John Bogle thinks the investing and business world could benefit from more exposure to history and the classics. In this The Atlantic article, he explains why:
"I'm skeptical about the narrowness of the business school curriculum. I happen to believe it should have a much greater liberal arts emphasis, and even a much greater emphasis on the classics. The Odyssey will tell you an awful lot about human nature and life, and therefore about business, and societal values. Read the Odyssey. Read Dante's Inferno. You can also learn a lot by reading Seneca's essay on the shortness of life or Montaigne's essay on vanity."
What makes a study of history and the Classics so important for business?
"It involves critical thinking," Bogle explained. "It involves some kind of perspective, it involves some ability to think 'you know, this has happened before and it could be happening again now.'"
Bogle goes on to say that we've essentially gone from an ownership society to a situation where agents manage most of the money. Fifty or sixty years ago institutions owned something like eight percent of all stocks. They now own roughly 75 percent. Well, according to him, these agents need to change their emphasis.
"These are pension funds, pension managers, mutual fund managers, but they're agents for others, and they're not honoring their agency. They're not putting their clients first, their principles first. They've ignored their principles, focusing on speculation, rather than investment."
Bogle points out that speculation in aggregate can, especially when frictional costs are taken into account, potentially be worse than a zero sum outcome. In the article he refers to a speech that Ben Graham gave back in 1958. It's pretty clear that Graham would not have thought very highly of the quants.
In fact, it seems he would have consigned them to a rather low level of Dante's Inferno.
Bogle added the following later in the article:
"Somebody ought to spend a little time thinking," he said, "and this gets back to the classics, about the role of business in society. It should add value. But the financial business does not add value. By definition the financial business subtracts value. In round numbers, it takes something like $600 billion out of the pockets of investors every year. That's $6 trillion dollars in 10 years."
Charlie Munger, Paul Volcker, and Warren Buffett have, give or take, articulated similar views on the corrosive effects of short-termism and speculation in the financial system.* They have each generally argued for policies that reduce it over the years. Last September, Buffett and Bogle signed along with 25 others a letter titled Overcoming Short-termism that argued for policies that reduce speculation and encourage patient capital.
So there has been a fair amount of material (new and old) generated on this subject by some pretty good thinkers.
As of now, it appears their views and recommendations will not become policy in any meaningful way.
It will be a fairly unfortunate prospect if that's what happens. A hugely important missed opportunity. At the end of the article, Bogle also paraphrases a quote by Upton Sinclair:
"It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
Check out the full article.
Adam
Related post:
When Genius Failed...Again
* Based upon what they wrote in their own time, it seems likely that John Maynard Keynes or John Kenneth Galbraith wouldn't disagree much if at all.
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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, February 26, 2010
Thursday, February 25, 2010
Employment
The weekly report on unemployment claims was disappointing today (The more detailed monthly employment report is available next week). Check out this chart from a post earlier this month on calculatedriskblog.com.
Employment came back much more quickly during the 9 recessions that happened from 1948 to 1990. In all of those cases employment was restored to the previous peak level in 30 months or less.
The characteristics of employment in the two recessions we've had this past decade are much different.
The 2001 recession, even though it was not a very deep one, still took 46 months or so restore employment to previous levels. The current much deeper recession is still bumping along at employment levels more than 6% below the previous peak after 25 months and counting. Post WWII recession have NEVER been 6% below the previous peak for even 1 month...we have now been there for 4 months in a row.
So something much different is going on.
Keep in mind the last time we had 10%+ unemployment (1981-82) it only took a total a 27 months to fully restore employment to previous levels.
Why have the dynamics changed so much? I think at least part of the problem is a decade of misallocated capital (i.e. from internet stocks to real estate bubbles) but it's likely more complex than that.
No matter what, some fresh thinking to get at the root of this problem seems needed.
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.
Employment came back much more quickly during the 9 recessions that happened from 1948 to 1990. In all of those cases employment was restored to the previous peak level in 30 months or less.
The characteristics of employment in the two recessions we've had this past decade are much different.
The 2001 recession, even though it was not a very deep one, still took 46 months or so restore employment to previous levels. The current much deeper recession is still bumping along at employment levels more than 6% below the previous peak after 25 months and counting. Post WWII recession have NEVER been 6% below the previous peak for even 1 month...we have now been there for 4 months in a row.
So something much different is going on.
Keep in mind the last time we had 10%+ unemployment (1981-82) it only took a total a 27 months to fully restore employment to previous levels.
Why have the dynamics changed so much? I think at least part of the problem is a decade of misallocated capital (i.e. from internet stocks to real estate bubbles) but it's likely more complex than that.
No matter what, some fresh thinking to get at the root of this problem seems needed.
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, February 23, 2010
Munger's Parable
Charlie Munger recently wrote a parable that was published in Slate. It starts by describing a fictitious place called "Basicland". Historically, this fictional place encouraged trade, strongly enforced property rights, had a sound currency, and a rather simple banking system.
Unfortunately, "Basicland" ends up morphing into something altogether different over time.
A parable about how one nation came to financial ruin
Here are a couple of short excerpts from the parable:
"So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called 'financial derivatives.'"
Basicland's politicians, dealing with the mostly self-inflicted hardship, asked for suggestions from the "Good Father"* (even though they historically didn't pay much attention to him since he didn't contribute to their campaigns).
What did he suggest?
"...he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy."
Munger says that while these suggestions drew some approval but prominent economists had strong objections because of intense faith in free markets (i.e. all forms of casino gambling were considered by them to be useful activities).
Somehow, enough were convinced that placing this kind of hyperactive casino activity right in the middle of a financial system made sense.
Munger references a quote by what he calls a "long-dead economist" who knew the most about the ill-effects of hyperspeculation, John Maynard Keynes.
"When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." - John Maynard Keynes
Read the whole article. In parable form it sums up much of what is, and has been, of real concern to the likes of John Bogle, Paul Volcker, and Warren Buffett among others. The current state of affairs would likely have troubled John Maynard Keynes and John Kenneth Galbraith as well. This obviously does not fall down political party lines. There is a good mix of Democrats and Republicans here.
What they seem to have in common is an awareness of financial history and how much the same kinds of mistakes seem to get repeated.
The tools and schemes just have new names. From John Kenneth Galbraith's book, A Short History of Financial Euphoria:
"...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
I have heard more than one pundit and policymaker discount Volcker's thinking as being out of touch with today's realities.
I am sure this parable will be pretty much be ignored or discounted much the same way.
It's also likely, sooner or later, we will regret doing so.
Adam
* Named Benfranklin Leekwanyou Vokker in the parable.
---
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.
Unfortunately, "Basicland" ends up morphing into something altogether different over time.
A parable about how one nation came to financial ruin
Here are a couple of short excerpts from the parable:
"So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called 'financial derivatives.'"
Basicland's politicians, dealing with the mostly self-inflicted hardship, asked for suggestions from the "Good Father"* (even though they historically didn't pay much attention to him since he didn't contribute to their campaigns).
What did he suggest?
"...he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy."
Munger says that while these suggestions drew some approval but prominent economists had strong objections because of intense faith in free markets (i.e. all forms of casino gambling were considered by them to be useful activities).
Somehow, enough were convinced that placing this kind of hyperactive casino activity right in the middle of a financial system made sense.
Munger references a quote by what he calls a "long-dead economist" who knew the most about the ill-effects of hyperspeculation, John Maynard Keynes.
"When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." - John Maynard Keynes
Read the whole article. In parable form it sums up much of what is, and has been, of real concern to the likes of John Bogle, Paul Volcker, and Warren Buffett among others. The current state of affairs would likely have troubled John Maynard Keynes and John Kenneth Galbraith as well. This obviously does not fall down political party lines. There is a good mix of Democrats and Republicans here.
What they seem to have in common is an awareness of financial history and how much the same kinds of mistakes seem to get repeated.
The tools and schemes just have new names. From John Kenneth Galbraith's book, A Short History of Financial Euphoria:
"...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
I have heard more than one pundit and policymaker discount Volcker's thinking as being out of touch with today's realities.
I am sure this parable will be pretty much be ignored or discounted much the same way.
It's also likely, sooner or later, we will regret doing so.
Adam
* Named Benfranklin Leekwanyou Vokker in the parable.
---
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, February 17, 2010
Berkshire Hathaway 4th Quarter 2009 13F-HR
Based upon the most recent 13F-HR filing released yesterday, Berkshire Hathaway (BRKa) reduced its holdings in the following stocks:
Johnson & Johnson - reduced 26%, from 36.9 to 27.1 million shares
(even with this sale, remains a top ten position worth over $ 1.7 billion)
ConocoPhillips - reduced 34%, from 57.4 to 37.7 million shares
(remains a top ten position worth over $ 1.8 billion)
Procter & Gamble - reduced by 9%, from 96.3 to 87.5 million shares
(after sale, PG remains the 4th largest position worth $ 5.5 billion)
Exxon - reduced 67%, from 1.3 million to 422 thousand shares
Carmax - reduced 11%, from 9 to 8 million shares
Ingersol Rand - reduced 27%, from 7.8 to 5.6 million shares
Gannett - reduced 36%, from 3.4 to 2.2 million shares
Suntrust - reduced 22%, from 3.1 to 2.4 million shares
United Health - reduced 65%, from 3.4 to 1.2 million shares
Wellpoint - reduced 60%, from 3.4 to 1.3 million shares
Also, as expected he sold out of his other railroad holdings. In total, Buffett sold approximately $ 2 billion worth of stock.
Some of these stocks, specifically United Health (UNH) and ConocoPhillips (COP) were sold at fairly significant losses. Procter & Gamble (PG) was sold but remains a large position. In the 4Q of 2008 Buffett sold approximately half his stake in Johnson & Johnson (JNJ) to help finance the purchase of Goldman Sachs (GS). After that, he began rebuilding that position. So it is plausible that some of these sales have occurred to help with the purchase of by far the largest acquisition in Berkshire Hathaway's history: Burlington Northern Santa Fe. Who knows.
While Buffett did more selling than buying, he continued to add to his already huge stake in Wells Fargo (WFC). It now makes up 17% of the Berkshire Hathway equity portfolio, 2nd biggest position after Coca-Cola (KO). The additional purchases of shares in WFC was the biggest change on a dollar basis. Here is a list of all the increases:
Wal-Mart Stores - increased 3.2%, from 37.8 to 39.0 million shares
Wells Fargo - increased 2.1%, from 313.4 to 320.1 million shares
Becton Dickinson - increased 25%, from 1.2 to 1.5 million shares
Iron Mountain - Increased 107%, from 3.4 to 7.0 million shares
Republic Services - increased 128%, from 3.6 to 8.3 million shares
Value of all purchases was less than $ 500 million.
Iron Mountain (IRM) has fallen below the lowest prices that were available in the 4th quarter so those new shares are underwater for now. The current Berkshire Hathway's equity portfolio is worth approximately $ 50 billion excluding the preferred shares he holds in the likes of General Electric (GE), Goldman Sachs (GS), and Mars-Wrigley etc.
Adam
Long positions in BRKb, KO, WFC, PG, COP, GE, and JNJ.
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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.
Johnson & Johnson - reduced 26%, from 36.9 to 27.1 million shares
(even with this sale, remains a top ten position worth over $ 1.7 billion)
ConocoPhillips - reduced 34%, from 57.4 to 37.7 million shares
(remains a top ten position worth over $ 1.8 billion)
Procter & Gamble - reduced by 9%, from 96.3 to 87.5 million shares
(after sale, PG remains the 4th largest position worth $ 5.5 billion)
Exxon - reduced 67%, from 1.3 million to 422 thousand shares
Carmax - reduced 11%, from 9 to 8 million shares
Ingersol Rand - reduced 27%, from 7.8 to 5.6 million shares
Gannett - reduced 36%, from 3.4 to 2.2 million shares
Suntrust - reduced 22%, from 3.1 to 2.4 million shares
United Health - reduced 65%, from 3.4 to 1.2 million shares
Wellpoint - reduced 60%, from 3.4 to 1.3 million shares
Also, as expected he sold out of his other railroad holdings. In total, Buffett sold approximately $ 2 billion worth of stock.
Some of these stocks, specifically United Health (UNH) and ConocoPhillips (COP) were sold at fairly significant losses. Procter & Gamble (PG) was sold but remains a large position. In the 4Q of 2008 Buffett sold approximately half his stake in Johnson & Johnson (JNJ) to help finance the purchase of Goldman Sachs (GS). After that, he began rebuilding that position. So it is plausible that some of these sales have occurred to help with the purchase of by far the largest acquisition in Berkshire Hathaway's history: Burlington Northern Santa Fe. Who knows.
While Buffett did more selling than buying, he continued to add to his already huge stake in Wells Fargo (WFC). It now makes up 17% of the Berkshire Hathway equity portfolio, 2nd biggest position after Coca-Cola (KO). The additional purchases of shares in WFC was the biggest change on a dollar basis. Here is a list of all the increases:
Wal-Mart Stores - increased 3.2%, from 37.8 to 39.0 million shares
Wells Fargo - increased 2.1%, from 313.4 to 320.1 million shares
Becton Dickinson - increased 25%, from 1.2 to 1.5 million shares
Iron Mountain - Increased 107%, from 3.4 to 7.0 million shares
Republic Services - increased 128%, from 3.6 to 8.3 million shares
Value of all purchases was less than $ 500 million.
Iron Mountain (IRM) has fallen below the lowest prices that were available in the 4th quarter so those new shares are underwater for now. The current Berkshire Hathway's equity portfolio is worth approximately $ 50 billion excluding the preferred shares he holds in the likes of General Electric (GE), Goldman Sachs (GS), and Mars-Wrigley etc.
Adam
Long positions in BRKb, KO, WFC, PG, COP, GE, and JNJ.
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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, February 16, 2010
Failure of Common Sense
So I guess the following practice somehow made perfect sense to Lehman at the time.
The following is from an article on proprietary trading:
Back in 2006, Lawrence McDonald, a former Lehman Brothers bond trader, remembers, he asked an intern what he was doing during the winter break at the now bankrupt investment bank. The intern, who was a junior in college, said he was trading derivatives for the firm. Surprised, McDonald asked the intern the size of his pad — Wall Street–speak for how much of the firm's money he was able to trade — figuring it couldn't be much.
The intern's response: $150 million.
"It was one of the most amazing things," says McDonald, who has since written a book about his time at Lehman, titled A Colossal Failure of Common Sense. "This kid didn't even have a college degree."
This anecdote might make it a bit less of a mystery how Lehman got into trouble.
Trading derivatives is obviously not as simple as trading stocks. Much more tricky and potentially dangerous. Difficult to know how much exposure there was for Lehman here but, whatever it was, it was in the hands of an intern over winter break.
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 following is from an article on proprietary trading:
Back in 2006, Lawrence McDonald, a former Lehman Brothers bond trader, remembers, he asked an intern what he was doing during the winter break at the now bankrupt investment bank. The intern, who was a junior in college, said he was trading derivatives for the firm. Surprised, McDonald asked the intern the size of his pad — Wall Street–speak for how much of the firm's money he was able to trade — figuring it couldn't be much.
The intern's response: $150 million.
"It was one of the most amazing things," says McDonald, who has since written a book about his time at Lehman, titled A Colossal Failure of Common Sense. "This kid didn't even have a college degree."
This anecdote might make it a bit less of a mystery how Lehman got into trouble.
Trading derivatives is obviously not as simple as trading stocks. Much more tricky and potentially dangerous. Difficult to know how much exposure there was for Lehman here but, whatever it was, it was in the hands of an intern over winter break.
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.
Successful Investing
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. - Warren Buffett
Friday, February 12, 2010
Berkshire Hathaway Joins the S&P 500 Today
Today, Berkshire Hathaway (BRKa) will be added to the S&P 500 as a company now worth over $ 180 billion.*
One of the five most valuable companies in the US.
In 1970, Berkshire Hathaway was earning ~$ 5 million/year. Roughly 40 years later the company earns over $ 9 billion/year and has more than $ 140 billion in investments (common stocks, bonds, and cash equivalents).
A total transformation.
That's investing. Turning a fragile business producing less than $ 5 million in earnings/year into the modern Berkshire Hathaway through smart allocation of capital over time.
Adam
Long BRKb
* A market value that is arguably lower than its intrinsic value at this time.
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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.
One of the five most valuable companies in the US.
In 1970, Berkshire Hathaway was earning ~$ 5 million/year. Roughly 40 years later the company earns over $ 9 billion/year and has more than $ 140 billion in investments (common stocks, bonds, and cash equivalents).
A total transformation.
That's investing. Turning a fragile business producing less than $ 5 million in earnings/year into the modern Berkshire Hathaway through smart allocation of capital over time.
Adam
Long BRKb
* A market value that is arguably lower than its intrinsic value at this time.
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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.
Thursday, February 11, 2010
Tilson: Berkshire Hathaway Analysis
Here is an analysis of Berkshire Hathaway (BRKa) by Whitney Tilson that is updated from time to time.
Whether you agree with the valuation or not, Tilson's analysis is an easy way to get more familiar with an increasingly complex company.
Adam
Long BRKb
Link to Whitney Tilson's Analysis
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.
Adam
Long BRKb
Link to Whitney Tilson's Analysis
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, February 10, 2010
Book Review: How to Read a Financial Report
I haven't read How to Read a Financial Report but this review of it is favorable. Sounds like it may provide a convenient way to learn accounting in general and how to interpret financial statements.
One weakness of the book may be that it only spends a small amount of time on managerial accounting.
From the review:
John Tracy discusses at length the connection between the balance sheet and the income statement. He believes many accountants do not appreciate the connection between the two. He devotes a large segment of the book to the relationship between operating expenses and accounts payable, inventory and accounts payable, cost of good sold and inventory and other interconnections between the two financial reports.
Dr. Tracy devotes a short segment of the book to managerial accounting, I especially enjoyed this segment. Although, as Dr Tracy himself notes he could write a separate book regarding managerial accounting alone, in the few pages he writes about managerial account he provides readers some valuable insights. He asks what is better a 5% sales increase or a 5% price increase. In the fictional company used by Dr. Tracy a 5% price increases profit before fixed expenses by 22.3% whereas a 5% sales would increase the number by only 5%. This is because there are variable expenses that rise with increases in sales volume i.e. sales commission, cost of goods sold. Many managers will focus on increasing sales just to gain market share even if it would be more profitable to simply raise prices.
Maybe Dr. Tracy will write a good book on managerial accounting at some point. This one's probably still worth checking out.
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.
One weakness of the book may be that it only spends a small amount of time on managerial accounting.
From the review:
John Tracy discusses at length the connection between the balance sheet and the income statement. He believes many accountants do not appreciate the connection between the two. He devotes a large segment of the book to the relationship between operating expenses and accounts payable, inventory and accounts payable, cost of good sold and inventory and other interconnections between the two financial reports.
Dr. Tracy devotes a short segment of the book to managerial accounting, I especially enjoyed this segment. Although, as Dr Tracy himself notes he could write a separate book regarding managerial accounting alone, in the few pages he writes about managerial account he provides readers some valuable insights. He asks what is better a 5% sales increase or a 5% price increase. In the fictional company used by Dr. Tracy a 5% price increases profit before fixed expenses by 22.3% whereas a 5% sales would increase the number by only 5%. This is because there are variable expenses that rise with increases in sales volume i.e. sales commission, cost of goods sold. Many managers will focus on increasing sales just to gain market share even if it would be more profitable to simply raise prices.
Maybe Dr. Tracy will write a good book on managerial accounting at some point. This one's probably still worth checking out.
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, February 9, 2010
'Black Swan' Author: Buffett May Just Be Lucky
Just luck?
From this CNBC article:
Nassim Taleb says there isn't enough evidence to show that Warren Buffett's skill, and not his good luck, is responsible for the billionaire's enormous investing success over the decades.
No surprise but I'm gonna take a different view. Here's how Taleb explains his thinking:
"I am not saying Buffett doesn't have skill — I'm just saying we don't have enough evidence to say Buffett isn't doing it by chance."
Late last year he also said:
I Can't Believe I Live In A World Where Bernanke Could Be Reappointed
What I am seeing and hearing on the news -- the reappointment of Bernanke -- is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn't even know he doesn't understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible - as if we promoted every doctor who caused malpractice.
Taleb added...
No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic tranquility of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan.
So not much respect for Buffett or Bernanke...to say the least!
Now that's self-confidence.
Right or wrong the self-imposed silence equals loss of entertainment.
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.
From this CNBC article:
Nassim Taleb says there isn't enough evidence to show that Warren Buffett's skill, and not his good luck, is responsible for the billionaire's enormous investing success over the decades.
No surprise but I'm gonna take a different view. Here's how Taleb explains his thinking:
"I am not saying Buffett doesn't have skill — I'm just saying we don't have enough evidence to say Buffett isn't doing it by chance."
Late last year he also said:
I Can't Believe I Live In A World Where Bernanke Could Be Reappointed
What I am seeing and hearing on the news -- the reappointment of Bernanke -- is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn't even know he doesn't understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible - as if we promoted every doctor who caused malpractice.
Taleb added...
No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic tranquility of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan.
So not much respect for Buffett or Bernanke...to say the least!
Now that's self-confidence.
Right or wrong the self-imposed silence equals loss of entertainment.
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, February 8, 2010
Charlie Munger: Nebraska Furniture Mart
Charlie demonstrating the utility of simple microeconomics during a talk he gave to the University of California, Santa Barbara Economics Department in 2003.
"Berkshire Hathaway just opened a furniture and appliance store in Kansas City. At the time Berkshire opened it, the largest selling furniture and appliance store in the world was another Berkshire Hathaway store, selling $350 million worth of goods per year. The new store in a strange city opened up selling at the rate of more than $500 million a year. From the day it opened, the 3,200 spaces in the parking lot were full. The women had to wait outside the ladies restroom because the architects didn’t understand biology. (Laughter). It’s hugely successful.
Well, I've given you the problem. Now, tell me what explains the runaway success of this new furniture and appliance store, which is outselling everything else in the world?
[Pause]
Well, let me do it for you. Is this a low-priced store or a high-priced store? (Laughter). It's not going to have a runaway success in a strange city as a high-priced store. That would take time. Number two, if it's moving $500 million worth of furniture through it, it's one hell of a big store, furniture being as bulky as it is. And what does a big store do? It provides a big selection. So what could this possibly be except a low-priced store with a big selection?
But, you may wonder, why wasn't it done before, preventing its being done first now? Again, the answer just pops into your head: it costs a fortune to open a store this big. So, nobody's done it before. So, you quickly know the answer. With a few basic concepts, these microeconomic problems that seem hard can be solved much as you put a hot knife through butter. I like such easy ways of thought that are very remunerative. And I suggest that you people should also learn to do microeconomics better."
While Charlie doesn't mention it in the above talk, the team that manages Nebraska Furniture Mart has also developed a significant cost advantage over the years. Warren Buffett put it the following way in his 1983 letter:
"One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. I'd rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don't even dream about, and they then pass on to their customers much of the savings." - Warren Buffett
So some of that cost advantage comes from scale but much of it is successful buying and other operating practices that go back to the founder, Mrs. B.
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.
"Berkshire Hathaway just opened a furniture and appliance store in Kansas City. At the time Berkshire opened it, the largest selling furniture and appliance store in the world was another Berkshire Hathaway store, selling $350 million worth of goods per year. The new store in a strange city opened up selling at the rate of more than $500 million a year. From the day it opened, the 3,200 spaces in the parking lot were full. The women had to wait outside the ladies restroom because the architects didn’t understand biology. (Laughter). It’s hugely successful.
Well, I've given you the problem. Now, tell me what explains the runaway success of this new furniture and appliance store, which is outselling everything else in the world?
[Pause]
Well, let me do it for you. Is this a low-priced store or a high-priced store? (Laughter). It's not going to have a runaway success in a strange city as a high-priced store. That would take time. Number two, if it's moving $500 million worth of furniture through it, it's one hell of a big store, furniture being as bulky as it is. And what does a big store do? It provides a big selection. So what could this possibly be except a low-priced store with a big selection?
But, you may wonder, why wasn't it done before, preventing its being done first now? Again, the answer just pops into your head: it costs a fortune to open a store this big. So, nobody's done it before. So, you quickly know the answer. With a few basic concepts, these microeconomic problems that seem hard can be solved much as you put a hot knife through butter. I like such easy ways of thought that are very remunerative. And I suggest that you people should also learn to do microeconomics better."
While Charlie doesn't mention it in the above talk, the team that manages Nebraska Furniture Mart has also developed a significant cost advantage over the years. Warren Buffett put it the following way in his 1983 letter:
"One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. I'd rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don't even dream about, and they then pass on to their customers much of the savings." - Warren Buffett
So some of that cost advantage comes from scale but much of it is successful buying and other operating practices that go back to the founder, Mrs. B.
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, February 3, 2010
The Volcker Rule
Below is some excerpts of Paul Volcker responding to Senator Mike Johanns in front of the Senate Banking Committee yesterday.
Senator Johanns didn't seem to consider the "Volcker Rule" to be all that relevant and appeared deeply skeptical. Several other Senator's expressed similar skepticism.
First, some background on the so-called "Volcker Rule". The rule is not intended to solve all the problems that were at the root of the financial crisis. Volcker said as much during the hearing. It is intended to limit speculative activity by bank's that have the benefit of FDIC and Federal Reserve backing.
The main criticism of it seems to be that it doesn't solve every problem that caused the crisis. Since when is it necessary for something to solve every problem to have merit?
The idea of the rule is to push the more speculative activity to places that can be allowed to fail without destabilizing the broader financial system.
Volcker Video
Senator Johanns: "Tell me the evil that you're trying to wrestle out of the system by this rule, if we were just to say great, were with ya, we pass it the way you want it passed. What evil disappears?"
Volcker: "Well I don't know whether you want to call it evil but I feel that I've failed if you are more confused than you were before. What I want to get out of the system is taxpayer support for speculative activity. And I want to look ahead. If you don't bar that it's gonna become bigger and bigger and it becomes/adds to what is already a risky business. And I don't want my taxpayer money going to support somebody's proprietary trading. I'll make it as simple as that."
Then later...
Senator Johanns: "It kinda reminds me what the chief of staff said: 'never let a good crisis go to waste.' And what we are doing here is we're taking this financial reform and we're expanding it beyond where we should be. And I just question the wisdom of that unless somebody can make the case to me that had this been in place the world would be different."
Volcker's response:
Volcker: "The chairman made the point that I would emphasize. The problem today is to look ahead, and try to anticipate the problems that may arise that will give rise to the next crisis. And I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."
We need more Volcker's.
Adam
Related post:
Volcker on Financial Innovation
---
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.
Senator Johanns didn't seem to consider the "Volcker Rule" to be all that relevant and appeared deeply skeptical. Several other Senator's expressed similar skepticism.
First, some background on the so-called "Volcker Rule". The rule is not intended to solve all the problems that were at the root of the financial crisis. Volcker said as much during the hearing. It is intended to limit speculative activity by bank's that have the benefit of FDIC and Federal Reserve backing.
The main criticism of it seems to be that it doesn't solve every problem that caused the crisis. Since when is it necessary for something to solve every problem to have merit?
The idea of the rule is to push the more speculative activity to places that can be allowed to fail without destabilizing the broader financial system.
Volcker Video
Senator Johanns: "Tell me the evil that you're trying to wrestle out of the system by this rule, if we were just to say great, were with ya, we pass it the way you want it passed. What evil disappears?"
Volcker: "Well I don't know whether you want to call it evil but I feel that I've failed if you are more confused than you were before. What I want to get out of the system is taxpayer support for speculative activity. And I want to look ahead. If you don't bar that it's gonna become bigger and bigger and it becomes/adds to what is already a risky business. And I don't want my taxpayer money going to support somebody's proprietary trading. I'll make it as simple as that."
Then later...
Senator Johanns: "It kinda reminds me what the chief of staff said: 'never let a good crisis go to waste.' And what we are doing here is we're taking this financial reform and we're expanding it beyond where we should be. And I just question the wisdom of that unless somebody can make the case to me that had this been in place the world would be different."
Volcker's response:
Volcker: "The chairman made the point that I would emphasize. The problem today is to look ahead, and try to anticipate the problems that may arise that will give rise to the next crisis. And I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."
We need more Volcker's.
Adam
Related post:
Volcker on Financial Innovation
---
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, February 2, 2010
James Grant on Economic Forecasting
Here's an article from nymag.com on some of James Grant's latest thinking. He has seemingly turned pretty optimistic in the past year.
The article points out the limits of what is knowable in economic forecasting (the article says that Grant considers it to be "a pseudo-intellectual parlor game"). Here's an excerpt from the article:
"In the industrial history of the United States, there have only been about 30 economic recoveries, a minuscule sample size. (If somebody touted a medical breakthrough based on a study of 30 patients, who would rush to sign up for this new wonder drug?) As for the data itself, consider that the dominant measure of economic activity, gross domestic product, is an antique that does a poor job of capturing the intangible investments that abound in the information economy. The numbers that drive the markets up and down, like jobless figures, are glorified guesses subject to constant revision. The latest issue of Grant's Interest Rate Observer notes that annualized GDP growth for the third quarter of 1983 has been revised ten times, including just this fall! How much can we possibly know about the future if we’re still unsure about 1983?"
Good to see someone in the business of economic forecasting admitting the limits of that game. Most of the investors that have served as models for my own investing have consistently reinforced the point that macroeconomics is of little use in equity investing.
In 2003, Munger said this at a speech to the University of California, Santa Babara Economics Department:
"My fourth criticism [of how economics is currently taught] is that there's too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It's like trying to master medicine without knowing anatomy and chemistry. Also, the discipline of microeconomics is a lot of fun. It helps you correctly understand macroeconomics. And it’s a perfect circus to do. In contrast, I don’t think macroeconomics people have all that much fun. For one thing they are often wrong because of extreme complexity in the system they wish to understand."
Also, at a Wesco meeting back in 2004 Charlie said:
"Gigantic macroeconomic predictions are something I've never made any money on, and neither has Warren [Buffett]."
Deteriorating macroeconomic conditions at some point in the future should be taken as a given. Why (or why not) a businesses has long-term competitive advantages, whether it is likely to produce durable high returns on capital, and judging the margin of safety is where I spend my energy.
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 article points out the limits of what is knowable in economic forecasting (the article says that Grant considers it to be "a pseudo-intellectual parlor game"). Here's an excerpt from the article:
"In the industrial history of the United States, there have only been about 30 economic recoveries, a minuscule sample size. (If somebody touted a medical breakthrough based on a study of 30 patients, who would rush to sign up for this new wonder drug?) As for the data itself, consider that the dominant measure of economic activity, gross domestic product, is an antique that does a poor job of capturing the intangible investments that abound in the information economy. The numbers that drive the markets up and down, like jobless figures, are glorified guesses subject to constant revision. The latest issue of Grant's Interest Rate Observer notes that annualized GDP growth for the third quarter of 1983 has been revised ten times, including just this fall! How much can we possibly know about the future if we’re still unsure about 1983?"
Good to see someone in the business of economic forecasting admitting the limits of that game. Most of the investors that have served as models for my own investing have consistently reinforced the point that macroeconomics is of little use in equity investing.
In 2003, Munger said this at a speech to the University of California, Santa Babara Economics Department:
"My fourth criticism [of how economics is currently taught] is that there's too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It's like trying to master medicine without knowing anatomy and chemistry. Also, the discipline of microeconomics is a lot of fun. It helps you correctly understand macroeconomics. And it’s a perfect circus to do. In contrast, I don’t think macroeconomics people have all that much fun. For one thing they are often wrong because of extreme complexity in the system they wish to understand."
Also, at a Wesco meeting back in 2004 Charlie said:
"Gigantic macroeconomic predictions are something I've never made any money on, and neither has Warren [Buffett]."
Deteriorating macroeconomic conditions at some point in the future should be taken as a given. Why (or why not) a businesses has long-term competitive advantages, whether it is likely to produce durable high returns on capital, and judging the margin of safety is where I spend my energy.
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, February 1, 2010
Error of Pessimism
The following quote seems rather relevant these days
"The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant." - British economist Arthur C. Pigou
Here's another article that references the same quote.
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 error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant." - British economist Arthur C. Pigou
Here's another article that references the same quote.
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.
Volcker on Financial Innovation
An article in the timesonline.co.uk with some of Paul Volcker's comments to a conference of senior level bankers late last year.
Some excerpts:
...a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).
"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence," said Mr Volcker...
He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you're paid?"
Also, here are some of Volcker's comments from a separate article in the telegraph.co.uk covering the same event. He told some of the world's most senior financiers...
...that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".
Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.
Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other". He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you..."
Well said, Mr. Volcker.
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.
Some excerpts:
...a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).
"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence," said Mr Volcker...
He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you're paid?"
Also, here are some of Volcker's comments from a separate article in the telegraph.co.uk covering the same event. He told some of the world's most senior financiers...
...that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".
Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.
Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other". He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you..."
Well said, Mr. Volcker.
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.
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