Li Lu on understanding a business…

Via notes from his 2010 lecture at Columbia:

You can’t truly understand everything about a business in 1 week. It took me 10 years and I am still learning new things about BYD. It is a continuous learning process. You could spend a lifetime studying a business or industry, but in a few seconds I can tell you whether or not I like it. You want to build [knowledge and continually learn]. There is not set preparation.

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His comment "but in a few seconds I can tell you whether or not I like it" reminded me of these posts:

Warren Buffett quote on filters

Alice Schroeder on Buffett’s filtering process

FiveBooks Interviews: John Kay on Economics in the Real World

Link to: FiveBooks Interviews: John Kay on Economics in the Real World

Stanley Druckenmiller at TEDx Wall Street

Found via ValueWalk.


Link

Who is to blame for Healthcare.gov? (Hint: The Initials are RPV) - by Ben Wanamaker and Devin Bean

Who botched Healthcare.gov? The contractors, politicians, and president all claim that they are not responsible – and they are all right. Forcing a new idea into a locked government business model virtually guaranteed that problems would arise. Further understanding how an organization’s capabilities define its actions can help explain how problems arose with Healthcare.gov and, in the second post in this series, help illuminate how these problems can be fixed.

The Financial Sense Newshour interviews Kyle Bass

Found via Zero Hedge.

Kyle: When you think about what Reinhart and Rogoff’s book says, it kind of gets to an answer but it’s not the right way to look at things; there are many more variables to analyze the situation with. One is, of course, debt to central government tax revenues—that ratio. Another one is what percentage of your central government tax revenues do you spend on interest alone? Those barometers are much more impactful than just using a debt-to-GDP barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve read all the white papers that they’ve written prior to writing the book, one of the other conclusions that they draw is when debt gets to be about 100% GDP it becomes problematic. Well, what that means is, typically—and, again, painting the world with a broad brush—central government tax revenues are roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times your revenue, that’s when you start to have a problem. Historically, the analysis that’s been done empirically by academics has focused on the countries that have fallen into a restructuring or a default as a result of this ratio that you and I are discussing. Historically, those have been emerging market economies that have higher borrowing costs. So, it actually makes complete sense that that number is too low when you’re talking about a developed market economy versus an emerging economy because, in theory, a developed economy can borrow at lower rates than an emerging economy can. That being said, in Japan, when the debts are 24 times their central government tax revenue, they are already completely insolvent—it’s just a question of when does it blow up.

Notes from Chicago Invest For Kids Conference 2013

Via Market Folly:

Link to: Chicago Invest For Kids Conference Notes

Steve Romick's Q3 Commentary

We would prefer that some of the lunacy we see out there translate into fear as that generally causes investors to sell assets without regard to value. Many of you would probably agree that people nowadays are anxious about both the economy and federal governance. And yet, the Federal Reserve’s QE (Quantitative Easing) policies continue to support asset prices, despite slower economic growth and myriad other uncertainties.

This can be seen in the returns of more speculative stocks. As a proxy for shares of that ilk, we turn to the most heavily shorted companies at the start of 2013. The top 100 most-heavily shorted stocks in the Russell 3000 returned 44.6% for the nine months ended September 30, dwarfing the index’s return of 19.52%.

With a reluctant nod to obliging central banks, the stock market seems to be the only game in town so equities continue their unabated rally, regardless of quality. It seems a lot of people share CNBC’s Jim Cramer’s view that, “We all know it’s going to end badly, but in the meantime we can make some money.” If you believe this trend will continue, you will most likely be better served having your capital with a manager who is more fully invested. As Morningstar analyst Dan Culloton observed in his most recent commentary about Crescent, “The past 10 years included two bear markets and were fraught with volatility, which plays to the fund’s strengths.” Absent volatility, we are like an automobile whose gas gauge is nearing empty. That doesn’t mean we are stuck in idle. We continue to read, speak to executives, visit companies, and then read some more. We’d like nothing more than to shift to a higher gear and increase our exposure, but given the lack of securities offering a genuine margin of safety, we’re content to stay out of the fast lane for now.

In the meantime, we’ve taken advantage of the kindness of others who seem to have plenty of petrol and have bid up many of our investments to a point where we find the risk/reward unattractive. To remain intellectually honest and clinically dispassionate, we have found ourselves with little alternative but to make some sales.

Martin Whitman on WealthTrack

Link

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 Related book: Modern Security Analysis: Understanding Wall Street Fundamentals

Gillian Tett interviews Alan Greenspan

Six years on from the start of the credit crisis, the former US Federal Reserve chairman is prepared to admit that he got it wrong – at least in part

John Mauldin: A Code Red World

NYSE margin debt is showing the kind of rapid acceleration that often signals a draw down in the S&P 500. Are we there yet? Maybe not, as the level of investor complacency is just so (insert your favorite expletive) high.

The potential for bubbles building atop the monetary largesse being poured into our collective glasses is growing. As an example, the "high-yield" bond market is now huge. A study by Russell, a consultancy, estimated its total size at $1.7 trillion. These are supposed to be bonds,the sort of thing that produces safe income for retirees, yet almost half of all the corporate bonds rated by Standard & Poor's are once again classed as speculative, a polite term for junk.

Hussman Weekly Market Comment: The Grand Superstition

In general, the larger the events, the more important the events are to survival, and the closer in proximity those events occur, the more likely an organism is to believe those events are tied together by cause and effect. This makes the 2008-2009 credit crisis an ideal playground for superstition.

When we examine the 2008-2009 credit crisis in retrospect, there’s no question that the central concern at that time was that massive bank failures would trigger a “global financial meltdown.” The risk of widespread failures was driven by losses in mortgage-backed securities and related assets held by major banks, and by highly leveraged financial institutions like Bear Stearns and Lehman, representing the “shadow” banking system.

The balance sheet of a major bank looks like this: for every $100 of assets, the bank typically owes about $60 to depositors and $30 to bondholders, with the other $10 representing retained earnings and “equity” capital obtained by issuing stock. With $100 in assets against $10 in capital, a bank like this would be “leveraged 10-to-1” against its equity capital. At non-banks like Bear Stearns and Lehman, the leverage ratios were 30-to-1 or higher. Given 30 times leverage, it only takes a decline of just over 3% in the value of the assets to completely wipe out the capital and leave the company insolvent (as the remaining value of assets would be unable to pay off the existing obligations to customers and bondholders). In such an environment, a “run” on the institution can force asset sales, which accelerate capital losses and increase the likelihood of insolvency.

Under existing accounting rules, banks and other financial institutions were required to report the value of the securities they held, using prevailing market prices, a requirement known as “mark-to-market.” As asset values collapsed in 2008 and early-2009 because of mortgage losses, financial institutions across the globe found themselves rapidly approaching insolvency.

As the willingness of investors to buy mortgage securities seized up, and economic activity plunged, the Federal Reserve stepped into the financial markets and became the major purchaser of existing and new mortgage securities issued by Fannie Mae and Freddie Mac. This arguably helped to support continuing activity in the housing market, but it is not what ended the crisis.

Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “substantial discretion” in the values that they assigned to assets. With that discretion, banks could use cash-flow models (“mark-to-model”) or other methods (“mark-to-unicorn”).

The problem for investors is that this was quite a subtle event – hardly memorable, and certainly not grand and obvious like the Federal Reserve’s intervention was. But we are wired for survival, and the larger the events, and the closer they are in proximity, the more likely we are to draw cause and effect connections between them. That’s particularly true if there is at least a weakly logical way that they might be related (as was true the Fed’s mortgage support).

Importantly, the impact of the FAS 157 change is easier to appreciate in hindsight than it was in the fog of war. Its success relied on regulators to go along with the new numbers, and bank depositors and customers to believe them. I've frequently discussed our own response to the crisis, which was to insist that our methods to estimate market return/and risk were robust to Depression-era outcomes (even though our existing methods had anticipated the crisis and performed admirably during the market collapse). It's no secret that we missed returns in the interim as a result. We are evidence-driven investors, and similar economic and financial disruptions were simply out of context from the standpoint of post-war evidence. Nevertheless, it's critical to go back and understand the actual mechanism that ended the crisis, so that we as investors don't allow ourselves to be misled into an increasingly false sense of security about Federal Reserve actions. It's probably also worth observing how heavily banks have relied on the release of "loan loss reserves" in order to beat earnings estimates in recent periods.

Leithner Letter No. 167-170

Link to: Leithner Letter No. 167-170: 26 October 2013 - 26 January 2014

Scott Adams: How to Fail at Almost Everything and Still Win Big

A couple of things on Scott Adams (the creator of "Dilbert") and his new book.

WSJ: Scott Adams' Secret of Success: Failure

HBR: Scott Adams on Whether Management Really Matters

Book: How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life

Related previous post: How to Get a Real Education - By Scott Adams

Jain feeds Buffett’s hunger

I'm a bit late getting to this, but thanks to those who passed the link along.

The first signs of a new Ajit Jain came at the January 2012 renewals, when the potential heir to Buffett played big on Australasian cat and international retro.

Jain took a large share of the IAG property cat treaty that had handed painful losses on to the pre-existing markets. It looked like classic Jain: hundreds of millions of dollars of capacity thrown at the feet of a cedant that was struggling for capacity. In hindsight, it became clear that it was the first in a series of mammoth cat and multi-line deals with cedants from Asia Pacific.

IAG was followed by a hefty (and uncapped) retro quota share for Asia Capital Re; next came some aggressive Japanese quake pro rata deals and a gargantuan quota share with Toa Re.

After Berkshire Hathaway made its presence felt during the Indian renewals, the New Zealand Earthquake Commission (EQC) was next as the reinsurer came from a standing start to write a NZ$500mn line to help the programme expand substantially.

By far the most prominent deal in Jain's Asia Pacific push was made with loss-hit Australasian cedant Suncorp. Berkshire ramped its line on the main programme up to around $800mn, hoovered up the entire New Zealand buy-down protection and wrote a $300mn-premium quota share of Suncorp's Queensland homeowners' book. It is believed all of this was written for a three-year period.

And this agreement overshadowed a multi-year deal with Berkshire that took the whole of New Zealand insurer AMI's NZ$1.4bn cat programme out of the market, denying resentful loss-paying markets the chance to earn their payback.

At the beginning of 2013 Berkshire filled in the final piece of its Australasian strategy by striking a deal with QBE to write 15 percent shares of a range of its programmes, including the company's $1.3bn global cat treaty and its global aggregate cover.

All in all, Berkshire Hathaway is thought to have swollen its Asia Pacific writing by between $1.5bn and $2bn in this period of frenzied activity, with most of this coming through multi-line uncapped quota shares or cat excess-of-loss business. 

The Stiglitz Syndrome...

From Nassim Taleb in Antifragile:

There is something more severe than the problem with Thomas Friedman, which can be generalized to represent someone causing action while being completely unaccountable for his words. 

The phenomenon I will call the Stiglitz syndrome, after an academic economist of the so-called “intelligent” variety called Joseph Stiglitz, is as follows. 

Remember the fragility detection in Chapter 19 and my obsession with Fannie Mae. Luckily, I had some skin in the game for my opinions, be it through exposure to a smear campaign. And, in 2008, no surprise, Fannie Mae went bust, I repeat, costing the U.S. taxpayer hundreds of billions (and counting)—generally, the financial system, with similar risks, exploded. The entire banking system had similar exposures. 

But around the same period, Joseph Stiglitz, with two colleagues, the Orszag brothers (Peter and Jonathan), looked at the very same Fannie Mae. They assessed, in a report, that “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.” Supposedly, they ran simulations—but didn’t see the obvious. They also said that the probability of a default was found to be “so small that it is difficult to detect.” It is statements like these and, to me, only statements like these (intellectual hubris and the illusion of understanding of rare events) that caused the buildup of these exposures to rare events in the economy. This is the Black Swan problem that I was fighting. This is Fukushima. 

Now the culmination is that Stiglitz writes in 2010 in his I-told-you-so book that he claims to have “predicted” the crisis that started in 2007–2008. 

Look at this aberrant case of antifragility provided to Stiglitz and his colleagues by society. It turns out that Stiglitz was not just a nonpredictor (by my standards) but was also part of the problem that caused the events, these accumulations of exposures to small probabilities. But he did not notice it! An academic is not designed to remember his opinions because he doesn’t have anything at risk from them. 

At the core, people are dangerous when they have that strange skill that allows their papers to be published in journals but decreases their understanding of risk. So the very same economist who caused the problem then postdicted the crisis, and then became a theorist on what happened. No wonder we will have larger crises. 

The central point: had Stiglitz been a businessman with his own money on the line, he would have blown up, terminated. Or had he been in nature, his genes would have been made extinct—so people with such misunderstanding of probability would eventually disappear from our DNA. What I found nauseating was the government hiring one of his coauthors. 

I am reluctantly calling the syndrome by Stiglitz’s name because I find him the smartest of economists, one with the most developed intellect for things on paper—except that he has no clue about the fragility of systems. And Stiglitz symbolizes harmful misunderstanding of small probabilities by the economics establishment. It is a severe disease, one that explains why economists will blow us up again. 

The Stiglitz syndrome corresponds to a form of cherry-picking, the nastiest variety because the perpetrator is not aware of what he is doing. It is a situation in which someone doesn’t just fail to detect a hazard but contributes to its cause while ending up convincing himself—and sometimes others—of the opposite, namely, that he predicted it and warned against it. It corresponds to a combination of remarkable analytical skills, blindness to fragility, selective memory, and absence of skin in the game. 

Stiglitz Syndrome = fragilista (with good intentions) + ex post cherry-picking 

There are other lessons here, related to the absence of penalty. This is an illustration of the academics-who-write-papers-and-talk syndrome in its greatest severity (unless, as we will see, they have their soul in it). So many academics propose something in one paper, then the opposite in another paper, without penalty to themselves from having been wrong in the first paper since there is a need only for consistency within a single paper, not across one’s career. This would be fine, as someone may evolve and contradict earlier beliefs, but then the earlier “result” should be withdrawn from circulation and superseded with a new one—with books, the new edition supersedes the preceding one. This absence of penalty makes them antifragile at the expense of the society that accepts the “rigor” of their results. Further, I am not doubting Stiglitz’s sincerity, or some weak form of sincerity: I believe he genuinely thinks he predicted the financial crisis, so let me rephrase the problem: the problem with people who do not incur harm is that they can cherry-pick from statements they’ve made in the past, many of them contradictory, and end up convincing themselves of their intellectual lucidity on the way to the World Economic Forum at Davos. 

There is the iatrogenics of the medical charlatan and snake oil salesperson causing harm, but he sort of knows it and lies low after he is caught. And there is a far more vicious form of iatrogenics by experts who use their more acceptable status to claim later that they warned of harm. As these did not know they were causing iatrogenics, they cure iatrogenics with iatrogenics. Then things explode. 

Finally, the cure to many ethical problems maps to the exact cure for the Stiglitz effect, which I state now. 

Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.

Hoisington Q3 2013 Letter

The Fed’s capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation. The Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. Later, in the late 1970s and early 1980s, rampant inflation was brought under control by a determined and persistent Federal Reserve.

However, when an economy is excessively over-indebted and disinflationary factors have forced central banks to make overnight interest rates as close to zero as possible, central bank policy has repeatedly proved powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere) and from 1989 to the present in Japan are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.

Four considerations suggest the Fed will continue to be unsuccessful in engineering stronger growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP). First, the Fed’s forecasts have consistently been overly optimistic, indicating that their knowledge of how LSAP operates is flawed. LSAP obviously is not working in the way they had hoped, and they are unable to make needed course corrections. Second, debt levels in the U.S. are so excessive that monetary policy’s traditional transmission mechanism is defunct. Third, recent scholarly studies, all employing different rigorous analytical methods, indicate LSAP is ineffective.Fourth, declining velocity deprives the Fed of the ability to have a measurable influence on aggregate economic activity and is an alternative way of confirming the validity of the aforementioned academic studies.

Charlie Munger on future inflation

I re-watched the talk with Charlie Munger at Harvard-Westlake (from January 2010) last night on DVD and thought Munger's inflation comment was worth mentioning. After talking about how he knew the derivative and mortgage mess was going to very badly, but that he didn't know when, he then answered the part of the question about inflation using a similar framework. Here's the quote from the Santangel's Review Transcript which captured the essence of it:

"I knew we’d have a hell of a mess eventually. I just didn’t know when it was coming. I think I know eventually we will have a hell of an inflation mess, but I can’t tell you when it is coming. It could be way in the future. But I think eventually you’ll have it."

The Buffetts on Charlie Rose

Found via ValueWalk.

Link

Mark Spitznagel on CNBC

Thanks to Jim for passing this along.


Link

East Coast Asset Management's Q3 Letter

Found via Market Folly.

In our third quarter letter you will find an update on our portfolio and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled The Architecture of Reason, I will discuss a framework of rational decision-making and how we attempt to apply it using our seventy-two-point investment checklist.

Buffett: Why I didn't buy the Washington Post

Berkshire Hathaway CEO Warren Buffett reveals why he passed on the deal that Amazon CEO Jeff Bezos stepped up to.

Warren Buffett on power of a handshake

Warren and the Howards were on Piers Morgan last night. This is one clip of many. As of now, a few more can be accessed from HERE.


Link

Cliff Asness on WealthTrack

Link

The Buffetts on Charity, Succession, and TV (video)

Found via the Corner of Berkshire & Fairfax.

Oct. 22 (Bloomberg) -- Berkshire Hathaway chairman/CEO Warren Buffett, board member Howard G. Buffett and Howard W. Buffett, executive director at Howard G. Buffett Foundation, talk with Betty Liu about their book “40 Chances,” their philanthropic endeavors, succession at Berkshire Hathaway and Warren Buffett’s love of the TV show “Breaking Bad.” They speak on Bloomberg Television’s “In The Loop.”

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Related book: 40 Chances: Finding Hope in a Hungry World

Dan Pink talks with Brad Stone, author of The Everything Store: Jeff Bezos and the Age of Amazon

Link to: Dan Pink’s Office Hours: Brad Stone

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Related book: The Everything Store: Jeff Bezos and the Age of Amazon

Related previous post: The Secrets of Bezos: How Amazon Became the Everything Store

Warren Buffett on American Express in 2009...

I posted this on Twitter over the weekend, but it may be worth sharing here as well:

Note to self, when Buffett says this on TV, listen (CNBC in 2009): "But that doesn't mean American Express isn't a hell of a buy at $10."

The quote came from THIS transcript.

Federal Reserve Policy Failures Are Mounting - By Lacy Hunt

Found via Zero Hedge.

The Fed's capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve.

However, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.

Martin Wolf Presentation: Has the financial crisis changed the world?

I haven't gotten a chance to watch this yet, but I've seen it pop up and be recommended in a few different places.

Link

Hussman Weekly Market Comment: Did Monetary Policy Cause the Recovery?

As investors, we should be aware that the current Shiller P/E of 24.8 (S&P 500 divided by the 10-year average of inflation adjusted earnings) is now above every historical instance prior to the bubble period since the late-1990's, save for the final weeks approaching the 1929 peak. We should also be aware that overvaluation alone in the late-1990’s did not stop the market from reaching even higher levels as new-era speculation culminated in the 2000 bubble peak.

It’s fine, and quite accurate to say that valuations are not as frenzied as they were at the 2000 extreme (a comparison that fell from the lips of Robert Shiller himself last week), provided that one also recognizes that the hypervaluation in 2000 has been followed by a period that included two separate market losses in excess of 50%, and a nominal total return from 2000 until today averaging just 3.2% annually. Even that weak 13-year return has been achieved only thanks to distortions that have again driven present valuations to temporary and historically untenable extremes.

Put simply, the past 13 years have chronicled the journey of valuations - from hypervaluation to levels that still exceed every pre-bubble precedent other than a few weeks in 1929. If by 2023, stock valuations complete this journey not by moving to undervaluation, but simply by touching pre-bubble norms, we estimate that the S&P 500 will have achieved a nominal total return of only about 2.6% annually between now and then.

Michael Shearn's Detailed Analysis of Strayer Education (STRA)

Via BeyondProxy:

We believe that it is easier to be patient with an investment holding that declines in price when one intimately understands the investment holding. From that perspective, we want to give you our detailed investment thesis on Strayer so you can better understand why we continue to allocate a large percentage of the portfolio to this investment.

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Related link: The Harkin Report on For-Profit Colleges

And if anyone has gone to Strayer or knows people who have gone there, teach there or work there, send me and email (valueinvestingworld@gmail.com), as I'd love to get more information from people involved with Strayer. Thanks.

Nassim Taleb quote

From Antifragile:

Subtraction of a substance not seasoned by our evolutionary history reduces the possibility of Black Swans while leaving one open to improvements. Should the improvements occur, we can be pretty comfortable that they are as free of unseen side effects as one can get.

So there are many hidden jewels in via negativa applied to medicine. For instance, telling people not to smoke seems to be the greatest medical contribution of the last sixty years. Druin Burch, in Taking the Medicine, writes: “The harmful effects of smoking are roughly equivalent to the combined good ones of every medical intervention developed since the war.… Getting rid of smoking provides more benefit than being able to cure people of every possible type of cancer.
...
Likewise, happiness is best dealt with as a negative concept; the same nonlinearity applies. Modern happiness researchers (who usually look quite unhappy), often psychologists turned economists (or vice versa), do not use nonlinearities and convexity effects when they lecture us about happiness as if we knew what it was and whether that’s what we should be after. Instead, they should be lecturing us about unhappiness (I speculate that just as those who lecture on happiness look unhappy, those who lecture on unhappiness would look happy); the “pursuit of happiness” is not equivalent to the “avoidance of unhappiness.” Each of us certainly knows not only what makes us unhappy (for instance, copy editors, commuting, bad odors, pain, the sight of a certain magazine in a waiting room, etc.), but what to do about it.

James Grant Presentation: The Monetary Revolution and the Visible Hand

Link

Horizon Kinetics: Q3 2013 Commentary

Thanks to James for passing this along.

No one can accuse us, in these pages, of not being diligent in using our words, though we have been accused at times of using too many. So this review switches modalities somewhat, with more exhibits and fewer words. What won’t switch are the themes, which are as relevant as ever: 1) the important and dysfunctional ways in which indexation is affecting security valuations, risk, and returns; and 2) the antithesis of indexation—active management and individual security selection, of which we, certainly, are practitioners.

Khan Academy: A Conversation with Elon Musk (April 2013)

Found via The Big Picture.


Link

Different takes on oil prices in 2008

It’s interesting that the fundamental investor and the economist attribute the 2008 rise in oil to supply and demand while the traders attribute it to speculation. In hindsight, I guess Paul Tudor Jones was probably the most correct in his balance of the two. But I think there’s a lesson in psychology in here somewhere. To the man with only a hammer…

Government Take Force report:

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.

Warren Buffett on CNBC in June 2008:

“It's not speculation, it is supply and demand. … We don't have excess capacity in the world anymore, and that's what you're seeing in oil prices.”

Ben Bernanke in July 2008:

"If financial speculation were pushing all prices above the level consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But, in fact, available data on oil inventories shows notable declines over the past year."

George Soros in an interview with the Telegraph in May 2008:

“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.

Paul Tudor Jones in a June 2008 interview with Alpha magazine:

“It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products. Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.”

Warren Buffett CNBC Interview Transcripts Collection

Link to: Warren Buffett CNBC Interview Transcripts Collection

Warren Buffett at the 2013 Fortune Most Powerful Women Summit

Found via ValueWalk.


Link

James Grant on Bloomberg (video)

Oct. 16 (Bloomberg) -- James Grant, publisher of Grant's Interest Rate Observer, talks about the impact of the fiscal impasse in Washington on global markets, U.S. debt and the dollar, and the outlook for Federal Reserve policy. Grant speaks with Deirdre Bolton on Bloomberg Television's "Money Moves."

Tracy Britt Cool on Management Lessons From Warren Buffett

Thanks to Matt for passing this along.

Tracy Britt Cool, Warren Buffett‘s financial assistant at Berkshire Hathaway, says she was already familiar with the billionaire’s investing style when she joined the company in 2009, but working by his side for the past four years has given her a new appreciation for Mr. Buffett’s hands-off management style.

The big lesson, Ms. Cool said, was learning “how much you can get out of people when you… give them space.” Speaking at Fortune magazine’s Most Powerful Women conference in Washington, DC on Wednesday, the 29-year-old Harvard MBA said Mr. Buffett gives his managers “freedom and flexibility” to run their businesses as they see fit, even when he doesn’t agree with them.

As the chairwoman of four Berkshire-owned companies including paints maker Benjamin Moore, Ms. Cool said she spends a lot of her time “getting smarter about ways to help Berkshire,” especially in terms of helping improve operations and eventually, make acquisitions.

California Housing Bubble 2.0 in Pictures - By Mark Hanson

Fantastic, everybody made some good money in the past 18 months thanks to the Fed’s aggressive monetary policy — or, to be specific Twist, QE3, and QE4 — which dropped mortgage rates from 5.5% to sub 3.5% almost overnight in late 2011.  This made it so everybody could instantly “afford” 20% more house.  Over the next year this increase in “purchasing power” pushed house ‘prices” higher.  Throw in top aggressive Wall Street and private all-cash “investors” regularly paying 10% to 20% over appraised value / list price for their buy-to-flip/rent schemes and viola’…everybody who owns a home is a lot more “wealthy” — on paper — than 18 months ago.

This note is to throw out some compelling data on where housing actually sits relative to the bubbly years.  And that although it may look different, conditions may be quite similar.   Greed and fear, as they relate to financial assets and decision making, are powerful emotions.   When you see them driving markets, step back, breathe, have a drink, and a think.

Finding the Next Steve Jobs

Nolan Bushnell is the founder of Atari, Chuck E. Cheese’s, and countless other companies, making him one of the most prolific and successful entrepreneurs of our time. In “Finding the Next Steve Jobs” he offers practical advice for hiring and retaining talent, advice designed to help you make your business a creative powerhouse.  The tips are delivered via 52 short chapters, each with its own “pong” (Bushnell’s term for a piece of advice, a word that originated with the name of a video game the author created in the 1970s).

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Book: Finding the Next Steve Jobs: How to Find, Keep, and Nurture Talent

The Power of Human Energy: Angela Ahrendts at TEDxHollywood

Thanks to Alex for passing this along. As announced yesterday (I think), Ms. Ahrendts is leaving Burberry to join Apple.

Link

Paul Singer: Fed Should Say 'We've Done Enough'

Thanks to Kent for passing this along.

In a discussion with WSJ's Gerald Baker at Heard on the Street Live, Paul Singer of Elliot Management discusses the Federal Reserve's "tapering," the possibility of inflation and the markets' skittishness about it. Photo: World Economic Forum.

Warren Buffett on CNBC

Links to videos:

Buffett: It's not a mistake to buy stocks now

DC's 'political weapon of mass destruction': Buffett

Berkshire's $1.1 billion acquisition

Buffett: It would be asinine to jeopardize US credit

US is like a very rich family: Buffett

Buffett predicts 'there will be entitlement reform'

Benjamin Moore will not go into Lowe's or Home Depot: Buffett

Buffett buys banks based on the future

Buffett: Coca-Cola vs. Pepsi

Buffett on JPMorgan's woes

Buffett's big mistakes

Buffett sides with Apple against Icahn's call for buyback

Buffett on Fed policy and economy

Buffett on JC Penney's future "Coming from behind in retailing is just plain tough."

'Health care is the tapeworm' of the US economy: Buffett “We’re so rich we can get away with doing things wrong for a while….We can’t get away doing them indefinitely.”

'Philanthropy is tougher than business': Buffett

'Stocks are not selling at bubble levels': Buffett

Buffett's advice to Republican

The science interview: Jared Diamond

Found via The Big Picture.

The provocative insights of the bestselling author have won him a huge following – and the disdain of some academics. He discusses criticism, gall bladders and what the west can learn from other societies

David Tepper on CNBC

Links to videos:

Tepper: Fed won't taper for 'a long time'

This is not the time to miss a debt payment: Tepper

Tepper: Looking for normal stock multiples

Greenlight Capital Q3 2013 Letter

Via Market Folly:

Link to: Greenlight Capital Q3 2013 Letter

Stewart Cowley, the Bond-Fund Manager Who Can't Stand Bonds

Thanks to Matt for passing this along.

Stewart Cowley manages $1.5 billion in the Old Mutual (ODMTY) Global Strategic Bond Fund. One place he generally avoids investing that money: bonds.

Mr. Cowley doesn't hold conventional U.S. Treasury bonds. He doesn't hold traditional U.K. gilts. He doesn't hold Japanese government bonds.

"I'm the bond manager who doesn't like bonds," he says, sitting in the modern London headquarters of Old Mutual Global Investors, a unit of Old Mutual PLC, which is a venerable City institution with roots going back to 19th-century Cape Town, South Africa.

Managing a bond fund these days is a peculiar business. Global central banks have aggressively supported government bonds, driving up—many would say distorting—their prices. Market observers generally agree that support will eventually ebb, bringing prices back down and bond yields up, but no one can be certain when. What is an investor to do?

Many fixed-income managers have shortened their "duration"—a measure of how sensitive a bond portfolio is to changes in interest rates—to mitigate damage from potential rate increases, and have trimmed their holdings of safe-harbor bonds.

Mr. Cowley has gone into hyperdrive with a highly unorthodox strategy: He has taken large negative positions on major government bonds by "shorting" (or betting against) contracts tied to the bonds' future performance. His duration is minus-four years, meaning his fund will rise on average 4% for every one-percentage-point rise in the average interest rate for the bonds in his fund. It is the only duration below zero of any U.K. fund tracked by Morningstar. While he hasn't bought conventional U.S. Treasurys or British gilts, he has bought inflation-protected debt from those countries.

Behind Mr. Cowley's bearishness is a conviction that central banks' sizable stimulus programs, known as quantitative easing, are bound to end. Markets, he thinks, are addicted to the easy-money policies and are in for a rude awakening when economic fundamentals reassert themselves.

Robert Shiller on CNBC

Robert Shiller, Yale University economics professor, shares how he found out he won the Nobel Prize. Shiller also explains the difference between his "irrational" market theory and fellow Nobel Prize winner Eugene Fama's "efficient market" theory.

Link

What Happens When You Don’t Buy Quality? And What Happens When You Do? – By Sanjay Bakshi

Thanks to David for passing this along.

Link to: What Happens When You Don’t Buy Quality? And What Happens When You Do?

CEOs to Face Berkshire-Loyalty Test

Although it isn’t unprecedented for Mr. Buffett to replace top executives, they typically leave only when they retire. Mr. Buffett, who declined to comment, has said that no manager of a significant Berkshire business has left voluntarily to join a competitor.

There has been more churn than usual at the subsidiaries lately. Last week, paint company Benjamin Moore named retail-industry veteran Michael Searles as CEO, the third person to occupy the post in two years.

Jewelry retailer Borsheims also named a new CEO last week after Susan Jacques, who had led the company since 1994, left for the top position at the Gemological Institute of America, a nonprofit.

“He’s got very good people running the companies, and several down the line,” said Cliff Gallant, an analyst with Nomura. But “retention is a risk factor. When he moves on, I’m concerned that some of them will move on.”

At a May gathering of Berkshire CEOs with Mr. Buffett ahead of the company’s annual meeting, some managers asked him what their responsibility was after he was no longer at the company, according to people present.

Mr. Buffett encouraged them to preserve Berkshire’s culture of autonomy, one person said.

People familiar with Mr. Buffett’s thinking said the investor believes that Berkshire managers are loyal to the company and not to him personally. Still, he has acknowledged that despite his efforts to preserve Berkshire’s culture for the future, things will change.

Bruce Greenwald Interview

Found via ValueWalk.


Link

TWO-HIT WONDER

Jack Dorsey, of Twitter, is now making big money at Square—and is out to prove that he’s more than a lucky man.

The Secrets of Bezos: How Amazon Became the Everything Store

Amazon.com rivals Wal-Mart as a store, Apple as a device maker, and IBM as a data services provider. It will rake in about $75 billion this year. For his book, Bloomberg Businessweek’s Brad Stone spoke to hundreds of current and former friends of founder Jeff Bezos. In the process, he discovered the poignant story of how Amazon became the Everything Store.

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Related book: The Everything Store: Jeff Bezos and the Age of Amazon

Hussman Weekly Market Comment: Short Horizon, Long Horizon

Over history, and including the past decade, properly normalized valuations have remained a powerful guidepost for full-cycle and long-term returns, particularly on the horizon of 7-10 years. On that front, the current price/revenue multiple of the S&P 500 of 1.54 is now nearly double the historical norm prior to the late-1990’s bubble. The same is true for other useful metrics such as the market value of nonfinancial stocks to nominal GDP (based on Z.1 flow of funds data). With our broadest estimate of prospective S&P 500 10-year nominal total returns down to just 2.9% annually, 10-year Treasury bond yields at 2.7%, Treasury bill yields pinned at zero, and state and corporate pension assumptions still in the range of 7-8% annually, it appears quite likely that the coming decade will produce a widespread pension funding crisis in the U.S.

Meanwhile, the current Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) of 24.2 is closer to 65% above its pre-bubble median. Despite the 10-year averaging, Shiller earnings – the denominator of the Shiller P/E – are currently 6.4% of S&P 500 revenues, compared to a pre-bubble norm of only about 5.4%. So contrary to the assertion that Shiller earnings are somehow understated due to the brief plunge in earnings during the credit crisis, the opposite is actually true. If anything, Shiller earnings have benefited from recently elevated margins, and the Shiller P/E presently understates the extent of market overvaluation. On historically normal profit margins, the Shiller P/E would be about 29 here. In any event, on the basis of valuation measures that are actually well-correlated with subsequent market returns, current valuations are now at or beyond the most extreme points in a century of market history, save for the final approach to the 2000 peak.

Of course, valuations exert far more effect on long-term returns than on short-term outcomes, where a much larger set of considerations generally apply. Unfortunately, on shorter horizons, the past few years have been unusual. Market conditions that have historically resulted in awful losses over the intermediate-term have instead been associated with positive returns.

John Mauldin: Sometimes They Ring a Bell

After last week's discussion of the Affordable Care Act, it would be easy to drift off into all of the negative consequences of the current problems in Washington DC. There's just so much negative energy every time you turn on the TV that it simply drains you. I am well aware of what's happening and why, and yet I still find myself weary simply from the process of trying to follow what's happening. If I feel that way, it's no wonder the polls show that the general public's attitude is "a plague on all your houses." Of course, the snafus always seem to get resolved, but you just wonder how worthwhile all the drama is.

In this week's letter, though, we are going to talk about a different type of energy and a story that I find enormously positive. Three items have come across my screen in the past month that, taken together, truly do signal a major turning point in how energy is discovered, transported, and transformed. And while we'll start with a story that most of us are somewhat aware of, there is an even larger transformation happening that I think argues against the negative research that has come out in the last few years about the reduced potential for growth in the world economy.

Taleb’s fragile world

How fragile we are. Five years on from the Lehman Brothers collapse, political and regulatory errors have made the world’s financial system even more fragile.

This alarming line of thought comes from Nassim Nicholas Taleb, best known for The Black Swan, which explained markets’ difficulties in pricing extreme events for which they had no precedent.

Mr Taleb, who spoke to me in London last week, divides opinion. For some he is a genius, for others a charlatan. What seems clear, however, is that his gloriously charismatic act and polymath choice of imagery, drawn from philosophy, mathematics and the Classics, can get in the way of underlying ideas which are not in fact far-fetched. Indeed they contain a hard kernel of commonsense truth.

Here, then, is an attempt to render Mr Taleb’s poetic arguments in prose. Those wishing to see the man in action can watch the videos on FT.com.

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Links to videos:

Taleb’s fragile world, Part One

Taleb’s fragile world, Part Two

America’s default on its debt is inevitable - By James Grant

“There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”

How wrong he is.

The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.

Things were very different when America owed the kind of dollars that couldn’t just be whistled into existence.

Nassim Taleb and company optionality…

Via ValueWalk:

[For a third rule] I’d say, look for companies that have optionality….Optionality means to have more upside than downside because the company has options. An “option” in this sense acts like a financial option, and a financial option is an instrument of antifragility because you pay a premium and you have all this upside and very little downside.

The companies make more from the upside of something than from the downside. Make sure the optionality is not priced by the market. And of course, go away from companies that have negative optionality.

An optionality that is priced in the market is, for example, buying energy companies and gold companies before a rally in gold. Instead ofinvesting in gold, people invested in companies that made a lot more than gold. But after a while, this got priced in. In other words, if you’re wrong on gold, you do a lot better than those who invested in gold outright. If you’re right on gold, you do a lot better than those who invested in gold.

You have to avoid the lottery-ticket effect of investing in companies that are overpriced because people are looking at the big upside.

America’s Greatest Inventor – By Bill Gates

I love learning about history, especially the history of innovation. I recently got to write the foreword for Edison and the Rise of Innovation, a new book about one of the great inventors ever. I thought I would share the foreword with you, along with a few photos of some of the Edison-related items I’m lucky enough to own.

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Related book: Edison and the Rise of Innovation

The Story Of Thomas Alva Edison

Link

Jim Chanos on CNBC

Links to videos:

Chanos: HP probably a secular short

Chanos: Cloud long, coy on cloud short

Meredith Whitney's hedge fund adventure

James Chanos: Bad news for global coal

Claire Barnes' Q3 letter: Overcomplexity to dysfunctionality

The Apollo Asia Fund's NAV fell 0.8% in the third quarter, to US$1,896.80. Over the last twelve months it was up 9.3%.

Despite a 5% retreat in NAV from the peak in May, the estimated current-year PE of the fund at the end of September was 15.6, still relatively high by the fund's own historical standards. Moreover, some of the high-quality, cash-generative consumer stocks which have stood us in good stead in the past are now priced for ongoing high growth which we doubt they will be able to deliver, and many of the stocks less highly rated are discounted for good reason. Stock selection currently seems quite challenging.

Moreover, a growing proportion of our attention goes to monitoring (and trimming) our existing holdings, many of which seem to be finding their own businesses equally challenging.

Our report in July 2011 discussed bureaucracy and overcomplexity, highlighting this graphic illustrating an issue which appears more and more relevant. The complexity of simple tasks and services seems to be growing apace. More and more detailed regulation is crowding out useful activity. More and more professional people seem to be swamped - and to have less and less time remaining to focus on the most important aspects of their jobs. More and more systems seem to be tipping from overcomplexity to dysfunctionality. Fascinating examples have arisen in recent weeks.¹ ²

There must be beneficiaries of this somewhere. Individual lawyers, regulators, and fixers are hard to invest in. Some IT companies, conference organisers, printing companies and hotels may benefit - but these are not particularly promising sectors for a fund such as ours.

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The companies we like are those which have continued ability to grow and a clear plan of action which we believe they will be able to implement steadily, adjusting to inevitable gusts, but able to maintain a steady course even in changing circumstances. Any well-run company of this type is one that we would like to have on the radar screen, as analysis often takes us months; we can then be in a position to buy when valuations are fair or better. We have a number of these, and have added one new one recently. We have many more candidates on the watchlist or yet to research, but are always happy to hear of more.

Pricing and Market Share...

From the latest Expeditors 8-K, but something which I think applies to many other industries as well:

This is a market where you need to be very careful not to “take” market share at rates that are unsustainable. The funny thing about focusing on one dimensional goals, like market share gains, is that you will get two dimensional results, one of which you've decided doesn't warrant any prospective consideration (i.e. market share gains without regard to sustainable profitability). Ours is a business where you need to have two dimensional success. As we've noted before, in a service business like logistics, gaining market share isn't nearly as important as gaining profitable market share. To us, this is the difference between “taking market share” and having market share “take you.” We'd prefer not to be “taken.” We think our shareholders would agree. Giving the shareholders' money to potential customers to induce them to move freight through our Expeditors network seems somewhat counter-productive…let alone a breach of our fiduciary responsibility and moral obligation to make money for those same shareholders.

Kyle Bass on CNBC

Link to videos:

Kyle Bass: JCP poorly handled

Bass: Puerto Rican debt complete junk

Bass: Can't hedge from default

Niall Ferguson: Krugtron the Invincible, Part 1

This also reminded me of something Charlie Munger said at the Daily Journal Annual Meeting this year when asked about QE and government involvement in the economy: 

“Well, you just asked one of the most complicated and interesting questions and one of the most important questions in the whole world. Of course, nobody knows the answer -- just when too much is too much. We know you can't just start printing money to run the whole economy and stopping taxation. At some point on that road, you get a backlash, which causes anguish you don't want to get to. But how far you can go in having these Keynesian benefits and get by with it without risking that backlash, nobody knows for sure.If you're like me, I believe in giving big trouble a wide berth, so I would try and stop a little short on this. Solving my problems by printing money.

Somebody like Paul Krugman, who's overdosed on mathematics, and uses the king's English better than practically anybody alive, so he's very dangerous. He just thinks there's no limit to the amount of -- he wouldn't say that, but he thinks the limit is so faraway you don't need to worry about it at all. That is not my view. But nobody knows the answer to that.”

It's an ill wind that blows no one any good. The financial crisis that came to a head five years ago with the failure of Lehman Brothers has been especially beneficial to the economist Paul Krugman. In his widely read New York Times column and blog, Krugman regularly boasts that he has been "right" about the crisis and its consequences. "I (and those of like mind)," he wrote in June last year, "have been right about everything." Those who dare to disagree with him -- myself included -- he denounces as members of the "Always-Wrong Club." Readers of his blog have just been treated to another such sneer.

"Maybe I actually am right," Krugman wrote back in April, "and maybe the other side actually does contain a remarkable number of knaves and fools. ... Look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I'm Krugtron the Invincible!" That last allusion is to the 1980s science fiction superhero, Voltron. The resemblance between Krugman and Voltron was suggested by one of the gaggle of bloggers who are to Krugman what Egyptian plovers are to crocodiles. Yesterday one of these thought, wrongly, that he had caught me out. Unwisely, the crocodile snapped its jaws shut.

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Let us leave -- for the moment -- the question of the future size of the federal debt, which I have dealt with elsewhere and shall return to in a subsequent article. My purpose here is simply to challenge Krugman's right to behave in this way. Even if he were nearly always right, there would be no justification for his lack of civility. But he is not nearly always right. There is therefore no justification for his unshakeable certainty either.

Krugman reserves a special contempt for people who, in his words, "take a position and refuse to alter that position no matter how strongly the evidence refutes it, who continue to insist that they have The Truth despite being wrong again and again." He calls this "derping." The awkward thing for Krugman is that "being wrong again and again" perfectly characterizes his own commentary on what proved to be one of the crucial issues of the financial crisis: whether or not Europe's monetary union would survive it.