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.
Wednesday, May 12, 2010
Creating a Stable System
Here's an interesting post about a Wall Street trader and maybe just a bit of a glimpse into the culture of Wall Street more generally.
"I had a conversation this morning with a trader that I have known from the 1990's, which is a lifetime in this business."
Then later in the post...
"If you met him you might like him. He's affable, conservative, a decent conversationalist, and personally well kept and engaging. But he is missing something, like the derivative of a human being. If you talk about the 'bad guys' he doesn't identify with them. He thinks he is 'us.' It's never occurred to him that he is the problem. Because his value system is utterly one dimensional and egocentric. In some ways he is the most intelligent twelve year old I have ever met. But I am sure he considers me a fool and an idealist. And I might agree. But it is not so much who you are, but why. Who or what do you serve?
He is a microcosm of Wall Street, and the prevailing attitudes in the Big Banks in particular. If you wish to form public policy, if you want to create a stable system, one based on human values, never ask a trader or a trading company for advice. They are incapable of framing the question in a way that will provide you a workable answer."
The full post can be found here. Check it out in its entirety.
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 had a conversation this morning with a trader that I have known from the 1990's, which is a lifetime in this business."
Then later in the post...
"If you met him you might like him. He's affable, conservative, a decent conversationalist, and personally well kept and engaging. But he is missing something, like the derivative of a human being. If you talk about the 'bad guys' he doesn't identify with them. He thinks he is 'us.' It's never occurred to him that he is the problem. Because his value system is utterly one dimensional and egocentric. In some ways he is the most intelligent twelve year old I have ever met. But I am sure he considers me a fool and an idealist. And I might agree. But it is not so much who you are, but why. Who or what do you serve?
He is a microcosm of Wall Street, and the prevailing attitudes in the Big Banks in particular. If you wish to form public policy, if you want to create a stable system, one based on human values, never ask a trader or a trading company for advice. They are incapable of framing the question in a way that will provide you a workable answer."
The full post can be found here. Check it out in its entirety.
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 11, 2010
Of Interest...Not Reason
Warren Buffett has taken a bit of criticism for his defense of Goldman Sachs.
So here is a CNBC article summarizing some of that criticism (and support).
I happen to agree with much of the criticism but not at all surprised by Buffett's defense of Goldman. The reality is, Berkshire Hathaway (BRKa) now has a meaningful financial interest in the investment bank.
"Would you persuade, speak of interest, not of reason." - Ben Franklin
In a perfect world, I'd like to see Buffett come down much harder on the Goldman and the industry as a whole but that's not in the cards. Charlie Munger, in his own unique way, has been plenty critical of Goldman and, more generally, investment banking practices while still not undermining Berkshire's investment.
To me, Buffett is simply an exceptional businessman and investor who also happens to be a very good teacher.
He need not be a saint.
Adam
Long BRKb
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.
So here is a CNBC article summarizing some of that criticism (and support).
I happen to agree with much of the criticism but not at all surprised by Buffett's defense of Goldman. The reality is, Berkshire Hathaway (BRKa) now has a meaningful financial interest in the investment bank.
"Would you persuade, speak of interest, not of reason." - Ben Franklin
In a perfect world, I'd like to see Buffett come down much harder on the Goldman and the industry as a whole but that's not in the cards. Charlie Munger, in his own unique way, has been plenty critical of Goldman and, more generally, investment banking practices while still not undermining Berkshire's investment.
To me, Buffett is simply an exceptional businessman and investor who also happens to be a very good teacher.
He need not be a saint.
Adam
Long BRKb
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 10, 2010
Old Bullion
Ingredients in a recipe for financial crisis:
Excerpts:
The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside.
Grant later added...
"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's.
Some well thought out incentives and sensible rules could meaningfully improve safety and soundness of the system.
The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism.
Well said, James Grant.
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.
- excess leverage financing questionable assets
- bankers with too little "skin in the game"
- speculation (short-termism) in lieu of wise long-term capital allocation
- complex non-transparent betting (customized derivatives contracts) between large institutions creating hard to gauge counter-party risk
Excerpts:
The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside.
Grant later added...
"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's.
Some well thought out incentives and sensible rules could meaningfully improve safety and soundness of the system.
The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism.
Well said, James Grant.
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.
Thursday, May 6, 2010
Smart Money
"Everywhere you look this problem has been caused by high-IQ asininity" perpetrated by "high-IQ boobs," Munger said. "People who know the edge of their own competency are safe, and those who don't, aren't."
Munger added: "Investment banking will behave more responsibly if we as citizens force it to behave more responsibly."
article
Munger added: "Investment banking will behave more responsibly if we as citizens force it to behave more responsibly."
article
Wednesday, May 5, 2010
Friends & Romans
Included in Jeremy Grantham's 1Q 2010 letter, is the 1st part of a speech he gave at the Annual Benjamin Graham and David Dodd Breakfast in October of 2009 with the title:*
"Friends and Romans, I come to tease Graham and Dodd, not to praise them."
The speech focuses on the limits/disadvantages of Graham and Dodd and is backed up with lots of useful and interesting data (according to Grantham...some of it is proprietary). Well worth reading the whole speech.
Below are some of his comments:
- Too much reliance on low price-to-book
Low P/B ratios are, after all, the market's way of saying "these are the assets in which I have the least trust." It should not be surprising, therefore, that when you have a depression, or nearly have one, that more of these "cheap" companies go bust than is the case for the "expensive" Coca-Colas.
- Too much emphasis on outperformance of benchmarks in lieu of risk-adjusted returns
To cut to the chase, P/B does not represent intrinsic value. Nor do P/E ratios or yields. To make this point I regularly pose a question to investment audiences: "I give you Coca-Cola at 1.2 times book or General Motors at 1.0 times book. Hands up, who wants General Motors?" No one ever puts up their hand, and I say, "Therefore, Q.E.D., P/B is not value." You know that the extra qualities represented by Coca-Cola are worth a premium. The question is only, "How much?"
Grantham points out Ben Graham learned some hard lessons that informed his later investment style.
The Inconvenient Real World Special Case
In fact, Quality stocks have outperformed the market since 1965 (when our quality data begins)... We define "quality" using primarily a high and stable return. I think you would agree that this is a workable definition of a franchise since to be both high and stable means you have the ability to set your own prices. Secondarily, we look at debt. This yields a very uncontroversial list of stocks of the Coca-Cola, Johnson & Johnson, and Microsoft ilk with not even one financial! Even though the "quality" factor is now cheap, it has still outperformed by a decent (maybe you'd say "modest") 40% over almost 50 years. But this 40% is an amazing free lunch. Warren Buffett doesn't really talk much about the fact that he is playing in a superior universe. Why should he?
Grantham adds that it's like having a Triple A bond outperform a B+.
Price-to-book [low P/B], despite its low beta, is a risk factor because of its low fundamental quality and its vulnerability to failure in a depression. This is true with small cap as well. But what about "Quality?" This factor has outperformed forever. (The S&P had a High Grade Index that started in 1925 and handsomely outperformed the S&P 500 to the end of 1965 when our data starts.) Since the market is efficient, to Fama and French quality must be a risk factor! So, by protecting you in the 1929 Crash and in 2008, and by having a low beta for that matter, Quality as represented by Coca-Cola and Johnson & Johnson must be a hidden risk factor. Oh, I know: "The real world is merely an inconvenient special case!"
Grantham also calls quality stocks (Coca-Cola, Johnson & Johnson) the only free lunch in investing in his 3Q 2009 letter.
The good news is that unlike most of the past decade or so the quality franchises are not expensive. Check out Grantham's full letter.
Adam
Long Coca-Cola, Johnson & Johnson, and Microsoft
Related posts:
-Grantham on Quality Stocks
-Superinvestors: Galileo vs The Flat Earth
-Best Performing Mutual Funds - 20 Years
-Max Planck: Resistance of the Human Mind
-Staples vs Cyclicals
-Best and Worst Performing DJIA Stock
-Defensive Stocks?
* "Friends, Romans, countrymen, lend me your ears..." - Mark Antony in Julius Caesar
---
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.
"Friends and Romans, I come to tease Graham and Dodd, not to praise them."
The speech focuses on the limits/disadvantages of Graham and Dodd and is backed up with lots of useful and interesting data (according to Grantham...some of it is proprietary). Well worth reading the whole speech.
Below are some of his comments:
- Too much reliance on low price-to-book
Low P/B ratios are, after all, the market's way of saying "these are the assets in which I have the least trust." It should not be surprising, therefore, that when you have a depression, or nearly have one, that more of these "cheap" companies go bust than is the case for the "expensive" Coca-Colas.
- Too much emphasis on outperformance of benchmarks in lieu of risk-adjusted returns
To cut to the chase, P/B does not represent intrinsic value. Nor do P/E ratios or yields. To make this point I regularly pose a question to investment audiences: "I give you Coca-Cola at 1.2 times book or General Motors at 1.0 times book. Hands up, who wants General Motors?" No one ever puts up their hand, and I say, "Therefore, Q.E.D., P/B is not value." You know that the extra qualities represented by Coca-Cola are worth a premium. The question is only, "How much?"
Grantham points out Ben Graham learned some hard lessons that informed his later investment style.
The Inconvenient Real World Special Case
In fact, Quality stocks have outperformed the market since 1965 (when our quality data begins)... We define "quality" using primarily a high and stable return. I think you would agree that this is a workable definition of a franchise since to be both high and stable means you have the ability to set your own prices. Secondarily, we look at debt. This yields a very uncontroversial list of stocks of the Coca-Cola, Johnson & Johnson, and Microsoft ilk with not even one financial! Even though the "quality" factor is now cheap, it has still outperformed by a decent (maybe you'd say "modest") 40% over almost 50 years. But this 40% is an amazing free lunch. Warren Buffett doesn't really talk much about the fact that he is playing in a superior universe. Why should he?
Grantham adds that it's like having a Triple A bond outperform a B+.
Price-to-book [low P/B], despite its low beta, is a risk factor because of its low fundamental quality and its vulnerability to failure in a depression. This is true with small cap as well. But what about "Quality?" This factor has outperformed forever. (The S&P had a High Grade Index that started in 1925 and handsomely outperformed the S&P 500 to the end of 1965 when our data starts.) Since the market is efficient, to Fama and French quality must be a risk factor! So, by protecting you in the 1929 Crash and in 2008, and by having a low beta for that matter, Quality as represented by Coca-Cola and Johnson & Johnson must be a hidden risk factor. Oh, I know: "The real world is merely an inconvenient special case!"
Grantham also calls quality stocks (Coca-Cola, Johnson & Johnson) the only free lunch in investing in his 3Q 2009 letter.
The good news is that unlike most of the past decade or so the quality franchises are not expensive. Check out Grantham's full letter.
Adam
Long Coca-Cola, Johnson & Johnson, and Microsoft
Related posts:
-Grantham on Quality Stocks
-Superinvestors: Galileo vs The Flat Earth
-Best Performing Mutual Funds - 20 Years
-Max Planck: Resistance of the Human Mind
-Staples vs Cyclicals
-Best and Worst Performing DJIA Stock
-Defensive Stocks?
* "Friends, Romans, countrymen, lend me your ears..." - Mark Antony in Julius Caesar
---
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 4, 2010
Buffett & Munger: The "Mischief Maker"
From a Warren Buffett interview on Monday with CNBC's Becky Quick. First, they play a clip of an interview with Charlie Munger from over the weekend then Buffett comments on it.
CHARLIE MUNGER: Envy is a much more serious mischief-maker than greed.
BECKY: How so?
MUNGER: There's something in human nature that just can't stand even if you are making $5 million a year, that dumb bastard down the street is making $ 7 million.
Buffett's comments...
...envy seems to me the silliest of the seven deadly sins. The other guy doesn't feel it. You just feel worse. You are sitting there with your stomach churning because you are envious. It doesn't make a lot sense. I have always said, you know, if you are going to pick some sins from the seven deadly sins, go with gluttony and lust and you can have a hell of a weekend.
Check out the full 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.
CHARLIE MUNGER: Envy is a much more serious mischief-maker than greed.
BECKY: How so?
MUNGER: There's something in human nature that just can't stand even if you are making $5 million a year, that dumb bastard down the street is making $ 7 million.
Buffett's comments...
...envy seems to me the silliest of the seven deadly sins. The other guy doesn't feel it. You just feel worse. You are sitting there with your stomach churning because you are envious. It doesn't make a lot sense. I have always said, you know, if you are going to pick some sins from the seven deadly sins, go with gluttony and lust and you can have a hell of a weekend.
Check out the full 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.
Monday, May 3, 2010
Munger on Investment Banks
Some recent comments made by Charlie Munger from this Wall Street Journal article:
While Mr. Munger thinks Goldman did nothing illegal, the firm was engaged in "socially undesirable" activities, he said in an interview after the SEC lawsuit was filed.
"They were very competitive in maximizing profits in a competitive industry that was permitted to operate like a gambling casino," Mr. Munger said. "The whole damn industry lost its moral moorings."
He added that he believes Goldman is "more prudent and ethical" than other big Wall Street banks.
Munger generally comes down quite a bit more harshly on Wall Street's behavior than Buffett does.
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.
While Mr. Munger thinks Goldman did nothing illegal, the firm was engaged in "socially undesirable" activities, he said in an interview after the SEC lawsuit was filed.
"They were very competitive in maximizing profits in a competitive industry that was permitted to operate like a gambling casino," Mr. Munger said. "The whole damn industry lost its moral moorings."
He added that he believes Goldman is "more prudent and ethical" than other big Wall Street banks.
Munger generally comes down quite a bit more harshly on Wall Street's behavior than Buffett does.
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.
Sunday, May 2, 2010
Google vs Baidu
I don't usually spend much time on tech stocks but this caught my attention. A few days back, Susquehanna raised the price target of Chinese Internet search leader Baidu, Inc. (BIDU) to $ 1,000. At that price, Baidu's market value would be ~$ 35 billion.
The company also announced that it earned ~$ 70 million this quarter and is expected to earn ~$ 350 million for the full year.
So that target price represents a 100x multiple of this year's expected earnings.
Some facts on how Baidu compares to Google (GOOG) in terms of size and valuation.
Baidu is growing relatively fast and is currently the leader in internet search within China. Baidu may, in fact, be a good business. I have no idea. Internet search in China is not an area that I have any particular expertise or insight but a 100x multiple on just about any asset concerns me (unless that business is in a cyclical earnings trough).
In order to justify that 100x multiple, a person buying this stock has to 1) really trust the sustainability of Baidu's leadership and growth rate or 2) be in the business of looking for the "greater fool".
I wouldn't know how to figure out 1) and have no interest in 2).
It's also possible this an initial sign that inflated multiples on certain anointed stocks (if not the same, not unlike the late 90's early 00's) are making a comeback.
Let's hope not but it's worth keeping an eye on.
Adam
Long GOOG
* Based upon Google's most recent quarterly earnings run rate
---
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 company also announced that it earned ~$ 70 million this quarter and is expected to earn ~$ 350 million for the full year.
So that target price represents a 100x multiple of this year's expected earnings.
Some facts on how Baidu compares to Google (GOOG) in terms of size and valuation.
- Baidu, at least in comparison to Google, is still a relatively small company (though definitely not a small market capitalization). Consider that Google earns* ~$ 1 million/hour. That means Google can earn in 70 hours what Baidu earned last quarter.
- Google is expected to earn ~$ 9 billion this year and currently sells for less than a 20x multiple of those earnings. With over $ 26 billion of cash and no debt, Google's multiple of enterprise value (market cap+debt-cash) to earnings is more like 16x.
Baidu is growing relatively fast and is currently the leader in internet search within China. Baidu may, in fact, be a good business. I have no idea. Internet search in China is not an area that I have any particular expertise or insight but a 100x multiple on just about any asset concerns me (unless that business is in a cyclical earnings trough).
In order to justify that 100x multiple, a person buying this stock has to 1) really trust the sustainability of Baidu's leadership and growth rate or 2) be in the business of looking for the "greater fool".
I wouldn't know how to figure out 1) and have no interest in 2).
It's also possible this an initial sign that inflated multiples on certain anointed stocks (if not the same, not unlike the late 90's early 00's) are making a comeback.
Let's hope not but it's worth keeping an eye on.
Adam
Long GOOG
* Based upon Google's most recent quarterly earnings run rate
---
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.