Tuesday, June 30, 2015

Seth Klarman letter excerpt from 1999

From Seth Klarman in June 1999:
Students of financial history can point to historic levels of valuation to suggest that we are in a bubble. But students of psychology may be needed to complete the picture. For one thing, the financial markets have been so strong for so long that fear of market risk has mostly evaporated. People who used to hold bank certificates of deposit now maintain a portfolio of growth stocks. It is not really within human nature to comprehend that you may not know everything you think you know, and, further, that what you believe in could change on a dime. When your investments are backstopped by reasonably-priced tangible assets, the prospect of a change in sentiment is not very costly. If a building is no longer needed as a furniture retailer, maybe it would make a good warehouse. If you can't make money as a distributor, you can recover most of your capital by reselling your inventory.  
Not so for dreams. With more and more of the market value of U.S. equities represented by lofty (in some cases infinite) multiples of current results, a change in sentiment could wipe out a large percentage of investor net worth. Sentiment, existing only in the minds of investors, is subject to change quickly and without notice. Perhaps today's dreams will become realities for some of the current Internet and technology favorites; and perhaps not. For many, the dream will be replaced by a nightmare. Then, the escalating bill for betting on dreams rather than on realities will have to be paid up.   
Real value, of bricks and mortar, finished goods inventories, accounts receivable, operating factories and businesses, and even brand names, is hard, although far from impossible, to destroy. If you don't overpay for it, your downside is protected. If you purchase it at a discount, you have a real margin of safety.

Tom Gayner's Talk at Google: The Evolution of a Value Investor

Link to video

[H/T BeyondProxy]

Monday, June 29, 2015


Wilbur Ross on CNBC (video) (LINK)

This short piece from Michael Lewis last month is making its rounds again: Greece Saunters Across the Autobahn (LINK)

The recent Greek drama reminded me of the short "discussion" from 5 years ago between Hugh Hendry, Gillian Tett and Jeffrey Sachs (video) (LINK)

Claudio Borio's slides on persistently low interest rates [H/T Marginal Revolution] (LINK) [And you can watch him give his talk on them as well, HERE.]

Grant's Interest Rate Observer on Puerto Rico, from May 2014 (LINK)

Matt Ridley on EconTalk (LINK)
Related book: The Rational Optimist
Hussman Weekly Market Comment: Durable Returns, Transient Returns (LINK)
Significant news items tend to concentrate selling decisions that contribute to abrupt losses, but those losses are already inevitable once valuations become extreme. In the current cycle, the catalyst might be European bank leverage (which is the main reason Greece is a concern), credit concerns related to covenant lite junk debt, economic weakness, investor concern about monetary shifts, or possibly by wholly unanticipated events. But the “catalyst” will merely affect the timing of the losses. 
This is not a Goldilocks market. No, this is a Roseanne Roseannadanna market (Gilda Radner’s character from Saturday Night Live). Though investors seem to believe that catalysts for a market plunge should be known ahead of time, they’re likely to learn in hindsight that the specific catalyst didn’t matter. History teaches that once obscene valuation is coupled with overvalued, overbought, overbullish extremes, and is then joined by deterioration in market internals, the outcome is already baked in the cake. Afterward, investors discover “Well Jane, it just goes to show you… It’s always something. If it’s not one thing, it’s another.” 
Understand that now. Once extreme valuations have been established, further market gains have always been transient. Once market internals deteriorate, it’s a signal that investors have shifted from risk-seeking to risk-aversion. At that point, there is no specific event that must be known in advance. One need only have an appreciation for the inevitable swing of the pendulum from extreme euphoria to extreme fear that has characterized the financial markets for centuries. The “catalyst” is rarely appreciated as a catalyst until after severe market losses have already occurred, and in many cases, that catalyst is simply an event that concentrated selling plans that were already being contemplated. If it’s not one thing, it’s another. But it’s always something. 
The message here is not “sell everything.” The message is to understand where we are in the market cycle from the standpoint of a century of reliable evidence, and to act in a way that meets your investment objectives. Align your portfolio with careful consideration for your tolerance for losses over the market cycle; with your willingness to miss out on interim market gains should they emerge; with the horizon over which you will actually need to spend from your investments; with the extent that you believe that history is actually informative for making investment decisions; with the extent to which alternative investment outlooks are supported by evidence, ideally spanning numerous market cycles.

Sunday, June 28, 2015


The BIS Annual Report (LINK)

Steve Keen: "If you want to understand Greece today, read Wynne Godley from 1992." (LINK)

The Bruce Greenwald Method [H/T @mjmauboussin] (LINK)

Steven Romick’s Speech To CFA Society Of Chicago [H/T ValueWalk] (LINK)
We will therefore continue to focus our energies on the search for great businesses at good prices or decent businesses at great prices. We try and keep it simple. I confess that I didn’t always operate this way. In my early years, I ended up too much in the weeds. I had to know everything about a company and its industry. I’ve since learned that knowing less is okay as long as you have identified the one to three things that will drive the company. We believe exactness offers little so we prefer to establish a potential range of outcomes instead. We’d rather be directionally right rather than precisely wrong. 
We spend a lot of time asking such questions as: “How does the business work?” “Why does this opportunity exist?” And then, “What if?” Knowing that successful investing is as much about finding winners as it is about avoiding losers, we invert a favorable thesis so as to see it through less rose-colored lenses, all of which hopefully limits negative surprises. 
Stocks ask you different questions at different prices. One needs fewer answers at a low price versus a high price. For example, a container ship company priced as if its vessels are worth just scrap value requires only a couple of questions like, “How much cash might be burned before the market rebounds?” and “Can its balance sheet support that?” Whereas if you bought that same container ship company with good current cash flow but day rates are at highs and its stock is trading at two times book value, you’d be far more dependent on the sustainability of the day rate. You’d then have to ask whether or not the management team would spend their free cash flow wisely. In the first case, you’d worry less about their capital allocation decisions because they’d be lacking free cash flow and financial flexibility. 
Scott Adams: How Do You Avoid Email? (LINK)

TED Talk - Chris Urmson: How a driverless car sees the road (LINK)

Brad Feld speaks at Big Omaha 2015 (video) (LINK)

Sam Harris and Dan Carlin in podcast discussing American interventionism, the war on terror, and related topics (LINK) [And on a related-to-podcasts note, thanks to Max for telling me about the Overcast app, which is great for listening to podcasts.]

Matt Ridley: Invasive species are the greatest cause of extinction (LINK)

Cephalopod Week Wrap-Up (LINK)

Book of the day [H/T @dccommonsense]: The Wages of Destruction: The Making and Breaking of the Nazi Economy

Saturday, June 27, 2015

Seneca quote

From Dialogues and Essays:
`Why do many reversals of fortune happen to good men?' Nothing bad can happen to a good man: opposites do not mix. Just as the vast number of rivers, all the rain that falls in showers from above, and the massive volume of mineral springs do not alter the taste of the sea, do not even moderate it, so adversity's onslaughts are powerless to affect the spirit of a brave man: it remains unshaken and makes all events assume its own colour; for it is stronger than all external forces. I do not mean that he is insensible to those forces but that he conquers them, and as a man who in all else is calm and tranquil of mind he rises to face whatever attacks him. All adversity he regards as a training exercise.

Friday, June 26, 2015


Q&A with Bill Gates (LINK)
You once said success is a lousy teacher. What did you mean by that?  
Anybody who’s super-successful has been misled a little bit. They don’t really know the actual magic factors of luck and skill that led them to this wonderful success. Hopefully they’re engaged in an effort where they have lots of failures, things that try and don’t work. 
If you had one piece of advice to a young person, who wanted to be an innovator, what would it be?  
The sciences change the game. Entrepreneurs are the people who take it on, but the thing that shifts the rules of the game is science. If you really want to be part of driving that change yourself, just pick some state-of-the-art science and get involved in it.
Profits vs Growth [H/T @trengriffin] (LINK)

The Difference Between Culture and Values [H/T Brad Feld] (LINK)


The 2015 Earth and Sky Photography Winners (LINK)

Book of the day: Darwin's Dangerous Idea: Evolution and the Meanings of Life (also available as an audiobook)

Thursday, June 25, 2015


 Morningstar talks to Jeremy Grantham (video) [H/T ValueWalk] (LINK)
Another 5%-10% appreciation would put the market in bubble territory, but that doesn't mean it will pop right away, says the GMO chief investment strategist.
Latticework of Mental Models: Critical Mass (LINK)

Chris Mayer with some great thoughts on inflation (LINK)

A World Without Work (LINK)

Mark Sisson: 7 Ways to Use Stoic Philosophy to Improve Your Health and Happiness (LINK)

TEDx Talk - Dr. Bruce Damer - In the Beginning: The Origin & Purpose of Life (video) [H/T @nickgogerty] (LINK)

This was an interesting documentary (video): Deng Xiaoping - The Making of a Leader

I had added that documentary to my watch list because of the following answer from Lee Kuan Yew, when asked about what leaders he admired:
De Gaulle, because he had tremendous guts; Deng, because he changed China from a broken-backed state, which would have imploded like the Soviet Union, into what it is today; and Churchill, because any other person would have given up.
If you find that documentary interesting, Evan Osnos' piece on Xi Jinping may also be of interest if you haven't read it yet: Born Red. A couple of Charlie Rose interviews, with Osnos and Kevin Rudd, may be of interest as well.

Book of the day, which was recommended by Robert Shiller at his visit to the LSEThe New Division of Labor: How Computers Are Creating the Next Job Market

Lao Tzu quote

From Tao Te Ching: A New English Version:
When they think that they know the answers,
people are difficult to guide.
When they know that they don't know,
people can find their own way.

The temperament needed to be a great research analyst...

From The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns:
The temperament needed to be a great research analyst is similar to what is required for investigative journalism. A genuine curiosity and interest in business is required. A nose for a story also helps. By digging deeper and following intuition, a good analyst is able to gather certain relevant facts often overlooked by lazy competitors. An important trait of a good analyst is being able to define the limits of understanding. This self-awareness comes only with experience. Often an analyst without this ability genuinely professes an extensive understanding of a specific company or industry. But in reality, this knowledge may be woefully lacking when compared with other analysts. The analyst may suffer from what is known as the Dunning-Kruger effect, where a person’s own inexperience prevents recognition of that inexperience. Only through improved skill and experience can an analyst enhance the metacognitive competence that allows for the recognition of the limits of ability. Reading competitive research and talking to industry contacts after a thesis has been formed can help analysts get a sense for how much understanding is enough.

Wednesday, June 24, 2015


Horizon Kinetics - Under the Hood: What’s in Your Index? (LINK)

A review of George Cooper's book, Money, Blood and Revolution (LINK)

Shut Up When They’re Talking To You: Always Say Less Than Necessary - by Ryan Holiday (LINK)

Book of the day: The Adventures of Henry Thoreau: A Young Man's Unlikely Path to Walden Pond

Tuesday, June 23, 2015

East Coast Asset Management's Q1 2015 Investment Letter - Mr. Market Revisited

Thinking backward is quite intuitive.   Backward thinking involves  looking  for patterns, making links  between  unconnected  events  and forming  theories to influence forward-looking decision-making.  Backward thinking has a gravitational pull toward the experiential emotion in our past as well as giving more proportion to recent events.  
In  my  opinion,  the  biggest  error  in  looking  backward is  not  going back far enough to solve to laws and principles that are invariable, or unchanging through time.  The three largest data sets, which I have previously written and credited Peter Kaufman for first enlightening me about, are: 
1. The inorganic systems around us, which are 13.7 billion years in age and contain all the laws of physics and mathematics,
2. Organic systems, or all the biology on earth, which are 3.5 billion years in age and,
3. 20,000 years of recorded human history. 
We can use these invariable laws and principles for intelligent decision-making. 


Just a reminder that the PBS series First Peoples premieres tomorrow, June 24th, which I'm looking forward to, especially after the praise I've given the book Sapiens.

The Superinvestors of Daily Journal Corporation [H/T Linc] (LINK)

Robert Shiller visits the Planet Money podcast (LINK)
Related book: Irrational Exuberance 3rd edition
An interview with Ben Carlson about his new book, A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan (LINK)

If you're interested in Thailand [H/T @JohnAllenPaulos]: The Age of Dis-Consent

Monday, June 22, 2015


Howard Marks: The ‘Uncomfortably Idiosyncratic’ Billionaire [H/T ValueWalk] (LINK)
Related book: The Great Minds of Investing
Jana Vembunarayanan graciously shares his excelling "super videos" (LINK)

The Brooklyn Investor comments on Brookfield Asset Management (LINK)

Ben Bernanke joins the list of many who want to keep Alexander Hamilton on the $10 bill: Say it ain't so, Jack (LINK)
Related book: Alexander Hamilton
A Dozen Things Learned from Peter Fenton About Business, Investing and Venture Capital (LINK)

Chris Martenson talks to Jim Rogers (audio) (LINK)

Hussman Weekly Market Comment: All Their Eggs in Janet's Basket (LINK)
The financial markets are establishing an extreme that we expect investors will remember for the remainder of history, joining other memorable peers that include 1906, 1929, 1937, 1966, 1972, 2000 and 2007. The failure to recognize this moment as historic is largely because investors have been urged to believe things that aren’t true, have never been true, and can be demonstrated to be untrue across a century of history. The broad market has been in an extended distribution process for nearly a year (during which the NYSE Composite has gone nowhere) yet every marginal high or brief market burst seems infinitely important from a short-sighted perspective. Like other major peaks throughout history, we expect that these minor details will be forgotten within the sheer scope of what follows. And like other historical extremes, the beliefs that enable them are widely embraced as common knowledge, though there is always, always, some wrinkle that makes “this time” seem different. That is why history only rhymes. But in its broad refrain, this time is not different. 

The central fallacy operating here is the notion that monetary easing provides a kind of mechanical and concrete support to the financial markets, when in fact the primary driver of financial markets in recent years has been pure speculative risk-seeking. While risk-seeking is encouraged by monetary easing, it is not a reliable outcome. Once speculative valuation extremes have been in place, persistent monetary easing has certainly not prevented severe market losses in prior cycles. Investor preferences toward risk distinguish the expanding phase of a bubble from its inevitable crash, and these are most directly measured through the behavior of market internals, not through the behavior of monetary authorities. 

More enlightened leaders at the Federal Reserve would never have allowed, much less intentionally encouraged, yet the third speculative episode in 15 years. Unfortunately, the idea that repeated cycles of malinvestment and yield-seeking speculation have actually been the cause of the nation’s economic malaise doesn’t seem to cross their minds.
Book of the day: The Greeks - by H. D. F. Kitto [Note: Unrelated to the reasons Greece is in the headlines today.]

Related to the book above is Charlie Munger's description of 'Curiosity Tendency' in Poor Charlie's Almanack:
There is a lot of innate curiosity in mammals, but its nonhuman version is highest among apes and monkeys. Man's curiosity, in turn, is much stronger than that of his simian relatives. In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge. For instance, Athens (including its colony, Alexandria) developed much math and science out of pure curiosity while the Romans made almost no contribution to either math or science. They instead concentrated their attention on the "practical" engineering of mines, roads, aqueducts, etc. Curiosity, enhanced by the best of modern education (which is by definition a minority part in many places), much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.
Re-reading that excerpt from Munger had reminded me of my post on Areté, which led me back to Zen and the Art of Motorcycle Maintenance and Kitto:
"What moves the Greek warrior to deeds of heroism," Kitto comments, "is not a sense of duty as we understand it... duty towards others: it is rather duty towards himself. He strives after that which we translate 'virtue' but is in Greek areté, 'excellence' — we shall have much to say about areté. It runs through Greek life." 
...Kitto had more to say about this areté of the ancient Greeks. "When we meet areté in Plato," he said, "we translate it ‘virtue’ and consequently miss all the flavor of it. ‘Virtue,’ at least in modern English, is almost entirely a moral word;areté on the other hand, is used indifferently in all the categories, and simply means excellence."

Friday, June 19, 2015


Jason Zweig - 1974 and 1999: History Turned Upside Down (LINK)
Combing through my archives the other day, I came across a speech I gave in October 1999 to the Foundation Financial Officers Group, an organization of portfolio managers and other executives at some of the largest private charitable foundations. 
In the speech, given in the midst of a raging bull market, I looked back at the worst bear market in memory and urged the audience to ponder whether something similar might happen again. 
That kind of thought experiment might not be a bad idea for investors to try nowadays, too.
Interview with David Allen, author of Getting Things Done: The Art of Stress-Free Productivity [H/T @DanielPink] (LINK)

The Rational Walk discusses Markel (LINK)

MOI's interview with Keith Smith (LINK)

The Four Signs of a Pending Bear Market (LINK)

The number of closed-end funds available has shrunk by nearly one fifth since 2011 [H/T Abnormal Returns] (LINK)

Dan Primack interviews Marc Andreessen on the a16z podcast (LINK)

Maria Popova with some more great excerpts from Oliver Sacks' autobiography (LINK)

Thursday, June 18, 2015


Today's Audible Daily Deal is well worth the $0.99 you pay for the audiobook (available until 11:59PM ET): The Little Book of Talent: 52 Tips for Improving Your Skills

Drivers of ROE in the Context of Portfolio Management (LINK)

Chris Mayer: How Inflation Affects Stocks (LINK)
Related previous post: Warren Buffett’s Comments on Inflation
The Brooklyn Investor: In Search of Value (LINK)

The Brooklyn Investor: Quick Update on SuperPortfolios (LINK)

Would You Rather Own The Unicorns, or Facebook? (LINK)

NY Times article from 2010: Depression’s Upside [H/T @crowdturtle] (LINK)
For Darwin, depression was a clarifying force, focusing the mind on its most essential problems. In his autobiography, he speculated on the purpose of such misery; his evolutionary theory was shadowed by his own life story. “Pain or suffering of any kind,” he wrote, “if long continued, causes depression and lessens the power of action, yet it is well adapted to make a creature guard itself against any great or sudden evil.” And so sorrow was explained away, because pleasure was not enough. Sometimes, Darwin wrote, it is the sadness that informs as it “leads an animal to pursue that course of action which is most beneficial.” The darkness was a kind of light.
Scientists Film White Blood Cells Dying for the First Time Ever [H/T Chris] (LINK)

How Dinosaurs Shrank and Became Birds (LINK)

Book of the day (1980): The Myths of Inflation and Investing

Wednesday, June 17, 2015


Latticework of Mental Models: Law of Small Numbers (LINK)

The Brooklyn Investor: In Search of a Stock Market Bubble (LINK)

Chinese Firms Put Cash to Work in Stocks (LINK)

Five Reasons You Should Celebrate the AIG Ruling (LINK)
Related books: 
The AIG Story 
Fatal Risk
Wilbur Ross: My Greek investment will work out (video) [H/T ValueWalk] (LINK)

A discussion about Richard Nixon on Charlie Rose, with the authors of 2 new biographies, Being Nixon and One Man Against the World, which have been written because a lot of previously unreleased documents and recordings were released last year (video) (LINK)

Audiobook of the day: The Age of Voltaire: A History of Civlization in Western Europe from 1715 to 1756, with Special Emphasis on the Conflict between Religion and Philosophy

Mastering the work of your predecessors...

There once was a man who assiduously mastered the work of his best predecessors, despite a poor start and very tough time in analytical geometry. Eventually, his own work attracted wide attention, and he said of his work: 
"If I have seen a little farther than other men, it is because I stood on the shoulders of giants." 
The bones of that man lie buried now in Westminster Abbey, under an unusual inscription: 
"Here lie the remains of all that was mortal in Sir Isaac Newton."

Tuesday, June 16, 2015

Richard Dawkins at the 2014 Hay Festival

Link to video


Related books, HERE.

Yuval Noah Harari at Hay Festival: Why our imaginations make us human

Link to video: Sapiens: Why our imaginations make us human
It would be difficult to accuse Yuval Noah Harari of a lack of ambition: in Sapiens: A Brief History of Mankind, the historian covers the species from its origins to ‘the post-human era’. 
In the book, which has become an international bestseller, Harari compares homo sapiens with other human species (such as homo erectus) and with animals. 
What makes us special – and why do we rule the world? In this clip, Harari explains that it’s our imaginations and our ability to believe in myths and stories that enable us to communicate on a mass level – and to control other animals. 
“Money is the probably the most successful story ever told” he argues. “It has no objective value… but then you have these master storytellers: the big bankers, the finance ministers… and they come and they tell a very convincing story. ‘Look this piece of paper, it is actually worth 10 bananas’… and it works. Try doing that with a chimpanzee – it won’t work!”

Related previous posts:

Harari on hindsight...

The Worst Crime in History - by Yuval Noah Harari

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

Related links:

Yuval Harari's Talk at Google

Edge #437 - Yuval Noah Harari and Daniel Kahneman: A Conversation

Related lectures (videos): A Brief History of Humankind

[H/T @CravenPartners]


Nassim Nicholas Taleb's interview at the Tomorrow Conference in June 2015 (video) [H/T ValueWalk] (LINK)
Related book: Antifragile
Richard Thaler talks to Barry Ritholtz about his book, Misbehaving: The Making of Behavioral Economics (LINK)

Stephen Dubner talks with Google about his new book, When to Rob a Bank (video) [H/T ValueWalk] (LINK)

Brain Pickings - Happy Birthday, Adam Smith: What the Misunderstood Philosopher Can Teach Us about Happiness, Benevolence, and Kindness (LINK)
Related book: How Adam Smith Can Change Your Life
A Partnership with China to Avoid World War - by George Soros (LINK)

Bill Nye talks about fracking (video) (LINK)

TED Talk - Rana el Kaliouby: This app knows how you feel — from the look on your face (LINK) [This reminded me of the book Emotions Revealed, Second Edition: Recognizing Faces and Feelings to Improve Communication and Emotional Life.]

Mark Sisson's Definitive Guide to Napping (LINK)
Related book: The Primal Blueprint

Monday, June 15, 2015


Interview with Professor and Fund Manager Sanjay Bakshi (LINK)

A Dozen Things Learned from Mario Gabelli about Investing and Business (LINK)

Amazon Expands Prime With Goods Shipped Directly From Merchants (LINK)

How Wall Street Enabled A Controversial Power Grab At A Wannabe Berkshire Hathaway [H/T Linc] (LINK)

The Leithner Letter Leithner Letter No. 188-191 (LINK)

Introductory chapter of John Kay's forthcoming book, Other People's Money (LINK)

What advances in robotics and AI bode for us (video) [H/T @danielpink] (LINK)

Philae comet lander wakes up and phones home (LINK)

Another Paul Jaminet interview discussing his book, Perfect Health Diet (LINK)

Hussman Weekly Market Comment: When You Look Back On This Moment In History (LINK)
There are moments in time when durable history is made; history that others observe much later, shaking their heads, at a loss to understand how the events that followed could not have been obvious at the time. When you look back on this moment in history, remember these things. 
When you look back on this moment in history, remember that spectacular extremes in reliable valuation measures already told you how the story would end. Among the measures best correlated with actual subsequent S&P 500 total returns, capitalization-weighted market indices such as the S&P 500 were more richly valued in only 54 weeks of history, 21 of which represented the final advance to the 2000 market peak, with the remaining 33 representing the retreat from that high to present valuation levels, on the way to a 50% loss in the S&P 500 Index and an 83% loss in the Nasdaq 100 Index. Presently, the market has already lost the momentum and favorable market internals that were evident during that final run, so we doubt that the 2000 extreme should be viewed as an objective. 
When you look back on this moment in history, remember that the valuation of the median stock was never higher. Ever. Even at the 2000 peak. 
As we’ve noted previously, MarketCap/GVA has a correlation of about 92% with actual subsequent 10-year S&P 500 total returns, even in recent market cycles. Look carefully at the chart above, and notice thatsecular valuation lows such as 1950 and 1982 occurred at valuation levels just one quarter of current levels. Forget, for a moment, about the next 5 years, 10 years, or even 15 years. Suppose that the market was to experience a secular low no sooner than 20 years from today. What would the total return of the S&P 500 be in the interim? Well, we know that earnings, revenues, and nominal GDP have historically proceeded at a peak-to-peak growth rate of 6% annually across economic cycles. That growth rate has been gradually slowing in recent decades, and there are strong reasons beyond inflation – rooted in labor force growth and real productivity growth – to be more conservative. But suppose, as optimists, we assume the same 6% nominal growth rate in the future. In that case, the percentage change in the S&P 500 over the 20 year period to that secular low would be (1.06)*(1/4)^(1/20)-1 = a loss of -1.1% annually. Fortunately, one would expect dividend yields to contribute enough to bring the total return of the S&P 500 just above zero. 
You can understand market returns over every span of history using the same basic arithmetic. In the 33 years since the 1982 low, valuations have quadrupled, and the S&P 500 has enjoyed an average price increase of 9.5% annually, even though nonfinancial gross value added has increased by only 5% annually. Do the math: (1.05)*(4/1)^(1/33)-1 = 9.5%. Kick in the average 2.8% dividend yield since 1982, and you arrive at the 33-year total return since 1982 of 12.3% annually. Understand how much of that long-term return is owed to depressed starting valuations.  

Saturday, June 13, 2015


I've previously asked for (good) business biography recommendations, and I appreciate all who have sent titles along (the list so far is HERE). On a related note, I came across the following site which has a bunch more listed: Business History - Business Biographies. It's a pretty extensive list, but if anyone browses through it and reads anything exceptional, please let me know. Thanks.

The same site can also serve as good background for an industry you are researching: Business History - Industries.

Paul Ford: What is Code? (LINK)
Related book: Code: The Hidden Language of Computer Hardware and Software
Podcasts Are Saving NPR (LINK)

Book of the day: Uncommon Friends: Life with Thomas Edison, Henry Ford, Harvey Firestone, Alexis Carrel, and Charles Lindbergh

Friday, June 12, 2015


David Kass' notes from the Berkshire Hathaway Annual Meeting (LINK)

IAEA Board Approves Agreement for Hosting the IAEA’s LEU Fuel Bank [H/T Linc] (LINK) [Related 2006 article: Mr. Buffett’s Excellent Idea]

Richard Thaler visits the London School of Economics to discuss his book, Misbehaving: The Making of Behavioral Economics (LINK)

Jim Grant: As “Dadbods” Get Chic, Under Armour Shares Could Go Out Of Style (LINK)

Twitter CEO Dick Costolo Out, Jack Dorsey In (LINK)

Chris Sacca on the Tim Ferriss podcast (LINK)

Reddit AMA with Neil deGrasse Tyson [H/T Will] (LINK)

Talks at Google: Matthieu Ricard: "Altruism" (video) (LINK)
Related book: Altruism: The Power of Compassion to Change Yourself and the World
Book of the day:  The Greater Journey: Americans in Paris - By David McCullough (also available through Audible, with one of my favorite narrators, HERE.)

Thursday, June 11, 2015


Sanjay Bakshi: What is Staying Power? (LINK)

FT Business of Luxury Summit 2015 D1 Opening Keynote - Johann Rupert (video) (LINK) [Besides mentioning Tom Russo a couple of times, he also recommends that people read the books: 1) The Second Machine Age; and 2) Humans Need Not Apply.]

Marty Whitman's latest letter [H/T ValueWalk] (LINK)

John Hempton: Herbalife - the (very) long post (LINK)

Steve Schwarzman: How the Next Financial Crisis Will Happen [H/T Will] (LINK)

Meredith Whitney Says She’s Done With Hedge Funds After Struggle (LINK)

The microfinance delusion: who really wins? (LINK)

Astronaut Terry Virts' (@AstroTerry) last picture from space before returning to Earth today (LINK)

Book of the day [H/T @Sanjay__Bakshi]: Brand Breakout: How Emerging Market Brands Will Go Global

Wednesday, June 10, 2015

Thought, not money, is the real business capital...

From Harvey Firestone in Men and Rubber: The Story of Business:
Business is founded on thought. Optimism and enthusiasm are valuable in keeping up the morale of an organization--they are lubricants which help to overcome friction--but they cannot be the driving power, and they cannot substitute for well-thought-out business principles, any more than a machine will run just because it is well oiled. Power has to be transmitted before a wheel will turn. We give various names to the thought which has the power to turn the wheels. Sometimes we call it management. But there is another kind of management which is not based on thought and which is not management at all; for instance, there is the kind of management which operates solely on records. Records will guide thought, but they will not substitute for thought. Good management--that is, management with real thought behind it--does not bother trying to make its way by trickery, for it knows that fundamental honesty is the keystone of the arch of business. It knows that you will fail if you think more of matching competitors than of giving service; that you will fail if you put money or profits ahead of work, and that there is no reason why you should succeed if what you do does not benefit others.

This is not idealistic philosophy; it is the hardest kind of hard common sense. If you ask yourself why you are in business and can find no answer other than "I want to make money," you will save money by getting out of business and going to work for someone, for you are in business without sufficient reason. A business which exists without a reason is due for an early death. The single reason for the existence of any business must be that it supplies a human need or want, and, if my experience is worth anything, a business which has this reason for its existence will be bound in the end to prosper if thought be put into it. Thought, not money, is the real business capital, and if you know absolutely that what you are doing is right, then you are bound to accomplish it in due season.

I say this not because I read it somewhere in a book, but because I have lived it.


Tech Startups Woo Investors With Unconventional Financial Terms — but Do Numbers Add Up? [H/T @jasonzweigwsj] (LINK)

Latticework of Mental Models: Kantian Fairness Tendency (LINK)

Financial Journalism Operating Guidelines (LINK)

The Four Filters Invention Of Warren Buffett & Charlie Munger (LINK)

a16z Podcast: Apple Gets Its Music Streaming and Gives News Another Try (LINK)

Andrew Smithers: Interest rates, secular stagnation and secular decline (LINK)

Edge #443: The Exquisite Role of Dark Matter - A Conversation With Priyamvada Natarajan (LINK)

Book of the day: The Wisdom of Insecurity: A Message for an Age of Anxiety

Tuesday, June 9, 2015


Bruce Greenwald: An Alternative Explanation of the Great Recession (video) [H/T ValueWalk] (LINK) ["What I'm going to start talking about, because this is a Minsky conference, is something that Hyman Minsky identified that's been largely overlooked now. Which is that the notion that balance sheet crises are something novel I hope has Hyman Minsky rolling over in his grave. Because not only did he identify in qualitative terms a sequence of balance sheet crises -- which by the way fill an important gap in Keynesian theory. The problem with basic Keynesian models is that they're not cyclical models."]
Related books from Hyman Minsky: Stabilizing an Unstable EconomyCan It Happen Again?: Essays on Instability and FinanceJohn Maynard Keynes (Minsky's re-interpretation of the Keynesian Revolution)
No Ordinary Disruption: the four global forces breaking all the trends (LINK)
In a new book, No Ordinary Disruption, the three leaders of the McKinsey Global Institute, McKinsey's business and economics research arm, argue that the world is now roughly in the middle of a dramatic transition as a result of four fundamental disruptive trends: growth and urbanisation in emerging markets, technological disruption, increasing connectivity, and the ageing of populations. None of these disruptions, on its own, is a surprise. The unique challenge is that they are happening at the same time - and on a huge scale, creating second-, third-, and even fourth-order effects that are scarcely possible to anticipate. As they collide, they will produce change so significant that much of the management intuition that has served us in the past will become irrelevant, causing us to reset our collective intuition.
Paul Volcker warns on health of US state finances [H/T Matt] (LINK)
Related report: Truth and Integrity in State Budgeting
Brain Pickings: The Dalai Lama’s Daily Routine and Information Diet (LINK)
Related book; The Open Road: The Global Journey of the Fourteenth Dalai Lama 
Camera traps provide treasure trove of African animal pics (LINK)

The truly exceptional business...

The truly exceptional business can operate with little capital. When U.S. securities markets function normally, most healthy businesses have no trouble securing needed capital. This means that great business opportunities whose only competitive hurdle is access to capital are likely to be exploited, and the economic profitability of industry participants inevitably suffer as a result. Exceptional businesses enjoy competitive positions that are more nuanced. Their competitive protections enable pricing power over their customers and control over their input costs from suppliers. This means that they can maintain and increase profitability without having to spend excessively to protect their turf. 
Companies that have sound competitive positions but operate in industries where expensive machinery is needed for production expose themselves to inflationary pressures. Current capital outlays that are needed to maintain equipment may end up costing a fraction of what is spent on similar outlays in the future. Analysts should be aware of this hidden cost when entering periods of anticipated high inflation. 
An analyst can become adept at qualitatively assessing the capital needs of a business and the follow-on effects that inflation would have on future capital outlays by studying the growth patterns of similar businesses. It is often the case that businesses require little capital to grow while maintaining their competitive position because the industry itself allows it. In industries like information services, software, and precision instruments, companies stake out competitive territory with products that may become universally adopted. Other companies in the industry often cede this territory willingly rather than spend enormous amounts of capital in a futile attempt to gain meaningful market share. The winners are left with the enviable position of dictating pricing terms to their customers without fear of a competitive response. 
A company that has a unique competitive position that allows high returns on investment and has plenty of opportunity to reinvest back within the business at similarly high rates is especially compelling for the buy-and-hold investor. The internal growth prospects create a natural allocation mechanism for capital within the business, and management’s task is relegated to protecting and expanding the company’s competitive turf. These situations are the ones qualitative analysts seek.

Monday, June 8, 2015

Howard Marks Memo: Risk Revisited Again

Link to Memo: Risk Revisited Again
In April 2014, I had good results with Dare to Be Great II, starting from the base established in an earlier memo (Dare to Be Great, September 2006) and adding new thoughts that had occurred to me in the intervening years. Also in 2006 I wrote Risk, my first memo devoted entirely to this key subject. My thinking continued to develop, causing me to dedicate three chapters to risk among the twenty in my book The Most Important Thing. This memo adds to what I’ve previously written on the topic. 


Peter Bernstein on risk (video) [H/T The Big Picture] (LINK)
Related book: Against the Gods: The Remarkable Story of Risk
Safal Niveshak: How to Be Happy and Get Rich (some lessons from a re-reading of Poor Charlie’s Almanack) (LINK)

Nathaniel Popper on EconTalk discussing his book, Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money (LINK)

Hussman Weekly Market Comment: Why Stocks are Not "Cheap Relative to Bonds" (LINK)
One of the constant refrains we hear at present is that while stocks may be richly valued on an absolute basis, they are “cheap relative to bonds.” At least one professor recently told students that valuations are meaningless because the P/E on cash is 100. Technically, with T-bill yields at just 0.01%, the P/E on cash is more like 10,000, but let’s not quibble. Using simple P/E ratios or inverted interest rates as a standard of value only makes sense if you have no appreciation for how securities are valued. By this kind of standard, I would advise these students to propose that their professor give them each $100 in return for a promise of a single payment of $2 next year, on the argument that the P/E of 50 is a fraction of the "P/E on cash." 
I’ll repeat what I’ve called the Iron Law of Valuation: every security is a claim on a very long-term stream of future cash flows that will be delivered into the hands of investors over time. Given that expected stream of future cash flows, the current price of the security moves opposite to the expected future return on that security. The value of a share of stock is determined by far more than current earnings, and one's estimate of value will be ill-formed if current earnings aren't a sufficient statistic for the long-term earnings trajectory. 
Moreover, market valuations, prospective equity returns, and actual realized equity returns have historically been only weakly related to the level of interest rates (even long-term interest rates). The long-term rate of return priced into stocks is far less correlated and less sensitive to interest rates than investors seem to believe (see Recognizing the Risks to Financial Stability for the record on this, particularly with regard to the "Fed Model"). 
Every valuation ratio used on Wall Street is simply an effort to approximate the Iron Law of Valuation by comparing price with some fundamental “X,” instead of explicitly modeling the long-term stream of deliverable cash flows for that investment. And here’s the central issue – if your fundamental “X” is not representative and proportional to the very, very long-term stream of cash flows that stocks are likely to deliver over time (think 50 years), valuing stocks as a ratio to X is meaningless. At the extreme, paying $100 for a one-year promise of $25 would represent a “cheap” P/E of just 4, but it would also be a ridiculous investment. Similarly, history has demonstrated cycle after cycle after cycle that paying elevated P/E multiples on record earnings is a time-tested way to lose 30-50% of your money by the time the cycle is complete. 
As for the discount rate applied to those cash flows, understand that whatever discount rate you use is also the long-term rate of return that you get if the expected cash flows actually materialize. The higher the price an investor pays for a given stream of expected cash flows today, the lower the return that an investor should expect over the long-term. As detailed below, investors have responded to zero interest rates by driving stock valuations up to the point where expected market returns over the coming decade are also zero. Given that outcome, one is quite free to say that stocks are reasonably valued “relative” to zero interest rates, but one should still expect zero 10-year returns on stocks. 
My impression is that's not how investors are thinking. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.
Book of the day (which has been the book of the day before, but some recent Tweets from Sanjay Bakshi reminded me of it yet again): The Way to Wealth: To which is added: The Whistle & The Advantages of Drunkenness

Sunday, June 7, 2015


Sanjay Bakshi with more thoughts on Nestlé and Maggi (LINK)

The Anti-Poverty Experiment - by Jason Zweig (LINK)

Daphne Koller on the Future of Online Education [H/T Matt] (LINK)

A Dozen Things Learned from Jim Goetz about Business, Startups and Venture Capital (LINK)

Autopsy: Lessons from Failed Startups (LINK)

Hubris, and Sputnik, Doomed the Edsel (LINK)
Related book: Disaster in Dearborn: The Story of the Edsel
What Good Is History? - by Morgan Housel (LINK)
Related book: Why Don't We Learn from History?
Moderna Therapeutics: The billion-dollar (private) biotech (LINK)

Ultraviolet close-up reveals comet surprise (LINK)

‘The Stoic Formula for a Happy, Meaningful Life’ by William Irvine (LINK)
Related book: A Guide to the Good Life: The Ancient Art of Stoic Joy 
Related previous post: Stoicism quotes, thoughts, and readings

Friday, June 5, 2015


Sanjay Bakshi on Nestlé India and thinking about whether or not the Maggi noodles issue has created a buying opportunity (LINK)

Focus on the Key Variables of an Investment (LINK)

How Innovation is Affecting Market Valuations (LINK)

Car Wars: In-depth study of the US automotive product pipeline [H/T @AlexRubalcava] (LINK)
Car Wars is an annual proprietary study that assesses the relative strength of each automaker’s product pipeline in the US. The purpose is to quantify industry product trends and then relate our findings to investment decisions.
Why cloud computing is attracting scientists (LINK)

Book of the day: The Complete Book of Five Rings - By Miyamoto Musashi (also in audiobook)
"The Book of Five Rings by Miyamoto Musashi was written in 1643 and it’s all about the strategy of warfare, intent, and ultimately, commitment. It was introduced to me in 1984 by my friend Pat Morita who played Mr. Miyagi in The Karate Kid movies. He gave me a copy of the book, which he had signed, and said, "This will change your life." It taught me how to create strategy and do battle in the cutthroat world of Hollywood. It has guided my life and my ability to focus creatively and be impenetrable to the failure of intent."—Brian Grazer (author of A Curious Mind: The Secret to a Bigger Life, among many other accomplishments)

The linkage between returns-on-capital and competitive advantage...

From The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns:
The small-cap manager should attempt to understand the linkage between returns-on-capital and competitive advantage. The latter drives the former, but the former is also indicative of the latter. If an analyst discovers that a company exhibits high returns on capital employed for long time periods, it is likely that the descriptive qualities of the business will reveal a competitive edge. This symbiosis may support the case for a quantitative screen using returns on capital as a factor; however, companies that exhibit sustainably high internal compounding are more likely to be priced as superior businesses, given their success. A better approach is to find those businesses that exhibit competitive advantages but have yet to post stellar financial results. These rare situations can be a source of high total returns for the astute manager.

Thursday, June 4, 2015


Elizabeth Holmes on Charlie Rose (video) (LINK) [And the video of her May commencement speech at Pepperdine which is mentioned in the interview, is HERE. "Success is not a result of spontaneous combustion. You must set yourself on fire."]

Richard Thaler talks to Google about his new book, Misbehaving: The Making of Behavioral Economics (video) [H/T ValueWalk] (LINK)

How a curmudgeonly old reporter exposed the FIFA scandal (LINK)
Related books: Foul!: the Secret World of Fifa; Bribes, Vote Rigging and Ticket Scandals (2006); Omertà: Sepp Blatter's FIFA Organised Crime Family (2014)
Bruce Greenwald on Challenges Finding Opportunities [H/T ValueWalk] (LINK) [There are also a few more videos from First Eagle, HERE.]

InvestingByTheBooks interviews William Green about his book, The Great Minds of Investing (LINK)

Why Did John Malone Invest in Lions Gate? (LINK)

Meet the Journalist Who Fooled Millions About Chocolate and Weight Loss (LINK) [This also reminds me of an article Peter Bevelin mentioned in one of my interviews with him: Why Most Published Research Findings Are False.]

How Ink Is Made (video) [H/T The Late Show Podcast] (LINK)

The Pillars of Creation: What's changed? (LINK)

In Michael Lombardi's interview with Shane Parrish, he mentioned Evan Thomas' biography of Robert Kennedy as being one that had a big influence on him. It looks like Thomas is set to come out with a biography on Richard Nixon in a couple of weeks, which Walter Isaacson recently recommended: Being Nixon: A Man Divided

Wednesday, June 3, 2015

Sheryl Sandberg's post about her late husband Dave Goldberg

Link to: Sheryl Sandberg's Facebook post
A childhood friend of mine who is now a rabbi recently told me that the most powerful one-line prayer he has ever read is: “Let me not die while I am still alive.” I would have never understood that prayer before losing Dave. Now I do. 
I think when tragedy occurs, it presents a choice. You can give in to the void, the emptiness that fills your heart, your lungs, constricts your ability to think or even breathe. Or you can try to find meaning. These past thirty days, I have spent many of my moments lost in that void. And I know that many future moments will be consumed by the vast emptiness as well.  
But when I can, I want to choose life and meaning. 

This also reminded me of another post (from a U.S. soldier) about realizing what's important in life: Andrew Olmsted's final post (given to a friend to post in the case of his death)


And both of those are reminders of 5 little words worth keeping in mind: It can end so fast.

ValueWalk's 10-Part Charlie Munger Series (PDF)


And in case you haven't pre-ordered your copy of this book yet (September release): Charlie Munger: The Complete Investor


Warren Buffett’s NetJets Gets a New Captain [H/T Linc] (LINK)

NetJets Shuffle: Costs of Deviations from the Berkshire Model - by Lawrence Cunningham (LINK)

New England’s top GOP donor isn’t a Republican [H/T Will] (LINK)
Boston billionaire Seth Klarman says most Republicans are “Neanderthals” on gay marriage. He calls Senator Tom Cotton’s letter to the Iranian leaders “divisive.” And he considers the 2010 Supreme Court ruling that ushered in an era of unlimited political donations “a terrible decision.” 
Meet New England’s top campaign contributor. He gives mostly to Republicans, but he’s not much of one. 
“I’m a complicated guy,” Klarman said to The Globe in a rare interview. “I’m fairly nuanced in my views. I’m trying to do what I think is the right thing for the country.” His registration: independent.
An excerpt from William Green’s The Great Minds of Investing (LINK)

100x - by Chris Mayer (LINK)
Related book: 100 to 1 in the Stock Market
Robert Shiller visits the LSE - Irrational Exuberance: as relevant as ever (LINK)
Related book: Irrational Exuberance 3rd edition
Aswath Damodaran: Cash, Debt and PE Ratios: Cash is an upper and debt is a downer! (LINK)

Mark Spitznagel on the Paradox of Higher Returns with Lower Risk (video) [H/T James] (LINK)

The Absolute Return Letter - June 2015 (LINK)

Latticework of Mental Models: Redundancy (LINK)

The Brooklyn Investor: Jamie Dimon for Dummies (LINK)

Jamie Dimon Is Now a Billionaire, and He Got There in an Unusual Way (LINK)

Elon Musk: The World’s Raddest Man, and How Tesla Will Change The World (Part 1, Part 2)
Related book: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future 
TED Talk - Bill Gross: The single biggest reason why startups succeed (LINK)
Gross' list of the Top 5 Factors:
1. Timing
2. Team / Execution
3. Idea "Truth" Outlier
4. Business Model
5. Funding
Mysterious die-off sparks race to save saiga antelope (LINK)

News meets comedy: John Oliver's FIFA II segment (video) (LINK)