Category Archives: Accounting

Another CASE STUDY on Accounting; Free Course on Behavioral Finance

Science of hitting Don’t Invest until you see the money lying there on the floor–Jim Rogers, Investor.

From the 1997 Berkshire Hathaway (BRKaShareholder Letter:

In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.

If they are in the strike zone at all, the business “pitches” we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today’s balls go by, therecan be no assurance that the next ones we see will be more to our liking. Perhaps the attractive prices of the past were the aberrations, not the full prices of today. Unlike Ted, we can’t be called out if we resist three pitches that are barely in the strike zone; nevertheless,just standing there, day after day, with my bat on my shoulder is not my idea of fun.

When the above was written, the party that ultimately led to the tech bubble era valuations* had already begun in the equity markets.

And check out:

Case Study on Earnings Qualithy

Our last case on earnings quality was National Electric found by going into the case study value vault found in the blog post in the following link:    I promised to provide an answer. Before submitting my write-up on that case, perhaps the following case would be a good supplement to learn more about uncovering earnings quality.  This case should be pretty obvious. Don’t cheat! Just use the material provided in the link below and answer the three questions in the HBS Case Study.


John Chew shared a folder with you via YouSendIt.

Another Case Study Dec 2012
View this folder

If you get stuck, here is a hint: (don’t look until you have tried to solve the case on your own!   With practice, certain figures and phrases in the notes to the financials should SCREAM OUT at you.  Whatever happened to the CFO?

A Christmas Vault with goodies for all will be posted if someone posts their solution.

Free Behavioral Finance Course! (Coursera)

I have signed up!

Workload: 7-10 hours/week

About the Course

Behavioral economics and the closely related field of behavioral finance couple scientific research on the psychology of decision making with economic theory to better understand what motivates investors, employees, and consumers. This course will be based heavily on my own research. We will examine topics such as how emotion rather than cognition determines economic decisions, “irrational” patterns of thinking about money and investments, how expectations shape perceptions, economic and psychological analyses of dishonesty by presumably honest people, and how social and financial incentives combine to motivate labor by everyday workers and CEOs alike. This highly interdisciplinary course will be relevant to students with interests in General Management, Behavioral Finance, Entrepreneurship, Social Entrepreneurship, and Marketing.

This class has two main goals:

  1. To introduce you to the range of cases where people (consumers, investors, managers, and significant others) make decisions that are inconsistent with standard economic theory and the assumptions of rational decision making. This is the lens of behavioral economics.
  2. To help you think creatively about the applications of behavioral economic principles for the development of new products, technology based products, public policies, and to understand how business and social policy strategies could be modified with a deeper understanding of the effects these principles have on employees and customers.

About the Instructor(s)

Dan Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, with appointments in the Fuqua School of Business, the Center for Cognitive Neuroscience, and the department of Economics. As one of the foremost leaders in psychology and behavioral economics, Dr. Ariely has published his research in top economic, medical and psychology journals and is the author of Predictably Irrational (2008), The Upside of Irrationality (2010), and The (Honest) Truth About Dishonesty (2012), three bestselling general audience books about research in behavioral economics. In addition, he is the founding member of The Center For Advanced Hindsight.  More information about Dan can be found at:

Take an MBA course on Buffett:

The Difference Between Mainstream Economics and Austrian Economics


The 2012 Holiday Book Survey has been tallied and the results can be found here. I want to thank everyone who participated in the survey.

The biography & memoir genre continues to lead the survey (Steve Jobs – Walter Isaacson & new comer The Passage of Power – Robert Caro) with social science still having a strong showing (The Signal and the Noise – Nate Silver & Thinking, Fast and Slow – Daniel Kahneman). Atlas Shrugged continues to breach the top 5 although falling from its #2 spot in the last two years to #5. Overall, biography & memoir and business & finance showed the strongest growth.

I hope you enjoy this years’ book list and find something of interest to read or gift. If you have any suggestions on how to improve on the survey, please let me know.

All the best and happy holidays.

Barry Pasikov, Managing Member of HazeltonCapital Partners in Highland Park, IL 60035    Tel: 312-970-9202



Money Supply Growth and Inflation; Book Recommendations

Relative price and total return of the S&P 500 index

Inflation-Adjusted Returns:

Money supply (M2) continues to accelerate. This week’s non-seasonally adjusted 13 week number shows money supply climbing at  a 9.0% annualized rate.  Here’s the acceleration in growth over recent weeks: 5.1%,  5.6%,  6.6%,  7.1%, 7.5%,  7.8%,  8.2%,  8.4%, 8.7%, 9.0%.

Ask yourself if the economy is growing at a 8% to 9% rates. No, then where is the money going?  Here comes rapid manipulated growth, with the eventual effects of rising prices at the consumer level.  Pray, protest and protect thyself.

Book Recommendations

To improve as an investor, you need to practice your profession.  The books below allow you to sharpen your financial statement skills through case studies. 

A reader suggested: What’s Behind the Numbers by John Del Vecchio, CFA and Tom Jacobs, JD.  Check out the book and the case studies:

Classics: Quality of Earnings: The Investors’ Guide to How Much Money Is Really Making by Thorton O’glove (1987)

The Financial Numbers Game: Detecting Creative Accounting Practices by Charles W. Mulford (2002)

How to Lose Money in a Top Performing Fund.




An Accounting Pro on Financial Statement Analysis

Expecting to invest successfully in a company like the one discussed in the prior post would be like expecting to win at this game (turn up the volume):

One trick that has helped me when analyzing a company for the first time is to go right to the back of the financial statements and look at the figures before I read what the CEO has to say. Be careful of hearing the story before you look hard at the numbers. Accounting is a rules based system that management can use (legally) to obscure economic reality from those who do not connect the numbers. Practice will help.

Let’s hear what a Pro (a reader, AGEDWISDOM) has to say:

This post should be a supplement to a two-year course in learning how to invest

Purpose of this Article

When beginning the journey of value investing, one of the more technical questions that every non-accountant or non-finance personnel might face is the dreaded necessity to interpret financial statements. This post is a primer to get you started on the path to financial statement analysis. Rather than trying to read 50 books on accounting and getting hopelessly lost, this article can serve as a map in times of distress (or when you want to rip your hair off) in trying to interpret some arcane financial statements. Let’s get started, shall we?

Who am I?

Suffice to say, I am an accountant trained in the British tradition somewhere in Asia which means I’m more used to IFRS (accounting standards for mostly the rest of the world) as opposed to those trained in the US. With the convergence of accounting standards worldwide, there’s not that great a disparity between accounting standards between countries anymore. I have worked as an auditor for some years, so you can have some comfort in what I say. But as the saying goes, “Listen to everyone but judge for yourself”

Questions, questions and more questions

When you start your journey with value investing, you’ll be asking yourself many questions but the basic three might likely be:

1. How important is financial statement analysis to value investing?
Very. For those of you that have been following John’s blog, you can see a common thread in many of his posts. And that is, the X-Files motto (cue in the theme song…), “Trust No-one”. At the risk of sounding cliché, the financial statements is literally the last bastion of objectivity in the reporting of financial results.

What I mean by this is that if you rely on secondary sources, you’ll very likely run into people with interests or bias that may misinterpret the results for you. A prime example would be financial newspapers. Since most of these papers are owned by large conglomerates, they tend to report on the positive sides of things and keep the less savory things hidden. Prime example might be the recent Facebook IPO.

2. Is there a formula, models or a short-cut to interpreting financial statements?
No. There’s a very good reason for this.

Short-cuts, instant results… I’m too busy (ugh! typical mentality these days…) Whatever short-cuts or formulas that you intend to use… my advice, better BEWARE! You see, although financial statements is the so-called last bastion of objectivity, this doesn’t mean that the bastion is under daily assault by aggressive CEO’s and their Financial Controllers that do their darn best to try to present a pretty picture when it’s anything but. These CEO’s know whatever beautiful models that the analyst use. In the hands of a capable accountant, it’s entirely possible to subvert or render certain models useless.

Look in layman’s terms – it’s pretty simple. Let’s say my criteria for a value investing book is based Graham’s Security Analysis. Now, I find that I want to buy other good value investing books… but I want to know FAST… I want SHORTCUTS. I don’t actually want to ask other people or skim through the book (too busy, you see…), so using Graham’s book as a sample, the book must be:

1. Over 600 pages long
2. Be prohibitively expensive.
3. Have some foreword by prominent value investors of the day

Now, if a million other value investors use this so-called short cut as criteria to buy books on value investing, what will likely happen is that some publisher will start churning out huge amounts of titles to cater for these short-cuts… So, the publisher will in a sense pervert whatever models or indicators that you are using. These books could be utter rubbish, for all you know.

Hope I’m clear.

3. Why is it so mind-boggling, so arcane, so supercalifragilisticexpialidocious?
Elementary, my dear! It’s designed to be that way silly. We need to have some barriers of entry don’t we? Otherwise, a lot of professionally trained people would be out of a job.

Seriously though, the financial reporting world is much like an arms race. On one hand, you have the accounting profession trying to report results objectively and consistently. Unfortunately, on the other side, you have very aggressive, highly intelligent and extremely well paid consultants, accountants and investment bankers that find very creative ways to report profits in both good times and bad. Guess who’s winning the war?

As such, financial statements are becoming more and more complex, especially for those companies listed on the stock exchange.

Your job as a value investor is to attempt to separate the wheat from the chaff and attempt to weed out the distortions and look at the company’s results in an objective view so that you can access the value of the company.

The Journey

My advice on learning accounting is less reading, more doing. What do I mean by that? Financial statement analysis is a language on its’ own. Granted, it’s a more esoteric form of language but it’s still a language – the language of finance. You don’t learn a language by reading it but by applying it!

So, start small. Take baby steps. Grab a hold of financial statements of companies you are intimate with. These could be companies you are currently working in, or those you used to work for. It could be the financial statements of your relatives’ business. Something, anything…

Get 3-5 years’ worth of financial statements. Go through these financial statements and see what you can glean out of it. Find out how much you do know or don’t. Then, get a good book on financial statement analysis that you like and use it to help you analyze the financial statements further.

Write a short report summarizing what you think happened to the company during the 3-5 years. Was the sales improving? Are margins improving? Are profits improving? Are cash flows improving? More importantly, why, why, why? After that, talk to the person in-charge of the business and see whether your understanding of the business from interpreting the financial statements was correct or wrong. This will help you sharpen your skills when you tackle listed companies later on.

The Bottom-Up Approach

I am a firm believer of starting from the bottom up. Try to understand the nuts and bolts of interpreting financial statements especially the cash flow statement. No point trying to analyze the financial statements of a huge multinational with operations spanning several countries with hundreds of businesses and subsidiaries that run into several hundreds pages when you haven’t even tried your hand at something simple, yes?

Yes, you can start with a top-down approach later on… but always try to start with something small and build up on it.

Books, what Books?

Rather than starting with books, I suggest simple exam questions of accountancy bodies that try to test students abilities to interpret financial statements. That way, you get to try to speak in the language of finance and see how good you really are at it. There’s an added benefit of not dozing off whilst reading those books on accountancy…. phew… some are great (at putting people to sleep 🙂


So, there you have it. My 5 cents view on accounting. Hope it’s a useful guess post. Take it for what you will and hopefully, some of you find some value to it. Good luck!


GMO 3Q 2012: JG_LetterALL_11-12 (2)

Understanding Equity Returns: BI_Explaining_Equity_Returns_812

Retail Stocks (Buffett and Beyond): Buffett and Beyond November+2012



Case Study on Earnings Quality-HBS

John Chew shared a folder with you via YouSendIt.

Earnings Quality CS (You can only download contents from this folder)
View this folder

Click on the above link to download the HBS Case Study. Can you determine the earnings quality? Please answer concisely the two questions on page 6. The prizes will be awarded by the end of the week. Good luck.

Another Way of Calculating Equity Capital Cost/Risk

As central as it is to every decision at the heart of corporate finance, there has never been a consensus on how to estimate the cost of equity and the equity risk premium. Conflicting approaches to calculating risk have led to varying estimates of the equity risk premium from 0 percent to 8 percent—although most practitioners use a narrower range of 3.5 percent to 6 percent. With expected returns from long-term government bonds currently about 5 percent in the US and UK capital markets, the narrower range implies a cost of equity for the typical company of between 8.5 and 11.0 percent. This can change the estimated value of a company by more than 40 percent and has profound implications for financial decision-making. –McKinsey Quarterly, July 2005

Read Chapters 7 and 8 on Calculating Equity Cost in Kenneth Hackel’s:


Here is a synopsis by the Author:

Tell us what your new book is about?
Rarely does a does a book on finance and investments “break important new ground.”  I believe Security Valuation and Risk Analysis, encompassing my four decades covering about every facet of security analysis and corporate finance, does so. In it I show that:

  1. Cost of equity capital, a principal component of stock value, should not be determined by security volatility, as is widely practiced by public enterprises, investors, consultants and security analysts, but by the certainty related to the entity’s cash flows and credit health. A one percentage point change in cost of equity often results in a 25% or greater change to fair value and very often precedes turns in the underlying stock movements;
  2. Return on Invested Capital (ROIC), a principal component of valuation, should be measured as a function of the assets ability to produce free cash flows, as it should benchmark the expected cash return for cash expended (invested capital, as adjusted). It should not be based on Earnings before depreciation, taxes and depreciation (EBITDA). EBITDA, an income statement based accounting concept, is not a measure of the true economic return;
  3. Free cash flow should include cash the entity could easily free up, but to be correctly computed, must be adjusted for the many misclassifications and extraordinary items frequently found in reported financial statements.  Such adjustment procedures are explained

I prefer books written by practioners rather than academcs.

Good advice:

Learn from anyone and everyone. You’ll be surprised what information you can glean about business from about anyone you might meet. Ask about their job, what (if not nonpublic and material) their company could be doing to become more efficient, what it might be doing wrong or well, as well as the firm’s customers, clients, and competition. While all security analysts like to spend time with the chief financial officer (CFO), in a large organization it’s really the professionals that report to the CFO  who carry the valuable information and expertise. For instance, if possible, I like to speak to the individual who wrote particular footnote sections of the 10K or 10Q, such as the manager of global tax or the pension manager.

The chief motivational factor over the course of my professional career has been my desire to learn and experience all there was when it came to analyzing stocks. A good security analyst always should seek out individuals from whom to learn, books to study, and schools and conferences from which to receive training. An analyst must use his or her resources and ask sound questions based on an understanding of the subject or an obvious quest for such an understanding. As a young analyst, I chaired the Education Committee at the New York Society of Security Analysts, so I had access to high-ranking individuals whom I could invite, visit with, and learn from.

An analyst needs to be as inquisitive as a police detective—nd as probing and as suspicious. An analyst never should get complacent during bull markets or be so doubting during bear markets as to lose sight of the long-term opportunities.

The main problem: Assessment of risk

The author says, “I believe that the most glaring weakness in investment and security analysis relates to the assessment of risk—the determination of a proper cost of equity capital.

The analysis of risk represents the single most important underexplored factor in security research and the primary reason for investor disappointment in their investment returns.

The cost of equity capital, while known as a measure of investors’ attitudes toward risk, more aptly should represent the uncertainty to the cash flows investors can expect to receive from their investment in the security being considered. Only through an accurate and reliable cost of equity capital can fair value be established, as well as the determination of whether management is creating value for shareholders, as measured by the return on invested capital (ROIC) in comparison with its cost.

I am gauging risk to the cash flows, just as a debt holder would evaluate the risk of payment of interest and repayment of principal. If the entity is overcapitalized yet has poor or inconsistent free cash flow, its cost of capital could, by my measure, be greater than the average entity. Such an enterprise would benefit from its short-term ability to weather economic events, but unless cash flows improved, it would risk losing that flexibility.”

The book may help you improve your analytical abilities but it is a dense read.


Buffett Tutorial on Accounting and Valuation: See’s Candies Case Study

I have always maintained that excepting fools, men did not differ much in intellect, only in zeal and hard work.  –Charles Darwin

Value investing works, because it does NOT work ALL the time. –Joel Greenblatt

Today’s post focuses on accounting (GAAP) and valuation through the words of Warren Buffett. The case study on See’s Candies and the other readings will help improve your skills. The burden is on you to understand and apply the lessons. If you do not understand FIFO or deferred taxes, then look up those terms in a basic accounting book, then do problem sets to grasp the concepts. Don’t take Buffett’s words on faith; try to apply the concepts of economic Goodwill to a commodity based company like, for example, US Steel (X) versus a franchise company like Coca-Cola (KO). Do you agree with Buffett’s analysis?

Prof. Joel Greenblatt’s book, The Little Book that Beats the Market, is (simply) an application of Buffett’s thoughts on economic Goodwill.

Helpful hint: Take a subject like share repurchases or divdend policy and try to find many different sources on the subject. Learn the subject to death. Master how, when or if a company should act in returning capital to shareholders.

See’s Candies Case Study:Sees Candies 2012


A Parable on Valuation: The Old Man and the Tree or a Parable of Valuation

Inflation:Inflation Swindles the Equity Investor and Buffett inflation file

EBITDA: Placing EBITDA into Perspective and TEV to EBITDA Research

Joel Greenblatt: Little Book That Still Beats the Market, The – Joel Greenblatt

Secrets of (view):   25 minutes

Corporate Finance

Share Repurchases: Corporate Structure and Stock Repurchases and Assessing Buybacks from all Angles_Mauboussin

Dividends: Dividend Policy, Strategy and Analysis

You will beat Wall Street easily if you apply the above lessons. The hard work is in mastering the material.   Stay the course.

Investment Process–A Goldmine

A Reader’s Investment Process

Investment_Principles_and_Checklists_(Ordway)  (EXCELLENT!)  I hope readers are inspired to create their own like this gentleman. He synthesizes the best material from the great investors and then incorporates their principles into a checklist. This paper is also an excellent review of investment principles. Now the hard part is for YOU to CONSISTENTLY FOLLOW what you know you must do.

Good Reading for Value Investors

Quality of earnings: Earnings_Quality_–_Evidence_from_the_Field

Mark Seller’s Article on Becoming the NExt Buffett: So_You_Want_To_Be_The_Next_Warren_Buffett_–_How’s_Your_Writing_–Sellers24102004   Even the writer, Mark Sellers, who left the investment management business had trouble becoming the “next Buffett.” The volatility of owning one natural gas company help hasten his exit from the business.

A great blog post with links to Charlie Munger’s letters:

Enjoy your weekend while I organize the VALUE VAULT.

Advice on Learning from a Reader/Accountant, Agewisdom


As an accountant, I can understand some of the predicament that many non-accountants are facing. Three years to get a professional qualification and another 4 years in auditing and I still get a bit of headache digesting some information on financial statements. So, even though its’ daunting, please don’t get discouraged.

There’s been a lot of great discussion and tips by everyone here (great community) but I’d like to add my top 3 tips to help in understanding financial statements.

1. Start with the familiar.

Basically, I am sure everyone is familiar with some sort of business. You may be an engineer, so you’d be familiar with an engineering business. Or your family may run a stationery shop, so you’d be familiar with that sort of business.  After reading the basic books on financial statements, stop and get a copy of financial statements of businesses that you are familiar with.

Then from there, look at the figures, preferably for the past 3-5 years. You see, what is important to understand is that the financial statements with the notes over a 3-5 year period tells its’ own story. It’s like a novel, except with more figures and some explanatory notes. If you understand the business well, you’ll find that financial statements actually make a lot of sense and quantifies what you know in your gut-feeling. Further, the type of financial statement in every industry is sometimes vastly different. Financial statements in a trading business is vastly different from that of an insurance co, for example.

2. Understand the principles and Hot Areas

If possible, try to understand the underlying reasons why accountants prepare certain financial statements in a certain way. For instance, an understanding of the principle of deferred taxation would allow you to make the firm judgment call that any deferred tax asset in the Balance Sheet should be ignored. Why? I’d leave you to find out. Further, be aware of certain danger areas such as Contingent Liabilities and Special Purpose Vehicles (SPVs). Yes, it’s difficult reading but knowing these areas are quite crucial in assisting in making a firm judgment call.

3. Follow the money or

As with all things, cash is KING! So the cash flow statement is the most important part of the financial statements. It doesn’t matter if the company is making HUMUNGOUS profits if its’ cash flow is NEGATIVE. So, a company that is the darling of everyone but is hemorrhaging cash quarterly is a dangerous one. Coincidentally, Enron never prepared cash flow statements on the basis it was too complicated. We all know what happened next.

Enron Case Study:

A Tip for Beginners in Learning An Industry: Cruise Ships

Using this Blog has an eclectic mix of posts on valuation, competitive analysis and accounting. Use the search box in the upper right corner for relevant posts on subjects that interest you. For example, if you want to learn more about EBITDA as a cash flow metric then type those words into the search box and you will see several posts like this one: Placing EBITDA into perspective:

Value Vault

Also, there are over 60 books, many case studies and 30 videos on investing in the VALUE VAULT. Email me at with (only) VALUE VAULT in the subject line. Within 48 hours, I will do my best to send you the keys to the cloud-based folder so you can download anything you might like to study. No reply? Just email me a reminder. I know this blog needs better organization and all the information can be overwhelming for new investors. The trick to developing skill is to cut through all the noise to focus on the key issues that will drive the success of the investment. Practice reading original 10-Ks and 10-Qs and Proxies.  Look at profitability, margins, trends, ownership, and the history of the industry. Take and keep notes. What are you learning?

Other blogs

A self-taught investor with excellent examples     

Another for beginners:


APPLY, APPLYBut YOU must apply what you read to the actual world. Practice.

Investing is something that you DO. OK, you are a beginner and you have read a basic book

on accounting (Go to the folder called BOOKS in the VALUE VAULT and choose

How to Read a Financial Statement. Next ask yourself,

“Would I want to invest in the cruise ship industry?” (Find out)

“Can I understand what drives profitability? What factors can the

companies control? Is there a better company than the others?” Compare the

two (CCL and RCL -see below) using common-size financial statements to

see trends or indications of strength or weaknesses. Common-size financial statements:

Read through two years of annual reports and proxies for both companies,

noting what you don’t understand–then go look up and research the answers.

Read about the industry BEFORE you read this article (click on link):

Case Study for Beginners Study an Industry Cruise Ships.

Background on Carnival Corporation

CCL_VL  CCL_Morn   CCL_2011 Annual Report

Royal Caribbean

RCL_VL    RCL_Morn   RCL_Investor Relations Presentation March 2012

Then read the article and see if you agree or can reverse engineer

what the writer did. I think you will have more fun and make your learning more relevant.

 Have a Great Weekend!

Comprehensive List of Investing Books

Ordway Letter

As per the last post:, I mentioned signing up for a free newsletter at

Below is an example of his letter. His reading list on value investing is  comprehensive. My suggestion is to read the Intelligent Investor by Graham, then Margin of Safety (posted on this blog and in the Value Vault) several times to understand the mindset of a value investor, then move onto the Buffett readings. Question and reread. Study accounting and competitive advantage while perusing annual reports of companies that interest you. If you don’t understand something, then try to find the answer through sleuthing. Practice THINKING INDEPENDENTLY (The experts don’t know the future either!) Apply principles to specific examples, that is why this blog emphasizes case studies.

Be patient. If it was easy, then the rewards wouldn’t be there. Competence will begin to appear in five or six years of intensive study and perhaps expertise after ten to fifteen years. I am still a student after 25 years with a long journey ahead.

An analysis on Share Repurchases: MauboussinOnStrategy_–_ShareRepurchaseFromAllAngles_June_2012

Bearish_on_Brazil I worked in Brazil, and the problems come down to abuse of property rights and poor laws and institutions. Don’t be fooled.


Suggested reading material or any other commentary is always welcome — just send me an email. I hope everyone is doing well and has a great 4th of July holiday next week.

  • “Former Treasury Secretary Henry Paulson said the U.S. will emerge relatively unharmed from the debt crisis in Europe as efforts by Greece, Spain and other nations to stabilize their economies persist for the long-term. ‘Although Europe is a drag, the U.S. will continue to muddle along with growth that really isn’t enough to make a dent in employment,’ Paulson…said at a [June 19] biotechnology industry conference in Boston. Europe will eventually stabilize and avoid a ‘catastrophic outcome,’ he said, [but] under the best circumstances, ‘this will drag on over time.’” (Source: Bloomberg)
  • Regarding the outlook in Europe: “I’m sure of three things. I  don’t know what’s going to happen; nobody else knows what is going to  happen; and all the experts are predicting different outcomes so 90% of  them must be wrong, if not 100%. It is a folly to listen to anyone who  says they know what is going to happen and make investments on that  basis.” — Howard Marks*
    • * Remarks delivered at a conference in New York on June 12, 2012. Any misattributions or mistakes are my own. Further comments are paraphrased as follows: Europe will probably get by, with the governments — namely Germany — doing the bare minimum. But there is certainly a non-zero chance of of something very bad happening. Either way, Europe in general is a huge mess and will likely remain so for years. The wall of worry in today’s market is well deserved; the litany of macro concerns prevalent today may be the most extreme in my or anyone’s career, but they also have existed for years — we just weren’t focusing on them. The riskiest thing in the world is a lack of belief in the presence of risk in the market; that is certainly not the case today. Act cautiously; insist on value and safety. Low-priced, well-capitalized corporate assets are — as always — the best options in this environment.

Facts and Figures

  • In the past six years, the balance sheets of the world’s eight largest central banks have more than tripled (in dollar terms) from $5.4 trillion to $15+ trillion. (Source: Bianco Research)
  • Coca-Cola will return to Myanmar (Burma) for the first time in 60 years. The only two countries left in the world without Coke will then be Cuba and North Korea. (Source: Bloomberg)
  • “From 1985 through 2011…for every dollar spent in [capex, M&A, dividends and buybacks], roughly $0.55 went to capital spending, $0.27 to M&A, and $0.18 to dividends and buybacks.” (Source: Michael Mauboussin — see attached; note: dividends and buybacks were about equal at ~9% each)
    • In the past 10 years, dividends and M&A have remained about the same (~9% and ~26%, respectively), while capex has fallen to 50% and buybacks have climbed to 14%. In the last five years, the trend is even clearer: still almost 9% in dividends, only 43% in capex, 16% in buybacks and 32% in M&A


  • Reading List — A couple of friends asked for this recently, so I thought I’d send it around in case you’re looking for some good reading material this summer. The “top 100” and groupings are just my opinion — there should be something for everyone on this list, and hopefully some new or overlooked books or articles. Please let me know if you have any suggestions or corrections to the list.
  • “Share Repurchases from All Angles” — An excellent article from Michael Mauboussin offering some clear-headed thinking on share buybacks.
  • “Bearish on Brazil” — A great debate about Brazil’s economic prospects. The attached is an essay in Foreign Affairs adapted from the author’s new book Breakout Nations: In Pursuit of the Next Economic Miracles. I haven’t read the book yet, but the essay is interesting. The author, who is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management, explores Brazil’s lofty reputation as a growth market and attributes most of the successes to a heavy reliance on rising commodity prices driven by Chinese demand. The author also believes Brazil has a “hidden cap” on growth — due to high interest rates, inflationary feedback, uncompetitiveness, an overvalued currency, chronic government overspending and misinvestment, lack of productivity growth, and a lack of investment in anything other than a welfare state — that will be exposed as commodity demand/prices weaken.


  • Hedge Fund Market Wizards Jack Schwager has just released the fourth book in his Market Wizards series. I’ve read the others, which began more than 20 years ago, and this one is the best yet. They’re all focused more on “trading” than “investing,” and some of the trade-y stuff really makes me cringe, but even the staunchest Grahamite still has something to learn here. In particular, Schwager’s interview with Edward Thorp is excellent — that material alone would make a great book.The only overlap with The Alpha Masters is a chapter on a Ray Dalio, which is longer and more detailed in Schwager’s book.  And if nothing else, Schwager’s interview with Joel Greenblatt gives this book all the credibility it needs. Highly recommended.
    • An interview with the author by Opalesque (via a great blog) is here.


  • Debunking the Myth of Intuition” — A great interview with Prof. Kahneman on a range of topics.
  • Julian Robertson Interviewed on Bloomberg TV — A rare interview with Julian Roberston. Topics include hedge funds and investment strategy, Europe and the debt crisis, and American politics.
  • The Five Mega-trends Shaping Tomorrow’s Customers” — An op-ed by Coca-Cola CEO Muhtar Kent about the key forces driving the world’s consumers.
  • The Formula That Killed Wall Street? The Gaussian Copula and the Material Cultures of Modelling” — Don’t let the title scare you.
  • Why I’m Betting Big on Europe— A profile of David Herro and his investments in European banks. Regardless of an opinion on the merits of these investments, this is certainly not a mutual fund manager with any fear of a little tracking error!
  • The State of the Nation’s Housing” — The latest annual report from The Joint Center for Housing Studies of Harvard University. I’ve always found this report to be one of the very best ways to understand the conditions in the housing industry (and it’s free!). This year’s press release reads: ““While still in the early innings of a housing recovery, rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices. With new home inventories at record lows, unless the broader economy goes into a tailspin, stronger sales should further stabilize prices and pave the way for a pickup in single-family housing construction over the course of 2012.”
  • This is Your Brain on Bargains: JC Penney and the Curse of Discounts” — An interesting look at consumer behavior, the history of coupons and discounts, and the potential impact on JCP’s strategy.
  • Shatel Q&A: Friendships are Buffett’s Sport Riches” — Speaking of Michael Lewis (see below), I thought Moneyball was a pretty good book. In this interview, which is more of a curiosity than anything else, Buffett said in response to a question about sports figures asking for advice from him: “I get a lot of them that just want to talk. Billy Beane called. He’s a  Berkshire shareholder. He was running the A’s. He was running them like  Berkshire, he thought. There’s a fair number of them who are  shareholders.”
  • In Insider and Enron Cases, Balancing Lies and Thievery— I think this is a really interesting debate. And this essay is amazing — the lead Enron prosecutor walks through a very honest assessment of the case; admits that it had “fundamental weaknesses” and that Skilling “took steps inconsistent with alleged criminal intent”; and states that his trial strategy breakthrough came after watching the movie based on Bethany McLean’s outstanding book The Smartest Guys in the Room (which is highly recommended, by the way).


  • Remarks at the Festival of Economics — A recent speech by George Soros in which he outlines his theory of reflexivity and his thoughts on the euro/EU crisis. It’s long and a little dense — and the reflexivity stuff certainly isn’t new — but there are worthwhile thoughts and analysis in here if you wade through it. And here and here are other Soros articles on the topic.
  • Don’t Eat Fortune’s Cookie” — Michael Lewis’s recent speech to the graduating class at Princeton. I have mixed emotions on his articles and books — I love some of them, others not so much — but in the spirit of the recently passed graduation season, this is worth a quick read. Other commencement links:
  • Unequal Shares” — A look at dual-class share structures and public company governance in light of the recent Facebook IPO. A recent issue of The Economist also looked at the possible demise of the public company, which obviously a bit of hyperbole but has some worthwhile thoughts behind it.
  • “Not So Expert” — A column in The Economist about psychological biases and financial decisions. “The need for financial advice may be more psychological than practical.”
  • NYSE CEO: Public Has Lost Trust in Market — I think there is something to the NYSE’s side of the argument. And much like the move from private partnerships to publicly-traded corporations, I would view the exchanges’ decisions to IPO as a seminal moment in the evolution of the environment we have today.

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