Tag Archives: Buffett

Reading for this weekend

Snails

Bubble Watch

GMO_QtlyLetter_1Q14_FullVersion

ABOOK-Mar-2014-Valuations-Stocks-to-GDP

Momentum Stocks Crushed

Momentum Crush

http://www.acting-man.com/?p=30382#more-30382

Buffett Notes

BN-CQ488_0503be_M_20140503154303

http://covestreetcapital.com/Blog/?p=1173    Icahn slams Buffett on his cowardice.

Warren-Buffett-Katharine-Graham-Letter on Pensions 1975

Warren-Buffett-Florida-Speech

Buffett1984Retail Stores and Clean Surplus

Berkshire_Hathaway_annual_meeting_notes_5-3-2014

20140424_CNBC_Transcript__Legendary_Investor_Warren_Buffett_Speaks_with_Becky_Quick

BRK_annual_letter-2014

Have_Researchers_Uncovered_Buffetts_Secret

20140224_Preview_of_Buffett’s_annual_letter__Learn_from_my_real_estate_investments

And in case of Buffett overdoseCrony Capitalist

Resource StocksRules of Thumb for Junior Mining Speculators and A Light at the End of the Tunnel

How to get a job

VITO

How to Get a Job on Wall Street (Or anywhere else)

This post discusses getting a job on Wall Street, but the basic principles apply to whatever your area of interest is.
An EPJ reader sent this email to me earlier today:

Tomorrow morning I plan to go knocking on doors at different Private Equity firms in the Houston Area. Those firms do not have a career section on their website, so I have decided to go the old fashion way and knock at their door. Basically, I want to get an entre level analyst position and start from there. Today, I am starting an online MSc. in Corporate Finance, so I hope that could help me.
My question to you is, what tips would you suggest me when I go tomorrow morning? would that strategy work?

I receive many emails like this. Early in my career, at one point, I actually went door to door and managed to get a job on Wall Street that way, but it is extremely difficult. You have to be prepared for lots of rejection, you have to know, going in, everything about the job and firm that you are attempting to get an interview at. You have to be clever, pushy and lucky to get past the receptionist and you then have to make your points, powerfully and succinctly, as to why you would be a good fit for the firm. Then you have to be prepared and have answers to any objections. Did I mention accomplishing all this is not easy?
An alternative might be to contact smaller firms by email or phone, contact the partners, and tell them you are willing to work for free for 6 months to prove yourself. Be a pest.

I also like the idea of working for a temp agency. Befriend someone at an agency and tell them that you are willing to work as a temp in the PE industry, hedge fund industry etc., whatever it is you are interested in, because you want to get in the door. Once you are in the door, you can be judged on your skills. Be a pest at the temp agency, so that you are on their mind.

Another strategy is to start a blog, not an opinion and policy blog like mine, but a blog that shows your skills in the field you would like to enter. If you want to get into the PE industry, write one or two analytical posts per month that analyze sectors of the economy and why it may make sense for the PE industry to get involved in those sectors (or why they should be avoided). If you consider yourself, say, a good stock analyst, then start a blog where you post one or two detailed stock research reports each month. Email links to your posts to the people you would like to work for. I know of two analysts that got their starts this way.

When all is said and done, it’s about being clever and focused and knowing well the person/firms you want to work for, so that you can show them the skills you have that can help them.

I found the profile of Tracy Britt Cool in BusinessWeek fascinating. She clearly had been thinking about working for Warren Buffett for a long time and she went about in a methodical way attempting to get a job with Buffett. And, got it! BusinessWeek writes:

When Warren Buffett bought half of a commercial mortgage finance company in 2009, he hired a 25-year-old fresh out of business school to keep tabs on the investment[…]Now 29, Cool is one of Buffett’s most-trusted advisers, traveling the country to assist a constellation of companies too small to command her boss’s direct attention[…]

“When I first met her I thought, ‘Oh my gosh, this girl’s scaring me, she’s so professional,’” said Teresa Hsiao, a classmate at Harvard College. “Her idea of fun may not be what we consider fun, like looking at 10-Ks,” the annual reports filed with securities regulators.

Cool, who declined to be interviewed for this article, met Buffett through Smart Woman Securities, the group she and Hsiao founded while Harvard undergraduates. SWS aims to educate members about everything from compound interest to preparing a pitch to prospective investors.
Cool and Tiffany Niver, a Harvard classmate from Nebraska, wrote to Buffett and asked if members could visit. He agreed. The pilgrimage has become an annual event for the group, which has expanded to 17 chapters[…]Cool was inspired by Buffett’s value-investing principles when she built SWS, Horne said. “I don’t think that was unconscious,” she said. “She clearly had Warren in her sights.”

While at Harvard Business School, Cool wrote in an essay: “My goal is to work with a great investor, who even more importantly is a wonderful teacher and mentor.”

Think about this. She set her sights on working for Warren Buffett and accomplished that! How many people would kill to get a job next to Buffett? A lot. But she did it. Why?  Because she did many things that others don’t do. She had a methodical plan. She developed her skills that would make her valuable to Buffett and then she developed a plan to get in front of Buffett so that she could demonstrate her skills.

Go forth and do likewise.

The Forging of a Skeptic (Buffett/Schroeder Interview); Investigative Journalism

Dino

A Great Interview: The Forging of a Skeptic_Buffett

Snippets:

Learn about investigative journalism to become better at investing

Alice: Yes, I will give away some of my secrets. People would do well to study investigative journalism. Read something like Den of Thieves or A Civil Action and try to reverse engineer how it was reported.

Here are three other great books on conversing with people, understanding their real motives, and just generally understanding how the human mind works.

The Work of a Securities Analyst at a Wire House

You may wonder why analysts at banks hedge themselves so much – on the one hand this, on the other hand that. Partly it can be lack of courage. But someone is always trying to lawsuit-proof your opinion. Decisive statements are lawyered into “may, can, could, might, potentially, appears” instead of “is, does, should, will,” much less “look out below.”

The time pressures that work against quality research are also well-known. You write-up a lot of inconsequential things, especially what I call “elevator notes” (this quarter “X was up and Y was down”). Instead of writing original or probing views, you are really incentivized to spend as much time as possible marketing.

Also, if you adhere to consensus, it does protect your career. There’s an old saying that no one ever got fired for buying from IBM. Nobody ever got fired for making a wrong estimate that was within sell-side consensus.

Whereas, if you break from consensus, you really can’t afford to be wrong very often. That phenomenon really drives the sell-side. It can be overt, such as when we were judged on how “commercial” our work was. This is a veiled threat, because, of course, our work has to be marketable in order for us to have a job. The firms essentially want two things that are incompatible.

Focus on the Essentials

Miguel: It’s funny and I hope one day you can meet my boss. But you can tell him anything in the world (about an investment) but he always circles back to two questions

  1. Is it a good company, and
  2. Is it cheap?

Alice: Sure.

Miguel: I think that I am a little bit like you in that I love thinking about things. But I also find it very easy to get lost in details while forgetting to ask, “Is this something I even want to own in the first place?”

Alice: One trap is not probing deep enough to really answer whether a particular investment opportunity is a good business. It’s easy to make a facile judgment about that based on a summary description of a business. The sheer breadth of different business and investment opportunities in a modern capital market creates an overflow of information that leads many investors to have short attention spans in thinking about companies comparatively.

Curiosity is an inherent kind of arbitrage that no amount of computer technology can overcome. Warren makes it sound so simple to know what is and is not a truly good business – and great business do resonate very clearly when you understand why they are great and especially when they’ve been identified as successful investments by an investor like Warren Buffett and proven so with hindsight – but like many things in investing, Buffett makes it sound easier than it is. When it comes to appreciating something that is special about a business that others do not, I’ve learned that the devil really is in the details.

Miguel: How is Warren different from other value investors?

Alice: He’s more interested in money, for one thing (laughs).

In terms of how that affects his investing behavior, number one, in his classic investments he expends a lot of energy checking out details and ferreting out nuggets of information, way beyond the balance sheet. He would go back and look at the company’s history in-depth for decades. He used to pay people to attend shareholder meetings and ask questions for him. He checked out the personal lives of people who ran companies he invested in. He wanted to know about their financial status, their personal habits, what motivated them. He behaves like an investigative journalist. All this stuff about flipping through Moody’s Manual’s picking stocks … it was a screen for him, but he didn’t stop there.

Number two, his knowledge of business history, politics, and macroeconomics is both encyclopedic and detailed, which informs everything he does. If candy sales are up in a particular zip code in California, he knows what it means because he knows the demographics of that zip code and what’s going on in the California economy. When cotton prices fluctuate, he knows how that affects all sorts of businesses. And so on.

The third aspect is the way he looks at business models. The best way I can describe this is that it’s as if you and I see an animal, and he sees its DNA. He isn’t interested in whether the animal is furry; all he sees is whether it can run and how well it will reproduce, which are the two key elements that determine whether its species will thrive.

I remember when his daughter opened her knitting shop. Many parents would say, I’m so proud of Susie, she’s so creative, this is something of her own, maybe she can make a living at it. Warren’s version is, I’m so proud of Susie, I think a knitting shop can produce half a million a year in sales, they’re paying whatever a square foot for the storefront, and labor is cheap in Omaha.

It was similar when Peter was producing his multimedia show, The Seventh Fire. Many parents would say, wow, my son has pulled off a critically acclaimed show. Warren obviously thought that, but what he articulated was, they’re charging $40 a ticket, I think the Omaha market is too small for that price point, whereas in St. Louis they may cover the overhead, and I think he paid too much for the tent because the audience doesn’t really care what kind of tent it’s sitting in and it hurts margins, etc.

Read the entire interview: 

http://seekingalpha.com/article/235292-behind-the-scenes-with-buffett-s-biographer-alice-schroeder

 Investigative Journalism and Brookfield Asset Management

Brookfield

Repetitive Advantage: Broad Run Investment Management:Broad-Run-VII-Profile-Nov-2013

Buying Jan 2015 $15 call option at $3.00 in ABX 

A special situation since there is a change in Board. If ABX can survive its balance sheet by improving its low cost assets, then there could be 100% to 200% upside with gold prices above $1,250. Right now we are in tax selling as well as a weak gold environment.  ABX’s management says they will pare down/sell off their high cost mines. If gold goes sub- $1,000, then ABX could really struggle.

ABX

Look familiar?

Despair

How to Read and Get SMARTER

Go Straight

Ask to be on his email list for incredibly insightful articles. dahhuilaudavid@gmail.com
The Buffett Formula — How To Get Smarter from http://www.farnamstreetblog.com/ 

“The best thing a human being can do is to help another human being know more.”
— Charlie Munger

“Go to bed smarter than when you woke up.”
— Charlie Munger

Most people go though life not really getting any smarter. Why? They simply won’t do the work required.

It’s easy to come home, sit on the couch, watch TV and zone out until bed time rolls around. But that’s not really going to help you get smarter.

Sure you can go into the office the next day and discuss the details of last night’s episode of Mad Men or Game of Thrones. Sure you know what happened on Survivor. But that’s not knowledge accumulation, it’s a mind-numbing sedative.

You can acquire knowledge if you want it.

In fact there is a simple formula, which if followed is almost certain to make you smarter over time. Simple but not easy.

It involves a lot of hard work.

We’ll call it the Buffett formula, named after Warren Buffett and his longtime business partner at Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They are also learning machines.

Read more every day here: http://www.farnamstreetblog.com/

 

Commenting on what it means to have knowledge, in How To Read A Book, (PLEASE follow that link!) Mortimer Adler writes: “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”

Can you explain what you know to someone else? Try it. Pick an idea you think you have a grasp of and write it out on a sheet of paper as if you were explaining it to someone else. (see The Feynman Technique and here, if you want to improve retention.)

Nature or Nurture?

Another way to get smarter, outside of reading, is to start surround yourself with people who are not afraid to challenge your ideas.

Like what you’re reading? Join thousands of others and get a free weekly update via email.

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” — Charlie Munger

Read more posts on Farnam Street on:
 • 

LTStockPrices

Progress, changes in the index and more money in circulation.

Have a good weekend.  I highly recommend, HOW TO READ A BOOK by Adler.

You will become a better analyst/investor. Plus, I need everyone here to become a whole lot smarter the next time I pose a “brain crusher.”

Buffett Investment Lesson; Gold Capitulation Part 2

jurors

RISK: My grandfather invested his fortune in Russian bonds. This was before the Russian Revolution. At the time, he was told he couldn’t lose money. Because the bonds were pegged to gold. So there was no currency risk. And these were bonds of Russian railways, which were the most solid businesses in the world, and they were guaranteed by the Tsarist government. No currency risk. No default risk. No business risk. They were as close to risk-free as you can get. But when the Bolsheviks took over they seized the railways. They stopped paying the bonds. And they executed the Tsar and his family.”

It didn’t make any difference if the bonds were pegged to gold or not. They were worthless. It just reminds you of how things can go very bad in a way you don’t expect. Who would have imagined a communist revolution in Russia? (Could a Dictator take over the U.S.A.?)  www.acting-man.com

Buffett Image

The 1975 Buffett memo that saved WaPo’s pension

Found here:Warren-Buffett-Katharine-Graham-Letter on Pensions 1975

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time — Buffett was 45 when he wrote it and years away from attaining the investment fame he has today — his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient. Full article: http://finance.fortune.cnn.com/2013/08/15/warren-buffett-katharine-graham-letter/?iid=EL

gold

Gold and Gold Stock Capitulation (GLD represents gold while GDX represents an index of major gold producers and GDXJ represents junior gold miners). Note the date of the low prices in End June/Early July. We last mentioned capitulation here: http://wp.me/p2OaYY-25W

GLD and GDX

Paulson’s Investors help form a bottom in Gold: http://www.acting-man.com/?p=25354#more-25354 (a suggested read)

Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more thereafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds. As the Bloomberg article mentions:

“Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,”according to an e-mailed response to questions.”

CSInvesting Editor: As mentioned before, I have been unable to find attractively priced franchises so in the past four months I have bought “quality” miners and related companies like RGLD, SLW, FNV, AUY, AEM, NGD, EGO, etc.  I place the word, QUALITY in quotes because those companies are not franchises and each struggles with the cyclical risks of their product–metals. So beware, I am biased to seeking out information that bolsters my bullish outlook like Commercial Hedgers having a low short position:

CoT-gold

and extremely negative speculative sentiment–a contrary signal.

Public-opinion-gold

And….

  • A very seasoned mining executive I’ve known for years (www.grandich.com)  sent me the following email, along with the latest World Gold Council report. He made a very keen observation is his email. Here it is:

“As an aside FYI, attached is the WGC’s first ½ 2013 report  – skip to page 14 and look at the highlight yellow I put in. Of ~2000 supply and demand tonnes  , ~578 tonnes are sold by ETF’s. If ETF’s sales were zero there would be a 29% supply shortfall. Total mine production is 1377 tonnes, ETF’s sold 42% of all mine production first ½ this year.    My math is that if the ETF’s get cleaned up and go to 0 sales, we are looking at quite a gold supply problem. Old fashioned thinking I know, but alas, I am just a simple guy.”

We have a very serious mine production shortfall that has been masked during the gold raids and sell-offs. I think it will get exposed going forward.

I need evidence against my thesis, so please send any negative information against owning precious metals miners and gold. I am reading:

Gold Bubble Book

Next week, I will post a valuation on Royal Gold (RGLD) so get a head start and visit the websites of Franco-Nevada (FNV), Silver Wheaton (SLW) and Sandstrom Gold (SAND) to learn about this business.

HAVE A GREAT WEEKEND!

Fifty Years on Wall Street; Tap Dancing to Work

300px-Henry_Clews

Henry Clews: Fifty Years in Wall Street (1907)

You may not love financial history as much as I do, but you will enjoy reading about the following themes:

  • The characteristics of winning and losing speculators
  • Wall Street during periods of war
  • How operators attempted to “corner” the markets for individual stocks
  • The causes and consequences of Wall Street panics
  • The influence of Wall Street on national politics
  • How individuals like Jay Gold, Daniel Drew, and Commodore Vanderbilt made their fortunes.

Book: Fifty Years in Wall Street (1859 to 1900) https://www.hightail.com/download/bWJxTG05R0Z1Yk5Yd3NUQw Thanks to a generous contributor.  The book is worth reading for a feel of Wall Street during the 19th Century and for learning that human nature does not change especially on Wall Street.  Add this to your Reminiscences of a Stock Operator from the last post http://wp.me/p2OaYY-26h. You now have reading material on Wall Street (1850 to 1930) from the speculators’ point of view.  Place this in your financial history section of your learning library!

Gilded Age: http://en.wikipedia.org/wiki/Gilded_Age and the Panic of 1857 

 The Life of Warren Buffett: Tap Dancing to Work

https://www.hightail.com/download/bWJxTG05R0ZrUm1LRmNUQw

Ok, I am burnt out on Buffett! And, I don’t think this is the best book on Buffett–better to spend the time on Snowball (soon to be posted), but I don’t censor, I leave it up to YOU, dear reader, to decide. See Amazon Review below:

A review: I was very much looking forward to this book – to be able to read a comprehensive and organized treatise on Buffett’s many philosophies and strategies. What a disappointment!

Be warned that the book is nothing but tidbits and random bits and pieces of articles written about him (and a few by him) over the last 46 years.

But don’t expect to learn anything you probably already didn’t know.
Any normal person wanting to learn about what really makes this man tick, and what his investing philosophies and strategies are, would do better to read Alice Schroeder’s comprehensive and impressive biography of Buffett – “The Snowball.”

I received the dropbox keys to a treasure chest of 80 books so I will parcel out over the next few weeks.  

If you find any books that helped you become a more insightful investor, then please let me know so I can share with the group. Thanks.

Case Study on Buffett’s Purchase of The Washington Post

The-Washington-Post-logo

Buffett began acquiring shares of the  Washington Post in early 1973, and by the end of the year held over 10 percent of the non-controlling “B” shares. After multiple meetings with Katherine Graham (the company’s Chairman and CEO), he joined the Post’s board in the fall of 1974.

According to Buffett’s 1984 speech The Superinvestors of Graham-and-Doddsville, in 1973, Mr. Market was offering to sell the Post for $80 million. Buffett also mentioned that you could have “…sold the (Post’s) assets to any one of ten buyers for not less than $400 million, probably appreciably more.” How did Buffett come to this value? What assumptions did he make when looking at the future of the company? Note: All numbers and details in this article are from the 1971 and 1972 annual reports and “Buffett: The Making of an American Capitalist” by Roger Lowenstein.

ANALYSIS

The purpose of this exercise is to reverse engineer Buffett’s analysis of the Washington Post Company—in other words, to construct a reasonable analysis given the facts as of 1973 that will lead us to the same conclusion Buffett arrived at.

READ more………..Washington_Post)Buffett Analysis (Thanks to a reader)

and 1972 Annual Report: Washington_Post)Buffett Analysis

Readings: So You Want To Be Like Buffett.

I am keeping this epic cover. A top in Central Banking confidence.

atlantic-april-2012-cover-ben-bernanke

Meanwhile……………..

hopeandchange

SpendingDeficit

Readings

So_You_Want_To_Be_The_Next_Warren_Buffett_Hows_Your_Writing_Mark_Sellers

The_Coffee_Can_Approach_Michael_Mauboussin

 

Have a Good Weekend.

Fiat Currencies vs. Gold; Paul Singer on Current Conditions; Readings

Fiat Currencies

Curiously, many people argue this would be a good time to abandon gold. We don’t think so – we rather think that faith in central banks will eventually crumble, and then it will be well and truly ‘game over’ for these perpetual bubble machines. As a friend of ours frequently remarks: at that point the question of how to price gold will be akin to asking what the last functioning parachute on an airplane that is going down should be worth. http://www.acting-man.com/?p=23082

Hedge fund “friend” upon hearing that I own gold, “If you were a lot smarter, we could call you stupid.”

Why Gold?

No, I am not actually doing what I posted here:http://wp.me/p2OaYY-1Vv. I own gold bullion and several precious metals miners, so yesterday when the stock market is up 1/2% while my portfolio drops 1%+, I take comfort when I review why I own gold:

“In a speech in Rome, ECB President Mario Draghi said the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.

For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But It will likely consider such a step,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.”

Meanwhile, sentiment in gold and precious metals miners is at historic (20 year) lows: http://thetsitrader.blogspot.com/2013/05/gold-and-silver-sentiment-reversal-is.html and Short Side of Long

While……..China and other Asian countries buy on dips.China Gold Imports

China_official_20gold holdings

I don’t buy the gold bugs premise that central banks will back their currencies with gold unless forced to by the market/the public. However, central bankers buying may indicate the lack of trust in their colleagues’ fiat currencies.  Also, gold “flowing” East represents a wealth transfer from West to East.

Print, print: http://www.zerohedge.com/news/2013-05-08/germany-under-pressure-create-money

In The Wilderness by Paul Singer

[T]he financial system (including the institutions themselves, products traded, and risks taken) has “gotten away from” the Fed’s ability to comprehend. The Fed is primarily responsible for that state of affairs, and it is out of its depth. Former Chairman Greenspan created — and reveled in — a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard. By successive bailouts and purporting to understand (to a higher and higher level of expressed confidence) a quickly changing financial system of growing complexity and leverage, he cultivated an ever-increasing (but unjustified) faith in the Fed’s apparent ability to fine-tune the American (and, by extension, the world’s) economy. Ironically, this development was occurring at the very time that financial innovations and leverage were making the system more brittle and less safe. He extolled the virtues of derivatives and minimized the danger of leverage and risky securities and dot-com stocks, all while he should have been putting on the brakes. It was not just the disappearance of vast swaths of the American financial system into unregulated subsidiaries of financial institutions, nor was it just government policies that encouraged the creation and syndication of “no-documentation” mortgages to people who could not afford them. It was also the low interest rates from 2002 to 2005, the failure to see the expanding real estate bubble caused by an unprecedented increase in leverage and risk, and the general failure to understand the financial conditions of the world’s major institutions.

Under Chairman Bernanke, the combination of ZIRP and QE completed the passage of the Fed from sober protector of a fiat currency to ineffective collection of frantically-flailing, over-educated, posturing bureaucrats engaged in ever more-astounding experiments in monetary extremism.

If you look at the history of Fed policy from Greenspan to Bernanke,you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin.

Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.

It is true that the CEOs of the world’s major financial institutions lost their bearings and were mostly oblivious to their own risks in the years leading up to the crash. However, as the 2007 minutes make clear, the Fed was clueless about how vulnerable, interconnected and subject to contagion the system was. It is not the case that the Fed completely ignored risk; indeed, several Fed folks made “fig leaf” statements about the risks of the mortgage securitization markets, as well as other indications that they appreciated the possibility of multiple outcomes. But nobody at the Fed understood the big picture or had the courage to shift into emergency mode and make hard decisions. In the run-up to the crisis the Fed was a group of highly educated folks who lacked an understanding of modern finance. After convincing the nation for decades of their exquisite grasp of complexities and their wise stewardship of the financial system, they didn’t understand what was actually going on when it really counted.

Ultimately, of course, as the system was collapsing and on the verge of freezing up completely, the Fed shifted into the (more comfortable and much less difficult) role of emergency provider of liquidity and guarantees.

All this background presents an interesting framework in which to think about what the Fed is doing now. QE is a very high-risk policy, seemingly devoid of immediate negative consequences but ripe with real chances of causing severe inflation, sharp drops in stock and bond prices, the collapse of financial institutions and/or abrupt changes in currency rates and economic conditions at some point in the unpredictable future. However, the lack of large increases in consumer price inflation so far, plus the demonstrable “benefits” of rising stock and bond markets, have reinforced the merits of money-printing, which is now in full swing across the world. In the absence of meaningful reforms to tax, labor, regulatory, trade, educational and other policies that could generate sustainable growth, “money-printing growth” is unsound.We believe that the global central bankers, led by the Fed as “thought leader,” have no idea how much pain the world’s economy may endure when they begin the still-undetermined and never-before attempted process of ending this gigantic experimental policy. If they follow the paths of the worst central banks in history, they will adopt the “tiger by the tail” approach (keep printing even as inflation accelerates) and ultimately destroy the value of money and savings while uprooting the basic stability of their societies. Read the 2007 Fed minutes and you will understand how disquieting is the possibility of such outcomes and how prosaic and limited are the people in whom we have all put our trust regarding the management of the financial system and the plumbing of the world’s economy.

Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt. It also has produced second-order effects, such as inflating the prices of commodities, art and other high-end assets purchased by financiers and investors. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE without large adverse impacts on the prices of stocks and bonds and the performance of the economy. If the economy does not shift into sustainable high-growth mode as a result of QE, then the exit from QE is somewhere on the continuum between problematic and impossible.

Central banks facing high inflation and/or sluggish growth after sustained money-printing frequently are paralyzed by the enormity of their mistake, or they are deranged by the thought that the difficult and complicated conditions in a more advanced stage of a period of monetary debasement are due to just not printing enough. At some stage, central banks inevitably realize, regardless of whether they admit the catastrophic nature of their own failings, that the cessation of money-printing will cause an instant depression. Even though at that point the cessation of money-printing may be the only action capable of saving society, that becomes a secondary consideration compared to the desire to avoid immediate pain and blame. The world’s central banks are in very deep with QE at present, and the risks continue to build with every new purchase of stocks and bonds with newly-printed money.

* * *

[And, as an added bonus, here are Singer’s views on gold:]

There are many current theories as to why the price of gold had been drifting down and then collapsed in mid-April. We are trying to sort out various possible explanations, but we urge investors to be cautious in their thinking about what circumstances would likely cause gold to rise or fall sharply. The correlations with other assets in various scenarios (risk on or off, economic normalization, inflation, the rise and fall of interest rates, euro collapse) may shift abruptly as the macro picture evolves. Many people think that if stock markets continue rising, and/or if the U.S. and Europe restore normal levels of growth and employment, then the rationale for owning gold is weakened or destroyed. This perception may be correct, and it is certainly a topic that is currently much discussed, but ultimately another set of considerations is likely to dominate.

The world is on a seemingly one-way trip to monetary debasement as the catchall economic policy, and there is only one store of value and medium of exchange that has stood the test of time as “real money”: gold. We expect this dynamic to assert itself in a large way at some point. In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent. Gold may not exactly be a “safe haven” in the sense of an asset whose value is precisely known and stable. But it surely is an asset that, in a particular set of circumstances, becomes a unique and irreplaceable “must-have.” In those circumstances (loss of confidence in governments and paper money), there are no substitutes, and the price of gold may reflect that characteristic at some point.

Disprove Your Opinions on Gold

Gold BubblePure nonsense, April 24, 2012

By Bobnoxy

This review is from: Gold Bubble: Profiting From Gold’s Impending Collapse (Hardcover)

This book will no doubt go into the proverbial dustbin of history along with Dow 36,000. Ask yourself some honest questions and then compare your answers to this book’s entire premise.

Is gold in a bubble? Well, what do bubbles look like? Luckily, we have two recent examples, the housing bubble, and the tech stock bubble in the late 90’s. What did those look like?

To me, they looked like everyone was getting rich in techs stocks and flipping houses. Regular people were quitting their jobs and day trading or flipping houses full time. The average guy, the little guy, sometimes referred to as the ”dumb money” was making an easy fortune.

Now, how many of your friends own any gold and talk about it with you? How much do you own? The writer points to all the publicity around gold, like those ads telling people to sell their gold. And ever since gold hit $1,000, people were doing just that, selling their gold.

In a bubble, those people would be loading up, but they’re selling! The world’s central banks, the smartest people in the world when it comes to money, are the big buyers. This would be the first bubble in history that the dumb money was selling into and the smartest money on the planet was buying. Do you really think that the people with the least knowledge about money are getting this right?

It would also be the first bubble to happen with almost no participation from the general public. This could be the weakest analytical book written this year. Just because the price of something is up does not mean it’s in a bubble.

If you look at the average selling price of gold in the year it peaked for the last bull cycle, 1980, or $660 an ounce, and look at today’s price, the average annual gain for that 32 years is about 3%. If stocks had risen by 3% annually for that long, would anyone be calling it a bubble?

Then look at our trillion dollar deficits and the growth in the Fed’s balance sheet, total government debt of $18.5 trillion when you include state and local debt that as taxpayers, we’re all on the hook for, and there’s your bubble, and the best reason to defend yourself by owning gold.

Readings:

Thanks to a reader’s contribution: Here is a good article attached on bureaucracy and leading to misguided incentives. http://www.nytimes.com/2013/05/12/magazine/the-food-truck-business-stinks.html?ref=magazine&pagewanted=print

Another reader:

I came across your website via your interview with Classic Value Investors. I like the way you try to help people learn the craft. Value investing is in principle not that difficult, as long as you have a good teacher. So well done!

On my own value investing blog (http://www.valuespreadsheet.com/value-investing-blog). I try to share my knowledge on the subject as well, but not per sé with case studies like you do. However, your approach is very informative for readers, so maybe I should try that some more.

I’ve also written a free eBook which explains three valuation models in simple words. Feel free to add it to your value investing resources if you like it:

http://www.scribd.com/doc/137908826/How-to-Value-Stocks-By-Value-Spreadsheet

Kind regards, Nick Kraakman, www.valuespreadsheet.com

—-

Thanks for the above contributions.

 

Internet Boom and Bust; Herbalife and Bill Ackman

nasdaq1986s

Here is the Perhsing Square website on Herbalife. Sign up and learn:

Pershing has their HLF deck up on the website: http://factsaboutherbalife.com/

Verdict: This will get ugly but my money would be on Ackman since there is no competitive advantage, so I would place the value no more than tangible book value at best with no more than a 90 second look at the financials.

The purpose of this post is also to study a Ponzi scheme. The response of the company to Ackman’s research leads me to say this company’s days are numbered.

BOOM and BUST

Could Austrian Business Cycle Theory Dotcom Boom and Bust have helped you as an investor? Buffett’s presentation on the Dotcom Bubble in early 1999 (See page 64) A Study of Market History through Graham Babson Buffett and Others. Note how the market went into a speculative frenzy, rising more than 50% AFTER Buffett’s speech. Human action can’t be predicted like a physics experiment.

An excellent book that predicted the bust was the The Internet Bubble: Inside the overvalue World of High Tech Stocks–and What you Need to Know To Avoid The Coming Shakeout by Anthony Perkins and Michael Perkins (1999 and 2001 editions).

Burning up (cash) http://www.fool.com/news/foth/2002/foth020830.htm

A student’s overview: David Carr – THE TECHNOLOGY STOCK BUBBLE

Ackan presents on Herbalife: http://www.reuters.com/article/2012/12/20/us-ackman-herbalife-idUSBRE8BI1MZ20121220. He says that he will be setting up a website with all his research on Herbalife. If anyone FINDS IT, please send me the link to post. This could become a good case study on multi-level marketing.

Dec. 21 2012 Update: Thanks to a reader: www.businessinsider.com/bill-ackmans-herbalife-presentation-2012-12

See presentation here:Who-wants-to-be-a-Millionaire

See this article:http://seekingalpha.com/article/918831-an-investor-s-guide-to-identifying-pyramid-schemes

Motivate thyself: Anthony Robbins http://www.youtube.com/watch?v=Cpc-t-Uwv1I&feature=share&list=PL70DEC2B0568B5469.  Yes, he could be a huckster, but he is a great public speaker. Focus on HOW he presents.