rukawa

I am a big fan of financial histories. Two excellent old books about bonds that appear interesting: Municipal bonds: A century of experience http://babel.hathitrust.org/cgi/pt?id=coo.31924014530335;view=1up;seq=25 Corporate Bond Quality and Investor Experience http://babel.hathitrust.org/cgi/pt?id=coo.31924014530335;view=1up;seq=7

He references Corporate Bonds: Quality and Investment Performance. I think the book can be found here: http://papers.nber.org/books/hick57-1 I have a very strong desire to read this book.

I think that is a bad idea. I view investing as opportunistic. Its possible for any sector to be undervalued and a great source of investment ideas and these sectors change over time. You are best finding an area where values are depressed or something strange is going on and figure it out. It doesn't make any sense to me to choose a business sector, study it and then wait for a fat pitch. The other thing is that I don't think there is a huge advantage to being an expert in a business sector. In my view, in investing, additional knowledge has a huge diminishing utility. For instance Buffett got a lot of mileage out of understanding how Coke was going to grow in foreign markets but not a lot out of knowing that Coke has no taste memory. A lot of the research investors do is more about becoming comfortable about what they are doing then it is about adding utility to their investment decisions. Its a lot like when you meet a girl and you are both really attracted to each other. Its rarely the case that you jump right into bed right away. Often there is a lot of talking first. But the talking is mostly superfluous. It doesn't in anyway alter the ultimate endpoint...that's often a foregone conclusion. Its just a way of getting comfortable with what happens next :P

I see this too but I don't think its just Academia. I think all of us are dumber in some sense. One thing I have realized is that people in the past could think in a more systematic and organized way. You can read Graham's Security Analysis and you definitely get a taste of this form of thinking. What is strange is the performance on things like IQ tests has improved.

Let me guess....Gold Standard.

I was taught about power systems by a German Mathematician who works for OPG. The guy was careful, serious, extremely intelligent, and had done a lot of work on supply/demand for OPG. When I say a lot of work I mean that they had the ability to model the whole supply stack for Ontario and the demand better than energy traders at banks. His focus was on modelling wind energy. His proteges actually went on to work at banks. He was hugely skeptical of both wind and solar. And he thought the closing of coal power plants in Ontario was a huge mistake. Its true the coal pollutes and has a disadvantage relative to Natural gas. But in my view Natural Gas supplies are not as easily available as people think. Shale gas has been hugely misleading in this regard because of the huge decline rates and the Wall Street hype.

I realize a lot of people on these boards believe the future is solar and believe in new battery technologies. I don't. And the people who actually run power systems don't. Like for instance the people who mathematically model supply and demand at OPG. Coal fired plants don't increase grid stability but they don't decrease it either. Solar and wind both increase grid instability hugely. Currently demand spikes are managed in a few ways: you run jet engines with Jet fuel which is incredibly expensive, if you are really lucky you have excess hydro power and you can just reduce/increase hydro to deal with changes in demand (Quebec does this for Ontario), or you use transmission lines and geographical diversity which doesn't always work. Running jet engines with jet fuel because the sun is not shining is a hugely expensive way to avoid a blackout but scenarios like that are easily possible with huge amounts of solar power. The problem here is that no one understands how difficult it is to run a power system. Its not like a market. In a market demand does NOT have to equal supply at all times. If it doesn't markets don't clear and you have stuff lying on shelves. Walmart does this everyday and doesn't blink an eye. But on a power grid nothing can be left on the shelf for even one second. Demand must be mostly be equal to supply. Otherwise you will get changes in voltage and current and eventually blackouts. Small fluctuations are ok. But large ones have to be managed. For instance there is a spike in demand when people come home at around 5-6pm because people start turning things on. Solar and wind just make this much more unmanageable.

Ontario based analysis follows: If there is inflation and interest rates go up then housing will go down not up. The logic of buyers is based on affordability of houses which is driven by how large their monthly mortgage payment is and their disposable income. If inflation goes up without salaries going up (which can happen) then buyers will be able to afford a smaller mortgage payment and so won't be able to pay as much for a house. How do you get inflation without rising salaries...Simple! US raises rates. Canadian interest rates don't go up. Then our exchange rate goes down and all US goods become more expensive. But our salaries don't increase. So everyone can afford less house. Eventually we will be forced to raise interest rates and housing prices will accordingly go down because monthly mortgage payments will go up. There are other things people don't take into account like the payroll tax to support Ontario's new pension system (less disposable income), massive increase in electricity costs, rising taxes to support infrastructure and unsustainable spending, and of course the mother of all housing demand destroyers: the baby boomers who didn't save for retirement and therefore need to sell their houses.

Coal is cheap. It could get cheaper. I guess this is one of those things that depends on what you believe. I don't believe solar will be a viable alternative to coal. There is no good way to store energy on the power grid. Grid stability is hugely important because the Power grid must perfectly match demand and supply at all times...PERIOD. Plus solar is unreliable and still very costly. I don't think Shale Gas is sustainable. The decline rates are too high and required capital investment is too large. Most shale assets have been written down and guys like Rex Tillerson are outright stating that no money is being made. Eventually the shale adventure will end and probably with a number of bankruptcies. Once it does natural gas prices will go up. EPA regulations may constrain the US but they don't constrain other countries. And EPA regulations can be changed easily if the next president is Republican.

That's easy. NG low prices are unsustainable because shale boom is unsustainable. Energy demand will rise. Coal will be the only option.

Black Earth Farming is getting cheap. I think right now its worth a look. Its trading at less than book. In my view its book is also undervalued. We are running out of place to grow food. Eventually Russian farm productivity will go up and when it does farmland values will go up.

From Chou's letter: Chou seems to argue both ways. My feeling is that he isn't really sure. But your right that the CDS bet seems to be more about betting on risk than on junk bonds.

The junk bond market is obviously overpriced. On the other hand as Chou's semi-annual report points out CDS spreads are low. How can we bet on junk bond defaults? Using CDSes. This product from ProShares was recently introduced it appears exactly for this purpose: http://www.proshares.com/funds/wyde.html I believe there are several similar etfs in europe. I feel like it might be nice to bet against North American junk bonds and also perhaps EU sovereigns which are also spectacularly expensive. Not sure though to short EU bonds.

My view was always that US RE experiences short sharp big corrections. Canada RE just goes flat for a long time. So my view is that there will be no correction. Canada will just have flat RE for the next 20 years.

[Edited] In Margin Of Safety, Seth Klarman talks again and again about how investors have to take advantage of predictably irrational Institutional Behavior. One example he mentions is forced buying when stocks are added to indexes. I wonder whether anybody has experience with this? Does it work and what are the typical timelines and returns? Anyways on the bogleheads site there is an excellent example with BlockBuster than illustrates the phenomenon. http://www.bogleheads.org/forum/viewtopic.php?t=69006

I don't get it. Is there a reason why people don't use screens more? I have observed this before that value investors tend to avoid using screens but I don't understand the reason. And why wouldn't this work in the US? Is the idea that the market is too efficient for screens to work?

I was wondering what peoples favorite stocks screens are? Right now I am running one on PE using average 10 year earnings.

I am guessing the Vectrus/Exelis(EGL) is being done for the same reasons.

@lu_hawk That explanation was just what I was looking for. Thanks. Absolutely brilliant.

I have read "You Can be a Stock Market Genius" about spinoffs but I never completely understood why they make sense and have never had one that made sense to me. I think the Greenblatt logic was that spinoffs make sense because the holders of spinoffs typically sell them which depresses their value. This is because the spinoff holders were not interested in holding a small company in the first place. Have other people made significant money using this strategy. Are there things I should be looking for? Does it makes sense at this time given the high valuations for small cap stocks?

Because that is where I picked the idea up from. It needed be a cornerstone of his philosophy for him to have popularized it. He has talked directly about brand names several times and has made several investments along these lines include Coke, See's Candies, Heinz, Gillette, Dairy Queen, American Express and Fruit of the Loom. I would say investing in brand names is as associated with Buffett as ten baggers is associated with Peter Lynch or Net-Nets is associated with Benjamin Graham. Whether these ideas are a cornerstone of their philosphies is a separate question.

I no longer work as an engineer but orignally studied Engineering Science at U of T. Later I did a Master in Math Finance which is completely based on an efficient market view. Devil Take the Hindmost was the book that convinced me that market are hugely irrational.

Good point. There does seem to be some kind of acceleration of Fads. They are born and die quicker. Not sure why....

I think it was Buffett who popularized the idea of investing in companies with very strong brands like Coke. But, Buffettistians tend to forget the reason Buffett even wanted to find companies with large moats...he was trying to resist the iron law of competition that inexorably destroys the competitive advantages of all companies in the long run. My view is that the rise of the brand name was caused by the scarce advertising spots possible with broadcast television technology and the scarce shelf-space of large chain stores. But brand names are dying due to the Internet, Cable Cutting and the infinite Shelf Space of e-commerce companies like Amazon. You no longer need huge advertising budgets to reach large numbers of people...think Angry Birds. And online reviews enable you to determine quality without a brand name to assist you. In this world, are brand names like Coke, Pepsi and Sony valuable anymore? How long is the life of a brand name?

The great depression was essentially the result of huge corporate and financial sector debts. Not consumer debts!! Prem Watsa's deflation bet was right...he just selected the wrong country :)