Links

Always a great time to revisit this: Seth Klarman on the Painful Decision to Hold Cash [H/T @trengriffin] (LINK)

Latticework of Mental Models: Moral Hazard (LINK)

Meet Mark Spitznagel, the Investor Behind Universa’s Big Gain [H/T Jim] (LINK)

Related book: The Dao of Capital

Boeing uses its clout to control supplier consolidation (LINK)

How farmers from rural China bet on the stock market and lost [H/T @jasonzweigwsj] (LINK)

Nick Kristof: This Land Is Our Land (LINK)

I noticed that one of my all-time favorite reads is now also available in audio format for those interested: On the Shortness of Life - by Lucius Seneca

Links

A Dozen Things Learned from Charlie Munger About Benjamin Graham’s Value Investing System (LINK)

Related book: Charlie Munger: The Complete Investor

Tren Griffin talks with Forbes about his book on Charlie Munger (LINK)

James Chanos discusses China on the Full Disclosure podcast (audio) (LINK)

A 'Black Swan' Fund Makes $1 Billion (LINK) [Related book: The Dao of Capital]

“This is just the beginning,” said Universa founder Mark Spitznagel, referring to the market volatility last week. His longtime collaborator, Mr. Taleb, who advises Universa, is a professor at New York University and is known for his pessimistic forecasts on the global economy. 

“The markets are overvalued to the tune of 50%, and I’ve been saying that for some time,” said Mr. Spitznagel, who has spent the past several years warning of a coming correction he viewed as inevitable given the easy-money policies by central banks around the world.

The Power Revolutions (LINK)

Natural gas, solar power and data-driven efficiency are making big gains, but history shows that the shift away from coal and oil won’t be fast or neat

Masters in Business podcast: Paul McCulley (audio) (LINK)

PHILOSOPHICAL ECONOMICS: Fiscal Inflation Targeting and the Cost of Large Government Debt Accumulation (LINK)

Hussman Weekly Market Comment: If You Need to Reduce Risk, Do it Now (LINK)

It’s important to recognize that the S&P 500 is down only about 6% from its record high, while the most historically reliable valuation measures are double their historical norms; a level that we still associate with expected 10-year S&P 500 nominal total returns of approximately zero. We fully expect a 40-55% market loss over the completion of the present market cycle. Such a loss would only bring valuations to levels that have been historically run-of-the-mill. Investors need not expect, but should absolutely allow for, a market loss of that magnitude. If your investment portfolio is well-aligned with your actual risk tolerance and the horizon over which you expect to spend the funds, do nothing. Otherwise, use this moment as an opportunity to set it right. Whatever you're going to do, do it. You may not get another opportunity, and if you're taking more equity risk than you wish to carry over the completion of this cycle, you still have the opportunity to adjust at stock prices that are close to the highest levels in history.

Oliver Sacks, Neurologist Who Wrote About the Brain’s Quirks, Dies at 82 (LINK)

Related book: On the Move

Graham and Dodd quote

From Security Analysis:

Current Earnings Should Not Be the Primary Basis of Appraisal. The market level of common stocks is governed more by their current earnings than by their long-term average. This fact accounts in good part for the wide fluctuations in common-stock prices, which largely (though by no means invariably) parallel the changes in their earnings between good years and bad. Obviously the stock market is quite irrational in thus varying its valuation of a company proportionately with the temporary changes in its reported profits. A private business might easily earn twice as much in a boom year as in poor times, but its owner would never think of correspondingly marking up or down the value of his capital investment.  

This is one of the most important lines of cleavage between Wall Street practice and the canons of ordinary business. Because the speculative public is clearly wrong in its attitude on this point, it would seem that its errors should afford profitable opportunities to the more logically minded to buy common stocks at the low prices occasioned by temporarily reduced earnings and to sell them at inflated levels created by abnormal prosperity.

Maximizing the experience of the people who have the most aptitude and the most determination as learning machines...

From Poor Charlie's Almanack:

Another idea that I found important is that maximizing non-egality will often work wonders. What do I mean? Well, John Wooden of UCLA presented an instructive example when he was the number one basketball coach in the world. He said to the bottom 5 players, "You don't get to play - you are practice partners." The top seven did almost all the playing. Well, the top seven learned more--remember the importance of the learning machine--because they were doing all the playing. And when he adopted that non-egalitarian system, Wooden won more games than he had won before. I think the game of competitive life often requires maximizing the experience of the people who have the most aptitude and the most determination as learning machines. And if you want the very highest reaches of human achievement, that's where you have to go. You do not want to choose a brain surgeon for your child by drawing straws to select one of fifty applicants, all of whom take turns doing procedures. You don't want your airplanes designed in too egalitarian a fashion. You don't want your Berkshire Hathaways run that way either. You want to provide a lot of playing time for your best players.

Links

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

The ETF Flash Crash (LINK)

Stock Halts Added to Monday’s Market Chaos [H/T Matt] (LINK)

Many Psychology Findings Not as Strong as Claimed, Study Says (LINK)

Related link [mentioned by Peter Bevelin in one of my interviews with him]: Why Most Published Research Findings Are False

Josh Foer on the James Altucher podcast (LINK)

Related book: Moonwalking with Einstein 

Related previous post: Memortation, or One Way to Put What You Learn to Practical Use

Stoic Mindfulness (LINK)

The Really Big One: An earthquake will destroy a sizable portion of the coastal Northwest. The question is when. [H/T Phil] (LINK)

Book of the day [H/T Phil]: Shaky Ground: The Strange Saga of the U.S. Mortgage Giants

A rule of intuition...

From Thinking, Fast and Slow:

It is wrong to blame anyone for failing to forecast accurately in an unpredictable world. However, it seems fair to blame professionals for believing they can succeed in an impossible task. Claims for correct intuitions in an unpredictable situation are self-delusional at best, sometimes worse. In the absence of valid cues, intuitive “hits” are due either to luck or to lies. If you find this conclusion surprising, you still have a lingering belief that intuition is magic. Remember this rule: intuition cannot be trusted in the absence of stable regularities in the environment. 

....................

The above also reminded me of some Graham and Dodd comments, from Security Analysis:

Intuition Not a Part of the Analyst’s Stock in Trade. In the absence of indications to the contrary we accept the past record as a basis for judging the future. But the analyst must be on the lookout for any such indications to the contrary. Here we must distinguish between vision or intuition on the one hand, and ordinary sound reasoning on the other. The ability to see what is coming is of inestimable value, but it cannot be expected to be part of the analyst’s stock in trade. (If he had it, he could dispense with analysis.) He can be asked to show only that moderate degree of foresight which springs from logic and from experience intelligently pondered. It was not to be demanded of the securities statistician, for example, that he foretell the enormous increase in cigarette consumption since 1915 or the decline in the cigar business or the astonishing stability of the snuff industry; nor could he have predicted—to use another example—that the two large can companies would be permitted to enjoy the full benefits from the increasing demand for their product, without the intrusion of that demoralizing competition which ruined the profits of even faster growing industries, e.g., radio. 

Links

Ruane, Cunniff & Goldfarb Investor Day Transcript (May 2015) [H/T market folly] (LINK)

Pershing Square Holdings' interim report [H/T Will] (LINK)

Jim Grant: The Fed Turned the Stock Market Into a 'Hall of Mirrors' (video) (LINK)

Are You a "Ben Graham Defensive Investor"? (LINK)

The Absolute Return Letter - August/September 2015 (LINK)

This month's Absolute Return Letter is a little different. It was a very eventful summer with many incidents impacting financial markets and we have compiled all these topics into one letter. China is, not surprisingly, a core subject. If the Chinese economy is slowing (and it is), we don't think China is in for a hard landing. If anyone is in the near term - and this may surprise you - we think the U.S. and the euro zone are far more likely candidates.

Kazakhstan to host IAEA nuclear fuel bank to assist non-proliferation [H/T Linc] (LINK)

One of NTI's supporters, U.S. billionaire investor Warren Buffett, contributed $50 million to "jumpstart" the project, Nunn said. 

"I look forward to the time soon when the fuel bank will become an operational reality," Buffett said in a message read by Nunn. 

"Please tell all the decision makers that I am a patient and long-term investor and I know that international agreements take a considerable amount of time. But please also tell them that I am 84 years old."

Book of the day: Men to Match My Mountains

Links

The Trajectory of a Crash (LINK)

Glut of Chinese Steel Looms Large [H/T Matt] (LINK)

The 27 Must-Follow Feeds in the World of Science (LINK)

Last Week Tonight with John Oliver: Televangelists (video) (LINK)

Book of the day (recommended by Marc Andreessen): Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages

Structuring compensation incentives...

From Charlie Munger: The Complete Investor:

Munger believes that structuring compensation incentives is critical. If the right structure exists, then a seamless web of deserved trust can be created which lessens problems related to this tendency. For example, it is surprising how many people fail to recognize how performance suffers if you pay someone in advance rather than after the work has been completed. It’s precisely because of the dangers of misaligned incentives that Munger and Buffett chose to make compensation decisions themselves, whereas they delegate almost all management responsibilities.

The importance of an above-average sales organization...

From Common Stocks and Uncommon Profits:

In this competitive age, the products or services of few companies are so outstanding that they will sell to their maximum potentialities if they are not expertly merchandised. It is the making of a sale that is the most basic single activity of any business. Without sales, survival is impossible. It is the making of repeat sales to satisfied customers that is the first benchmark of success. Yet, strange as it seems, the relative efficiency of a company's sales, advertising, and distributive organizations receives far less attention from most investors, even the careful ones, than do production, research, finance, or other major subdivisions of corporate activity.  

There is probably a reason for this. It is relatively easy to construct simple mathematical ratios that will provide some sort of guide to the attractiveness of a company's production costs, research activity, or financial structure in comparison with its competitors. It is a great deal harder to make ratios that have even a semblance of meaning in regard to sales and distribution efficiency.

... Again, the way out of this dilemma lies in the use of the “scuttlebutt” technique. Of all the phases of a company's activity, none is easier to learn about from sources outside the company than the relative efficiency of a sales organization. Both competitors and customers know the answers. Equally important, they are seldom hesitant to express their views. The time spent by the careful investor in inquiring into this subject is usually richly rewarded.