Category Archives: Investing Gurus

Buffett’s 2014 Letter to Shareholders


Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.”

Comments on the Berkshire Hathaway 2014 letter,  Part 1

Note the plug (page 6) for Where Are the Customers’ Yachts by Fred Schwed. That along with the Money Game by Adam Smith will teach you the ways of Wall Street. Also, see:

Intrinsic Value: Buffett reiterates that it is not a precise number for Berkshire nor, in fact for ANY stock.

GEICO delivers savings to its customers because it is a low-cost operation (source of structural competitive advantage).  The company’s low costs create a moat—an enduring one—that competitors are unable to cross.  Note Buffett’s comment on the animated gecko, a LOW-COST spokesperson.


Here’s how he explained it:

“In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.)

“During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.”

Buffett said the dawdling resulted in an after-tax loss of $444 million by the time Berkshire was no longer a Tesco shareholder. That, he added, is about 0.2% of Berkshire’s net worth. Only three times in 50 years has Berkshire recorded losses from a sale equal to more than 1% of its net worth.

Unfortunately, we don’t learn what exactly caused the loss. How did Buffett miscalculate intrinsic value?    Did management worsen, but if so, then how can an investor sidestep that?   I believe the economics changed as customers had more in-home deliveries and other choices coupled with poor store execution from Tesco.  I was disappointed with this explanation of the Tesco loss, but Buffett would reply that it was only 1/5 of 1%.

Nominal vs. Real Returns

During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13 cents in 1965 as measured by the CPI (Flawed or whats wrong with cpi)

I prefer measuring in gold grams, because gold is a store of value and market-based rather than concocted by Federal bureaucrats.DJIA-1900

There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as the transfer to others of purchasing power now with reasoned expectation of receiving more purchasing power–after taxes have been paid on nominal gains—in the future.”   (I wonder why Mr. Buffett makes no mention of the financial repression of ZIRP and NIRP?  It is the elephant in the room because of the devastating effect it has on savers and on calculating discount rates for investment.)

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities—Treasuries, for example—whose values have been tied to American currency. That was also true in the preceding half century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.  Buffett’s comments are backed up by history as shown here:Triumphand triumph_of_the_optimists

Stock prices will always be far more volatile than cash equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments—far riskier investments. Than widely –diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk.  Though this pedagogic assumption makes for easy teaching, it is dead wrong. Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing power terms) than leaving funds in cash-equivalents. That is relevant to certain investors-say, investment banks—whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.

For the great majority of investors, however, who can—and should—invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.

Note the multi-decade horizon. Stocks were unchanged from 1964-1981, please see page 79: A Study of Market History through Graham Babson Buffett and Others.  Read what Buffett has to say about stock markets. Some say it is Time to exit because of high valuations for big-cap stocks in the U.S. market. So even if stocks decline for a decade but your holding period is MULTI-Decade, then hold tight.  Tough to do, but history seems to bear his thesis out: valuing-growth-stocks-revisiting-the-nifty-fifty.  I prefer to act like the pig farmer in A Study of Market History (see link above).

If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risk things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon (to panic) are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).


Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary to managers and advisors and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. ….Anything can happen anytime in markets. And no advisor, economist, or TV commentator–and definitely not Charlie nor I–can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.

A plug for Jack Bogle’s The Little Book of Common Sense Investing.  Basically, Buffett is saying keep it simple, think and hold L O N G – T E R M, avoid high fees and commissions, and don’t use leverage. 

Next, let’s look at Berkshire–Past, Present and Future in Part II

More on Buffett’s Investments

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998 (transcript of above lecture–see page 7 for See’s Candies)

329_Buffett_Seminar_1978 to a value investment class at Stanford University.

Buffett_Case Study on Investment Filters Tabulating Company

The Essays Of Warren Buffett – Lessons For Corporate America  (Please read pages 82 to 97, especially the section on cigar-butt investing).

Valuation of Western Insurance_2  (A reader, WAPO mentioned in the comments section of the Dempster Mill Post that Chapter 3 of Deep Value didn’t include Buffett’s other early investments like Western Insurance, Genesee Valley, Union Street Railway, American Fire Insurance, and Rockwood.   Does anyone wish to dig these investments up from somewhere?  Just post in the comments section and/or I can post your work for the readers. 

In the Dempster Mill Post we learned that Buffett succeeded in this investment because he:

  1. Most importantly and in deference to Graham, he bought well--he started paying $18 in 1956 for Dempster with its $70 per share of book value and $50 of net working capital per share.  He bought right.  Note in the video lecture above, Buffett mentions that he paid 1/3 of working capital for a windmill company (probably Dempster).
  2. Then he was patient. This investment was held for at least seven years.
  3. Finally, he had Harry Bottle to turn the business around.

Thanks for the intelligent and thoughtful comments on Dempster. We learn from the questions and thoughts of others.

Perhaps his success in Dempster Mills lured him to buy Berkshire Hathaway?(considered by Buffett to be his worst investment)

Next we will review See’s Candies, Sanborn Map.  We will focus on Buffett’s writings in his shareholder letters on valuation.  See the Essays of Warren Buffett above.

For new investors you may feel frustrated by the lack of clear rules.  Net/nets depend upon reversion to the mean before total value destruction, but franchises manage to repel the forces of competitive entry for longer than investors expect. Early, fast growing franchise companies like Wal-Mart (in the 1970s) or Costco trade at what appear to be sky-high multiples of earnings (30+) yet the market is UNDER-pricing the profitable growth of those companies.   There seem to be grey areas. Congratulations, we are making progress.    And for experienced investors, we can never reread the writings of investment greats like Graham and Buffett as many times as we should, but it may seem like


Have a Great Weekend!

The Superinvestors of Graham and Doddesville


Effective money managers do not go with the flow. They are loners, by and large. They are not joiners; they’re skeptics, cynics even. Whatever label you want to put on them, they trait they all share is that they don ‘t automatically trust that what the majority of people–especially the experts–are doing is necessarily correct or wise. If anything, they move in the opposite direction of the majority, or they at least seek out their own course.

Warren Buffett is the best example of this contrarian impulse. In the 1960s, when Buffett started out (An excellent recounting of that era is The Go-Go Years, The Drama and Crashing Finale of Wall Street’s Bullish 1960s  by John Brookes, Good review of the book, the Go-Go Years)go go most money managers were investing in highly cyclical, heavily indebted and capital-intensive industrial giants like U.S. Steel (X). As a consequence, stock in those kinds of companies were overpriced in Buffett’s view, especially when compared to their earnings. Instead of following the majority and buying into that mini-bubble, he consciously sought out companies on the other end of the spectrum–businesses with lower capital expenditures and higher profit margins–and he wound up buying relatively cheap stocks in ad agencies and regional media companies like Capital Cities, Gannett, and the Washington Post. This was a complete departure from the consensus of the time, and it made Buffett a ridiculous amount of money. (Scott Rearon, Dead Companies Walking, 2015)

As we study Chapter 3 in Deep Value and Buffett’s early career, we should learn more about this tribe called value investors. Have they had success and why?

Below are four (4) articles you should read in sequence. Watch for what these investors do differently than the majority of institutional investors. Lessons we can use?

  1. The Superinvestors of Graham and Doddsville by Warren Buffett
  2. Graham Dodd Revisted by Lowenstein
  3. Searching for rational investors in a perfect storm
  4. KLARMAN in response to Lwenstein Article on Rational Investors

This Friday/Weekend I will review our readings.  By the way, I don’t know if the graph above is accurate, but it might stimulate our reading of the articles.

How to join Deep-Value group at Google I ask enrollees to join to make communication and emailings easier.

See’s Candies, Sanborn Map, and Inflation Article

SeesA Nor’easter is coming my way (up to two to three feet of snow with high winds) so I may be out of contact for two or three days.  But push on we must. We continue to study Chapter 3, in Deep Value and Buffett’s investing career.Sees 2

The best investment article I have ever read of Buffett’s is:

Buffett & Inflation Highlighted plus if you wish to read all that Buffett has said about inflation then Buffett inflation file.

A key case for you to focus on is See’s_Candies_Case_Study. Combined with Buffett’s Inflation Swindles the Equity Investor (Fortune Article: Buffett – How Inflation Swindles the Equity Investor), you will see a leap in Buffett’s thinking. Both are important to understand and complementary to each other.

Finally, Sanborn_Map_Case_Study_BPLs is another case mentioned in Chapter 3 of Deep Value.

Hopefully, students will discuss in the comments section.

Time to bring out the snowshoes!

It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we’re seeing an abundance of what we call “leveraged mismatches” - a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch..   John Hussman, Jan. 26, 2015

Warren Buffett: Liquidator to Operator

Dempster Mills

Dempster Mills Case Study:

Dempster_Mills_Manufacturing_Case_Study_BPLs  Note the difference in strategy between Buffett and Graham in this type of investment.

As previously discussed, we have read the Preface and Chapter 2, Contrarians at the Gate in Deep Value where we learned about Graham and liquidations and the great mean-reverting mystery of value investment. Klarman’s writings were also read (Margin of Safety) to learn about his approach to liquidation and valuation. Valuation is an imprecise art where value is no one precise number.  Finally, Mr. Market is there to serve us not guide us. Therefore, think of all the pundits, experts, and CNBC commentators we can ignore for the rest of our investing careers.

If readers have questions or comments, do not hesitate to write. I try not to look at my emails but once a week. I neither have a cell phone nor a TV, but time is scarce so I can respond faster (or another student can to your questions) here in the comments section.

Now we transition into reading Chapter 3 of Deep Value, “Warren Buffett: Liquidator to Operator.”  Buffett was Graham’s prized student who forged his own way.   There are about ten books written on Buffett every year. We will now focus on his early career by going through his Complete_Buffett_partnership_letters-1957-70_in Sections

After Dempster, we will study Sanborn Map and then See’s Candies. Put on your thinking caps.   Go the extra mile and find out more about these companies if you have the interest.   Focus on how Buffett estimated the intrinsic value of Dempster Mills AND how he managed the investment over time.   What made up his margin of safety BESIDES the price discount?

Reader Question:   Do I know Toby Carlisle, and do I think his approach works?

Yes, I have had the pleasure of meeting Toby. A nice guy who seems like a Renaissance man similar to Graham but with a darker sense of humor. Toby taught me how to speak Australian English.   You don’t thank your host for a delicious meal by saying, “That was excellent.!”   You say, “What a belly-bust!”   You don’t go out to drink beers, you go out to “rip down a frosty.”  I am indebted for those tips.  I learned during my working days in Cairns, Australia that fly-crawling was the national sport.  If you could choose which fly could crawl the furthest along a wall or ceiling, you were the champ.  The game had a huge element of randomness. I digress…

Since we haven’t finished our course of study on Deep Value Investing, I am no expert to comment upon his approach. But Deep Value investing can work since it does the opposite of a naive strategy. Hard-core contrarian-investing is difficult because buying what has been losing or is obscure, despised, and loathed goes against human nature.  Are you more attracted to go into a full restaurant than one with cobwebs across the window?   So far in our readings, net/nets seem more likely to be small, illiquid securities, so the investing approach may be more suited for individuals with a limited amount of capital who can go anywhere to find bargains.

Even the great Walter Schloss managed small amounts of money using his deep value approach. As his accounts grew, he would return capital to his partners, thus keeping the amounts of money he managed appropriate for the illiquidity of the names he bought and sold.  He would also buy and sell scale down and up, I heard.

Why don’t you call him at his firm, Eyquem Investment Management LLC or visit and find his email address. Ask for his record so far in managing accounts.  What happens when there are only six or seven net/nets–does he concentrate into those?

-Are my instructions clear?

Addendum: Does Intuition Have a Role in Quantitative Investing?

Joel Greenblatt Discusses Portfolio Management


An excellent Wealth Track interview of Joel Greenblatt on his portfolio management process (25 minutes):

At the ten minute mark Joel makes an amazing statement: 97% of the top quartile money managers from the decade of 2000-2010 (encompassing two big sell-offs) were in the bottom half of performance three years out of ten; 79% were in the bottom quartile and a whopping 47% were in the bottom decile (in tenth place!) in three of the ten years.  Talk about fortitude and sticking to your strategy!

Joel Greenblatt’s Magic Formula for those unfamiliar with his approach.

Joel Greenblatt is the founder and a managing partner of Gotham Capital, a hedge fund (also called a private investment partnership). He is also an adjunct professor at the Columbia University Graduate School of Business, and holds a B.S. and an MBA from the Wharton School.  According to Greenblatt’s “The Little Book that Beats the Market” (Wiley, 2005) learning to successfully invest in the stock market is simple. Greenblatt said that he wanted to write a book his children could read and learn from. The main point Greenblatt makes is that investors should buy good companies at bargain prices-businesses with high return on investment that are trading for less than they are worth. This is a classic value investing methodology that Benjamin Graham would have espoused.

Finding Undervalued Stocks

To those familiar with Benjamin Graham, Greenblatt’s approach is obvious: buy stocks at a lower price than their actual value. This assumes you are able to somewhat accurately estimate a company’s actual value based on future earnings potential. Greenblatt alleged that stock prices of a company can experience wild swings even as the value of the company does not change, or changes very little. He views these price fluctuations as opportunities to buy low and sell high.He follows Graham’s “margin of safety” philosophy to allow some room for estimation errors. Graham said that if you think a company is worth $70 and it is selling for $40, buy it. If you are wrong and the fair value is closer to $60 or even $50, you will still be purchasing the stock at a discount.

Finding Well Run Companies

Greenblatt believes that a company with the ability to invest in its business and receive a good return on that investment is usually a “well run” company. He uses the example of a company that can spend $400,000 on a new store and earn $200,000 in the next year. The return on investment will be 50%. He compares this to another company that also spends $400,000 on a new store, but makes only $10,000 in the next year. Its return on the investment is only 2.5%. He would expect you to pick the company with the higher expected return on investment.Companies that can earn a high return on capital (the return a company makes after investing in the business) over time generally have a special advantage that keeps competition from destroying it. This could be name recognition, a new product that is hard to duplicate or even a unique business model.

Magic Formula

EBIT to Enterprise Value

Greenblatt compares a company’s ratio of EBIT (earnings before interest and taxes) to enterprise value against the risk-free rate. Enterprise value is a measure of company value that takes into consideration the company’s capital structure (debt versus equity). You could do a simple earnings yield calculation by dividing net earnings by the market value of the company’s stock, but Greenblatt has a different take. He divides earnings before interest and taxes by a stock’s enterprise value.  A company’s enterprise value represents its economic value, which is the minimum value that would be paid to purchase the company outright. In keeping with value investment strategies, this is similar to book value.Enterprise value is equal to the market value of equity (including preferred stock) plus interest-bearing debt minus excess cash. Greenblatt uses enterprise value instead of just the market value of equity because it takes into account both the market price of equity and the debt used to generate earnings.Companies with debt must pay interest on the debt and eventually pay off the debt. This makes the debt’s true acquisition cost higher. Adding debt to market capitalization lowers the EBIT to enterprise value, making a company less attractive. Excess cash is subtracted from enterprise value because the un-needed cash reduces the overall cost of acquiring a business. If a company is holding $25 million in cash, the effective acquisition cost is reduced by that amount. Excess cash raises EBIT to enterprise value, making the company more attractively priced.EBIT to enterprise value helps to measure the earnings potential of a stock versus its value. If the EBIT-to-enterprise value is greater than the risk-free rate (typically the 10-year U.S. government bond rate is used as a benchmark), Greenblatt believes you may have a good investment opportunity-and the higher the ratio, the better.

Return on Invested CapitalReturn on capital, or return on invested capital (ROIC) is similar to return on equity (the ratio of earnings to outstanding shares) and return on assets (the ratio of earnings to a company’s assets), but Greenblatt makes a few changes. He calculates return on capital by dividing earnings before interest and taxes (EBIT) by tangible capital. Instead of using net income, return on invested capital emphasizes EBIT, also known as pretax operating earnings. Greenblatt uses this number because the focus is on profitability from operations as it relates to the cost of the assets used to produce those profits.Another difference is Greenblatt’s use of tangible capital in place of equity or assets. Debt levels and tax rates vary from company to company, which can cause distortions to both earnings and cash flows. Greenblatt believes tangible capital better captures the actual operating capital used.The equity value Greenblatt uses to calculate return on equity ignores assets financed via debt, and the total assets value used in the return on assets calculation includes intangible assets that may not be tied to the company’s primary operation. According to Greenblatt, the higher the return on capital, the better the investment.

Greenblatt’s Implementation of the Magic Formula 

Greenblatt started his Magic Formula screen with a universe of the 3,500 largest exchange-traded stocks, based on market capitalization (shares outstanding multiplied by share price). He then ranked the stocks from one to 3,500 based on return on capital (the highest return on capital got a ranking of one; the lowest received a rating of 3,500). Next, he ranked the stocks based on their ratio of EBIT to enterprise value, with the highest ratio assigned a rank of one and the lowest assigned a rank of 3,500. Finally, he combined the rankings (if a company ranked 20 for return on capital and 10 for EBIT to enterprise value, the combined ranking was 30).For practical purposes, Greenblatt recommends investing in 20 to 30 stocks by purchasing five to seven every few months. The holding period he advises for each stock is one year. He believes this strategy will allow you to make changes on only a few stocks at a time as opposed to liquidating and repurchasing the entire portfolio at once.


Greenblatt tested his investing strategy over a 17-year period and earned an average annual return of 30.8%. He held 30 stocks at a time and held each stock for one year.In the book, Greenblatt devotes an entire chapter to explaining that the strategy is not a “magic bullet” that always works. During his test period, he found that, on average, five of every 12 months underperformed the market. Looking at full-year periods, once every four years the approach failed to beat the market.Sticking to a strategy that is not working in the short run even if it has a good long-term record can be difficult, Greenblatt says, but he believes you will be better off doing just that. Greenspan supposed that following the latest fad or short-term investment ideas will not yield market-beating results.

Narrowing the Stock Universe

The first step is to remove all over-the-counter stocks (OTC) and ADRs (shares of foreign companies trading on U.S. exchanges). Greenblatt’s initial database of stocks included only exchange-traded stocks. Next, all stocks in the financial and utility sectors are excluded due to their unique financial structures.

Market Capitalization

While Greenblatt’s original study included stocks with market capitalizations of $50 million or greater, he subsequently modified the minimum value for market capitalization between $50 million and $5 billion, depending upon on liquidity needs and risk aversion.

Return on Invested Capital

Return on capital measures the return a company achieves after investing in the business; the higher the return on capital, the better the investment.Tangible capital is defined as accounts receivable plus inventory plus cash minus accounts payable. This figure is based on the fact that a company needs to fund its receivables and inventory but does not have a cash outlay for accounts payable. For our screen, we require a return on invested capital greater than 25%, as specified in Greenblatt’s alternative screening suggestions.

EBIT to Enterprise Value

The ratio of EBIT to enterprise value helps to measure the earnings potential of a stock versus its value. To calculate, Greenblatt divides EBIT by enterprise value. For this screen, we use the EBIT-to-enterprise-value ratio to narrow the field to 30 stocks by choosing those with the highest ratio.


Like any stock screening strategy, blindly buying and selling stocks is never a good idea. Developing and implementing disciplined buy, sell and hold strategies is a better option. Greenblatt’s Magic Formula is not revolutionary, but does provide a new twist on the old value investing ideas. While his past record is impressive, it will be interesting to see how the screen holds up during this period of market turmoil and its aftermath.

Joel Greenblatt’s Magic Formula Criteria

  • Companies in the financial and utilities sectors are excluded
  • Over the counter stocks are eliminated
  • Non-US companies are excluded
  • Market capitalization is greater than $50 million
  • Return on capital is greater than 25%
  • Return on capital is found by dividing earnings before interest and taxes (EBIT) by tangible capital
  • EBIT = Pretax income + interest expense
  • Tangible capital = accounts receivable + inventory + cash – accounts payable + net fixed assets
  • Pick the 30 stocks with the highest earnings yield
  • Earnings yield = EBIT/ Enterprise value
  • Enterprise value = market value of equity (including preferred stock) + interest-bearing debt – excess cash

King Dollar or Listening to Pundits


The dollar “breaks-out” and


Sentiment and consensus rally–a new KING DOLLAR for many years to come.


Gold, of course, sells off on King Dollar, stronger US economy, and less inflation fears.

This post illustrates the HUGE swings in sentiment from the DEATH of THE DOLLAR in 2011 when this was occuring:

dollar gold

Back to today (Oct. 2014)


King Dollar, with the obvious understanding that it’s dominance has only just begun (Dennis Gartman at minute 2 proclaims a bull run for the US dollar-click on this link). My have we come a long way from the new moon of the dollar cycle low in late April of 2011, where many of the same players and pundits openly declared the dollar crisis in full swing and just getting started. Back then, the mood in the markets was decisively dimmer, from both the usual suspects – to the ominous warnings from leaders in the private sector that the US consumer would soon face “serious” inflation in the months ahead.

Lesson: The same pundit, Dennis Gartman, who was proclaiming the Death of the Dollar in 2011 near the absolute low is now, four years later, trumpeting that the Dollar is King. No one knows the path of the dollar or gold. We can make our own probabilities but to be CERTAIN is the sin.  I gave up watching CNBC then years ago. 


And what do the pundits say about this on CNBC?



I hear crickets…………..

The Education of a Value Investor Part III: The “Ugly”


Everyone has a plan ’till they get punched in the mouth. –Mike Tyson

The author describes in Chapter 7: The Financial Crisis, Into the Void, his trauma. He learned not to be leveraged and to turn off the Bloomberg to avoid the daily carnage.  But I wonder why—if the experience was so searing—he didn’t reflect deeply on the causes for what had happened. Like after seeing the dead and wounded in your safari camp after an elephant stampede and then wondering if changing the color of your tents would stave off disaster.  Perhaps studying elephant migratory patterns would help. Value investors like Seth Klarman and Jim Grant were howling about rapidly burgeoning mortgage debt and centrally-planned interest rates.  Mr. Spier should dust off his Mises and Rothbard texts on the Austrian theory of the business cycle.

On page 80, he believes that people’s human excesses and moral compromises helped cause the financial crisis. Poppycock!  And even if true, then what lessons could be learned? People are always and everywhere greedy, kind, cruel, amoral, and just plain human. Forget the inner scorecards, Robert Cialdini, author of the book Influence, would be saying, “look at incentives.”  The U.S. banking system is inherently flawed.  Since 1840 the US has had 12 major banking crises, while Canada has had none—not even during the Great Depression. See Fragile by Design by Charles W. Calomiris and Stephen Haber. I don’t believe Canadians are less prone to humanness than Americans? Ever been to a hockey game?  The author makes an assertion without theory, evidence or fact. That’s ugly.

The author seems to lack curiosity as to what happened to him.  However, he did listen to Michael Burry’s warnings about the mortgage crisis, but he didn’t share what he thought happened. He bet that policymakers would use every available tool to avert disaster.  But why should the politburo at the Federal Reserve intervene to pile more debt upon debt? To what effects and consequences? What about the crisis of 1920? The Fed did nothing and the result was the fastest and strongest recovery in US history. View:

Now the US labors under high private debt, too-big-too-fail banks, absurd Dodd Frank bank regulations (10,000 pages and counting of rules), and a $4 trillion dollar Fed balance sheet.   Imagine if the Fed did the right thing and shut down.   The panic of 2008 was a global banking crisis. Wealth would have been unaffected, however titles to that wealth would change from the profligate to the prudent.  Now, in 2014, bubbles and moral hazards abound.

My questions are not only asked of Mr. Spier but also of Mohnish Pabrai and Bill Miller.  Mr. Miller once mentioned how cheap housing stocks were at 6 times earnings during 2006 Yet homebuilder company earnings were at 200-year peaks.  Mr. Miller may have lacked understanding of how much mal-investment occurred along with a host of other reasons (community reinvestment act that forced banks to lend to poor credit risks so they could be rechartered). Mr. Pabrai can clutch a check-list but that won’t help in a credit crisis if he owns a subprime lender.

Ironically, Mr. Spier mentions sub-prime auto dealer/lender, Carmax (KMX), as a risk.  Now with massive Fed intervention with QE, QE2, QE3, and QE Forever, why be a value investor? Move over Graham and Buffett, own the most leveraged, subprime lenders you can find like: KMX

But be sure to sell in time:


Balance sheets matter when bubbles pop. Right now–for now–bubbles abound.

May Mr. Spier enjoy his nirvana, but I can’t recommend this book for anybody who is forging their own way.  You are better off to read Buffett and Graham’s writings while thinking of your own strengths and weaknesses. Follow Mr. Spier’s example and keep a diary of your progress. It’s YOUR journey.

I won’t be doing other book reviews unless I am 100% behind recommending the book to you. I would like to next look at DEEP VALUE by Toby Carlisle. Ten thumbs up.

Tutorial on Gold and the Mining Business from the Denver Mining Show

Very good overviews of gold and mining

Updating the Bullish and Bearish Cases For Gold 

Gold Bullion and the Need for Systematic Insurance.  An excellent review of market risk.

How Not to Blow it Next Time 

The Education of a Value Investor: Part II, The “Bad”




We do not see things as they are. We see them as we are.  – The Talmud

Part II: The “Bad”

To be fair, the author delivered exactly on his promise in the first paragraph of his book:

My goal in writing this book is to share some of what I’ve learned on my path as an investor. It is about the education of this investor, not any other investor. This story is not an investment how-to. It’s not a road map. Rather, it is she story of my journey and of what I’ve learned along the way. With my own flaws and foibles and idiosyncratic abilities—and despite my considerable blind spots.

I titled this part of the review, “Bad” because I was hoping for so much more from the author. Much of his description of his investment process is cursory and his analysis seemed a mile wide and a half-inch thick.  Examples will be discussed in part III.   He never promised that in his opening paragraph, but more experienced investors will then have little to learn from this book.

If you want to learn about the psychology of investing and trading then start with the classic, Reminiscences of a Stock Operator by Edwin Lefevre.  Tudor Jones calls it a textbook for speculation.

Another relatively unknown classic, Why You Win or Lose by Fred Kelly (1930) See a synopsis here:WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)

Investing is something you do. Like sex, reading about another’s activities will only take you so far in understanding it. You must apply yourself, actually invest, and review your results.

Two excellent books on having an investment process and managing emotions:

Trader Vic-Methods of a Wall Street Master and Trader Vic II-Principles of Professional Speculation by Victor Sperandeo.

Back to a hardcore value investor. Read, There’s Always Something To Do, The Peter Cundill Investment Approach.   Cundill was a Canadian Graham and Dodder.

An interesting romp through the investing world, The Money Game by Adam Smith.

Simple But Not Easy by Richard Oldfield is another interesting overview by an old pro.

Then if you want to understand why you must fit investment to YOUR OWN approach, read about all the different ways there are to trade and invest by reading the Market Wizard books by Jack Schwager or Free Capital by Guy Thomas.

Of course, go to the original sources and read all the investment letters from Buffett, Munger, Klarman, Tweedy Browne. Type in their names in the search box and see where the links lead you.

In Part III, the “Ugly” I take off the gloves and point out the author’s fuzzy thinking regarding the financial crisis.

Li Lu’s Lecture; Value Investing Videos

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JUN 24, 2010

Li Lu’s 2010 Lecture at Columbia

Many of you enjoyed my previous transcript of a talk Li Lu gave at Columbia University. Thanks to Joe Koster, you can now view a more recent lecture he gave to Bruce Greenwald’s value investing class in April of 2010. Seen here: Based on Berkshire’s investment in BYD, the fact that Lu manages Charlie Munger’s money, and that even Buffett would give money to Lu if he ever retired (according to Greenwald) makes me think Li Lu is an investor worth watching.

With that in mind, I believe it is insightful to study whatever you can find about him and his approach. I think this lecture from 2010 is great. The recording has some audio issues making it difficult to hear and I thought that some of you might enjoy reading notes from the talk. This is not a true transcript, but an approximation of what was said. I think it comes pretty close, having listened to the lecture a few times. I think you will find it helpful and Lu’s talk rewarding.

Bruce Greenwald: Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander of the Sequoia Fund. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.

Letters to a young analyst (Great blog for books):

Scottish Vote on Independence: