Category Archives: Investing Gurus

Peter Cundill, Deep Value Investor

Your main job as a net/net buyer is to elminate the possibility of bankruptcy.–Peter Cundill

Peter Cundill’s Reading List

Peter Cundill: Background & bio

Peter-Cundill

The Canadian born investor, Peter Cundill, plunged into the world of financial markets while he was still at McGill University, which he  graduated from in 1960 with a degree in Commerce.Cundill earned the designation of Chartered Accountant and then Chartered Financial Analyst before moving from Montreal to Vancouver  to become the President of AGF Investment management; he worked at the company for four years from 1972 till 1975.

During that time he was also a partner in the company called the Vanan Financial Management Ltd. which in 1975 took over the All-Canadian Venture Fund. In 1977, Cundill established his very own Vancouver-based firm named Peter Cundill & Associates Ltd. and renamed the All-Canadian Venture Fund to Cundill Value, when the fund became the flagship of his newly established firm. Peter Cundill & Associates, now named Mackenzie Cundill Value Series A after a strategic partnership of PCA with Mackenzie Financial Corporation, best epitomizes the bottom-up value investment outlook of Peter Cundill.

The Cundill Value Fund was launched in December 1974 and immediately lost money during 1975. However, after this dismal start, the star fund manager recovered quickly and reported few losing years after 1975.

From 1974 through to 1988 the fund returned 22% per annum. Over its 35 year history to 2010, the Cundill Value Fund achieved a CAGR of 13.7%, which is especially impressive when you consider the fact that the market was still recovering from the financial crisis when this figure was calculated.

Peter Cundill was awarded the Analysts’ Choice Career Achievement Award for the best mutual fund manager of all time in 2001. At the award ceremony which recognized his  35 plus years of contribution and expertise as a fund manager and value investor, he was referred to as the ‘Indiana Jones of the Canadian Money Managers’, a title which was acknowledged by Cundill with great pleasure. Cundill’s expertise even gained  recognition from Warren Buffet, who claimed Peter Cundill had the traits of a good successor and possessed the kind of credentials required that would be suitable for Berkshire Hathaway’s next chief investment officer.

Observing the multi-dimensional personality of Peter Cundill, it is evident that he enjoyed life to the fullest. By no means did he limit himself from challenges or new experiences. He had an innate child-like curiosity and explored various aspects of his interests. His love for travelling turned him to one of the best global investors, and his rapacious reading habit lead him to the writings of the great Benjamin Graham. Cundill also enjoyed and challenged himself with various sports such as handball, rugby, skiing and hiking; being a dedicated marathon runner, at the age of over 40 he was capable of completing 22 marathon races including ‘Sub 3 hour’ (running the marathon under three hours).

His contribution was not limited to the financial world, but to the world of academia and literacy. Being a philanthropist, in 2008, he founded the Cundill Prize at McGill University to recognize the non-fiction publication for authors who have a great impact on literary, social and academic fields.

Despite of his recent death on 23rd January 2011 due to a rare neurological disease, the legacy and investment philosophy of Peter Cundill is kept alive by the firm he founded in 1975 and the numerous contributions made by him in the world of finance and academia.

Peter Cundill: Investment philosophy

Like many value investors, Cundill’s style of investing can trace its roots back to Benjamin Graham; Cundill liked to buy $1 for $0.40. What’s more, Cundill liked to buy stocks that were generally ignored and rejected by the general public, giving his approach a contrarian style.

Unlike Graham, who brought as many companies as he could, as long as each company met his strict criteria, Peter Cundill only considered companies with strong balance sheets and an upcoming catalyst that could unlock value for investors. It’s often the case that deep-value investments languish for years before acatalyst unlocks value. By investing only when a catalyst was upcoming, Cundill increased his risk of success. Peter usually scrutinized each company’s balance sheet to discover off balance sheet financing and assess the company’s true debt load.

Contrarian Investing (Part II)

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“Bull markets are born on pessimism,” he declared, they“grow on skepticism, mature on optimism, and die on euphoria.” –John Templeton

John Templeton paid attention to the emotion of the stock market. The first half of his philosophy was “The time of maximum pessimism is the best time to buy.” When everyone else was selling, he bought low during the Depression and in 1939 at the onset of World War II . . . and he made millions.

The second half of his philosophy was “the time of maximum optimism is the best time to sell.” He sold high during the Dot.com boom when everyone else was still buying. Founded in the 1950s, his Templeton Growth Fund averaged 13.8% annual returns between 1954 and 2004, consistently beating the S&P 500.

I think there are a few ways to make many times (10x to 100x +) your money over a long period of time.   The first would be to own emerging growth companies that have owner-operators who are both excellent operators and capital allocators who grow the company profitably at a high rate over decades.   The business generates high returns on capital while being able to deploy capital into further growth. Think of owning Wal-Mart in the early 1970s or Amazon after its IPO or 2001.   There will be a post on 100 to 1 baggers soon. I prefer this approach.

Wal-Mart 50 Year Chart_SRC

The second way would be to buy distressed assets and then improve those assets or create efficiencies by creating economies of scale. Carlos Slim, Mexican Billionaire, would be an example of this type of investor. Think activist investing. Note that Carlos Slim has operated at times as a monopolist in a government protected market.  Most of us do not have his options.

The third way would be to buy deeply-distressed, out of favor, cyclical assets and then resell upon the top of the next cycle. Gold mining is a difficult, boom/bust business, for example–see Barrons Gold Mining Index below. All businesses are somewhat cyclical, but commodity producers are hugely cyclical with long multi-year cycles due to the nature of mining-it takes years and high expense to reopen a mine and even if I gave you $2 billion and several years, you and your expert team may not be able to find an economic deposit. Note the five-to-ten year cycles below.

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We are focusing on the third way, but in no way do I suggest that this is for you. You need to be your own judge.  There is a big catch in this approach, you need to choose quality assets and/or companies with managements that do not over-leverage their firms during good times or overpay for acquisitions during the booms (or you could choose leveraged firms but be aware of the added risk and size accordingly becasue when a turn occurs, the leveraged firms rise the most). You also need to seek out a period of MAXIMUM pessimism which is difficult to do. How do you know that the market has FULLY discounted the bad news?  Finally, YOU must be prepared to invest with a five-to-ten year horizon while expecting declines of over 50%. That concept alone will make you unique.   Probably most will turn away from such requirements.

We pick up from http://csinvesting.org/2015/12/14/contrarian-dream-or-nightmare/.  Before we delve into the technical aspects of valuing cyclical companies, think about what it FEELS like to have the CONVICTION.  Here is an example:

We last studied Dave Iben, a global contrarian investor, in this post: http://csinvesting.org/tag/david-iben/.   You should read, Its Still Rock and Roll To Me at http://kopernikglobal.com/content/news-views and listen to the last few conference calls at the right side of the web-page.   Note Mr. Iben’s philosophy, approach, and Holdings. His portfolio is vastly different than most money managers or indexers. But being an contrarian takes fortitude and patience. Kopernik Global performance since inception:

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Next preview the readings below.

First you need to understand Austrian Business Cycle Theory to grasp how massive mal-investment occurs. Why does China have newly built ghost cities? Distortion of interest rates causes mal-investment (the boom) then the inevitable correction because the boom was not financed out of real savings.

Why is the bust so severe for mining/commodity producers?   Read Skousen’s book on the structure of production.  Think of a swing fifty feet off the ground and 200 feet long.   If you are sitting near the center of the swing’s fulcrum (nearest the consumer), then the ups and downs are much less than being on the end of the swing furthest from the consumer (the miners and commodity producers).

4 files were sent to you.
Read Ch. 19 Security Analysis.pdf
Boom/Bust Austrian business cycle theory.pdf
Damodaran Valuing Cyclical Commodity Companies.pdf
Must Read Structure-production.pdf

Sorry: here is the Hooke book (chapter 19 on resource companies)

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File Icon Business Valuation Methods – Jeffrey C. Hooke.pdf Download
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Even if you are an expert in valuation, investing in a cyclical company can be lethal: Vale: Go Where it is darkest (Damodaran)

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Then Throwing in the towel on Vale. I am not picking on Prof. Damordaran because we all make mistakes, and he graciously has provided a case study for us.  Study the posts and the comments.

Can you think of several research errors he made (BEFORE) he invested?

Remember in the prior post, the long-term chart of the CRB index showing commodities at 41-year lows since the CRB Index is below 175 or back to 1975 prices?  Then why, if gold is a commodity,  doesn’t gold trade at $200 or at least down to $500 to $700 as the gold chart from that time shows?monthly_dollar

Why, if gold is money, doesn’t gold trade in US Dollars at $15,000 or the estimated price to back US Dollars by 100% in gold?  You can change the amount to $10,000 or $20,000, but you get the idea.gold monetary base

 

Gold during the boom of 1980 rel. to Financial Assets in 1980 the price of gold at $800 per ounce allowed for the US gold holdings to back each US dollar then outstanding.

Try thinking through those questions.  Can we use what we learned from gold to value oil?

I will continue with Part III once readers have had several days to digest the readings and at least three readers try to answer at least one question.  Until then……………………….be a contrarian not contrary.

Update on 21/Dec. 2015 http://fortune.com/2015/12/21/oil-prices-low/

Carl Icahn Warns While Wall Street Ridicules

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Carl Icahn and Danger Ahead

Today he warns:

I’ve seem this before a number of times. I been around a long time and I saw it ’69, ’74, ’79, ’87 and then 2000 wasn’t pretty. A time is coming that might make some of those times look pretty good… The public, they got screwed in ’08. They’re gonna get screwed again. I think it was Santayana that said, “those who do not learn from history are doomed to repeat it,” and I am afraid we’re going down that road.

How do you know Carl Icahn is right?

Wall Street’s Ridicule

http://thefelderreport.com/2015/10/02/mr-market-to-carl-icahn-danger-ahead-lol/

Risking dollars to make pennies

http://thefelderreport.com/2015/12/10/owning-stocks-today-is-risking-dollars-to-make-pennies/

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The Valeant Saga, Part III; Master Class in Deep Value Investing by Icahn

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Part II on Valeant  Let’s pretend you are asked to evaluate the situation for Mr. Ackman.  He is in deep #$%^& and has brought in fresh eyes to advise him. Pershing Square has had to install two hotlines–Hotline 1: for investor suicide calls and Hotline 2: for investors who wish to phone-in death threats.

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All bad joking aside, you have a huge pile of information to present the critical issues.  Do you advise Mr. Ackman to buy more, sell immediately, sell down to a “more reasonable amount,” or hold?  Use reason not opinion or emotion to guide you.

Step back and ask what are the important issues?  What is Valeant worth? Can you know that?   Pretend you are an investigative journalist trying to uncover the story.

You can start here with company documents:

What does Valeant do?  Does Valeant have assets or a business method that gives the company a higher sustainable return on capital?   What roll-ups/acquisition firms have been very successful in the past and how was success achieved?

Then you can read all the rumours and commentary swirling around Valeant, but be quick to focus on what you determine to be important.  There are several links in the documents for you to follow further.

If anyone has other information to share please post in the comment section.

Also follow the links to the prior posts on Valeant to read the comment sections.

In a week, we will go through this exercise.   Now YOU have the chance to do the work.

Good luck and have a great weekend!

Excellent Video of Carl Icahn below.

http://greenbackd.com/2015/11/05/icahns-masterclass-on-deep-value-and-activism/

The Ongoing Saga of Valeant Part II

Dead Cat

Post 1 on Valeant is here

Is Valeant the Next Enron–NYT

  1. Bronte Capitals Comments on Valeant Conference Call  The Bronte posts will give you a thorough background on the controversies surrounding Valeant and Philidor.
  2. Valeant and its captive pharmacies-Bronte Capital
  3. Simple Proof that Philidor has shipped drugs where not licensed

A torrent of SeekingAlpha articles:

You can follow the reactions of investors and analysts at Seeking Alpha.

Hedge Fund Herding  The psychological aspects of following others and the pressures of the short-term performance derby. Lesson: Never cease to do YOUR own thinking and analysis.

Ackman down 16% and will hold CC on Valeant this Friday (Oct . 30th)  Below are charts of Ackman’s portfolio. The sharks front-run the potential liquidation as Ackman’s investors go queasy.

Ackman Portfolio

Ackman Blowup?

Link to CC on this Friday at 9 AM EST

Readers should share if they believe there are actionable lessons here for investors in terms of psychology, portfolio management and analysis.  Time is precious so we need to learn the important lessons.

My take-away so far.

First, Valeant’s Low Valuation and Rip Roaring Growth (Aug. 20th 2015 by Barrons  Note the author’s focus on growth–but IF that growth is not sustainable within a franchise (protected above the cost of capital profit margins) then  cause this: changed investor expectations:

VRX

And that ladies and gentlemen is called a permanent loss of capital IF investors paid too much for growth in a company doing roll-ups of commodity-like products (generic drugs) at unsustainable retail prices (competition and insurer push-back will cap price gains).

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Meanwhile, investors face the second most overvalued equity market in history (Source: Hussman Funds).

The Stoics and Investing; Volatility and the Prisoner’s Dilemma

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The Stoics

Stoics understood that if negative emotions such as anger, envy, greed, fear, and grief plague your life, then soundness and peace of mind will elude you. Serentiy in the midst of adversity–which is hardly the same thing as the modern, Western and secular notion of “happiness”–is a necessary condition of a well-lived life.

nov15_newsletter-1 How the Stoic Philosophers influenced Ben Graham

feb16_newsletter-2 Part 2

Volatility

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Carl Icahn Speaks About Our Market Train Wreck

Billionaire activist-investor Carl Icahn gives an interview on FOX Business Network's Neil Cavuto show in New York in this February 11, 2014 file photo. Icahn said October 9, 2014, Apple Inc's shares could double in value and urged the company's board to buy back more shares using its $133 billion cash pile.  REUTERS/Brendan McDermid/Files (UNITED STATES)

Billionaire activist-investor Carl Icahn gives an interview on FOX Business Network’s Neil Cavuto show in New York in this February 11, 2014 file photo. Icahn said October 9, 2014, Apple Inc’s shares could double in value and urged the company’s board to buy back more shares using its $133 billion cash pile. REUTERS/Brendan McDermid/Files (UNITED STATES)

Carl Icahn Speaks

Carl Icahn is becoming a DC activist just in time to help stimulate congressional talks on corporations being able to repatriate money to America at a lower tax rate, he told The Post.

Icahn — a day after GOP presidential front-runner Donald Trump unveiled his economic plan, which included corporate tax relief for repatriated funds — released a 15-minute video Tuesday titled “Danger Ahead,” giving his views on the US economy. Icahn also endorsed Trump for president.

The billionaire investor dedicated much of the video and a corresponding interview with The Post to the taxation rate of repatriated profits.

“We want to make sure companies have the ability to bring their funds [$2.2 trillion in overseas profits] back,” he told The Post.

“Repatriation [tax rate] should be 7 or 8 percent.” Presently, companies pay taxes in countries where they make the goods, and then a 35 percent rate when bringing the money back to the US.

Icahn said he had been in touch with Sens. Charles Schumer (D-NY) and Orrin Hatch (R-Utah) and Rep. Paul Ryan (R-Wis.), “and everyone wants to see a [reduced rate] bill” by December.

“I think Schumer, Hatch and Ryan want to see this happen,” Icahn said.

If they don’t succeed, Icahn said, the repatriation effort will stall in the 2016 presidential election year and the US will see more balance-sheet cash remaining overseas, out of Uncle Sam’s reach.

Icahn’s biggest stock position, meanwhile, is his stake in Apple, from which he would benefit greatly if the company can repatriate some of its $200 billion at a lower tax rate.

“Repatriation would be viewed as massively positive for Apple,” Friedman Billings Ramsey Capital analyst Dan Ives said.

Icahn Enterprises, the investor’s publicly traded vehicle that is a proxy for his investments, is down 28 percent this year and 37 percent over the past 12 months. The company took a $373 million loss last year, largely on energy stock declines.

Another top 10 Icahn holding is Herbalife, which, as of June 30, had 48 percent of its $750 million in cash overseas.

The foreign cash repatriation talks in Washington could use some help, a well-placed Senate source told The Post. “I think it’s a long shot it gets passed this year.”

The main problem is key Democrats want to spend the new proceeds collected from repatriation on a long-term highway funding bill.

But key Republicans are uncomfortable with that idea because they are concerned that once repatriated money slows, Congress may have to raise taxes to pay for continued highway funding.

Not all business interests, especially big tech companies, are for repatriation at lower tax rates as they now have an excuse to not bring back foreign profits. So Icahn calling senators and being vocal on the subject makes a difference, the source said.

Icahn in the video explains why he is for repatriation.

“If that money came back, it would [be used] for jobs.”

“That money is given to somebody who will invest in this country. As opposed to taking the money in Europe and investing in Ireland or somewhere like that.”

www.nypost.com

A Masters Degree in Mungerisms, Druckenmiller Buys 20% of Portfolio in GLD

Bakshi

A Masters in Munger  Take the university level course.

Charlie Munger

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Berkshire Hathaway Annual Meeting Notes 2004

gold and Drucken

Druckenmiller Buys GLD 20%

spy credit spreads

credit spreads widen

What is Mr. Druckenmiller worried about?

Buy-Backs Create Stealth Leverage

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Gold “UNDERVALUED?”

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Buffett’s Search and Analysis Techniques; Economic Fitness

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Wise Thoughts from Buffett on Finding Stocks

  1. I started at page one [of these manuals-Moody’s and Value-Line] and went through every company that traded, from A to Z. When I was done I knew something about every company in the book.
  2. I like businesses that I can understand. Let’s start with that. That narrows it down by 90%. There are all types of things I don’t understand, but fortunately, there is enough I do understand. You have this big wide world out there and almost every company is publicly owned. So you have all American business practically available to you. So it makes sense to go with things you can understand.
  3. First, you need two piles. You have to segregate businesses you can understand and reasonably predict from those you don’t understand and can’t reasonably predict. An example is chewing gum versus software. You also have to recognize what you can and cannot know. Put everything you can’t understand or that is difficult to predict in one pile. That is the too-hard pile. Once you know the other pile, then it’s important to read a lot, learn about the industries, get background information, etc. on the companies in those piles. Read a lot of 10Ks and Qs, etc. Read about the competitors. I don’t want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. We’re getting ready to make a $5 billion investment and this was the process I used.
  4. You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all
  5. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
  6. I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
  7. If we were to do it over again, we’d do it pretty much the same way. The world hasn’t changed that much. We’d read everything in sight about businesses and industries we think we’d understand. And, working with far less capital, our investment universe would be far broader than it is currently.

7 Gems from Buffet on Analyzing Stocks

  1. You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  2. There’s nothing different, in my view, about analyzing securities today vs. 50 years ago.
  3. We favor businesses where we really think we know the answer. If we think the business’s competitive position is shaky, we won’t try to compensate with price. We want to buy a great business, defined as having a high return on capital for a long period of time, where we think management will treat us right. We like to buy at 40 cents on the dollar, but will pay a lot closer to $1 on the dollar for a great business.
  4. Munger: Margin of safety means getting more value than you’re paying. There are many ways to get value. It’s high school algebra; if you can’t do this, then don’t invest.
  5. If you’re going to buy a farm, you’d say, “I bought it to earn $X growing soybeans.” It wouldn’t be based on what you saw on TV or what a friend said. It’s the same with stocks. Take out a yellow pad and say, “If I’m going to buy GM at $30, it has 600 million shares, so I’m paying $18 billion,” and answer the question, why? If you can’t answer that, you’re not subjecting it to business tests.
  6. Capital-intensive industries outside the utility sector scare me more. We get decent returns on equity. You won’t get rich, but you won’t go broke either. You are better off in businesses that are not capital intensive.
  7. No formula in finance tells you that the moat is 28 feet wide and 16 feet deep. That’s what drives the academics crazy. They can compute standard deviations and betas, but they can’t understand moats. Maybe I’m being too hard on the academics.

7 Nuggets from Buffett on Valuing Stocks

  1. When Charlie and I buy stocks which we think of as small portions of businesses our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.
  2. In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
  3. Intrinsic value is terribly important but very fuzzy. We try to work with businesses where we have fairly high probability of knowing what the future will hold. If you own a gas pipeline, not much is going to go wrong. Maybe a competitor enters forcing you to cut prices, but intrinsic value hasn’t gone down if you already factored this in. We looked at a pipeline recently that we think will come under pressure from other ways of delivering gas [to the area the pipeline serves]. We look at this differently from another pipeline that has the lowest costs [and does not face threats from alternative pipelines]. If you calculate intrinsic value properly, you factor in things like declining prices.
  4. Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
  5. We use the same discount rate across all securities. We may be more conservative in estimating cash in some situations.
  6. Just because interest rates are at 1.5% doesn’t mean we like an investment that yields 2-3%. We have minimum thresholds in our mind that are a whole lot higher than government rates. When we’re looking at a business, we’re looking at holding it forever, so we don’t assume rates will always be this low.
  7. The appropriate multiple for a business compared to the S&P 500 depends on its return on equity and return on incremental invested capital. I wouldn’t look at a single valuation metric like relative P/E ratio. I don’t think price-to-earnings, price-to-book or price-to-sales ratios tell you very much. People want a formula, but it’s not that easy. To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. All cash is equal. You just need to evaluate a business’s economic characteristics.

More Reading

Most of these quotes came from Buffett FAQ which contains the Q&A from shareholder meetings and goes beyond what you’ll find in the annual letters.

Just from these small selection of quotes, you can see how Buffett manages to dance in zone 4.

Take his words to heart and let’s join him on the dance floor because the sweet spot is where we belong. Read more: http://www.oldschoolvalue.com/blog/investing-perspective/warren-buffett-analyze-value-stocks/#ixzz3iofOBNF9

Economic Review & Fitness

Boot Camp  A good resource for students

Consequence of ZIRP

What is money?

Economic Conversations

How the economy works by Ray Dalio

Sentiment

Crude-Oil-Returns

oil Sentiment

oil carnage

Oil headed to $10 a barrel

HAVE A GOOD WEEKEND!

What Happened to Einhorn’s Mojo?

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Einhorn, Has he lost his mojo?

Can anyone understand the change in performance. Is it Einhorn’s process or the market?  Hint: I don’t think Einhorn went from brilliance to idiocy or was it random luck?  Comments welcome.