Tuesday, March 31, 2015


Buffett: Tesla doesn't threaten me (videos and article) (LINK)

Evan Osnos on Xi Jinping (LINK)

James Surowiecki: The Puerto Rican Problem (LINK)

Toby Carlisle talks to the WMTW podcast (LINK)
Related book: Deep Value
Steve Keen: The Principal And Interest On Debt Myth (LINK)

Amazon starts selling repair, cleaning and assembly services online (LINK)

R.I.P. California (1850-2016): What We’ll Lose And Learn From The World’s First Major Water Collapse [H/T Matt] (LINK)

Tim Ferriss talks to Amanda Palmer (LINK)
Related book: The Art of Asking: How I Learned to Stop Worrying and Let People Help
Book of the day [H/T @AlexRubalcava]: The Making of the Atomic Bomb

"One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations."

From Sapiens: A Brief History of Humankind:
One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations. Once people get used to a certain luxury, they take it for granted. Then they begin to count on it. Finally they reach a point where they can’t live without it. Let’s take another familiar example from our own time. Over the last few decades, we have invented countless time-saving devices that are supposed to make life more relaxed – washing machines, vacuum cleaners, dishwashers, telephones, mobile phones, computers, email. Previously it took a lot of work to write a letter, address and stamp an envelope, and take it to the mailbox. It took days or weeks, maybe even months, to get a reply. Nowadays I can dash off an email, send it halfway around the globe, and (if my addressee is online) receive a reply a minute later. I’ve saved all that trouble and time, but do I live a more relaxed life? 
Sadly not. Back in the snail-mail era, people usually only wrote letters when they had something important to relate. Rather than writing the first thing that came into their heads, they considered carefully what they wanted to say and how to phrase it. They expected to receive a similarly considered answer. Most people wrote and received no more than a handful of letters a month and seldom felt compelled to reply immediately. Today I receive dozens of emails each day, all from people who expect a prompt reply. We thought we were saving time; instead we revved up the treadmill of life to ten times its former speed and made our days more anxious and agitated. 

Monday, March 30, 2015


My friend Lukas' book has officially been released: Value Investing: A Value Investor's Journey Through The Unknown...

Sanjay Bakshi and Vishal Khandelwal's email exchange about why the rules for buying vs. holding a stock are not the same (LINK)

Kyle Bass sits on a panel at The Buttonwood Gathering (video) [H/T Zero Hedge] (LINK)

Barry Ritholtz talks to Charley Ellis, Chair of the Yale Endowment, and author of Winning the Loser’s Game: Timeless Strategies for Successful Investing (LINK)

Steve Keen: The Fed Has Not Learnt From The Crisis (LINK)

Steve Keen on the PeakProsperity podcast (LINK)

Ben Bernanke is now blogging (LINK)

Hussman Weekly Market Comment: Eating Our Seed Corn: The causes of U.S. economic stagnation, and the way forward (LINK)
For practical purposes, the above identity reduces – from the standpoint of overall variability – to a straightforward statement: Unusually elevated corporate profits (a surplus) are largely a mirror image of unusually large deficits in the household and government sectors. Most of the variability in corporate profits over the business cycle is the mirror image of variability in the sum of household savings and government savings. If you examine the actual U.S. data, this is exactly what we observe. Because government and household savings (shown on an inverted scale below) have actually recovered in recent years from the depths of the financial crisis, we’re beginning to see a flattening of growth in U.S. profits. That flattening is likely to turn into outright contraction during the next couple of years.
Mark Buchanan: Common core and common rancor (LINK)
Learning how to distinguish between fact and opinion would seem to be a pretty fundamental piece of any education. In the bizarre world of U.S. public schools, though, it's proving to be controversial. For several years, schools across the U.S. -- with significant help from the Bill and Melinda Gates Foundation -- have been putting in place something called the Common Core, a set of standards on what students from kindergarten through 12th grade should learn on topics including English, mathematics, science and history. Along the way, they’ve faced ample criticism, some of it reasonable. Teachers, in particular, think they haven't had adequate preparation.
Inside Jeremy Lin's life after Linsanity and the New York Knicks [H/T Abnormal Returns] (LINK)

StarTalk Radio: The Future of Humanity with Elon Musk (LINK)

Book of the day [H/T Brad Feld]: The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World's Most Important Company

Howard Marks talks to Google: The Most Important Thing - "Origins and Inspirations"

Link to video


Related book: The Most Important Thing Illuminated

[H/T ValueWalk]

Sunday, March 29, 2015

Shane Parrish's 2015 Daily Journal Meeting Notes

Shane Parrish has finished his extensive notes from the 2015 Daily Journal Meeting. Shane is charging $33 for them. And while there are free notes from the meeting out there, these will be the best by a long shot. 

And it’s also a way to show your appreciation for the work Shane has done, not just on the notes, but also on Farnam Street. It’s always nice when someone leaves me a tip in the TIP JAR showing their appreciation for this blog, or uses the Amazon link on my site to make an Amazon purchase (which doesn’t cost the buyer anything extra), and here’s a way to both learn a little extra from Charlie Munger as well as show Shane appreciation for all of his work. I’ve already ordered my copy.

Friday, March 27, 2015


Michael Lewis on Charlie Rose discussing Flash Boys, one year after publication (video) (LINK)

How to Succeed in Life, the Warren Buffett Way (LINK)

Things You Didn’t Know About Buffett’s Strategy (LINK)

Warren Buffett and 3G May Have One Barrier to Even Bigger Deals (LINK)

The Brooklyn Investor discusses the book, Double Your Profits: In Six Months or Less, that is essentially the playbook used by 3G (LINK)

TiE SoCal fireside chat between Mihir Worah (PIMCO), S. Pulavarti (UCLA Endow.) and Mohnish Pabrai  (video) [H/T ValueWalk] (LINK)

How Chicago has used Financial Engineering to Paper over its Massive Budget Gap (LINK)

Apple's Tim Cook will give away all his money (LINK)

Amazon’s New Unlimited Cloud Storage Is Absurdly Cheap (LINK)

Gary Klein discussing his book, Seeing What Others Don't: The Remarkable Ways We Gain Insights (LINK)

Five Good Questions for Ron Fierstein about his book, A Triumph of Genius (LINK)

Book of the day: The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East

Thursday, March 26, 2015


I'm probably going to wait for some extensive notes--like those from Shane Parrish last year--before reading much on yesterday's Daily Journal Meeting, but if you're interested now, there are some excerpts and articles HERE, HEREHERE, and HERE.

The latest, updated list of Nassim Taleb's Additional Aphorisms, Rules, and Heuristics (LINK) [These are in addition to those in his book The Bed of Procrustes: Philosophical and Practical Aphorisms.]

Author Interview: Larry Cunningham on Berkshire Beyond Buffett (LINK)

Kraft Deal Fueled by Lean Recipe (LINK)
Related book: Double Your Profits: In Six Months or Less
The Brooklyn Investor on Kraft-Heinz (LINK)

How Super Angel Chris Sacca Made Billions, Burned Bridges And Crafted The Best Seed Portfolio Ever (LINK)

This Is How A Ray Dalio Letter Looks (LINK)

Interview with Dr William White, former Head of the Monetary and Economic Department at the BIS (LINK)

MTY Food Group – A Case Study of a 100-Bagger (LINK)

Brain Pickings - Sense of Nonsense: Alan Watts on How We Find Meaning by Surrendering to Meaninglessness (LINK)
Related book: The Tao of Philosophy
Cicero on Living a Stoic Life (LINK)
Related book: On Duties
Wandering Jupiter swept away super-Earths, creating our unusual Solar System [H/T @ProfSteveKeen] (LINK)
Jupiter may have swept through the early Solar System like a wrecking ball, destroying a first generation of inner planets before retreating into its current orbit, according to a new study published March 23rd in Proceedings of the National Academy of Sciences. The findings help explain why our Solar System is so different from the hundreds of other planetary systems that astronomers have discovered in recent years.

Howard Marks Memo: Liquidity

Link to Memo: Liquidity
My wife Nancy's accusations of repetitiveness notwithstanding, once in a while I think of something about which I haven't written much. Liquidity is one of those things. I’m not sure it’s a profound topic, and perhaps my observations won’t be either. But I think it’s worth a memo.

Wednesday, March 25, 2015

Charlie Rose: Remembering Lee Kuan Yew


Related book: From Third World to First: The Singapore Story - 1965-2000

Related link: Lee Kuan Yew obituary

Related video: Munger praises Singapore and Lee Kuan Yew


3G Capital, Berkshire to Buy Kraft, Merge It With Heinz (video) (LINK)

Warren Buffett was also on CNBC discussing the deal, HERE, HERE, HERE, and HERE.

ValueWalk with more excerpts from the Baupost Group 2014 Letter (LINK)

Farnam Street - Mental Models: The Mind’s Search Algorithm (LINK)
Related book: Diaminds: Decoding the Mental Habits of Successful Thinkers
Giverny Capital's 2014 Annual Letter to Partners [H/T ValueWalk] (LINK)

Andrew Smithers: Pity the Poor Fed (LINK)

John Kay: Must we endure excessive drug prices to encourage pharmaceutical R&D? (LINK)

Chris Pavese posts on Sam Walton's Rules for Building a Business (LINK)
Related book: Sam Walton: Made In America
The Brooklyn Investor on Markel Ventures (LINK)

Bill Gates: 6 Books I Recommended for TED 2015 (LINK)
The books: 
Business Adventures 
The Bully Pulpit [The Audible version is also read by one of my favorite narrators.] 
On Immunity 
Making the Modern World 
How Asia Works 
How to Lie with Statistics

Tuesday, March 24, 2015

Warren Buffett on Charlie Rose remembering Don Keough

Link to video: An appreciation of Don Keough
An appreciation of Don Keough, former president and chief operating officer of Coca-Cola with Muhtar Kent, Father John Jenkins, Timothy Shriver, and Warren Buffett. Leon Wieseltier, contributing editor and critic for The Atlantic.


Justice, capitalism and progress: Paul Tudor Jones II at TED2015 [H/T Santangel's Review] (LINK) [The video of the speech isn't on TED yet, but appears to be posted HERE.]

Soros Says Greece Now Lose-Lose Game After Being Mishandled (video) [H/T ValueWalk] (LINK)

The Brooklyn Investor on Markel's 2014 Annual Report (LINK)

Brain Pickings - Umberto Eco’s Antilibrary: Why Unread Books Are More Valuable to Our Lives than Read Ones (LINK)
Related book: The Black Swan
Tim Harford - The pricing paradox: when diamonds aren’t on tap (LINK)

China’s ‘comfort women’: Thousands of Chinese women were forced into sex slavery during the second world war. Here is one survivor’s story (LINK)

Book of the day: Everyday Irrationality: How Pseudo- Scientists, Lunatics, And The Rest Of Us Systematically Fail To Think Rationally

Monday, March 23, 2015

The War Over Who Steve Jobs Was - by Steven Levy

Walter Isaacson’s official biography of Apple’s genius leader is being challenged by a new book supported by Jobs’s inner circle.

Link to article: The War Over Who Steve Jobs Was
Isaacson’s eponymous biography of Jobs became a publishing phenomenon, selling over a million copies and making Isaacson himself somewhat of a celebrity. But privately, those closest to Jobs complained that Isaacson’s portrait focused too heavily on the Apple CEO’s worst behavior, and failed to present a 360-degree view of the person they knew. Though the book Steve Jobs gave copious evidence of its subject’s talent and achievements, millions of readers finished the book believing that he could be described with a word that rhymes with “gas hole.” A public debate erupted around the question of whether having a toxic personality (as was the general interpretation of Isaacson’s depiction) was an asset or a handicap if one chose to thoroughly disrupt existing businesses with vision and imagination. A Wired cover story (not mine!) asked, “Do you really want to be Steve Jobs?” 
Only now, over three years later, has their dissatisfaction become public. In a February New Yorker profile, Apple’s design wizard Jony Ive conspicuously insisted that, while sometimes withering, Jobs’s harsh criticisms of his employees’ work were not personal attacks, but simply the result of impatient candor. As for Isaacson’s book, Ive was quoted as saying, “My regard couldn’t be any lower.” 
But their unhappiness comes in full view in a new book co-written by the journalist who left early from the memorial service, Brent Schlender, called Becoming Steve Jobs. The reason Schlender had been angry enough at Jobs to turn down a precious final meeting was that his former source had stopped giving him access for his Fortune Magazine stories. But for this book, Apple was rolling out the red carpet for Schlender. In their new tome, Schlender and co-author Rick Tetzeli capture the thoughts of the people closest to Jobs in rare interviews seemingly granted to get the record straight. The subjects include Ive, Apple CEO Tim Cook, Apple’s former head of communications Katie Cotton, Pixar CEO Ed Catmull, and Jobs’ widow, Laurene Powell Jobs. Others who were otherwise uninclined to cooperate did so at the urging of some of the aforementioned insiders. The implicit message seems to be that although almost all of those people participated in the official biography, they very much feel that the Steve Jobs they knew has still not been captured. Catmull’s authorized quote about the new book is telling: “I hope it will be recognized as the definitive history.”

Related books:

Becoming Steve Jobs (or audiobook)

Steve Jobs - by Walter Isaacson (or audiobook)


Lee Kuan Yew: The wise man of the East (LINK)
Related book: From Third World to First: The Singapore Story - 1965-2000
"60 Minutes" had three interesting segments last night, including one with Neil deGrasse Tyson (video) (LINK)

Philosophical Economics: A New-and-Improved Shiller CAPE: Solving the Dividend Payout Ratio Problem (LINK)

Hussman Weekly Market Comment: Monetary Policy and the Economy: The Case for Rules Versus Discretion (LINK)
Last week, the Federal Reserve Open Market Committee (FOMC) began its statement on monetary policy indicating that recent data “suggests that economic growth has moderated somewhat.” While the Fed removed the phrase that “it can be patient in beginning to normalize the stance of monetary policy”, the Fed’s weaker view of the economy prompted an immediate retreat in Treasury yields, an abrupt drop in the foreign exchange value of the U.S. dollar, a surge in stock prices, and an upward spike in the dollar price of gold and oil. The basic thesis of all of these moves is that the Fed may wait longer before increasing the rate of interest that it pays to banks on idle cash reserves (viz., “raising interest rates”). 
We agree – partly. As I noted a week ago, “From my perspective, it remains unclear whether the Fed will resist the temptation to defer hiking interest rates, given what we observe as a deteriorating economic landscape.” The problem for investors is that along with the initial moves in Treasury yields, the dollar, stocks, gold, and oil that followed the FOMC statement, we also saw credit spreads widen rather than narrow last week, while our measures of market internals continue to show divergences that indicate a shift investor preferences toward increasing risk aversion.

Sunday, March 22, 2015


Sanjay Bakshi: Why You Shouldn’t Invest in a Business That Even a Fool Can Run (LINK)

Baupost’s 2014 Letter To Investors: A Tale Of Two Halves (LINK)

Danny Meyer at TEDxManhattan: The Convergence of Casual and Fine (video) (LINK)
Related book: Setting the Table: The Transforming Power of Hospitality in Business
Barry Ritholtz talks to Meb Faber (LINK)
Related book: Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies
The Implosion Of A Warren Buffett Wannabe (LINK)

Aswath Damodaran: Illiquidity and Bubbles in Private Share Markets: Testing Mark Cuban's thesis! (LINK)

Five Good Questions for Samuel Arbesman about his book, The Half-Life of Facts (LINK)

Singapore's Lee Kuan Yew dies at 91 (LINK)

Talks at Google: Mohnish Pabrai and Guy Spier in Conversation with Saurabh Madaan

Link to video


Related books:

The Dhandho Investor 

The Education of a Value Investor

[Double H/T to George and ValueWalk]

Saturday, March 21, 2015

Documentary on The Transcontinental Railroad

Link to video


If you're interested in books on railroads, I have three listed HERE.

Friday, March 20, 2015

Atul Gawande And Charles Munger On Why More Health Care Isn't Better

Link to article: Atul Gawande And Charles Munger On Why More Health Care Isn't Better
American health care is obsessed with more. 
But the industry is beginning to realize that more isn’t always what’s best for patients. Dr. Atul Gawande, a globally respected surgeon, recently pointed out the harm that can come when physicians do more, particularly for patients near the end of their lives. And Charles Munger, vice-chairman of Berkshire Hathaway and partner to Warren Buffett, called health care’s fee-for-service payment model dysfunctional because it rewards doctors for performing more procedures, not for achieving better outcomes. 
In the pursuit of more, American health care has too often missed the mark on better. And to become better, health care must change its culture, its financial structure and how we educate our nation’s medical students.  
Dr. Gawande, a best-selling author and one of the leading physician voices in the country, took on this issue during this year’s Stanford Medical School annual Tseng Lectureship. At the end of his keynote address on the medical needs of the elderly and the terminally ill, I participated in a panel discussion along with him and Munger on the future of America’s failing health care system.

Related book: Being Mortal: Medicine and What Matters in the End

[H/T Linc]

Ray Dalio on true open-mindedness

"True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternate points of view." -Ray Dalio


Thursday, March 19, 2015


Robert Wilmers' Letter to Shareholders (LINK)

Philosophical Economics: Using Total Return EPS to Decompose Historical S&P 500 Performance (LINK)

Bill Gates: We’re Not Ready for the Next Epidemic (LINK)

Mystery dust cloud and aurora spotted on Mars (LINK)

Yuval Noah Harari: the theatre of terror (LINK)

I started listening to the book Sapiens: A Brief History of Humankind, which I mentioned yesterday, and think it is going to be one of my favorites in a long time, in case you've yet to check it out for yourself.

The world's best companies are built by fanatics...

In a 2012 interview with Charlie Rose, Bill Gates said:
Bill Gates: I think the world's best companies are built by fanatics. And when you're in your 20's and 30's, being fanatical comes...at least it came pretty natural to me....I wanted to let everybody have cool software. And so I didn't feel bad that that's what I was doing. 
Charlie Rose: Help me understand what it takes to build a Microsoft, or to build an Apple, or to build a Facebook...in terms of what it is that you and Mark and Steve had? 
Bill Gates: Well, in each of those cases, you had people who were quite fanatical about... 
Charlie Rose: Now what does fanatical mean? 
Bill Gates: Work day and night. Sort of don't worry about the possibility of failure. Every setback is just something to work a little bit harder at doing. And you really know what you're trying to achieve. And you're going to hire the best people. And you're going to change your strategy until you can get that to happen.
I once asked, “What is the essence of the type of person you are looking for?” The answer: “We are looking for fanatics.” We live in an age when people want a quick fix, a shortcut to exceptional results. But there is no such easy path. There is only an intense, long-term, sustained effort. And the only way to build that kind of enterprise is to be fanatic. Such obsessed people do not become the most popular people, as they often intimidate others, but when fanatics come together with other fanatics, the multiplicative effect is unstoppable.

Wednesday, March 18, 2015


Michael Mauboussin and Dan Callahan: Min(d)ing the Opportunity - Excess Returns Require the Chance to Apply Skill (LINK)

David Einhorn talks to the Hackley School (LINK)

James Surowiecki: In Praise of Short Sellers (LINK)

Claudio Borio's remarks in the BIS Quarterly Review are always worth checking out (LINK)
As bond markets show us day after day, the boundaries of the unthinkable are exceptionally elastic. At the end of February, around $2.4 trillion worth of global long-term sovereign debt was trading at negative yields. Of that total, more than $1.9 trillion had been issued by euro area sovereigns alone. And since then, the sinking trend has continued. The latest figures indicate that French, German and Swiss sovereign yields are negative up to four, six and 10 years, respectively. 
In The Adventures of Tom Sawyer, Mark Twain tells us that the essence of good management is to have your friends paint the fence and pay you for the privilege. By that yardstick, some sovereigns have surpassed the master.
Jim Grant: Here's why Fed won't remove 'patient' (LINK)

Andrew Smithers: Current errors of conventional wisdom (LINK)

You Can Now Send Money on Facebook. What's in It for Them? (LINK)

David Brooks: Skills in Flux (LINK)

Book of the day [H/T @vitaliyk]: Sapiens: A Brief History of Humankind [The audiobook also has good reviews. The author's Talk at Google on the book is available HERE. And his TEDx talk looks interesting as well, HERE.]

The importance of culture

From DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz:
YOU CAN EXPORT A GREAT CULTURE ACROSS WIDELY DIVERGENT INDUSTRIES AND GEOGRAPHIES. The truly remarkable thing is how the Dream-People-Culture model carried from investment banking and finance into beer, from Brazil to all of Latin America, then to Europe and the United States, and now expanding all over the world. For Lemann, Telles and Sicupira, culture is not in support of strategy; culture is strategy. The three partners have always held to their core values and distinctive culture, while continually growing into new industries, expanding across geographies, and pointing towards ever bigger goals – a beautiful example of the underlying dynamic, “Preserve the Core and Stimulate Progress” exemplified by any enduring great company. There is a corollary to this lesson: you can “predict the future by geography.” In the early days of the company, the three founders looked from Brazil to the United States, saw what was already working; then, instead of simply waiting for that to happen in Brazil, they would act aggressively to import the best United States practices, and do so early.
The excerpt above also reminded me of what Christopher Begg wrote in his Q3 letter:
"The only moat that is not fleeting, and conversely the only moat that is truly enduring, is culture."

Related previous post: “Dream, People, Culture”: Carlos Brito, CEO of Anheuser-Busch InBev

Tuesday, March 17, 2015


The Steve Jobs You Didn't Know: Kind, Patient, And Human (LINK)
"This picture of him isn’t understood," says Cook. "I thought the [Walter] Isaacson book did him a tremendous disservice. It was just a rehash of a bunch of stuff that had already been written, and focused on small parts of his personality. You get the feeling that [Steve’s] a greedy, selfish egomaniac. It didn’t capture the person. The person I read about there is somebody I would never have wanted to work with over all this time. Life is too short. 
"Steve cared," Cook continues. "He cared deeply about things. Yes, he was very passionate about things, and he wanted things to be perfect. And that was what was great about him. A lot of people mistook that passion for arrogance. He wasn’t a saint. I’m not saying that. None of us are. But it’s emphatically untrue that he wasn’t a great human being, and that is totally not understood. 
"The Steve that I met in early ’98 was brash and confident and passionate and all of those things. But there was a soft side of him as well, and that soft side became a larger portion of him over the next 13 years. You’d see that show up in different ways. There were different employees and spouses here that had health issues, and he would go out of his way to turn heaven and earth to make sure they had proper medical attention. He did that in a major way, not in a minor, ‘Call me and get back to me if you need my help’ kind of way. 
"He had the courage to admit he was wrong, and to change, a quality which many people at that level, who have accomplished that much, lack. You don’t see many people at that level who will change directions even though they should. He wasn’t beholden to anything except a set of core values. Anything else he could walk away from. He could do it faster than anyone I’d ever seen before. It was an absolute gift. He always changed. Steve had this ability to go through a learning curve quickly, more quickly than anybody I’ve known, about such a wide variety of things.
Bill Gates: Warren Buffett Just Wrote His Best Annual Letter Ever (LINK)

Robert Shiller: How Scary Is the Bond Market? (LINK)
Related book: 3rd edition of Irrational Exuberance
Ray Dalio Sees End Of Supercycle, Issues A Dire Warning (LINK)

Albert Edwards: Excerpts From The First TV Interview In 20 Years (LINK)

Peter Diamandis: Disrupting Real Estate (LINK)

Hans Rosling Discusses Pre-Conceived Notions and a Fact-Based World View (video) [H/T @TimHarford] (LINK)

Tim Harford: Man v machine (again) (LINK)

Sequoia Fund's Annual Report [H/T Santangel's Review] (LINK)

GMO White Paper - De-risking Goes Beyond Interest Rate Risk: The Case for Dynamic Asset Allocation in an LDI Solution (LINK) [Free registration required.]
In this white paper, Catherine LeGraw, a member of GMO's Asset Allocation team, suggests that corporate pension plans currently in the process of de-risking by reducing interest rate risk may also want to evaluate other investment risks they bear, most particularly, valuation risk.
Brad Feld: Three Startup Books To Buy Today (LINK) [The books: Startup Opportunities: Know When to Quit Your Day JobBend The Curve: Accelerate Your Startup's Success, and The Leader's Guide.]

Out of Kony’s Shadow (LINK)
Related book: Mama Koko and the Hundred Gunmen

Monday, March 16, 2015

Charlie Munger on projections

From his speech “Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs” (available HERE, HERE, or in Poor Charlie's Almanack):
Usually, I don’t use formal projections. I don’t let people do them for me because I don’t like throwing up on the desk (laughter), but I see them made in a very foolish way all the time, and many people believe in them, no matter how foolish they are. It’s an effective sales technique in America to put a foolish projection on a desk. 
And if you’re an investment banker, it’s an art form. I don’t read their projections either. Once Warren and I bought a company and the seller had a big study done by an investment banker, it was about this thick. We just turned it over as if it were a diseased carcass. He said, “We paid $2 million for that.” I said, “We don’t use them. Never look at them.”


William Cohan catches up with Jamie Dimon [H/T Will] (LINK)

Dan Harris on Charlie Rose discussing his book, 10% Happier (video) (LINK)

Philosophical Economics - Introducing the Total Return EPS Index: A New Tool for Analyzing Fundamental Equity Market Trends (LINK)

Art scandal threatens to expose mass fraud in global art market [H/T Matt] (LINK)

Benedict Evans: What the Apple watch is, and isn't (LINK)

Learning From a Lagging Mutual Fund: The once-highflying Hussman Strategic Growth Fund weathered the crisis but missed the rally (LINK)

Hussman Weekly Market Comment: Extremes in Every Pendulum (LINK)
Whether or not it is fully appreciated, we are observing extremes in nearly every pendulum of the global financial markets. The situation is likely to be seen in hindsight as one of the broadest points of financial distortion in history. Broadest, because unlike the 2000 peak when technology and large capitalization stocks were more overvalued on reliable measures than they are today, the median stock is now more overvalued than in 2000. It’s true that on historically reliable valuation measures that are best correlated with actual subsequent total returns on stocks, the 2000 peak remains the most overvalued point for the S&P 500 in U.S. history, though only about 20% above present valuation levels on those measures (there are certainly many popular but unreliable measures that suggest only moderate overvaluation here). Aside from that 2000 peak, the S&P 500 itself is now more overvalued than at the 1929 peak, not to mention the lesser 1972, 1987 and 2007 extremes. We estimate that the S&P 500 Index is likely to be below its present level a decade from now, though adding dividends is likely to raise the nominal total return to about 1.6% annually on a 10-year horizon.

Sunday, March 15, 2015


Meb Faber: Stocks are the Most Expensive, Well, Ever (LINK)
Related book: Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies
Barry Ritholtz talks to Brad Katsuyama (LINK)
Related book: Flash Boys
U.S. Producers Ready New Oil Wave [H/T @jasonzweigwsj] (LINK)

Fossil Fuels Will Save the World (Really) [H/T @jasonzweigwsj] (LINK)

Disney's $1 Billion Bet on a Magical Wristband (LINK) [If you're looking for a good Audible book, DisneyWar was a good listen.]

The crazy, true-life adventures of Norway's most radical billionaire [H/T The Big Picture] (LINK)

Why America fell out of love with golf [H/T Abnormal Returns] (LINK)

An interview with Danny Meyer [H/T Abnormal Returns] (LINK)
Related book: Setting the Table: The Transforming Power of Hospitality in Business
Niall Ferguson gave a novel, The Buried Giant, high praise on Twitter: "Reading Kazuo Ishiguro's The Buried Giant. I am more enthralled than I have been by a book in a long time. Profound meditation on memory."

Friday, March 13, 2015


Michael Lewis Reflects on Flash Boys, one year later (LINK)

The Long, Slow Death of Cable Just Reached a Tipping Point [H/T Matt] (LINK)

Macau’s Economy Shrinks 17.2% After Casino Revenues Fall (LINK)

Five Good Questions for Barbara Muller, co-author of the book Revolutionary Conversations (LINK)

UK Goodbye To War Loan: 1917 To 2015 (video) [H/T ValueWalk] (LINK)
To commemorate this most interesting of gilts we have made a film about War Loan – one that tells the economic history of the UK through wars, default, the re-joining and leaving of the gold standard, the inflationary 1970s, the loss of the UK’s AAA credit rating, and finally the deflation that has followed the Great Financial Crisis.
Book of the day: 400 Million Customers

Richard Feynman: "How you get to know is what I want to know."

From The Meaning of It All: Thoughts of a Citizen-Scientist:
All scientific knowledge is uncertain. This experience with doubt and uncertainty is important. I believe that it is of very great value, and one that extends beyond the sciences. I believe that to solve any problem that has never been solved before, you have to leave the door to the unknown ajar. You have to permit the possibility that you do not have it exactly right. Otherwise, if you have made up your mind already, you might not solve it. 
When the scientist tells you he does not know the answer, he is an ignorant man. When he tells you he has a hunch about how it is going to work, he is uncertain about it. When he is pretty sure of how it is going to work, and he tells you, "This is the way it's going to work, I'll bet," he still is in some doubt. And it is of paramount importance, in order to make progress, that we recognize this ignorance and this doubt. Because we have the doubt, we then propose looking in new directions for new ideas. The rate of the development of science is not the rate at which you make observations alone but, much more important, the rate at which you create new things to test. 
If we were not able or did not desire to look in any new direction, if we did not have a doubt or recognize ignorance, we would not get any new ideas. There would be nothing worth checking, because we would know what is true. So what we call scientific knowledge today is a body of statements of varying degrees of certainty. Some of them are most unsure; some of them are nearly sure; but none is absolutely certain. Scientists are used to this. We know that it is consistent to be able to live and not know. Some people say, "How can you live without knowing?" I do not know what they mean. I always live without knowing. That is easy. How you get to know is what I want to know.

The above quote also reminded me of the Voltaire quote: “Doubt is not a pleasant condition, but certainty is absurd.”

Thursday, March 12, 2015


Grant's Interest Rate Observer - February 28, 2003: Emulate Henry Singleton (LINK)
Related link [H/T Bill]: Leon Cooperman's presentation on Henry Singleton
Is There a Next Jack Bogle? Not If You Ask Jack Bogle (LINK)

Video: Buffett Farms in Nebraska [H/T Will] (LINK)

Presentation from Jeetay Investments: Moats and Millions (LINK)

How arthropods got their legs (LINK)

Book of the day (courtesy of this Richard Dawkins tweet: "If you want truth about Alan Turing, ignore The Imitation Game. The definitive biography is The Enigma by the mathematician Andrew Hodges."): Alan Turing: The Enigma (It also appears to be on Audible for just $5.95 right now. If you're not an Audible member yet, you can get a free trial and two free books, which you get to keep even if you cancel, by going HERE.)

What distinguishes a first-class business from an ordinary business?

From Deep Value:
In a cruel irony, most good businesses earning high returns on invested capital can’t absorb much incremental capital without reducing those high returns, while most bad businesses earning low returns on invested capital require all earnings be reinvested simply to keep up with inflation. Bad businesses that can only earn sub-par returns destroy capital until they are liquidated. The sooner the business is liquidated, the more value that can be salvaged. The longer the good business can maintain a high return on invested capital, the more valuable the business. What then distinguishes the first-class business from the ordinary business? The differentiator is not simply high returns on capital, which, as Graham pointed out, even an ordinary business will earn at some point in the business cycle, but sustainable high returns on capital throughout successive business cycles. The sustainability of high returns depends on the business possessing good economics protected by an enduring competitive advantage, or what Buffett describes as “economic castles protected by unbreachable ‘moats.’”

Wednesday, March 11, 2015


Why Warren Buffett's son isn't the heir apparent [H/T Will] (LINK)
Related book: Berkshire Beyond Buffett
Andrew Smithers: Quantitative easing and the Tokyo market (LINK)

John Kay: Why do we welcome innovation to products more readily than to processes? (LINK)

Google Just Made Near-Infinite Storage Cheap and Easy (LINK)

This retirement letter from Google’s CFO is like few you’ll ever read (LINK)

Ebola survivors offer clues to body's virus defences (LINK)

Chameleon colours 'switched by crystals' [H/T Linc] (LINK)
Published in the journal Nature Communications, the study was a collaboration between quantum physicists and evolutionary biologists at the University of Geneva. 
First of all, the team noticed there were no big, spidery cells containing yellow or red pigment that could explain the shifts in hue. 
They hit upon the importance of the crystals when they looked inside a type of cell called an "iridophore" using an electron microscope. Whichever angle they looked at them from, the crystals formed an incredibly neat, regular pattern - just the sort of arrangement that creates structural colours.
"When you see this with the eye of a physicist, you know it will have an effect on light," said senior author Prof Michel Milinkovitch. 
So Prof Milinkovitch and his colleagues set out to establish whether these crystals might explain not just the chameleon's bright colours, but its changes to those colours as well.

Warren Buffett on qualitative and quantitative factors in investing (1967)

From Warren Buffett's October 1967 Letter to Partners:
The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say. "Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money can be made with either approach. And, of course, any analyst combines the two to some extent - his classification in either school would depend on the relative weight he assigns to the various factors and not to his consideration of one group of factors to the exclusion of the other group. 
Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this no one has come back from recess - I may be the only one left in the class), the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a "high-probability insight". This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side - the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.

Tuesday, March 10, 2015


I hadn't seen this until now, though given the popularity of the book I figured this was coming eventually, but 100 to 1 in the stock market appears to have been re-released earlier this year. So if you hadn't gotten your copy yet, now you can, HERE.

Tony Robbins on Charlie Rose (LINK)
Related book: MONEY Master the Game
Base Hit Investing: Simple Concept of Intrinsic Value Part 2 (LINK)

Merryn Somerset Webb talks to Bill Bonner (LINK) [A book Bill Bonner co-authored in 2007, Mobs, Messiahs, and Markets, was a great audiobook.]

Google Ventures and the Search for Immortality [H/T Matt] (LINK)

Tim Harford: Boom or bust for bitcoin? (LINK)

Dan Carlin: Ancient Assyrians would have understood Islamic State’s methods (LINK)

Monday, March 9, 2015


The first time Buffett, Osborne and 18 others were mentioned in The World-Herald [H/T Linc] (LINK)

StarTalk Live! Podcast: Evolution with Richard Dawkins and Bill Nye (Part 2) (LINK) [Related books, with The Ancestor's Tale added from last time, HERE. I also have some other evolution-related books HERE.]

The Brooklyn Investor on the Alleghany Annual Report (LINK)

I posted this a few weeks ago, but the Kyle Bass video interview is making the rounds again, so in case you missed it... (LINK)

Hussman Weekly Market Comment: What Does That Difference Mean? (LINK)
The early weeks of 2015 are the first time in history that both 10-year Treasury yields and our estimates of prospective 10-year nominal total returns for the S&P 500 have both declined below 2% annually. Even at the 2000 peak, when our 10-year total return projections were negative, the 10-year Treasury yield was 6.8%, and small capitalization stocks showed reasonable value, particularly on a relative basis. Presently, long-term bonds provide nowhere to hide, and median equity valuations exceed those at the 2000 peak on price/earnings, price/revenue, and enterprise value/EBITDA. Because of yield-seeking speculation, stock and bond prices today are already where they are likely to be many years from today. Prices are likely to experience an interesting and volatile trip to nowhere in the interim. 
We saw a noteworthy piece from an analyst named Jonathan Selsick last week. Essentially, Selsick examined the Shiller P/E (the S&P 500 divided by the 10-year average of inflation-adjusted earnings), and showed that the multiple is even better correlated with actual subsequent S&P 500 total returns using 16-year smoothing and a 16-year investment horizon. 
At present, the Shiller-16 (along with a broad range of other historically reliable valuation measures having strong correlation with actual subsequent returns) projects negative total returns for stocks on a 6-year horizon, even assuming continued growth in GDP, revenues, earnings, and other fundamentals. Indeed, current valuations match the levels observed at the 1929 peak. That certainly doesn't imply that equally catastrophic losses are likely to follow (stocks lost 85% of their value from 1929 to 1932 as valuations collapsed from historic highs to historic lows, and keep in mind that even moving from a 70% loss to an 85% loss involves losing half of your money, which is why I insisted on stress-testing in 2009). Still, we believe that projecting a loss for the S&P 500, including dividends, on a 6-year horizon, is an evidence-based estimate, reflecting assumptions that are very much in the middle-of-the road. In other words, we see that expectation as just about right.

F. Scott Fitzgerald quote

"The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." -F. Scott Fitzgerald

Sunday, March 8, 2015


Prem Watsa's 2014 letter to shareholders [H/T James] (LINK)

Bridgewater's Ray Dalio Explains the Power of Not Knowing (LINK)

25iq: A Dozen Things Learned from David Tepper about Investing (LINK)

Understanding Succession at Berkshire Hathaway After Buffett [H/T Linc] (LINK)
Related book: Berkshire Beyond Buffett
Jamie Dimon and Warren Buffett’s secret party [H/T Will] (LINK)


Richard Duncan on Financial Sense Newshour (LINK)

The Investors Podcast interviews Tobias Carlisle about his book, Deep Value (LINK)
Related link: Talks at Google: Tobias Carlisle
Rory Sutherland on the Freakonomics Podcast (LINK)
If you’ve never read David Ogilvy’s Confessions of an Advertising Man, do yourself a favor and do so immediately.

Saturday, March 7, 2015

Frank Martin quote

From the interview included in yesterday's links:
The first thing I look at in a company is the proxy, the required tell-it-all document on what management thinks about incentives and other matters they typically don't discuss elsewhere. The first thing I do is look at the management—seeing if its behavior is consistent with what it says in the proxy. The idea that stock options align interests is borderline insanity. Charlie and Warren would think the same way in the more egregious cases. 
If a business has a record of improprieties or dishonesty or issues of borderline integrity, we'll pass always. Life is too short to spend time with people that you can't like, admire, and respect.

Friday, March 6, 2015


Scott Adams: Try This Trick to Improve Focus (LINK)

A rare interview with Frank Martin, via the always excellent work of The Manual of Ideas (LINK)
Related link: Frank Martin's 2014 Annual Letter
The Brooklyn Investor comments on the Berkshire Hathaway Annual Report (LINK)
Related previous post: A few comments on the Berkshire Hathaway letter to shareholders
Tim Ferriss talks with Mark Hart and Raoul Pal on his podcast: Hedge Funds, Investing, and Optimizing Lifestyle (LINK)

The British Origins of the US Endowment Model (LINK)

Ross Ashcroft talks to George Cooper, author of Money, Blood and Revolution (audio) (LINK)

Five Good Questions for Scott Fearon about his book Dead Companies Walking (LINK)

An interview with Jony Ive: The man behind the Apple Watch (LINK)

StarTalk Live! Podcast: Evolution with Richard Dawkins and Bill Nye (Part 1) (LINK) [Related books, in what I think is a decent order in which to read them, HERE.]

Quote of the day, which has been posted on the blog before HERE, but is worth repeating many times over: “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” (The article it originally came from was a January 2014 article describing Peyton Manning, HERE.)

That quote also led me back to another excerpt from that same ECAM letter, which described one of the biggest sources of business (and investment) failure:
Overreaching is one of most common causes of death in trees as it creates an air pocket in the trees’ pipes, xylem, which is why trees will often rot from the inside out. 
Enduring businesses avoid this fate by employing resolute incremental growth. The stewards of these enduring businesses know that most business failures are the direct result of overreaching. Instead of incremental progress, they overreach in an effort to ‘get theirs now.’ Quite often, that unnecessary “extra” decays the organization from the inside out. If you study business failure, you can point to overreaching as the single biggest cause of dialectical materialism in business. We see it every day in the marketplace, in how management rewards themselves with options, and in how management teams follow inferior mergers and acquisitions strategies. How often do we see mergers and acquisitions work well in biology? It is a biologically flawed objective, so why should it work seamlessly in business? It is a short-cut strategy to produce growth that often creates that same embolism that will eventually rot the decent business as they try to merge contrasting DNAs. There are evolved business systems that can integrate mergers and acquisitions well, but they are outliers.
And both the quote and excerpt above also reminded me of a reply Peter Bevelin gave in one of my interviews with him:
As Munger says: “All I want to know is where I’m going to die so I’ll never go there.” When I hear them at the annual meeting, I am thinking about Einstein’s reply to a student. The student had challenged Einstein’s statement that the laws of physics should be simple by asking: “What if they aren’t simple?” Einstein replied, “Then I would not be interested in them.”  
They have a unique ability to distinguish masses of trivia from what is really important – to filter out situations, and find what’s at their core. They tell the simple, blunt truth rather than say things that sound good.

Thursday, March 5, 2015

Warren Buffett Interview: Journalism to JP Morgan

Interview with Warren Buffett on his thoughts on Journalism to JP Morgan, for Iconic Voices, a video series with global leaders.

Link to video

[H/T George]


The full transcripts of the Federal Reserve's Federal Open Market Committee meetings from 2009 were released (LINK) [In conjunction with these, it might be interesting to revisit the FCIC interviews, now that a few years have passed, HERE.]

Warren Buffett: 'I Consider Myself a Journalist' [H/T Linc] (LINK)
“I consider myself a journalist to some extent,” the 84-year-old billionaire said in a video interview premiering Thursday night as part of the “Iconic Voices” series at Arizona State University. “I say, ‘Is the Washington Post Co. worth $22 a share?’ in 1973. I say, ‘Is the BNSF railroad worth us paying $34 billion?’ I assign myself the story. It’s my working hypothesis that it is. But then I go and look for the facts.”
Edge #437 - Yuval Noah Harari and Daniel Kahneman: A Conversation (LINK)

Sam Harris and Graeme Wood discuss the Islamic State (LINK)

Book of the day, which I've mentioned a couple of times before, but it seems relevant given the article directly above: The True Believer: Thoughts on the Nature of Mass Movements

Wednesday, March 4, 2015


How a 25-Year-Old Sparked Plunge at Lumber Liquidators (LINK)

Horizon Kinetics' March Commentary (LINK)

Absolute Return Letter - March 2015: Tigers in Africa (LINK)

A Warning From Buffett About Banks [H/T Linc] (LINK)

The $62bn secret of Warren Buffett’s success (LINK)

One Potential Weakness of Berkshire Hathaway (LINK)

John Kay: The best strategy is to be good at whatever it is you do (LINK)

The Price of Oil Is About to Blow a Hole in Corporate Accounting (LINK)

Andrew Smithers: Corporate Japan’s cash flow surplus (LINK)

The Governor of the Bank of Uganda on "The Economics of Mobile Money" (LINK)

Essay: The death of international development [H/T @peterbuffett] (LINK)

Limitations of Book Value in Security Analyses

From The Aggressive Conservative Investor (written in 1979, which is good to keep in mind when reading the part with the oil example):
To repeat, we do not believe in acquiring securities solely on the basis of the earnings record of a company or on the outlook for its reported earnings. Neither do we think that an investment program based on acquiring securities simply because they are available at large discounts from book value would necessarily be well advised. Availability at a large discount from book does give a first approximation that a security may be a bargain, or even that it may be attractive according to the financial-integrity approach. But this first approximation ought to be tempered by a more thorough analysis. In order for book value to be a good indicator of the wealth or future earning power of a going concern, other factors must be considered as well. 
A company’s record of profitability is, of course, some indication that the book asset value actually reflects real operating wealth, in the sense of assets that provide the wherewithal for obtaining earnings. Earnings for the current and the three prior years may also be a potential source of liquidity if income taxes have been paid or tax liability has accrued on them. The investor should also consider such factors as the size of the company’s operational overhead and the incentives for control groups to work against the interests of the outside stockholders. Also, since book value is only an accounting figure, it cannot be more useful than accounting figures in general. In our view, the most important limitation of the usefulness of book value as an analytical tool is that in itself, it does not measure the quality of a company’s assets, which we believe tends to be significantly more important than the quantity of asset value. Unfortunately, quality is a less measurable and less precise concept than quantity, involving what is essentially a subjective judgment. 
What do we mean by “quality of assets”? In short, financial integrity. We suggest that quality of assets is determined in a corporate situation by reference to three separate, but related, factors. 
First, an asset or mix of assets has high-quality elements insofar as it approaches being owned free and clear of encumbrances. Conversely, the assets of debt-ridden companies tend to be of low quality. Note that though encumbrances that depress the quality of assets (such as long-term indebtedness) may be stated liabilities, they may also be off-balance-sheet items, some of which, of course, will be disclosed in footnotes to the company’s financial statements. These include such items as pension-plan liabilities, and such contingent liabilities as litigation and guaranties of the debts of others. Others may be disclosed elsewhere. For example, a railroad may be obligated to operate unprofitable commuter services, or a steel mill may be required to install antipollution equipment that does not generate revenue. Still other off-balance-sheet encumbrances may not be disclosed in any public document. A common example would be the need to substantially overhaul outdated plants and equipment in order for the business to remain competitive enough to survive. Unless an investor has know-how, and perhaps even know-who, he may be unable to find out that such encumbrances exist. 
The second factor to consider in evaluating the quality of assets of a going concern is its operations. Does it have a mix of assets and liabilities that appears likely to produce high levels of operating earnings and cash flows? Good operations are the most important creator of high-quality assets and are likely to contribute to a company’s having a strong financial position. Lenders quite properly prefer to finance businesses whose operations are sound and who are likely to create the wherewithal for continuing debt service on a long-run basis. 
...The third factor the investor must consider is the nature of the assets themselves. An asset or mix of assets tends to have high quality when it appears to be salable at a price that can be estimated with a modicum of accuracy. In most going-concern situations, of course, no values can be assigned to specific assets as a practical matter, because they are useful only as a part of the operations of the company—as part of an overall mix. For example, although it is said that certain proved and readily recoverable domestic oil reserves have a present value of five dollars per barrel, it is not especially useful for a nonmanagement investor analyzing Exxon to value that company’s assets according to this formulation as long as the company is likely to remain a going-concern operation. Exxon’s domestic reserves in that instance are dedicated directly or indirectly to Exxon’s refinery and marketing operations; for practical purposes they have no five-dollar-per-barrel independent value. By contrast, if the same proved reserves were owned instead by, say, General American Oil, the five-dollar-per-barrel valuation would tend to be meaningful as long as there was a likelihood that General American would sell the reserves to others in bulk or in the normal course of business, or that General American would be acquired by others. 
First and foremost, then, for an asset to have independent value from the point of view of the outside securities holder, it must be available for sale apart from the operations of the going concern. It must be something that is not so related to the going-concern operation, or if so dedicated, is separable from it in a manner that will not have an adverse impact on the operating-earnings power of the going concern. 
Aside from this freedom from a going-concern encumbrance, there are certain other characteristics that tend to make assets more attractive to lenders, and thus of higher quality. Assets that are liquid and marketable tend to be more attractive to lenders than those that are not. Liquid assets include cash and equivalent marketable securities, including restricted securities with meaningful rights of registration, proved oil and gas reserves, cutting rights and timberlands, and various types of real property. In order to be marketable, the assets must have a value that is readily measurable. In the case of securities that are traded in organized markets, the market provides a measure of value. Other assets may have readily ascertainable values even though not so traded—as, for example, income-producing real estate. 
If an asset is one that third-party lenders or guarantors (such as financial institutions and governments) are experienced in lending against, the standards they have developed for lending may also provide a measure of value, and the asset tends to be more valuable than it would otherwise be. Examples of such high-quality assets have included oil and gas, maritime vessels and certain types of real estate. 
Flexibility and scarcity are factors that tend also to make an asset more valuable. Thus, multipurpose assets tend to be more valuable than single-purpose assets. Flexibility is especially important in the case of real estate: a factory useful for only one type of assembly-line production tends to be less attractive than, say, a downtown hotel that can be converted economically into efficiency apartments. Assets that are scarce, at least on a long-term basis (such as copper mines or domestic oil), may have special values all their own.
Certain assets that appear to have these characteristics may, of course, not have them because of legal impediments. For example, U.S. margin regulations make common stocks worse collateral than other assets that lack common stocks’ characteristics of liquidity, marketability, flexibility and measurability. Other assets may have special value because they can be used to create tax shelter. Because tax savings allow these assets to throw off more cash, tax-sheltered assets tend to be most attractive in the eyes of creditors. Thus, assets such as real estate, timberlands, to some extent oil and gas as well as other natural resources, and until recently, motion pictures have been outstanding examples of this. 
These three factors—the amount of encumbrances, the operations and the nature of the assets themselves—tend to be interrelated and may be offsetting. Thus, a company that is less encumbered tends to be freer to invest in assets lacking high quality. The property and casualty insurance industry provides a good example of this: where an insurer’s capital and surplus are small relative to stated liabilities (and to premium income, which in turn tends to be related to the size of liabilities), that insurer will concentrate its investments in government and corporate debt instruments. Only as capital ratios improve relative to stated liabilities (and premium income) will insurers tend to invest a portion of their assets in such lower-quality instruments as equity securities, especially common stocks.