Kraven

You're welcome. I agree with what you say. We all change as we age and grow. The things that interest you when you're younger no longer seem as important or doable as you grow old. It doesn't necessarily mean though that it invalidates your earlier viewpoints. There is no doubt in my mind at least that Graham in his 70s and 80s, rich and with various interests, did not feel the need to sit there and pore over balance sheets. He didn't need or want the money and the intellectual satisfaction it had given him was no longer there. It reminds me of a story of my grandfather. He was only slightly younger than Graham and had come from Eastern Europe by way of London and then Ellis Island, finally settling in Chicago. He had unbelievable strength, not physically but of mind and character. He had an intestinal fortitude not uncommon of men of his day and almost completely gone now. He knew what was right and he stood up for it no matter what the consequences. So as I said, he was in Chicago and was an adult in the Great Depression. He held various jobs as people did then, those who could find them, and was everything from a lawyer to a construction worker to a carpenter to a bee keeper (not sure exactly how that last one played out). Family history held that during the Depression, while he was a lawyer he had a small time case (the only kind of case he had, when he had it). He wasn't a super lawyer, he was a nobody. This was Al Capone's time and supposedly a case my Grandfather was working on had reached his attention somehow. A man stopped by his "office" (a hole in the wall) and said somethin to the effect that "the Big Boss wants you to stop this case". He knew of course who the man was and who the "Big Boss" was. He never knew why this case mattered, but it did apparently. His response was "the Boss knows his business and I know mine. I don't get in anyone's way, but I need to do what is right in this matter. I hope the Boss understands." The other man shook his head and walked out. That was the end of it. My Grandfather never heard another word and thought that Capone may have respected someone politely standing up to him, or maybe he just forgot about it. In any case, I remember as kids us asking him about it and whether he'd do it again. His response was "I must have been meshugana! [Yiddish for crazy] What was I thinking? Of course in those days if Capone tells you something you do it!"

Kraven, it is not my assertion; It is Ben Graham himself who says that he made 20% a year with net-nets for decades: "We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source". Later in the letter he says: "I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome". I am very reluctant to doubt his word on this unless I see strong evidence to the contrary. If I am not wrong, Ben Graham average returns were 15% during his career. So one hypothesis which fits very well the empirical information we have is that he used different investment strategies and with the years he realized that the one which worked best was, precisely, mechanical or formulaic investing. In addition, it left him spare time to womanize. Win-win. Txitxo, Sure, of course I know that Graham reported his 20% returns in net nets. Of course, it always troubled me slightly that the number we all rely on as the possibility for a net net portfolio was stated by Graham as "we must have earned", that is, it isn't as specific as I would have liked, but I don't doubt it either. You are right. If it isn't 20% then it's 15% or something. When I asked whether you had the numbers audited, I said that a bit tongue in cheek. You relied on a statement by Graham, his words. So did I. It may not be as exact, but remember we don't need to know a man's weight to know he's fat or a woman's age to know she is old enough to vote. You implied that I could not know his interests and such changed because you had not been there to analyze him and interview him. However, he was interviewed enough for the words to be there. Certainly there are more statements he made that his interests were different than that he returned 20% in net nets. I have never made the statement either that he didn't believe it when he said late in life that a mechanical investing approach was preferable. You may be right. After a lifetime of investing he may have decided against individual security analysis in favor of the mechanical. However, my point was that while he changed his view, his interests and place in life had changed. Surely you know of this. To take a step back for a second, until around the mid 1950s investing, while perhaps not his primary interests, certainly took up the bulk of his time. During this time he had 3 editions of Security Analysis and the first edition The Intelligent Investor. While he talks about more mechanical approaches for defensive investors, for more enterprising or aggressive investors he believed in individual security analysis (as well as net nets of course). But net nets were more or less the sole mechanical approach he recommended in those days to those analyzing individual securities. Even then, while it was certainly a basket approach, he didn't advise just purchasing them "blindly" as he did to some extent late in life. So his investment career ends, he moves to LA and more or less disappears from the investing community. He teaches a class at UCLA, but that seems to be about his only tie to investing. During this time other than GEICO he generally only owns bonds. More than 10 years later, in 1968, Buffett organizes the first "Graham Group" at the Hotel Del Coronado in San Diego. At this meeting is not only his prize pupil, but all his other favorites and various other brilliant investors and past employees. He shows up, gives some kind of odd quiz and leaves early. He then spends the next few years shuttling between France and La Jolla with his mistress. He seems to become interested again in investing as an intellectual pursuit (in interviews during this time he still maintains he doesn't generally invest in stocks any more and his money is in bonds) and does some interviews and prepares to update The Intelligent Investor. At his 80th birthday party, with all manner of friends and family about, he reflects on his life and doesn't mention investing at all. At this time he now, for the first time, begins to argue that the mechanical approach is superior and he no longer believes in individual analysis. My contention isn't that he didn't believe what he said, but that given the changes in his life, his advanced age, etc that it isn't good support for the assertion that a mechanical approach is superior. If it is, then everything Graham did before is worthless. There is no point in reading Security Analysis or The Intelligent Investor. All one needs to do is buy a basket of net nets that appear on a screen. Note too, it wasn't just net nets he suggested, but combinations of low p/e and low equity/assets and so forth. For me, given his actions and place in life, I cannot view this as sufficient support especially as weighed against the body of his life's work. If Mick Jagger gave an interview and said he's thought about it, but sex, drugs and rock n' roll is no way to live a life, would that be good evidence or simply the fact that he's closing on 70 and in a different place? One could argue of course that he considered the issues and has changed his mind, but I guess it wouldn't be enough for me.

Perhaps. I did not have the chance to interview Ben Graham at that stage in his life and analyze him to see whether he meant what he said, or whether he actually was old and tired, and just rationalizing his distaste for reading balance sheets. But we should also consider the possibility that perhaps we are the ones rationalizing. The facts are that he was making 20% a year with real money, using a basket of net-nets, and that those same net-nets apparently keep generating similar performance nowadays. There are very, very few, pure Graham and Dodd value investors which match those numbers. So maybe he was on to something. Specially if making 20% for decades left him time to enjoy other pursuits. I think you are reading something in to my post that wasn't there. The point wasn't that he didn't believe what he was saying, but that his interests had changed over time. He was at a different place in his life. I am not sure that one needs to have interviewed him and analyzed him. This can all be ascertained from various writings. If required, I am sure that your assertion that he made 20% a year "for decades" was made by auditing his financials for each of those years, yes? Note too that by the time he left the investment business in the mid 1950s he held few to no stocks other than his shares in GEICO which he held into his later years (and perhaps died with, it's not clear to me). While he made a few stock investments in his later years (this was in fact how he met Charles Brandes who at the time was just a young stockbroker in La Jolla, CA), he basically held his entire wealth in munis. Graham's statements may very well be good evidence for formulaic investing. But the truth was there were 2 major stages in Graham's life. So did his views on investing change because he felt there was a better way, or did they change because his interests and stage in life changed? I believe the latter, you clearly believe the former. There is no right answer, but it is a fact that when he spoke at his 80th birthday party and reflected on his life he didn't even mention his investing career. In my view this does not provide much support for the notion that he had considered all the angles and believed that formlaic investing was preferable to fundamental analysis. Those are the words he said of course, but said while jet setting between CA and France mistress in tow.

This stuff has been rehashed here in various threads numerous times. By the time Graham was near the end of his life he no longer believed in individual security analysis and felt that baskets of securities bought via various screens would outperform. By the time he retired from the investment business in the mid 1950s he had essentially burnt out on investing. It was a new chapter in his life. He had moved to Southern California and while he was still teaching classes at UCLA he no longer cared about the business really. He spent his time on various other pursuits - everything from translating various works from Greek to English, to working on inventions, etc. His primary pursuit during this time was his newfound affair with his dead son's significant other. Graham ended up splitting his life between his third wife and his mistress and between Los Angeles (later La Jolla) and France. He had never really cared that much about money once his needs were met and he didn't care at all by the later stages of his life. It's always been my contention that those who want to attribute to Graham support for EMT and the like are barking up the wrong tree. He was old, tired and had completely different interests.

Jamie is awesome. I really respect the guy. He's earned the right to speak his mind. Funny story. During the financial crisis a friend of mine was working on something with JPM. It had everyone's attention, including Dimon. He waits for a response and the guy he was working with came back with "Jamie says it's a piece of shit. Do it over." Classic.

Done. Agreed. No worries, my friend. Separate from this point, I was thinking about the purported moat and stickiness of Wells Fargo's deposits. I am a firm believer that most of banking is commoditized and that most commercial banking products are fungible. So what would cause someone to keep their deposits at Wells even for less interest? It could be perceived safety, although for most people the FDIC guarantee is more than sufficient. Although I have no facts to back me up, I would think that most people who have more than $250k just sitting in the bank are also sophisticated enough to explore other options. Now that option may be just throwing it into an index fund or an annuity or something, but it's still something. I did a thought experiment. I wanted to think about how many banks are within a few miles of my house (which is in the suburbs). I stopped counting at 12. This includes everything from Wells Fargo, Sun Trust, Bank of America, Citibank, PNC, Capital One, BB&T and M&T to at least 4 community banks. With a couple exceptions (i.e. a branch buried in the bottom level of a strip mall with limited parking), none of these branches are really any more or less convenient than any other. So forgetting for a second community banks, I thought to myself why would someone keep their money with Wells Fargo rather than Sun Trust, Bank of America, Citibank, PNC, Capital One, BB&T or M&T? Is it because it's more prestigious? That can't be it. While there was a point in time many years ago when it might have mattered, it certainly doesn't now and hasn't for a long time. Is it because they offer better service? Perhaps, although with the exception of certain relationship type business banking, is there really such a difference in service from one bank to another when you deposit a check or withdraw funds from a teller? Kind of all the same. We discussed branding before. Do people identify with one bank over another? Just like someone is a diehard Phillies fan or a diehard Yankees fan, is someone a "PNC Man" through and through? Safety, as mentioned above, may have some bearing on it, but I was unable to come up with a real item that differentiates one bank from another except for pricing and convenience. If someone has a savings account and checking account with Wells Fargo would they leave if Bank of America pays a little more? I don't think so, but it's not because they are Wells Fargo people to the core. It's because it's a huge pain in the ass. You have to get new checks, change any kind of direct deposits or automatic withdrawals, etc. While it's not painting the Sistine Chapel, it's the kind of chore that most people shy away from. So as I said before, I believe that commercial banking isn't do no harm, it's do just enough to not piss people off so they leave. In some ways all the banks thus have the same moat and no moat at all.

Txlaw, you're welcome. I agree with what you said. I do believe we see eye to eye on these things.

Agreed. US Bank is definitely in that same category. There are others. My feeling on anything that sells at a premium is that you have to be very right for the investment to work out. WFC needs to continue doing exactly what it's doing, or perhaps even better, for the investment to really make sense. Perhaps they will, I don't know. What does BAC need to do to be a good investment? Not that much. It doesn't need to thrive. So something costs an extra billion here or there. It doesn't matter. So it isn't worth BV but never gets above 80% of BV. Still a great investment and obviously I think it will do better than that. But there are so many smaller regional and community banks that are performing well and selling for the same kinds of valuation as BAC, but have none of the same issues.

Txlaw, fair questions and points. I will try to respond in kind. In terms of whether people think WFC can do no wrong, I do believe that many do think that. I have tried to make clear my point that I believe that WFC is a very fine bank. I don't think it's a great investment. Price determines value and I just think at best WFC is fairly priced. The comments in various threads definitely skew to the positive on WFC. If a bank like BAC is mentioned someone will invariably say "why invest in crap like BAC when you can do what Buffett does and invest in WFC?!" Surely you have seen these comments, they happen all the time. So is that "most" people? Probably you're right on that and it isn't. I also don't generally believe that all or most "board members" follow WEB or HWIC. I do believe there are significant amount though that do. See comment above. This is just a personal viewpoint. I think there are a substantial amount of independent thinkers who are very smart people though on the board and that's why I hang around. If I didn't, I wouldn't. Branding? I personally don't think that most people care all that much. It's more about pricing and convenience. Sure, something like the debit card fees hurt BAC, but it's a vocal minority that care. Take away the fee and no one gives a crap. I firmly believe that most banking is about pricing and convenience. Want a mortgage? Does someone care which bank gives it to them? No, it's about saving 2 bp and timeliness in closing. That explains a lot about the stickiness of deposits. It's not do no harm, it's do just enough so that people don't get pissed and walk. In terms of cross selling, that's all meaningless corporate speak. Every institution I've ever known does these things. It all depends on what is being measured. A teller can easily cross sell a mortgage so that would count as 1 cross sell, but a derivatives trader isn't going to cross sell that same mortgage and it's difficult for that guy to bring in an M&A client for example. So while it's impressive that WFC has the top spot in that, it's the kind of thing that has no magic to it. Someone else will have it some other time. I just don't think it means much. In terms of WFC not engaging in some of the more complex shenanigans, you are right, they didn't. Originally it was due to prudence. Later it was due to inability to catch up. They got lucky, pure and simple. I know that they desperately wanted to be in the biz. They saw the tremendous profits being generated from financial products and wanted their share. They didn't know how to build the business properly. By the time they started throwing money at it, it was very late in the game and so the damage was contained. I am unable to prove it to you. So I guess what I say means nothing, but I can't do anything about that. I have no more details I can provide. To sum up, everything being equal, if WFC was being sold at the same valuation levels as say BAC, I'd be all over it. I think it's a great bank. I think they have a polished image that in some respects is well deserved and in other respects is part of a good PR machine. I think that some of their good fortune is due to excellent management and some is due to being lucky to miss out on certain things. I think that there are a number of people who believe that WFC is a superior bank investment because it has the Buffett imprimatur. As I said, good bank, not good valuation. There are tons of banks that perhaps aren't of the same quality but selling for fractions of WFC. Banks that will be increasing by multiples, not percentages. What's the best that happens with WFC? It grows along with the economy and perhaps gets a little multiple expansion. Nothing wrong with that, I just think there's better out there. Hope I answered your questions fully. If not, feel free to ask again. I didn't intend to miss anything if I did.

This was from 2007 (so early 2008?), but doesn't really prove your point. When someone can't compete generally they will immediately take a different approach and say that they didn't want to. In this case, the damage was already done. It was beneficial to point out that they hadn't engaged in these types of deals. It really doesn't respond to the point I made. I said that they tried to compete but generally weren't able to gain traction. Rabbitsrich made some good points and I agreed, in part, with them. Perhaps it was about capital and distribution, at least once things got frothy, but before that I don't believe it was. Wells did try to do these things. Perhaps they could have tried harder, I can't speak to that, but once it all fell apart it was certainly their good fortune that they hadn't succeeded like some of the firms.

Yes and no. It wasn't always about capital and distribution. That may have been the case in the frothy years (say 2006-2007), but before that when there wasn't unlimited dealflow it was about relationships. Sure, a team could have been bought I guess, but it's never so easy to just start over. I think too the products weren't always commodities. Again, they may have become that and in all these cases it depends on exactly which product we're talking about. But before things became bubblicious it was about innovation and deal technology (in terms of structures and the like). There were better firms and clients did at one point care who was doing what. I suppose though what you say is certainly correct at least once it got later in time. So, good points.

Color me shocked. This is like the jealous queen suing Snow White. I had honestly thought that Wells did things perfectly. Who knew. lol, must be an election coming. Nope, no political commentary. I find it interesting that many investors believe that among banks Wells is as pure as the driven snow. Don't get me wrong, it's a fine institution, but they did all the same things the other banks did. They are fortunate in that they weren't as good as the others. Sometimes it's better to be lucky than good. By that I mean that they tried to break into all the various structured products, securitization, derivatives, etc., but couldn't get any traction. Once the financial crisis came and they came out of it smelling like roses (relatively speaking) there was a bit of revisionist history. It's interesting that of all the banks that this action could be brought against, Wells was 2nd. I love the banks, but think that Wells, while a good firm, isn't a great investment as least as compared to all the other cheaper banks out there. I think that Wells has the Buffett imprimatur so is viewed as superior to the other financials. People forget that it comes down to price.

Color me shocked. This is like the jealous queen suing Snow White. I had honestly thought that Wells did things perfectly. Who knew.

Dreman recently updated his book and it came out in the last year or so. I am not sure all that much changed, but he does relate things to the financial crisis.

"Diversification is protection against ignorance" -- seems to be what you're prescribing here. Good lord. See my recent comments in the Charlie Munger thread. http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/the-best-of-charlie-munger-1994-2011/msg87960/?topicseen#msg87960 I couldn't disagree more that diversification is intended to be protection against ignorance. Doing anything for the sake of doing it is moronic. Having a different philosophy is not.

Ditto, it's a treasure trove. Especially appropos for us now are his remarks on and about page 75 about how it's prudent and better for a foundation to invest in as few as one to three well chosen equities than to think wrongly that they should be diversified. I never understand these kinds of comments. That is, those that imply there is a better way to invest in terms of diversification or concentration. Schloss would take dozens of small positions. His performance over almost a 45 year period is better than most of those from the town of Graham and Doddsville (in fact possibly the best save for Buffett himself). I don't understand why it's "wrong" to think that one can take more than 1 to 3 positions. I am not saying doing that is wrong, it isn't obviously. If someone can do it, go ahead. I'd venture of course that very few people on this board who preach excessive concentration actually are at 1 to 3 positions. In my view, there are many ways to skin a cat. No way is right or wrong. There is no absolute truth to any one philosophy. The thing is though that it's those who preach concentration typically say that that is the best way and that any other way is protecting against ignorance. One never heard Schloss saying similar things about those who concentrate. In fact, he often was very self deprecating and said he wasn't very bright and that's why he took this approach. Not true obviously, but shows a different approach to describing stylistic differences. Walter was a lot more discerning than many realize. When he spotted a balance sheet bargain, he would go back and read 10 years of 10K's and satisfy himself that he was investing in a solid company with capable, ethical management. Then he might wait to see if that stock went down even more, perhaps with EOY tax loss and portfolio dressing before pulling the trigger. That method worked well overall for Walter, but Ben Graham said that buying secondary issues at a bargain price was not apt to lead to profits when the market was exuberant. We saw evidence of this big time in 98 and 99, which led up to a great time to buy all sorts of bargains after the market rolled over in 2000. Same after the crash in 08 & 09. Walter's strategy will beat anything else after a crash. Walter had enormous patience. He was interviewed not long after Y2K. The interviewer asked him if he thought Stanley Furniture was a bargain worth buying. It was a bargain that paid a high dividend. Walter took a look at it and expressed the opinion that they might pass their dividend. That's exactly what happened. When the market and that stock turned down, Walter bought that stock for 20 cents on the dollar compared to its price earlier. A couple of years later, Walter had a 4 bagger. :) Even Warren used the Schloss method successfully in recent years, picking up quite a few bargains in the Korean market after it crashed over a decade ago. :) I couldn't agree more with what you just said. I am not sure what it has to do with your earlier statement however. There is no requirement that in order to be discerning one must only hold a handful of stocks. I think Schloss was incredibly discerning. But this is a different discussion. You said "especially appropos for us ow are his remarks . . . about how it's prudent and better . . . to invest in as few as one to three well chosen equities than to think wrongly they should be diversified." That assertion mirrors others about how diversification is not a cure for ignorance and the like. So my point is that why does it matter? Schloss was diversified and did incredibly well. Munger was not diversified and did incredibly well. So what? And I don't believe for a second that Schloss thought he had to have dozens of positions, I think he found dozens of positions worth holding. It sounds though as if we are certainly in agreement on Schloss.

Ditto, it's a treasure trove. Especially appropos for us now are his remarks on and about page 75 about how it's prudent and better for a foundation to invest in as few as one to three well chosen equities than to think wrongly that they should be diversified. I never understand these kinds of comments. That is, those that imply there is a better way to invest in terms of diversification or concentration. Schloss would take dozens of small positions. His performance over almost a 45 year period is better than most of those from the town of Graham and Doddsville (in fact possibly the best save for Buffett himself). I don't understand why it's "wrong" to think that one can take more than 1 to 3 positions. I am not saying doing that is wrong, it isn't obviously. If someone can do it, go ahead. I'd venture of course that very few people on this board who preach excessive concentration actually are at 1 to 3 positions. In my view, there are many ways to skin a cat. No way is right or wrong. There is no absolute truth to any one philosophy. The thing is though that it's those who preach concentration typically say that that is the best way and that any other way is protecting against ignorance. One never heard Schloss saying similar things about those who concentrate. In fact, he often was very self deprecating and said he wasn't very bright and that's why he took this approach. Not true obviously, but shows a different approach to describing stylistic differences.

It's a great idea if you are 100% sure you are going to earn a return greater than 3.875%. It's similar to the Will Rogers advice of buy stocks that go up; if they don't go up, don't buy them. If you know you can do it, then do it, if not, don't. For safety, simply buying BRK or FFH should give you better than 4% return, as long as you can tolerate the lumpiness -- that's why I'm thinking about this. Sounds like you got your answer. Since BRK or FFH will do better than 4% I guess you should go forward.

The thing I loved the most about Larry Ellison was that there was a book about him called something like The Difference Between God and Larry Ellison is that God Doesn't Think He's Larry Ellison.

It's a great idea if you are 100% sure you are going to earn a return greater than 3.875%. It's similar to the Will Rogers advice of buy stocks that go up; if they don't go up, don't buy them. If you know you can do it, then do it, if not, don't.

Very interesting. I didn't know of this book, but knew Susan many years ago. From what I remember, it doesn't surprise me that she would write a great book. She was very smart and not that it matters from the standpoint of the book, very nice as well. Glad to see her doing well.

Not anytime soon most likely. Asbestos lawsuits have been going on for over 40 years. Exxon Valdez litigation is still ongoing since the spill in 1989. In a semi-related type of matter and no where near the scale, there was litigation regarding Drexel Burnham for a decade. These MBS related lawsuits will go on so long as blood can be squeezed from a stone and the last "aggrieved" person feels they've had their day in court. So a long, long time.

Since $10 sounds really high and is probably out of the range of many potential board members given these tough economic times when they need to decide between super sizing for the week or joining the board, it might have sounded better to try and soft pedal it a little. You could have gone the Ron Popeil method and told people that use of the board for 10 years is a $1,000 value, but they're not going to spend $1,000. They're not going to spend $500. They're not going to spend $250. Etc etc. Or perhaps you could have gone with the "4 easy payments of $2.50 each". Or you could go the "would you pay $.00003 cents a day for use of the board for 10 years?" So many options.

In my view, the key to Schloss's success was patience. Embedded in that is ignoring the noise, keeping his head, etc. His genius wasn't in technical skills or superior analysis. I say this as one of the world's biggest fans of his. I owe him a tremendous intellectual debt. But he would be the first to admit that he wasn't a better securities analyst than many others. In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did. His true genius was in patience, time arbitrage to the extreme. As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish. I know that many value folks believe that past pricing means nothing. Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance. I think that people miss the point. It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future. I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis. Allan Meachum had a great line about this in an article a while back. He said that each year the price of most stocks will move about 80% from high to low. I have no idea whether 80% is an accurate number or not, but the gist is very true. So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome. That is Schloss's genius. He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more. He has said after about 4 years he would think about selling, but he really didn't like to sell. Most of the selling was probably forced by Edwin. Walter liked to hold on. He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear. Most survive if not thrive and so long as the future looks something like the past, the stock will do ok.

I don't recall that exact quote. Buffett wrote about Schloss saying something to the effect that his clients were straight from a roll call at Ellis Island. I know in the Greenwald book it says that the Schlosses have 2nd and 3rd generation clients who aren't wealthy and have significant amounts of their money invested with them. Perhaps this is what you are thinking about?