Friday, May 30, 2014

Tim Harford: An astonishing record – of complete failure

Link to article: An astonishing record – of complete failure 
‘In 2008, the consensus from forecasters was that not a single economy would fall into recession in 2009’

In the 2001 issue of the International Journal of Forecasting, an economist from the International Monetary Fund, Prakash Loungani, published a survey of the accuracy of economic forecasts throughout the 1990s. He reached two conclusions. The first was that forecasts are all much the same. There was little to choose between those produced by the IMF and the World Bank, and those from private sector forecasters. The second conclusion was that the predictive record of economists was terrible. Loungani wrote: “The record of failure to predict recessions is virtually unblemished.”

Now Loungani, with a colleague, Hites Ahir, has returned to the topic in the wake of the economic crisis. The record of failure remains impressive. There were 77 countries under consideration, and 49 of them were in recession in 2009. Economists – as reflected in the averages published in a report called Consensus Forecasts – had not called a single one of these recessions by April 2008.

This is extraordinary. Bear in mind that this is not the famous complaint from the Queen that nobody saw the financial crisis coming. The crisis was firmly established when these forecasts were made. The Financial Times had been writing exhaustively about the “credit crunch” since the previous summer. Northern Rock had been nationalised in the UK and Bear Stearns had collapsed in the US. It did not take a genius to see that trouble was on the way for the wider economy.

More astonishing still, when Loungani extends the deadline for forecasting a recession to September 2008, the consensus remained that not a single economy would fall into recession in 2009. Making up for lost time and satisfying the premise of an old joke, by September of 2009, the year in which the recessions actually occurred, the consensus predicted 54 out of 49 of them – that is, five more than there were.
The obvious conclusion is that forecasts should not be taken seriously. There is not a lot of point asking an economist to tell you what will happen to the economy next year – nobody knows. It is still a source of constant wonder to me that the demand for forecasts – in economics and elsewhere – remains undiminished.

John Maynard Keynes famously looked forward to a day when “economists could manage to get themselves thought of as humble, competent people, on a level with dentists”.

It’s a nice piece of self-deprecation, but it’s also an analogy worth exploring. We don’t expect a dentist to be able to forecast the pattern of tooth decay. We expect that she will offer good practical advice on dental health and intervene to fix problems when they occur. We should demand much the same from economists: proven advice about how to keep the economy working well and solutions when the economy malfunctions. And economists should bear in mind that no self-respecting dentist would be caught dead forecasting when your teeth will fall out.

Nassim Taleb quote

The quote below is from The Black Swan, and I rediscovered the quote in THIS great post from Jana Vembunarayanan where he discussed what he learned from the Big History Project:

"I am sometimes taken aback by how people can have a miserable day or get angry because they feel cheated by a bad meal, cold coffee, a social rebuff or a rude reception. We are quick to forget that just being alive is an extraordinary piece of good luck, a remote event, a chance of occurrence of monstrous proportions. Imagine a speck of dust next to a planet a billion times the size of earth. The speck of dust represents the odds in favor of your being born; the huge planet would be the odds against it. So stop sweating the small stuff. Don’t be like the ingrate who got a castle as a present and worried about the mildew in the bathroom. Stop looking at the gift horse in the mouth – remember you are a Black Swan." -Nassim Taleb

Need a Book for the Beach? Here’s J.P. Morgan’s Summer Reading List

Link to article: Need a Book for the Beach? Here’s J.P. Morgan’s Summer Reading List
Over the years, Jamie Dimon, J.P. Morgan’s chief executive and chairman, and Mary Erdoes, CEO of J.P. Morgan Asset Management, have contributed their own picks, Mr. Oduyoye said.

Here’s this year’s list:

Art & Place: Site-Specific Art of the Americas, by Editors of Phaidon
Thrive: The Third Metric to Redefining Success and Creating a Life of Well-Being, Wisdom, and Wonder, by Arianna Huffington
Talk Like TED: The 9 Public-Speaking Secrets of the World’s Top Minds, by Carmine Gallo
The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy, by Bruce Katz and Jennifer Bradley.
The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, by Erik Brynjolfsson and Andrew McAfee
Things a Little Bird Told Me: Confessions of the Creative Mind, by Biz Stone
The Future of the Mind: The Scientific Quest to Understand, Enhance, and Empower the Mind, by Michio Kaku
Olives, Lemons & Za’atar: The Best Middle Eastern Home Cooking, by Rawia Bishara
An Astronaut’s Guide to Life on Earth: What Going to Space Taught Me About Ingenuity, Determination, and Being Prepared for Anything, by Col. Chris Hadfield
The Billionaire and the Mechanic: How Larry Ellison and a Car Mechanic Teamed Up to Win Sailing’s Greatest Race, the America’s Cup, by Julian Guthrie

And for comparison here’s the inaugural list from 2000:

The Pursuit of Wealth: The Incredible Story of Money Throughout the Ages by Robert Sobel
The Essays of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham
Security Analysis (Classic 1934 Edition) by Benjamin Graham and David Dodd
Rich Dad, Poor Dad by Robert Kiyosaki and Sharon Lechter
The Cluetrain Manifesto by Rick Levine, Christopher Locke, Doc Searls and David Weinberger
The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by Clayton Christensen
Faster by James Gleick

The Silicon Boys and Their Valley Dreams, by David Kaplan
The Tipping Point: How Little Things Can Make a Big Difference, by Malcolm Gladwell
Patient Number One, by Rick Murdock

Thursday, May 29, 2014

When Does the Story Break? - by W. Ben Hunt

The most common question I get from Epsilon Theory readers is when. When does the market break? When will the Narrative of Central Bank Omnipotence fail? To quote the immortal words of Devo, how long can this go on? Implicit (and sometimes explicit) in these questions is the belief that this – whatever this is – simply can’t go on much longer, that there is some natural law being violated in today’s markets that in the not-so-distant future will visit some terrible retribution on those who continue to flout it. There has never been a more unloved bull market or a more mistrusted stock market high. 
It’s a lack of love and a lack of trust that I share. I believe that public markets today are essentially hollow, as what passes for volume and liquidity is primarily machines talking to other machines for portfolio “positioning” or ephemeral arbitrage rather than the human expression of a desire to own a fractional ownership share of a real-world company. I believe that today’s public market price levels primarily reflect the greatest monetary policy accommodation in human history rather than the real-world prospects of real-world companies. I believe that the political risks to both capital market structure and international trade (which are the twin engines of global growth, period, end of story) have not been this great since the 1930’s. Simply put, I believe we are being played like fiddles. That does NOT mean, however, that I think anything has to change next week … or next month … or next year … or next decade. The human animal is a social animal in the biological sense, and as such we are cognitively evolved to maintain our beliefs and behaviors far beyond what is “true” in an objective sense. This is, in fact, the core argument of Epsilon Theory, that there is no such thing as Truth with a capital T when it comes to the institutions and the social organizations that we create. There’s nothing more “natural” about our market behaviors than there is around, say, our fashion behaviors … the way we wear our clothes or the way we cut our hair. For 150 years everyone knew that everyone knew that gentlemen wore wigs. This was the dominant common knowledge of its day in the fashion world, absolutely no different in any way, shape or form than the dominant common knowledge of today in the investing world … everyone knows that everyone knows that it’s central bank policy that determines market outcomes. And this market common knowledge could last for 150 years, too. 
I’m not saying that a precipitous change in market beliefs and behaviors is impossible. I’m saying that it’s not inevitable. I’m saying that it’s NOT just a matter of when. I’m saying that understanding the timing of change in market behaviors is very similar to understanding the timing of change in fashion behaviors, because both are social constructions based on the Common Knowledge Game. It’s no accident that the most popular way to relate that game is the story of the Emperor’s New Clothes.

Wednesday, May 28, 2014

MOOCs’ disruption is only beginning - By Clayton M. Christensen and Michelle R. Weise

JOURNALISTS, AS 2013 ended, were busy declaring the death of MOOCs, more formally known as massive open online courses. Silicon Valley startup Udacity, one of the first to offer the free Web-based college classes, had just announced its pivot to vocational training — a sure sign to some that this much-hyped revolution in higher education had failed. The collective sigh of relief from more traditional colleges and universities was audible. 
The news, however, must have also had the companies that had enthusiastically jumped on the MOOC train feeling a bit like Mark Twain. When newspapers confused Twain for his ailing cousin, the writer famously quipped, “The report of my death was an exaggeration.” Undoubtedly pronouncements over MOOCs’ demise are likewise premature. And their potential to disrupt — on price, technology, even pedagogy — in a long-stagnant industry is only just beginning to be seen.

Be Skeptical of Both Piketty And His Skeptics - by Nate Silver

Data never has a virgin birth. It can be tempting to assume that the information contained in a spreadsheet or a database is pure or clean or beyond reproach. But this is almost never the case. All data is collected and compiled by someone — either an individual researcher or a government agency or a scientific laboratory or a news organization or someone or something else. Sometimes, the data collection process is automated or programmatic. But that automation process is initiated by human beings who write code or programs or algorithms; those programs can have bugs, which will be faithfully replicated by the computers.

This is another way of saying that almost all data is subject to human error. It’s important both to reduce the error rate and to develop methods that are more robust to the presence of error.1 And it’s important to keep expectations in check when a controversy like the one surrounding the French economist Thomas Piketty arises.

Piketty’s 696-page book “Capital in the Twenty-First Century” has become an unlikely best-seller in the United States. That’s perhaps because it was published at a time when there is rapidly increasing interest in the subject of economic inequality in the U.S.2 But on Friday, the Financial Times’ Chris Giles published a list of apparent errors and methodological questions in the data underpinning Piketty’s work. Piketty has so far responded to the Financial Times only in general terms. 
My goal here is not to litigate the individual claims made by Giles; see The New York Times’ Neil Irwin or The Economist’s Ryan Avent for more detail on that. Rather, I hope to provide some broad perspective about data collection, publication and analysis.

Related quote from Charlie Munger when asked about Piketty, after stating that he doesn't agree with him (45-46 minute mark, HERE): "I think he's full of air."

Daniel Kahneman's Long Now Talk

Before a packed house, Kahneman began with the distinction between what he calls mental “System 1”---fast thinking, intuition---and “System 2”---slow thinking, careful consideration and calculation. System 1 operates on the illusory principle: What you see is all there is. System 2 studies the larger context. System 1 works fast (hence its value) but it is unaware of its own process. Conclusions come to you without any awareness of how they were arrived at. System 2 processes are self-aware, but they are lazy and would prefer to defer to the quick convenience of System 1.

“Fast thinking,” he said, “is something that happens to you. Slow thinking is something you do.“

Related book (with a Kindle price of just $2.99): Thinking, Fast and Slow

Evan Osnos on Charlie Rose

Tyler Cowen wrote this about Osnos’ new book: “This is one of the best books on contemporary China, maybe the best.”


Q&A with James Rickards

"Everything that was 'too big to fail' in 2008 is bigger and more dangerous today," says New York Times bestselling author James Rickards. Rickards predicts the crash of the global currency market and insolvency of the U.S. dollar in his latest book, The Death of Money: The Coming Collapse of the International Monetary System. "We're waiting for the catalyst that will cause this catastrophe to come tumbling down."

Reason Managing Editor Katherine Mangu-Ward sat down with Rickards to discuss the future of money and a return to the financial stability of the gold standard in an event co-hosted by the Charles Koch Institute.

Link to video


Related books:

The Death of Money: The Coming Collapse of the International Monetary System

Currency Wars: The Making of the Next Global Crisis

[H/T Mish]

Graham and Dodd quote

Just as relevant today as it was in 1940:
“…it is important to note that mass speculation can flourish only in such an atmosphere of illogic and unreality. The self-deception of the mass speculator must, however, have its element of justification. This is usually some generalized statement, sound enough within its proper field, but twisted to fit the speculative mania. In real estate booms, the “reasoning” is usually based upon the inherent permanence and growth of land values. In the new-era bull market, the “rational” basis was the record of long-term improvement shown by diversified common-stock holdings.” –Ben Graham and David Dodd, Security Analysis
Today’s “element of justification” probably relates to what the Fed is doing and is perceived will do if the economy softens, and the majority’s belief in what that means for stock prices.

Tuesday, May 27, 2014

John Hussman's Wine Country Conference 2014 Presentation and Q&A

Link to Video Presentation


Link to Q&A


Profit Margins Don’t Matter: Ignore Them, and Focus on ROEs Instead (LINK)

Michael Lewis reviews Tim Geithner’s book Stress Test (LINK)
Related book: Stress Test: Reflections on Financial Crises
Lessons From Cable Cowboy John Malone (LINK)
Related book: Cable Cowboy: John Malone and the Rise of the Modern Cable Business
10 Life Lessons From a Navy SEAL (LINK)

Lacy Hunt: The Dark Side of Debt (LINK)

London Value Investor Conference Notes 2014 (LINK)

The empire of Alain de Botton (LINK)

Kyle Bass: The Looming Crises in Asia

Link to: Kyle Bass: The Looming Crises in Asia
For the last several years, nobody has been more outspokenly bearish on Japan than Kyle Bass. In a recent talk, Bass reiterated his doubts about Japan’s chances of averting a debt crisis. What’s more, he also said China’s economy will fall below expectations. 
Bass changed one aspect of his outlook on Japan. Instead of predicting a collapse of the Japanese bond market, he focused on a severe weakening of the yen – without predicting when that might happen. His predictions for China were equally distressing. He said that its banks will be saddled with non-performing loans and that its economy is actually contracting. 
“I don’t think the markets are discounting what’s really happening in China,” he said.

Monday, May 26, 2014

Giving Yourself an Investing Makeover - By Jason Zweig

Link to article: Giving Yourself an Investing Makeover
If you set out deliberately and systematically to remake yourself into a great investor, how would you go about it?

That is what the money manager Guy Spier has spent much of the past 17 years trying to figure out. He believes that most investors pay attention to the wrong things and allow their minds to get hijacked by bad ideas.

So Mr. Spier has set about purifying the environment in which he makes investing decisions — changing his work space, altering the information he uses and, above all, continually trying to counteract his own irrationality. What he calls his “journey” is a transformation any individual investor should be able to emulate — perhaps even better, he says.

That journey accelerated in 2008, after Mr. Spier and his friend, fund manager Mohnish Pabrai, donated $650,100 to a charity and won a private lunch with Warren Buffett. After listening to Mr. Buffett, Mr. Spier says, he realized “I’ve got to hit the reset button and make drastic changes.”

Mr. Spier, 48 years old, is worth listening to. A graduate of Oxford University and Harvard Business School, he runs the Aquamarine Fund, a $180 million partnership specializing in cheap “value” stocks. Since its launch in September 1997, the fund has beaten the S&P 500 by an average of 4.9 percentage points annually, net of fees.

In a book to be published in September by Palgrave Macmillan, “The Education of a Value Investor,” Mr. Spier describes his struggle to improve his decision-making hygiene.


Related book, which I'm really looking forward to reading when it comes out in a few months: The Education of a Value Investor

And an additional excerpt from the article:
For 18 months, Mr. Spier listened to nothing in his car but a lecture on human misjudgment by Charles Munger, Mr. Buffett’s vice chairman at Berkshire Hathaway. Of the two dozen mental mistakes cited by Mr. Munger, “I realized I was guilty of all of them,” Mr. Spier says.
I also occasionally listen to Munger's speech, which I downloaded to my computer, and then to my phone by using THIS link.

I'm also in the process of building out a memory palace of the speech as I think it is so important, which I described in THIS post.

Also keep in mind that Munger updated the speech for Poor Charlie's Almanack, so reading the updated version in that book is probably better than only listening to the YouTube version. Poor Charlie's Almanack can be bought HERE.

TED Talk - The new bionics that let us run, climb and dance

A talk that was one of Bill Gates' favorites...

Sornette vs. Taleb Diametrically Opposite Approaches to Risk & Predictability

Link to video

Jared Diamond, "The Third Chimpanzee" | Talks at Google

A new version of The Third Chimpanzee aimed at a younger audience from his original text. It kind of reminds me of what Richard Dawkins did with The Magic of Reality.



Related book: The Third Chimpanzee for Young People: On the Evolution and Future of the Human Animal (or Kindle format)

Hussman Weekly Market Comment: Exit Strategy

Link to: Exit Strategy
The S&P 500 set a marginal new high on Friday, in the context of a broad rollover in momentum thus far this year that we view as likely – though of course not certain – to represent a broad cyclical peak of the sort that we observed in 2000 and 2007, as distinct from spike-peaks like 1987. Valuation measures remain extreme, with the market capitalization of nonfinancial stocks pushing 130% of GDP (relative to a pre-bubble norm of about 55%), the S&P 500 price/revenue ratio at 1.7, versus a pre-bubble norm of 0.8, and the Shiller P/E near 26 – which while lower than the 2000 extreme, exceeds every pre-bubble observation except for a few months approaching the 1929 peak. We presently estimate 10-year nominal total returns for the S&P 500 Index averaging just 2.3% annually, with zero or negative total returns on every horizon shorter than about 7 years.

A side note about valuations and profit margins – my concern about record profit margins here is emphatically not centered on what profit margins may do over the next few quarters or years. The relationship between cyclical movements in earnings and stock prices is simply not very strong. Rather, as I noted in The Coming Retreat in Corporate Earnings, “my present concern is much more secular in nature. It can be expressed very simply: investors are taking current earnings at face value, as if they are representative of long-term flows, at a time when current earnings are more unrepresentative of those flows than at any time in history. The problem is not simply that earnings are likely to retreat deeply over the next few years. Rather, the problem is that investors have embedded the assumption of permanently elevated profit margins into stock prices, leaving the market about 80-100% above levels that would provide investors with historically adequate long-term returns.”

In other words, we should not be concerned about extremely elevated profit margins because earnings are likely to weaken and stock prices might follow over the next couple of years (although that may very well occur). We should be concerned because investors are pricing stocks as a multiple of current earnings. They are implicitly using current earnings as if they are representative and proportional to the entire stream of future earnings going out over the next five decades or more. That’s what it means to use a valuation multiple. It means that you take some fundamental as a sufficient statistic for the stream of cash flows that the security will deliver into the hands of investors for decades to come. If you think you know what wage rates, competitive pressures, interest rates and tax policy will be 10, 20, 30, 40 and 50 years from now, and that the present situation is representative and permanent, good luck with that. Otherwise, investors should recognize that because of the variability of profit margins over the long-term, valuation measures that adjust for variations in profit margins have been dramatically more reliable than unadjusted measures over time (see Margins, Multiples, and the Iron Law of Valuation).

Steven Romick on WealthTrack

Link to video

Friday, May 23, 2014

Charlie Munger on Opportunity Costs

From the 2005-2013 collection of Munger notes:
I just wanted to do the best I could reasonably do with the talent, time and resources I had available. That’s what I was doing then and now. Everything is based on opportunity costs. Academia has done a terrible disservice: they teach in one sentence in first-year economics about opportunity costs, but that’s it. In life, if opportunity A is better than B, and you have only one opportunity, you do A. There’s no one-size-fits-all. If you’re really wise and fortunate, you get to be like Berkshire. We have high opportunity costs. We always have something we like and can buy more of, so that’s what we compare everything to.

All of you are in the game of taking the lot you have right now and improving it based on your opportunity costs. Think of how life is simplified if you approach it this way.

From Munger's Harvard-Westlake talk, which I've posted before:
Berkshire Hathaway is constantly kicking off ideas in about two seconds flat. We know we’ve got opportunity X, which is better than the new opportunity. Why do we want to waste two seconds thinking about the new opportunity? Many of you come from places that don’t do that. You’ve got to have one horse, one rabbit, one something or rather, and that rabbit is going to be thinking about something which would be ruled out immediately by an opportunity cost available generally to the place – but, it’s a different department. You have to be diversified and so on and so on. It’s easy to drift into this idea that opportunities don’t matter, you’ve got so many different ways of doing things that are better. It isn’t better.

The right way to make decisions in practical life is based on your opportunity cost. When you get married, you have to choose the best [spouse] you can find that will have you. The rest of life is the same damn way.

And a related discussion from this year's Berkshire Annual Meeting (more extensive notes HERE, in case you've missed them):
Buffett: Charlie and I view our cost of capital as what can be produced by our second best idea. 

Munger: I've never heard an intelligent cost of capital discussion. Warren's way of having every dollar retained having to produce at least a dollar of market value is the best way to describe our cost of capital. But that's not what people mean when they say it, especially in business schools. But it's simple; our way is right and their's is wrong.

Thursday, May 22, 2014


T. Boone Pickens Best Quotes (LINK) [H/T Daniel]

Review: The Frackers by Gregory Zuckerman (LINK)
Related book: The Frackers
Steven Romick On His Favorite Russian Equities (LINK)

Marcus Aurelius quote


Matter. How tiny your share of it.

Time. How brief and fleeting your allotment of it.

Fate. How small a role you play in it.

Wednesday, May 21, 2014


Eddie Lampert video excerpts from the Sears Holdings Annual Meeting (LINK)

Buffett’s Berkshire Discloses $528.7 Million Verizon Bet (LINK)
The Verizon investment was probably taken by one of his backup stock pickers, Todd Combs or Ted Weschler, based on its size, said Richard Cook, co-founder of Cook & Bynum Capital Management LLC. The deputies each oversee about $7 billion for Berkshire and have gotten more funds from Buffett since being hired in 2010 and 2011.
Expeditors International 8-K, “Responses to Selected Questions”, is always a good read (LINK)

Ryan Holiday: My Creative Secret: Quantity Over Quality — And Commitments (LINK)

The Manual of Ideas video excerpt: Mohnish Pabrai and Guy Spier Talk Investing

Stephen Levitt & Stephen Dubner on Charlie Rose

They come in about 32 minutes into the episode link below.

Link to: Stephen Levitt & Stephen Dubner on Charlie Rose


Related book: Think Like a Freak

Charlie Munger's favorite human misjudgment

Via 2005-2013 collection of Munger notes:
What is your favorite human misjudgment?

My favorite human misjudgment is self-serving bias: how the brain subconsciously will decide that what’s good for the holder of the brain is good for everyone else. If the little me wants it, why shouldn’t the little me have it? People go through life like this. I’ve underestimated this phenomenon all my life. People go bonkers taking care of their own self-interest. It’s a sea of miscognition. People who write the laws, people who treat patients, who experiment with rats, all suffer horribly from this bias.

Hardly anything could be more important to the study of law than the study of psychology, but there’s a taboo against it. You see many people who’ve gotten straight A’s at law school, but they screw up in dealing with self-serving bias.

I would say that the current head of the World Bank [Paul Wolfowitz] had an elementary question: as head of the Bank, a lot of people hate you, so how bright do you have to be to distance yourself from a question of a large raise from your live-in girlfriend? He sent it to the lawyers, they hemmed and hawed, and he lost his moorings. Even a child shouldn’t make his obvious mistake. Similarly, I’d guess President Clinton would have had a better record if he’d had better insight on certain subjects. Note that I carefully picked one from each party. [Laughter]

Andrew Smithers on the McAlvany podcast

Quote from the interview: "We don't do forecasts. We try to explain rather than forecast."

Link to interview: Valuing Wall Street with Andrew Smithers


Related books:

The Road to Recovery: How and Why Economic Policy Must Change

Valuing Wall Street: Protecting Wealth in Turbulent Markets

Monday, May 19, 2014


Hunter S. Thompson on Finding Your Purpose and Living a Meaningful Life (LINK)
A great excerpt from Shane over at Farnam Street from the book Letters of Note.
Thinking & Writing : The CIA’s Guide to Cognitive Science & Intelligence Analysis (LINK)
A great find from Miguel over at Simoleon Sense.
Marc Andreessen on EconTalk (LINK)

The Liquidity Gauge (LINK)
I think this is one of the more interesting macro models to keep in one's mind. One description of this might be the macro-equivalent of 'in the short-run the market is a voting machine, in the long run it is a weighing machine.' While maybe not something the long-term value investor will worry much about, it is the concept behind why Richard Duncan predicted in 2012 that 2013 would be a great year in the stock market (there was going to be record liquidity in the market). While that correct call was possibly more a result of randomness than economic law, as the macro is so hard to  analyze correctly and consistently, it does make sense to me that the inputs that go into his liquidity gauge is a decent summary of short-term votes. Valuation will rule in the long run, but given that the liquidity gauge is going to finally start turning negative in Q3 and especially Q4 of this year, I think it's something to keep an eye on. Duncan believes this liquidity is going make for a rough market in the second half of the year, and also believes that this roughness is going to lead the Fed to reverse course on its tapering. While I don't think one should make investment decisions depending on this, many other great investors' cash build-up along with this idea makes me think having plenty of cash in one's portfolio may be a useful thing to have the rest of the year. (For more on Duncan's work, see THIS previous post)
The Single Greatest Predictor of Future Stock Market Returns (LINK)
I think some interesting data could come from combining the 'average investor portfolio allocation to equities' data in this post with 'the liquidity gauge' mentioned above, and seeing how they trend and compare to each other and the market over time. If anyone has the time and statistical capability to go ahead and do it, please share when you're done!

Hussman Weekly Market Comment: The Journeys of Sisyphus

Link to: The Journeys of Sisyphus
As we discussed several months ago, that hope of succeeding rests on what economist J.K. Galbraith called “the extreme brevity of the financial memory.” Part of that brevity rests on ignoring the forest for the trees, and failing to consider movements further up the mountain in the context of how far the stone typically falls once it gets loose. It bears repeating that the average, run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance, making the April 2010 S&P 500 level in the 1200’s a fairly pedestrian expectation for the index over the completion of the current market cycle. A decline of that extent wouldn’t bring valuations close to historical norms, and certainly not to levels that would historically represent “undervaluation.” But consider that a baseline expectation, and don’t be particularly surprised if the market loses closer to 38% - which is the average cyclical bear market loss during a secular bear market period. A market loss of about 50% would put historically reliable valuation metrics at their historical norms, though short-term rates near zero would seem inconsistent with a move to historically normal valuations with typical (~10% annual) expected total returns, absent other disruptions.

Sunday, May 18, 2014


Nassim Taleb: 193 additional aphorisms and heuristics (LINK)

Chuck Akre on WealthTrack (LINK)

'Biggest dinosaur ever' discovered (LINK)

How do you like your 'toothfish?' (LINK)

Robert Greene interview

Link to interview: TNM 156: Robert Greene – How to Make a Big Life Change
Are you afraid you’ll have to make a radical shift in your life in order to feel fulfilled?

Have you ever felt tempted to walk away from your career so you could pursue a dream?

And is it really too late to make a big change in your life?

Mastery and 48 Laws of Power author Robert Greene is here to discuss how he wandered through dozens of jobs and being seen as a loser at the age of 37 to reading his name on the New York Times Bestseller list.

Related books:

Mastery (Kindle, Paperback)

The 48 Laws of Power (Kindle, Paperback, Audio CD)

Friday, May 16, 2014

Charlie Munger on making mistakes...

Via notes from the 2013 Daily Journal Annual Meeting:
Of course, there's going to be some failure in making the correct decisions. Nobody bats a thousand. I think it's important to review your past stupidities so you are less likely to repeat them, but I'm not gnashing my teeth over it or suffering or enduring it. I regard it as perfectly normal to fail and make bad decisions. I think the tragedy in life is to be so timid that you don't play hard enough so you have some reverses.

Growing up with Warren Buffett

From a couple of weeks ago…

Warren Buffett’s children -- Susie, Howard and Peter -- on growing up in the face of the public and life in the Buffett house.

'Freakonomics' Author Steven Levitt Explains How Anyone Can 'Think Like A Freak'

A discussion about Levitt and Dubner’s latest book, Think Like a Freak

BUSINESS INSIDER: What does it mean to "think like a freak?" 
STEVEN LEVITT: It means putting away your moral compass and not worrying about what the answer "should" be, but focusing on what the answer really is. It means thinking hard about causality. It means going beyond the obvious to consider all the possibilities — but still being willing to accept the obvious.

Seth Klarman quote

“…conservatism may cause investors to refrain from making some investments that in hindsight would have been successful, but it will also prevent some sizable losses that would ensue from adopting less conservative business valuations.”

Thursday, May 15, 2014

Disbursing Cash to Shareholders: Frequently Asked Questions about Buybacks and Dividends - by Michael J. Mauboussin and Dan Callahan

[H/T ValueWalk]

Warren Buffett's Canadian lieutenant eyes Alberta expansion

Link to article: Warren Buffett's Canadian lieutenant eyes Alberta expansion
The low-profile Canadian who serves as one of Warren Buffett’s chief lieutenants is making a big bet on the economic potential of his home province amid speculation that he might one day succeed the famed investor at the helm of Berkshire Hathaway Inc.

Edmonton-born Greg Abel, 51, presides over Berkshire Hathaway Energy, the power and utility arm of the Oracle of Omaha’s sprawling conglomerate. He has earned plaudits for guiding the Iowa-based energy unit on an acquisition binge, including a $3.2-billion deal earlier this month for AltaLink, Alberta’s largest electrical transmission company.

More acquisitions may be in the works, he hinted in an interview, given Alberta’s rapid population growth and frenetic pace of economic expansion.

“We were excited when AltaLink came up because we just see, truly, a great place to invest and we want to be part of the significant investment that’s going on in that province,” Mr. Abel said, adding he had been looking for an opportunity to invest in Canadian energy infrastructure.

[H/T Linc]

DAVID TEPPER: 'I Am Nervous. I Think It's Nervous Time.'

Link to article: DAVID TEPPER: 'I Am Nervous. I Think It's Nervous Time.'
Scaramucci's discussion with Tepper touched upon a variety of topics. He asked him about the stock market. Tepper doesn't sound bullish anymore.

"I think we're OK. But, listen, there's times to make money and there's times not to lose money. This is probably you're supposed to think about preserving some of your money...I think you can still be long, but I think you're supposed to have some cash now."

"It's funny people think we're always bullish."

He said he's positioned low enough in exposure where he can bring it back up or down.

"I am nervous. I think it's nervous time."

He said the market is probably OK. "But it's getting dangerous."

Scaramucci asked for any opportunities that are glaring.


"I'm not saying go short. Just don't go too friggin long."

[H/T Will]

Wednesday, May 14, 2014

Marcus Aurelius quote

“Keep in mind how fast things pass by and are gone—those that are now, and those to come. Existence flows past us like a river: the “what” is in constant flux, the “why” has a thousand variations. Nothing is stable, not even what’s right here. The infinity of past and future gapes before us—a chasm whose depths we cannot see.

So it would take an idiot to feel self-importance or distress. Or any indignation, either. As if the things that irritate us lasted.” –Marcus Aurelius, Meditations

Recent Charlie Rose interviews of note...

Interviews with:

E.O. Wilson (Discussing his book A Window on Eternity: A Biologist’s Walk Through Gorongosa National Park)

Louis C.K. (A lot of this interview was about what it takes to become a great comedian, and a lot of those lessons translate into becoming great at just about anything.)

Timothy Geithner (Discussing his book Stress Test: Reflection on Financial Crises)

Tuesday, May 13, 2014

Edge Conversation with Rory Sutherland: This Thing For Which We Have No Name

Link to video and conversation text: This Thing For Which We Have No Name
"No one ever got fired for buying IBM" is a wonderful example of understanding loss aversion or "defensive decision making". The advertising and marketing industry kind of acted as if it knew this stuff—but where we were disgracefully bad is that no one really attempted to sit down and codify it. When I discovered Nudge by Richard Thaler and Cass Sunstein, and the whole other corpus on Behavioral Economics…. when I started discovering there was a whole field of literature about "this thing for which we have no name" …. these powerful forces which no one properly understood—that was incredibly exciting. And the effect of these changes can be an order of magnitude. This is the important thing. Really small interventions can have huge effects. ... 
...Markets actually work because they're adaptive. Bad things get killed, good new things sometimes get promoted. But most of the time what you'll find in business is no one has the faintest idea of why the things that work actually work. What's very useful here is that finally a group of academics with money, time, and immensely high intelligence were finally sitting down to codify and make sense of things, which we'd been aware of for years but which, to our shame, we'd never attempted to actually try and systematize.

There are some great books mentioned in the interview, such as Thinking, Fast and Slow (only $2.99 on Kindle) and Timothy Wilson's book, Strangers to Ourselves, which Nassim Taleb reviewed on Amazon in 2003, in which he wrote:
The book that carried the most influence on my thinking this year (I went back to it half a dozen times). 
This is a clearly written presentation of our inability to forecast our own behavior and to predict our emotional reactions to positive and negative events. One would think that the repetition of experiences with consistent forecasting biases would lead to some correction but this is not the case. 
We are more resilient than we think ("immune neglect"). The book also discusses the reversion to baseline happiness after what we thought would bring a permanent improvement in our moods (yet we never learn from it). 
The most important part covers the "hindsight bias" how we see past misfortunes as deterministic --and how we can confront negative emotions by making them even more so (by creating a narrative that make the events appear unavoidable).

Monday, May 12, 2014

Broyhill Asset Management's thesis on Kennedy Wilson Holdings

What Timothy Geithner Really Thinks

Geithner’s book, Stress Test: Reflections on Financial Crises, which Warren Buffett recommended, is available today. And for entertainment, read the 3 (as of this posting) Amazon reviews by people who obviously have not read the book.

To clarify his perspective on all of that “messiness and unpleasantness and awkwardness,” Geithner has spent the past year writing a book — “Stress Test: Reflections on Financial Crises” — that will be published on May 12. It is filled with revealing and sometimes gripping behind-the-scenes anecdotes. Geithner acknowledges for the first time, for instance, that he was initially at odds with Paulson and Bernanke over whether to bail out Lehman Brothers in advance of the famous weekend meeting in which they sought to find a solution before the firm collapsed. (“I sensed their advisers pulling them toward political expedience,” he writes, “trying to distance them from the unpalatable moves we had made and the even less palatable moves I thought we’d have to make soon.”)

Geithner also discloses that some members of the administration talked openly about nationalizing some banks like Citigroup. (“If you want to go in, you better be sure there are W.M.D.'s,” Lee Sachs, an assistant secretary of the Treasury, said during a meeting with Obama in the Roosevelt Room.) And Geithner discloses that he refused to fire Ken Lewis, the chief executive of Bank of America, who was near retirement. (“Tim, I’m trying to look out for you,” Geithner reports Gene Sperling, a counselor to him at the time, saying that he didn’t owe Lewis any favors. “If he’s going anyway, why don’t you push him out?”) He even concedes that he and Summers were initially opposed to the Volcker Rule, the widely popular regulation barring commercial banks from proprietary trading. His support, he writes, was “certainly political.”

But “Stress Test” is also surprisingly personal. Geithner confides that he actually didn’t want the Treasury job in the first place and that he tried on multiple occasions to resign, but Obama wouldn’t “liberate” him. He is also forthcoming — albeit in the somewhat unemotional language of the technocrat — about his own regrets. (“Before the crisis, I didn’t push for the Fed in Washington to strengthen the safeguards for banks, nor did I push for legislation in Congress to extend the safeguards to nonbanks,” he writes. “I wish we had expanded our housing programs earlier, to relieve more pain for homeowners.”)

Geithner likes to say that all the criticism and the second-guessing and the vitriol directed his way never got to him. “I try to pay no attention to that,” he told me over lunch one afternoon in New York. Almost indignantly, he added, “Our job was to fix it, not to make people like us.” Later, though, he softened and qualified the statement. “I’m human, and I like to be liked,” he said, “even if I didn’t expect to be liked in this.”

Hussman Weekly Market Comment: Setting the Record Straight

With advisory sentiment running at 56% bulls and fewer than 20% bears, with most historically reliable valuation metrics about twice their pre-bubble norms (and presently associated with negative expected S&P 500 nominal total returns on every horizon of 7 years and less), with capitalization-weighted indices near record highs but smaller stocks and speculative momentum stocks diverging badly, and with a Federal Reserve clearly intent on winding down the policy of quantitative easing that has brought these distortions about, we continue to view the present market environment as among the most dangerous instances in history.

Chris Davis on WealthTrack


Cosmos: A Spacetime Odyssey: The Electric Boy (Episode 10)


It seems like a good companion to this episode might be the book Charlie Munger recently thought was brilliant: Faraday, Maxwell, and the Electromagnetic Field (or in Kindle format)

Saturday, May 10, 2014

Stoicism quotes, thoughts, and readings

Here are the thoughts and quotes I’ve collected that relate to Stoicism that I review on a regular basis, for those that might be interested. And then at the bottom of this post are some reading recommendations for those looking to learn more.

Stoicism quotes and thoughts:

“He is a wise man who does not grieve for the things which he has not, but rejoices for those which he has.” –Epictetus

“Never have I put my trust in Fortune, even when she appeared to be offering peace; all those gifts she bestowed on me in her kindness—money, position, influence—I stored where she would be able to reclaim them with no disturbance to me.” –Seneca

“…the wise man is neither raised up by prosperity nor cast down by adversity; for always he has striven to rely predominantly on himself, and to derive all joy from himself.” –Seneca

"People look for retreats for themselves, in the country, by the coast, or in the hills; and you too are especially inclined to feel this desire. But this is altogether unphilosophical, when it is possible for you to retreat into yourself at any time you want. There is nowhere that a person can find a more peaceful and trouble-free retreat than in his own mind, especially if he has within himself the kind of thoughts that let him dip into them and so at once gain complete ease of mind; and by ease of mind, I mean nothing but having one’s own mind in good order. So constantly give yourself this retreat and renew yourself. You should have to hand concise and fundamental principles, which will be enough, as soon as you encounter them, to cleanse you from all distress and send you back without resentment at the activities to which you return." —Marcus Aurelius

"Practice, then, from the very beginning to say to every rough impression, ‘You’re an impression and not at all what you appear to be.’ Then examine it and test it by the standards that you have, and first and foremost by this one, whether the impression relates to those things which are within our power or those which aren’t up to us; and if it relates to those things which aren’t within our power, be ready to reply, ‘That’s nothing to me’." —Epictetus

William Irvine: “The Stoics were not opposed to emotion in general but to negative emotions such as fear, anger, and grief -- what sensible person wouldn't be? They saw nothing at all wrong, though, with the experience of positive emotions. Indeed, they strove to put themselves into a state of mind in which they could take delight in the world around them.”

Charlie Munger: 1) Never feel sorry for yourself (even if your child is dying of cancer); 2) Never have envy.

Nassim Taleb on Stoics and Stoicism:

“Having control over randomness can be expressed in the manner in which one acts in the small and the large. Recall that epic heroes were judged by their actions, not by the results. No matter how sophisticated our choices, how good we are at dominating the odds, randomness will have the last word…..There is nothing wrong and undignified with emotions—we are cut to have them. What is wrong is not following the heroic or, at least, the dignified path. That is what stoicism truly means. It is the attempt by man to get even with probability…..stoicism has rather little to do with the stiff-upper-lip notion that we believe it means…..The stoic is a person who combines the qualities of wisdom, upright dealing, and courage. The stoic will thus be immune from life’s gyrations as he will be superior to the wounds from some of life’s dirty tricks. But things can be carried to the extreme; the stern Cato found it beneath him to have human feelings. A more human version can be read in Seneca’s Letters from a Stoic, a soothing and surprisingly readable book that I distribute to my trader friends.....Good, enlightened (and “friendly”) advice and eloquent sermons do not register for more than a few moments when they go against our wiring. The interesting thing about stoicism is that it plays on dignity and personal aesthetics, which are part of our genes. Start stressing personal elegance at your next misfortune. Exhibit sapere vivere (“know how to live”) in all circumstances…..The only article Lady Fortuna has no control over is your behavior.”

“Seen this way, Stoicism is about the domestication, not necessarily the elimination, of emotions. It is not about turning humans into vegetables. My idea of the modern Stoic sage is someone who transforms fear into prudence, pain into information, mistakes into initiation, and desire into undertaking.

“Seneca also provides us a catalogue of social deeds: invest in good actions. Things can be taken away from us—not good deeds and acts of virtue.”

“So far, that story is well known, and we have learned to move from the left of the Triad (fragile) to the center (robust). But Seneca went beyond…. He said that wealth is the slave of the wise man and master of the fool. Thus he broke a bit with the purported Stoic habit: he kept the upside…. In my opinion, if previous Stoics claimed to prefer poverty to wealth, we need to be suspicious of their attitude, as it may be just all talk. Since most were poor, they might have fit a narrative to the circumstances (we will see with the story of Thales of Miletus the notion of sour grapes—cognitive games to make yourself believe that the grapes that you can’t reach taste sour). Seneca was all deeds, and we cannot ignore the fact that he kept the wealth. It is central that he showed his preference of wealth without harm from wealth to poverty…. Seneca even outlined his strategy in De beneficiis, explicitly calling it a cost-benefit analysis by using the word “bookkeeping”: “The bookkeeping of benefits is simple: it is all expenditure; if any one returns it, that is clear gain; if he does not return it, it is not lost, I gave it for the sake of giving.” Moral bookkeeping, but bookkeeping nevertheless…. So he played a trick on fate: kept the good and ditched the bad; cut the downside and kept the upside. Self-servingly, that is, by eliminating the harm from fate and un-philosophically keeping the upside. This cost-benefit analysis is not quite Stoicism in the way people understand the meaning of Stoicism (people who study Stoicism seem to want Seneca and other Stoics to think like those who study Stoicism). There is an upside-downside asymmetry. That’s antifragility in its purest form.” [note to last sentence: “And for those who believe that Zeno, the founder of Stoicism, was completely against material wealth, I have some news: I accidentally found a mention of his activities in maritime financing, where he was an involved investor, not exactly an activity for the anti-wealth utopist.”]

Only focus on what you can control. You cannot control what others say or how they act. You can only control how you react.

Negative visualization. Imagine losing the comforts of your life and the people and things you love and enjoy. And remember that one day you will lose them; either through misfortune or death.

From dust to dust. We came from the dust of stars and will return to dust one day. Remember that you will eventually die, and that it could happen at any time. Do not dwell on this fact, but reflect on this reality as a way to help you live.


Some people may prefer to go straight to the classics below, which I can’t argue with, but for those that want a good initial overview, I recommend William Irvine’s A Guide to the Good Life: The Ancient Art of Stoic Joy. Ryan Holiday’s book, The Obstacle Is the Way: The Timeless Art of Turning Trials into Triumph, is a bit of a more popularized intro. There is a also an online course from Wondrium called Think like a Stoic: Ancient Wisdom for Today's World

Of the classics, I’d start with these 3 as an intro the main Stoic figures:

Epictetus: Discourses and Selected Writings (including the Enchiridion, which is the place to start before getting into the rest of the Discourses)

Marcus Aurelius: Meditations 

While Seneca, Epictetus, and Marcus are generally considered “The Big 3”, Musonius Rufus may be the Big 4th, so it may be good to go to him next:

Musonius Rufus: Lectures and Sayings 

Another worthwhile addition is The Moral Sayings Of Publius Syrus: A Roman Slave.

And then if you want to get a little deeper with Seneca and Epictetus:

There are also some great audiobook narrations of Seneca's key works:
The Moral Epistles: 124 Letters to Lucilius
On the Shortness of Life, On the Happy Life, and Other Essays: Essays, Volume 1 
On Anger, on Leisure, on Clemency: Essays, Volume 2 
And audiobooks for Epictetus' Enchiridion & Discourses as well as Marcus Aurelius' Meditations.

Henry Hazlitt also put together a nice collection from the Big 3: The Wisdom of the Stoics: Selections from Seneca, Epictetus, and Marcus Aurelius

Tim Ferriss also posted one of Seneca's great essays: On The Shortness of Life. And Ferriss compiled a great 3-volume set on Seneca's letters and some modern Stoics called The Tao of Seneca: Volume 1, Volume 2, Volume 3

There is also a lot of Stoic wisdom in Schopenhauer and Frankl:

Arthur Schopenhauer: Essays and Aphorisms 

Viktor Frankl: Man's Search for Meaning 

Jim Stockdale is another more recent Stoic: Thoughts of a Philosophical Fighter Pilot 

On the fiction side of things, Tom Wolfe’s A Man in Full is one to check out. As is Zorba the Greek

And Nassim Taleb discusses Stoicism in parts of his books (some of which is quoted in the upper part of this post):


And finally, Rudyard Kipling’s poem If, which has a Stoic tone to it.

If—By Rudyard Kipling

If you can keep your head when all about you  
    Are losing theirs and blaming it on you,  
If you can trust yourself when all men doubt you,
    But make allowance for their doubting too;  
If you can wait and not be tired by waiting,
    Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
    And yet don’t look too good, nor talk too wise:

If you can dream—and not make dreams your master;  
    If you can think—and not make thoughts your aim;  
If you can meet with Triumph and Disaster
    And treat those two impostors just the same;  
If you can bear to hear the truth you’ve spoken
    Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
    And stoop and build ’em up with worn-out tools:

If you can make one heap of all your winnings
    And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
    And never breathe a word about your loss;
If you can force your heart and nerve and sinew
    To serve your turn long after they are gone,  
And so hold on when there is nothing in you
    Except the Will which says to them: ‘Hold on!’

If you can talk with crowds and keep your virtue,  
    Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
    If all men count with you, but none too much;
If you can fill the unforgiving minute
    With sixty seconds’ worth of distance run,  
Yours is the Earth and everything that’s in it,  
    And—which is more—you’ll be a Man, my son!

Friday, May 9, 2014

Eddie Lampert: Turnarounds and Transformations

At Sears Holdings’ annual stockholders meeting this week, we talked a lot about the difference between turnarounds and transformations. I want to share some of those thoughts here. 
Turnarounds happen when a company succeeds again at doing what it had once done successfully before. Transformations are almost entirely different – they occur when companies adapt their business model to fundamental shifts in technology, competitive landscapes, government policies and regulations, or macro trends to serve their customers (or, in our case, members) in new ways. Over the last decade, incidentally, Sears and Kmart have faced all of the challenges I just listed. 
As you might expect, we talked a lot about Sears and Kmart at our annual meeting. But we also took a close look at the transformations of three other companies: Apple Inc. (formerly Apple Computer), General Dynamics Corporation, and Eastman Kodak Company. I want to be clear that I am in no way saying that Sears Holdings is just like any of these companies, but there are lessons to be learned from them, two that were successful and one that was unsuccessful in their transformations.

Warren Buffett on growth and value...

From his 1992 Letter to Berkshire Shareholders (or available on the Kindle in the best value investment there is, HERE):
Our equity-investing strategy remains little changed from what it was fifteen years ago, when we said in the 1977 annual report:  "We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety.  We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price."  We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute "an attractive price" for "a very attractive price." 
But how, you will ask, does one decide what's "attractive"?  In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition:  "value" and "growth."  Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. 
We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago).  In our opinion, the two approaches are joined at the hip:  Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. 
In addition, we think the very term "value investing" is redundant.  What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid?  Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening). 
Whether appropriate or not, the term "value investing" is widely used.  Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield.  Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments.  Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase. 
Similarly, business growth, per se, tells us little about value.  It's true that growth often has a positive impact on value, sometimes one of spectacular proportions.  But such an effect is far from certain.  For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth.  For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners. 
Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value.  In the case of a low-return business requiring incremental funds, growth hurts the investor.