vinod1

This is what Graham has to say on Macro Mechanical forecasting systems sound vaguely plausible on the basis of a priori reasoning and rely for its convincingness on the fact that it has worked for a number of years past. The necessary weakness of all these systems lies in the time element. It is safe and easy to prophesy, for example, that a period of high interest rates will lead to a sharp decline in the market. The question is “How soon?” There is no scientific way of answering this question. They are not truly scientific, because there is no convincing reasoning to support them and because, furthermore, really scientific (entirely dependable) forecasting in the economic field is a logical impossibility.

IMHO I do not think bottom up value investing in the style of Graham/Buffett ignores macro. It ignores macro in the sense of basing investments on macro calls as in - avoiding US stocks because USD is expected to go down, avoiding stocks because of expected economic problems, buying chinese stocks because of expectations of rapid economic growth, avoiding Japanese stocks because of poor demographics, etc. It considers macro as in not assuming profit margins to return back to peak of 2007 for consumer sensitive stocks, not assuming sales to show rapid increase due to likely poor GDP growth, etc. I do not think Buffett/Graham ever ignore this kind of Macro input into their stock valuation. Vinod

I found "Risk Arbitrage" by Guy Wyser Pratte to be pretty useful. It has a concise history of how markets have evolved in the Arbitrage field and goes into the basic issues along with several examples from Author's experience. I have not worked through all the examples yet, but it is on my to do list. Vinod

Thanks for your comments. I have added the complete notes in pdf format as well. Vinod

I skimmed through the 1st and 4th editions as well but I liked the 2nd edition the best. Do you have any particular topic in mind that is dealt with in better detail in the 4th edition? Thanks Vinod

If anyone is interested you can view my notes to Security Analysis at http://vinodp.com/documents/investing/security_analysis_index.html I have read Security Analysis several times but did not seem to retain most of what Graham is saying. So about an year back I started going through the book and tried to summarize what he is saying in each chapter. By trying to summarize, it forced me to slow down and really think through the ideas that Graham is conveying. It took me a little over an year to go through the whole book - often re-reading the same chapter again and again and until several of the examples are deeply ingrained in my memory. One of the most surprising things that I noticed is that Graham seldom tried to value a stock! He is more interested in determining why a stock should not be worth less than a certain amount. So instead of saying, I think the stock is worth $40-$80, he is more interested in determining if a stock should not be worth at least $30. His comments on emerging market bonds and why some of the debt of emerging market companies may be safer than the debt of their respective governments even though in theory it should not be the case, is simply far too advanced compared to what is currently being taught in the CFA curriculum. His comments on Bond Insurers and the problems that it could lead to is stunning. His bond equivalent valuation of equity is another very practical tool that is highly applicable in the current environment. Vinod

As PIMCO's Paul McCulley writes in this months commentary you can guess an economist's expectation of inflation vs deflection and what action should be taken, based on the economic theory he subscribes to. All we need is to identify if the economist belongs to Austrian or Monetarist or Keynesian school and there is no need to read the commentary as the arguments fall along the familiar pattern. http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/July+2009+Global+Central+Bank+Focus+McCulley.htm Vinod

"It was little short of nonsense for the stock market to say in 1937 that General Electric Company was worth $1,870,000,000 and almost precisely a year later that it was worth only $784,000,000. Certainly nothing had happened within twelve months’ time to destroy more than half the value of this powerful enterprise, nor did investors even pretend to claim that the falling off in earnings from 1937 to 1938 had any permanent significance for the future of the company. General Electric sold at 647/8 because the public was in an optimistic frame of mind and at 271/4 because the same people were pessimistic. To speak of these prices as representing “investment values” or the “appraisal of investors” is to do violence either to the English language or to common sense, or both." - Ben Graham, Security Analysis Some things never change. Vinod

Hi Parsad - Thanks a lot. Vinod

Did anyone get a hard copy of FFH 2008 annual report? I did not get from my brokerage firm so I sent letter to FFH but still did not get one. I followed up with another letter to FFH but still there is no response. FFH website has this statement Shareholders may request a copy of our audited financial statements free of charge by writing to the Corporate Secretary at 95 Wellington Street West Suite 800 Toronto, Ontario, Canada M5J 2N7 Is this address correct? Anyone has a suggestion on how to get a printed copy of 2008 AR? Thanks Vinod

"The arguments for and against ultimate inflation are both unusually weighty, and we must decline to choose between them." - Ben Graham, Security Analysis Vinod

1. What discount rate is used for valuation and what variables/data does he use to determine this? Given that inflation in India is persistently higher compared to developed countries and more prone to upward surprises, does he make any adjustment for this in his estimate of discount rate? 2. Does he use any data sources in addition to Corporate annual reports for his research? Is there something like a valueline that summarizes several years of historical data? 3. Does he have any position sizing limits to limit the maximum size of a single position or sector? 4. Does he try to structure the portfolio into various strategies Net-Nets, Arbitrage, Turnarounds, Inevitables, etc? If so could he eloborate on the various strategies? Vinod

Thank you! I only scanned the report but I am having trouble reconciling their IV estimate of only 107K while using a 1.7 book multiple for Insurance. I am not sure if they missed the investments but this does not sound right. Vinod

The only thing I can think of is a non-dollar denominated Sovereign Inflation Protected Bond. Something like the ETF, WIP may provide this protection. But it does not have options, so it would not be possible to lever up with a small amount of money. Klarman also mentioned about having bought a low cost inflation protection investment, so his portfolio may provide some guide. Vinod

You can add in the occasional asset/license sales by Govt but that is usually not a significant factor for US. Vinod

All Govt spending (every single dollar spent by Govt) has to be supported by one of the following 1. Taxes 2. Debt (T Bills, T Notes, T Bonds sold) 3. Printing Money Deficit is by definition funded by 2 & 3. The Govt has to fund the $1.6 trillion via #2 and #3 this year. Vinod

I do a somewhat similar check for stocks over 10 year periods, but I try to check how much earnings have increased as a result of retained earnings rather than use the market values. A stock can start the measure period at an expensive level and end the period deeply undervalued, in which case it fails this test. Vinod

I do not think this is a good test. Yes, it provides a quantitative check on intentions but it is a way of "using the market to inform you rather than to serve you". A better test would be "Has the intrinsic value increased by at least as much as the amount of retained earnings". I think the answer to this questions would be a resounding yes. Vinod

I was trying to research Buffett's purchase of KO and came across this article. Nothing much new but I have not read this article before. http://www.nytimes.com/1990/04/01/magazine/buffet-takes-stock.html?pagewanted=all Vinod

kawikaho, Check the mechanical investing board at fool and backtest.org to see if it fits your need. I am not sure if they have the data you need but it might worth a try and it is free. Their approach is too black box for me and have not really looked at what they have. I have a bunch of old S&P Stock guides that allows me to thumb through the data way back to 1984 but that is about it. Vinod

Eric - Great to have you back. Vinod

Could it be Martin Wolf of FT? He writes exceptionally well and is not ideological. By far the best. Vinod

Agree completely with Mark Jr. A few additional points 1. Buffett when he was running his partnership never had more than 40% of the portfolio in a single asset. Only after he was in control of Berkshire that he put his net worth into it. 2. This is what He said on this subject Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. Later in 1998, LTCM was in trouble. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up. I do not think anyone can approach the level of intensity and focus and depth of understanding that Buffett brings to an investment. So for us mere mortals it would not be prudent to assume that we would have the same level of understanding that Buffett has on any investment. The thing to worry about in investing is "things that we do not know that we do not know". These kinds of surprises are far too common. 3. I would look at Klarman sizing and he generally had a 10-15% sizing on his top investment. This is I think a reasonable position for a very high probability, large margin of safety and with low probability of large loss. A larger position would be reserved for truly once in a lifetime, 20 punch rule kind of picks. Even in this case I would limit it to say 20-25 of Portfolio with maybe an exception for Berkshire, since it is managed with the understanding that several owners might have 100% of their net worth in it. 4. A wide variety of business lines might reduce some kinds of risk but a single business is exposed to certain risks that cannot be eliminated like litigation, rouge employee acts, etc. 5. My estimate for a blowup (defined as permanent loss of 30-40% or more of IV) would be something like 5% of more for FFH. That is we can expect one such event every 20 years. So this is not something that I would be comfortable putting anywhere near 50% of total portfolio. Vinod

Although it has a cheesy title, I liked "How to pick stocks like Warren Buffett" by Timothy Vick. No great insights and nothing fancy but it summarizes Buffett's approach pretty well. Vinod

Does anyone else get the impression that Sokol would be taking over Berkshire after Buffett? He seems to be standing out ahead of the others for this role. Vinod