The Forbes 400 as a Lesson in Economics

Indeed, of the charter members of the first Forbes 400, only 32 remain today. Far from a country where only the rich get richer, the wealthy in the US are very much a moving target. While there are 74 Forbes 400 members who inherited their entire fortune, 270 members are entirely self-made. Though many attended Harvard, Yale and Princeton, there are countless stories within of high school and college dropouts, not to mention others who grew up extremely poor. Politicians who regularly engage in class warfare would do well to keep the Forbes 400 out of the hands of their constituents, because it makes a mockery of the kind "Two Americas" rhetoric suggesting the existence of a glass ceiling that keeps hard workers at the bottom of the economic ladder. To read the Forbes 400 is to know with surety that the U.S. is still very much the land of opportunity.

THE TEXAS HEDGE REPORT - RAILROADS: FOLLOWING BUFFETT’S LATEST MOVE

With Buffett’s latest railroad purchases making headlines, we thought it might be timely to take a look at this industry. A casual glance will show that the large rail stocks Buffett has been buying are trading at greater than 15x trailing earnings. That seems a pretty full price to pay for a stock not named Coke or Gillette!

Columbia Business School - Class Recordings Archives

Some new videos were added from recordings earlier this year (last year's are available as well):
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http://www1.gsb.columbia.edu/valueinvesting/research/class_recordings.html

Are we headed for an epic bear market?

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.

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One of the world's leading experts on credit derivatives, Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.

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I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?"

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Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.

RealPlayer - A Useful New Addition

RealPlayer now allows you to download any streaming audio or video, in any format, even if it's not Real formatting.
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To download the latest version, go to: www.real.com
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I highly recommend making your first download Charlie Munger's 2007 Commencement Speech at USC's School of Law your first (he starts speaking at 43:45). My notes to the speech are posted HERE.

Robert Rubin - Fortune Article, Harvard Commencement, Interviews on Charlie Rose, Book

Fortune Article - 2003

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Part of Rubin's approach to decisions at the Treasury was to put them off as long as possible. Some people might call that procrastination; Rubin called it getting that one last fact or well-judged opinion, from whoever at the table might offer it, that might make a decision the right one. Geithner says the young members of the Treasury staff would on occasion rush into Rubin's office, imploring him for a decision about something consequential. Rubin's first question would often be, "How much time do we have before we have to decide?" Summers tabs this Rubin's habit of "preserving his optionality."

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He has less serious habits, of course, and the Treasury team got to know them all. Rubin quit wearing a watch about 20 years ago--he thought it made him too conscious of time--and he doesn't carry a briefcase, instead toting what he needs in brown, expandable legal folders jammed under his arms. At the office he likes to work in stocking feet. For the 6 1/2 years he was in Washington--he tends to be very precise about that elapsed time--he lived like a bachelor at the Jefferson Hotel, flying to New York on weekends to rejoin his wife. He reads voraciously, keeping several pieces of fiction and nonfiction going at once. But he is largely oblivious to popular culture: His staff found that he hadn't heard of Aretha Franklin or Eartha Kitt, and until corrected he thought that Jimmy Buffett was Warren's son. He also once suggested to the board of the American Ballet Theatre, on which he sat, that it help along a cost-reduction drive by cutting 10% of the swans in Swan Lake. His advice, he says, was not well received.

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Harvard Commencement - 2001

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I am deeply honored to be your commencement speaker today. A little over forty years ago, I arrived as a freshman at Harvard College, from a public school in Miami Beach, Florida. I remember the first day of orientation, when the incoming freshman class met together at Memorial Hall, and the acting Dean of Freshman said, as an effort at reassurance, that only 2% of the incoming class would fail out. I felt that I was providing enormous protection to the rest of my incoming classmates, because in my mind I was going to fall short so colossally as to fill that whole 2% all by myself.

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However, I remained, and my Harvard experience reshaped the intellectual framework through which I viewed everything that came my way, including the decision-making that has been the critical core of my professional life, both on Wall Street and in government. My views on that critical function of decision-making derived from my life's activities and formatively and powerfully from my Harvard experience, will be the primary focus of my remarks today, because I believe that decision-making will be at the core of your lives, too, no matter what you do. The only question will be how well you make those decisions.

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Interviews on Charlie Rose

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His Book: In an Uncertain World

Warren Buffett to CNBC: "I Don't Care" If the Fed Cuts Rates

The important thing in stocks is to buy a stock in a good business at a reasonable price. Anybody that is buying or selling stocks based on what the Fed is doing, or what they think they're going to do at their next meeting, I think is destined to not having a great financial future. It really doesn't have anything to do with the value of good companies 3, 5 years from now. People who think they can dance in and out based on Fed signals, I think, they're going to make their brokers rich, but they're not going to make themselves rich.

Olstein Funds Annual Report

Olstein's Top Twenty Quality of Earnings Alerts
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1. Material deviations between net income and free cash flow
2. Material differences between the tax books and shareholder books as measured by deferred taxes
3. Material changes in balance sheet debt and liquidity ratios
4. Inventories, especially finished goods or raw materials, increasing or decreasing faster than sales
5. Accounts receivable increasing or decreasing faster than revenue
6. Deviations between depreciation and capital expenditures
7. The repetitiveness and materiality of non-recurring write-offs
8. The role that non-trend line changes in reserves contribute to, or negatively impact, current earnings
9. The repetitiveness and materiality of non-recurring gains such as sales from venture capital portfolios
10. The impact and reality of a company’s deferred expense capitalization policies as it effects reported free cash flow
11. Discretionary expenses deviating materially above and below trend lines
12. The reality, consistency and conservativeness of revenue recognition techniques when measured against the passing of cash
13. The impact that acquisitions have on sustainable free cash flow and the growth thereof
14. Changes in other asset accounts
15. The impact of transactions with special-purpose vehicles
16. Pension income and expense recognition measured against the pension plan’s assumptions and the funded status of the plan
17. Large deviations between pro forma and reported earnings
18. The impact of option transactions on reported free cash flow and the impact on future results and valuations of the company
19. The capabilities of management as measured by their long-term decision-making capabilities; especially when problems develop; their attitude toward risk as measured by the quality of the balance sheet; and their preparation for a rainy day; their methodology of communicating with shareholders; and finally their ability and emphasis on returning value to shareholders
20. Disclosure of material information needed to assess the value of the company

Whitney Tilson: Hot favourites won’t always turn out to be great winners

To this last point on buying and holding, the funds I co-manage have recently sold several long positions, driven by our belief that the odds of a significant market correction over the next year have increased substantially. We’re not predicting Armageddon, but we think the subprime train wreck is in its early stages and could have substantial effects on the world economy and credit markets.

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In light of this more cautious outlook we went through our portfolio, analysing each position and asking ourselves, “If our fund were 100 per cent cash today, would we buy this stock?” During times when our outlook is more sanguine, we sometimes hold 80-cent dollars – typically either in stocks that we purchased as 50-cent dollars and are waiting until they reach our estimate of intrinsic value, or in high-quality, growing businesses that are moderately undervalued, which we’re happy to own in lieu of cash at certain times. But in today’s environment, we prefer cash to anything but pound-the-table-with- conviction stocks.

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As a result of this exercise, we’ve closed or reduced positions in great companies such as Microsoft, Costco, Wal-Mart and Anheuser-Busch.

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Among the highest-conviction stocks on which we’re now more concentrated are: Target, McDonald’s, Fairfax Financial and – my personal pick to “last the next decade” – Berkshire Hathaway.

"Stumbling" on Value Investing

Using excerpts from Dan Gilbert's book, Stumbling on Happiness, this article seeks to illustrate a variety of psychological pitfalls that may prevent people from achieving long-term success as value investors.

Quality Without Compromise - Berkshire's Investment in See's Candy

Part 1:

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William Ramsey, an executive at Blue Chip Stamps, stood in the office of Robert Flaherty as they both awaited a call. Moments earlier, Flaherty had attempted to persuade Warren Buffett, majority owner of Blue Chip Stamps, to consider purchasing See’s Candy, a popular West Coast candy maker. Buffett turned them down—up until then, he was used to buying boring businesses on the cheap: banks, textile mills and insurance companies. Ramsey however, thought See’s was a great buy, and desperately tried to get Buffett back on the phone. Their secretary finally got hold of Buffett at his home in Omaha. He had reviewed the numbers, and liked what he saw.

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Part 2:

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See’s Candies was a fantastic business. Buffett and Munger couldn’t have asked for much better. With Chuck Huggins, the See’s brand name, and the superior economics of the candy industry, they got the whole package for $25 million. But ultimately, the success of any investment comes down to the price paid relative to the value received. Was paying 12.5 times after-tax earnings justifiable?

Transcript - Consuelo Mack WealthTrack - Zweig, Cohen, Tilson

Original Air Date: September 7, 2007

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WHITNEY TILSON: We haven't sold any Berkshire, and we continue to buy it and recommend it. It’s the only stock that’s been in their portfolio in almost nine years that we’ve been managing money professionally. So we are big fans, but recently, I'll echo exactly what Hersh said; generally speaking, stick with blue chip companies, strong balance sheets that can crank out growth even in a declining economy, that have a tail wind. Berkshire Hathaway qualifies, McDonald's, one of our top holdings, qualifies. And our largest position is now Target (TGT). It falls into the general category of very high quality, blue chip stocks, and every value guy owns some of them today, be it, Buffett has been buying Burlington Northern, and Johnson & Johnson, and Microsoft. So we think there are a lot of high quality 80-cent dollars out there. But we only own ones where we think there is a catalyst. As I mentioned before, I don't want to own 80-cent dollars --

7 Stupid Thinking Errors You Probably Make

5) Anchoring Bias

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Anchoring is a well-known problem with negotiations. The first person to state a number will usually force the other person to give a new number based on the first. Anchoring happens even when the number is completely random. In one study, participants spun a wheel that either pointed to 15 or 65. They were then asked the number of countries in Africa that belonged to the UN. Even though the number was arbitrary, answers tended to cluster around either 15 or 65.

Was Harry Potter Inevitable? - Michael Mauboussin

Our society often associates success with quality. In a fiercely competitive market, the thinking goes, only the best products rise to the surface. Once a product is a hit, whether a blockbuster movie or a bestselling book, we readily point to the attributes that make it so appealing. And the stakes are high: studies show a small minority of winners reap the vast majority of the sales.

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The link between success and quality is clear and legitimate in many domains. For example, consistent tournament winners in tennis or golf must have the skill to beat a large field of hungry challengers. But what happens if factors other than quality shape success? Might we draw the wrong lessons from the successes and failures we see and make ill-informed decisions as a result?

The Harder Side of Sears

In picking a new CFO from the banking industry, hedge-fund manager Eddie Lampert places an emphasis on a finance department driven by hard data and quantititive analysis.

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Also of note, Mr. Lampert is buying back a bunch of stock.

FERMAT AND PASCAL ON PROBABILITY

Italian writers of the fifteenth and sixteenth centuries, notably Pacioli (1494), Tartaglia (1556), and Cardan (1545), had discussed the problem of the division of a stake between two players whose game was interrupted before its close. The problem was proposed to Pascal and Fermat, probably in 1654, by the Chevalier de M´er´e, a gambler who is said to have had unusual ability “even for the mathematics.” The correspondence which ensued between Fermat and Pascal, was fundamental in the development of modern concepts of probability

Probabilistic Thinking and the 80/20 Rule

The human brain is inherently bad at dealing with probabilities. This is largely evident in the field of investing where investors try to handicap companies as potential investments, especially in the face of uncertainty. Investors should strive to improve their cognition of probabilities and operate with a frame of mind that helps to compensate for our wiring at birth. As well, investors need to avoid information overload, a few key variables is all one needs to handicap the odds of an investment’s success or failure.

$30B Worth of Advice

Marty Whitman, founder of Third Avenue Mgmt., shares his investment strategy with CNBC's Sue Herera.

Tweedy, Browne's Secrets of Value Investing

Christopher Browne is one of three members of the company's management committee and son of an early founder. He has recently written "The Little Book of Value Investing," which lays out the money management disciplines that have been so successful for Tweedy, Browne. In it, he argues the merit of buying "stocks on sale" and answers the obvious question: If value investing is so successful, and so simple, why doesn't everybody do it?

Whitney Tilson’s 2007 Wesco Annual Meeting Notes

OPENING REMARKS

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I note that this year we’re in a tent. It’s amazing that a tent can be made to work so well. It’s a tribute to our civilization. If our ancestors had been in a tent, it would not be like this one, with air conditioning and so forth.

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It’s amazing that all you people come. You know, I didn’t set out in life to become the assistant leader of a cult. [Laughter] As they say, experience is what happens when you’re looking for something else.

FocusInvestor.com - The Munger Network of Mental Models

A good read:

Focus Investing Series Part 3: Mental Models

Bear Bonanza

Earlier this year Prem Watsa, the gunslinging chief of Fairfax Financial (nyse: FFH), had $341 million riding on a hunch that dozens of brokers, banks and insurers could struggle paying their debts. Watsa has a history of making a killing on bearish bets. He sold half the company's stock holdings before the 1987 crash and bought puts against the S&P 500 before the index fell in 2000. But as summer began, his latest wager had produced nothing but losses.

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Then the credit markets seized up, and investors began clamoring for the Toronto insurer's collection of credit default swaps, basically insurance against bond defaults. Prices climbed. By the end of July Fairfax's swaps were worth $537 million, up 170% in a month.

Emotion Can Make You a Bad Investor

The brain processes expectation in a much more intense way than it processes the actual experience. So, the hope of making money often feels better than actually making money does, and the fear of losing money often feels worse than actually losing money. And those are the two states that often drive your behavior.

Take-Home Lessons on Value Investing

Do you want greater investment returns? You need to assume more risk. So says academic finance, which rests almost entirely on the principle that reward necessarily entails and is commensurate with risk. Indeed this assumption has at least an element of truth to it, inasmuch as stocks are riskier than bonds, and also tend to deliver greater returns than bonds over longer (say, multiyear) periods of time.

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Hedge fund manager and author of "The Dhandho Investor," Mohnish Pabrai, begs to differ with the academics. Like so many value investors who've come before him (and to whom he's duly deferential), Pabrai provides a framework for selecting unloved, overlooked, forgotten, and seemingly boring businesses that are selling at cheap enough prices to minimize risk and maximize returns.