rukawa

Well we do having a housing bubble in Canada. But the big banks are not heavily exposed AFAIK. The CMHC (Canadian version of Freddie/Fannie except its not a private company) is. But I don't think we will experience the problem that the US has experienced. Housing may go nowhere for 10-15 years but a financial crisis due to housing is less likely because we don't have non-recourse mortgages. Basically we have a regulatory system that is more pro-bank, more risk averse and less competitive than the US.

I think of this example when I think about this. I imagine Buffet working in the 1950's for Graham. He has got on a grey lab coat. He goes through the Moody's manuals and fill in forms for Graham which examine stocks on criteria like Price to Book, debt to equity etc. He spends weeks and weeks doing along side Walter Schloss filling in hundreds of forms. After weeks of painstaking work the narrow they search down to a couple a handful of stocks worthy of further examination. Here are two outstanding future investors performing a basic stock screen MANUALLY that I could do in a few minutes on a computer and over a far huger universe than they would ever consider. And I am supposed to forgo this huge advantage?! This all reminds me of this video: http://www.youtube.com/watch?v=pIAoJsS9Ix8

I think its crazy not to take advantage of technology. Investors today have huge advantages over investors of the past. The online availability of information being the hugest. This website is a case in point. But beyond this website there are a huge number of things you can do with technology that can help with investing. For instance if you want to determine all stocks which are cannibals you can run a Bloomberg stock screen and find out the answer in a couple of seconds.

In part of Monish Pabrai's presentation he talks about investing in cannibals (companies that buyback shares rapidly). I was thinking about how these companies could be systematically searched for. The simplest way is just to look for companies with rapidly decreasing shares outstanding. A more sophisticated measure would also incorporate the fact that its better to buyback when share prices are low and perhaps even issue shares when they are high. I guess I am trying to identify the Teledynes of the world. Has anybody tried this? Any ideas on where I can find historical shares outstanding data?

Jeremy Grantham has made the same point about profit margins mean reverting. However I have always had a problem with this argument and the reason is that I don't understand why profit margins are so high to begin with. My basic answer is that profit margins are high because productivity gains have not gone to labour due to the demise of unions and strong competitive pressures from countries like China. This happened I think in the beginning of the Industrial Revolution as people moved from rural areas to cities. In the long run wages get bid up and as they do profit margins erode. I am not confident of any of this though and don't think anyone really has a good answer as to what is going on.

Somebody mentioned this under the book section ... this is the Mastermind that Napolean Hill talks about! Its a wonderful site. If you need money to make the site mobile you should organize a donation drive....I am sure you will raise the money easily.

Thanks Oddballstocks for the detailed answer! Its exactly what I was look for. Thanks to Tim too! If anyone has any other tips for microcaps, I'd love to hear them.

Check MSN money under their 10 year summary. They have 10 year history of shares outstanding as well as earnings, revenues and depreciation.

This book is the one that made me a value investor.

I have a few questions about what microcaps... not sure if anyone know the answers. My question is how do you get information on them. Mergent Online is once source. What else? How exactly do you research really small market cap stocks? The other question is liquidity. How do you buy and sell these things?

"What do you call all that insurance float?" A very very special and unique form of leverage that is very different in its characteristics than debt. Float often has a negative interest rate for instance. Buffet is in a very special position that he wouldn't be in if he had less capital. The derivatives are also special because he doesn't have to post collateral or meet any margin requirements. Plus they are very long term bets.

Yes but he was making 12K a year during those 6 years. He was also supporting a family. I attached a spreadsheet with some assumptions. I am unable to reproduce the 50% figure. EDIT: Buffet was in university up to 1951. In addition he lost money buying a Texaco station after he started working. He worked for Graham only from 1954-56 and worked for his father's firm from 1951-54. The rest of time he was employed as a stock-broker. Given this the 50% return is more plausible. >40% returns were highly likely. buffetts_rate_of_return.xls

"Because you already knew what's in it or because you disagree with what is being said?" To the extent that I agree with him I find that what he has written has already been better explained by others or is obvious. There is rarely anything I learn that is new or unexpected. My brain is so bored by what he writes that I am incapable of learning anything.

I never understood the appeal of this book to Buffett or other fund managers. There must be something I am missing. I think Francis Chou also really likes it. To be honest I just don't get it.

I am reading their book but there are some things I don't like. They have a strong tendency to just believe models. Their argument appears to be that models are more correct than experts so we should just trust models. And we shouldn't fiddle with models because that is always bad. But where exactly did these sanctified models come from? God? But there are many problems with quantitative models. Models can be extremely bad. They never discuss the dangers of over-fitting a model. For instance their PROBM model they discuss is hugely complicated. Its difficult to understand the justification for the coefficients in the PROBM formula and its not clear if these coefficients remain stable if the model was fit with a different historical sample of data. I am hugely skeptical that this formula will work. They are way too credulous about all of this. In addition models can be easily gamed and will be gamed as soon as they become popular. This appears to be the case with some of the earnings quality measures they discuss. Generally any econometric type model is highly suspect because the basic coefficients derived from the regression used can be unstable over time. This is because the economic system does not have a stable structure....its not like an atom. Its an organic evolving entity and so relationships that hold at one time can fail to hold at another. This point was made by Maynard Keynes but completely ignored by econometric researchers because it threatened their research which of course proved to be mostly garbage. A good example is the Black-Scholes equation which is the single greatest social scientific model ever developed. I have tremendous respect for this model and think its quite remarkable. However its wrong because implied vols should be flat for all option times to maturity and strike prices. They aren't. There is a volatility smile observed in most markets where extreme strike prices have higher than expected volatilities. But here's the thing. It wasn't always so! When the model was originally developed the smile did not exist. Implied vols were constant across all strikes. The vol smile appeared I believe after the 1987 crash. The economy evolved. The model no longer worked. Traders realized that selling out of the money puts and calls could be hugely risky because huge market moves could occur more frequently than they expected.

The time to stop being a Value Investor is exactly when they are getting all the girls. ;D Personally I hope that value investing is never very popular. I already think its too popular and wish it wasn't. It would make all our lives a lot easier.

American Express was late into the partnership, 1960's. Buffet's >50% returns were during the 1950's which was mostly pre-partnership when he was working from Graham. This was the time where he read through all 20000 pages of the Moody's manuals twice. His style at this point was pure Graham. I think you would be surprised as to the type of things Warren investing in even after the partnership started. From SnowBall: "In his personal portfolio, he still played with things like the "penny" uranium stocks...These were now fantasically cheap....it was shooting fish in a barrel. They weren't large fish, but you were shooting them in a barrel. You know you were going to make good money. It was minor. The bigger stuff I was putting in the partnerships" There is however one non-Graham stock that Warren did invest in as did Graham...GEICO. So your right that he wouldn't totally restrict himself.

True they could have these qualities. But is there then no price whatsoever that would tempt you to invest in them? 50% returns are probably extremely difficult to achieve. But can higher returns be achieved? Check out table 6 of What has Worked in Investing. The highest returns are achieved by small cap value, in particular the 10th decile of both P/B and Market Cap simultaneously. The returns are 23% from 1963-1990 for this group of stocks. That means a purely passive small cap value investor would have grown $100,000 to about $24,000,000 over 26.5 years. Generally the out performance is about 10% PA over Large Cap Value. I remember looking at DFA over its life-time because I wanted to compare DFA with Francis Chou. I believe that passive Small Cap Value actually beat Chou. The returns were however a lot smaller than 23% over the period. I think both achieved returns around 11 %. Of course the time periods for the Fama study and DFA are not the same so results are not comparable.

Buffett has stated several times that he could make >50% returns if he was till investing small sums of money. His largest returns ever were pre-partnership and early partnership in the 1950's using what was basically a pure Graham approach with Micro Cap stocks. The obvious question is why can't this be done today? Buffett would read Moody's manuals, the modern equivalents are ValueLine and Mergent online. My view is that if I am going to invest I ought to invest where I have a decisive competitive advantage over fund managers, institutional investors and others. Also where I can get the highest returns. Small Caps are known to have higher returns. And most fund managers cannot waste time with Micro Caps because the sums of money they manage are too large. So until I become a billionaire investing huge sums of money it makes sense for me to focus on Micro Caps. I have also read OddballStock's website and some of his postings. He adds another reason which is that Small Caps are easier to understand since their businesses are relatively uncomplicated. I am looking to generate a debate about this. What are the pitfalls of investing in this area. Why do people avoid this area? For the posters who are investing in this area what approach do you use. How do you find these stocks and investigate them. OddBallStocks, I know this is your specialty so I would appreciate any advice you have, tips, pointers, argument etc.

I am huge believer in copying but please tell us what your copying so I can copy your copy of Pabrai's copy. :D

Buffett did say that he would read a couple of thousand financial statements every year. However I wonder what you focus on when reading these statements. Is there a thread on this?

Also think this article by is interesting on why Canadian housing is probably going to be flat for a very very long time: http://www.theglobeandmail.com/globe-investor/why-housing-prices-arent-coming-back/article6929120/

One person I like to read on Macro is Steve Keen. I especially like one idea that he has. Keen is a demand-sider not a supply sider. The driving force in the economy is not supply its effective demand. And a part of effective demand is driven by increases in debt. The way to think of this is that Johnny takes out a loan from the bank and uses it to buy stuff. His increases in debt increase the effective demand for stuff in the economy. Decreases in debt do the reverse. You can think of increases in debt as the rate of change or velocity of debt. In this case the acceleration of debt, the change in the rate of increase in debt is a component of GDP growth. This idea is very interesting. It implies a few things. During the deleveraging process for consumer debt there will be a large change in the velocity of debt. It will go from positive to negative since consumers will go from increasing their debt level to decreasing them. During this time GDP growth may be negative. However once consumers stabilize on the lower level of debt velocity the acceleration of debt will be zero and so GDP growth need not be negative anymore. It can be positive even with consumers deleveraging. HOWEVER, as consumers deleverage a component of GDP growth will be gone. Namely the acceleration of debt component. This is generally what drives a huge economic boom. To summarize: component of GDP = rate of change of debt component of GDP growth = rate of rate of change of debt or acceleration of debt. http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/

I guess the key question now is HyperInflation/Inflation. My model of macro focuses on debt. Not total debt because I don't think all forms of debt are equal. I divide the balance sheet into: corporate, financial, consumer and government. Each of these 4 actors can be heavily indebted and then there is the question of how they deleverage and what kind of crisis deleveraging can lead to. In my opinion the two worst cases are: hyperinflation which is usually caused by a sovereign debt problem and deflation which is almost always a corporate/financial balance sheet crisis. Corporate + Financial debt crisis - Japanese lost decade and the United States during great depression. This is almost always heavily deflationary and can be made much much worse if there is not lender of last resort and deposit insurance because then you get runs on banks. Deflation occurs because corporations are simultaneously trying to raise cash at the same time. How do they do this - fire workers and blowout sales. This inevitably causes deflation. Sovereign Debt Crisis - worst case here is hyperinflation but this almost never happens and almost always is the result of a political crisis and incredibly dysfunctional governments. Hyperinflation is an extremely rare outcome and is almost always the result of extreme political dysfunction. Consumer Debt Crisis - Most benign. The reason is simple. You can't fire your children or your wife. Generally consumers will keep consuming and will only lower their consumption by the minimum possible amount so that they can keep consuming. The develeraging process here generally leads to low GDP growth for a very long period of time. Inflation is usually low and deflation does not occur. Equity markets move sideways. I think the United States is experiencing a consumer debt crisis + financial debt crisis. The outcome will probably not be hyperinflation because US elites, institutions etc are simply not screwed up enough to ever allow that to happen. Deflation is unlikely because corporate balance sheets are in good shape so they don't have to engage in fire sales and don't have to fire people. My view is that equity markets are going to move sideways for a long long time. That means they will go up and come back down again but not gain significant ground.

This thread is long so I am not sure if this was already posted but I like BridgeWater's study on deleveragings an-in-depth-look-at-deleveragings--ray-dalio-bridgewater.pdf