Sunday, July 31, 2016


Piling Up Losses in a ‘Self-Directed’ 401(k) Account - by Jason Zweig (LINK)

Three Bucket Framework - by Jana Vembunarayanan (LINK)

A Dozen Things I’ve Learned from Andy Grove about Business and Strategy - by Tren Griffin (LINK)
Related books: Only the Paranoid SurviveHigh Output Management
Jim Grant Is Bullish on Gold, Bearish on Kraft (LINK)

IMF admits disastrous love affair with the euro and apologises for the immolation of Greece (LINK)

Richard Duncan: Creditism Has Replaced Capitalism (macro podcast) (LINK)

Beyond Siri: The World Premiere of Viv with Dag Kittlaus (video) [H/T Will] (LINK)
Related previous link: Dag Kittlaus on Charlie Rose (video)
Book of the day [H/T Jack Schwager]: Endurance: Shackleton's Incredible Voyage (the audiobook also gets good reviews)


Some insightful comments from Howard Marks on the Oaktree call last week:
Well, I think that clearly, when the central banks take the risk fee rate to 0, all other rates kind of emanate from them -- from that in a capital markets line kind of phenomenon. So it's all a function of that. Now we have adjusted downward our client's expectations and our own expectations as to what our strategies can provide. As I recall, Bruce, when we started off 1988, we thought distressed could do 25% to 30%. And then we've had occasions since then when we said 30% or more. And we're not saying 30% anymore or 25% or 20%, but we're hoping, for example, to get 15%. And we're targeting 15% in the investment decisions we make. And we still believe we can make 15%. And we may fall a little short of that, but that's a goal, it's what we're underwriting to. Our hurdle is 8%. We still think we'll clear the hurdles. And it would be perfectly logical to go to the clients and say, look, 10 years ago, if the 5-year yields at 6%, today, it yields 1%, the hurdle should be lower. But we don't want to have that conversation. The client still need the levels of return in excess of our hurdles. And that's what they come to us for, and we still think we can get it. But of course, as the capital market line comes down, the achievement of any given return gets harder. And that's the world we live in. But I don't want to go in there and say, well, how about if we start getting incentives at 5% on distressed debt and so forth. And I don't think that's a necessary conversation. And we just haven't ever had the desire or felt the need to have that conversation. 
...Well, I mean by definition, we'll buy at 15%. And in prior cycles, we wouldn't buy at 20%. So back 15 or 18 years ago, I wrote a memo called, It Is What It Is, in which I said, the investment environment is what it is, it's a given, we can't change it, and we can't order up a new one. We have to work within it. And this investment environment offers us lower prospects than ever. But of course, makes our products more important than ever to our clients. And I dare say that most people have given up on getting the 7.5% that they require from mainstream stocks and high-grade bonds. Well, what does that leave? I think it leaves us in a pretty good position. Plus, we have adjusted to the change in the environment over the last, I would say, roughly 6 and 7 years by bringing out -- by continuing to bring out and increase our suite of products designed to produce returns around 10, which 10, 15 years ago, 10 looked like a modest accomplishment. And now, it looks like nirvana. And we're -- we have a number of products ranging from strategic credits, which Bruce mentioned, and direct lending to European credit solutions to mezzanine to enhance income to real estate debt, all of which we think will produce high single digits or in 10% or so, if we -- if things break right. And as I said before, now people say, oh, my God, 9%, wouldn't that be great? Believe me, nobody stood up and cheered for 9% 30 years ago. But that's the way things are today. It is what it is.

Friday, July 29, 2016


Bill Gates: America’s Best Days Are Not Behind Us (LINK)
Related book: The Rise and Fall of American Growth
My mother’s unconventional parenting lessons - By Richard Branson (LINK)

FT Alphachatterbox: Gavyn Davies and Tyler Cowen on the productivity puzzle (podcast) (LINK)

Sheryl Sandberg leans into her next book, ‘Option B,’ about grieving and healing (LINK)

Book of the day [H/T Matt]: The Wawa Way: How a Funny Name and Six Core Values Revolutionized Convenience - by Howard Stoeckel

Thursday, July 28, 2016


GMO Quarterly Letter: The Duration Connection (LINK)
In the GMO 2Q16 Letter Ben Inker offers a discussion about short-duration risk assets and their potential to offer decent returns over time with less vulnerability to rising discount rates. These assets, generally lumped together under the “alternatives” title, are generally out of favor today given their disappointing performance since the financial crisis, but the characteristics that made them disappoint may well prove a blessing if discount rates start to rise.
Jeff Bezos Beautifully Explains Innovation and Consumer Sovereignty (LINK)

Information asymmetry: Secrets and agents (LINK)
George Akerlof’s 1970 paper, “The Market for Lemons”, is a foundation stone of information economics.
Episode 07 of Malcolm Gladwell's Revisionist History podcast (LINK)
In 1984, Elvis Costello released what he would say later was his worst record: Goodbye Cruel World. Among the most discordant songs on the album was the forgettable “The Deportees Club.” But then, years later, Costello went back and re-recorded it as “Deportee,” and today it stands as one of his most sublime achievements. 
“Hallelujah” is about the role that time and iteration play in the production of genius, and how some of the most memorable works of art had modest and undistinguished births.

Wednesday, July 27, 2016


GMO's Mean-Reversion Strategy Is Tested in Today's Market [H/T Abnormal Returns] (LINK)

The Brooklyn Investor blog: Record Valuation Spreads! (LINK)

Steve Keen talks with Merryn Somerset Webb (video) (LINK)
Related 1992 article mentioned by Keen: Maastricht and All That - by Wynne Godley
Investing quote of the day: "George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs....I've learned many things from [Soros], but perhaps the most significant is that it's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn't maximize the opportunity." -Stanley Druckenmiller (via the book The New Market Wizards)

Tuesday, July 26, 2016


How Warren Buffett & Elon Musk Both Compete and Contrast on Energy [H/T Linc] (LINK)

Greenlight Capital's Q2 Letter (LINK)

Notes on Credit Acceptance Corp (CACC) - By John Huber (LINK)

Unilever Acquires Dollar Shave Club: Was The Rubicon Just Crossed? - by Shai Dardashti (LINK)

Platform wars: the final score - by Benedict Evans (LINK)

Midsize Companies Shouldn’t Confuse Growth with Scaling [H/T Abnormal Returns] (LINK)

Dolly at 20: The inside story on the world’s most famous sheep (LINK)

Warren Buffett on taking a big swing...

From the 1998 video linked to yesterday:
"A few things have worked out very well [for me]. And the nice thing about the investment business is that you don't need very many. You'll see plenty of times when you get chances to do things that just shout at you. And the thing you have to do is, when that happens, you have to take a big swing. That is no time to be reading a book on the theory of diversification....When you find something where you know the business is within your circle of competence, you understand it, the price is right, the people are right--then you take your thumb out of your mouth and you barrel in."

Monday, July 25, 2016


1998 video: Warren Buffett & Bill Gates Discuss Innovation, Business and Success [H/T ValueWalk] (LINK)
Related article about the event: The Bill & Warren Show
1960 Speech by Dave Packard to HP Managers [H/T @trengriffin] (LINK)
Related book: The HP Way
Trust experts on anything but the future - by Matt Ridley (LINK)

Stock Investors Pay Up for Peace of Mind [H/T @jasonzweigwsj] (LINK)
Related previous link: Horizon Kinetics: How Indexation is Creating New Opportunities for Short-Sellers, And Why This Should Alarm Ordinary Buyers of Stock and Bond ETFs
EconTalk: Angela Duckworth on Grit (LINK)
Related book: Grit: The Power of Passion and Perseverance
Intelligence Squared - “Richard Dawkins: The Rational Revolutionary” (podcast) (LINK) [Related books HERE.]

Hawaii's Lava Flow Is a Mesmerizing Force (video) (LINK)

Sunday, July 24, 2016


Arnold Van Den Berg: "Experiential Wisdom on Value Investing" | Talks at Google (LINK)

Tren Griffin: A Dozen Things I Learned Being Involved in one of the Most Ambitious Startups Ever Conceived (Teledesic) (LINK)

Jeff Bezos Moves Past Warren Buffett on World's Richest List (LINK)

Part 1 of Kevin Kelly's interview with London Real, discussing his book The Inevitable (video) (LINK)

The Knowledge Project podcast: Véronique Rivest (LINK)
On this episode, I talked with Véronique Rivest, one of the most respected sommeliers in the world, about one of my favorite subjects: Wine. We're going to go through a tasting, and learn some everyday tips and tricks.
Nate Silver: How I Acted Like A Pundit And Screwed Up On Donald Trump [H/T Linc] (LINK)

Brain Pickings (2013) - A Calendar of Wisdom: Tolstoy on Knowledge and the Meaning of Life (LINK)
Related book: A Calendar of Wisdom
Similar designs, 100 million years apart (LINK)

Friday, July 22, 2016


Warren Buffett Deputy Ted Weschler Makes His Mark (LINK)

Horizon Kinetics Q2 Conference Call (video/audio) (LINK) [The Q2 Commentary is also HERE.]

The Strategy Tax - by Ben Carlson (LINK)

Grant's Interest Rate Observer from 1987: Sell Donald Trump (LINK)
“Boy, you got me good,” Donald Trump told the editor of Grant’s. 
As The Wall Street Journal reports today, The Donald reacted with uncommon charity to a prescient Grant’s article in 1987 headed “Sell Donald Trump.”
The Global Economy’s Hesitation Blues - by Robert Shiller (LINK)

A Guide to Marketplaces (LINK)
Related previous links: 1) Marketplaces (and Network Effects); and 2) a16z Podcast: Getting Network Effects
Exponent podcast: Episode 086 — Falling a Pokémon Off a Cliff (LINK)

The turquoise killfish only lives for 3 months, but could help unlock the secrets of ageing (LINK)

Thursday, July 21, 2016


Warren Buffett videos from CNBC this morning:
Warren Buffett: How to fix boardrooms across the US 
Buffett: Guidance could lead to malpractice
The Motivation Toolkit (LINK)

Marketplaces (and Network Effects) (video) (LINK)
Related previous link: a16z Podcast: Getting Network Effects
William Mougayar: "Blockchains: Past, Present and Future" | Talks at Google (LINK)
Related book: The Business Blockchain
Ryan Holiday: "Ego is the Enemy" | Talks at Google (LINK)
Related book: Ego Is the Enemy 
Episode 06 of Malcolm Gladwell's Revisionist History podcast (LINK)
In the early ’90s, Hank Rowan gave $100 million to a university in New Jersey, an act of extraordinary generosity that helped launch the greatest explosion in educational philanthropy since the days of Andrew Carnegie and the Rockefellers. But Rowan gave his money to Glassboro State University, a tiny, almost bankrupt school in South Jersey, while almost all of the philanthropists who followed his lead made their donations to elite schools such as Harvard and Yale. Why did no one follow Rowan’s example?
How It`s Made | Metal Golf Clubs (video) (LINK)

An Interview With Tony Robbins (LINK)

June was the ninth month in a row that we’ve broken the global high temperature record (LINK)

Wednesday, July 20, 2016


DaVita HealthCare Partners (DVA): An Intelligent Fanatic Led Turn Around (LINK)

Unilever Buys Dollar Shave Club for $1 Billion (LINK)

Dollar Shave Club: How Michael Dubin Created A Massively Successful Company and Re-Defined CPG [H/T @iancassel] (LINK)

Dollar Shave Club and The Disruption of Everything -  by Ben Thompson (LINK)

Patrick O'Shaughnessy's Full Recommended Reading List (LINK)

TOXO - A 2009 Conversation with Robert Sapolsky (video and transcript) (LINK)
Related book: Life: The Leading Edge of Evolutionary Biology, Genetics, Anthropology, and Environmental Science
Book of the day: Digital Vortex: How Today's Market Leaders Can Beat Disruptive Competitors at Their Own Game

Monday, July 18, 2016


Bill Gates delivers the Nelson Mandela Annual Lecture [Gates enters about 32 minutes into the video.] (LINK)

Bonds Aren’t as Wretched an Investment as They Seem - by Jason Zweig (LINK)

As Rates Sink, Housing Bubbles Rise (LINK)
Canada, Australia and Sweden are among central banks caught between supporting their economies and addressing financial threats
1992 Harvard Business Review interview with Softbank's Masayoshi Son [H/T Ben Thompson] (LINK)
One success measure was that I should fall in love with a particular business for the next 50 years at least. Very often, people get excited for the first few years, and then, after they see the reality, they get tired of the business. I wanted to choose one that I would feel more and more excited about as the years passed. 
Another factor was that the business should be unique. That was very important to me. I didn’t want anyone else doing exactly the same thing. A third was that within 10 years I wanted to be number one in that particular business, at least in Japan. And I wanted to pick a business where the business category itself would be growing for the next 30 to 50 years. I didn’t want to choose a sinking ship. 
I had all those measurements, about 25 in all, and 40 new ideas. I took a big sheet of paper, and I drew a matrix and put down scores and comments for each. Then I picked the best one, which turned out to be the personal computer software business. That was the start of Softbank.
The Questions That Matter. And the questions that don’t. [H/T @Magyer] (LINK)
Back when I was a junior equity analyst, I asked more than my fair share of questions that didn’t matter. I would dial in to a company’s quarterly conference call and enter the Q&A queue intent on asking the most detailed, nit-picky question I could. Something along the lines of: “I noticed your cash conversion cycle has slowed by a few days sequentially. Could you walk me through what that says about the current demand environment and whether you project any weakness going forward?” 
That looks and sounds like an intelligent question. But why did I ask it? The answer, to the extent there is one, would be immaterial to my analysis. A 10-year discounted cash flow model with a terminal growth rate — or any other model for that matter — is not sensitive to such a short-term input. 
Instead, I asked it to justify my presence on the call. I asked it to demonstrate publicly just how quickly and completely I had dissected the company’s financial filings. And I asked it to prove how hard I was working. I did not ask it expecting to glean an insight that would lead to a better investing outcome.
Book Review: Leadership Lessons from a UPS Driver by Ron Wallace (LINK)
Related book: Leadership Lessons from a UPS Driver: Delivering a Culture of We, Not Me
EconTalk: Ryan Holiday discusses his book Ego Is the Enemy (audio) (LINK)

Simply Complex: The Life and Times of Murray Gell-Mann (video) [H/T @mjmauboussin] (LINK)

The Seven Deadly Sins of Banking

From Capital Returns (the excerpt below was from a Marathon letter written in November 2009):
One large European financial institution, however, which didn’t blow up during the Global Financial Crisis is Svenska Handelsbanken, Sweden’s largest bank and a long-term Marathon holding. Over the years we have gotten to know the bank quite well. Our meetings with management have often provided timely insights into the folly of their European banking competitors. A recently published book about the bank, entitled A Blueprint for Better Banking, by Niels Kroner, describes the history and culture of the bank and, as the title suggests, argues that many of the recent problems of the financial system could have been avoided if other banks were run in the “Handelsbanken way.” 
Handelsbanken is a very conservatively run, branch-based retail bank which was the only major Swedish bank not to break in the Nordic banking crisis of the early 1990s. This time around, Handelsbanken has pulled through yet again, avoiding the need to raise fresh capital or receive government support. That puts it on a short list of only three major European banks. Handelsbanken’s decentralised business model encourages branch managers to make loans based on local, face-to-face knowledge of customers rather than relying on centralised credit scoring techniques, as their competitors do. The bank consistently has the best customer service ratings in the industry and the lowest costs (as demonstrated by a low cost to income ratio compared with other banks). A few years ago, we asked management why (as we had been told) there were holes in the carpets at many of its branches. “Carpets don’t make money,” was the reply. 
Having avoided the disasters of its peers, since the beginning of 2007 Handelsbanken shares have outperformed those of all other major European banks. According to Niels Kroner, Handelsbanken has succeeded by not committing what he calls the Seven Deadly Sins of Banking. These are as follows: 
First deadly sin: Imprudent asset-liability mismatches on the balance sheet 
Obviously there are many cases around the world of how borrowing short and lending long can go wrong for banks. Recent examples in Europe include Northern Rock in the UK and the Irish banks. During the boom years, the Irish banks financed household mortgages that had a contractual maturity of two decades or more, with commercial paper of less than one year’s duration. Handelsbanken is acutely conscious of the risks posed by asset-liability mismatches. The bank uses a central treasury function to match and price deposits and loans according to their respective maturities. In this way, branches cannot report a profit by simply engaging in maturity transformation. 
Second deadly sin: Supporting asset-liability mismatches by clients 
The classic example here is foreign currency lending to households in Central European countries. Not long ago, European banks were providing low interest euro and Swiss franc mortgages to Hungarian and Latvian consumers. It was unlikely these customers understood the foreign exchange risk they were running. Handelsbanken does not engage in such lending, mainly because the primary incentive of the branch managers is to eliminate default risk. The worst thing a branch manager can do is to run up bad loans. Internally, branches are ranked on this measure to shame the underperformers. 
Third deadly sin: Lending to “Can’t Pay, Won’t Pay” types 
Here one immediately thinks of banks lending to subprime borrowers and private equity firms. Handelsbanken’s approach is rather to “lend to people with money.” Theirs is a niche lending approach rather than a mass market one. In company research meetings over the years, Handelsbanken told us that the banking industry had become obsessed with earning a few extra basis points of spread each quarter, while losing sight of credit risk, namely the chance that borrowers might never be in a position to repay the principal. 
Fourth deadly sin: Reaching for growth in unfamiliar areas 
A number of European banks have lost billions investing in US subprime CDOs (UBS has blown some $40bn in this manner), having foolishly relied on “experts” who told them that these were riskless AAA rated credits, i.e., they outsourced the underwriting decision. In Scandinavia, many banks pursued growth in the Baltic states and have suffered as GDP in the region has contracted by 15–20 per cent this year (house prices in Latvia are now down 70 per cent from the peak). Handelsbanken’s approach to foreign expansion, by contrast, has always been one of cautious “organic incrementalism,” as they describe it. The bank largely eschewed the Baltic states as too risky. Instead, Handelsbanken expanded its branch network in a number of mature Western European markets – including UK, Germany, and Norway – where it has been easy to recruit good branch managers among those who have grown disillusioned with the centralising tendencies at their old banks. In the UK, Handelsbanken hired local branch managers who brought with them their best clients and most highly regarded colleagues. 
Fifth deadly sin: Engaging in off-balance sheet lending 
Recent examples of the cardinal banking sin of off-balance sheet lending include the use of conduits and SIVs by European banks. By contrast, Handelsbanken’s approach is to accept only risks which it is prepared to hold on its balance sheet until maturity and not to lend money to those that are in the business of lending money themselves. Incidentally this principle also restrained the bank from engaging in pass-the-parcel securitization schemes which have had such a damaging effect on underwriting standards across the European banking system. 
Sixth deadly sin: Getting sucked into virtuous/vicious cycle dynamics 
The sixth deadly sin is to be seduced by what might be termed Ponzi economics. Lending by Scandinavian banks in the Baltic states seemed like a good idea for a long time partly because GDP was growing rapidly. The strong economic growth, however, was a function of rapidly growing credit supplied by the banks themselves. The fact that every bank was lending in the same market made it feel safe, and for a while the virtuous cycle continued. Real estate markets around the world were similarly characterised by the notion that asset quality was independent of credit conditions. Handelsbanken prides itself on its contrarian streak. It is less prone to high level “strategic” moves (which normally entail engaging in happy groupthink) because of its reliance on the branch network. The branches have a fairly consistent risk appetite through the cycle and so tend to lose market share in frothy times (e.g., during the 2006–08 period) and gain share when others are unwilling or unable to lend. 
Seventh deadly sin: Relying on the rearview mirror 
A recent expression of this common financial vice includes the widespread use of value-at-risk models. Such models tend to be based on a limited amount of historic data, which in the years before the crisis were relatively benign. True risk was understated. In its 2007 annual report, Merrill Lynch reported a total risk exposure – based on “a 95 per cent confidence interval and a one day holding period” – of $157m. A year later, the Thundering Herd stumbled into a $30bn loss! After house prices have risen by 85 per cent in ten years, as they had in the United States, was it realistic to expect a maximum decline of 13.4 per cent (Freddie Mac’s worst case scenario)? Handelsbanken determined its capital requirements based on more pessimistic crisis scenarios, such as a repeat of the Swedish banking crisis. 
There are many other ways in which Handelsbanken is different from its peers. In its dialogue with investors, bank representatives refuse to engage in the game of trying to estimate this year’s profit number. They have no other choice, since divisional budgets were abolished in 1972. If managers have budget targets, so the thinking goes, it becomes more difficult to stay out of the market when pricing is unfavourable. 
Management incentives are also unusual. The bank funds an employee profit-sharing scheme called the Oktogonen Foundation, which receives allocations when the group’s return on equity exceeds the weighted average of a group of other Nordic and British banks. If this criterion is satisfied, and it usually is, except at the peak of the cycle, one-third of the extra profits can be allocated to Oktogonen subject to a limit of 15 per cent of the dividend to shareholders. If the Handelsbanken lowers the dividend paid out to its shareholders, no allocation is made to the profit-sharing foundation. 
The foundation channels a large part of its resources into Handelsbanken stock and currently holds 11 per cent of the bank’s equity. All employees receive an equal part of the allocated amount (without the traditional skew towards the upper echelons), and the scheme includes all staff in the Nordic countries and, since 2004, in Great Britain. Disbursements are only made once a member of staff has reached the age of 60. Employees who have been working for Handelsbanken since 1973 have around $600,000 – which turns out to be roughly half the value of a Nobel prize – due to them at retirement, regardless of whether they have worked as the CEO or as a security guard. The system undoubtedly contributes to the bank’s tribal culture and aligns employee interests with shareholders.

Sunday, July 17, 2016


Mental Models I Find Repeatedly Useful [H/T @ChrisPavese] (LINK)

a16z Podcast: Getting Network Effects (LINK)

Dag Kittlaus on Charlie Rose (video) (LINK)
Dag Kittlaus, who previously co-founded Siri, discusses his new company Viv and advances in artificial intelligence.
Erupting Volcano Lets Scientists Watch Rare Caldera Collapse (LINK)

A couple of interesting titles in the latest $4.95 sale on Audible:

No One Would Listen: A True Financial Thriller

Salt: A World History

Friday, July 15, 2016


Jeremy Grantham's thoughts on the recent Brexit vote (LINK)

Oaktree’s approach to Navigating Cycles (LINK)
This Special Edition Insights relays a discussion between Bruce Karsh (Co-Chairman and Chief Investment Officer) and a diverse group of Oaktree investment professionals on the topic of cycles, both past and present.   
Latticework of Mental Models: Inattentional Bias (LINK)

Why Do We Haggle For Cars? (LINK)

Horizon Kinetics - Under the Hood: What's in Your Index? The Exxon Conundrum (LINK)

Trucking Company Failures on the Rise [H/T @chriswmayer] (LINK)

The Hedgehog and the Fox (When It Comes to Platforms and Innovation) (LINK)

The magnificent spiral galaxy NGC 6814 (LINK)

Thursday, July 14, 2016


Sanjay Bakshi on Checklists (LINK)

Investors Now Pay Germany to Borrow for 10 Years (LINK)
Germany sold 10-year debt at a negative yield on Wednesday, becoming the first eurozone nation to do so and setting a further milestone in the relentless fall of government bond yields around the world. 
...In the U.S., a $12 billion sale of 30-year Treasury bonds attracted stellar demand Wednesday despite a record-low yield of 2.172%, which smashed the previous low of 2.43% set in January 2015. Indirect bidding, a proxy of foreign demand, surged to 68.5% of total bids at the sale.
John Hempton: The Fraud-Hunting Short Seller Taunting Bill Ackman On Valeant [H/T Abnormal Returns] (LINK)

Matt Ridley: Twitter and Facebook are tearing us apart (LINK)

Episode 05 of Malcolm Gladwell's Revisionist History podcast (LINK)
This week we talk about a topic near and dear to our stomachs—cafeteria food. You might not look fondly on the food at your college cafeteria, but in recent years some schools have made an investment in high-quality food. 
While it may seem like a good thing, it represents a moral dilemma that many colleges have to face: should they focus on good food and amenities or good financial aid?

Wednesday, July 13, 2016


A big thanks to Andrew for alerting me to a great site to help build some worldly wisdom: CuriosityStream (You can sign up for a 1-month free trial HERE.)

Warren Buffett versus the three-tier drinks system [H/T Linc] (LINK)

Sequoia completely exits Valeant [H/T Matt] (LINK)
As we have previously reported, our longtime chief executive officer and co-manager of Sequoia, Robert D. Goldfarb, retired from our firm at the end of March 2016. Our new leadership elected to sell our position in Valeant Pharmaceuticals, exiting completely by mid-June. Valeant was our largest position to start the year and its 80% decline through June 30 badly penalized our results. For the first half, Sequoia generated a negative 13.2% return vs. a positive 3.8% return for the S&P 500 Index. Absent Valeant, the rest of the Fund’s portfolio generated a positive return of 2.3% for the first half.
A Technical Glitch - by Ben Thompson (LINK)

Ruchir Sharma at the LSE (audio) (LINK)
Related book: The Rise and Fall of Nations: Forces of Change in the Post-Crisis World
Joseph Henrich: "The Secret of Our Success" | Talks at Google [H/T @Jesse_Livermore] (LINK) [There is also a video of Henrich at the LSE HERE from a few weeks ago, which was also posted on the LSE podcast on June 22nd.]
Related book: The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter

Tuesday, July 12, 2016


If you have Netflix, I highly recommend the BBC's Life Story series, narrated by the great David Attenborough. It looks like you can also buy the DVDs HERE.

Berkshire's Blemishes: Lessons for Buffett's Successors, Peers, and Policy - by Lawrence A. Cunningham (LINK)

Buffett’s Investment in Dempster Mill–A Cigar Butt (LINK)

Michael Mauboussin on Creating a Checklist (LINK)
Related book: Think Twice: Harnessing the Power of Counterintuition
Alex Tapscott: "Blockchain Revolution" | Talks at Google [H/T ValueWalk] (LINK)
Related book: Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World
Lessons learned from Theranos’ fall (LINK)

Hugh Hendry: How We Learned To Sop Worrying And Love "the Brexit bomb" (LINK)
Amidst today’s hysteria concerning the drop in sterling, people forget that the pound dropped 36% in the wake of the collapse of Northern Rock in 2007 and by 15% in 2014 on fears of a triple dip recession, and the world didn’t come to an end. Again, plus ça change…it appears that the prevailing glut of global liquidity seems to act as a shock absorber; the money simply has to go somewhere, typically sovereign bonds and bond like equity proxies.
A Brief History of Trial by Combat (LINK)

The Loudest Sound In The World Would Kill You On The Spot (LINK)

99% Invisible podcast, Episode 195: Best Enjoyed By (LINK)
Date labels (e.g. “use-by”, “sell-by”, “best-by”, “best if used by,” “expires on”, etc.) are on a lot of products. Forty-one states require a date label on at least some food product, but there are huge inconsistencies, not just in the wording, but in the meaning of these labels. Some states require them only on dairy, some on shellfish, some on any perishable foods. It’s become complicated to decipher these dates, or to know how to act on them, for large retailers and individual consumers alike. And despite what many people assume, they are not about food safety, and were actually never meant to be. 

Predictability and technology

I often look for quotes from Warren Buffett or Charlie Munger when I'm trying to think about how a business model for a company I'm looking at may develop, and how those possibilities relate to my downside risk. Comparing the business model with what I look for in downside risk on that potential investment is why I've essentially filtered my prospective ideas into four categories to help guide the time I spend on potential ideas. I discussed the categories in THIS article a few years ago, but they've progressed quite a bit since then, so I need to update that article at some point. 

But finding wisdom from Buffett and Munger to help in the thinking and filtering process has been quite valuable, and Peter Bevelin's latest book has been of great use in helping to find such wisdom. The most recent example being the excerpt below from Warren Buffett's 2009 letter which I think is worth thinking about whenever one is looking at a technology-related business:
Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding. 
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy.
I think one of the biggest mistakes investors make is to underestimate the competitive landscape, and as I mentioned in the Key Checklist Items post, this includes businesses and entrepreneurs that aren’t even competitors yet, which is especially relevant when looking at technology companies. Predicting a growing industry is far different, and easier, than predicting how that growth will translate into a profit margin and return on capital for an individual company (a point made by Mr. Buffett in the quote above). 

Over the last couple of years, I've posted more links related to technology and venture capital than I had previously. Part of this is because I'm a believer that the way in which technology and the internet will change business models and competitive advantages going forward is still in its early stages, and also because I think there is a lot to learn from that world about management teams and business cultures. From an investment standpoint, these types of businesses are generally more unpredictable. But if one can look at smaller public companies and wait for the fat pitch, it's occasionally possible to find one at a value price where one's downside is not dependent on having to predict the unpredictable.

And given the winner-take-all nature of the internet, if one is able to recognize a true moat in a business within an industry destined to become much larger (e.g. Google in search, Amazon in e-commerce, etc.), especially if one can find that business relatively early and pay a good-to-fair price, then it is possible for one to practice Charlie Munger's desired method of finding a few great companies and then sitting on your ass, even among businesses where technological change plays a large role. Determining what a good-to-fair price is, of course, the art, challenge and opportunity in investing.

Monday, July 11, 2016

Your latest reminder to ignore most financial and macro news...

The front page of CNBC's website the day of the Brexit vote, the day after, and then this morning:


"A bubble can be identified partly based on nosebleed valuations, but a bubble is also behavioral. When prices are rising simply because they have been rising, when people on the sidelines are drawn into speculation because they can't stand their friends and neighbors making what seems like free money while they themselves are not, the market may be entering bubble territory. In the words of famed economist John Kenneth Galbraith, 'A bubble comes from rising prices, whether of stocks, real estate, works of art or anything else. A price increase attracts attention and buyers, which results in even higher prices.'" -Seth Klarman ("The 2008 Collapse and Its Aftermath: A Financial Market Perspective", June 2013)

Stock Market Returns Are Lumpy (LINK)

Two technologies—better batteries and local distribution networks—threaten the legacy electric utilities [H/T @ChrisPavese] (LINK)

a16z Podcast: Software Programs the World (LINK)

The Promise of Regrexit - by George Soros (LINK)

John Kay on The implications of Brexit (podcast) (LINK)

The visualizations transforming biology (LINK)

Book of the day: The Book of Life: Daily Meditations with Krishnamurti

Saturday, July 9, 2016


Thornton O'Glove: "Quality of Earnings" | Talks at Google (LINK)
Related book: Quality of Earnings
The Values of Value Investing (LINK)

When Startups Put the Fab in Fabricate (LINK)

India + Internet = ? (LINK)

Lunch with the FT: Philip Tetlock (LINK)
Related book: Superforecasting: The Art and Science of Prediction
A Guide to E-Mail Sign-Offs [H/T @AdamMGrant] (LINK)

Chart of the day - Real House Prices, % change from Q1 2000-Q3 2015 [H/T @PlanMaestro]:

Friday, July 8, 2016


2003 CFA Magazine article (Inaugural Issue): Living Legends [Bernstein, Bogle, Brinson, Buffett, LeBaron, Neff, and Templeton] [H/T Barry Ritholtz] (LINK)

Benjamin Graham on Financial Advisors (LINK)

Best's Review Article about Ajit Jain [H/T Linc] (LINK)

Buffett’s Gen Re Turns to Rival for Broker Relationships [H/T Linc] (LINK)

Why Banks Aren’t Giving You a 3%, 30-Year Mortgage…Yet (LINK)
Government bond yields have plummeted this week, but mortgage rates haven’t fallen so fast. 
After plumbing record lows earlier this week, the 10-year yield closed at 1.387% on Thursday. The national average for a 30-year, fixed-rate conforming mortgage was 3.41%, according to the latest data from Freddie Mac released Thursday. The difference or spread between the two, at 2.02 percentage points, has risen in recent weeks and is at one of its widest levels since mid-2012. 
...Indeed, if the difference between the 30-year mortgage rate and the 10-year Treasury yield were at its average level for the previous 10 years, the average mortgage would be 3.17%. Mortgage rates key off the 10-year Treasury because most homeowners tend to move within around 10 years, repaying their loans in the process.

Even so, borrowers are doing well. Rates around 3.5% are historically low. And the fact that the national average has dipped decisively below 3.5% may spur even more borrowing activity. A range of average rates between 3.6% and 4% has occurred many times for 30-year fixed-rate mortgages since 2012, but they fell below 3.5% for only brief periods; the record low of 3.31% was hit in November 2012.
Groundhog's Shadow and the Cost of Fear: A Case for the Mounting Bubble in Defensive Stocks (LINK)

How Accounting Standards Went Insane: It Didn’t Start with IFRS Convergence (LINK)

Crazy - A Story of Debt, by Grant Williams (video) (LINK)
This is a story about debt – 2008 was the crystallization of that, the years since have been the denial of it, and the years to come will be the resolution. Grant Williams, founder & publisher of the ‘Things That Make You Go Hmmm...’ research service, and co-founder of Real Vision TV, brings us an eye-opening presentation titled Crazy, where he puts into perspective the extraordinary levels of global debt and unprecedented monetary policy, and reminds us that the many factors that led to the ‘08 crisis are still very much present.
U.S. Regulator Bans Theranos CEO Elizabeth Holmes From Operating Labs for Two Years (LINK)
U.S. Federal health regulators dealt a major blow to Theranos Inc., banning founder Elizabeth Holmes from operating a blood-testing laboratory for at least two years and yanking regulatory approval for its California lab. 
The Silicon Valley company announced the sanctions, by the Centers for Medicare and Medicaid Services, in a news release late Thursday night. The company can appeal the ruling. 
The sanctions, which include an unspecified monetary penalty, cap eight months of public scrutiny that began in October when The Wall Street Journal raised questions about the company’s ability to perform a wide variety of blood tests with just a few drops of blood. Theranos once was a leading light in the technology boom, with the private company valued at $9 billion in 2014.
Cool Tools Podcast - Show 058: Tim Ferriss (LINK)

Thursday, July 7, 2016


As Brexit and China worries persist, I keep thinking about this quote from Charlie Munger: "We're emphasizing the knowable by predicting how certain people and companies will swim against the current. We're not predicting the fluctuation in the current."

Over an extended holiday weekend visit to Believeland, I was able to get most of the way through the book Shoe Dog. It is one of the best business biographies I've come across, and I highly recommend it. The qualities of persistence and endless trial-and-error (especially in the early years) that are evident in many of the great business success stories are in full force with the story of Phil Knight. 

CEOs relish 'unique' benefits of being a Buffett-owned business, despite some downsides [H/T @CunninghamProf] (LINK)

The Bezos Effect: How Amazon’s Founder Is Reinventing The Washington Post – and What Lessons It Might Hold for the Beleaguered Newspaper Business [H/T Linc] (LINK)

Bill Gross' July 2016 Investment Outlook (LINK)

Energy limits: Why we see rising wealth disparity and low prices (LINK)

Richard Duncan: Forget Brexit, China’s The Real Crisis (video) (LINK)

Episode 04 of Malcolm Gladwell's Revisionist History podcast (LINK)

The Fascinating Science Of Why We Yawn [H/T @AdamMGrant] (LINK)

The current Audible sale is 50% off the Classics Genre through July 11th at 11:59 PM PT. There are a lot of them, so if you are an Audible member you can take some time to explore them. But here are some that either caught my eye or ones that were already on my wish list that I noticed: 

The Way to Wealth – by Benjamin Franklin

The Autobiography of Charles Darwin

The abridged version of On the Origin of Species read by Richard Dawkins

The abridged version of The Voyage of the Beagle read by Richard Dawkins

The Iliad

The Odyssey

The Complete Essays of Montaigne

The South Sea Bubble and Tulipomania: Financial Madness and Delusion – by Charles Mackay [Two chapters from Extraordinary Popular Delusions and The Madness of Crowds.]

The Complete Stories of Sherlock Holmes, Volume 1

The Complete Stories of Sherlock Holmes, Volume 2

The Age of Reason – by Thomas Paine

Our Constitution: The Complete United States Constitution

The Prince - by Niccolo Machiavelli

As a Man Thinketh - By James Allen

Zorba the Greek

To Kill a Mockingbird

Treasure Island

A Tale of Two Cities

Atlas Shrugged

The Problems with Philosophy - by Bertrand Russell

The Prophet & The Wanderer - by Khalil Gibran

On the Road - by Jack Kerouac

The Dharma Bums - by Jack Kerouac

The Old Man and the Sea - by Ernest Hemingway

Green Hills of Africa - by Ernest Hemingway

A Moveable Feast - by Ernest Hemingway

Adventures of Huckleberry Finn - by Mark Twain

Plato's Republic

The Great Courses: Masters of Greek Thought: Plato, Socrates, and Aristotle

The Great Courses: Plato, Socrates, and the Dialogues

The Great Courses: An Introduction to Greek Philosophy

Wednesday, July 6, 2016

The essence of Charles Darwin's disruptive genius...

"The essence of Darwin's disruptive genius was his ability to think about nature not as fact—but as process, as progression, as history." -Siddhartha Mukherjee, The Gene: An Intimate History


A related quote (from my Favorite Quotes page):

"I have been speculating...what makes a man a discoverer of undiscovered things, and a most perplexing problem it is. Many men who are very clever—much cleverer than the discoverers—never originate anything. As far as I can conjecture, the art consists in habitually searching for the causes and meaning of everything which occurs. This implies sharp observation and requires as much knowledge as possible of the subject investigated." -Charles Darwin (The Autobiography of Charles Darwin)

That also reminds me of a quote from Charlie Munger relating to turning information and knowledge and cleverness into something useful: 
"We read a lot. I don't know anyone who's wise who doesn't read a lot. But that's not enough: You have to have a temperament to grab ideas and do sensible things. Most people don't grab the right ideas or don't know what to do with them." 

Tuesday, July 5, 2016


Bill Gates on his friendship with Warren Buffett: 25 Years of Learning and Laughter (LINK)

Podcast interview with Mikael Syding [H/T Tamas] (LINK)
Mikael managed the long/short equity fund at Futuris/Brummer from 2000 to 2015 as one of three senior partners, serving as portfolio manager and managing director. 
The fund received numerous awards, including several for being best directional hedge fund over ten years, and not least, European long short equity fund of the year in 2008 – a year, if you recall, where investors globally took a beating. The fund then went on to win the European Hedge Fund of the Decade 2000 to 2009.
Patrick Industries (PATK): The Best Performing Stock Since 2009 - by Ian Cassel (LINK)

The first signs of post-Brexit financial stress: property fund suspended (LINK)
AFTER the initial post-Brexit sell-off in sterling and equities, financial markets had quietened down in the wake of the shock referendum result. The FTSE 100 even moved ahead of its pre-Brexit level. 
But investor concerns have shown up in another market - property, Today Standard Life, the Scottish insurer, suspended redemptions in its UK Retail property fund, with £2.9 billion of assets under management. 
Aviva's The Second Property Fund To Suspend Withdrawals - Time To Look At That Liquidity Mismatch (LINK)

Third UK Property Fund Halts Withdrawals Amid Brexit Market Turmoil (LINK)
M&G Investments said it had stopped trading in a £4.4 billion U.K. property fund—the largest of its kind—becoming the third big-name asset manager to take similar steps in little over 24 hours. Earlier in the day, Aviva Investors revealed it had suspended trading in a U.K. property fund for similar reasons. That followed an announcement Monday by Standard Life Investments.
American Century employees sue for excessive 401(k) fees (LINK)
Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan's investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.
The Surprising Relevance of the Baltic Dry Index (LINK)

Jason Zweig inteviews Phil Tetlock: The Perilous Task of Forecasting [H/T ValueWalk] (LINK)
Related book: Superforecasting: The Art and Science of Prediction
Think Less, Think Better [H/T @ChrisPavese] (LINK)

Ten Things You Need to Know About the Juno Mission (LINK)

Phil Fisher quote

From Common Stocks and Uncommon Profits:
The ability to see through some majority opinions to find what facts are really there is a trait that can bring rich rewards in the field of common stocks. It is not easy to develop, however, for the composite opinion of those with whom we associate is a powerful influence upon the minds of us all. There is one factor which all of us can recognize, however, and which can help powerfully in not just following the crowd. This is realization that the financial community is usually slow to recognize a fundamentally changed condition, unless a big name or a colorful single event is publicly associated with that change.

Monday, July 4, 2016


Siddhartha Mukherjee on Charlie Rose discussing his book The Gene (LINK)

Richard Feynman on Teaching Math to Kids and the Lessons of Knowledge (LINK)

Latticework of Mental Models: Wisdom of Crowds (LINK)

Buffetts’ Berkshire Hathaway Wants More Wells Fargo (LINK)
Warren Buffett’s Berkshire Hathaway (BRK.A) has petitioned the Federal Reserve to add to its position in Wells Fargo (WFC). 
Wells Fargo’s stock price jumped to a session high ($47.28) after headlines about the application hit newswires, though it finished Friday down 0.6% at $47.04. Berkshire owns almost exactly 10% of shares outstanding and, according to Bloomberg, the Fed must authorize transactions that put any investor over the 10% mark.
China: The Next Crisis - Kyle Bass (video) [H/T ValueWalk] (LINK)

Mutual Fund Observer, July 2016 (LINK)

The Absolute Return Letter, July 2016 (LINK)

FT Alphachat podcast: Fact-checking Brexit claims with Tim Harford (LINK)

Hussman Weekly Market Comment: Head of the Snake - The Poisonous Gap Between Paper Wealth and Real Wealth (LINK)
Following the British referendum to exit the European Union, the paper value of global assets briefly fell by about $3 trillion. This decline in the market capitalization immediately garnered headlines, suggesting that some destruction of “value” had occurred. No. The value of a security is embodied in the future stream of cash flows that will actually be delivered into the hands of investors over time. What occurred here was a paper loss. While the recent one was both shallow and temporary, get used to such headlines. In the U.S. alone I fully expect that $10 trillion of paper wealth will be erased from U.S. equity market capitalization over the completion of the current market cycle. 
While any given holder can sell their securities here, somebody else has to buy those same securities. The fact that valuations are obscene doesn't mean that the economy has created more wealth. It just means that existing holders of stocks and long-term bonds have a temporary opportunity to obtain a wealth transfer from some unfortunate buyer. Whoever ends up holding that bag will likely earn total returns close to zero on their investment over the coming 10-12 year horizon, with profound interim losses on the way to zero returns.
Exponent podcast: Episode 085 — Ballots Versus Guillotines (LINK)

A book I'm excited to read is now available for pre-order: Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses

Book of the day [H/T CIO]: Seven Brief Lessons on Physics - by Carlo Rovelli

Margins and competitive advantage

Gross profit margin demonstrates competitive advantage: it is the purest expression of customer valuation of a product, clearly implying the premium buyers assign to a seller for having fashioned raw materials into a finished item and branding it. 
Although gross margin is a partial function of a company’s industry and high gross margins can reflect low asset intensity, sustained high gross profit margins relative to industry peers tends to indicate durable competitive advantage. Zeroing in on gross margins, as opposed to bottom line net income, also helps distinguish competitive advantage from managerial ability: bloated but short-term cost structures can reduce net income and disguise real long-term competitive advantages. High gross margins also confer other advantages: they can expand the scope for operating leverage, provide a buffer against rising raw material prices and provide the flexibility to drive growth through R&D or advertising and promotion. 
The more incremental top-line revenue that ends up as bottom-line profit, the better. Suppose two rivals each grow revenue by a dollar. If it costs one of them ten cents to do so and the other 80 cents, the growth is clearly more valuable for the former. Businesses with high operating margins are typically stronger than those with lower ones. 
Sustained margin expansion also signals strength. Big swings in operating margins can indicate that major cost components are outside of management’s control, suggesting that caution be applied. A company that consistently achieves both high gross and high operating margins indicates a strong competitive advantage sustainable at tolerable cost.

Saturday, July 2, 2016

Seneca quote

From Moral letters to Lucilius - Letter 23 (Kindle):
Do you ask what is the foundation of a sound mind? It is, not to find joy in useless things. I said that it was the foundation; it is really the pinnacle. We have reached the heights if we know what it is that we find joy in and if we have not placed our happiness in the control of externals. The man who is goaded ahead by hope of anything, though it be within reach, though it be easy of access, and though his ambitions have never played him false, is troubled and unsure of himself. Above all, my dear Lucilius, make this your business: learn how to feel joy.

Related quotes, which I've also added to the Stoicism quotes, thoughts, and readings page:
"People look for retreats for themselves, in the country, by the coast, or in the hills; and you too are especially inclined to feel this desire. But this is altogether unphilosophical, when it is possible for you to retreat into yourself at any time you want. There is nowhere that a person can find a more peaceful and trouble-free retreat than in his own mind, especially if he has within himself the kind of thoughts that let him dip into them and so at once gain complete ease of mind; and by ease of mind, I mean nothing but having one’s own mind in good order. So constantly give yourself this retreat and renew yourself. You should have to hand concise and fundamental principles, which will be enough, as soon as you encounter them, to cleanse you from all distress and send you back without resentment at the activities to which you return." —Marcus Aurelius 
"Practice, then, from the very beginning to say to every rough impression, ‘You’re an impression and not at all what you appear to be.’ Then examine it and test it by the standards that you have, and first and foremost by this one, whether the impression relates to those things which are within our power or those which aren’t up to us; and if it relates to those things which aren’t within our power, be ready to reply, ‘That’s nothing to me’." —Epictetus

Friday, July 1, 2016

Management incentives and insider ownership...

From Capital Returns (the excerpt below was from a Marathon letter in February 2012):
While the increasing influence of the proxy advisory services is welcome, the prescriptive, rule-based approach of these organizations does not suit every case, particularly when it comes to executive remuneration. What is the optimal incentive scheme, then? The answer is it depends on the circumstances. Remuneration structures based on earnings per share (EPS) growth and total shareholder return (TSR) performance measures are increasingly commonplace. Yet they suffer from the problem identified long ago by the management guru, Peter Drucker, who observed that the search for the right performance measure is “not only likely to be as unproductive as the quest for the philosopher’s stone; it is certain to do harm and to misdirect.” This is particularly the case when pay is linked to EPS – a particular bête noire for Marathon over many years. 
The earnings per share measure is prone to manipulation by unscrupulous executives; it takes no account of risk and encourages value destroying acquisitions and buybacks, especially when interest rates are low. It also encourages the quarterly EPS guessing game beloved by the sell-side. At times, it seems that meeting the EPS target has become the main strategic purpose of the company. This is regrettable. Corporate strategy should be about how best to allocate resources. If a turnaround requires a three-year investment phase, management may not pursue the optimal business plan if their compensation is linked to interim EPS results. While these inter-temporal issues can be partly resolved by phasing in performance rewards over a period of years, investor myopia and management’s own interest tend to lead to an exclusive focus on the calendar year EPS, which bears no relation to long-term value creation. 
Linking compensation to total shareholder return (TSR), the most common share price-based measure, is better than EPS, as it forces management to think about what drives shares prices over the medium term. Such schemes suffer from point-to-point measurement, which can be distorted if the stock price at either the start or end date is inflated by takeover speculation or by general overvaluation in the stock market. Then, there are questions over what time frame to measure the returns; also, whether the benchmark should be absolute or relative – both have their merits, neither is perfect. In the case of relative schemes, should the benchmark be provided by a peer group or by the broader market index? Sir Martin Sorrell, the head of advertising giant WPP, has become a very wealthy man thanks to his ability to outperform a small group of marketing service companies. Unfortunately, this wealth creation has not been shared with the company’s owners due to the under-performance of this sector over many years. 
For this reason, we normally prefer corporate incentives schemes to be benchmarked against the stock market index, in line with our own performance fees. Company managers might feel aggrieved that they have no control on performance relative to a broad index, which may be driven by moves in some heavily-weighted sector, such as mining or pharmaceuticals in the FTSE 100. Some companies have come to us seeking to switch from a relative TSR scheme to an absolute one – often after a period of relative outperformance which presumably management believes will end imminently. 
As regards the time frame over which performance should be measured, here one runs into the problem of investor myopia. Since the average holding period for European shares is down to 12 months (see Chart 3.2), the “average” investor has little interest in the performance of a company over a five-year period. We prefer longer measurement periods, with multiyear phasing in of benefits to encourage long-range strategic thinking. The views of high frequency traders and investors obsessed with quarterly EPS should be given a very low weight by management. Time frames may also need to vary by sector. In the capital goods and extractive industries, project terms may be well in excess of five years (for aero engines, product life cycles can be decades). 
Given that each measure has pros and cons, it is not surprising that remuneration consultants seek a compromise, bundling together a mixture of measures in the incentive scheme. But so-called “balanced” approaches, such as those which mix an EPS target with a return on capital overlay and a TSR override, are likely to confuse both management and investors and, even worse, can encourage sophisticated gaming strategies. 
Insider ownership has always seemed to us as the most direct way to deal with the principal-agent problem, which arises with the separation of corporate management from ownership. Our portfolios have tended to be skewed towards companies where successful entrepreneurs run their companies and retain sizeable shareholdings. Pleasingly, a number of companies have followed the example set by Reckitt Benckiser, where executives are required to build up significant shareholdings. Along similar lines, HSBC has recently revamped its incentives so that generous deferred share awards, which vest after five years, have to be held until retirement. Long-term share ownership is probably the best way of concentrating the minds of management on the true drivers of value. The manager’s instinct for wealth protection should guard against excessive risk-taking, the unfortunate counterexample of Lehman’s Dick Fuld notwithstanding.