twacowfca

Yes. They were unkind. Their mothers didn't teach them how to share the ball. ;D I came in to watch the game in the early part of the second quarter. Toward the end of the third quarter, I didn't see the Seattle offense touch the ball. In the meantime, the Seattle defense and special team put two more touchdowns on the board. Did I miss something?

I've worked on cases with Big 4 firms (umm, used to be Big 5), small and midsize firms. Cases involving small companies, big front page stuff, and one of the first Chinese RTOs to blow up. In no case have I seen anything that would suggest the auditor was in on it or ignored it. When the company blew up, the auditors were as surprised as everyone else. Auditors must rely on management representations in order to conduct their audit, and management bent on committing fraud will work as hard to fool the auditors as the investors. I would say that sometimes there have been questionable accounting decisions where they let the company get too aggressive. Read the footnotes and try to understand how the accounting impacts earnings. Understand the industry to know what's normal. Be careful with complex businesses. The books suggested above have techniques to identify problems. Watch out for auditor resignations, especially if questions have been raised about the company. Auditors will never say fraud has been committed because they can't. The closest thing they say is don't rely on our reports. And as far as an auditor's history, I would say that technique is better for identifying short candidates than longs. Thank you, Greg, for giving us your insider's view of the limitations of auditors to catch fraud.

Yes, the problem of bad agency is much more likely with small companies that don't have established records. being in a country with a strong tradition of the rule of law is no guarantee against bad agents, especially when there are lots of perfectly legal ways to shaft minority sharehders. A certain big liar comes to mind. 8)

Most frauds in the English speaking developed countries where the rule of law is well established and in other developed countries begin when the results appear to be likely to disappoint. Then, a company may start to play accounting games to make the results seem better than they really are. Next, things get worse, and not following the spirit of the accounting profession to accurately reflect reality can slip insidiously into fraud. Digging into financial statements and especially reading all the footnotes in recent years to see if there are changes that indicate management is glossing over adverse developments is quite helpful in spotting accounting games that put management on the slippery slope to fraud. The most blatant frauds involve the problem of agency. The Chinese reverse mergers are merely the most glaring example of this problem. The officers of these companies have not been the agents of the noncontrolling shareholders, but are the agents of self dealing skimmers and criminal gangs often abetted by corrupt officials. It is entirely possible for a bad agent to transfer assets of a company legally to the detriment of shareholders, especially when the transfer is from one country to another with government oversight that is less strict. This can happen even in developed countries where it may be difficult to extradite someone who is very likely guilty of fraud back to the country where the fraud took place. When the numbers and ratios for companies that appear at the top of the list when a screen is run are outliers, it is wise to think that something is not right. In 2001, Friedman's Jewelers and USG had the best P/E ratios of small cap to large cap publically traded companies. Five minutes of research revealed the reason USG was trading as a bargain: major asbestos liability. However, what was wrong at Friedman's was not obvious. I stayed away from Friedman's because I didn't understand why they were so very profitable. They were a downscale jeweler that extended credit to many of their customers. The price of their stock tripled within two years after they appeared as the best bargain on the P/E screen. Then, they went bankrupt when their management was no longer able to juggle the inadequate allowance for bad accounts. I didn't dig deeply into Friedman's because Their results seemed strange in relation to the low quality of their business without a good edge in a competitive market. One company I did lose money on was Trident Microsystems that I bought as a flyer because they were a US company with real assets and lots of cash that showed up on the Magic Formula screen as a dramatic net net. Their tech edge was deteriorating and an activist fund manager made a move on them to try to get them to return cash to shareholders. Their managers nipped that in the bud by taking a big chunk of their cash and using that to buy questionable R&D from a related Taiwan company. I saw the writing on the wall and sold my shares at a sizeable loss. Fortunately, it was only one or two percent of the portfolio. A few years later, the management cut a deal with a Taiwan company that apparently transferred all the substantial good assets of the company to Taiwan in exchange for something of questionable value, leaving Trident with a big hole that soon led to bankruptcy. for all I know, this may have been perfectly legal because two different legal systems governed the transactions.

Capital preservation should be the main goal for this retired couple. That means cash that could be available for picking up some high quality, income producing assets at bargain prices if the market sells off. At least wait another six months to see what happens. However, if you are determined to have them fully invested in equities, you might put them 25% in LRE, 10% in Admiral Group because they are great businesses that return almost all their earnings to shareholders. Then , put most of the remainder into high quality Utilities that pay good dividends. Keep at least 10% in cash for emergencies.

More than fully hedged before today. Bought some more OTM puts today to add to the formerly OTM puts that are now ITM.

Yup. If one can protect the downside, ( margin of safety ) then goosing the upside often makes sense. :)

Optionality is one if the best ways to deal with loss aversion. For example, in our business our bank offered us as good a rate on a slice of a pool of tax free bonds as we were were getting on our regular cash balances. They guaranteed in writing to buy them back on short notice at our purchase price anytime we wanted to go to cash. That was extraordinary, basically a free put. It made me question the wisdom of not only our mid sized bank , but the entire banking system in the mid 00's. We got an effective after tax rate of about 2% higher than otherwise. Then, we exercised our put in late 07 as we anticipated counterparty risk as the system appeared to be on the verge of becoming unglued then.

You can be very limited if you only invest in common stock (not using options). 100% investment in a single common stock can lead to the total loss you mention. Instead, using options, you can get at-the-money calls which represent a 100% notional upside position. But then you pay for those calls by writing puts on 99 other companies. You now have a portfolio of 100% concentrated upside in one name, but only 1% downside exposure in each of 100 different names. These Kelly formula discussions never deal with these real world strategies. It's all Ivory Tower stuff that leads to unrealistic fears about concentrated positioning. Or, flip that around with this hypothetical. Suppose one has a portfolio with stocks like Lancashire that pay high dividends and that the whole portfolio is loaded with what are -- I hate to use this term -- low beta stocks that are levered up with derivative, non recourse leverage that also levers up the amount of dividends received. Further suppose that the intrinsic value of the portfolio is satisfactory even in an elevated market and that there is very little concern about a general market decline except for one thing : that it would be nice to have a big pile of cash to pick up bargains in the event of a market selloff. In that event, taking a small portion of the dividends received and buying cheap index puts, might not be a bad strategy.

I agree with this statement, but the material suggests that it shouldn't matter what the absolute level of the numbers is or continuous play. Basically the idea is you display a loss aversion bias that is "irrational" if you would play this game continously but not once. Same goes for if you'd play it for $75,000,000 and not for $75. This argument seems like BS to me though and the use of the utility function makes sense to me.I'm not going to much happier with 100M than I am with 75M but I'd certainly be super disappointed 3 out of 4 times walking away with nothing by taking the gamble with the "higher expected value". It definitely seems at some point that the "bird in the hand being worth two in the bush" is a very very reasonable and even rational approach. I'm not trying to disprove the CFA material so much as I'm just trying to understand how most people think about this, what their decision would be, and what #'s would force them to change. More of out of curiosity than anything else. There's not a "right " answer to this question. If you get a question like this on the exam, calculate the capital needed under the Kelly formula to support rolling the dice on the volatile option. Then , explain that utility functions are typically nonlinear or situational. for example, the gambler might be loaded and well able to risk losing the $75, but he might want to impress the girlfriend on his arm by choosing the sure win, rather than looking like a fool by coming up empty handed when he could have had the sure thing. that type of faulty (?) reasoning underlies most of the suboptimal herding of investment managers.

I think Monish is probably a much better investor now than he was before the crisis. That was the first time he had to experience the full effect of the credit cycle on low quality and leveraged companies.

Hi Saidal, I'm actually going to Columbia for the CSIMA conference in February. I'm going to see if they'll let me make copies while I'm there. May as well kill two birds with one stone. Does anyone know how much the float of Blue Chip Stamps was when Warren and Charlie built up a substantial stockholding and what it was when they achieved control? How much did the float decline after that? How much was remaining after the redemption of stamps dropped down to a trickle?

Monish had the best record of about 3000 mainly equity hedge funds some organization compiled from about Y2K through about 2006. Then, his main fund lost about 2/3 of it's NAV/SH from his 2007 high water mark to about the market bottom. To his great credit he didn't close his funds even though he was far from receiving incentive payments after the crash. Instead, he persevered and slowly made back the losses. recently, he is reported not only to have made back the losses, but to have gotten above his annual hurdle which I think is 6% and once again be eligible for incentive payments. I don't know the details. I hope those who are more familiar with them will correct me if I'm wrong .

Do lawyers get to the play the game where they try to bias the jury during the jury selection process? Yes the jury selection process, known as voire dire, is very often used by the lawyers to make their case to the potential jurors before they are even selected. Voire dire is French term for jury tampering. Obviously if jurors are asked anything other than "do you know anyone involved", then you are not really getting a randomly selected jury of your peers, but rather a government selected jury which have been screened to make sure they all agree that what you are being charged with should be illegal and that they are all ready and willing to convict you of it if they think you did it. That's a faux amis. In the English system of justice, the term refers back to the Latin. It's a process where the defense and prosecution and sometimes the judge have the opportunity to question jurors to identify possible biases and exclude those individuals from the jury pool. Typically each side is also allowed the opportunity to peremptorily challenge and exclude a small number of those in the pool for any reason in addition to unlimited exclusions for bias.

I almost hope you 're right. We are 100% hedged now with cheap S&P 500 puts. Autocorrelation suggests the most likely market direction will be . . . what it's been doing -- treading water or resuming it's upward path. However, Mr. Market reads the tea leaves in January to see what's going to happen the rest of the year. This may be nothing more than a self fulfilling prophesy, but that becomes a rational expectation if January's trend is down. If that happens -- watch out below.!

Good take , Dazel. Please explain: "The Hedge Bleeding is Over".

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities. Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash.... Two things just happened by adding the very high quality wholly owned cash machines: 1) insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings) 2) You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire. The structure boosts intrinsic value. Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers. Buffett is playing a little game of fleet admiral here. That's a very good perspective, Eric. Warren had squeezed cash from BRK to buy NICO which meant that a company with lousy returns was joined to a controlled insurer with a huge pile of cash and marketable securities. BRK's ownership of NICO gave Warren optionality; if NICO had got in trouble with high intrinsic value but low market value equity holdings on its BS Warren could have squeezed or even liquidated BRK with its remaining working capital to provide relief to NICO. Things weren't all rosie. Warren's investments were such a spiderweb of cross holdings that the SEC took interest and was about to bring suit around that time. I think the key reason he took the plunge into investing almost all NICO's assets in equities was that equity holdings of insurance companies didn't have to be marked to market then. If his regulator questioned those holdings which were likely carried at purchase price, Warren could have pointed to how solid the underlying businesses were. NICO had been a homegrown Omaha success. I suspect that the regulator of that local business was not unfriendly or activist. :) I agree that operating businesses, which throw off tons of cash are very good things to possess… I think this is self-evident! But don’t forget that until the mid-90s’ almost 90% of the increase in BV for Berkshire was achieved thanks to insurance + investing. And during the 80s’ Berkshire practically only grew through insurance + investing. Even if today marked to market accounting, like twacowfca suggests, limits the amount of equities an insurance company can purchase, without running too much risk, and therefore what Berkshire achieved during the ‘80s is no more replicable, I think Dhandho Holdings might still do pretty well. Think about Markel: Mr. Gayner is surely a smart investor, but he is no outlier, nor he has a better track record than Mr. Pabrai… actually, his track record is only slightly better than the S&P500. Yet, MKL has compounded BVPS at more than 16% for the last 20 years. Dhandho Holdings imo is going to be a very good vehicle for compounding capital, even without owing operating businesses… This, of course, doesn’t exclude the fact Mr. Pabrai could very well decide to buy entire businesses in the future! :) Gio So in the old days, Buffet's company was allowed to use 100% of float to buy stocks? How did he deal with the volatility? I think the insurance float was about the last source of funds he put into the 1973 - 1974 bear market. Within a few months, the market turned and those stock purchases were no longer under water on a MTM basis. In any case they were still carried on the books at cost which was generally allowed then for calculating regulatory surplus. His regulator probably didn't give NICO a second look because many other insurance companies were approaching insolvency then.

Work is the curse of the drinking class, to turn a quote by the grumpy Marx on its head. For everyone else, in a diverse and open culture, there is opportunity to find a job in an organization that one enjoys for the most part where one's abilities can be maximized for the benefit of all.

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities. Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash.... Two things just happened by adding the very high quality wholly owned cash machines: 1) insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings) 2) You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire. The structure boosts intrinsic value. Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers. Buffett is playing a little game of fleet admiral here. That's a very good perspective, Eric. Warren had squeezed cash from BRK to buy NICO which meant that a company with lousy returns was joined to a controlled insurer with a huge pile of cash and marketable securities. BRK's ownership of NICO gave Warren optionality; if NICO had got in trouble with high intrinsic value but low market value equity holdings on its BS Warren could have squeezed or even liquidated BRK with its remaining working capital to provide relief to NICO. Things weren't all rosie. Warren's investments were such a spiderweb of cross holdings that the SEC took interest and was about to bring suit around that time. I think the key reason he took the plunge into investing almost all NICO's assets in equities was that equity holdings of insurance companies didn't have to be marked to market then. If his regulator questioned those holdings which were likely carried at purchase price, Warren could have pointed to how solid the underlying businesses were. NICO had been a homegrown Omaha success. I suspect that the regulator of that local business was not unfriendly or activist. :)

Do lawyers get to the play the game where they try to bias the jury during the jury selection process? Yes the jury selection process, known as voire dire, is very often used by the lawyers to make their case to the potential jurors before they are even selected. Yes, and perhaps attorneys may give away how weak their case is too. Recently, I was in the petit jury pool for a woman who was charged with driving under the influence. In my county, the judges typically show no mercy in sentencing. it looked like she was in danger of losing her license and likely going to jail, possibly for a long time as a repeat offender . I was amazed at how prejudiced I became against the defendant during the defense's voire dire. The pallid faced defendant sat in her chair without expression, wearing tinted glasses as her lawyer questioned prospective jurors about their knowledge of the accuracy of breathalyzer tests. The females in the jury pool disliked the defendant intensely. They kept whispering about how guilty she certainly was. One told another how a close relative had been killed by a drunk driver. Meanwhile , her lawyer's questions made the defense look weaker and weaker.

But the same can be said for 2012 and 2013...... The above statement, honestly, seems like a contrarian flag to me. If hedges were high probability winners, they wouldn't call them hedges. :)

Added some to the SPY puts we bought a few days ago. Portfolio is about 2/3 hedged. Why? WSBASE has flattened out of the year and a half growth slope, but still too early to say there is a change in the trend. Dynamics of S&P500 slope looks like a market on the verge of a crash, according to Sornette. Fed is concerned about the development of an asset bubble, so they may not save the bacon this time. Market cap/ GDP is high etc etc etc In short, lots of yellow flags.

Strongly disagree. USG invented the gypsum drywall industry and has generally been the lowest cost producer and distributor of that product with the most recognized brand name, Sheetrock, although there may be a few regional producers that also do well because of geography and transportation costs for a bulky product.

BRK will still hold something like $50M(?) in USG notes. Dunno about FFH.

Most of the original, annual editions of Benjamin Franklin's Poor Richard's Almanack in the Rare Books section of The Library of Congress. :)