vinod1

Over the past few months several of my friends moved to Android, all of them cite just one reason: After using iPhone for so many years they are sick of it and want something new. They are very likely to try the Windows phone if it is sufficiently good. Windows phone does not have to be the best to get a fairly good market share, they just have to ensure it is close to par. Vinod

Exactly, Microsoft has been releasing some very innovative products like Kinect and Surface. Their Metro UI takes an active tile-based approach which is very different from the iPhone icon based approach. The Metro world takes simplicity to the extreme unlike the textured, eye candy world of the iPhone. They are completely different philosophies. Google releases clones of competitive products with small changes - Android, Google+, Propeller, Google Offers and so on. Yeah this was one of the concepts that was highlighted in "Great By Choice: Uncertainty Chaos and Luck—Why Some Thrive Despite Them All" by Jim Collins - the idea was that of the company that was able to "riff" on the successful idea of another company and execute the idea better than its creator (largely by applying the other concepts in Collins' book, which is very worthwhile). Memorable examples cited in the book were Southwest Airlines, Microsoft and Apple. The companies that master this skill are at a significant advantage. As a consumer, I expect Google to reproduce some version of anything attractive that their competition provides, and they seldom disappoint. Off Topic: Since Jim Collins is mentioned I thought I would highlight something I read recently. Jim Collins "research" has been throughly discredited as fundamentally flawed. The book "The Halo Effect" goes into this in detail. This is a pretty good book that is very helpful to investing in general and a huge time saver by helping you to recognize business books that are popular but are complete bull shit. Vinod

My portfolio upside is concentrated in BAC as well. Cognitive dissonance though for me :) Vinod

I get your point, but the $300 billion is going to spread out over many different economic segments of the population. Some of it is going as salary increases or bonus pools of people who are already in the high income bracket. I would bet a pretty significant chunk of it goes to this segment. Some of it should go into denting unemployment as you point out. I would also think that some of this would be mitigated by higher chargeoffs and lower revenues from the now poorer non-financial companies. So I am not sure how much net benefit banks would get from lower profit margins overall. Vinod

LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Thinking a bit more about this, I think the argument could be much simpler. Banks have consumers and businesses as their major customers. The fact that profits for one (businesses) would reduce the profits of the other (customers), so I would think they should roughly even out and it should not make much of a difference to banks profits. There might be an optimal balance of profits between the two sets of customers of banks but overall I do not see much impact to banks profitability based on how the pie (profits) get divided between the two. Vinod

LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod

I have been making pretty much the same argument since 2005 to myself and to anyone who would listen to my rants. This is probably one of the root causes for me personally in avoiding much of financial crisis. As with many of these kinds of questions, I always ask myself "What would cause me to change my mind that the mean for profit margins has migrated to a higher level?" I noted that if profit margins in the years around 2010 still remain elevated I need to revise my thinking on this since it is more likely that I was wrong if profit margins could remain elevated for so long. I had written out my thoughts in that period in a sort of investment diary. I am now leaning towards the fact that normalized profit margins might justifiably be higher than they have in the past. If we use S&P 500 margins. First, the composition of the industries that are in the index is going to change and that would impact the profit margins as well. A larger percentage of retailers in the index would reduce profit margins say when compared to say having a larger percentage of Tech. Second, if many companies outsource lower margin operations to other countries then profit margins must trend higher on those that remain. I do not think the estimate of $100 and $105 for 2011 and 2012 for S&P 500 earnings are normal. However, I also think the estimate of $60 might be too pessimistic. Normalized margins might more likely to be in the 7-8% range. I agree with Grantham that profit margins are the most mean reverting of all in a capitalistic economy. But he (or others) does not say anything about what profit margins are normal or that mean profit margins should not change with structural changes in economy. I think profit margins might be more likely to be mean reverting around the 7-8% range going forward. Vinod

Costco both delivered and installed our exercise bike and elliptical machine. Ordered online. We had a problem with the elliptical machine going "clunk, clunk, clunk" after a while -- so Costco arranged to have a person come to our house to repair it. Didn't cost us a penny. Thanks! Just ordered one from Costco.

I would think they should have at least got their online platform to work reasonably well. I am trying to buy a Treadmill and wanted to go with Sears because they are the only ones that I know of that will also install (maybe services are really the main attraction?). As much as I tried I could not put an order in, it is giving me weird errors and contacting their customer service via Chat I got the following: I am sorry, the item you are looking for is currently out of stock, however, it will restocked soon. I suggest you to visit our website, frequently to get the update the information regarding the product. I had similar problem just trying to schedule an install they allow you to start off by selecting a product (treadmill) to install but in the next step where you have to select the product again you do not have any exercise equipment category to select. Vinod

I just read it. It gets better and the last few chapters (Part 4 - Lessons Learned) are worth a re-read. He sounds eerily like Buffett in those chapters and it is clear Lou is influenced by Buffett. Vinod

I would look first at the qualitative criteria 1. Are they following the value approach i.e. do they really believe in it and does their portfolio reflect this? Look at the portfolio they are holding in 1999, 2005-2007, and mid 2009. Read the shareholder letter to find out their reasoning for the portfolio. For me a badge of honor is negative returns in 1999 and low returns in 2006 and 2007. We know from hindsight and it should have been clear to any good value investor in 1999, that the most attractive and safe stocks in 1999 had a near zero to a small loss. 2. Look at turnover and expense ratio. If they are really following value investing they should have turnover in the range of roughly around 15-25% implying a holding period of 4-7 years. But this is a very rough guide and it should only be used over a number of years. Also they should have low expense ratio indicating that they are not greedy. Vinod

Investing without a firmly held opinion of IV. This is primarily because of not doing enough leg word and research to develop that conviction. When you invest without conviction, damn, Mr Market starts popping up in your head when the stock price declines and stays there for a while. This is an idea from Howard Marks but resonates with me strongly. Vinod

Do not disagree at all. I do not have much faith in automated systems for risk management. My point is more around the intensity and focus that is being put on risk management. Previously focus used to be on growth, now it is all about risk. I am saying optimism is in retreat at least anecdotally. Taleb had a very good article called "The black swan of Cairo" http://www.fooledbyrandomness.com/ForeignAffairs.pdf. Vinod

I do not think we would be able to say if the banking system has been reformed until after another 10-20 years. I can give some anecdotal evidence that it is more likely that enough changes have been made to make the financial system pretty robust 1. Where I work, we are spending just under $200 million for Basel 2 compliance. This amount is not to shore up capital but to strengthen the control and risk management systems and to ensure that the data we report is accurate. Company is absolutely fanatical about making sure that there are 2-3 levels of checks and balances along the whole chain. This is pervasive across multiple dimensions in the type of data we look at, the risk models we use, etc. Always the concern is what can go wrong? We built a castle, we have a moat, we filled the moat with dangerous reptiles yet it seems it is not sufficient. We are populating the perimeter with fire breathing dragons. We are in close contact with regulators and they are being fanatical about putting all the right controls. 2. I recently moved to a new house and when I tried to order cable, they did a credit check, and not satisfied they wanted the lease agreement. When I sent them the lease, they found a minor error in the lease agreement and asked me to correct the lease agreement before they process the order! I have very good credit history but the Cable company wanted to make sure that the lease agreement is corrected. We have come a long way from no doc loans of $500K to a legal team scrutiny of a cable order with a a monthly bill that is around $150! 3. I took a loan on a car just to get my wife's credit history built up. It is a joint loan from a credit union in which I had a bank account for 17 years. The has my direct deposit of my salary for the last 14 years and cash on hand in the checking account has averaged twice the car loan for many years. Yet it took me heck of lot of documentation just to get the loan approved. I had to talk 4-5 times with the loan officer before the loan got approved. This leads me to believe that people have probable gone to the other extreme. Dexia and MF Global seem to point otherwise but I think those are much different and do not reflect what is going on in the broader financial world. Vinod

We did not have any banking crisis from the end of great depression until the early 1980s. We had a pretty boring banking system for 4 decades after the trauma of GD. Vinod

Purely based on psychology I think there is much less likelihood of a crisis at the big banks in US 1. Penualtimate preparedness as Peter Lynch calls it. Preparing for the last crisis that we did not see coming. Never again seems to be the motto of many investors to be blindsided by such financial shocks. 2. Think about bank regulators and bank examiners at the individual banks. At least at the bank I work, I know we have swung to the other extreme in terms of awareness and attitude to risk. It is perfectly understandable of course. Think of the incentives for a bank examiner. Anything that blows up after he has examined that bank would reflect very badly on him and his career just after taking so much critique for not doing a good job in a crisis a couple of years back. Same goes for many senior managements. 3. Banks essentially seem to embody the sum of all fears for investors. They have a very valid reason of course to be fearful. I would be much more worried about things that no one is worried about. If so many people are worried about something and especially people high up who are in power are also worried about it, I sleep much more peacefully about such risks. Vinod

Thank you!

They have a 3 month trial subscription for $75. You get 13 segments, one each week that covers 1700 stocks. You also get online access where you can download all the pdf's for the 1700 stocks (using a download browser utility). I get this once every couple of years. For me it is definitely worth it. The first thing I do when researching a stock is to look up the Valueline pdf so it comes in pretty handy. Also going through the 1700 stocks one at a time gives you a very good sense of the majority of the large cap and mid cap stocks in US. Also it allowed me to short list about 200 stocks that pass a first screen of quality criteria that I plan to keep an eye on and develop a competency in. If you just want to look at how a valueline report looks like they have free reports for the Dow 30 stocks on their website. Vinod

Bass makes an incredibly compelling case for that (among other things) in this video I just got done watching. Shorting Japanese insurers that hold a lot of government bonds is something I am exploring. http://www.youtube.com/watch?feature=player_embedded&v=WWgtzwqWh60 i read that the japanese own 95% of their own debt. seems like it's in stable hands and not leveraged. also japan can print money and monetize the debt if need be. if bass gets this one right he should run for King of the World. He would get elected. To summarize Bass: Problem is not only existing debt but going forward. Japanese savings rate has been coming down from around 15% range to barely above 0%. So in future their debt had to be funded from external sources. Their debt to govt revenues is around 20. At a wtd average debt cost of 1% interest expense is taking up 25% of govt revenues. If debt costs rise by 1-2% you can do the math. Picture aint pretty. Vinod

Thank you!

Thank you!

I do not think Japan resembles Europe in any way. 1. Japan has a trade surplus - except for a few months here and there. 2. Japan has an independent currency and a central bank willing to print if needed. One of the above has to change for Japan to be dependent foreign debt. Vinod

Packer, How do you view your investment when holding a LEAP vs a stock? Say you have a 5% of portfolio allocated to a LEAP which might be say equal to a 20% nominal portfolio exposure to that investment, do you think of it as having invested 20% of your portfolio or do you just view it as a 5% allocation? Although it depends on the attractiveness of the opportunity, do you limit your LEAP allocation to a certain percentage of your total portfolio? I would think a 50% allocation of portfolio to LEAP would introduce a very high degree time sensitivity to the portfolio. I recently moved towards making most of my investments via LEAP balanced with a very high cash percentage and just wanted to get your thoughts as you seem to have a similar approach. Thanks Vinod

China can hold all the gold in the world but it is not going to give confidence to people to trust it as the reserve currency. If they become democratic and they develop the whole set of checks and balances across the various branches of government, then sure after a few decades of stability they have a chance. I have a tough time imagining any dictator or drug lord hoarding their wealth in Yuan in the next several decades. Vinod

That might be the best of the bad options but do not see that as a painless solution for Germany. Exports constitute 1/3 of German GDP and if it exits the Euro its currency is going to soar relative to many of the countries in Europe. That could be a pretty significant hit to its economy and this would be occurring at the same time as a major economic upheaval across the globe as a result of such a disruptive event. Vinod