Tag Archives: Klarman

Quantitative Value Lecture in NYC, Announcements for DEEP VALUE


I am temporarily using this email (jac007csi@gmail so check your spam filters) until I have my bulk email issues sorted out with AOL.com.  If YOU enrolled in the course and did not receive the email mentioned below, then email me at Aldridge56@aol.com and request the course materials for lesson 1.

I sent this book out before so delete if you have it. For those newly enrolled, please place in your research library. Not required reading.   Enrollment is NOW closed!

Attached is a book, M of Safety by Seth Klarman.  Over this course, I will be sending out other books/cases/notes and then asking for volunteers to do more in-depth research on the book, then we will share with the other students.  For example, I ask for one volunteer to critique that book.  Why is it a classic (on Amazon for $2,000) and what lessons for the investor? Is it similar to The Intelligent Investor?  You may wish to wait before volunteering because I will be sending out other projects by early next week and then you may choose a subject/topic of greater interest.

After reviewing Lesson 1 by Friday, we will watch a deep value investor/activist in action. Then for the advanced students, they can advise a company through a case study.  Then we will move onto liquidation values and Net/Nets.  We will circle back later (with the help of a volunteer) to further analyze Behavioral Portfolio Management (a reading from lesson 1).   Does investing in stock with NEGATIVE net worth makes sense?

There are 450 students enrolled. If only 10% volunteer for the twenty or so “special projects” then up to two people will be adequate.

Please consider DROPPING OUT if you are not a fanatic, Phanatic 

NOTICE: I can’t go, but can you or someone you know wish to attend?

Wesley Gray, co author of Quantitative Value Lecture on Wed. Jan. 7th at NYSSA in New York City

Wednesday, January 7, 2015

6:00 p.m.-7:30 p.m. | Presentation

7:30 p.m.-8:00 p.m. | Networking

NYSSA Conference Center
1540 Broadway, Suite 1010, (entrance on 45th Street)
New York, NY 10036

Member $20     Nonmember $40     Student Member $15
($10 surcharge for walk-ins)

Registration Deadline

Wednesday, January 7, 2015

CFA CEs= 1.5

Wesley R. Gray, Ph.D.

Janet Mangano
Chris Goulakos
Michael Livian, CFA

Additional Information
If you are unable to register for this event online, please call (212) 541-4530 for assistance.

Register via Mail/Fax 
Policies and Procedures

Geico Case Study; Klarman Sees Collapse


As David Ricardo, a successful speculator who, in his early retirement, became one of the finest economists of the early nineteenth century, explained in 1817:

It has been my endeavor carefully to distinguish between a low value of money and a high value of corn, or any other commodity with which money may be compared. These have been generally considered as meaning the same thing; but it is evident that when corn rises from five to ten shillings a bushel, it may be owing either to a fall in the value of money or to a rise in the value of corn…..

The effects resulting from a high price of corn when  produced by the rise in the value of corn, and when cause by a fall in the value of money, are totally different. 


You can never read enough about a great business and the importance of HOLDING ON to reap the benefits of growth.  If you can combine patience with the knowledge of understanding the moat of a great business, then you will have an outstanding investment career.

Geico Case Study and  wedgewood partners second quarter 2013 client letter

Klarman’s Speech (Thanks to a reader)

His latest speech also includes a distinct tone of regret over where the current state of affairs is taking the U.S. He sounds positively saddened by how things are run in his country. In Klarman’s words:

“Like all of you, I am worried about our future, I am concerned about the prospect for upcoming generations to have the same opportunities that ours did, and I’m saddened that our generation was handed something unique, the stewardship of the greatest country in the history of the world– and we are far down the path of making it less great.”

Klarman Slams Myth Of Efficient Markets

Klarman said that the idea that financial markets are efficient is foolish, and he goes on to describe how that will always remain the case. Markets are governed by human emotions and they do not follow laws of physics—prices will unpredictably overshoot, therefore the academic concept of market efficiency is highly incorrect.

“Academics are deliberately blind to the fifty plus year track record of Warren Buffett as well as those of other accomplished investors, for if markets are efficient, how can Warren Buffett’s astonishing success possibly explained?”

In his speech Klarman mentioned value-investor Ben Graham’s explanation of markets, where he says that Mr. Market is to be perceived as an eccentric counter-party which should be taken advantage of, but one should not follow its emotional advice. He also agrees with Ben Graham’s idea that assets should be bought at a significant discount to keep your margin of safety.

“As when you build a bridge that can hold 30 trucks but only drive 10 trucks across it, you would never want your investment fortunes to be dependent upon everything going perfectly, every assumption proving accurate, every break going your way.”

Klarman said that the current economy is being built like a house of cards that will implode. Huge deficits, empty government promises, pretty pictures painted to ease voters and reliance on external markets to keep your currency afloat, have all disrupted the margin of safety in U.S. economy.

Klarman Encourages Going Against The Grain

He says that investors have become increasingly speculative and subject themselves to frenetic trading, even the holding period of 30-yr treasuries has fallen down to a mere couple of months. Investors increasingly rely on technology to judge their performance not merely on a monthly or quarterly basis—it has now become an hourly practice.

“The performance pressure drives investors to into an absurdly short-term orientation…. If your track record is going to be considered by investment committees every quarter, if you are going to lose clients and possibly your job because of poor short term performance, then the long term becomes almost completely irrelevant.”

Read more: http://www.valuewalk.com/2013/07/klarman-economy-house-of-cards/

Klarman Takes a Hit on Gold Miners; The Leather Apron; Fed Action During 1987 Crisis


Some Investors Gettin’ Hammered in Gold Miners

In October, Marcel “Mac” DeGuire became president and chief operating officer of Guyana Goldfields, an exploration-stage company listed on the Toronto Stock Exchange that has been losing money trying to develop gold mines in South America for years. Within a few weeks DeGuire was helping to convince investors to buy into a Guyana Goldfields financing for C$3.40 a share, a significant fund raise for the company of some $100 million that closed in February. Eleven days later, however, DeGuire resigned from Guyana Goldfields, citing “personal reasons.” The stock has plunged by more than 60% in 2013 and is now changing hands for C$1.24.

It might be surprising for some market watchers to learn that Guyana Goldfields’ biggest shareholder is the Baupost Group, the massive Boston hedge fund firm run by Seth Klarman. Baupost owns 19.7% of Guyana Goldfields, a stake recently worth about $30 million. A billionaire hedge fund genius, Klarman is one of the most revered money managers of his generation, a value investor who likes to steer clear of controversy and public attention, keep his head down and concentrate on his investments. His track record and reputation are stellar, which makes it a little strange that Baupost has gotten behind Guyana Goldfields and some other long shot, some might even say iffy, gold mining ventures with penny stocks and high executive pay. These companies often make sure to point out that Baupost is a major investor in their shares in investment presentations.

Shares of gold mining companies have been hammered this year as the price of gold has tumbled. Most gold mining companies are facing a serious cash crunch as the economics of their industry get upended. The fall of gold and gold miners has publicly embarrassed investors who made big bets on the sector, like billionaire John Paulson, who has been so frustrated with the shadow his decimated and relatively small gold hedge fund has cast on the rest of his hedge fund operation that he has stopped sending out his gold fund’s financial returns to investors in his other funds. Klarman’s gold mining investments have also been clobbered, losing between $150 million and $200 million in value in 2013. That’s hardly an insurmountable loss for Klarman since Baupost manages $28 billion and, unlike Paulson, Klarman does not separate out his gold-related investments in a separate fund. Still, Klarman’s gold mining losses, which have not received any public attention this year, are among the biggest to have hit a major U.S. hedge fund this year.

Read more: http://www.forbes.com/sites/nathanvardi/2013/07/10/seth-klarmans-baupost-hedge-fund-loses-more-than-150-million-on-gold-miners/

Mr. Klarman must be quite bullish on the future price of gold in U.S. Dollars because his investments in the Junior resource sector require much higher gold prices to be profitable. Note the high capex costs.  Remember that it is not the size of a deposit but the cost to bring ozs. into production that matters. 

I prefer the royalty/streamer companies like RGLD, SLW, FNV, SAND that are already profitable with low fixed costs and little operational risk. Those firms  can make money even if gold goes lower.  When you read about “famous” investors losing money in a sector, a lot of bad news is long in the tooth, IMHO.

John Doody on July 10, 2013 discusses the gold mining sector (Audio): fsn2013-071013

A Good Read: The-Leather-Apron-Letter-07-12-2013

The Fed and the Crisis of 1987 (Financial History) 152107746-Fed-1987


Search Strategy: Copying Others

Search Strategy

If you plan to look through the investment positions of other known investors like Marty Whitman, Michael Price, Seth Klarman, etc., make sure you have as good an understanding or better of the particular company that you buy. Never cease to do your own work or you will neither learn nor probably profit.  Mr. Mohnish of www.pabraifunds.com uses this technique shamelessly. I personally doubt that Mr. Pabrai has a solid grasp of what a franchise is by his investments in Pinnacle Airlines, Exide (XIDE), a battery company, and Lend, a subprime originator. You may be copying others who, in turn, are copying others–a reflexive circle of ignorance and sloth.

An interesting blog post: Trolling through 13-Fs or a Search Strategy: http://classicvalueinvestors.com/i/2012/04/i-am-an-investor-not-an-inventor/

Don’t forget to view other blogs:www.simoleonsense.com and www.greenbackd.com

Enjoy Your Easter.

Learn Accounting; Industry Metrics; Amazon; Geico Valuation; Klarman, Textbook Pubs. are Toast

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” –Warren Buffett

To the Austrians, economics is not a tool of social control, it’s a framework for helping us understand humanity, its history, and our plight in the world”–Peter Boettke

Accounting and Financial Metrics of Industries

Learn more about accounting and a good source of industry metrics (please don’t share my secrets!)http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/index.html

Heilbroner, a socialist, admits socialism is a total failure: http://reason.com/archives/2005/01/21/the-man-who-told-the-truth

Game over for text-book publishers


Valuation of GEICO

http://www.scribd.com/doc/78448120/Warren-Buffett%E2%80%99s-1995-GEICO-acquisition. There is something important missing in this valuation. Can anyone point it out?

Is America’s Debt a Problem?


Klarman and the Importance of History

Facing History and Ourselves.   I am sure this has been posted before, but if not, view this.   http://vimeo.com/32333102

Charlie479 Discusses AMZN

A generous reader shared this: Interesting comments from Charlie479 on AMZN (from VIC). Another example of an investor who thinks strategically and like a business person.

charlie479   12/20/11 11:25 PM AMZN one of the best companies I forgot to say that I chuckled thinking about the analyst making the “I want to buy Amazon at 100x earnings” pitch. I suppose that doesn’t necessarily make it mispriced but the earnings power is certainly higher than current GAAP net income. I think they could easily raise their prices by $0.63 per each $25 order (not exactly the same thing, but if Super Saver shipping was $0.63 instead of free, would that really change shopper behavior?). If they managed the business to maximize current profits like this, that $0.63 increase per $25 would double earnings. If sales grow like they did the past 12 months then suddenly the multiple isn’t looking so crazy. I’m not saying this makes AMZN one of the top half dozen stock investments in the world but the p/e might not be awful if your thesis is right.

I’ve occasionally wondered if someone could beat Amazon if they had $80 billion. I don’t think they could take over the #1 spot but I do think they could become competitive in a lot of areas. I would probably use the $80 billion to start several category-specific internet retailers, develop a large selection within that category, and drive turnover by capturing mind share as the expert in that category and as the lowest price seller, initially at losses. This is more or less the Amazon playbook, and companies like Diapers.com (before being bought), Newegg, and Blue Nile have managed to carve out niches. I bet there will be more. I think if VCs or public markets are willing to lose enough money for awhile, it isn’t that hard to replicate the warehouse network and other logistical moats.

Another reason to temper the who-needs-another-pipeline thought I posed in the previous comment is that consumers sometimes choose retailers for reasons other than price and selection. Certain bricks and mortar retailers will always have an advantage in terms of convenience (e.g. convenience stores, insightful eh?). And customers like to touch and try on certain products, like clothes, so I don’t see Amazon getting anything close to 50% share in those categories. Freshness matters, too, so it’s not clear grocery can be effectively penetrated by Amazon, and I bet that is a large portion of the Global Retail sales denominator. So, perhaps the current internet retail number at 3% is lower than what most people think, but maybe the maximum theoretical internet retail percentage is also lower than what most people think.

charlie479  12/20/11 10:47 PM AMZN one of the best companies

I think Amazon is one of the most admirable companies in the world. It has the expense advantages in rent and labor over B&M retailers that you mention, and it has cost advantages over other internet retailers as well. The massive sales volume makes the fixed cost percentages very low, and the inventory turnover in many products is so high that it can accept lower gross margins and still generate higher ROIC than competitors who charge a larger markup. The lower markup attracts more customers and generates more volume, which only reinforces the edge. It is the higher-turn/lower-markup Borsheim’s dynamic that Buffett describes.

The advantages aren’t limited to cost either. The high turnover also allows them to carry a huge number of SKUs at adequate ROIC, so they can offer customers the widest selection in many categories. For certain categories, after I browse Amazon and then Wal-Mart, I’ll come away feeling that Wal-Mart doesn’t have much of a selection. It’s hard to make Wal-Mart look narrow. Amazon is the first/last place many people shop because they know it has the widest selection and it’s likely to have that selection in stock.

Another non-price advantage is that they’re the most trusted internet retailer. I actually think those customer satisfaction ratings might be understating the difference. Their return policy and customer service is great. Even if a product is available from discountworldxyz.com at a slightly cheaper price, I’ll pay more to get it through Amazon because I know it’ll be the product I ordered, or else I’ll be able to return it. Who wants to deal with negotiating shipping costs or return policies with anyone else? I don’t think this is simply Amazon being more generous than discountworldxyz.com. They have the low-cost structure described in paragraph #1 that allows them to accept higher return costs while still generating better ROICs. I also suspect that their extensive review database reduces some of the likelihood of returns.

I think many retailers like Best Buy are at such a severe selection and cost disadvantage (even adjusting for sales tax) that their businesses are in trouble in the long-term. I even worry about beloved Costco. I no longer have no-price-comparison-needed-let’s-just-buy faith when walking down the aisles at Costco because Amazon has better prices frequently enough to make me doubt. More broadly, as someone who is cheering for the Costcos (no financial rooting interest, I just root for them because I admire them), I worry that Amazon will get to such scale one day that it’ll be a more efficient overall system for one UPS guy to drive from the Amazon warehouse and cruise through your neighborhood dropping off everything you and your neighbors need for the week. That might sound crazy but the current system of having you and all your neighbors separately drive SUVs 15-20 minutes to Costco to each walk through the aisles hand-picking and then checking out, doesn’t sound that efficient by comparison. I haven’t read anything about Bezos explicitly saying that’s his endgame but I wouldn’t be surprised if that’s in the 10 year wish list. If they end up with the cheapest and widest pipeline, there might not be much need for other pipelines.

Klarman, Einhorn, Tudor Jones Readings, Hedge Funds and a Reader’s Questions

Note the chart below. Thoughts? Hedge Funds are a better deal for the fund managers than the clients.  Buyer beware.


The Loser’s Game by Charles Ellis: http://www.scribd.com/doc/78279980/CWCM-the-Loser-s-Game

(Source: www.santangelsreview.comFailure Speech by Paul Tudor Jones (2009) http://www.scribd.com/doc/16588637/Paul-Tudor-Jones-Failure-Speech-June-2009

Einhorn on Why He Shorted Lehman Brothers’ Stock: http://foolingsomepeople.com/main/TCF%202008%20Speech.pdf

Seth Klarman Interview by TIFF: http://www.tiffeducationfoundation.org/commentaryPDFs/2009_Ed2_COM.pdf

Questions from a reader

I owe several of you replies to your questions. Bear with me as I finish reading the Wal-Mart and Global Crossing Case Studies.

 A new readers asks,

I spent about 3 hours yesterday catching up on posts from your site that I had saved in my Google Reader over the past month. I am not sure how to describe my feeling right now besides to say I was enthralled and inspired. Your website is like finding a value investor pirate’s secret treasure trove on a deserted island. There is such a wealth of material and information and it’s all such high quality thoughts that I kept thinking, “Who the hell is this guy?” Attempts to dig into posts related to answering that question yielded several tantalizing details but the mystery remains.

Are you currently or were you an MBA student? I am trying to figure out where these lecture notes are being pulled from. It says “auditing classes from 2001-2007″… that’s an awful long time and the institution and role of the note-taker are left unsaid. I get you’re trying to focus on quality, not reputation, a worthy goal, but I am fascinated simply from the stand point of why I am suddenly able to access all of this information, for free. It doesn’t really matter, I am just curious, that’s all.

My replay: Thanks for the kind words. I have never been an MBA student. I worked on Wall Street as a broker and investment banker before starting a few companies here in the US and Brazil. Upon selling those businesses, I sought to dig into value investing. I saw that the author of a value investing book was teaching at Columbia Business School so living in Greenwich, CT–only 45 minutes from the campus–I hopped the metro train and sat in on his class.  The first class was around 1999, when his students would regularly laugh at the idea of valuing companies when all you had to  was buy Price-Line or Yahoo and see the price rise five percent in an hour. All I had to do was sit in the back and keep my mouth shut. Now, I think Columbia is touchy about outsiders sitting in on classes.

But you really don’t have to do what I did. You just need to read, read and apply your independent thinking to investing. Look how Michael Burry learned (See the Big Short by Michael Lewis or search this blog). But, I do believe that becoming an “expert” or skilled investor probably takes 5 to 20 years of intensive commitment.  Of course, you never “master” investing which is why the journey is fascinating. Also, several great investors have confirmed my belief that the best way to learn about value investing is through your own efforts and application of principles that you will learn through Buffett, Fisher, Klarman, Graham and your accounting textbooks.  There are a lot of dead ends and wasted time if you do not know the proper principles and methods for investing.


Investing really is constant applied learning which is cumulative. Let me share what I have noticed with ALL successful investors:


The investors work alone. Any group decisions for Buffett or Walter Schloss? They make their own deicsions, and they are little influcned by any form of group affiliation.  Buffett said of Walter Schloss: “I don’t seem to have much influence on Walter. That is one of his strengths: nobody seems to have much influence on him.” Ditto for Michael Burry.


These terms originate from a remark attributed to the Greek poet Archiloschu: “the fox knows many things, but the hedgehod knows on bigf thing.”  Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach.  READ WIDELY and not just on finance and economics.

Understanding how markets work is more important to an investor than understanding technology (trading systems).

  • Few great investors are overnight successes. Many have to overcome failure.
  • Money is about freedom, not consumption.
  • They enjoy the process, not the proceeds.

Note that Michael Burry accumulated his investment knowledge gradually, from his own experience and from reading others’ experience via bulletin boards, rather than from finance textbooks. (Hint: study the www.valueinvestorsclub.com or www.yahoo.com finance boards of intelligent contributors).

Successful investing is a practical craft, not an academic discipline, and certainly not a science. The craft of investing is comprised of heuristics: a toolkit of approximate, experience-based rules for making sense of the world. (See the book: FREE CAPITAL by Guy Thomas).


My goal is placing all this material here is multi-fold:

I have the material so I might as well post for the 20 or so hard-core students who will wish to use it. Many talented investors helped me, so giving back is my responsibility, though sharing this material helps me as much as anyone. I do not expect many readers because few people are suited for long-term, intensive self-directed learning.

There are those who are already in the business who think they already know everything; others seek a conventional route of the MBA; while some want investment ideas/tips–not theory, case studies and practice.   I wanted the material on the web for easy searching and access.

Secondly, many people have made excellent contributions to the value vault. Like the quarterback who hands the ball off to the running back who then runs 98 yards down field while breaking 7 tackles and leaping into the end zone, I receive too much credit.

Thirdly, interactions with curious readers help keep my thinking sharp.

Other questions:

I have a friend who has been working on developing a grass-based, intensive rotational grazing miniature farm on an acre of land about an hour north of Los Angeles, California. He looks at all the reading, time, energy and money he has spent on this project so far (and in the future) as the cost of acquiring a “personal MBA in agriculture” (yes, he gets that agriculturalists don’t get MBAs, but he’s approaching this project from the mindset of a businessman).

When I read through your site, I realize I could do the same thing using some of your material, as well as other blogs I follow and various recommended readings, as a launching point to pursue my own “personal MBA in investing” over the next 12 mos or so. The focus on case studies, and the ability to directly apply my learnings to my own small portfolio in real-time provide the perfect means to make real-world application to the theory being taught in the “classroom.” I think this is a big idea and I am very excited as I consider it more and more seriously. I plan to blog my entire journey and produce various supporting course materials along the way (such as reading list, top blog posts, favorite video lectures links, etc.) as well as keep a running tab on costs, so at the end of it all I can show other people what I learned and how much it cost to get the knowledge.

Yes, use the material how you wish. Start a study group and work on several of the cases. Eventually, there will be sections on special situation investing, competitive analysis, valuation, Austrian Economics.  Or you can take a case study and develop it further.  Seek higher; you can also sign up for courses at the Mises academy (www.mises.org) or go to www.thomasewoods.com to learn about Austrian economics.

I want to thank you again for the resources you place on your site. I’ve only just begun to dig into them and it may be some time before I begin actively participating in your site’s discussion but I do think it’s wonderful already.

And I absolutely LOVE that you’re into Austrian economics, as well. Finally, I’ve found someone else who is interested in synthesizing these two great (and in my view, complimentary) philosophies/disciplines, just as I am:   http://valueprax.wordpress.com/about/ (going to need to re-write that soon, though, to reflect my slightly new direction for the site, ie, cataloging my progress in acquiring a “personal MBA”)

My reply: I became interested in Austrian Economics because Rothbard and von Mises had the only coherent theory and explanation for booms and busts. But as I studied fruther, I learned more about the structure of production  and time preference which helps you understand the risks in different businesses. Every wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials.  You need to understand this if you EVER invest in a highly cyclical company–what company isn’t at some level cyclical?

Okay, that’s all for now. Thanks for sending the link to the Value Vault. Where are you located geographically, generally speaking? East Coast, West Coast? Big city, small town?

I live in Greenwich, CT home of many hedge funds, but I have never been to one.

Good luck on your journey.

Inflation, Hyperinflation and Investing with Klarman, Buffett and Graham

Investing and Inflation

Americans are getting stronger.  Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today a five year-old can do it. – Henry  Youngman.[1]

The best investing article on investing this editor has ever read:


If you  grasp what Buffett is saying, your results will improve. Inflation is the major  concern of any investor. You should measure your investment success not just by  what you make in nominal terms but by how much you keep after inflation. Take out a dollar from your purse or wallet. You  are taking a dollar today to invest  in a claim in a capital good (stock or bond of a company) to be able to consume  the same or more goods and services in the future.

An  interesting blog discusses Buffett’s above article and comments further on
inflation here: http://www.valueinvestingworld.com/2009/06/warren-buffetts-comments-on-inflation.html  and click on the pdf file (100 pages) which
aggregates all of Buffett’s writings on inflation and investing. http://www.chanticleeradvisors.com/files/107293/Buffett%20inflation%20file.pdf.

After reading those  articles, take a minute to download the 50-year charts on

Proctor & Gamble (PG): http://www.scribd.com/doc/65206655/Proctor-Gamble-50-Year-Chart

Coke (KO): http://www.scribd.com/doc/65206606/Coke-50-Year-Chart-SRC

US Steel (X):  http://www.scribd.com/doc/65207037/US-Steel-50-Year-Chart-SRC

Goodyear Tire & Rubber: GT: http://www.scribd.com/doc/65207109/GT-50-Year-Chart-SRC

I recommend going to www.srcstockcharts.com and consider
subscribing to their 35-year or 50-year stock charts as a way to understand the
long-term cyclicality of businesses. You might be amazed at the differences in
performance and persistence between good and bad businesses. As the world
focuses more on the short-term, I urge you to develop more long-term analysis.
Stocks are theoretically perpetual ownership interests unlike bonds.  It’s silly to focus on next quarter’s earnings and think that will have a major impact on intrinsic values.

Four companies is not a statistical relevant example size. Also, one has to be careful of hindsight bias and fitting a theory to the facts, but how does Buffett’s
article tie into these empirical results? What can you use from your analysis
to become a better investor? Thoughts? Hint: I learned to go where the living is easy not to solve tough problems.

Understanding the dangers of inflation is critical now
because of the monetary and credit distortions building up in the world’s
monetary system as the links below will show. A true understanding will require
a huge effort, but you have no choice if you wish to understand the challenges
and conditions you face as an investor.

Many traditional value investors believe an investor should avoid macro forecasting and just do bottom-up company-specific analysis.  I don’t believe you need to forecast markets but one must understand the current dangers and risks confronting him or her when valuing businesses. Not to have been aware of the unusual credit conditions in the housing market during 2003 to 2007 would have meant attaching unusually high normalized earnings to homebuilding stocks while in a housing bubble.

Hindsight bias? A stopped clock is always right twice? Several investors were screaming from the rooftops about the  bubble building in housing. Go here for a ten minute clip: http://www.youtube.com/watch?v=tZaHNeNgrcI.
For a more in depth analysis of the causes of the housing bubble by the same
analyst: http://www.youtube.com/watch?v=jj8rMwdQf6k.
By the way, the point is not the successful prediction but the reasoning behind his analysis. If you don’t understand economics you are like a one-legged man in an ass-kicking contest. Thanks Mr. Munger.

No greater value investor than Seth A. Karman in his introduction to Security Analysis, 6th Edition (2009) writes on pages, xxxii to xxxiii:

Another important factor for value investors to take into account is the growing propensity of the Federal Reserve to intervene in financial markets at the first sign of trouble. Amidst severe turbulence, the Fed frequently lowers interest rates to prop up securities prices and investor confidence. While the intention of the Fed officials is to maintain orderly capital markets, some money managers view Fed intervention as a virtual license to speculate. Aggressive Fed tactics, sometimes referred to as the “Greenspan put” (now the “Bernanke put”), create a moral hazard that encourages speculation while prolonging overvaluation. So long as value investors aren’t lured into a false sense of security, so long as they can maintain a long-term horizon and ensure their staying power, market dislocations caused by Fed action (or investor anticipation of it may ultimately be a source of opportunity.


Now for the current (2011):

A  monetary tsunami is coming: http://mises.org/daily/5597

Defining inflation: http://mises.org/daily/908

Just don’t believe what you read, go to the primary sources:

Current Money Stock Measures which are rising as fast as they did in the 1970s: http://www.federalreserve.gov/releases/H6/Current/

You need understanding to place those statistics into context.  The effects of inflation are rising prices in general or a decreased decline in some prices absent money printing. The effects are not just a result of the increased supply of money but the demand to hold money.

The pernicious effects of inflation:



Why gold prices are so high: http://mises.org/daily/5652/Why-Are-Gold-Prices-So-High


I am not  implying impending hyperinflation but understand the worst case scenario. The US has suffered two hyper-inflations (The
Confederate Greenback and the US Continental Dollar). The dollar’s exchange
value has declined as shown here: http://mykindred.com/cloud/TX/Documents/dollar/
and for further clarification go here: http://www.financialsensearchive.com/fsu/editorials/dollardaze/2009/0223.html

As  investors we must also be prepared to understand worst case scenarios like hyperinflation. See video http://www.youtube.com/watch?v=DzV9WZhhKrM&feature=related.  The Weimar hyperinflation destroyed the
wealth of Germany’s middle class. The social devastation helped usher
in http://www.youtube.com/watch?v=VCwV75obpYk&feature=related
Hitler. May we never forget the lessons of history.


THE best book on understanding the causes and effects of hyperinflation is The Economics of Inflation by Constantino Bresciani-Turroni, download the book here: http://mises.org/books/economicsofinflation.pdf

When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany by Adam Fergusson (1975, Reprint
2010). This is the “narrative description” of Bresciani’s book. The horror. Finally, another good read: Fiat Inflation in  France by White: http://mises.org/books/inflationinfrance.pdf

If you live in the USA or Europe and are not aware of the current dangers and what could happen, you are living a high-wire  act.

[1] Intelligent Investor, Chapter 2: The Investor and  Inflation by Benjamin Graham.

Timeout for reading about investment perspective and attitude

The primary attribute of a value investor is to seek bargains with a margin of safety. The reading: Margin of Safety by Seth Klarman will help give you the proper persective; click on this link http://www.my10000dollars.com/MS.pdf.   I am happy to lend you my book which has cleaner copy, just return it.

I recommend that you read that along with The Intelligent Investor by Benjamin Graham.


Some investors believe Benjamin Graham’s books and writings are outdated, but his perspective and attitude towards investing are timeless.   You are better off reading and rereading Buffett’s shareholder letters, Philip Fisher’s books, Graham’s textbooks and Klarman’s thoughts than reading all the other books on investing.  The difficulty lies in taking the principles to the opportunities that suit you.