Review.

Links to:


Related links:

Tuesday, July 23, 2013

Gold seen in neutron star collision debris

Richard Cook and Dowe Bynum at Wide-Moat Investing Summit 2013 (video)

The next Investing Summit, for those interested, is the Equity Income Summit which takes place on August 6-7.

How ESPN and ABC landed Nate Silver

Found via The Big Picture.

Why Buffett Bailed on India

Charlie Munger also briefly mentioned some of the issues with politics in India at the 58:38  mark in THIS video posted yesterday. The Confluence Weekly Geopolitical Report also discussed India this week, HERE.

Whitman, Diz quote

To repeat, we do not believe in acquiring securities solely on the basis of the earnings record of a company or on the outlook for its reported earnings. Neither do we think that an investment program based on acquiring securities simply because they are available at large discounts from NAV would necessarily be well advised. Availability at a large discount from book does give a first approximation that a security may be a bargain, or even that it may be attractive according to the fundamental finance approach. But this first approximation ought to be tempered by a more thorough analysis. In order for NAV to be a good indicator of the wealth or future earning power of a business, other factors must be considered as well.

Monday, July 22, 2013

James Montier quote

"One of the most useful things I’ve learnt over the years is to remember that if you don’t know what is going to happen, don’t structure your portfolio as though you do!" -James Montier

GMO's 2Q 2013 Letter

Roundtable: Charles Munger, Jim Sinegal, and Victor Fung: U.S. -- China Bilateral Investment: Managing Challenges, Optimizing Choices

Found via the Corner of Berkshire & Fairfax. It looks like Munger also gave quick (about 1 minute) comment when accepting an award HERE (at the 6:30 mark).


Atul Gawande: How Do Good Ideas Spread?

Continuous reorganization, activity...

This excerpt from Peter Bevelin’s book Seeking Wisdom reminded me of the Sears/Eddie Lampert article from last week:
Continuous reorganization may be dangerous. The Roman satirist Petronius Arbiter said in the 1st Century: "We trained hard, but it seemed that every time we were beginning to form into teams we would be reorganized. I was to learn later in life that we tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization." 
Keep in mind 
• The 19th Century American writer Henry David Thoreau said: "It is not enough to be busy; so are the ants. The question is: What are we busy about?" Don't confuse activity with results. There is no reason to do a good job with something you shouldn't do in the first place. 
• Charles Munger says, "We've got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active - discipline in avoiding just doing any damn thing just because you can't stand inactivity." 
• What do you want to accomplish? As Warren Buffett says, "There's no use running if you're on the wrong road."

Hussman Weekly Market Comment: The Road to Easy Street

Official Trailer: COSMOS (with Neil deGrasse Tyson)

Found via RDFRSThe new trailer for the reboot of Carl Sagan's COSMOS was released at Comic Con this weekend. A 13 part series being released in 2014!


Ben Goldacre discusses Bad Pharma (video)


Related books:

Related videos:

Sunday, July 21, 2013

Silver linings: Banks big and small are embracing cloud computing

A Buffett Fortune Fades in Brooklyn

John Mauldin: Any Bonds Today?

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless…." – John Maynard Keynes 

One of the more frequent and important questions I get asked when I travel is whether I think we will see inflation or deflation. My usual flippant answer is "Yes," and then I go on to explain that there is no simple answer. Over what time period? In what country? And by what means do you want me to measure inflation or deflation? Today we take a look at part of a white paper I am working on with Jonathan Tepper, the co-author of Endgame, on this topic. I think you will find it interesting reading on a summer's day. And I have to quickly mention the absolute disaster that is happening before our eyes in the labor market. Our kids are getting skewered (the polite word) by unintended consequences of the Affordable Care Act. We need a bipartisan fix quick, before we damage an entire generation. 

Steve Jobs quote (simplicity)

“That’s been one of my mantras—focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” -Steve Jobs, 1998 Business Week interview

Friday, July 19, 2013

Mavericks Lecture 2012: John Malone

This is from last year, but the previous posted reminded me of it, and it doesn't appear I had posted it before.



Related book: Cable Cowboy: John Malone and the Rise of the Modern Cable Business

John Malone on the Future of Media

Found via ValueWalk.


How the Tesla Model S is Made

Thanks to Andrew for passing this along.


Golf in China Is Younger Than Tiger Woods, but Growing Up Fast

Thanks to Phil for passing this along.

East Coast Asset Management's Q2 Letter

Via Market Folly. You can also sign up to receive ECAM’s future investor letters via email HERE.

Bill Gates reviews Jared Diamond's book "The World Until Yesterday"


Related previous posts:

Broyhill Asset Management's thesis on Cedar Fair

Thursday, July 18, 2013

Is a House Really a Good “Investment”? - by Cullen Roche

John Paulson's CNBC Interview


John Mauldin's Outside the Box: The Mirror Cracks

This reminds me of something else I was thinking about this morning. I was trying to think about a good analogy to the way the markets currently seem so dependent on Fed action/intervention. The thing that came to mind was Taleb’s turkey problem….for 1,000 days a turkey gets fed by a butcher. Every day that goes by the turkey gets more and more confident that this butcher is nice and is looking out for its well being. Until day 1,001 (a few days before Thanksgiving) when the butcher kills the turkey. The turkey was most confident in the thought that the butcher would always feed it and do good for it at the point just before the butcher delivered the Black Swan to the turkey (Black Swan for the turkey, not a Black Swan for the butcher). The markets seem to be acting similar to the turkey in response to the Fed, its equivalent of the butcher. The lesson: Don’t be a turkey.

The comparison between the recent interest rate spike and 1994 underlines just how Fed-dependent markets have become and how incredibly difficult it is going to be for Mr. Bernanke and his colleagues to alter policy without causing serious market dislocations…. 
Mr. Bernanke is creating the conditions for a violent market reversal. As I wrote last month (“Delusions of Stability”), the dependence of markets on the continued beneficence of the Federal Reserve is profoundly unhealthy.

Wednesday, July 17, 2013

Jim Chanos on CNBC

Link to videos:

Chanos: China 'great place to be short'

Chanos' Best Idea: Why I'm Short Caterpillar

Jim Chano's best short idea: CAT & HPQ (fuller version of his talk, starting at 9:45)

At Sears, Eddie Lampert's Warring Divisions Model Adds to the Troubles