twacowfca

His book doesn't have any value for me. I agree with every single thing he says, but it all seems to be stating the obvious. Perhaps that's because I'm wired to be a value investor. ???

States generally have the constitutional authority to grant a city charter and to take a city's charter away, but this is rarely done. In the 20th century, one state I used to live in disincorporated two bankrupt counties in the 1930's and combined then with a solvent adjoining county that could pay their bills. Later, in the 60's, the state disincorporated a town that tolerated clip joints that preyed on soldiers from a nearby military base after their corrupt politicians and crooks threatened the lives of the family of the local newspaper publisher who had exposed their crimes.

The mechanism for setting Libor was intended to be entirely truthful and objective, something that lenders and borrowers could rely on. It was intended to replace the many various 'prime rates' that were not reliable indicators for establishing the basis for true rates. Manipulating a rate that is relied on throughout world finance as objective and truthful is about as serious as it gets. Libor influences most commercial rates including those that don't specify that Libor is the basis.

I dont't think the Libor manipulation can be dismissed as a minor problem that is merely deserving of a fine. Testimony taken by the Bank of England indicates that traders for six big banks, including JPM and BAC regularly called each other to compare what they intended to report, including remarks questioning whether the rates some banks intended to report should be lowered. The fraudulent reporting during the financial crisis when the true interbank rates were going crazy may not have been merely a few basis points.

I disagree. JPM is one of the banks that was apparently making fraudulent submissions for setting Libor. Libor is the basis for untold trillion $$ of transactions and contracts. The potential liability for a US bank is mind boggling.

Term life with a guaranteed renewable premium is good. You might ask in your will that the proceeds not needed immediately be invested in BRK. BRK is almost certain to outperform almost all mutual funds over time with far less volatility because of the free put that The Gates Foundation will surely maintain because they don't want their regular, required sales of BRK to be for a price that is far less than BRK is worth.

The main usefulness of EBITDA or EBITDAR is getting a window to the economics of the business as a starting point for valuation. For example, Joel Greenblatt, in The Little Book That Beats the Market, gives an easy to understand example of how adding debt to the balance sheet could make a company appear to be a more valuable, higher earning business than it was before debt was added. EV/EBITDA is probably a more revealing crude metric than market cap/earnings or P/E, but it should only be a starting point for understanding the economics of a business and it's value. :)

Thank you for posting. Blackstone Group is a smart outfit. We may not like it, but we need to understand the reality of the headwind ahead.

- I saw Berkshire Hathaway listed amongst the holdings of AIC Mutual Funds, which I owned. - I looked up Berkshire Hathaway on this thing called the "internet" on my Microsoft Webtv in 1998. - I stumbled across the new Berkshire Hathaway website and read one of Buffett's shareholder letters. - I started selling all of my investments to buy nothing but Berkshire Hathaway B's when the share price fell. - Searching on the internet, I found the MF BRK Message Board. - I met John Zemanovich (Lotsofcoke) on the MF Message Board. - He invited me to the Yellow BRK'ers Party in Omaha in 2001, where this skinny guy who still had some hair named Mohnish Pabrai was hanging around. - Standing in the reception area of the Omaha Golf and Country Club, I almost walked into Warren Buffett & his daughter Susie...Susie took a picture of me and her father. - I left my job and worked in the mutual fund and insurance industry after meeting Buffett. - I started buying stock in a company called Fairfax Financial whose website I stumbled across. - MSN Berkshire Hathaway Shareholders Board launches for me and a few Berkshire friends. - We start to interview people like Mohnish Pabrai, Tim McElvaine, Larry Sarbit, Andy Kilpatrick, a young Sardar Biglari! - Hordes of Fairfax shareholders start flooding the board, because of the short attack on Fairfax. - I leave a message on the Investor Relations contact for Fairfax telling them something is happening with their stock, and it looks like a coordinated attack. - I write a letter to Prem Watsa thanking him for the letters he writes...he invites me to come to Toronto, but I could not go at the time. - Two years later I finally get to my first Fairfax meeting. Prem, JoAnn and Francis have arranged for me to spend the day at Fairfax's office...I start the Fairfax Financial Shareholder's Dinner with nine people and Francis surprises us! - I come back and quit the mutual fund and insurance business and start Corner Market Capital with my cousin Alnesh...our very first partner is our future director and part owner Andrew Cooke...who happened to work as a consultant to Fairfax! - We hold our annual meeting alongside Fairfax's meeting and the dinner. - Three years later, JoAnn passes away from colon cancer and we hold the dinner in her memory with proceeds going to the Crohn's & Colitis Foundation of Canada. - Sold a portion of the General Partner to our two directors...Andrew Cooke and Glen Rollins...they are an intricate part of CMC and MPIC Funds now! - The shareholder's dinner now has 145 people attending, with 12+ speakers, and we raised $13,000. - CCFC asks me to help organize the first ICE Gala in BC with a goal of raising $200,000! - Corner Market Capital passes it's 6th Year of Operations! While there may be a certain amount of opportunity in the above, the bulk is sheer dumb luck...fortunate enough to stumble across good people, good mentors, good partners and good friends! Cheers! All of that couldn't have happened to a nicer guy. Belated happy birthday, Sanjeev! :) Frank Tim Joseph

Yeah, but the quality's worth it with their main and mid frame systems. We used to have to beat our IT guys with a stick to use anything but IBM. They wouldn't even think about using a PC for special applications until well into the 90's. Then no off brands, only HP with Intel chips and Windows. Meanwhile, we built up an office network using Macs. Windows 8 looks like a huge home run. I think it, especially with Surface, will give Microsoft a new lease on life to hold off the reborn Apple. But I'll fight you if you try to take my Apple toys away from me. On another subject, our CFO, for whom security is the most important consideration, recently got an Iphone and seems to be phasing out his Blackberry.

You're very welcome. :)

Beta refers to the propensity of the price of a stock to rise or fall more or Less than the market rises or falls. It's a useful concept in some circumstances. For example, in March, 2009, we rotated out of some of our low beta stocks that were great businesses and had fallen less than the market or had even risen during the market meltdown. We used cash from those sales to buy high beta stocks like BAC that had tanked, on the supposition that the enormous liquidity the government was pumping into the system would stabilize the market before it fell all the way to the sub basement level reached in The Great Depression. We sold those high beta stocks a few months later when the market rebounded after they rose about four times as much as the market went up. Then, we put the proceeds back into the low beta stocks of the great businesses that should outperform the market enormously over time. Beta is useful when trading in and out of stocks, but it is not very relevant for valuing the long term worth of a business. Beta is however an extremely important concept to understand for fund managers who could lose their jobs if they underperform in the short term, but who will hold on to their jobs if their performance fairly closely tracks the mediocre performance of other fund managers. Volatility means how much percentage a stock (or the stock market) goes up and down, not compared to the market like beta, but compared to itself, in other words compared to the mean of its own price fluctuations. The width of the standard deviation is the usual measure of volatility. Fortunately for those with a long term perspective, volatility is often computed based on the average daily fluctuation over a relatively short interval of a few months. Volatility has a strong tendency to regress to the average percentage or mean. Therefore, those who have the advantage of being able to invest (or sometimes trade) with a long term perspective can take advantage of volatility. As Warren has pointed out, volatility is the friend of the value investor who isn't overexposed to Mr. Market's moods and who has dry powder available to shoot game when the hunting is good. :)

A rise in short term rates would be reflected immediately with a rise in money market rates. Banks that depend on deposits for their funding would have to match those rates and pay more, probably before they could raise the rates on loans that roll over. However, the effect on each bank would be different depending on their long/ short exposures to changes in interest rates. The recent stress tests that banks published tells a lot about what the effect of a substantial rise in rates would be for each bank. In general, I don't think that a rise in rates would be favorable for most banks. Taxes on the investing class to pay for increased Medicaid enrollment are definitely going into effect Jan. 1, 2013. Politics involving who's in and who's out after the election could make it difficult to gain consensus to extend the Bush tax cuts or repeal the spending cuts scheduled to take effect in January. I think stocks will decline in price as the effective owners earnings take home pay is cut by tax increases. Most insurance companies, especially those with long tailed liabilities, may, however, benefit from a rise in interest rates. :)

I think you are right again. The current risk free rate is very low compared to the potential for appreciation of certain stocks. To some extent, the market compensates for this through a high implied volatility in the valuation of certain leaps, especially those that have experienced high historical volatility recently. BAC is a salient example of this phenomenon. There may be some sleepers like WFC with relatively modest implied vol that could be better buys. Be aware that rising interest rates at some time in the not to distant future such as with increased taxes on the investing class in the US in 2013, could pinch net interest margins for banks if they are unable to raise the rates they charge on loans in a time of weak demand as much as they may have to increase the rate they offer to attract deposits. I don't think banks are a better business when considering their long term prospects through the entire credit cycle. Every decade or two the government takes the worst of the lot out and shoots them. Then the survivors are put under many restrictions. They no longer have the monopoly they enjoyed decades ago on attracting deposits. Even the big money center banks that have a lock on profitable business that small banks can't handle have a big downside with loss of control and lack of liquidity on the derivatives they write.

Arden, your understanding of Black Scholes is correct. It's as good as it gets for pricing short term options, but it can be way off when pricing LEAPS. LEAPS are usually priced more accurately using scenario analysis by assigning probabilities and expected values to future states. :) Your idea of substituting a different rate for the risk free rate makes sense for LEAPS. Using the industry or sector specific cost of capital for very long dated warrants would be appropriate. You might be able to lever that idea into a Nobel Prize if you are an academic. :) The WFC warrant you describe does seem to be a better buy compared to the option assuming the variables for each are about the same except for the duration. Referring to the risk free rate as being the assumed drift rate is one way of looking at it, but the risk free rate is also related to the cost (real or implied) to finance the purchase of the stock in order to write a covered call. As that rate goes up the cost to write the call increases and the call gets more expensive to write. I'm always sceptical about theories that assume Mr. Market is omniscient.

Cuban made his fortune by selling his company into the greatest bubble ever in the US. Then he executed equity forward contracts to make sure that he would be able to take something substantial out for himself if the bubble popped before his lockup period expired. Smart move! That experience colors his perspective on the stock market.

Interesting assertion. Btw, absence of evidence is not evidence of absence. Given that drive and ambition are based a lot on circumstances and are such subjective ideas that are difficult to define, I am interested to learn more. The only article I could find online was an article from Time - not the most credible of magazines when it comes to unbiased scientific reporting - and that article too couldn't give any conclusive evidence for the claim that ambition is genetically influenced. If you have access to any scientific literature from credible scientific journals, I would be interested to read it. What were the sample sizes used or how were the studies controlled for environment/culture/nationality etc? Was it an observation based study or a questionnaire based study? The reason I am asking is because some similar studies I have come across seem to be methodologically flawed. Of course not, but a causal link can never be established. You can only draw inferences from the (non-)existence of correlations. The thing I quoted about twins I am 99% sure that I got from Bryan Caplan, but I can't seem to find it again. However, he has done no such study so I am gathering he got it from someone else, like Taubman, 1976 (here: http://www.jstor.org/discover/10.2307/1827497?uid=3738984&uid=2&uid=4&sid=56284796393). Of course, since that is a study only on white males in America, it does not deal with extreme environmental differences (of which I am sure we would see different outcomes - sending one child to Somalia and one to Monaco will show up in future income). Overall, I am obviously no expert on the subject but my impression is that scientific consensus has moved from the tabula rasa theory to a worldview of most things about our behaviour being genetically decided or at least heavily influenced. Ambition and drive in particular certainly feel like things that should be under our control, but then again evolutionary psychology predicts that being a very useful illusion for us as human beings, so I stay sceptical of that. However, almost no one is very keen on the idea of powerful genes. Liberally minded people think it makes the world even more non-egalitarian and conservatives are afraid that the image of the self-made man could be tarnished. Suggest you order a copy of the out of print book: The Truth About You, by the late Dr Arthur Miller. Whether genetic, epigenetic, environmental, imprinting or whatever, we all have tropisms, or motivated abilities that become manifest at an early age and continue without essential change for the rest of our lives. :)

I'd add, too, that for me one of the lessons from LTCM is that you can be sure (AND CORRECT) about what has to happen -- on the run and off the run Treasury prices will converge, for example -- and still lose your ass. Why? Because, others things can happen first. When you're highly leveraged, everything goes to zero on a long enough time scale. Things that haven't happened before will happen. Buffett has been talking about this since Taleb was in high school. Buffett was able to get extraordinarily wealthy -- because he was so good at this -- even without leverage (though the float was a big help in Berkshire's golden period). And so, if you follow his example, it is almost certain that you won't get the same returns without a lot of borrowed money. And, if you borrow a lot of money... It is hard to do extremely well without leverage and that is why it will always be the sirens's song of the investment game. The sad truth is that markets really are getting more efficient in the sense that spreads are narrowing on average for all sorts of trades. The profit margin has narrowed for all the different hedge fund strategies that used to work so well for people like Thorp in the early days of systematic trading. Ergo the use of leverage which leads to blowups. But big banks don't have to borrow money to engage in such risky trades. They simply make multi billion dollar trades with other banks and then declare that some related trade offsets and balances the first trade. Trading that isn't market clearing is a big lie in aggregate because of the size of the positions. The recent difficulty JPM continues to have with only one trade involving less than $100B notional amount is only the tip of the tip of the iceberg. Any one of the biggest banks would almost certainly go bust if they tried to unwind all of their derivative trades in a year or so. How do I know this? Because Gen Re actually wound down their whole book with great difficulty over several years, with significant losses even though they waited patiently for the most opportune times to close out different positions. And their whole book was 'only' $30B or so if I'm not mistaken. Most of the big banks are said to have derivative books that are somewhere between 100 and 1000 times the size of Gen Re's book.

Not to justify Sellers but all I've heard about that situation is that he had an awful time. Friendships and business relations were finished. As a fund manager put it to me, "he is done in this business". And at the time he was very close to making it to the big leagues, like $300 million AUM and a column in the Financial Times. From there to managing pubs and fighting lawsuits left and right? Not that I wouldn't like to be in his present situation but without the baggage and there is a baggage. And his big sin? Everyone made so much of his concentration but I think most in this board will recognize that it is a perfectly reasonable strategy if your picks are OK. His most important pick Contango MCF, the reason for his breakout but also his fallout, had such a margin of safety that survived pretty decently a failed sale, the collapse of Lehman, and one of the outstanding commodity bear markets on record (natural gas). Premier Exhibitions? That was a bigger mistake, go to variant perceptions if you want the whole story, but many had worse sins (Fannie, AIG, Washington Mutual) and he was not alone in having to recover from a bad 2008. The problem seems to me that he did not have a chance for a comeback: too many recent investors that did participate in his breakout years, too much hot money from funds of funds, and he did not short. And those investors left him before he could get to the "oversexed man in a brothel March 2009". On the other side when you have a big opportunity, a once in a lifetime opportunity like let's say TARP warrants, do you want to dilute returns over-diversifying, timing or shorting so you can: 1. handle investors pre-conceptions and ST time frames, like Burry had to face. 2. have space in a bear market, to survive a deepening of that bear market, like Munger had to face. 3. avoid short sellers moving against you betting your clients will desert you, like Berkowitz had to face. How to build a business so we can protect investors from themselves and you can get to the other side? One of the reasons I love following this board is learning from others in this area. There is more to this business than being a good investor. Yes to your last statement. We all have our blind spots. "Wud ta 'ave tha gift he gae us t' see ourselfs as ithers see us.". But it's so much fun to pick apart others flaws. The cardinal sin and fatal flaw of the geniuses at LTCM was being EMH believers and not sizing their bets conservatively to provide a margin of safety to live to fight another day. That flaw was compounded by their non genius leader's being a martingale man who often doubled down on a bad bet instead of cutting his losses. Sellers blind spot was having a superficial experience with card counting and Kelly bet sizing. Old time successful card counters know that lots of things can come at you unexpectedly like having a cheating dealer. Therefore, they never use full Kelly bet sizing. Even a half Kelly may be too much if someone doesn't have a lot of experience. A full Kelly can blow up a fund easily merely through a random draw without even experiencing a black swan flying over and crapping on your head. With a full Kelly, there is a 50% chance of a 50% drawdown of your capital. If that happens without a lock up, there will be a run on the bank, and that fund is toast.

Ironically, Sellers blew up without good risk control during the financial panic. No need to feel sad for him though. He took his high water mark fees ($30m or so), closed down his fund with no attempt to gain back his clients' losses and retired to enjoy being a big fish in the microbrewery pond.

Interesting test of self awareness about how much one doesn't know. However, one of their questions (and the supposed correct answer) was misleadingly imprecise and technically wrong. I think you are right that investors and traders with the best long term records are exceptional in assessment of risk/reward. Buffett is a great bridge player. Thorp had the best risk adjusted record of all with a downside adjusted Sharpe ratio of 13 (only three down months and no down quarters in a couple of decades of fund management). Ziemba says that the great majority of traders, such as Jim Simons, who have been highly successful over their careers without blowing up have, like Thorp, been successful card counters. :)

That quote attributed to Einstein has not been verified from any source I'm aware of that was in existence during his lifetime. I think it was Thomas Edison who said it. You're right, but a similar, unverified quote has also been attributed to Einstein.

That quote attributed to Einstein has not been verified from any source I'm aware of that was in existence during his lifetime.

Realize that half of California's Nobel prize winners didn't score very high on IQ tests when they were young. IQ tests are an imperfect way of measuring intelligence, especially very high intelligence. Warren and his sister both scored about the same on IQ tests in 999+ percentiles when they were young, but the test results didn't make a clear distinction between the intelligence of a very smart lady and one of the great geniuses of the world. Richard Feynman was mediocre in subjects other than math and science, probably from lack of interest rather than from lack of ability. Einstein couldn't pass the admission test for the high level technical college in Switzerland he wanted to attend, although he did well on some sections of the test. He had to take a year of what was essentially a prep high school before he was finally admitted. When he published three papers in one year that turned Physics upside down a couple of years after graduation, one of his professors exclaimed, "Einstein!? That lazy dog?" We've given thousands of IQ tests. One time we got an alternate version of a test we had been using. I asked two people who had scored 135+ on the first test they had taken during the hiring process if they would like to take the second test as well, and they agreed to take it. They both scored about 125, probably because they weren't under any pressure to perform the second time.

I sort of agree too, but only if a good workman follows the master of the craft. Ben Graham was the master, and Warren was his star pupil. Walter Schloss was Ben's gofer, and his arithmetic annual returns over five decades were nearly as good as Warren's. He carefully observed everything Ben did and didn't do. He learned how to buy stocks cheap, and even cheaper, like waiting until December tax loss and portfolio dressing time -- and then putting in lowball bids for balance sheet bargains that had declined a lot in price. He returned annual profits to his investors and escaped the curse of most fund managers, finding suitable investments for hot money. What a guy! By the way. Walter was undoubtedly well above average intelligence. People with average intelligence usually aren't very literate, don't like to do math, spend time watching TV. Their writing involves things like posting on Facebook.