Links

TED Talk - Tim Harford: How messy problems can inspire creativity (video) (LINK)

The $500 Million Battle Over Disney’s Princesses: How Hasbro grabbed the lucrative Disney doll business from Mattel (LINK) [H/T @ChrisPavese] (LINK)

Greg Ip on EconTalk discussing his book Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe (LINK)

Book of the day: Birdseye: The Adventures of a Curious Man

Given the areas of the market that are getting hit especially hard right now, maybe one or more of the documentaries below will be of interest to some:

Crude - The Incredible Journey Of Oil

Offshore Oil Drilling Industry

World's Marvelous Oil Tankers

Super Tanker: LNG Carrier

The Biggest SHIP in the World 2015

Links

Today's Audible Daily Deal ($3.95) is a worthwhile listen: The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers - by Ben Horowitz

Broyhill Book Club 2015 - by Chris Pavese (LINK)

In Silicon Valley Now, It’s Almost Always Winner Takes All [H/T @BrattleStCap] (LINK)

Apollo Asia Fund's Q4 report: Upheaval and new perspectives (LINK)

The First Million - by Ian Cassel (LINK)

What made Charles Darwin an Effective Thinker? Follow the Golden Rule (LINK)

Links

A Dozen Things Learned about Investing from Jim Chanos (LINK)

A New Year Message from Horizon Kinetics (LINK)

In 2015, we continued to observe evidence of the impact of indexation as the primary investment modality. At the risk of sounding like a broken record, we can’t help but share yet another data point illustrating the valuation dichotomy created by the ETF divide, which to our knowledge is unprecedented, at least in our three-plus decades of investing experience. The largest 15 companies in the S&P 500 Index have an aggregate market capitalization of $4.7 trillion dollars. That is also the total market capitalization of the smallest 346 companies in the S&P 500. Looked at in another way, the 15 highest-contributing stocks, with an average aggregate weight of 13%, produced about 280% of the S&P’s return. That’s the extent of bifurcation which investors face. Mindboggling as it is, this is reality. 

Of course, our ongoing study on the subject of indexation begs the question: how does it all end? Fee competition continues to trend toward a dead end: the iShares Total Market ETF (ITOT), which purports to include every possible subset that is buyable in the stock market, just lowered its expense ratio to three basis points, which is three 100ths of 1%. We believe that this is a seminal moment in indexation mass-investing. As the profitability is squeezed out of it, so too will be the incentive of the manufacturers and promoters to practice it. This change will have completely unpredictable consequences for equities at large, because ETF asset flows have been dominating valuations with no regard whatsoever for the fundamental properties of the underlying securities they comprise.

Hussman Weekly Market Comment: Complex Systems, Feedback Loops, and the Bubble-Crash Cycle (LINK)

In any complex system, there are typically two types of feedback loops at work. Some feedback loops are balancing, so that deviations from some desired target are followed by actions to push the system back to that target. Your body has lots of these, which keep your temperature, blood sugar, and other vital processes in check. Other feedback loops are self-reinforcing, so that deviations from some starting point are followed by changes that push the system even further from that point. Cancer and viral replication are among those self-reinforcing feedback loops, and can be fatal if left unchecked by a balancing loop. 

Any system that rewards the winner of one competition with the means to win the next competition also contains a self-reinforcing feedback loop. Many internet and social media companies benefit from this dynamic, because new users tend to gravitate toward the platforms chosen by existing users. Even if these companies operate with little profit, speculative financial markets may provide them with a war chest of cash through overvalued public offerings, which can then be used to acquire other businesses. The U.S. income distribution has featured a similar feedback loop in recent decades because repeated cycles of capital misallocation have resulted in a scarcity of productive investment. The irony is that as productive capital becomes scarce, the pie becomes smaller, but a larger share goes to the owners of existing capital. Fed policymakers then respond to economic weakness with actions that amplify the misallocation of capital. Instead of continuing these monetary distortions, the best way to improve the distribution of income in the U.S. would be to encourage productive investment at every level - government (productive infrastructure, clean energy), industry (investment and R&D incentives), and individuals (education, job training). This would contribute both to a larger pie and a more equitable income distribution. 

Most complex systems contain both balancing and self-reinforcing feedback loops, and the behavior of the overall system can change dramatically depending on which loop becomes dominant at any point in time

BRIEF HISTORY & INTRODUCTION OF RUBBER (LINK)

Book of the day: Cod: A Biography of the Fish that Changed the World

While I've had the book Cod on my list for a while, it was brought back to my attention from this paragraph in the book Capital Returns:

Thoughtful investment managers probably packed Capital: The Story of Long-Term Investment Excellence by Charles Ellis for their beach reading this year. Instead, our pick of the holiday reading this year is Cod by Mark Kurlansky. In this wonderful book, Kurlansky describes the rise and fall of the cod fishing and processing industry from the perspective of a social historian and gastronome, and the book takes the form of a culinary travelogue peppered with recipes. The recipes look appealing, but our advice is to read the book from the perspective of the capital cycle; then the industry’s rise and fall becomes even more interesting.

Links

Sanjay Bakshi: NO HEDONIC TREADMILL FOR MR. CHANDRAN (LINK)

Latticework of Mental Models: Game Theory (LINK)

Five Good Questions for Gareth Jones about his book Why Should Anyone Work Here? (LINK)

a16z Podcast: Blockchain vs./and Bitcoin (LINK) [This was from November, but I just got to it, and it provided some hints as to how the Blockchain may find its way into financial markets that I thought were worthwhile things to think about.]

Links

Last night, I finished watching the first two segments from the last 60 Minutes episode, on the sinking of the El Faro (LINK) and the Agromafia (LINK), and I thought both were interesting.

Buffett Nears Buyback Threshold as Shares Extend Slump (LINK)

PayPal Co-Founder Max Levchin's Bet on Cryptography (video) (LINK)

Audible's latest sale goes until January 10th, and includes some good titles (I think you have to be a member, and if you aren't you can get a free trial HERE). Some that stood out to me:

The Most Important Thing ($3.99)

Common Sense on Mutual Funds ($4.95)

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist ($4.95)

Law 101: Everything You Need to Know About American Law ($4.95)

The Primal Blueprint ($4.95)

Good Calories, Bad Calories ($4.95)

The 48 Laws of Power ($4.95)

On the Path to Enlightenment: Heart Advice From the Great Tibetan Masters (4.95)

Links, and a few comments

The Motley Fool interviews Sanjay Bakshi (LINK)

Focusing on the Investment Process (LINK)

Economic Inequality: The Simplified Version - by Paul Graham (LINK)

Nassim Nicholas Taleb on the Real Financial Risks of 2016 (LINK)

Teams of foxes make the best forecasts, but expert hedgehogs can help - by John Kay (LINK)

Related book: Superforecasting

Horizon Kinetics - What's in Your Index? The Beta Game - Part II (LINK)

The Ghosts of Baha Mar: How a $3.5 Billion Paradise Went Bust (LINK)

Book of the day (just released): Deep Work: Rules for Focused Success in a Distracted World

*****

On the topic of forecasts (which seems relevant given a couple of links above)...

I occasionally take pictures of forecasts I see people make online and then use Google's Inbox email service to have those pictures re-sent to me at some point in the future. It serves as a good example to ignore nearly every forecast, especially about the future, and especially if they have anything to do with the price of something over a short period of time. The one that showed up today was from an oil 'expert' whom I like and whose work I respect. In July of last year, he was predicting that "for a variety of fundamental reasons" oil was likely to end 2015 above $75 per barrel. It was a post he made on Twitter which it appears he has since deleted. I won't mention his name here, but just wanted to point out that you need to even be careful when finding useful people to pay attention to because they can selectively craft their prediction record to look better that it actually might be. As hard, or impossible, as it is for people to predict the future, it's also hard to predict who may have been correct in the past because you may not see the entire paper trail (and this is before even taking the extreme role of luck into consideration). I think it was probably a worthless exercise to try and predict something like the price of oil a few months out in the first place. But since he used the word "likely" in his prediction, maybe he was even right, and that the less likely event is what happened. But given that this particular prediction was deleted, probably because it didn't look so good when the end of the year was approaching, the historical narrative when trying to judge his future comments is now distorted, though most who read this blog probably don't pay much attention to such forecasts anyway.

I especially wanted to mention the above because there are a number of companies that have been bought at much higher prices by respected value investors that have been correlated with the price of oil (and other commodities) that have taken another leg down lately. The question now becomes whether or not the current prices provide enough downside protection where the commodity prices are less relevant to making an investment decision because the risk/reward equations have become so favorable. A few names that come to mind that are big enough for me to mention here are things like Subsea 7, TGS Nopec, SEACOR, and Colfax. Many investors don't even consider names like this, and I think that's fair enough. But given that it is an area that has gotten as beaten down as it has, I am reminded of the Howard Marks quote:

Skepticism is usually thought to consist of saying, “no, that’s too good to be true” at the right times. But I realized in 2008—and in retrospect it seems so obvious—that sometimes skepticism requires us to say, “no, that’s too bad to be true.”

If anyone happens to have any on-the-ground type of scuttlebutt on these names (i.e. not just the stuff that can be found in filings or online), I'd love to hear what you might be willing to share. Thanks.

Links

How To Find Intelligent Fanatic CEOs Early (LINK)

Culture Eats Strategy: Nucor’s Ken Iverson on Building a Different Kind of Company (LINK)

Related book: Plain Talk: Lessons from a Business Maverick 

Related previous post: The importance of culture

Mohnish Pabrai: Bubbles - Past, Present and Future (video) [H/T ValueWalk] (LINK)

The Absolute Return Letter - January 2016 (LINK)

When tarantulas grow blue hair (LINK)

Investing book of the day: The Zulu Principle

Investing quote of the day: "...once an outstanding management has proven itself and fundamental conditions have not changed, shares should never be sold just because the stock has had a huge rise and may seem temporarily high priced." -Phil Fisher (Common Stocks and Uncommon Profits and Other Writings)

Links

Bill Gates on Books and Blogging (LINK)

The latest essays from Paul Graham: 1) The Refragmentation; and 2) Economic Inequality

Energy Equities Are Cheap? Define That, Please (LINK)

Book of the day: The Personal MBA

Links

Kyle Bass on Wall Street Week (video) (LINK)

Mutual Fund Observer, January 2016 (LINK)

Hussman Weekly Market Comment: The Next Big Short: The Third Crest of a Rolling Tsunami (LINK)

Over the holiday, we went with a group of friends to see The Big Short, based on the book by Michael Lewis about the global financial crisis. The film is deeply critical of Wall Street and weak banking regulation, most of which I see as valid. The one thing missing was that the film didn’t clarify why the mortgage bubble emerged in the first place, which I would have liked Margot Robbie to have mentioned while she was explaining mortgage-backed securities in the bubble bath. 

The answer is straightforward: as the bubble expanded toward its inevitable collapse, the role of Wall Street was to create a massive supply of new “product” in the form of sketchy mortgage-backed securities, but the demand for that product was the result of the Federal Reserve’s insistence on holding interest rates down after the tech bubble crashed, starving investors of safe Treasury returns, and driving them to seek higher yields elsewhere. 

See, the Fed reacted to the collapse of the tech bubble and the accompanying recession holding short-term rates to just 1%, provoking yield-seeking by income-starved investors. They found that extra yield in seemingly “safe” mortgage securities. But as the demand outstripped the available supply, Wall Street rushed to create more product, and generate associated fees, by lending to anyone with a pulse (hence "teaser" loans offering zero interest payments for the first 2 years, and ads on TV and radio hawking “No income documentation needed! We’ll get you approved fast!”; “No credit? No problem! You have a loan!”; “Own millions of dollars in real estate with no money down!”). The loans were then “financially engineered” to make the resulting mortgage bonds appear safer than the underlying credits were. The housing bubble was essentially a massive, poorly regulated speculative response to Federal Reserve actions. 

The current, obscenely overvalued QE-bubble is simply the next reckless response to Federal Reserve actions, which followed the global financial crisis, which resulted when the housing bubble collapsed, which was driven by excessively activist Federal Reserve policy, which followed the collapse of the tech bubble. As my wife Terri put it “It’s like a rolling tsunami.”

Richard Duncan warns of weak credit growth ahead for 2016 and 2017 (LINK)

Between 1952 and 2008, every time US credit growth (adjusted for inflation) fell below 2%, the United States went into recession. During that period, the ratio of total credit to GDP rose from 150% to 380%. In other words, credit growth drove economic growth; and when credit did not grow, neither did the economy. 

...Credit growth looks likely to fall back below the 2% recession threshold next year. If the Fed’s inflation forecasts are correct, then credit growth (adjusted for inflation) could fall to 1.6% next year and to only 1.0% in 2017.

[And if you want to subscribe to Richard Duncan's Macro Watch newsletter, you should also still be able to use the coupon code 'valueinvestingworld' to get 50% off.]

Links

The Edge Annual Question 2016: WHAT DO YOU CONSIDER THE MOST INTERESTING RECENT [SCIENTIFIC] NEWS? WHAT MAKES IT IMPORTANT? (LINK)

Warren Buffett Arrives in Europe: Seeking Quality Companies to Preserve and Protect (LINK)

Related book:  Berkshire Beyond Buffett

Hayman's Bass Sees Energy as Investment Opportunity as Glut Ends (LINK)

John Malone 1994 interview [H/T @Find_Me_Value] (LINK)

Other People’s Yachts: Churchill and his Money, or Lack of It [H/T @ChrisMayerAgora] (LINK)

Related book: No More Champagne: Churchill and His Money

Five Good Questions for Arthur Benjamin about his book The Magic of Math (video) (LINK)

Clips of a number of famous founders on how they got started (Bezos, Jobs, Oprah, Branson, Page, Zuckerberg) (video) [H/T @iancassel] (LINK)

Comedians In Cars Getting Coffee: President Barack Obama (video) (LINK)

Book of the day: How to Talk to Anyone: 92 Little Tricks for Big Success in Relationships