From a recent Wall Street Journal article by Jason Zweig on Seth Klarman:
"We didn't get the value out of this crisis that we should have," Mr. Klarman told the audience. "For our parents or grandparents, it was awful to have had a Great Depression. But it was in some ways helpful to carry a Depression mentality throughout their later lives, because it meant they were thrifty with their money and prudent in their investment decisions." He added: "All we got out of this crisis was a Really Bad Couple of Weeks mentality."
Check out the full article.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, May 31, 2010
Wednesday, May 26, 2010
Bond Vigilantes
From a recent Wall Street Journal article:
Remember the bond market vigilantes, that frightening band of financial marauders who once roamed the earth like a fearsome herd of Tyrannosaurus rex? They were so scary that in February 1993, as President Bill Clinton struggled to reduce the federal budget deficit, James Carville quipped that he wanted to be reincarnated as the bond market so he could intimidate everybody.
The article later adds that the bond market vigilantes are often a force for good and ill at the same time. So, while the bond market is quite powerful, it is not necessarily wise and rarely subtle.
Well, the real world requires at least a bit of subtlety.
The bond market -- or any properly functioning market -- is a useful signaling mechanism but at extremes can be the tail that wags the economic dog. The view that they are always right and always a useful disciplinary force is simplistic and deeply flawed.
To me, that view doesn't give enough consideration to the potential downside, at times, of such a hyperactive and interconnected system.
Check out the full article.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Remember the bond market vigilantes, that frightening band of financial marauders who once roamed the earth like a fearsome herd of Tyrannosaurus rex? They were so scary that in February 1993, as President Bill Clinton struggled to reduce the federal budget deficit, James Carville quipped that he wanted to be reincarnated as the bond market so he could intimidate everybody.
The article later adds that the bond market vigilantes are often a force for good and ill at the same time. So, while the bond market is quite powerful, it is not necessarily wise and rarely subtle.
Well, the real world requires at least a bit of subtlety.
The bond market -- or any properly functioning market -- is a useful signaling mechanism but at extremes can be the tail that wags the economic dog. The view that they are always right and always a useful disciplinary force is simplistic and deeply flawed.
To me, that view doesn't give enough consideration to the potential downside, at times, of such a hyperactive and interconnected system.
Check out the full article.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, May 25, 2010
Easy to Teach & Useless
Here's a useful s useful summary of something Charlie Munger said about beta at the 2010 Wesco shareholder meeting:
The concept of beta or volatility is asinine. It isn't always bad ideas that cause bad outcomes but good ideas taken to excess. Obviously if you own very volatile stocks your returns can be volatile day to day. The main problems in life can only be solved when you know what works, what doesn't and why.
Very high IQ people coming out of b-schools are basically useless to us, aside from their own idiosyncratic virtues. These people often tell him and Warren that what they learned in b-school was useless and they like the way Warren and Charlie think. Simple formulas are all that are taught but they are totally useless. B-schools have not done civilization a favor by making the matter easier to teach but useless. If he were running a business school, he would start off with a history of business. That system would steal cases from each of the sub-specialist's repertoire so there would be a lot of cross-academic friction. However, he thinks it is useful to know why GM rose and then failed. He also thinks it would be beneficial to examine why railroads rose, struggled and why are they better investments now. Unfortunately, it is easier to teach beta, which he equated to algebra; where you can plug in values and find an answer.
Check out these notes for more on what Munger had to say.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The concept of beta or volatility is asinine. It isn't always bad ideas that cause bad outcomes but good ideas taken to excess. Obviously if you own very volatile stocks your returns can be volatile day to day. The main problems in life can only be solved when you know what works, what doesn't and why.
Very high IQ people coming out of b-schools are basically useless to us, aside from their own idiosyncratic virtues. These people often tell him and Warren that what they learned in b-school was useless and they like the way Warren and Charlie think. Simple formulas are all that are taught but they are totally useless. B-schools have not done civilization a favor by making the matter easier to teach but useless. If he were running a business school, he would start off with a history of business. That system would steal cases from each of the sub-specialist's repertoire so there would be a lot of cross-academic friction. However, he thinks it is useful to know why GM rose and then failed. He also thinks it would be beneficial to examine why railroads rose, struggled and why are they better investments now. Unfortunately, it is easier to teach beta, which he equated to algebra; where you can plug in values and find an answer.
Check out these notes for more on what Munger had to say.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, May 24, 2010
Sinking Seaworthy Ships
On March 9th, The Chairman of the CFTC said the following about credit default swaps:
Keynote Address of CFTC Chairman Gary Gensler - OTC Derivatives Markets Conference
"At the height of the crisis in the fall of 2008, stock prices, particularly of financial companies, were in a free fall. Some observers believe that CDS figured into that decline. They contend that, as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company's prospects. This analysis has led some observers to suggest that credit default swap trading should be restricted or even prohibited when the protection buyer does not have an underlying interest.
Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that 'a mischievous kind of gaming or wagering' had caused 'great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed.' The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be 'null and void to all intents and purposes.'
For a time, however, it remained legal to buy insurance on another person’s life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest."
History does seem to repeat in finance. The names of the products may change but the effect is the same.
From John Kenneth Galbraith's book, A Short History of Financial Euphoria:
"The rule is that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of financial memory*. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version." - John Kenneth Galbraith
The problems we face in finance today have parallels that go back a long way.
Adam
* More from the same book: "...for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius." - John Kenneth Galbraith
CFTC Chairman Keynote Address
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Keynote Address of CFTC Chairman Gary Gensler - OTC Derivatives Markets Conference
"At the height of the crisis in the fall of 2008, stock prices, particularly of financial companies, were in a free fall. Some observers believe that CDS figured into that decline. They contend that, as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company's prospects. This analysis has led some observers to suggest that credit default swap trading should be restricted or even prohibited when the protection buyer does not have an underlying interest.
Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that 'a mischievous kind of gaming or wagering' had caused 'great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed.' The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be 'null and void to all intents and purposes.'
For a time, however, it remained legal to buy insurance on another person’s life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest."
History does seem to repeat in finance. The names of the products may change but the effect is the same.
From John Kenneth Galbraith's book, A Short History of Financial Euphoria:
"The rule is that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of financial memory*. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version." - John Kenneth Galbraith
The problems we face in finance today have parallels that go back a long way.
Adam
* More from the same book: "...for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius." - John Kenneth Galbraith
CFTC Chairman Keynote Address
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, May 21, 2010
Munger on Dumb Competition
From a recent Forbes interview with Charlie Munger. When Charlie was asked about himself he said:
"I went where there was dumb competition (investment management). We do so well in spite of being so stupid. That's why there's hope for you!"
Check out some of the other excerpts from the interview.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
"I went where there was dumb competition (investment management). We do so well in spite of being so stupid. That's why there's hope for you!"
Check out some of the other excerpts from the interview.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, May 19, 2010
Berkshire Hathaway 1st Quarter 2010 13F-HR
Berkshire Hathaway's (BRKa) 1st quarter 2010 13F-HR was released on May 17th, 2010.
The equity portfolio is now made up of over 40% financials and 38% consumer goods. Top five holdings are:
Here is a summary of changes made to the portfolio this past quarter:
Sold completely out of positions in Wellpoint (WLP), United Health (UNH), Suntrust (STI), and Travellers (TRV).
Also reduced exposure to the following:
Other reductions include KMX, GCI, MCO, COST, MTB but the overall portfolio impact was not significant. None of these smaller individual changes represented more than .15% of the equity portfolio's value.
The reduction to his Kraft shares was the largest change this quarter (sold ~$ 900 million of what was a ~$ 4 billion position) and likely a reflection of not being too impressed with the purchase of Cadbury or the sale of the pizza business. Yet it remains a top five holding. Some of the other equities that were sold last quarter may reflect a desire to raise some cash after the Burlington Northern purchase.
Finally, Buffett bought some additional shares in the following:
None of these 3 purchases was more than .15% of the equity portfolio's value so each of these additions were relatively small adjustments.
So the moves in Kraft and to a lesser extent Procter & Gamble were the largest one's made quarter. Still, neither change was significant in the context of the entire equity portfolio.
Adam
Long positions in BRKb, KO, WFC, AXP, PG, KFT, COP, JNJ, and MCO.
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The equity portfolio is now made up of over 40% financials and 38% consumer goods. Top five holdings are:
- Coca-Cola (KO) = 21.6% of the portfolio
- Wells Fargo (WFC) = 19.6%
- American Express (AXP) = 12.3%
- Procter and Gamble (PG) = 9.6%
- Kraft (KFT) = 6.3%
Here is a summary of changes made to the portfolio this past quarter:
Sold completely out of positions in Wellpoint (WLP), United Health (UNH), Suntrust (STI), and Travellers (TRV).
Also reduced exposure to the following:
Other reductions include KMX, GCI, MCO, COST, MTB but the overall portfolio impact was not significant. None of these smaller individual changes represented more than .15% of the equity portfolio's value.
The reduction to his Kraft shares was the largest change this quarter (sold ~$ 900 million of what was a ~$ 4 billion position) and likely a reflection of not being too impressed with the purchase of Cadbury or the sale of the pizza business. Yet it remains a top five holding. Some of the other equities that were sold last quarter may reflect a desire to raise some cash after the Burlington Northern purchase.
Finally, Buffett bought some additional shares in the following:
None of these 3 purchases was more than .15% of the equity portfolio's value so each of these additions were relatively small adjustments.
So the moves in Kraft and to a lesser extent Procter & Gamble were the largest one's made quarter. Still, neither change was significant in the context of the entire equity portfolio.
Adam
Long positions in BRKb, KO, WFC, AXP, PG, KFT, COP, JNJ, and MCO.
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The Soccer Referee
From the Wesco 2010 meeting notes taken by The Inoculated Investor.
Charlie then changed the subject to soccer. Soccer is a game that is very competitive and it is hard to win when the other team has a player that is unusually good. If you let the players do what they want to do they will work mayhem on that great player. Therefore, the soccer referee has to limit the mayhem. This is an important role in soccer. This is the role that government should take with investment bankers. You can’t expect competitive people like them to reign themselves in. It's understandable that if you recruit these competitive people that it leads to too much aggression and ethical standards go down. Something like that has happened in investment banking.
Later, Charlie Munger added...
At the end, Lehman (LEH) was pathological. The totally crooked and crazy operators who originated mortgages and then packaged them into securities... In the end it does not work well for those who sell things that are bad for their customers. The disturbing thing is that most of these people think it is someone else’s fault. Hitler said when he was in that bunker that it was too bad that this happened. He believed that the problem was that the German people hadn’t appreciated their leader enough.
This is similar to what people on Wall Street think now. There needs to be an adult in the room. But the government was not a good referee of mortgage originators.
You can't put a set of rules and incentives in place for the best actors and expect things to work out well. It's not surprising to find the kind of bad behavior we saw on Wall Street when a flawed system is put in place or allowed to continue.
It's not as if removing the bad actors will fix the problem...you have to change the system itself.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Charlie then changed the subject to soccer. Soccer is a game that is very competitive and it is hard to win when the other team has a player that is unusually good. If you let the players do what they want to do they will work mayhem on that great player. Therefore, the soccer referee has to limit the mayhem. This is an important role in soccer. This is the role that government should take with investment bankers. You can’t expect competitive people like them to reign themselves in. It's understandable that if you recruit these competitive people that it leads to too much aggression and ethical standards go down. Something like that has happened in investment banking.
Later, Charlie Munger added...
At the end, Lehman (LEH) was pathological. The totally crooked and crazy operators who originated mortgages and then packaged them into securities... In the end it does not work well for those who sell things that are bad for their customers. The disturbing thing is that most of these people think it is someone else’s fault. Hitler said when he was in that bunker that it was too bad that this happened. He believed that the problem was that the German people hadn’t appreciated their leader enough.
This is similar to what people on Wall Street think now. There needs to be an adult in the room. But the government was not a good referee of mortgage originators.
You can't put a set of rules and incentives in place for the best actors and expect things to work out well. It's not surprising to find the kind of bad behavior we saw on Wall Street when a flawed system is put in place or allowed to continue.
It's not as if removing the bad actors will fix the problem...you have to change the system itself.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, May 17, 2010
Math, Physics, & Investing
Below are some principles that, at least for me, are very relevant to investment process but just happen to come from math and physics.
1) Enrico Fermi - Believed the ability to effectively estimate was an important skill for physicists. A good way to solve physics, and other difficult problems, was by coming up with simple, approximate, but meaningful estimates (over precise calculations) to verify if he was on the right track. After that is done well, that one could later decide if a bigger effort to measure something with more precision was warranted.
Fermi was known for his ability to make good approximate calculations with little or no actual data, hence the name. One well-documented example is his estimate of the strength of the atomic bomb detonated at the Trinity test, based on the distance traveled by pieces of paper dropped from his hand during the blast. Fermi's estimate of 10 kilotons of TNT was remarkably close to the now-accepted value of around 20 kilotons. - Wikipedia
In investing, becoming good at making quick, meaningful, approximations (of valuation, market size etc.) using simple assumptions is more important than complex spreadsheet analysis. If you need a spreadsheet to see a mispricing then you shouldn't be buying it. The mispricing should be plainly obvious.
Prior post: Enrico Fermi's Rule
2) Richard Feynman
"The first principle is you must not fool yourself -- and you are the easiest person to fool." - Richard Feynman
Whether aware of it or not, heuristics (mental shortcuts) and cognitive biases exist in our mental wiring that can lead to misjudgments.
...heuristics are simple, efficient rules... These rules work well under most circumstances, but in certain cases lead to systematic errors or cognitive biases. - Wikipedia
So these shortcuts, for example, can be helpful but, in the context of investing, can cause the potential and risks of an investment to be misjudged; they can also cause an investor to become overconfident or maybe overestimate how well a particular investment is understood. Consider confirmation bias, which just happens to be one of many cognitive biases. The way it works against the investor is that, once a purchase has been made, there can be a tendency to seek information that confirms the wisdom of that action. Well, that behavior, done consistently over time, inevitably will lead to blind spots and potentially expensive misjudgments.
One way to counteract this tendency is to consciously spend more time and energy thinking about why an investment thesis may be wrong; to seek out opposing views instead of reading or listening to those who might have a view that mostly conforms to your own.
"If you want to avoid irrationality, it helps to understand the quirks in our own mental wiring..." - Charlie Munger
3) Kurt Godel - Showed that any system of mathematics complex enough to contain basic arithmetic must always be either inconsistent or incomplete. A quick way to begin understanding the first of his two incompleteness theorems is through its relationship to the liar paradox.
"When I was young everybody was excited by Gödel who came up with proof that you couldn't have a mathematical system without a lot of irritating incompleteness in it. Well, since then my betters tell me that they've come up with more irremovable defects in mathematics and have decided that you're never going to get mathematics without some paradox in it. No matter how hard you work, you're going to have to live with some paradox if you're a mathematician.
Well, if the mathematicians can't get the paradox out of their system when they're creating it themselves, the poor economists are never going to get rid of paradoxes, nor are any of the rest of us. It doesn't matter. Life is interesting with some paradox. When I run into a paradox I think either I'm a total horse's ass to have gotten to this point, or I'm fruitfully near the edge of my discipline. It adds excitement to life to wonder which it is." - Charlie Munger
So even the simplest systems can have paradox. If the simple ones have it, you can be pretty sure the more complex stuff does.
Occasionally, you will find an investment surrounded by contradiction, paradox or what is just generally counterintuitive.
This should not deter further investigation since the confusion caused can sometimes help an asset become mispriced.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
1) Enrico Fermi - Believed the ability to effectively estimate was an important skill for physicists. A good way to solve physics, and other difficult problems, was by coming up with simple, approximate, but meaningful estimates (over precise calculations) to verify if he was on the right track. After that is done well, that one could later decide if a bigger effort to measure something with more precision was warranted.
Fermi was known for his ability to make good approximate calculations with little or no actual data, hence the name. One well-documented example is his estimate of the strength of the atomic bomb detonated at the Trinity test, based on the distance traveled by pieces of paper dropped from his hand during the blast. Fermi's estimate of 10 kilotons of TNT was remarkably close to the now-accepted value of around 20 kilotons. - Wikipedia
In investing, becoming good at making quick, meaningful, approximations (of valuation, market size etc.) using simple assumptions is more important than complex spreadsheet analysis. If you need a spreadsheet to see a mispricing then you shouldn't be buying it. The mispricing should be plainly obvious.
Prior post: Enrico Fermi's Rule
2) Richard Feynman
"The first principle is you must not fool yourself -- and you are the easiest person to fool." - Richard Feynman
Whether aware of it or not, heuristics (mental shortcuts) and cognitive biases exist in our mental wiring that can lead to misjudgments.
...heuristics are simple, efficient rules... These rules work well under most circumstances, but in certain cases lead to systematic errors or cognitive biases. - Wikipedia
So these shortcuts, for example, can be helpful but, in the context of investing, can cause the potential and risks of an investment to be misjudged; they can also cause an investor to become overconfident or maybe overestimate how well a particular investment is understood. Consider confirmation bias, which just happens to be one of many cognitive biases. The way it works against the investor is that, once a purchase has been made, there can be a tendency to seek information that confirms the wisdom of that action. Well, that behavior, done consistently over time, inevitably will lead to blind spots and potentially expensive misjudgments.
One way to counteract this tendency is to consciously spend more time and energy thinking about why an investment thesis may be wrong; to seek out opposing views instead of reading or listening to those who might have a view that mostly conforms to your own.
"If you want to avoid irrationality, it helps to understand the quirks in our own mental wiring..." - Charlie Munger
3) Kurt Godel - Showed that any system of mathematics complex enough to contain basic arithmetic must always be either inconsistent or incomplete. A quick way to begin understanding the first of his two incompleteness theorems is through its relationship to the liar paradox.
"When I was young everybody was excited by Gödel who came up with proof that you couldn't have a mathematical system without a lot of irritating incompleteness in it. Well, since then my betters tell me that they've come up with more irremovable defects in mathematics and have decided that you're never going to get mathematics without some paradox in it. No matter how hard you work, you're going to have to live with some paradox if you're a mathematician.
Well, if the mathematicians can't get the paradox out of their system when they're creating it themselves, the poor economists are never going to get rid of paradoxes, nor are any of the rest of us. It doesn't matter. Life is interesting with some paradox. When I run into a paradox I think either I'm a total horse's ass to have gotten to this point, or I'm fruitfully near the edge of my discipline. It adds excitement to life to wonder which it is." - Charlie Munger
So even the simplest systems can have paradox. If the simple ones have it, you can be pretty sure the more complex stuff does.
Occasionally, you will find an investment surrounded by contradiction, paradox or what is just generally counterintuitive.
This should not deter further investigation since the confusion caused can sometimes help an asset become mispriced.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Thursday, May 13, 2010
Munger: "Separate Derivatives from the Basic Bridges of Civilization"
From an interview with Charlie Munger published in Forbes magazine yesterday. Munger apparently would make Paul Volcker "look like a sissy" when it comes to financial regulation:
"I would economically restrain what investment banks and banks do more than he would. I would separate derivatives from the basic bridges of civilization. We don't want civilization contaminated by extreme speculation. I'd ban all the derivatives trading except for metals and commodities. The new stuff is a marvelous gambling game. It swamps any commercial transactions that are needed. Gambling does not become wonderful just because it pertains to commerce." - Charlie Munger
He then added he'd make finance a less attractive place to be by possibly putting in place something like a Tobin tax on all transactions.
He also points out Warren Buffett wrote a letter in 1982 saying that allowing the creation of the S&P 500 derivatives contract would do more harm than good. So he tried to prevent them from coming into existence.
Civilization would be a better place without them.
Munger added that Warren can't help but buy a mispriced financial item. So they were still buyers of derivatives, at times, even though they felt they should not exist.
Check out the entire interview.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
"I would economically restrain what investment banks and banks do more than he would. I would separate derivatives from the basic bridges of civilization. We don't want civilization contaminated by extreme speculation. I'd ban all the derivatives trading except for metals and commodities. The new stuff is a marvelous gambling game. It swamps any commercial transactions that are needed. Gambling does not become wonderful just because it pertains to commerce." - Charlie Munger
He then added he'd make finance a less attractive place to be by possibly putting in place something like a Tobin tax on all transactions.
He also points out Warren Buffett wrote a letter in 1982 saying that allowing the creation of the S&P 500 derivatives contract would do more harm than good. So he tried to prevent them from coming into existence.
Civilization would be a better place without them.
Munger added that Warren can't help but buy a mispriced financial item. So they were still buyers of derivatives, at times, even though they felt they should not exist.
Check out the entire interview.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
1962 Buffett Partnership Letter
Here are some notes from the Buffett partnership letters taken by Frank Gifford, a Berkshire Hathaway shareholder.
Some excerpts 1962 section of the notes:
Our target is an approximately 1/2% decline for each 1% decline in (the Dow*) and if achieved, means we have a considerably more conservative (vehicle*) for investment in stocks than practically any alternative.
During the first half of 1962 we had one of the best periods in our history, achieving a minus 7.5% result before payments to partners, compared to the minus 21.7% over-all result on the Dow.
...Six-months' or even one-year's results are not to be taken too seriously. Short periods of measurement exaggerate chance fluctuations in performance.
Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year. It is instead to be measured against the general experience in securities as measured by the Dow-Jones Industrial Average, leading investment companies etc.
While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance....If any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.
I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.
These notes provide a useful way to get familiar with some of the highlights from those early letters.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Some excerpts 1962 section of the notes:
Our target is an approximately 1/2% decline for each 1% decline in (the Dow*) and if achieved, means we have a considerably more conservative (vehicle*) for investment in stocks than practically any alternative.
During the first half of 1962 we had one of the best periods in our history, achieving a minus 7.5% result before payments to partners, compared to the minus 21.7% over-all result on the Dow.
...Six-months' or even one-year's results are not to be taken too seriously. Short periods of measurement exaggerate chance fluctuations in performance.
Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year. It is instead to be measured against the general experience in securities as measured by the Dow-Jones Industrial Average, leading investment companies etc.
While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance....If any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.
I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.
These notes provide a useful way to get familiar with some of the highlights from those early letters.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
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