Chris Lau - Seeking Alpha

Thursday, December 30, 2010

Let me be honest: My Performance Review for 2010

There are two things to remember:
1. Know thyself
2. Nothing in excess

Gravitating around those two rules will reduce the chances of getting stuck in troubled places where it would be hard to get out.

1. Know thyself
In investing and finance, knowing thyself is a measurable, yet in news writing and reporting, few media writers would need to quantify their stock tips by reporting a "return-on-stock-tips" figure.

Ditto for Analysts.

Chart 1
Since writing for Seeking Alpha (, my reports (written in February 2009) yielded the following returns below. The phenomenal returns would look impressive, if not for the S&P returning almost 50% within the same period.

Companies Analyzed: BCE, Microsoft, Silver Wheaton, Valeant Pharmaceuticals (merged with Biovail in 2010):

Top: stock ticker
Right: Total return (%)

Chart 2
As for Seeking Alpha ( reports written from May 2009,  the following returns below are illustrated.This chart was generated in yahoo finance and represents reports for 9 companies: BCE, Activision, Gamestop, FedEx, First Solar, Ford, Family Dollar Stores, Strayer Education.
Top: stock ticker
Right: Total return (%)
Notes: Strayer Education and FedEx were argued for short plays. The rest were long plays. No report was written on Motorola in 2009.

Motorola was analyzed in 2010 and has reached its target price (with a 50% margin of safety level).

Published reports here.

Sunday, December 05, 2010

Warren Buffett's Biggest Mistake

Buffett's biggest mistake was investing in his own company. Specifically, Buffett spent 20 years in the textile business, instead of focusing on something more profitable like insurance (at the time).

Bottom Line:

If you're in a terrible business, get out of it. If you want to be a good manager, buy a good business, and everyone will think you're smart.
It's better to buy something that's good at a fair price, than to buy something cheap at a bargain price.

h/t Marketfolly (originally posted: 10/2010)

Sunday, October 17, 2010

An Introduction to video game-style investing:

I signed up an account at this past summer. Kapitall is a web-based game that introduces new investors to the complexities of the stocks, mutual funds, and exchange traded funds (ETFs).

This is accomplished by allowing users to create virtual portfolios and to manage play money.

Most recently, the site allowed users to open a TD Ameritrade account via Kapitall. Trades on Kapitall can be replicated on TD Ameritrade.

Since staff at Kapitall include game designers and former staff of Morgan Stanley, the site user interface is very unique.

This friendly environment will be very appealing to individuals who have never invested real money in the market. The industry and company filtering will also help individuals find relevant information very quickly.

The company information tab also points the user to SEC filings. This is useful feature for experienced investors looking to complete more extensive research on companies.

Below are some screen shots to illustrate some of Kapitall's functionality. Images are from my account.

1. Top Bar shows total return (27.6%), company search, skill level (bronze) and number:

2. A $100,000 portfolio ($100,000 portfolios are available when skill level increases)

3. A number of portfolios were created. 'Chinese Stocks' was a template portfolio. 'Speculative' is
a portfolio that was created to copy the moves of various hedge fund managers.

4. Holding Details for the 100K portfolio. Yep, cash is still king in this speculative trading environment:

5. Kapitall displays companies related to Microsoft, lists that include Microsoft, and funds that hold Microsoft. Why include Microsoft as an example? The market is under-estimating the impact of Windows Phone 7 (WP7), the value of Bing (0 to over 10% search traffic in a year is impressive), and long-term cash flow growth from sales of Windows 7.

According to CruncBase, Kapitall has 60,000 active monthly visitors. For readers who sign up, look me up and connect as a contact.

Monday, October 11, 2010

Klarman and Security Analysis (Financial Analysts Journal)

Seth A. Klarman is president of The Baupost Group, LLC, Boston. Jason Zweig is a columnist for the Wall
Street Journal, New York City. In the October publication of Financial Analysts Journal , Klarman offers his views on securities analysis work of Graham and Dodd. By that extension, this would include securities analysis by Warren Buffett:

The world is different now than it was in the era
of Graham and Dodd. In their time, business was
probably less competitive. Consultants and
“experts” weren’t driving all businesses to focus on
their business models and to maximize performance.
The business climate is more volatile now.
The chance that you buy very cheap and that it will
Also, the financial books of a company may not
be as reliable as they once were. Don’t trust the
numbers. Always look behind them. Graham and
Dodd provide a template for investing, but not
exactly a detailed road map.
Klarman is most definitively one of the few modern investors following Buffett who is "one-of-a-kind." Let us be realistic: although the teachings of Buffett are covered here, few readers are likely to be as successful as Buffett. This reality should not prevent investors from analyzing securities and the market diligently and thoroughly:
Our approach has always been to find compelling
bargains. We are never fully invested if there
is nothing great to do. We test all our assumptions
with sensitivity analysis. Through stress testing,
we gain a high degree of conviction that we are
right. We are prepared for things to go slightly
wrong because we adhere to a margin-of-safety
principle that gives us the necessary courage to go
against the tide.

Yet, we don’t actually think of it as courage, but
more as arrogance. In investing, whenever you act,
you are effectively saying, “I know more than the
market. I am going to buy when everybody else is
selling. I am going to sell when everybody else is
buying.” That is arrogant, and we always need to
temper it with the humility of knowing we could be
wrong—that things can change—and acknowledging
that we have a lot of smart competitors. Thus, in
worrying about all the things that can go wrong, you
can prepare, you can hedge—and you must remember
to sell fully priced securities so that you are
underexposed when things go badly. All these elements
give us the courage to follow our convictions.
The last point I would make is that your psychology
as an investor is always important. If you
lose your confidence, if you’ve made too many
mistakes, if you are down too much, it becomes
very easy to say, “I can’t stand being down more
than this.” Unless you have a bet-the-business
mentality, you would worry about your business,
about client redemptions, and about your own net
worth in the business.
So, by being conservative all the time—by
being both a highly disciplined buyer to ensure that
you hold bargains and a highly disciplined seller to
ensure that you don’t continue to own things at full
price—you will be in the right frame of mind.
Avoiding round trips and short-term devastation
enables you to be around for the long term.
So, what is Klarman buying?

Right now, we are buying, or trying to buy,
private commercial real estate because the stresses
in that market are creating bargains. The private
market in commercial real estate, especially the
private market for anything less than center city
Class A office or malls, has terrible fundamentals,
and the likelihood that they will get better soon is
not good. Yet the government has propped the
market up with TARP money and Public-Private
Investment Program money and also, essentially,
by winking at the banks. I think the Federal Deposit
Insurance Corporation has told banks, “Don’t be in
a hurry to sell your commercial real estate. We will
bear with you.” Servicers of commercial real estate
securities and mortgage securities have also been
slow to sell and eager to restructure.
About the stock market rally:
In contrast to the private markets, the public
market in real estate has rallied enormously. Many
REITs are yielding 5 or 6 percent, which reflects
vastly higher prices and less attractive yields than
the private market offers.

Nevertheless, we are not making any money in
real estate right now. We are putting money to
work in private commercial real estate when we
can, very selectively, because those investments
will yield a good return over time, unlike the public
part of real estate that is quite unattractive.
We are making money on the distressed debt
we bought two years ago, which has gone from 40
or 50 or 60 to 90 or par, and on other similar securities
that have been grinding along, throwing off
cash, mostly rising in price or going through a
process that will ultimately deliver a profit to us.

Further reading as advised by Seth Klarman
  • Graham’s The Intelligent Investor
  • Graham and Dodd’s Security Analysis (6th ed with updated comments)
  • Joel Greenblatt’s You Can Be a Stock Market Genius
 This book is tactical and includes some very specific and interesting strategies

  • The Aggressive Conservative Investor,7 by Marty Whitman and Martin Shubik
  • Anything from Jim Grant writes is wonderful
In regards to Grant, Klarman notes that even if he’s not always right on his predictions, he is among the best thinkers and financial historians.
  • Michael Lewis has never written a bad book
Moneyball is about value investing. Looking back 20 years from now, The Big Short9 may be the definitive
book about this era. It is about a microcosm, but the microcosm explains everything.

  • Andrew Ross Sorkin’s Too Big to Fail is fabulous
  • All of Roger Lowenstein’s books are excellent (we should read everything Roger has written)
Klarman's Final Thoughts:
Never stop reading. History doesn’t repeat, but it does rhyme.

Jim Grant has a wonderful expression: In science, progress is cumulative, and in finance, progress is cyclical. Fads will come and go, and people will think we are on to a new thing in finance or investing; but the reality is that it is probably not really new, and if we have seen the movie or read the book, maybe we know how it turns out.

Wednesday, September 29, 2010

Quote from Charlie Munger

Charlie Munger is an investment manager and philanthropist. He is Vice-Chairman of Berkshire Hathaway Corporation. Buffett of course describes him as his business partner.

He was recently interviewed at the University of Michigan. The nearly 2-hour video is both informative yet less hopeful on how things will play out in the U.S. and globally.

Full Video here.

Moving to a key quote from Munger, based on advice given from his grandfather:

Assume that the real-life opportunities you get in life are few, and when you get a "lollapalooza", for God's sake don't hang on to it like a timid little rabbit. Don't hang back. There aren't that many of the real good big ones.
To support this great idea, Munger refers to Berkshire's "lousy" performance. Berkshire had "just" 20 great investment ideas over a 40 year period, which worked out to one great idea every 2 years.

Thursday, September 23, 2010

Warren Buffett & Jay-Z on Success

Warren Buffett and Jay-Z were interviewed on Forbes on the discussion of success. The contents is much like a 'mash-up' of ideas between finance and rap music in which the commonalities between the two breeding success is answered.

Disclosure: 'Empire State of Mind' was played full volume as these notes were compiled.

Much of what Buffett said was already posted on this blog. Nevertheless, the key points are posted below. My emphasis is in bold.
  • Buffett had a 15 year jump ahead of others
  • Need emotional stability
  • Need to think independently, think on own facts and act on it – few are able to do this
  • Stay within your circle of competence 
  • It’s like tennis: few of us will get to play in Wimbledon, but in tennis, get ball over the net and you will be fine
  • Investing is not about not having brilliant decisions, it is about avoiding the bad ones (it’s like baseball: hit singles and doubles)
  • Read Benjamin Graham’s book (The Intelligent Investor) at 19, started at 7 and read all he could in stocks by age 12
  • Buffett was never grounded to anything and but was never profitable – it was not until after reading Graham’s Intelligent Investor did he start to succeed
  • The two key ideas?
    1. Think of stock as part of a business, not as a stock price or ticker
    2. Margin of Safety
  • How did he break out of the pack of the other rappers?
  • Within all that chaos you are searching for the truth – his first album at 26, so had more maturity
  • What did he do when faced with fork-in-the-road moments? ...
  • Consistency: he did not fade away. Music is like stocks. Instead of jumping on that next hot thing, he had discipline and confidence in who he was
  • He treated music as a business
  • The greatest trick in music that people ever pulled was they convinced artists they can’t be an artists who can make money. It was set-up!
  • Hip hop broke that thing. At end of day, you need to separate music from the business. For example, it has to be about making music in the studio
  • Genius approach was about not giving up, created own buzz, and music recording company came back to them
About Luck
  • Buffett was born 1930 in US, odds 30:1 he would succeed. He had decent genes, but was wired for capital allocation
  • Buffett was turned down by Harvard which gave opportunity to study under Ben Graham
Business Models
  • Everything you do is cumulative: what was learned by Buffett at 20 is still useful now
  • Principles do not change – it is much like physics – know what makes a good manager, product – there is transference
  • Knowing what to leave out is as important: how do you beat Bobby Fisher, the great chess player? Play him in anything else besides chess
  • Napster was an opportunity to embrace: shutting it down and having arrogance resulted in million more “napsters”
  • Would have been better to have opened yourself up to change. Landscape changes, the way you go about business needs to change. You don’t necessarily need to change yourself
Business Moats
  • Buffett likes having a business that has moats, where competitors cannot get to you
  • The best moat to have is your own talent: taxes, inflation can’t take that away from you
  • When Buffett talks to student he asks if you’re a $1 million asset he’d pay 10% ($100,000), how do you make yourself worth 50% more?
  • Answer: Improve yourself, (ie) learn to communicate better might increase your worth 50% which equates to $500,000
  • Develop habits of success – look around you and list talents of others and follow
Making Mistakes
  • Discuss what went wrong, face up to it
  • Have ability to discuss an opposing position comfortably
  • Learn why and how poor decisions were made
  • Don’t expect perfection in yourself – it is too demanding to do so
Final Thoughts on Success
  • Buffett: Almost everyone who was successful had a teacher that has affected him – if you can pass that along, that is better than passing along money
  • Jay-Z: Apply yourself, stay true to who you are, how far where you come from. Hope.

Conclusion:  Take control of your destiny by learning about business, so you won’t lose what you’ve created

Video Link:

h/t Marketfolly

Sunday, September 19, 2010

The Thing about Margin of Safety...

The risk that a security will decline is quantified using a margin of safety. Howard Marks comments on the downside to using a margin of safety in the Sep/Oct edition of CFA Magazine. Marks is Chairman of Oaktree Capital, a firm that manages over $75B in assets. He talks about margin of error (my emphasis in bold):
I’m a worrier. I always ask myself whether I’m being too cautious. I believe strongly that
girding for bad times, and thereby ensuring margin for error, is more essential than preparing for good times. If you prepare for and count on good times, their failure to materialize can knock you out.
There’s a downside to this, however. Having a margin for safety in your portfolio means you can’t always maximize returns. The people who are sure what’s going to
happen and turn out to be right—due to skill or luck— are the ones who’ll maximize. Those who aren’t sure what is going to happen and build in a margin of safety are unlikely to maximize under any single scenario. As investors, we all have to choose whether we’re going to play mostly offense or mostly defense.
As investors, we all have to choose whether we’re going to play mostly offense or mostly defense.

The last several decades were marked by increasingly aggressive behavior, what I call “willingness.” Then there was the trend toward levering up in order to do more than one’s capital permits, or “expansiveness.”  Finally, we all observed the bullishness that produced rising asset prices.
These three trends reached a peak in 2007, and it’s easily summed up in what I find to be the greatest investment adage: “What the wise man does in the beginning, the fool does in the end.” I’m not saying leverage is a mistake, but it’s a mistake when it’s carried too far. There’s nothing in the investment business—no asset class, no single investment, no strategy—that’s a good idea or a bad idea. Everything is a good idea or a bad idea at a particular price and at a particular time. It’s when people forget this that they get into trouble.

Sunday, September 05, 2010

Free MBA Lessons from Warren Buffet: Pt. 10

Skipping ahead for the moment, in the lecture series with Warren Buffett, Buffett gives much insight for investors in navigating through the noise in finance.

The bottom line is that Buffett evaluates an investment as a business, and cares little about daily changes in its stock price:
I have no idea where the market is going to go...the market knows nothing about my feelings.

The stock doesn't care what you pay, it doesn't care that you own it. Any feeling you have in the markets are not reciprocated. It's a very cold shoulder.
Needless to say, Buffett gets more interested the lower prices on stocks go. Better buys are made when stock prices fall.

Finally, Buffett provides insight on how he thinks his life would have played out if he were born at a different time, and with a different set of opportunities:
If I'm lucky, then the way to do it is to play out that game and do something you enjoy throughout your life with people you like. If I could make $100M dollars by buying a business from some guy that made my stomach churn then I'd say no, because that's like marrying for money...which isn't a good idea under any circumstances but if you're already rich then it's crazy.

Tuesday, August 31, 2010

Free MBA Lesson from Warren Buffett - Pt. 2

Lessons on LTCM
Continuing with the MBA lecture series with Warren Buffett, Buffett discusses Long-Term Capital Management (LTCM), a fund run by very, very smart people, but which collapsed in 1998. LTCM needed to be rescued, after a chain reaction of panic resulted first with Russia defaulting on its debt.

With respect to the managers of LTCM, Buffett comments:

To make money they didn't have and didn't need, they risked what they did have and did need... and that's foolish. (Re-enforced)  

If you risk something that is important to you, with something that is unimportant to you, it just does not make any sense...I don't care if the odds are 100:1 that you'll succeed, or 1000:1 that you'll succeed.

Things to know: Buffett owned Dairy Queen and held a position in Coca-Cola.

Tuesday, August 24, 2010

Free MBA Lesson from Warren Buffett - Pt. 1

In the first of a series of videos with Warren Buffett at an MBA school, Buffett discusses the kinds of people to choose for hiring. Intellect, Energy, and Integrity are important, but what is the type of person to choose in a leadership role?

The person to choose for such a leadership role would be one whom you respond the best to.

The person to "go short on" (to bet against) would be the person who had a quality that turned you off. Ego and dishonesty are examples.

How to Be Admired 

The qualities you choose and that which you do not want are traits of your choosing. Behaving like those whom you admire is a way you can be admired too. The habits you choose govern what you become:

"The change of habit is too light to be felt until it is too heavy to be broken."

When it comes to finance and investing, quality of management through leadership must be assessed, almost before anything else (although balance sheet analysis might come first). Shareholders would not want a company run by liars, as written in this article from The Economist (How to tell when your boss is lying - It's not just that his lips are moving).

Thursday, August 05, 2010

Happiness: Part 2

Jeffrey D. Saut, Raymond James & Associates, compared the positive performance of major markets last month to that of happiness. This introduction is worth repeating (ed: addition of paragraphs).

"Don’t Worry, Be Happy"
“Happiness is contagious, spreading among friends, neighbors, siblings, and spouses like the flu, according to a large study that for the first time shows how emotions can ripple through clusters of people who might not even know each other.

The study of more than 4,700 people, who were followed over 20 years, found that people who are happy, or become happy, boost the chances that someone they know will be happy. The power of happiness, moreover, can span another degree of separation, elevating the mood of that person’s husband, wife, brother, sister, friend or next-door neighbor. Your emotional state also depends on the choices and actions and experiences of other people, including people to whom you are not directly connected.

Happiness is contagious.

One person’s happiness can affect another’s for up to a year, the researchers found,and while unhappiness can also spread from person to person, the ‘infectiousness‘ of that emotion appears to be far weaker. Laughter can trigger guffaws in others; seeing someone smile can momentarily lift one’s sprits.

But the new study is the first to find that happiness can spread across groups for an extended period of time. The findings provide striking new evidence of the power of social networks, which should have implications for public policy.

Happy people tend to be better off in myriad of ways, being more creative, productive and healthier. Some experts praised the study as a landmark in the growing body of evidence documenting the influence of personal connections and the importance of positive emotions. ‘It’s a pathfinding article,’ said
Martin E. P. Seligman, a University of Pennsylvania psychologist. ‘It’s totally original and the findings are
. . . James Dines, The Dine’s Letter

“Happiness” . . . what a novel concept! As the brilliant strategist James Montier writes:
“If you are after specific investment advice, stop reading now.” He goes on to note:

“Don’t equate happiness with money. People adapt to income shifts relatively quickly; the long lasting
benefits are essentially zero.”

“Exercise regularly.

“Have sex (preferably with someone you love). Sex is consistently rated as amongst the highest generator of happiness.”

“Devote time and effort to close relationships.
Close relationships require work and effort, but pay vast
rewards in terms of happiness.”

“Pause for reflection, meditate on the good things in life.
Simple reflection on the good aspects of life helps prevent hedonic adaptation.”

“Give your body the sleep it needs.”

“Don’t pursue happiness for its own sake, enjoy the moment.
Faulty perceptions of what makes you happy, may lead to the wrong pursuits. Additionally, activities may become a means to an end, rather than something to be enjoyed, defeating the purpose in the first place.”

“Take control of your life, set yourself achievable goals.”

“Remember to follow ALL of the (above) rules!”

Monday, July 26, 2010

Are you Happy?

Before reading further, ask yourself: are you happy?

Each individual can each find a way to be happy. Collectively, and in the case below, for various nations, the prospects are dire.

Howard Marks, chairman of Oaktree Capital, has about $76B assets under management. He discusses the prospects for the United States, PIIGs, and Greece. In his latest memo, Marks expresses concern about austerity measures. For some nations, devaluation of its currency is required.
Its Greek to Me

Marks' Bottom line: anyone who invests today in a pro-risk fashion out of belief in the recovery must be confident he’ll be agile enough to take profits before the long-term realities set in.

Marks doubts his concerns are unfounded, but could not imagine silence would be preferable.

Who can disagree to that? Succeeding in the market requires being right and having a non-consensus view. Keeping silent on concerns enables ones concerns to be discussed and more likely to be addressed, collectively and for individual investors.

Monday, July 12, 2010

Essential Warren Buffett on Passion, BP, iPad

Warren Buffett is worth an estimated $62 billion in 2008. He is the second richest man in the United States, after Bill Gates, and net of Buffett's philanthropic activities.

Buffett shares his wisdom in the following assortment of interview clips.

On the best advice he received - Knowing you can always come back; that you can tell a guy to "go to hell" tomorrow:

Link here

On passion: spending on things that enrich his life, why prospects are better now for students than in his time, and on thinking "outside the box."

Link here

On British Petroleum (BP), and on why the BP CEO should be fired:

Link here

On YouTube and iPad (why Buffett spends more time on the computer than Bill Gates):

Link here

On why Buffett thinks the economy is coming back (contrary to views of Krugman):

Link here

Thursday, July 08, 2010

Blackberry 9800 "Slider" Preview

A few months ago, a hideous low-resolution image of Research In Motion's "Slider" was leaked on the internet and shared among high-traffic gadget sites. The reaction was less than positive. Between that time, RIM's shares dropped 32%.

Below is another video leak of RIM's Blackberry 9800 Slider.

What is the verdict on the Blackberry Slider? Is it a "win" or is it "an epic fail?"

h/t K.S.

Disclosure: No position in RIMM stock. An intrinsic value for RIM is currently being assessed. Using a forward growth rate of 29%. and a 10-year avg EPS (2000 - 2009), RIM is currently trading at an implied margin of safety of 50%.

Thursday, July 01, 2010

The Secret Powers of Time

In 'The Secret Powers of Time,' 30 years of research is summarized to explain about how different cultures view time differently. Using this theme, the video illustrates how the value of family values, happiness, and one's (or a society) view of the future are based on the perspective of time.

The video explains how many of life's puzzles can be solved by simply understanding our own time perspective.

h/t the big picture

Monday, June 28, 2010

Notes on the How the Internet is Fostering our Stupidity

Bloomberg Businessweek reviewed the book 'The Shallows: What the Internet Is Doing to Our Brains.'  In it, Carr states that we are experiencing "a reversal of the early trajectory of civilization: We are evolving from being cultivators of personal knowledge to being hunters and gatherers in the electronic data forest."

With that frame of mind, this note will not be bombarded with the latest facts, statistics, or headline. Instead, three stories for essential reading are below below. 

Barry Ritzholtz, The Big Picture, writes "A Closer Look at the Second Leg Down in Housing."  In it, he discusses the direction for home prices in the U.S., following the end of the home tax credits. As posted on InvestorInsight, Mauldin states that "The firm began raising cash in Q1 of 2010, and by the time the first quarter was over, was only 50% long. They sold more stock in April, and in a bit of good timing that Ritholtz will tell you was "dumb lucky" went to 100% cash on May 5, 2010 – the day before the 1,000 point flash crash. "

World Debt (source: the economist). This in turn makes the G20 response to European debt that much more significant.

RIM - Research In Motion - Stock decline over 10% after earnings were announced
What was Waterloo Canada's RIM thinking when a Bank of America Analyst asked:

"What will help RIMM regain U.S. market share? But it seems that AT&T channel is very strongly aligned with Apple. And Verizon and Sprint seems to be aligning with Android. So where does that leave RIM?

So the specific question I have is, what motivates customers to buy a BlackBerry 6.0 product instead of say the new iPhone 4.0 or new Android products? Other than network efficiency, what kind of differentiator should we focus on?"

RIM CEO Balsillie's Response:
"Well, I mean, be careful about your implicit assumptions in your question, or shall I say explicit assumptions in you questions. Yes, I think you guys just have to watch and see what the plans are.

I think there's a lot of implicit and explicit assumptions, and that maybe should be examined. And part of that is the question of how powerful is their innovation is a good question, with the timing of it, it's a good question. I think an important question to ask is, how much does constructive alignment matter to a carrier, because that's been just an enormous issue throughout Europe and Asia, and definitely coming on in Europe.

And I think how much does efficiency matter, and when you look at these pricing plans, I think that that should tell you something. So I mean, we watch and see. I mean, we have unprecedented campaigns and device programs and commitments in our history. And I'm just not going to talk anything more about our products and our launches until their time."
Not getting an answer to a question is one thing, but being told how to ask a question might be looked upon as...odd.

Monday, June 14, 2010

Notes on Investing in Range-bound Markets: Pfizer

Vitaly Katsenelson, author of the book, Active Value Investing, believes the markets are range-bound. He discusses the case of investing in pharmaceuticals, and in particular, Pfizer. Pfizer, as you'll recall moved nowhere in the last 10 years (and even lost shareholders money). The patent on Lipitor is expiring soon, and Pfizer continues to invest billions ($11B) in Research and Development. Discounted in the stock is the fact Pfizer has hundreds of drugs in Phase 3.

In short, shareholders get 4% in yield, can adjust to inflation or deflation (through changing prices), can acquire to grow (it bought Wyeth at respectably low multiple, at 10-13x instead of at 20x), and any new drug developed will benefit shareholders at stock price premium (as measured by P/E).

Few investors watch videos on Yahoo, but Yahoo is starting to produce better content again. Below is Katsenelson on Yahoo TechTicker:

Note that Pfizer's R&D spend was $7.767B ending Dec 31 2009. While recent cutbacks, layoffs, and site closures have been hard, the company appears committed to R&D. This is according to Martin Mackay, Ph.D., president of Pfizer PharmaTherapeutics Research & Development in a recent interview.

Sunday, June 13, 2010

Essential World Cup 2010

1. An instant view of the matches for each day, by match, team, group and stadium was created by

h/t zerohedge

2. World Cup and Economics: Goldman Research Piece.
h/t The Big Picture

Tuesday, June 08, 2010

Europe's ( PIIGs) Debt Explained

If pictures are worth a thousand words, then what is a photo illustrated with flowing data? Below is an illustration of the web of debt flowing among and outside PIIGs. Note that Britain might need to be referred to as the UK, as that would include Northern Ireland.

(click image to enlarge)

Source: flowingdata

Tuesday, June 01, 2010

Mortgage +1.75% Rate Increase in Canada?

In David Rosenberg's newsletter today, Rosenberg speculated a 175bps rate hike in Canada over a 16-month period. 

 Funding pressures are escalating again in the global banking sector as contagion risks intensify. What a wonderful environment for the Bank of Canada to be in as it contemplates its well telegraphed interest rate move — the Bank typically goes 175bps over a 16-month span and while Mr. Carney has no track record in a tightening cycle, let’s just say that the institution he presides over has never done anything less than 125bps. We shall see how market expectations are navigated in the press statement if the Bank does pull the trigger.
This forecast is not entirely impossible, given the over 6% GDP growth in first quarter:

Housing and related spending plus inventories accounted for 70% of total GDP growth in Q1.
Conversely, growth in housing may slow in the second half of this year:

we believe that we will see a major slowdown in activity in the second half of the year. We have seen signs already that housing activity is slowing especially in the face of higher mortgage rates in Q2 and this will continue into H2.

Monday, May 24, 2010

Notes from Author of $2,397 Book (

Seth Klarman recently made a speech at the CFA Conference in Boston last week. This speech was transcribed and posted on

Note: I am providing hedge fund analysis to Articles (co-analyzed/commented by Marketfolly) will appear on the Marketfolly site. The site has nearly 10,000 subscribers and x000,000 hits per month.

As you will recall, Klarman is author of 'Margin of Safety' and Fund Manager at Baupost Group. The fund has $20 billion in assets under management.

Klarman provides great insight on such things as group think, on taking action through courage.

On Conviction and Courage
So what do we do to give us conviction? 
1.) Find compelling bargains, not slight bargains.
2.) Test everything with sensitivity analyses.
3.) Prepare to be wrong. It’s not courage, it’s Arrogance, when you buy something, you’re saying you’re smarter than everyone else. We realize we have lots of smart competition and temper our arrogance with humility to realize that many things could go wrong. 

Our own confidence matters, and we’re highly disciplined buyers and sellers to avoid round trips and take advantage of short term sell offs. 
Jason Zweig: So Investors need cash and courage?
Klarman: Courage is a function of process.

On Group Think

One observation that can be made (at the danger of making false generalizations) is about large companies. Why is Microsoft referred to as "the evil empire?" Does a company become "evil" as it gets larger?

A company can get "dumber" as it gets larger. The same phenomenon is applicable in the group analysis of securities:

Zweig: How do you avoid group think?
(my emphasis in bold)
Klarman: We recently had an investment team retreat with leading thinkers. They all said
there was a terrible problem with paper money, we should consider gold, the EU
would break up. Our partner’s immediate thought was that gold was a group
thought and we should be cautious holding it.

So we focus on intellectual honesty and try to learn from mistakes, accept them, and move on. We spend a lot of time on this in our hiring process. When there’s a mistake, there is no yelling, it’s never the analyst’s fault (unless it’s a dumb formula error, etc), everything is reviewed by senior people and we’re wrong together. We’re aware of our biases and the risk of being biased. As an investor you need to decide if you’d rather make more money
in up years and have a few bad years, or protect your downside, and we’ve obviously
chosen the latter. We’d rather under-perform a huge bull market then get clobbered
in a bear.

On Intellectual Honesty

Zweig: Everyone says it’s never the analyst’s fault, but often they don’t stick to this
when something goes wrong. How do you screen for Intellectual Honesty in your
hiring process?
Klarman:  We ask about their biggest mistake, which doesn’t have to be investing related. But if you say your biggest mistake is wearing mis-matched socks one day, then
that’s likely not being intellectually honest. 
We ask ethical questions, ask them how they’d respond in morally ambiguous situations, we want to see that they realize conflicts can exist. We want people who fit in. One key thing is idea fluency, if I present a thesis I want people to immediately come up with 10 places to look to exploit it, I don’t want them sitting at their desk thinking, “hmm, where should I look?”

Monday, May 17, 2010

Notes on Risks from Howard Marks (Oaktree Capital)

In Marks' latest memo, Marks discusses the need for discipline, patience, and selectivity.

Many of you wonder why markets have risen so quickly, wonder why you're missing out, and are less observant on the risks attached to plowing in capital in the stock market.

Marks reminds investors that true risk managements involves forecasting the unknowable. The market fallout in Greece two weeks ago was an example. More are likely to come. Therefore, a sufficient margin of safety for the valuation of companies is warranted.

Below is a highlight from the memo.
A few important things about investing:
  • Investors generally overestimate their ability to see the future, and the worst of them act as if they know exactly what lies ahead.
  • It’s important to worry about what’s coming next. The fact that we don’t know what it is shouldn’t permit us to think there’s nothing to worry about.
  • Low asset prices allow us to invest aggressively, without much consideration given to worrisome fundamentals and the possibility of negative surprises. But as prices rise, so should our degree of concern over these things.
The bottom line is this: the fact that we don’t know where trouble will come from
shouldn’t allow us to feel comfortable in times when prices are full. The higher
prices are relative to intrinsic value, the more we should allow for the unknown.

Full Memo is here

Tuesday, May 11, 2010

Rosenberg's Worry List Pt. 2

A loyal reader of Rosenberg's newsletter had more to add to the Worry List.

They are:

  • German NRW elections on Sunday
  • Congress catching onto U.S. Taxpayer participation in EU bailouts
  • Liquidity crisis in Japan
  • Funding issues for Aussie banks
  • Housing in China
Rosenberg is the Chief Economist & Strategist for Gluskin Sheff.

Saturday, May 08, 2010

Rosenberg's Worry List

1. Greek default and contagion risks to European banks
2. ECB dragging its heels (รก la Bernanke in 2007)
3. Hung parliament in the U.K. to add to uncertainty
4. China policy tightening and possible bubble burst in real estate
5. U.S. economy only managing 1.6% annualized real final sales growth in the past three quarters
6. Slide in Chinese stock market and commodity prices signalling an end to the global V-shaped recovery
7. Big fiscal drag will drain as much as two-percentage points off U.S. growth next year; 1.25 percentage points in Canada
8. Higher dividend and capital gains rates in the U.S. will curb investor enthusiasm
9. U.S. dollar surge will eat into U.S. large-cap corporate earnings
10. Every index is now showing a return to U.S. home price deflation


Saturday, April 24, 2010

Book Review: Active Value Investing: Making Money in Range-Bound Markets (Hardcover)

Active Value Investing: Making Money in Range-Bound Markets (Hardcover)

By: Vitaliy Katsenelson

If you are told to invest in mutual funds because you are told these funds would rise, would you blindly take this advice and expect funds to rise? The vast majority would do so.

If you started playing in the stock market, would you consider only price (Google is $600) and not value (Google has an intrinsic value of... Google has a quality value of... Google has a growth rate of...)? You are not alone. Most do so.

In the first case, investors are led to believe that stocks must rise, because they have always done so historically. Yet, there are exceptions: Japan.

Japan has been in a trendless market for 20 years. 20 years of net zero returns is a long time of nothing, to exasperate the idea of non-performance.

In Active Value investing, the author discusses the approach to take in earning a return in an environment where stocks trend up and down.

The viewpoint that North America is currently range-bound is not common.

You would be almost alone (along with the author) on this call.

This book compliments my need to approach in a market that is range-bound. For example, many countries (with some exception ie China and Brazil) are facing a balance sheet recession. This will mean that the government has limited capacity in taking a Keynesian approach to stimulate the economy.

Any strength by sector will be met with resistance and counter forces that pull that sector back down.

As a side note, in my analysis of companies such as Netflix, Cree, and Riverbed Technology, all three companies exceeded my price targets. These companies (in a virtual portfolio) were sold after the target was reached, upon which, the shares kept rising (Netflix rose from a target price of $62 to $100, Cree is $79.22 and Riverbed, with a target price of of $27, is now $33).

The author’s quantitative approach to analyzing the market is simple: QVG – Quality, Valuation, and Growth. This approach is consistent with the teachings of Graham (Margin of Safety).

It is also consistent with my own approach to valuation analysis using ranges of value. I first learned about this approach from my readings of and online lecture review from Seth Klarman.

The author encourages discipline in buying and selling securities. The author accomplishes this by teaching the reader to strip out the emotional aspect attached to investing.

This is a worthwhile read for any investor who does not want to be a fool, by being a mere member of the herd. Expressed another way, the author teaches the reader to avoid belonging among the vast majority of participants who invest in the stock market.

Active Value investing is available on Amazon.

Thursday, April 22, 2010

Sponsored Post: Keryx Biopharma (NASDAQ:KERX) Product Development Update

Keryx Biopharmaceuticals, Inc. (NASDAQ:KERX) is an emerging biopharma company that has a pair of lead compounds in late stage development: Perifosine for the treatment of cancer and Zerenex for patients suffering from renal disease.

Last December, Keryx announced the initiation of a Phase 3 pivotal study of Perifosine (KRX-0401), the Company's PI3K/Akt pathway inhibitor (a cell signaling pathway that disrupts the normal cell cycle / programmed cell death and leads to chemotherapy drug resistance in some cancer cells), in multiple myeloma patients under a Special Protocol Assessment (SPA) with the FDA with Fast Track designations for this indication.

Perifosine is in-licensed by Keryx from Aeterna Zentaris. Keryx expects a patient recruitment period of approximately 16-18 months and expects to report data from this study during 2H11. In addition, a refractory metastatic colorectal cancer (mCRC) study under SPA is expected to begin 2Q10 with projected completion 2H11.

During the first week of 2010, Keryx announced that it has reached agreement with the FDA regarding a SPA for the design of a Phase 3 clinical program for Zerenex (ferric citrate), which is the Company's iron-based phosphate binder for the treatment of elevated serum phosphorous levels (hyperphosphatemia occurs in the majority of dialysis patients, resulting in serious medical complications such as blood vessel calcification and skeletal deformities since phosphate is a major component of bone along with calcium) in patients with end-stage renal disease (ESRD) that are on dialysis.

Zerenex works by forming iron-phosphate complexes in the gut that are not absorbed since patients with ESRD are prone to electrolyte disorders such as elevated phosphorus due to the absence of normal kidney function. In accordance with the Company's SPA agreement with the FDA, the Phase 3 clinical program for Zerenex will consist of two clinical studies, including (1) a short-term efficacy study that is expected to commence by the end of 1Q10 with date expected during 2H10; and (2) a long-term safety and efficacy study that is expected to begin mid-2010 with data expected and a NDA filing expected during 1H12.

Keryx has retained all key commercial rights for its two lead compounds and has the resources to complete Phase 3 development for both of its lead compounds, which provides more leverage in partnership discussions. The estimated cash burn rate for 2010 is $1.3 million per month or approximately $4 million per quarter and $16 million for the entire year.

This is a sponsored post placed by IR GRO on behalf of ProActive Capital. Please visit the ProActive News Room for more details on Keryx.

Tuesday, March 23, 2010

The Concise Guide to Everything in 327 slides

Confessions of a Value Investor

If there was a rule in giving presentations that no presentation shall exceed 10-20 slides, this link breaks it. It is 327 slides in length. Note: this presentation is available on many sites, but none are available for download.

Background: Professor Bakshi gave a talk entitled “Confessions of a Value Investor: A Few Lessons in Behavioral Finance.” It was given to the students of Indian Institute of Management, Lucknow.

Confessions of a Value Investor (Download)

Friday, March 19, 2010

Summary Notes: Conversation with George Soros

A Conversation with George Soros at HKU from JMSC HKU on Vimeo.

George Soros spoke at HK University, and fielded a number of questions from students and professionals. Soros was last covered on this blog last October.

If you want to spend even a moment this year on finance and economics, this is the one video (89 minutes) to watch. Soros provide his opinion on the current financial crisis, regulatory reform, the economy in developed countries versus developing countries, and on China.

Here are the summary notes:

About the Proposed Solutions to Current Crisis:

  • Will result in protection of system plus extra protection with Regulators part of that solution
  • Regulators are imperfect because bureaucratic and worse, they are subject to political influence
  • Imposing capital requirement justified (Volker proposal is valid)
At 49 minutes in the video, a young student told the audience and Soros he did not understand Soros' writings at age 13, at college, and now, at age 30, he still cannot understand it.

He asks Soros: "If you cannot influence the market, how do you spot turning points?"

Soros replies:

Markets move far away from equilibrium as well as towards equilibrium. When a positive feedback occurs, it is a bubble. When a negative feedback occurs, it is moving towards equilibrium.

Will market move as a bubble or to equilibrium? Greenspan saw bubble in 1996, but Soros said you cannot predict how far the bubble will go. Further, bubbles are not irrational. It is rational to participate in bubble. When bubble is mature, he sells or goes short.

Other important points:
  • An investor could have been short in 1996 but not alive (insolvent) in 2000. This follows the old adage that markets can remain irrational longer than an investor can stay solvent 
  • Soros shorted internet stocks after they fell, but had to cover because the stocks rose again
  • Conclusion: there is no recipe for getting the market right!

On China:
  • The China / Taiwan relationship is a negative sum gain right now
  • For world to be prosperous, a positive sum gain is required
Soros not a favorite for China. When he is asked his opinion on China opening up of society (culturally) to the world, his response is the following:

  • Open society through a critical process would raise prosperity
  • China developed an efficient critical process, but it is confined to the leadership
  • This leadership requires constant consultation to see what is being done wrong
  • One of the strengths of China today is leadership
  • China's leadership is self-critical and is anxious about doing the right thing
  • China needs to allow outside criticism as well
  • On the plus side, its internal critical process is efficient
Soros notes that China has emerged as a leading power in the world: it is rising while the U.S. is sinking; rest of the world turns towards positive influences.

China is the motor.


  • the American consumer was the motor before financial crisis
  • Rest of world turning towards China
  • China must pay attention to how the world views it: it can only rise in a way where it is accepted by the world

   In response to a question on Soros causing the color revolution, his response is that it is easy to blame someone else than to look at one’s own shortcomings.

Soros is not in favor at all of revolutions, as revolutions destroy without creating a world order. He believes in critical thinking and gradually improving the order rather than revolutions.

His viewpoint on the current crises is that:
  • the Greek crisis will pass and (EU) solvency requirements will be met
  • China/India/Brazil will grow faster than the developed world

Sunday, March 14, 2010

Take the Leap

Rick Smith is author of the Leap *How 3 Simple Changes Can Propel Your Career from Good to Great. the Leap would appeal to people who have ...a job... but want to take a leap in self-employment: entrepreneurship.

This book is a worthwhile read. I could relate to much of the material in this book, due to my past interactions with's owners as the company grew its application on facebook (its application now called IQ Investing), and later on launched its investing services in October 2009.

In brief, kaChing obtained $3M in venture capital funding in 2008, and an additional $7.5M in December 2009.

I cannot express in words how much was learnt in having the opportunity to work with, interact, and to learn (virtually via the Internet, emails, and phone) from the staff and owners at kaChing.

Moving back to the topic, Smith in the Leap writes about the difference between success achieved either by luck or by skill. With the stock market, succeeding in investing requires skill (over the long run).

This teaching is, and continues to be a central measurement for members on IQ Investing.

Thus, it was a surprise to read Smith's discussion on a discovery in 2005. A series of ultraviolet and infrared filters could be used to read the texts in manuscripts that were previously undecipherable.

This science discovery was then applied to obtain the writings of Aristotle's lost book Invitation to Philosophy:

So what did Aristotle have to say from his ancient pedestal that is useful and relevant to us today? A great deal, it turns out. In the restored manuscripts, he draws a critical distinction between outcomes caused by skill or intellect and those caused by chance or luck. Even when two outcomes are identical, Aristotle argues, those that result from deliberate action have much greater value than those that occur will-nilly, without any particular intent in our part.
Imagine, by way of illustration, two sailors starting out from the same dock. One tacks left and right, riding the wind and playing the tides and current as best he can. The other quickly tires of all that, furls his sail, naps on the deck, and lets the boat drift where it will. Conceivably, both could end up several hours later at the same point. It might even be a pleasant place to arrive at, but Aristotle would argue that the end point, in fact, has utterly different meaning for the two sailors because the journeys that got them there are nothing alike.
For an outcome to truly matter, for it to have deep value to our lives, we have to be in control of the actions that get us there. We have to be the one steering the ship - the one deciding which way to tack and when, and how much reach to give the sails. If we simply let ourselves drift toward happiness or fulfillment or any other goal - or if we let others determine the route that will get us there or what the goal itself will be - we have lost control of our own journey and can never fully enjoy or even, at a subconscious level, embrace the outcome.
It is my hope that my virtual "travel" on IQ Investing, the people I have met and connecting with, and the many things that I have learnt will propel a leap further than I can even imagine.

Friday, March 05, 2010

20 Lessons and 10 False Ones

In Seth Klarman's annual letter, Klarman posted his 20 lessons of 2008 from the financial crisis. 

He most aptly notes that the lessons "were either never learned or else were immediately forgotten by most market participants.”

Twenty Investment Lessons of 2008

  1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
  2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.
  3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.
  4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.
  5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
  6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.
  7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of "private market value" as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.
  8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
  9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
  10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.
  11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.
  12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.
  13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.
  14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.
  15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.
  16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank's management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.
  17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.
  18. When a government official says a problem has been "contained," pay no attention.
  19. The government – the ultimate short-term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.
  20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.
Below, we itemize some of the quite different lessons investors seem to have learned as of late 2009 – false lessons, we believe. To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach. It requires a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience.

False Lessons
  1. There are no long-term lessons – ever.
  2. Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.
  3. There is no amount of bad news that the markets cannot see past.
  4. If you’ve just stared into the abyss, quickly forget it: the lessons of history can only hold you back.
  5. Excess capacity in people, machines, or property will be quickly absorbed.
  6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.
  7. In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.
  8. The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.
  9. The government can indefinitely control both short-term and long-term interest rates.
  10. The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”)

Sunday, February 28, 2010

How to generate a 801,516% Return (Berkshire Hathaway Annual Letter)

Warren Buffett published his annual letter to the shareholders of Berkshire Hathaway. Over a 45 year period, Buffett and Munger produced a total return of 801,516%. This is double that of the return of the S&P 500 in the same period, and represents a 20% compounded annual return.

Here is the link for the full letter.  

One can try to analyze and replicate Buffett's success, correctly or incorrectly. Buffett, however, attributes his success on what he does not do. It can best be summarized with a quote from Munger:

“All I want to know is where I’m going to die, so I’ll never go there.” 
Thinking in mathematical terms, to solve difficult problems:

“Invert, always invert"
Finally, in terms of music:

Sing a country song in reverse, and you will quickly recover your car, house and wife.
Berkshire Activity - A summary

Recall that in September 2008, when the financial markets seized, Berkshire had sufficient cash to inject in the market. In 2009, Berkshire bought a railway company (which is discussed on pages 3-4).

In 2009, Buffett stated in his letter that "the economy ...will be in shambles throughout 2009." His letter also contained 12,830 words which the media did not cover. While Buffett stated his disappointment in the way media covered stories, Buffett did explain that not all of Berkshire's business is doing well. That is, GEICO's entrance in the credit card market proved to be a losing business.

Berkshire also owns NetJets. While the company had its share of success, it has so far costed the company 157M in pre-tax loss, and debt soared from $102 Million (at the time of purchase) to $1.9B in April 2009. Buffett notes that its fortunes are beginning to turn around (debt reduced to $1.4B and earnings are profitable, after losing $711M in 2009).

On a more positive note, Buffett believes the housing problem is largely over (page 11).

Summary of Holdings for 2009:

Shares Company
Percentage of
Owned Cost * Market
(in millions)

151,610,700 American Express Company ........................ 12.7 $ 1,287 $ 6,143
225,000,000 BYD Company, Ltd. .............................. 9.9 232 1,986
200,000,000 The Coca-Cola Company .......................... 8.6 1,299 11,400
37,711,330 ConocoPhillips .................................. 2.5 2,741 1,926
28,530,467 Johnson & Johnson ............................... 1.0 1,724 1,838
130,272,500 Kraft Foods Inc. ................................. 8.8 4,330 3,541
3,947,554 POSCO ........................................ 5.2 768 2,092
83,128,411 The Procter & Gamble Company .................... 2.9 533 5,040
25,108,967 Sanofi-Aventis .................................. 1.9 2,027 1,979
234,247,373 Tesco plc ....................................... 3.0 1,367 1,620
76,633,426 U.S. Bancorp .................................... 4.0 2,371 1,725
39,037,142 Wal-Mart Stores, Inc. ............................. 1.0 1,893 2,087
334,235,585 Wells Fargo & Company .......................... 6.5 7,394 9,021
Others ......................................... 6,680 8,636
Total Common Stocks Carried at Market .............. $34,646 $59,034

Media reported that Berkshire sold positions in  ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson. The reason this was done was to raise cash to buy Dow and Swiss Re. In 2009, Berkshire was bullish on corporate and municipal bonds, a viewpoint that later proved to be correct when these issues rallied.

A Story

The story worth quoting from the letter is in regards to mergers and acquisitions, a theme that may play out this year as credits loosen, the appetite for risks increase, and as Berkshire itself considers other purchasing options:

The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After
the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise me, therefore, that you’ll never again do a deal this dumb.”We owned stock in a large well-run bank that for decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank immediately began looking for possible purchases. Its managers – fine people and able bankers – not unexpectedly began to behave like teenage boys who had just discovered girls.
They soon focused on a much smaller bank, also well-run and having similar financial characteristics in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside, though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price close to three times book value. Moreover, he wanted stock, not cash.
Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”
The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise me, therefore, that you’ll never again do a deal this dumb.”

Yes, the merger went through. The owner of the small bank became richer, we became poorer, and the managers of the big bank – newly bigger – lived happily ever after.

Monday, February 08, 2010

Lead by Example: Seth Klarman

Seth Klarman is the founder and president of The Baupost Group, a Boston-based private investment partnership. He is a topic of discussion on kaChing's Investing IQ App's "The Intelligent Investor" group (now with 1,270 members).

In the video, Klarman discusses his investment philosophy. He prefers to look for securities that fly below the radar, that are involved in complicated situations (and are therefore ignored by the investment community), stocks that are out of favor (kicked out of a major index or not belonging to one). He also prefers significant and illiquid securities over significant and liquid securities.

Klarman is worth listening to: Baupost manages $1.7 Billion for 40 families encompassing 700, and his book, "Margin of Safety," is $1,100 on (although the price of a book does not indicate the value of its content, but its lack of availability). Most importantly, his investment approach is to start cautiously by identifying all the risks and by avoiding them by hedging.

Klarman is rarely heard or followed by the media, unlike, for example, Warren Buffet. Yet, both investors have similarities in their approach to the selection of securities. For this reason,the Harvard Business Review interview (link below) is a worthwhile watch.

On Writing Margin of Safety:

Here is a link to the full interview provided by Harvard Business School.

These are some of the hi-lights from the video on leadership:
  • On leadership, lead by example
  • Be there and be available to staff (Klarman has an open trading desk as opposed to an office, even though he isn't a "trader")
  • Empower others: let others shine if you know they can do so
  • Set an example to colleagues on a having a balanced work-life