Read the Footnotes

Good point. I too am ignorant on the specifics. I didn't mean to impugn Metro Bank management, but to respond to Cubsfan's comments and assessments as I understood them. Falling victim to a charlatan is the worst case scenario that we all are trying to avoid, but there are many lessor risks in evaluating manager skill and honesty.

Metro Bank (MTRO.L) - UK exchange Cubsfan, I haven't followed Metro Bank, so I don't know the details of the story, but I'm sorry to hear of your bad outcome on Metro Bank. Hope it hasn't been too painful. I wanted to congratulate you on your reaction. The fact that you are here discussing this bodes well for you. I hope you can make the most of whatever lessons that might be available to you from a post mortem. You say "You can not believe anything they tell you" and "I bought it hook, line and sinker". Everyone is at risk of being taken in by psychopaths and charlatans, some more than others. I don't know what mistakes you'll feel you made, but here are some thoughts I hope will help even if you already know all of these points. Many great investors choose not to speak to management because they don't want to be influenced. I can also think of one investor I have tremendous respect for who says that he knows his unique personality makes him vulnerable to influence and that he doesn't have a good compass in this area. With that knowledge, he takes steps to minimize influence. Doing well in the markets has to do with refining a process that fits your personality. The risk of being taken in by management is probably something that isn't discussed enough and differences in susceptibility are probably discussed even less. Best of luck making the most of it. RtF

Great post, Schwab711. By my memory, I first met Schwab711 in the Spring of 2016 and he is just as insightful and incisive a thinker as you would suspect from his posts. I believe it was this same occasion that I pitched CNXC and FELP as Schwab711 references above. BG2008 was in attendance for all three of the pitches that I make reference to below, so maybe my comments will be of use to him or others. In the spring of 2016, I pitched the purchase of CNXC and FELP. Picasso and I both separately and roughly simultaneously came upon coal opportunities from different backgrounds and perspectives. I certainly felt it was very contrarian to propose coal investments in 2016 when so many coal companies were going under. Traded at the right time, you could easily have made returns of several hundred percent in roughly a year on each of them, but it was difficult to generate interest from fellow investors as Schwab711 said. I think both Picasso and I saw these investments as specific securities of specific companies that could be identified as promising opportunities with a margin of safety and it was not a bet on the industry itself, although you could argue the prospects of the industry were likely better than many people believed at the time. Shortly after I pitched FELP, I discovered some crazy guy named Picasso was writing about it. So coal has given me a lot from that perspective too, it introduced me to Picasso. In the spring of 2017 I pitched a group of Healthcare investments including HCA and simply buying the healthcare index. As an aside, BG2008 and I scheduled follow up conversations to discuss the opportunity in HCA, as a result of the pitch. The fear regarding regulatory changes had created a whole index that at least temporarily was undervalued. Those out of favor healthcare ideas beat the broader market with low risk. In the spring of 2018, I pitched buying VRX and/or LEAPS on VRX. People laughed, and I laughed along with them, but I was confident in my belief because I had been following the company for sometime, though more for amusement, or potentially as a whistleblower or short. My point is that sometimes a specific security is misunderstood (CNXC and FELP). Sometimes an entire sector is misunderstood (healthcare in 2016 and 2017). Sometimes a single company is misunderstood (VRX). Each of the examples I gave above were temporary opportunities the market presented. Many of the above buying opportunities lasted for quite a while, but I think BG2008 is looking for something that is misunderstood more consistently. I think BG2008 was asking about the situation where the industry is consistently misunderstood and he is probably consistently interested in higher quality companies. To the best of my knowledge, I was unsuccessful in talking him in to HCA, even though HCA is probably a better company than a lot of what I have invested in, and HCA has almost doubled in the past two years. Another point that might be worth making is that in the cases above, I was drawing on prior knowledge to identify the opportunity when it arose. I think from talking to Picasso about how he found FELP, he also relied heavily on prior accumulated knowledge. That is a little different from actively going out and seeking misunderstandings. That might work too, but it is a different process. The risk is that the further you are out of your base of knowledge the more you risk being (here I am paraphrasing Schwab711) as crazy as you might sound.

Doughishere, thanks for starting this thread. My mistakes were almost exclusively errors of omission. It's wonderful that I did well when I did act, on the other hand I have never lost so much money due to inaction when I had all the components necessary to dramatically improve results. It's a bit painful to know how much wealth I could have generated with just a bit more work and action. Concentration on my best ideas would have improved results too. On the other hand, I do sleep well.

Ah, that makes sense. They have many more forecasts that they share with clients which are not widely disseminated. Occasionally they share with non-clients additional forecasts for an extra asset class or two. In the past their slide decks that I saw would frequently contain forecasts for 40 different asset classes, or more.

GMO has their own Emerging funds for institutional investors, they also offer private funds, if you can meet a $1MM or $5MM minimum. The last time I looked I found there are a couple of ways small investors can get access to GMO's strategies but they are broad asset allocation strategies not limited to EM. Though their commentary is very useful, it's important to keep in mind who their audience is for their white papers. Most of their communication is primarily aimed at potential and current institutional clients. The EM benchmarks GMO uses for performance comparison are: http://us.spindices.com/indices/equity/sp-ifci-composite-price-index-in-us-dollar https://www.msci.com/emerging-markets (and variants) If I were a HNWI looking to increase my exposure to emerging markets value, I would look in to these opportunities: https://bonhoeffercapital.com http://www.acipartnership.com/about_us.php

Yes, an unenviable situation in some cases. In other cases the strategy has proven brilliant and the outcomes are phenomenal. The value to us in this discussion is to improve our chances to make informed guesses about when it makes sense to dive deeply over a long period of time and when doing so risks acquiring the analyst's version of Stockholm Syndrome. The risks can be both behavioral finance oriented on an individual level and a matter of incentive structures on an institutional level.

Good points. Plus, after having spent years becoming an expert in a single complex situation (such as Sears or Valeant), the cognitive dissonance of saying that you have no idea or it was all a waste would be quite high.

muscleman, I hope that you - by my biased quoting here - can see, that this line of posting is counter productive, for the CoBF members on here. If persons active here on CoBF can't post here on CoBF about their losses, and their afterwards reasonings related to that - [without being called out on CoBF this way, like you have done here], we [us, here at CoBF] will all most likely fare less well going forward. The wisdom of the losses [investing failures] are as precious as the wisdom of the gains [investing succeses]. - - - o 0 o - - - Please, be nice. I'd rather not take any "wisdom" from anyone who cannot take a loss and is afraid of being called out on an online forum. Munger in particular encourages us to rub our noses in it when we make mistakes and to be open and honest with people about our mistakes. That is not an easy thing to do. It is all too easy to simply to walk away from your mistakes, especially if you are an anonymous, or relatively anonymous poster on an internet forum. It would be nice if people who were bullish on VRX at $250/share would later return to post to the thread their examination of their mistakes after the crash, but that doesn't seem to happen. I have many friends from the board. Some of the best investors among my friends will happily engage with you in examining where they went wrong on ideas they posted on the board, but even these extremely intellectually honest investors must feel they have better things to do than post an analysis of their mistakes to the board. Part of the reason they are good is because they manage their time well. Occasionally you will see a post regarding mistakes, but not often. We need to recognize that even the best investors are likely to be wrong at least 30% of the time. The goal should be to be less wrong with time and not to lose too much money on either an absolute or relative basis when we are wrong. Anyone lacking that intellectual honesty is potentially dangerous to themselves or their investors. Also, anyone who is unwilling or unable to admit they have made mistakes in the past is a danger. Personally, I think WEB has probably made many mistakes in O&G, and I would bet he would admit to that. He has probably gone outside of his circle and made mistakes in other areas too. IBM might be another recent example. The fact that I think he may have made many mistakes in O&G has nothing to do with my respect for him as a person. Hopefully we can acknowledge mistakes made by investors that moved outside of their circle of competence, without taking that as an attack on the person. Regarding someone who has made misrepresentations, or tries to hide mistakes as part of misleading people with respect to their track record, that is an entirely different problem.

I think it would be best to rename this thread "Fairholme Partnership shutting down" to avoid confusion with the Fairholme funds. Another active manager biting the dust? Different then his mutual fund the Fairholme Fund. Hes just shutting down the Hedge fund he was running in addition.

There were never any responses. Why would they respond to someone who clearly doesn't understand? To be a bit more serious, occasionally someone would respond. Usually they would treat me like a ignorant novice that they were trying to educate. They told me that I did not understand and that supply would never increase because they were never going to make any more of these cars and therefore the price would only go up as a result. What is really scary is when you realize that almost none of the people I spoke to own these cars outright. In some of my informal and clearly biased samples essentially all were financed. If these samples have the least bit of predictive power, when the crash comes, it will hit hard. This part totally shocked me. If I were going to buy a toy, I would pay cash and keep the amount so small that if I took a totally loss I wouldn't care. I had mistakenly assumed other people overwhelmingly would pursue the same approach. To reiterate, I am fully aware that this is a small subset and of a small portion of ABS and poses no systemic risk and I am not aware of any SINGLE bubble at the moment that really does.

There were never any responses. Why would they respond to someone who clearly doesn't understand?

Oddball, I completely agree with the size of the auto loan market, and your assessment of one type of scenario that could bring down the system, however the original post asked: The question asks what might be exposed in a crash not what might precipitate a fall. Therefore, I think auto loans are an appropriate topic for this thread. Plus, if I am right there are loans that are much more egregious than most people expect and the effect will be worse than expected for those invested or employed with the bad actors, if these risks are not disclosed and priced appropriately. Also, there will likely be many different types of frauds of various sizes exposed just like in previous crashes. Oddball, I think your assumptions regarding subprime auto lending are very reasonable. However there is lending that has been unreasonable. Therefore you are making rational assumptions about actors who are behaving irrationally*, which might underestimate the problem. I would think of something closer to loan of $30k backed up by a $15K Dodge Neon. So though the size of the problem might be small relative to the economy, the lending standards are insane. By the way, how you might ask to you get an above market value auto loan? Well you simply end up upside down in your previous car or cars, and then find a lender to roll that debt in to your loan to purchase your next car. So this is not really an asset backed loan, it is really backed by the borrowers earnings, which might disappear in a recession or crash. At the other extreme I have also observed a different type of crazy auto lending. Here are some stories from personal conversations I had with people. I recently spent time with owners of cars worth more well in excess of $100k (some of whom were young people who seemed to have no discernible real assets or source of income). What was shocking to me is that every one of these cars I inquired about was financed to the gills. People were very happy to talk to me about how smart it was to buy them with as much debt as possible. The logic was that prices were only going to go up on the cars, and they would not want to have their money tied up in a car when they could make so much more money in the stock market. Though they did not say so, this seems to assume that stock prices also only go up. I was further shocked that the loan rates many of these people were getting were close to prime mortgage rates. I also talked to people who planned to buy classic or exotic cars. They all planned on buying with debt. I also met collectors who owned multiple Ferraris, Lamborghinis, Porsches, Aston Martins, etc. What was shocking to me is that these collectors were financing their collections at near 100% LTV. I kept asking these enthusiasts if they had any concerns about this, and they said that they aren't making any more of these cars and prices only go up. Does that sound familiar? I literally couldn't convince any owners of these rare, exotic, or classic cars that prices could go down. Obviously if there aren't enough Dodge Neon's to bring down the system, then there aren't enough classic 911's to bring down the system either. However, to anyone who invested in these loans above asset value, or in bubble priced collectors cars, is likely to be very unhappy someday down the line. You may need a car to get work, but you don't need a $100k car to get to work, and you certainly don't need a collection of cars. When the crash comes, a lot of these people won't have jobs anyway. Plus if we see this type of truly insane lending going on, what else is there in the sector that we aren't seeing? *These behaviors appear irrational because from the outside it is difficult to overcome your assumptions about the incentives and motives of the participants. Once you understand the true incentives and motivations of the individual actors, and how different they can be from what we would hope they are, then these actors start to appear rational in a perverted market suffering from a similar type of logic and incentives that lead to the previous implosion of subprime real estate lending.

I completely agree with the three quoted below. I would like to add that there is absolutely insane behavior within subprime auto lending, that has been well documented for some time for those willing to look. Luckily subprime auto is small in size relative to the total economy. I would like to add crypto currencies. If we aren't there yet, it will eventually attract fraudulent operators. Read the recent Grant's for an indication of the willingness to purchase against all reason. Finally, I think entrepreneurship and Venture and Angel Capital jumped the shark a while ago. Eventually there are going to be some very unhappy investors. Luckily most of these frauds will not be anywhere near the dollar value of Theranos and in aggregate will not be that large relative to the real economy. With time any of these areas of irrational behavior could grow in size enough to be of great concern although we have a long way to go.

http://www.cnbc.com/2017/07/14/jpms-jamie-dimon-blows-up-at-washington-on-earnings-call.html Here's an excerpt: Since the Great Recession, which is now 8 years old, we've been growing at 1.5 to 2 percent in spite of stupidity and political gridlock. Because the American business sector is powerful and strong, and is going to grow regardless of — people wake up in the morning, they want to feed their kids, they want to buy a home, they want to do things, the same with American businesses — what I'm saying is it would be much stronger growth had we made intelligent decisions and were there not gridlock. And thank you for pointing it out because I'm going to be a broken record until this gets done. We are unable to build bridges, we're unable to build airports, our inner city school kids are not graduating. I was just in France, I was recently in Argentina, I was in Israel, I was in Ireland. We met with the prime minister of India and China. It's amazing to me that every single one of those countries understands that practical policies to promote business and growth is good for the average citizens of those countries, for jobs and wages, and that somehow this great American free enterprise system, we no longer get it. Corporate taxation is critical to that, by the way. We've been driving capital earnings overseas, which is why there's $2 trillion overseas benefiting all these other countries and stuff like that. So if we don't get our act together — we can still grow. It's unfortunate, but it's hurting us, it's hurting the body politic, it's hurting the average American that we don't have these right policies. So no, in spite of gridlock we'll grow at maybe 1.5 or 2 percent. I don't buy the argument that we're relegated to this forever. We're not. If this administration can make breakthroughs in taxes and infrastructure, regulatory reform —we have become one of the most bureaucratic, confusing, litigious societies on the planet. It's almost an embarrassment being an American citizen traveling around the world and listening to the stupid s--- we have to deal with in this country. And at one point we all have to get our act together or we won't do what we're supposed to [do] for the average Americans. And unfortunately people write about this saying like it's for corporations. It's not for corporations. Competitive taxes are important for business and business growth, which is important for jobs and wage growth. And honestly we should be ringing that alarm bell, every single one of you, every time you talk to a client.

Actually, additional partnerships were opened due to the regulatory limitations on the maximum number of partners allowable in each partnership at the time. It had nothing to do with his ownership interest in each partnership.

You are on to something there. When the assets available to donate are large enough and/or the expected future tax liability is large enough, there are various trust techniques and giving options that can result in someone being wealthier with a more diversified, less risky source of income by having "given it away" than by having kept it in their own name. The wealthy have a way of buying such beneficial legislation. If you are wealthy enough to be concerned about such things, you might want to consult with an estate or trust attorney. The tax advantaged wealth preservation can be so advantageous as to be a viable retirement vehicle option in addition to an estate planning option. The best part of this is that the donor can gets credit for their munificence through public recognition while the average person has no clue that the donor may have enriched themselves in the process.

Let me know if you find the alpha forum I got a laugh out of this snarky posting by . . . SnarkyPuppy.

Just finished reading this book. For me it was a bit of a struggle to finish the last third of the book. Highlights: This book inspired me to go back and reread Poor Charlie's Almanack and other excellent books. The quotes of Charlie and others are all excellent and I came across a few that I was not familiar with. Lowlights: Toward the end of the book, I started coming across portions that didn't make sense to me. I found myself questioning whether it was a case unclear writing or poor editing which left me confused about the author's intent. Eventually I found myself questioning if he might have actually reached some misleading, or at least rather unorthodox conclusions regarding statements from Charlie and Warren. The synthesis of ideas at the beginning of the book was far stronger than toward the end. Recommendation: A great use of this book would be to simply browse a library copy to see if there are any quotes you aren't familiar with. Warning: If you frequently find yourself needing to read every word and completely read every book in its entirety, you might want to read this entire thread first and then decide whether you might better spend your time elsewhere.

A while back I came across somewhat similar newsletter services for small financial advisors. The people who sell and produce these use phrases like "thought leadership", a term that makes me feel ill for several reasons. The service basically prepackages a bunch of extremely generic, relatively useless advice that Munger would probably refer to as twaddle. The advisor then puts the firms name on the letterhead and does not disclose that most of the "content" of the newsletter is not their own. I would say it's misleading, but does not break any laws. The individual advisors then sign their own name to the bottom of the newsletter and voila, they are "thought leaders" without ever having to think (other than making the decision to subscribe to the service). Since these letters are only sent to clients and prospective clients, the letters are unlikely to end up on the web, and people are unlikely to realize the twaddle was prepackaged twaddle. Is this a good business? Well, it might be profitable, but I personally would not want to spend my time involved with an operation like this.

Oddball, do you have favorite books on failure you'd like to recommend?

Packer, I can't claim to be a REIT expert and I have never undertaken a systematic study as you have begun, but your thesis makes a lot of sense to me. First, let me clarify that my REIT experience is pretty much limited to the following: Academic study, general reading, and 10-k's Studying with some REIT managers in graduate school who were very successful, at least on their own behalf Interviewing with a few large REITs A few successful investments in REITs when P/AFFO didn't seem to make any sense. With that said, I have a few observations. First, there seem to be a lot of unsophisticated retail investors in REITs who buy for yield. Many of these retail investors probably don't access metrics regarding valuation or management cost the way they might for a mutual fund. As a result, REITs may add a level of inefficiency in the pricing of securities and the rewarding of managements. To add a couple of more anecdotal observations. Through talking to REIT managers, I learned of instances in which a REIT could be motivated to turn it's portfolio for institutional, or career reasons rather than for sound investment reasons. It would seem this sort of behavior would increase costs and simultaneously depress potential future returns. A REIT with a superior culture and incentives structure might be able to reduce costs and improving results by limiting these sorts of behaviors. Maybe someone from the board with experience in the industry could address this issue? When interviewing with a few REITs I couldn't see a relationship between the record of returns to shareholders and the opulence of the offices or the compensation offered. In fact it seemed there was a negative correlation. One very successful retired REIT manager I got to know made a fortune in REITs and was well known for his philanthropy. He told me that much of his fortune he made through the timing of trades in shares of his own REiT. He was adamant that the outside shareholders in his REIT had no idea of the true value of REITs or their likely future value and that outside shareholders typically bought in and sold out at exactly the wrong moments. He seemed gleeful when telling the story of how he could legally use his informational advantage to trade in opposition to the prevailing asset flows. I believe that REITs are an area where a specialist would have a much greater ability to make good investments than a generalist, including the chance to improving results through identifying superior management. If real estate is a less efficient market, then excellent management should have an even greater chance of producing superior returns, but there is always the risk that management will capture the majority of the economic rents. So as always you are looking for management that treats investors well. Clearly there are some great business people and asset managers in real estate and REITs. If REITs do have a greater degree of informational asymmetry and limits to management accountability then costs might be a great way to screen for managements. In fact, low cost may be a brilliant way to identify the managers that are in the game for the right reasons and are shareholder friendly. You also might want to try to control for the size of the REIT in your analysis. RTF

I would like to suggest that this poll may display self-selection bias. Those who check prices once per day or less than once per day likely show too much self-control to read CoB&F on a daily basis, and are therefore less likely to have had a chance to read or respond to this poll. Those with so much self-control they check their prices less than once a month are more likely to read this tread long after it's dead and are therefore less likely to ever respond. Might I also add that checking an investing thread where people discuss the fundamentals of a business or the news surrounding it is not synonymous with checking the stock price. One can still check the news on a daily basis but not get a quote on their holdings nearly as frequently. Point well taken. The correlations between internet usage patterns, price checking and news checking are all up for debate. I probably fall in the checking prices once a day, but checking news much more frequently camp and it took me around 20 hours to find this thread. So there's all of one data point on that subject. I should probably clarify that I was primarily joking in my post. I was enjoying the chance to intentionally create an overly analytical response a post that I found both fun and informative. Thanks for getting the discussion started jawn619.

I would like to suggest that this poll may display self-selection bias. Those who check prices once per day or less than once per day likely show too much self-control to read CoB&F on a daily basis, and are therefore less likely to have had a chance to read or respond to this poll. Those with so much self-control they check their prices less than once a month are more likely to read this tread long after it's dead and are therefore less likely to ever respond.