SharperDingaan

The reality is that to use these low prices, you have to make the energy intensive goods in the US - & then export the goods. You also have to recognize that without fracing the gas glut disappears, and pretty rapidly (shale depletion rates). So if you have 2-3 years before the glut disappears, what can you make? and how best to do it? Look at the smelters, foundries, etc. SD

We would put it to you that the overall approach wouldn't be much different to what he has already done. 1) Barbell approach (Taleb): T-Bills + calls; 2) Operations replacement (HW): Insurance float replaces the T-Bills; 3) Financial innovation: long-short calls/puts to nullify cash carry, & strip out alpha. In short ... a P&C insurance company getting paid thrice on its T-Bills (UW profit, T-Bill yield, securities lending) with zero cost options to exposure it to market volatility without any downside. Unfortunately, nobody would be able to buy into it :'( SD

How much exposure to banks can you really have? Adding that .. nth bank in currency X or Y really isn't going to add much, & the instrument has to at least offer the leverage of a long term option (warrant, etc). A Barclay's without BarCap will not generate the media sound bites - but it will be a lot smaller, easier to run, cheaper (lower earnings), backed by better quality earnings, & more likely to avoid nationalization. What isn't recognized is that whatever you buy; you are going to have to marry, as you are locking in today's low price in expectation of a rising dividend yield & a future higher share price. Today 3% dividend yield becoming 10-15% 5 yrs out .... & then because it is so high - leveraging against today's purchase to buy the next security. ie: Buy & hold ... forever. For this kind of an investment she had better be worth it! SD

You might want to look around you a bit .... The string of month-over-month US employment gains would suggest that the US economy has probably turned. Similar shoots elsewhere ... & every month we get further from green poop. A bump up this year is really a bet on post traumatic growth (Taleb). Probably reasonable, as survivor B/E's are far lower than they were, & most still have a fair bit of remaining capacity. Small revenue improvements are more than likely going to flow straight through to the bottom line, & generate upward earnings bias. Then the bond world ... duration reduction, & a modest re-allocation (<10%) to long term warrants, convertibles, options, etc ? (Taleb barbell). The BAC, AIG, & the TARP warrants that everybody loves? And when everyone starts moving in one direction ... the rest of the herd follows, and amplifies the move. HF algorithmic trading then amplifies it even more .... & the more gaming of the system the more reliable the outcome (antiifragility?) High cash AND some option positions. SD

40%. High as we did very well on the RIM hype ;)

Think a little longer term .... When WEB &/or Munger retire where do think the NA value community is going to go? And aren't the growing size of the FFH dinners, & the growing number/quality of folks on this board, an indirect indication of the future probabilities? You pay an annual premium & buy life insurance to get a tax free payout upon expiry. OR ... you can pay an annual premium & buy a long call/leap on FFH to get a tax free payout (tax free accounts) on WEB &/or Munger's retirement? ... and you pay for it by either annually reinvesting some BRK gain/divs in FFH calls/leaps, or periodically selling down BRK & buying FFH. The FFH discount to BV disappears re the long term arbitrage, & tends toward a premium the more it looks like WEB &/or Munger is getting ready to retire. It IS a pair trade ... just not the way that most would think of it. SD

You might find it useful to think out of the box a little: The only major way you get a large, long-term, loan book is to lend to bums. The good corporate credits are going to issue their own lower cost paper (LIBOR+, CP, BA, bonds, etc) to pay you off, as soon as they can. Good individual credits are either paying down monthly (P & I), or have the ability & intent to pay down at some future date of their choice. You have a book of bums and a book of 'churn'. When there hasn't been much economic activity for an extended period, the churn book is smaller than normal, you do what you can to frustrate the good credit's ability to leave, & the bums wag the dog. A good chunk of the bum book is often money-laundering related; there was never intent to repay, & the launderer did it to indirectly control the bank. The bank will lend additional funds to service the loan interest, or watch the loans default & the write-off wipe out the banks capital. And if the bank lends ... its shareholders will receive 'earnings' on those loans, the market will grant a higher share price, & everybody walks away with bonus. That 'new' money ultimately comes from the spread on the churn book. Repaying a loan lets a bank 'play the game' a little longer; it is effectively an insurance premium against the bank collapsing in the near-term. Investing the savings increases the bank's churn book (recipient borrows against your equity investment to expand the business) to produce additional margin. Both essentially produce the same result. Notable is that whether the bum is the underworld, or a sovereign, you get the same result. If Greece fails to service its debt, prominent German & French banks collapse. If XYZ fails to service, prominent Arab banks collapse ... but the Emir still gets to keep those nice buildings in the desert ;) The capitalist solution is to periodically deliberately collapse banks, & start fresh. Unfortunately, that is waaay too anti-fragile!

If you have an employer sponsored DC pension plan, change the allocation to 100% global equity. The monthly/quarterly investments are small, spread out over time, & in most cases the accumulating pot will not be big enough to overwhelm the DRIP benefits for at least a few years. The fund itself doesn't really matter - name brand, & reasonable expense ratio. Most would also expect the PIIGs to remain in poor shape for at least another 3-5 years, so there is no rush. SD

We like to be balanced ;) ..... rabid capitalist by day, & foaming socialist by night. Always a little exciting - just before & after the flip between extremes!

The weak links are actually very well known, it is just that Basel III is unevenly implemented across the various nations as it is does not carry force of law. Each national regulator has to codify the Basel principles into their own banking regulation ... & some think they are special (US). Implementation is also problematic. Imagine Switzerland without UBS, Germany without Deutsche Bank, England without Barclays, .... the US without maybe CitiBank & BoA. Regulators essentially have to let them make enough to pay the multi BILLION dollar fines for their prior wrong-doing .... because if they did not ... the fine would drain so much of their capital that it would trigger the banks collapse. Basel liquidity standards were postponed for 2 years on Jan 06. If they had gone through ... some of the above would have had to either almost double their equity in < 12 months, or call in almost every workout loan on their books. Most of the money raised would also have gone to maybe 3 country's, & their negative 'risk free' yields would have risen quite a bit. If you want to kneecap a recovery ..... Most nations require authorities to initiate prosecution within a set time period, otherwise the authority is deemed to have agreed with the practice. Notice that LIBOR prosecutions were fines for wrong-doing ... the redressment of client interest over/under payments was skipped over ... & it appears that some prominent European central banks were trying to run out the clock on prosecution. Maybe why they have a new central banker? Most European banks are also extremely weak, at around only 20-25% of the financial strength of the typical Canadian Sched-A. They are very limited in what they can absorb. The good news is that the payments indicate progress, & nobody else blew up is what has been very trying circumstance. Once the banking system has strengthened sufficiently, the scores will be settled, & many a bank head will be persuasively shown the wall - or a graceful retirement by date XX. SD

Basel III will do much of this for him. Get too big & you get designated a Globally Systemic Important Bank. A G-SIB is defined as a financial institution whose distress or disorderly failure, because of its size, complexity and systemic inter-connectedness, would cause significant disruption to the wider financial system and economic activity. Their are similar designations (D-SIB) in play at the sovereign level as well. The penalty is the requirement to put up more capital than your competitors, which lowers your RAROC, & makes you a less attractive investment. As most would prefer to spin off the riskier portions of their bank to avoid the G-SIB designation - the result is a global financial system a little easier to manage. Not touted is that if you seek the G-SIB as a business strategy, your bank becomes a fortress - & significantly less risky than your competitors. Future, lower, earnings discount at a lower rate - but you end up trading higher than your competitors as the global environment gets increasingly risky. Rather than pay the German government to take your money (bundt purchases), you buy the G-SIB's paper & get paid instead. The G-SIB gets access to almost unlimited funding, and at a cost slightly above the GLOBAL central bank rate. Also not touted is that if you spin off too much, the stub business could end up with a D-SIB designation. Significantly reduces the systemic risk in the domestic economy, but reduces the earnings of those with D-SIB designations. Fits nicely within the SML construct but is not what an I-Banker wants to hear - as it systematically lowers earnings & sucks the glamour out of the business. An I-Bankers comp is based in part on their glamour client earning as much as possible, & the bankers access to those glamour 'names'. Stodgy bank, & a higher cost of funds for his glamour clients, is not high on the list - hence the resistance. SD

Don’t laugh! Part-time College/University Level teaching. Diversified revenue; day job in private industry, night job in government. Minimal expense. Minimal overhead - primarily depreciation of intellectual capital & technology. Minimal CAPEX (seminar every year), minimal business risk. Long investment horizon. Sharpe ratio through the roof. Synergies everywhere. Write & sell the textbook. Referral fees if your company hires a graduating student. Gen X community involvement looks good in the day job. Wider network generating your next job in 5-10 yrs! And if you happen to teach finance/investment … you essentially get paid to research your companies. Now if you start up & run a new business for 8 years? it takes 3 years just to break even, & runs another 2 years at around break even – which route is more likely to yield the higher return? Which was the lower risk? To earn enough to justify the risk, how much does the business have to net ... & when? Not such a dumb idea!

Also keep in mind that the funds could be frozen at any time, & what escapes the trap becomes no questions asked bounty. Attracting all the best kind of friends, worldwide.

Agree on the PE assessment, but would add two outliers .... Most PE is institutional, therefore subject to the typical IPS minimums threshold. Headline events that temporarily drive the market price below a minimum threshold, typically act as tipping points. OK for about a week ... but after 2 weeks the position gets marked down ... whether there are trades or not. The PM's least risky personal option is to dump before the rush, & the first to dump will start a run. Needless to say XYZ becomes incredibly cheap, & bad mouthed everywhere in the media. Large cap or small cap .... the sell-off is almost always grossly exaggerated. A great time to offer liquidity at an extortionate price ;) A good portion of the bank owned PE is also not so private. PPP's may be the poster children - but don't ignore the proxy's doing serial accretive acquisitions, taking on bank supplied credit lines, & issuing equity along the way. Only to get taken out by said bank a few years later? Way too visible if the bank itself did it, but very different if done through a proxy ;) Obviously, if you can deduct who the outliers are - you are going to do very well.

We don't look to size, & chiefly exclude by exchange; kiss of death if you're not listed on the TSE or the dominant Int'l regional exchange. We just think there are too many scams/turds in the excluded mixes to make it worth the risk or time investment. Sure we might miss the next Microsoft at < $5.00/share. We'll just pick it up at $6/share ;) on the big board, if/when it graduates.

20 years ago you might have bought the service .... after the break-in, & only if a lot of valuables got taken. The resultant claim ended up being way more than the deductible, & you really took the service to reduce the cost of that new higher premium. It was a derivative product. Today a lot of the market buys the service to babysit the old folks .... especially if you/they live in different cities. They push a button & you get a text/'phone call. Effective, dirt cheap, & not reliant upon the neighbors. It has become the primary product. ..... one of those rare products that re-packaging & demographics really helps.

Look at the new equipment financing businesses; leasing, vendor financing, etc. The crisis forced most parent &/or shadow bankers to exit the market, hence it is very under served. Know that these businesses are inherently unstable as LT assets end up being funded with ST debt; if they can't roll their ST debt they go under - even the GE Capitals of the world. They are marketing tools, & their primary business purpose is to move metal (ie product of the underlying manufacturer), not necessarily make money in their own right. To be successful you need scale. The bigger you are the lower your Cost Of Funds, the more and earlier you see new deal flow, & the greater your ability to reject the probable duds. Over time, margins initially increase as financing is walked down the yield curve, then declines to zero as pricing is reduced to move more metal. The early years of the business model favor rapid growth, funded with recurring equity financing's priced at growth multiples. The middle years favor a sale of the various financing platforms to other entities (sovereign wealth funds, banks, manufacturers, etc). You also may want to keep in mind that the mindset in the early stage of the business is very different from that in the later stages. SD

There's a handy little 'container' company (T.PSN) in the NA oil patch that may be of interest. Welcome to the board.

What concentration really means - in plain language You do not have to be very big before you begin to notice …… that the cost of your ‘average’ concentrated equity bet is typically getting to be around 1 x annual salary, or more. And if you need to double down - that cost can easily become a material chunk of the value of your house. At an average cost of 1 x annual salary per investment, most folks would want to know exactly what they have bought - & how they expect it to perform. For the amount of financial (& spousal) risk/stress taken on, a compound 14%/yr (double every 5 years) also just does not cut it. It needs to be a compound 24%/yr (double every 3 years) or better - or go home. Do well & your risk will fall as the number of bets rises to 3-4. Diversification reduces the non-systemic risk, & reduces the leverage multiple if you need to double up. But …… for most people, that decline in financial risk will come at the expense of rising egotism - & your total investment will now be about the value of your house. Do nothing, & the cost of your average investment will tend to rise to about the cost of a condo - & if you need to double up – it is a condo in Manhattan, versus the Bronx. At an average cost of 1x house per investment, most folks would see you as sick, & most spouse would be looking for somebody else. There is a sweet spot, & you will not blow up if you continuously withdraw any capital accumulation past that sweet spot. Remember the adage: Money is the servant, not the Master. Not for everybody ….. but perhaps something to aspire to as you grow in maturity, & wisdom. SD

We very seldom stray beyond 3-4 equities, & have done so for many years. That said, we can offer some observations... If you don't do this full time, most of us cannot realistically expect to 'know' more than 3-4 securities at any one time. To get the bulk of the diversification benefit they also need to be in different industries. You have to be comfortable with volatility; portfolio swings of 25%-40% are not uncommon. You have to be looking for at least a double every 3 yrs; or a minimum 24%/yr compound return for the risk & management involved. You have to be willing to materially overweight at inception, & spend the rest of your time reducing your risk. The unit price at inception is usually at/near its lowest, & in most cases you will be progressively selling down as the share price rises to recover your initial investment. You should have a preference for equities that are either liquid, have an option market, or are likely to become marginable at some point in the future. You don't need to sell XYZ to recover your initial investment, if you can borrow it instead. You cannot expect to manage the portfolio passively. You must be willing to think for yourself, & be comfortable with holding contrary opinions. It will also help you to master the art of hedging. SD

+3%. Lower than normal as we took significant year over year losses on FBK, & pulled 1/2 our capital out following the buyout. We also put 75% of the remaining capital into cash from mid November onward. All told, a very good result. We reinvested in 3 exceptional buys mid month, & fully expect that 2013-2016 are more than likely to make up for this years result.

When I first started out a very wise women reminded me that the B or C in the group has typically had to deal with failure, & come to terms with it; the A in the group usually hasn't. What she meant was that the B's & C's you saw were net of survival bias, & the A's were the risk. Today's youth from Spain, Greece, or Ireland that actually got on a plane (all lands 50%+ youth unemployment) & left, are great examples of the B & C. The poster child is that Spanish 23-28 year old, with 3-5 years experience, physically interviewing in NA. It took balls to leave, & discipline to continue applying - when they could just have coasted as a waiter/waitress. Long term it's a great time to be a European youth, IF you're the half net of survival bias.

Always speak your mind - but be able to back it with fact, tact, & know how to be polite. No BS has value, & the higher up the chain the more value it has. At the shop floor level, keep the conversation clear & simple; drawing in the more advanced topics as the conversation builds. Everyone appreciates a good joke, wherever possible include women & minorities, & it doesn't hurt if you can have the conversation over a beer or two. Beer is good, but you better have a thick skin! CA's/CFA's right after graduation are notorious pr***s. My sheepskin says I'm good, I know it, I've spent my time in the salt mine, I'm king - & now you lowlifes will do what I tell you, because I told you to; unfortunately, most of the time the gaming works for them. It either passes slowly with maturity, or they meet a evil bastard & get 'matured' in 5 minutes or less. Game enough, & you will meet a Black Swan!

Smart by itself is not particularly useful – our smart guy/gal has to be able to talk to people, show some humbleness, & think laterally. Our smart guy/gal has to be able to cover the earthy through to the highbrow, & talk in terms their audience can understand. He/she also has to be mature enough to handle ‘smartness’. And depending on industry ... our guy/gal also needs a natural every-day ability to automatically link the cost curves of economics, to cost accounting principles - inclusive of futures markets & the forward volume pricing typical of the high-tech industry. Attributes that are much more common than one might expect. You do not get fired if you hire from ‘name’ brand schools – but you might well get fired if you take the rough diamond. Diamonds are inherently high risk/high return, hence they collect in industry where the practical side of risk/return is well understood. (oil/gas, mining, forestry, etc.). For every 5 hired, 3 might well fail, but Lenny .... for the 2 that work out! Most college/university entrants should not be there. They are not mature enough, & the experience was essentially used as a baby sitting exercise between graduating high school & early adulthood. In most parts of the world our guy/gal would get drafted at 18 for upwards of 2 yrs, & released back into college/university at around 20.The resultant ‘enforced’ maturity provides a grub stake on de-mob, & often results in far better decisions.

The nice thing about the patch is the no BS. Leadership, smarts, & chutzpa rise very quickly - provided that you can give just as cheerfully as you get! If you have it, you're going to be apprenticed in the best schools on the company's dime, & your 'friends' aren't going to be shy about kicking your ass. It's not just the money.