maxprogram

Although I disagree with Taleb, I actually think that his philosophies line up fairly well with Buffett's and Graham's. Taleb is certainly full of himself, but I think his comments on Buffett are from a lack of understanding of what Buffett does and how he invests. Due to his background, he understands/comprehends the investing style of Soros much better vs. true value investing (and other principles Graham discussed in his books).

Also remember -- the BNI acquisition is for 40% stock. Not sure what the index funds will do here, but they could replace up to 40% of their BNI holdings with BRK. So, it might not be necessary to purchase the entire BRK position in the market.

I attached the 2007 Lehman report as a PDF. Tariq - the numbers don't exactly match up but for this PDF I think the page numbers are just 1 behind. In other words, 115 on Buffett's page would be page # 114 on the PDF.

If you believe this, I think you fundamentally misunderstand value investing. Value investing (as taught by Graham, Buffett, Klarman, et at) is protecting your portfolio by purchasing assets (individually or in aggregate) with a margin of safety. Margin of safety = gap between price & value or any other method that reduces uncertainty. The true value of an asset is the expected value under many different scenarios. In other words, even if something can be worth zero, it still can be a value investment. From "Security Analysis": "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." If one put their entire portfolio in a security that may go to zero if you're wrong, then yes, that would be speculative. Graham goes on to say, "We speak of an investment operation rather than an issue or a purchase, for several reasons." What does "safety" mean? "The safety sought in investment is not absolute or complete; the word means, rather, protection against loss under all normals or reasonably likely conditions or variations." ... "Furthermore, an investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly."

The idea that BNI's moat is "bigger" than Coke's is funny. Just look at the market caps, that tells the whole story - $30 billion versus $130 billion. I think a better way to say it is that Burlington Northern's moat is stronger than Coke's. Coke does have a much bigger franchise. When you look 30+ years out, and attempt to rank which businesses/industries are most likely to still be around, I think BNI would definitely be above Coke on the list. Just as I think Coke would be above Google and Microsoft (even though both have larger franchise values).

I don't think Wal-Mart is overly cheap, and if you're a small value investor there are certainly many other better opportunities out there. However, as a more "defensive investor" (in the Ben Graham tradition) I think Wal-Mart has a lot of things going for it: * Trading at 10% pre-tax yield (EBIT/EV) vs. current bond yields * Great company, well managed * Low-cost, extremely efficient distribution, almost impossible to replicate * Future more certain than other bigger companies like GE, MSFT (i.e., when you think what might happen in 20 years, I think there are much higher odds WMT will still be the leader). * They've screwed up trying to expand internationally in the past (got outside COC, tried to "build outside their moat" as I like to say). But, I think they've realized this and are focusing more on domestic operations. * Will do well (though not stellar) through booms/busts in the economy

He is also coming out with a book later this year that is specifically on using checklists. The title is "The Checklist Manifesto: How to Get Things Right". Below is the Amazon link: http://www.amazon.com/Checklist-Manifesto-How-Things-Right/dp/0805091742 The bestselling author of "Better" and "Complications" explores the significance of the lowly checklist, and how it has revolutionised medical practice and saved lives. Today we find ourselves in possession of stupendous know-how, which we willingly place in the hands of the most highly skilled and hardworking people. Yet avoidable failures are common, and the reason is simple: the volume and complexity of our knowledge has exceeded our ability to consistently deliver it to people - correctly, safely or efficiently. Atul Gawande makes a compelling argument for the checklist, which he believes to be the most promising strategy in surmounting failure. He looks at how the checklist has allowed pilots to fly airplanes with more power and range than possible before; and how taking this idea to the complicated world of surgery produced a 90-second checklist that reduced surgical deaths and complications in eight hospitals around the world by more than one-third. Along the way, he will show how checklists (which cost next to nothing) actually work, and why some make matters worse while others make matters better. "The Checklist Manifesto" is a fascinating exploration on the nature of complexity in our lives - and how we can best overcome it.

I think Buffett attempted to challenge the survivorship bias argument when he stated that "...these winners were all well known to me and pre-identified as superior investors, the most recent identification occurring over 15 years ago." Also, we know (from Buffett biographies, old friends, etc.) that those he selected for the speech weren't just the "best" out of the people involved with Graham -- they were for the most part friends of Buffett's before and during the time their track records were established. Also, my guess is that most, if not all of those he listed continued to outperform the markets after 1983 (at least those who continued investing). I like to think of luck/skill in investing like very large dartboard: the unskilled, or those without the right strategy, are throwing darts blind all over the board. A few might hit the bullseye every once in a while, but in the long-run most wont succeed. Yes, out of a pool of millions of these investors, you should get a few who have "flipped heads" 20 times in a row. But the people like Buffett and other Grahamian investors know the right area to throw the darts. On each individual throw, there is a degree of randomness and luck involved -- but the probability is higher that these investors will get a higher score, on average, after many throws. So, over time, they will be more successful than the rest. I think that Taleb recognizes this in his books. A few quotes from Fooled by Randomness: "All the best and surviving traders trade on ideas based on some observations (including past history), but they make sure that the costs of being wrong are limited (and their probability is not derived from past data)." "Ergodicity means, roughly, that (under certain conditions) very long sample paths would end up resembling each other. Those who were unlucky in life in spite of their skills would eventually rise. The lucky fool might have benefited from some luck in life; over the longer run we would slowly converge to the state of a less-lucky idiot. Each one would revert to his long-term properties."

I think you guys are missing the point of the idea that lumpiness means nothing. 16% per year does NOT mean 16% per year. It could mean for example, -10% year 1, then +30% year 2, then 5% year 3, then 22% year 4, etc.. for an average of 16. The only person who got 16% per year exactly was Madoff. I don't think anyone ever said 16% every single year. I believe Klarman's point was that any loss on your portfolio is difficult to make up for, and can wipe out a lot of previous gains. The quote was from "Margin of Safety." Of course, Mr. Market is irrational, there will be mark-to-market losses, etc. But overall, as Klarman discusses, being extremely conservative with valuation estimates, having sufficient (but not excessive) diversification, holding cash in lieu of bargains, and opportunistic hedging will minimize downside. Rules #1 and #2 of investing. One example, as most on this board know, is Mohnish. I think that he will be fine in the long run, as will all his partners who stuck around. But after a 60% loss, it takes a long way to go to make up for it, even after a 50% gain. He's still trouncing the market and will probably continue to do so. I just think the purpose of Klarman's quote was to say that a string of 25-40% returns followed by a 50% loss is the same in the end as a string of 13% returns. Two different styles of investing with the same results.

Again, that is true the 49 years out of 50, but unfortunately that 50th year does eventually come around. Multiple successes multiplied by zero is still zero. How many hedge funds perished last year...25-30%? And that hedge fund number would have more than doubled if they couldn't lock up the capital. How many value fund managers got killed last year...85-90%? How many pension funds got mangled last year...65-75%? This reminds me of a good Seth Klarman quote: "An investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principle. An investor who earns 16% annually over a decade, for example, will end up with more money than an investor who earns 20% for 9 years and then loses 15% in the 10th year." I think both methods are justifiable. Consideration also has to be given to whether you are an individual investor, or are managing other people's money (and in that case, how good of a partner base you have).

Thought this would be helpful. The following chart is the inflation-adjusted (CPI) price of gold since 1900. Keep in mind that the price data is annual, so the "intra-annual" prices may distort the averages a bit. http://maxcapitalcorp.com/public/Gold.gif

turar- Not sure what Baupost's returns are from 01 on. But keep in mind that those returns you listed are from ONE of Baupost's funds (not the original one). Although he underperforms for this 10+ year period, I think you can infer that the fund must have had fairly large outperformance over the last 7 years. You can see that even in '00/'01 the fund owned a lot of market puts and hedges, which would have had a huge relative impact in '02.

http://www.ted.com/index.php/talks/shai_agassi_on_electric_cars.html (thanks to Miguel from Simoleon Sense) A related video on the potential for electric cars (and batteries). The economics discussed in this video are very interesting. I'm sure both Buffett and Munger have contemplated scenarios like this, and how they potentially change the economics of the energy business (for better or worse). i.e., If the entire U.S. moved to electric vehicles within 10 years, what would that do to the oil/gas and utility industries? In regard to moats, I think that the NA car manufacturers had competitive advantages many decades ago but they eroded to nothing over time. For BYD, it could be being the low cost provider, or having technological advantages through patents or other proprietary knowledge.

http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm "Warren Buffett hasn't just seen the car of the future, he's sitting in the driver's seat. Why he's banking on an obscure Chinese electric car company and a CEO who - no joke - drinks his own battery fluid." I've always thought that Buffett is a lot more technologically proficient than people give him credit for. Along with some of the ventures into wind energy, Berkshire is proving it is less old and stogy than some may think. Looks like he got BYD at around 12x 2008 earnings, not bad for its potential growth.

The Kelly formula shows what the optimal % to put in a certain bet is based on the outcomes & probabilities. But, it can also tell you which (or how many) investments to make (not necessarily the sample size). The "goal" of the formula is to maximize the geometric mean return of the portfolio as a whole. The commonly used example is a coin where heads yields a 3x return and tails is a complete loss. So if the coin flip is the only investment available, the formula says to put 25% in it. If you have three of the same coin tosses (each with independent outcomes), it says to put about 21% in each, with 37% in cash. If you have 100 of the same tosses, you should put 99.x% of the portfolio into all 100 tosses. Not 100%, because there is still and extremely small chance that all 100 will come up tails. The more bets you can make (assuming they have the same odds/outcomes), the higher the mean return for the entire portfolio. Obviously, the investment world is much more complicated and uncertain, but the same theory still holds. It seems like this is the basic argument that Markowitz uses in favor of diversification. But where it breaks down (which Buffett and other good investors know) is that it is incredibly difficult to find a lot of good investments. So the Buffett's of the world sacrifice more diversification for having better conviction and confidence in the few investments they do make. It's a tradeoff every investor needs to make. Those are my thoughts anyway.

I think arguments can be made for either being more concentrated or more diversified in the presence of more bargains. Here is the argument for being more diversified: On a purely mathematical basis, the more bargains (investments with higher expected return), the more you should be diversified. In other words, when you can only find 10 investments that are trading at 50% of value, you should be concentrated in those holdings. But if you can find 30 investments for 50% off (assuming you have the same level of conviction), you should invest in all 30 of them. This can be shown using the Kelly criterion. Also, when on average everything in the market is relatively cheap, it's much easier to throw darts and still be successful. If you are somewhat diversified, you're going to have good long-term returns, and little risk of permanent capital loss. With extremely cheap securities, it's hard to determine what's the "best" buy: a 30 cent dollar, or a 35 cent dollar. It's splitting hairs. So, that's an argument for more diversification. A more focused portfolio in a few investments where you have a lot of conviction in also makes sense. (Especially for individuals who don't have to worry about short-term investor withdrawals).

I posted this chart on the old board a few months ago, and thought I would put it up again: http://maxcapitalcorp.com/images/PriceValue.gif I hate to act like a market prognosticator, but I don't think we've seen capitulation yet. People talk about how pessimistic everyone is. But compared to what? Compared to the attitude 2 years or 10 years ago market participants are very pessimistic. But compared to what it was like in the late 70's or early 30's, nowhere near as pessimistic. 450 on the S&P sounds low to me (you never know), but I can certainly see 600. Using 10-year normalized earnings, 600 would be about a 10x multiple. Certainly not out of the ordinary with current economic issues -- it got down to the 6-8x range in 1932 and 1980. And if you think earnings could be low for an extended period of time (2-3 years), the 10-year earnings figure, and hence price, would be lower. I don't think that means one should be trying to "time" the market, but at least you should be expecting high odds of lower prices down the road.