Value Investing World

Hussman Weekly Market Comment: The Reality of the Situation

2012-05-29T21:35:00.000-04:00

For nearly two years, the massive interventions of central banks have repeatedly pulled a fundamentally weak and debt-burdened global economy from the brink of resumed recession. The Federal Reserve's balance sheet is now leveraged 52-to-1, with assets having an average duration of over 5 years, suggesting that if those assets were marked-to-market, an interest rate increase of less than 50 basis points would wipe out the Fed's entire capital base. Of course, the Fed takes no marks on its assets when it reports its balance sheet, though it does occasionally take down the value of the securities in the Maiden Lane shell companies that it illegally set up to bail out Bear Stearns and other entities (in violation of Section 13(3) of the Federal Reserve Act, which Congress had to amend and spell out like a See-Spot-Run book as a result).

At a 10-year Treasury yield of 1.7%, interest on reserves of 0.25%, and a monetary base now at about 18 cents per dollar of nominal GDP (see Run, Don't Walk), further purchases of long-term Treasury securities by the Fed would produce net losses for the Fed in any scenario where yields rise more than about 20 basis points a year, or the Fed ever has to unwind any portion of its already massive positions. So further QE by the Fed would effectively amount to fiscal policy. Moreover, the benefits of central bank interventions are becoming progressively smaller and short-lived (nearly log-periodic in fact, to borrow a term from crash dynamics). None of this restricts the Fed from embarking on further interventions. It just emphasizes how far the Fed has already descended into the deep.

GMO whitepaper: The What-Why-When-How Guide to Owning Emerging Country Debt

2012-05-29T21:26:00.000-04:00

As GMO approaches its 20th year managing emerging debt, Tina Vandersteel of GMO's Fixed Income Division offers a buyer’s perspective on how the asset class has evolved. She outlines the rewards and risks offered when investing in emerging external, local, corporate, “blended” and “multi asset” (including equities) strategies as well as insights into timing, portfolio fit, and other asset allocation considerations.

I Cannot Leave the Truth Unknown - By Frank Martin

2012-05-29T21:20:00.000-04:00

Link to: I Cannot Leave the Truth Unknown

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Related previous post: Martin Capital Management - 2011 Annual Report

Ray Dalio quote (the holy grail of investing)

2012-05-28T22:07:00.001-04:00

From Maneet Ahuja's book, The Alpha Masters:

Dalio says if you have 15 or more good, uncorrelated bets, you will improve your return to risk ratio by a factor of five. He calls this the holy grail of investing. “If you can do this thing successfully, you will make a fortune,” he says. “You’ll get the pot of gold at the end of the rainbow.”

Joel Greenblatt quote (diversification)

2012-05-28T15:54:00.000-04:00

“Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.” –Joel Greenblatt, The Most Important Thing Illuminated

Nassim Taleb quotes (the unexpected and the "unknown unknown")

2012-05-28T15:52:00.001-04:00

“Plans fail because of what we have called tunneling, the neglect of sources of uncertainty outside the plan itself…..The unexpected almost always pushes in a single direction: higher costs and a longer time to completion. On very rare occasions, as with the Empire State Building, you get the opposite: shorter completion and lower costs—these occasions are becoming truly exceptional nowadays…..As I said earlier, we are too narrow-minded a species to consider the possibility of events straying from our mental projections, but furthermore, we are too focused on matters internal to the project to take into account external uncertainty, the “unknown unknown,” so to speak, the contents of the unread books.” –Nassim Taleb, The Black Swan

Seneca quote

2012-05-28T15:52:00.000-04:00

“Just as conversation or reading or some deep reflection deceives travellers, and they discover they have reached their goal before knowing they were approaching it, so it is with this unbroken and rapid journey of life, that we make at the same pace, whether awake or asleep: those who are busy with other things do not notice it until the end comes.” –Seneca, Dialogues and Essays

Ray Dalio quote (learn from history)

2012-05-27T19:31:00.001-04:00

“If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.” -Ray Dalio (as quoted by Maneet Ahuja in The Alpha Masters)

Seneca quote (learning from the minds of the past)

2012-05-27T19:31:00.000-04:00

“Since nature permits us to have a share in every age, why should we not forsake this insignificant and fleeting span of time and devote ourselves with all our minds to the past, which is vast, which is eternal, which we share with better men?” –Seneca, Dialogues and Essays

John Mauldin: Meanwhile, Back at the Ranch

2012-05-26T15:36:00.001-04:00

It is simply hard to tear your eyes away from the slow-motion train wreck that is Europe. Historians will be writing about this moment in time for centuries, and with an ever-present media we see it unfold before our eyes. And yes, we need to tear our gaze away from Europe and look around at what is happening in the rest of the world. There is about to be an eerily near-simultaneous ending to the quantitative easing by the four major central banks while global growth is slowing down. And so, while the future of Europe is up for grabs, the true danger to global markets and growth may be elsewhere. But, let’s do start with the seemingly obligatory tour of Europe.

Howard Marks quote (humility)

2012-05-26T15:30:00.001-04:00

“In my view, the road to investment success is usually marked by humility, not ego.” –Howard Marks, The Most Important Thing Illuminated

Seneca quote

2012-05-26T15:30:00.000-04:00

“….we are never released from care if we suppose that each time we are under observation we are under scrutiny; for many things happen that expose our true selves against our will, and, though such attention to oneself may succeed, life brings neither happiness nor peace of mind to those who live it constantly behind a mask. But what great pleasure lies in that frankness that is pure and in itself unadorned, veiling no part of its character! But even a life such as this is liable to be scorned, if all things lie open to all people; for there are those who turn up their noses at whatever has become too familiar. But virtue runs no risk of being undervalued when it is put right before our eyes, and it is better to be despised for being natural than to be tormented by constant pretence. Let us, however, show moderation in the matter: it makes a considerable difference whether you live naturally or carelessly.” –Seneca, Dialogues and Essays

Darwin's Struggle: Origin Of Species

2012-05-25T21:40:00.002-04:00

Link

Charlie Munger quote (complexity and overconfidence)

2012-05-25T15:45:00.000-04:00

Mentioned by Peter Bevelin in my 2009 interview with him (and it reminds me of THIS Warren Buffett quote from this year's Berkshire Meeting):

“We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false. We’re so afraid of that process so we don’t do it.” –Charlie Munger

Walter Isaacson: Benjamin Franklin: An American Life

2012-05-25T15:30:00.000-04:00

Link

Nassim Taleb quote

2012-05-25T15:29:00.000-04:00

“We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living.” –Nassim Taleb, The Black Swan

Joel Greenblatt quote (mistakes)

2012-05-24T10:17:00.001-04:00

“Many of the mistakes I have made are the same ones that I had made before; they just look a little different each time—the same mistakes slightly disguised.” –Joel Greenblatt, The Most Important Thing Illuminated

Howard Marks quote (risk and high prices)

2012-05-24T10:17:00.000-04:00

“The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high. This isn’t a theoretical risk; it’s very real.” –Howard Marks, The Most Important Thing Illuminated

Public Money Finds Back Door to Private Schools

2012-05-24T10:06:00.004-04:00

Found via Greg Mankiw’s blog.

When the Georgia legislature passed a private school scholarship program in 2008, lawmakers promoted it as a way to give poor children the same education choices as the wealthy.

The program would be supported by donations to nonprofit scholarship groups, and Georgians who contributed would receive dollar-for-dollar tax credits, up to $2,500 a couple. The intent was that money otherwise due to the Georgia treasury — about $50 million a year — would be used instead to help needy students escape struggling public schools.

That was the idea, at least. But parents meeting at Gwinnett Christian Academy got a completely different story last year.

“A very small percentage of that money will be set aside for a needs-based scholarship fund,” Wyatt Bozeman, an administrator at the school near Atlanta, said during an informational session. “The rest of the money will be channeled to the family that raised it.”

…..

While the scholarship programs have helped many children whose parents would have to scrimp or work several jobs to send them to private schools, the money has also been used to attract star football players, expand the payrolls of the nonprofit scholarship groups and spread the theology of creationism, interviews and documents show. Even some private school parents and administrators have questioned whether the programs are a charade.

Most of the private schools are religious. Nearly a quarter of the participating schools in Georgia require families to make a profession of religious faith, according to their Web sites. Many of those schools adhere to a fundamentalist brand of Christianity. A commonly used sixth-grade science text retells the creation story contained in Genesis, omitting any other explanation. An economics book used in some high schools holds that the Antichrist — a world ruler predicted in the New Testament — will one day control what is bought and sold.

The programs are insulated from provisions requiring church-state separation because the donations are collected and distributed by the nonprofit scholarship groups.

Patient Capital's Q1 2012 Letter

2012-05-23T17:25:00.001-04:00

Found via Canadian Value Investing.

Despite the above noted issues Canada seems to be on top of the world. Canada avoided many of the serious problems arising from the financial crisis of 2008 and 2009. In addition, our financial system has been heralded as a model of prudence and good management. The Canadian economy buoyed by the developing world’s need for commodities has been relatively strong and resilient. Canadian consumers are continuing to spend and our housing markets are strong right across the country. Canadian equity markets and the Canadian dollar have also performed well. Foreign investors are flocking to Canada as an opportunity for growth and as a safe haven. All appears to be well in the land of the Great White North!

But we are getting nervous! We think that the Canadian economy and Canadian equity markets may be headed for some serious pullbacks.

Goldman Sachs’s Trott Tells Jury Of Buffett Deal Secrecy

2012-05-23T15:30:00.003-04:00

Byron Trott on the September 2008 Berkshire/Goldman deal. I guess it is also a good example of Warren Buffett sticking to his commitments and doing what he says he’ll do. Even if there are billions of dollars on the line, he promised the grandkids ice cream, so Goldman would have to wait. It is also a good example of one of Ben Franklin’s 13 Virtues: “Resolution: Resolve to perform what you ought. Perform without fail what you resolve.”

Warren Buffett’s investment in Goldman Sachs Group Inc. (GS) in September 2008 was so confidential that even his chief financial officer was unaware of it before being briefed on the details by a Goldman Sachs executive, a witness at the Rajat Gupta trial testified.

Byron Trott, who was vice chairman of investment banking at Goldman Sachs and the architect of the $5 billion investment by Buffett’s Berkshire Hathaway Inc. (BRK/B), testified today at Gupta’s insider-trading trial. Prosecutors, who called Trott as a witness, claim that Gupta, then a Goldman Sachs director, tipped Galleon Group LLC co-founder Raj Rajaratnam before the Buffett deal became public on Sept. 23, 2008.

“It was a major, major event to Goldman Sachs and to the markets,” Trott told jurors in Manhattan. “$5 billion was not easily found at that time.”

Prosecutors summoned Trott to tell jurors about the secrecy surrounding a deal that came soon after the collapse of Lehman Brothers Holdings Inc. and while the markets were in free-fall. At the time, Goldman Sachs needed at least $5 billion to “continue to exist,” he said.

“Our entire foundation was built on confidential information, and it could never be breached,” said Trott, who left Goldman Sachs in 2009 after 27 years at the bank. He said he operated on a “need-to-know basis.”

…..

The second proposal had terms closer to Buffett’s liking, including $5 billion in preferred stock carrying a 10 percent interest rate and the right to buy common shares of stock in a new public offering. Buffett also insisted that top Goldman Sachs executives not sell their own shares.

“Was this discussion confidential?” Brodsky asked.

“Very,” said Trott, who was based out of Chicago and working out of New York at the time. Trott said that winning Buffett’s investment was “like getting the Good Housekeeping seal of approval.”

They hammered out the deal in a 20-minute telephone call on Sept. 23 in which Trott said he wanted Buffett to be the “cornerstone” of the transaction. After they reached a tentative agreement, Buffett told Trott not to telephone until later that afternoon because he had an important appointment.

“He told me he promised his grandkids to take them to Dairy Queen, and he was not to be interrupted,” Trott said.

Howard Marks quote (risk)

2012-05-23T13:14:00.000-04:00

“Great investing requires both generating returns and controlling risk. And recognizing risk is an absolute prerequisite for controlling it.

Hopefully I’ve made clear what I think risk is (and isn’t). Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.”

–Howard Marks, The Most Important Thing Illuminated

Steve Keen WSJ Video - Mountain of Debt: A Mountain of Stress on Economy

2012-05-23T10:47:00.002-04:00

Link

Seth Klarman quote (holding cash)

2012-05-22T18:32:00.003-04:00

“In recent years, holding cash is so completely out of favor that it has become the ultimate contrarian investment.” –Seth Klarman, The Most Important Thing Illuminated

My Speech to the Finance Graduates – By Robert J. Shiller

2012-05-22T18:09:00.003-04:00

At this time of year, at graduation ceremonies in America and elsewhere, those about to leave university often hear some final words of advice before receiving their diplomas. To those interested in pursuing careers in finance – or related careers in insurance, accounting, auditing, law, or corporate management – I submit the following address:

Best of luck to you as you leave the academy for your chosen professions in finance. Over the course of your careers, Wall Street and its kindred institutions will need you. Your training in financial theory, economics, mathematics, and statistics will serve you well. But your lessons in history, philosophy, and literature will be just as important, because it is vital not only that you have the right tools, but also that you never lose sight of the purposes and overriding social goals of finance.