vinod1

they use the + sign. for example. aig is aig+. wfc is wfc+. bofa has two. bac+a bac+b. Hope you get the idea. If I put in aig+ Google finance is not able to recognize the symbol. Am I doing something wrong? Thanks Vinod

I do not think that is the only way for margins to collapse. I can think of two examples 1. Take PG. Many of its brand products sell at a premium price to more generic ones. If consumers are feeling poor, they can switch to non premium brands and margins would collapse at PG. This can occur at any company - actually more likely at other companies that do not have moats like PG. 2. Take Apple. Profit margins of iPhone, iPad etc are going to come down as rivals just catch up just enough in quality to erode margins. At some point say iPhone 12, the androids and windows phones of the world are going to be pretty close to iPhone to reduce the premium Apple was able to charge. No huge spending boom needed for either case. Vinod

The way I see it we either 1. See a pretty severe economic crisis - which I think would crush all the stocks, but banks would suffer really severely. In which case I would deploy some of my cash which should produce satisfactory returns. 2. Escape without a severe economic crisis but muddle through - in which case financials would likely provide satisfactory returns. Either scenario would leave me satisfied. Not a very scientific way to invest but it minimizes regret and allows me to sleep well. If we really see something like the Great Depression, we are going to be counting if the losses are 90% or 95%. To me they both feel the same even though you end up with twice the money in one case. Hence my barbell strategy. Vinod

I get your point about value investing and not worrying about macro. I would caution on a few things 1. S&P 500 profit margins are historically at their highest levels ever. So it would be imprudent to assume that such margins are sustainable or base your earnings for S&P 500 at that levels into the future. You are essentially betting that "This time it is different". To use analyst expectations for next year earnings is not a good idea. They are very consistently too high. Lots of studies if you want to look it up. 2. Given the high debt levels of both consumers and government (and the current political background) and zero rates by fed, we ran out of both fiscal and monetary bullets. Europe is in a pretty dire situation, comparable to years preceeding the Great Depression. Not that it is likely, but it is certainly a possibility. If such a scenario should happen, it would have a significant impact on US at a time when we ran out of fiscal and monetary ammunition. Not that I would avoid investing in stocks due to this but I want to position my portfolio to be able to survive should this scenario play out. Assuming that great depression would not happen again does not seem to be a good risk control. Whether this might mean 10% cash or 50% cash depends on you. 3. A careful reading of Great Depression and humility to accept that something like that or even worse could happen again is a must for any investor. This is what I took when Buffett said about what he is looking for in an investment manager "genetically programmed to recognize and avoid risk, including those never before encountered". I came from a very poor family, and I do not every want to be that poor again. I read a great deal about the Great Depression and protecting myself from such an event has been high on my list of priorities since I got interested in Investing several years back. If you look at what happened during Great Depressions stocks first fell 50%, investors jumped in and it went up 60%, then it crashed 85%. Unless one is holding some cash or holding a significant portion of portfolio in wide moat exceptionally strong companies, it would not be possible to recover from such a shock. That said I am about 80% long nominally (about 70% cash). BAC is my top holding. My thinking was either BAC and other financials do well and I make a pretty good return or they go bankrupt or get diluted to such an extent that it is essentially permanent loss of capital. In such a scenario, I think it is likely that some pretty good bargains would be available to deploy cash at very attractive returns. Vinod

2. The ability to print money must count for something. Since some amount of inflation (1-2%) is widely accepted to be necessary, this at a minimum provides one source of funding that is not accounted for. If Govt were to auction of the ability to print money, what would be its value? Bidding starts at $10 Trillion. :)

I do not know of any of the Super Investors of (G&D ville) who used leverage other than via float. It could be because non-callable leverage like LEAPS are a relatively recent phenomenon. I think the key is non-callable. Vinod

Thanks for posting. This is fantastic. Vinod

Do you need to know anything about baseball to make sense of this book? I wanted to read this book for a long time but I have next to no knowledge of baseball. Thanks Vinod

+1, and I do not think people realize how the composition of the S&P 500 has evolved since the 70s (oil crisis) to business with better margins, ROI, and global growth prospects. Invest bottom up, lots of opportunities in this market. Good point. There had been two changes (1) Change in composition of S&P 500. Earlier it was dominated by low margin businesses (Top 10 in 1960 were ATT, GM, Du Pont, Standard Oil, Union Carbine, Sears, Kodak, IBM, GE and Texas Company) but in the most recent years it was dominated by much higher margin business (Microsoft, PG, JNJ, Coke, etc). (2) Change in profit margins of many of the competitively advantaged companies within S&P 500. For example, profit margins of PG, JNJ, Coke have significantly improved from what used to be the case in the 1960s and 1970s. PG used to have profit margins of about 6.3% between 1951-1970 but recently has about 13%. Even if 13% margins are not sustainable I would think something like 10% is more likely than the 6% of earlier years. This is representative of other competitively advantaged business in S&P 500. The above two have to be balanced with the fact that overall profit margins are mean reverting. GMO and Hussman wrote about this extensively. If we completely ignore profit margins we would be looking at $90+ normalized earnings for S&P 500 and if ignore the changes in composition of S&P 500 and treat increases within the constituent companies as temporary we are looking at slightly below $60 normalized earnings for S&P 500. To me ignoring either does not make sense and think normalized earnings are more around $70 - $75 for S&P 500. Vinod

Vinod, how exactly can you evaluate if a currency is overvalued or not? BeerBaron My response is partly tongue in cheek. I do not have a strong opinion as I do not think it would be possible to really say if a currency if overvalued or undervalued. I do not really care all that much about exchange rates, important as they might be. Any view I have is mostly based on 1. Eyeballing say trade weighted exchange rates might give us some rough idea if a particular currency is overvalued or undervalued and could be of some use at extremes. 2. Inflation rate differentials, Bond Yield differentials, Expected economic growth rate differentials and Expected capital flows would give a rough idea of changes in exchange rates. This again is most useful during extremes i.e. when either all these are pointing to moving exchange rate in the same direction or the magnitude of the differentials is very large. Vinod

1. Slightly overvalued as it currently stands. I think euro is being held up by Chinese for a variety of reasons and it would be much weaker otherwise. Otherwise I do not understand its current strength. 2. Undervalued if any of the weak countries (PIIGS) exit. Euro would soar once the weak links are out. Theory being a chain is as strong as its weakest link and when the weak links are taken out it leaves a much stronger chain. Vinod

That is exactly the impression I get. I wondered about it whenever I hear his comments on BYD. He clearly seems to distance himself and associate BYD to Charlie. Vinod

I believe there is a lock up preventing them from selling the rest of the stake until 2013 Lock expired this month on their entire stake. I think they are not able to find a buyer for their entire stake. Vinod

In my mind I categorize any investment into one of the following 1. Exceptionals - These have two properties: (a) Businesses which are virtually certain of increasing IV over a 10 year period. (b) Businesses that can survive a 5 year period representing depression like conditions. These businesses have very low levels of business risk either due to the nature of the business itself or due to the owner/operator. If you buy these at reasonably prices, the only question is whether you are getting 5% or 10% or 15% returns, the chance of loss of capital even inflation adjusted is very low. I do not think it is consistently possible to make above 20% returns on a portfolio of these investments. 2. Deep Value - All other businesses that do not meet the criteria above. The quality of the businesses within this category varies of course. These can be net-nets, discount to net asset values, discount to sum of parts, distressed turnarounds, etc. These would give an opportunity to earn really high rates of return. I try to balance between the two though not in equal proportions. My belief is that if we ever encounter near depression conditions, investments of type #2 above are going to be wiped out. Investing complete portfolio with little cash levels purely in type #2 involves some kind of "willing suspension of disbelief" that ignores risk of severe economic stresses for an extended period of time. The above classification helps in position sizing, portfolio allocation and cash levels. Going through 1700 Value Line stocks I made a list of about 120 potential candidates of type #1 that I am in the process of digging deep into. So far I only have about a dozen candidates that I am comfortable to label as type #1 (and most of it involves piggybacking on Buffett's comments and portfolio a.k.a drinking the kook aid). Nothing original here, all the above has been copied from various investors. From Seth Klarman to Myth. Vinod

They have been tracking for non-GAAP earnings in excess of $5 in FY11. And management continues to claim $7 in 2014. Will they make deals that will jeopardize the EPS targets they are promising? In the end, they will be graded on only one thing. I did not find any reference to the 2014 $7 EPS target in the Q3 Presentation or Conf Call. Given that they are making so many changes, management has a good case for saying that the conditions have changed so that the EPS target is not valid anymore - I have a nagging suspicion they made all these changes to avoid meeting the $7 target. Vinod

None of the above Einhorn and Biglari lack his ethics and Lampert lacks his humility ( no humble person would try to turn around Sears for crying out loud ) I think the person who best channels the young Buffet is our gentle host Parsad I just do not know much about his ukelele proweress however to be certain LOL ;D +1

I am surprised at the level of incompetence of the management and board. The direction they are heading makes sense but not the way they are going about it. 1. If you are going to concentrate on software, I would think they would put together a portfolio of related software products over a 2-3 year period. You would try to pick up any companies opportunitistically on the cheap or at least at a reasonable price. They just seemed hell bent on making a large acquisition just to show off their intent. 2. If they want to divest PC business, I absolutely understand. What I do not get is making it public before they have firm plans. Now they have pigeon holed themselves into a position and they would not get the best price possible for this segment. I am getting the feeling that all these unnecessary actions at this time is an attempt to get away from the fact that they had publicly committed to a $7 EPS by 2014. Management must have realized that this is not achievable and these changes would provide a mechanism for management to not meet the target but avoid the responsibility. The stock is cheap with a modestly incompetent management but they seem to be much worse. Vinod

Looks great! And the move was so smooth.

Good luck!

You need to look at individual bonds as inflation expectations are priced at different rates across the term structure. For example as of this moment we have (from http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ ) 10-Year Treasury has a yield of 2.22% 10-Year TIPS has a real yield of 0.01% So the inflation expectation is 2.22 - 0.01 = 2.21%. Since TIPS do not theoretically have inflation risk, there is a certain amount of inflation risk premium built into this 2.21%. If we assume the inflation risk premium to be say about 0.5% (just a guess), then the inflation expectation can be said to be 2.21 - 0.5 = 1.71%. Most people just assume inflation risk premium to be negligible and just use 2.21% as the inflation expectation. You can do this across the different maturities to get the inflation expectation at that particular term. Note: The nominal and inflation Treasuries used above have a slightly different maturity dates since they are not issued on the same date. Vinod

Per the proxy he has about 2.2 million shares/options/stock units at end of 2010. That should be about $15 million. Vinod

Klarman takes a big position in MSFT. http://www.dataroma.com/m/holdings.php?m=BAUPOST Vinod

I'm wondering what kind of reaction MBI share price would have if they annonce 1 Billion $ settlement with BAC concerning the putback. They would crash like hell! MBI already booked $2.7 billion on their BS as if it has been recovered (if I understood it right). I think they are looking at something around $5 billion. Vinod

Wow! That is like 200% nominal portfolio exposure on just what you added!! Vinod

We are in the realm of Generally Accepted Munger Principles (GAMP) so I would gently request GAAP be left unmolested. :) Thanks Vinod