leftcoast

Another Vanity Fair essay by Michael Lewis on the European financial crisis, as seen through the lens of individual European countries. First he profiled Greece, then Ireland. This dispatch is from Germany and will no doubt be controversial in its portrayal. Germans longed to be near the shit, but not in it. This, as it turns out, was an excellent description of their role in the current financial crisis. ----------- Conceived as a tool for integrating Germany into Europe, and preventing Germans from dominating others, [currency union] has become the opposite. For better or for worse, the Germans now own Europe. http://www.vanityfair.com/business/features/2011/09/europe-201109

And how many moves ahead is Buffett seeing? :) What's interesting these days is how differently the two of them see (or at least talk) about the macro economic picture. Not that it really matters much to an individual investor who is just looking for a few massively undervalued companies. But it's interesting nonetheless.

According to this Fortune article about him, that's just the way he talks: http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/ Conversing with Moynihan is no easy task. He tends to fire off sentences in machine-gun-like bursts, without anything resembling a pause for punctuation. Words like "litigation" and "putback risk" run together into a verbal blur. For an executive with such clear ideas, he can be almost impossible to understand at times. "His mind is always outracing his mouth," says Jay Sarles, a former top executive at Fleet and BofA.

Prem in the news: http://www.theglobeandmail.com/report-on-business/economy/fairfaxs-watsa-sees-dirty-thirties-pain-ahead/article2125759/ The U.S. economy appears to be heading toward a lengthy period of deflation such as the one that struck Japan, and there is little policy-makers can do to prevent it, says one of Canada’s most accomplished investors. But it isn’t just the United States and Europe that Prem Watsa is worried about. The potential bursting of a property bubble in China has him even more concerned. And if Chinese demand for commodities dries up at the same time as U.S. consumers are shutting their wallets, then the global economy is in for a lengthy period of pain.

Yeah, the home game advantage is pretty well documented across a variety of sports. Psychology is a big part of it (I read somewhere that pro hockey players actually have higher testosterone levels when playing on home ice), but familiarity with the stadium or conditions can also give the home team an advantage.

I had 7/8 of my paper net worth evaporate (employee options). It was over a half million in losses... I was 28. Ouch. My first roommate in Santa Clara was an 18-year-old kid from Arkansas who dropped out of high school and moved to the Bay Area to be an IT admin for one of the recently IPO'd companies. When we met he told me nonchalantly that his options were worth almost $2 million. They were worthless a few months later. Fast forward 12 years and here I am now working at Microsoft, a darling of value investors... and waiting for Vancouver's real estate bubble to implode just as spectacularly as the dot-com bubble did.

IIRC, the catalyst was actually the outcome of Microsoft's antitrust case. The bubble burst coincided with a federal court decision that MSFT a monopoly. I don't think that piece of trivia is particularly useful in predicting the future, though. Don't they say "value is its own catalyst"? I think the same goes for overvaluation. I remember that day well. The valuations unraveled quickly after Judge Penfield Jackson ruled to break up the company. I remember it disctinctly because I had just flown out to Silicon Valley for a job interview the first week of April 2000. The newspapers headlines there all screamed "BLACK FRIDAY!" in font that looked like war had just been declared. On my flight back to Montreal, the guy next to me tried to recruit me into his new dot.com startup. He offered me a job before he even knew my name. I told him I was actually a mechanical engineer and that I didn't know any Java. He said "That's okay, none of my engineers know how to program. Do you want to get rich or not?" I got the job (the one I actually interviewed for) and moved to California for ringside seats at the train wreck that had just started. The next 2 years were like watching the Hindenburg go down in slow motion.

IIRC, the catalyst was actually the outcome of Microsoft's antitrust case. The bubble burst coincided with a federal court decision that MSFT a monopoly. I don't think that piece of trivia is particularly useful in predicting the future, though. Don't they say "value is its own catalyst"? I think the same goes for overvaluation.

It's weird... I live in Vancouver and everyone I talk to seems to agree that home prices are ridiculous and unsustainable. (Of course, some of them are buying anyway, and I only know one person looking to sell and rent. Home ownership is not primarily a financial decision most folks.) But in a bubble isn't everyone supposed to be in denial? How can a bubble be self-aware that it's a bubble? Seems like a paradox. Unlike tech stocks in 1999, or US real estate in 2005, where the general consensus seemed to be that it really would go on forever, here it seems people are aware of the how silly things are, but plunging in anyway. People are trying to minimize future regret, and the fear of getting left behind outweighs the fear of losing equity or working until 80.

No, I don't think it is. I believe the distribution of SNS shares should be classified as a return of capital, not as foreign dividend income. I had the same problem on the 2009 T5 form that my broker provided. Unfortunately CRA would not take my word for it, so I had to send a request to my broker for a new T5 form (along with a detailed explanation of why). That was 3 months ago. Much to my frustration, they are still reviewing it and have yet to issue a new T5.

Imagine how much work it would be to keep all that glass clean. If this is the future, then the best investment is Windex.

Yes, music and videos. It syncs with the Zune software on your PC. that was bronco's "quick joke". Hardly anyone bought a zune, let alone paid for downloaded music to it. I know more people with the nickname "Zune", than I do Zune owners. Ah. They don't even sell Zunes here in Canada. I don't know anything about the Zune devices (never seen one), but the subscription download service actually sounds pretty good. A friend in Seattle said he pays something like $12/month for all-you-can-eat music, which he listens to on his phone, his living room (via Xbox), or his PC. The devices all stay sync'd.

It might have a faster processor too. :)

Yes, music and videos. It syncs with the Zune software on your PC.

Agreed about the WP7 interface. I also have a Samsung Focus and it's awesome. The AMOLED screen is the best of any phone on the market.

That sounds to me like something arrogance would say. So perhaps that makes me incompetent. ;)

Just came across a nice profile of Brookfield and Bruce Flatt, published in the NY Times last month. http://www.nytimes.com/2010/12/19/business/19brook.html?pagewanted=1&_r=1 Mr. Flatt is animated when talking about his businesses but terse when questions turn to his personal interests. (“How do you relax?” “I read business books.” “What’s your favorite one?” “I don’t have one.” “Do you listen to music?” “No.”)

I see what you're saying, but I would argue that things have changed dramatically in just a few years. When Fox bought MySpace in 2005, MySpace had nowhere near the moat that Facebook has now. MySpace and FB were still slugging it out for users, and both were growing like crazy, but neither of them had the critical mass to make the competition irrelevant. In 2005, everyone I knew was not on MySpace. Deciding which social network to join (or whether to join any of them) was actually a decision. People were excited about MySpace's historic growth, but Fox failed to realize that MySpace was still one of several companies (remember Friendster?) in a winner-takes-all race, and it was too early to pick the winner. Today, the race is over. Facebook won, and everyone else died. FB now has the critical mass to make any entry into this space so expensive that even companies like Google and Microsoft are struggling. I don't think you can compare MySpace or Facebook in 2005 to Facebook in 2011. It's a bit like saying "American Express came out of nowhere to kill Diner's Club in the 1960s, so what's to stop some new company from taking out Amex now?"

You're right that search engine ads generally perform better, both in terms of click-through-rates (CTR) and conversion rates, than display (banner) ads. An ad's CTR measures the % of people who see the ad that click on it. The conversion rate measures the % of people who click on the ad that go on to purchase or signup for whatever is being advertised. However, one limitation with search engine ads is that they often can't generate meaningful amounts of traffic for a really niche product or really new product or service. With these types of products, it's possible that nobody will be searching for it. They have to be aware of it first. With Facebook, however, I know I can get my ad in front of pretty much all of my target customers who are online. And man, can I ever target my customer! I can define my target in terms of gender, age, location (right down to the city), language, personal interests (e.g. people who like model trains), relationship status, and social connections. And if 99.99% of them choose not to click on my ad, that's no skin off my nose. I only pay FB for the ones who do click. From Google or FB's perspective, the revenue equation is very simple. Revenue = Traffic x CTR x Cost per Click. Google wins on CTR and CPC. The CPC is higher because clicks from Google are worth more to advertisers due to higher conversion rates. And when Google shows an ad, it gets more clicks than when FB shows it (higher CTR). The last variable is traffic. About 10 months ago, Facebook overtook Google in terms of traffic, and its growth rate is still much higher. Another thing to note is that advertising is just one revenue stream on Facebook. The other really big opportunity is Facebook Credits, which will effectively give Facebook a 30% cut of all the gaming revenue that's currently going to companies like Zynga and Electronic Arts. Finally, please don't take any of this as an endorsement of FB's current valuation. I have no idea what the company is worth and I'm sure any conservative estimate I came up with would be far below what others are currently willing to pay. So I'm not saying FB is a good investment, just that it's a great company.

Facebook's moat is enormous. You could argue that it's bigger than Google's moat. Yes, there's a huge network effect. Facebook is a social network. The more people who join Facebook, the more people there are who want to join Facebook. That's the definition of network effect. If you are under 35 and living in NA, almost everyone you know is now on Facebook. So it's hard to imagine why you'd ever want to join another social network where none of your friends, family, and business contacts are. Beyond the network effect, there are also switching costs. Facebook has your photos, profile info, interests, and (for many people now) your email. If you are under 25, FB is probably your primary means of day-to-day communication with other people. Think about what that means. For many users, leaving FB for a competitor would far more painful than switching banks. Losing access to FB would be like losing access to their phone. Competitors have been coming out of the woodwork for years. Google has already tried and failed several times to build its own social network. It found success in Brazil and Estonia with Orkut (because it got there before FB and leveraged the network effect to build its own moat) but nowhere else. The latest attempt was Google Buzz. The fact that you've probably never heard of either of these is a good indicator of how successful they've been in taking on FB.

Here you go: http://i.i.com.com/cnwk.1d/pdf/ne/2004/raikes.pdf The MS exec's name is Jeff Raikes, and it's Jeff that actually does most of the analysis of MS and its moat. Keep in mind it was written 13 years ago... so both the competitive landscape and Buffett's personal e-mail address have probably changed. :)

<250 K (27.7%) between 250K and 1mil (36.1%) between 1mil and 2mil (22.9%) between 2 and 5 mil (10.8%) >5 million (2.4%) Those are pretty desirable demographics, Sanjeev. You could charge a lot more for ad space on this website! :) Of course, they're mostly cheapskates, but you don't have to tell advertisers that. ;)

I first dengyu at Microsoft -- they have an "Investment Club" distribution list there. I would post there, and he would post sometimes as well. We started chatting back and forth in email as our investment style seemed to be similar. That was April 2006, and I mentioned Fairfax and the old MSN Berkshire board to him. That's when he showed up on that board, and it's right around the time when FFH options got really cheap. He suggested to me that I should look into the options -- before that I'd never even worked out how puts/calls work. I would still be wearing an employee badge if it wasn't for him walking me through it. We would buy some nearly every day and swap stories of what prices we got. I remember getting an email from him one day stating that at closing he got 50 contracts of the $160 strike 2008 for 80 cents. Just imagine... the stock broke $300 before that expired. I had written a jscript file that would compute how much money I would make from my FFH calls at various prices (I had 240 contracts). We were both supremely confident that we could retire on that trade (he quit at age 25 before the end of 2006, having worked less than 2 yrs). So the week he quit, we decided to meet in person and went out to lunch. Pretty funny sitting across the table from someone I'd never seen in person, and here we were both able to quit... and all for a trade that seemed to us highly predictable. Just laughing and grinning. Good times. I stayed on until January 2008, it was harder to let go for me because I'd been "institutionalized" (quoting The Shawshank Redemption after 10 years of being there. Today he's developing games on his own time -- good for him. That's a great story! I'm at Microsoft now... making games on their time. :) I wonder if that investment club is still around.

Fairfax also has a huge portion of its equity portfolio in WFC and USB.

There's a pretty good discussion about the WFC warrants vs. common stock on the Motley Fool board: http://boards.fool.com/Message.asp?mid=28525732&sort=whole Interestingly, Wells bought back about two-thirds of its own TARP warrants at $7.70 when they were sold by the federal gov't in May, so WFC mgmt must see them as a good deal. I'm seriously considering switching from WFC common to warrants.