Barry's Annual Holiday Book Survey

My friend Barry's Holiday Book Survey is back! The short version of the directions is: CLICK HERE and fill out. And then please tell friends about it as well. 

If you are interested in previous years' results, they are HERE. Here is Barry's slightly longer description:

In the last couple of years I have compiled a yearly list of book recommendations from a group of colleagues, family and friends. This year I have expanded the list of participants and have also automated the process by using a webpage to collect, sort and present the book recommendations. 

To participate in the survey and or register to receive notification when it has been compiled, just click on the link below and you will be taken to the book survey webpage. I have designed the survey to make it both quick and easy to use. If you want to be emailed when the results of this survey are compiled and be notified of future surveys, then you must register (1st or 3rd radio button) on the book survey website. Future mailing lists and notifications will only be generated from those who have registered on the website. 

At the bottom of the book survey webpage is the survey. Please fill in the book’s title, author’s first and last name and the books genre (dropdown menu) in order of importance, #1 being your highest book recommendation and #5 being the lowest.

Link to: Barry’s Book Survey

Neil deGrasse Tyson: Does the Universe Have a Purpose?

Link

Warren Buffett & Carol Loomis on Marketplace

Found via the Corner of Berkshire & Fairfax.

Link to: Warren Buffett & Carol Loomis on Marketplace

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Related book: Tap Dancing to Work

Related previous posts:

Carol Loomis and Warren Buffett on Charlie Rose

Warren Buffett and Carol Loomis on CNBC

Warren Buffett & Carol Loomis on The Daily Show

Fireside Chat with Jeff Bezos & Werner Vogels

Found via the Corner of Berkshire & Fairfax.


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Related previous post: Jeff Bezos on Charlie Rose

Richard Duncan quotes

Longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight).

Part of the reason that monetarism failed to produce the anticipated results was due to changes brought about by globalization.

Nevertheless, the monetarists would have met with greater success if they had broadened their definition of money even further. Their mistake was to fail to see that there is no distinction between fiat money and credit. They should have included all dollar-denominated credit instruments in their definition of money. Or, put differently, they should have replaced money with credit in the equation of exchange, because by the 1980s there was less and less difference between the two. Now there is essentially none.

...because of financial innovation, credit has become more like money. Most credit instruments have long met the three criteria that define money. They can serve as a medium of exchange, they are a store of value, and they are a unit of account. In the past, however, they were not liquid. Now they are. The repo market makes them liquid. The repurchase market allows the owner of any credit instrument to obtain cash immediately by agreeing to repurchase that asset at a specified date in the future. Treasury bonds, municipal bonds, corporate bonds, GSE debt, and asset-backed securities are all now completely liquid. In other words, the entire $52 trillion in credit market debt outstanding is liquid and, therefore, money-like.

So, with money having become more like credit and credit having become more like money, there is little point in making any distinction between the two. Moreover, in recent decades, the quantity of credit has become so great relative to the quantity of money that it has made money irrelevant. 

The principal reason that monetarism became incapable of achieving the results expected of it was that money became indistinguishable from credit. After 1968, the thing that had been money, gold, made up a smaller and smaller fraction of the money supply, so small that it became completely irrelevant to the overall economy. It is the credit supply, not the money supply, that counts now. Therefore, the quantity theory of money must be revised to incorporate that change.

Voltaire quote

James Montier used this quote in his latest white paper:

“Doubt is not a pleasant condition, but certainty is absurd.” –Voltaire

Fed Policy at War With Market Mechanism, Grant Says (video)

Nov. 29 (Bloomberg) -- James Grant, publisher of Grant's Interest Rate Observer, talks about Federal Reserve monetary policy and Bank of Canada Governor Mark Carney's appointment as the next head of the Bank of England. Grant speaks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance." Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, also speaks.

ECRI's Achuthan Defends Call for U.S. Recession (video)

Nov. 29 (Bloomberg) -- Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, talks about the U.S. economy. Achuthan speaks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance."

James Montier white paper: The 13th Labour of Hercules: Capital Preservation in the Age of Financial Repression

James Montier, a member of GMO's Asset Allocation team, uses this white paper to discuss the impact on investments of monetary policy that results in consistent negative interest rates, or as he calls it, financial repression.

Bruce Berkowitz at the University Of Miami

Found via GuruFocus.


Link

William Ackman: Everything You Need to Know About Finance and Investing in Under an Hour

Found via ValueWalk.


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Nassim Taleb on CNBC

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Related book: Antifragile: Things That Gain from Disorder

Three Steps to Becoming the Master of Your (Office) Domain – By Robert Greene

Mastery is the ultimate form of power. When a person has mastered a field, he or she has attained such a grasp of the field’s complexities that opportunities and trends which are invisible to others are readily apparent to the master.

The power that mastery brings does not come from possessing a higher IQ, having greater natural talent, or being lucky enough to have wealthy parents who can afford the best schools. Instead, this power is the result of years of practice, experience, and experimentation.

A person who becomes a master follows a course that includes choosing the career path that best meshes with his interests, completing a fast-track and intense apprenticeship in the field, working with the right mentors, and learning how to handle the political aspects of collaborating with others. My book “Mastery” is based on my years of research on the greatest masters in history as well as interviews with nine contemporary masters. In it I describe in detail the process that leads to this power of mastery and how anyone can pursue it, regardless of background or what the field may be. The following are three key steps along the way, illustrated by examples taken from the lives of various masters.

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Related book: Mastery

Related previous post: Following the Path to Mastery with Robert Greene

Broyhill Asset Management: Solid as an OAK

Great presentation on the investment merits of Oaktree (OAK).

Link to: Solid as an OAK

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Related link: Broyhill Q3 Update

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UPDATE 1/2/2013: A Conversation About Oaktree

Warren Buffett & Carol Loomis on The Daily Show

Link to:

Part 1

Part 2

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Related book: Tap Dancing to Work

Warren Buffett and Carol Loomis on CNBC

Link to Part 1



Link to Part 2

Nassim Taleb: my rules for life

The controversial thinker who predicted the 2008 financial crisis hates bankers, academics and journalists. He's also a man of mystery – he eats like a caveman, and goes to bed at 8pm. We took the risk of meeting him

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Related book: Antifragile: Things That Gain from Disorder

Carol Loomis and Warren Buffett on Charlie Rose

Link to: Carol Loomis and Warren Buffett on Charlie Rose

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Related book: Tap Dancing to Work

60 Minutes: Discovering the secrets of lions

Dereck and Beverly Joubert have been filming Africa's lions for 30 years and their discoveries have challenged conventional wisdom. Lara Logan reports.



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John Mauldin: Capital Formation and the Fiscal Cliff

In today’s economic environment, we often complain about volatility and uncertainty, but there is one thing I think we can be fairly certain of: taxes are going up. I constantly try to impress upon my kids, most of whom are now adults, that ideas and actions have consequences. In today’s letter we will look at some of the consequences of an increase in taxes. Please note that this is different from arguing whether taxes should rise or fall. For all intents and purposes that debate is over. As investors, our job is to deal with reality. We must play the hand we are dealt. Taxation is a complex issue, but let’s see if a few word pictures can help us understand what we face.

Warren Buffett speaks with Matt Lauer

Mr. Buffett and Ms. Loomis were also on Charlie Rose last night. I'll post a link to that when it is available.



Link

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Related book: Tap Dancing to Work

Richard Duncan quotes

“There is one other aspect of the quantity theory of money that is important to understand. This theory is concerned with the impact that a change in the quantity of money (M) has on the price level (P ). It does not preclude the possibility, however, that other factors in addition to the quantity of money can also affect prices.

It will be essential to keep this in mind when considering the implications of the quantity theory of credit because there has been one development other than the extraordinary proliferation of credit that has had a truly extraordinary impact on prices during recent decades, globalization.

Globalization has resulted in a 95 percent decline in the marginal cost of labor in a relatively short span of time.

…had the price of labor not collapsed, the world would have been beset by hyperinflation long ago.

As the 1980s progressed, however, monetarism lost credibility as it become clear that monetary targeting did not always deliver the expected results. The price level did not change in exact accordance with the quantity of money as the theory held it must. In particular, the velocity of money (V) proved to be erratic and unpredictable.”

–Richard Duncan, The New Depression

George Soros: Why I Agree With (Some of) Friedrich Hayek

Found via The Big Picture.

Link to: Why I Agree With (Some of) Friedrich Hayek

Notes from the Sohn London Investment Conference 2012

Via Market Folly:

Link to: Notes from the Sohn London Investment Conference 2012

Fault Lines : Fracking in America

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Related previous post: The Facts Behind the Frack

Nate Silver: it's the numbers, stupid

The poker player and baseball nerd turned political forecaster won fame after predicting the result of the US election with uncanny accuracy. And as his star rises so too does that of a whole new generation of 'quants' leading the digital revolution

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Related paper (Taleb: “why political predictions work, not economic ones”): “Prediction Markets” & Game Setups Have Nothing to Do With Real Risks

Leo Babauta talks with Tim Ferriss: How to Learn Anything

Link

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Related book: The 4-Hour Chef: The Simple Path to Cooking Like a Pro, Learning Anything, and Living the Good Life

Related link: The 4-Hour Chef Launch — Marketing/PR Summary of Week One

Vanguard: Forecasting stock returns: What signals matter, and what do they say now?

Found via The Idea Farm.

Executive summary. Some say the long-run outlook for US stocks is poor (even ‘dead’) given the backdrop of muted economic growth, already-high profit margins, elevated government debt levels, and low interest rates. Others take a rosier view, citing attractive valuations and a wide spread between stock earnings yields and Treasury bond yields as reason to anticipate US stock returns of 8%-10% annually, close to the historical average, over the next decade. Given such disparate views, which factors should investors consider when formulating expectations for stock returns? And today, what do those factors suggest is a reasonable range to expect for stock returns going forward?

We expand on previous Vanguard research in using US stock returns since 1926 to assess the predictive power of more than a dozen metrics that investors would know ahead of time. We find that many commonly cited signals have had very weak and erratic correlations with actual subsequent returns, even at long investment horizons. These poor predictors include trailing values for dividend yields and economic growth, the difference between the stock market’s earnings yield and Treasury bond yields (the so-called Fed Model), profit margins, and past stock returns.

Hussman Weekly Market Comment: Overlooking Overvaluation

Presently, on the basis of smooth fundamentals such as revenues, book values, dividends and cyclically-adjusted earnings, the S&P 500 is somewhere between 40-70% above pre-bubble valuation norms, depending on the measure. That’s about the same point they reached at the beginning of the 1965-1982 secular bear period, as well as the 1987 peak. Stocks are far less overvalued than they were in the late-1990’s, but it is worth noting that nearly 14 years of poor market returns have resulted simply from the retreat from those bubble valuations to the current rich valuations. If presently rich valuations were to retreat again to undervalued levels that have accompanied the start of secular bull markets (see 1982 for example), stocks would produce yet another extended period of dismal returns. That prospect certainly isn’t the reason for our present defensiveness, but it’s worth understanding the dynamic that has produced the pattern of market returns we’ve observed over time.

The defining feature of dividends, revenues, book values and the 10-year average of inflation-adjusted earnings (the denominator of the Shiller P/E) is that they are smooth and insensitive to cyclical fluctuations in profit margins over the business cycle. In contrast, standard price/earnings ratios generally seem very reasonable when profit margins are elevated, and seem extreme when profit margins are depressed. Needless to say, that is no small risk for investors who are enamored with seemingly “reasonable” P/E ratios based on forward operating earnings (which assume that companies will indefinitely earn profit margins about 70% above historical norms).

While we prefer to explicitly model the stream of expected future cash flows in our own valuation work, these multiples can be converted into 10-year total return estimates for the S&P 500 using a fairly “model free” rule of thumb, by associating “fair” value with a 10% prospective return. If we write the normalized price-fundamental ratio as “NPF”, and assume that deviations are gradually corrected over a period of 10 years, we have:

Estimated prospective 10-year S&P 500 total return = 1.10/(NPF^.1) – 1

So for example, an NPF of 1.0 corresponds to a 10% 10-year prospective return. An NPF of 0.5, which we might see at the start of a secular bull market, would correspond to a 10-year prospective return estimate of 1.10/(0.5^.1)-1 = 17.9%.

As a more concrete example, with the S&P 500 price/dividend ratio presently about 43, versus a historical norm of 26, the NPF on dividends is about 43/26 = 1.65. That figure translates into a 10-year prospective return estimate of 1.10/(1.65^.1)-1 = 4.6%.

Nassim Taleb: From fat tails to Fat Tony

Predictions of socioeconomic variables are as dependable as the horoscope—so let’s not rely on them in 2013. Instead we will need systems that don’t fall apart when we make a mistake. This may seem blindingly obvious but apparently it is too “trivial”, too easy to understand and implement to appeal to the zeitgeist. For, alas, though those who risk their own funds put a premium on simplicity and practicality, others—academics driven by “rank” and status, management consultants, economic “experts”, and finance analysts—have an incentive to indulge in complexity and muddle.

This intrinsic limit to predictions is here to stay with us. It will not go away thanks to hard work by zealous researchers or more funding, more data, more computing power, and more complicated theories. For unpredictability is part of any system that is prone to “fat tails”, that is, one whose properties are dominated by rare events—what I have called “black swans”. Don’t imagine that complexity, chaos theory, agent-based modeling or some other fad narrative will deliver better, more usable predictions than those failed economic methods we are still teaching our university students.

Warren Buffett Op-Ed: A Minimum Tax for the Wealthy

SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

Following the Path to Mastery with Robert Greene

Greene comes on around 13:51.


Link

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Related book: Mastery

Related link (6-part article from Robert Greene on Tim Ferriss' site): The Magic of Apprenticeship — A How-To Guide

Excerpts from the article:

From Part III:

What prevents people from learning....is not the subject itself—the human mind has limitless capabilities—but rather certain learning disabilities that tend to fester and grow in our minds as we get older. These include a sense of smugness and superiority whenever we encounter something alien to our ways, as well as rigid ideas about what is real or true, often indoctrinated in us by schooling or family. If we feel like we know something, our minds close off to other possibilities. We see reflections of the truth we have already assumed. Such feelings of superiority are often unconscious and stem from a fear of what is different or unknown. We are rarely aware of this, and often imagine ourselves to be paragons of impartiality.

Children are generally free of these handicaps. They are dependent upon adults for their survival and naturally feel inferior. This sense of inferiority gives them a hunger to learn. Through learning, they can bridge the gap and not feel so helpless. Their minds are completely open; they pay greater attention. This is why children can learn so quickly and so deeply. Unlike other animals, we humans retain what is known as neoteny—mental and physical traits of immaturity—well into our adult years. We have the remarkable capability of returning to a childlike spirit, especially in moments in which we must learn something. Well into our fifties and beyond, we can return to that sense of wonder and curiosity, reviving our youth and apprenticeships.

Understand: when you enter a new environment, your task is to learn and absorb as much as possible. For that purpose you must try to revert to a childlike feeling of inferiority—the feeling that others know much more than you and that you are dependent upon them to learn and safely navigate your apprenticeship. You drop all of your preconceptions about an environment or field, any lingering feelings of smugness. You have no fears. You interact with people and participate in the culture as deeply as possible. You are full of curiosity. Assuming this sensation of inferiority, your mind will open up and you will have a hunger to learn. This position is of course only temporary. You are reverting to a feeling of dependence, so that within five to ten years you can learn enough to finally declare your independence and enter full adulthood.

From Part IV:

By nature, we humans shrink from anything that seems possibly painful or overtly difficult. We bring this natural tendency to our practice of any skill. Once we grow adept at some aspect of this skill, generally one that comes more easily to us, we prefer to practice this element over and over. Our skill becomes lopsided as we avoid our weaknesses. Knowing that in our practice we can let down our guard, since we are not being watched or under pressure to perform, we bring to this a kind of dispersed attention. We tend to also be quite conventional in our practice routines. We generally follow what others have done, performing the accepted exercises for these skills.

This is the path of amateurs. To attain mastery, you must adopt what we shall call Resistance Practice. The principle is simple—you go in the opposite direction of all of your natural tendencies when it comes to practice. First, you resist the temptation to be nice to yourself. You become your own worst critic; you see your work as if through the eyes of others. You recognize your weaknesses, precisely the elements you are not good at. Those are the aspects you give precedence to in your practice. You find a kind of perverse pleasure in moving past the pain this might bring. Second, you resist the lure of easing up on your focus. You train yourself to concentrate in practice with double the intensity, as if it were the real thing times two. In devising your own routines, you become as creative as possible. You invent exercises that work upon your weaknesses. You give yourself arbitrary deadlines to meet certain standards, constantly pushing yourself past perceived limits. In this way you develop your own standards for excellence, generally higher than those of others.

In the end, your five hours of intense, focused work are the equivalent of ten for most people. Soon enough you will see the results of such practice, and others will marvel at the apparent ease in which you accomplish your deeds.

From Part V:

When a machine malfunctions you do not take it personally or grow despondent. It is in fact a blessing in disguise. Such malfunctions generally show you inherent flaws and means of improvement. You simply keep tinkering until you get it right. The same should apply to an entrepreneurial venture. Mistakes and failures are precisely your means of education. They tell you about your own inadequacies. It is hard to find out such things from people, as they are often political with their praise and criticisms. Your failures also permit you to see the flaws of your ideas, which are only revealed in the execution of them. You learn what your audience really wants, the discrepancy between your ideas and how they affect the public. Pay close attention to the structure of your group—how your team is organized, the degree of independence you have from the source of capital. These are design elements as well, and such management issues are often hidden sources of problems.

Think of it this way: There are two kinds of failure. The first comes from never trying out your ideas because you are afraid, or because you are waiting for the perfect time. This kind of failure you can never learn from, and such timidity will destroy you. The second kind comes from a bold and venturesome spirit. If you fail in this way, the hit that you take to your reputation is greatly outweighed by what you learn. Repeated failure will toughen your spirit and show you with absolute clarity how things must be done. In fact, it is a curse to have everything go right on your first attempt. You will fail to question the element of luck, making you think that you have the golden touch. When you do inevitably fail, it will confuse and demoralize you past the point of learning. In any case, to apprentice as an entrepreneur you must act on your ideas as early as possible, exposing them to the public, a part of you even hoping that you’ll fail. You have everything to gain.

From Part VI:

Each age tends to create a model of apprenticeship that is suited to the system of production that prevails at the time. In the Middle Ages, during the birth of modern capitalism and the need for quality control, the first apprenticeship system appeared, with its rigidly defined terms. With the advent of the Industrial Revolution, this model of apprenticeship became largely outmoded, but the idea behind it lived on in the form of self-apprenticeship—developing yourself from within a particular field, as Darwin did in biology. This suited the growing individualistic spirit of the time. We are now in the computer age, with computers dominating nearly all aspects of commercial life. Although there are many ways in which this could influence the concept of apprenticeship, it is the hacker approach to programming that may offer the most promising model for this new age.

The model goes like this: You want to learn as many skills as possible, following the direction that circumstances lead you to, but only if they are related to your deepest interests. Like a hacker, you value the process of self-discovery and making things that are of the highest quality. You avoid the trap of following one set career path. You are not sure where this will all lead, but you are taking full advantage of the openness of information, all of the knowledge about skills now at our disposal. You see what kind of work suits you and what you want to avoid at all cost. You move by trial and error. This is how you pass your twenties, thirties or forties. You are the programmer of this wide-ranging apprenticeship, within the loose constraints of your personal interests.

You are not wandering about because you are afraid of commitment, but because you are expanding your skill base and your possibilities. At a certain point, when you are ready to settle on something, ideas and opportunities will inevitably present themselves to you. When that happens, all of the skills you have accumulated will prove invaluable. You will be the Master at combining them in ways that are unique and suited to your individuality.

You may settle on this one place or idea for several years, accumulating in the process even more skills, then move in a slightly different direction when the time is appropriate. In this new age, those who follow a rigid, singular path in their youth often find themselves in a career dead end in their forties, or overwhelmed with boredom. The wide-ranging apprenticeship of your twenties, thirties or forties will yield the opposite—expanding possibilities as you get older.

 

Richard Duncan quotes

Longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight).

[Irving] Fisher reasoned that the velocity of money, its rate of turnover, depends on “individual habits” and “technical conditions” and has no discoverable relationship with the quantity of money. “It will depend on density of population, commercial customs, rapidity of transport, and other technical conditions, but not on the quantity of money,” he wrote.

He also explained that the impact of a change in the quantity of money on the volume of trade (T) only lasts during a transition period.

He described the dynamics of the transition period as follows. An initial increase in the quantity of money (M) causes the price of goods sold by the business community to increase more quickly than the rate of interest they are required to pay to finance the production of those goods. That results in higher profits for businessmen. The improvement in profits prompts businesses to borrow and invest more, thus producing a pickup in the volume of trade (T). Sooner or later, however, interest rates begin to increase due to rising inflation. Eventually, interest rates catch up with the increase in prices, thereby causing profit margins to contract again. At that point, the business community realizes it has been too optimistic about profits. Consequently, businesses stop borrowing and investing, so the volume of trade (T) contracts again. 

This is essentially a clear and simple explanation of the business cycle, or the credit cycle, as it is sometimes called. While the transition period lasts, the increase in the volume of trade (T) produces a temporary increase in PT (real GDP), followed by a bust in which both the volume of trade (T) and real GDP contract again. At the end of the process, GDP is only higher in nominal terms because of the increase in the price level (P ). 

Fisher was convinced that the duration of the transition period (or business cycle) would always be short-lived because there would always be a limit as to how much the quantity of money (M) could expand. 

In 1912, the legal requirement for banks to hold liquidity reserves against their deposits and the legal requirement for the Fed to hold gold to back the paper currency it printed both limited the “further expansion of deposit currency” (i.e., money). Both those constraints have long since been removed. 

As discussed in Chapter 1, the banks no longer are required to hold meaningful liquidity reserves and the Fed does not back its Federal Reserve notes with gold. That means the amount of credit that can now be created is practically infinite and that the transition period during which the volume of trade (T) (and GDP) can expand is much longer than when Fisher wrote The Purchasing Power of Money. The implications of this change are enormous.

Bill McBride interview

The economics blogosphere was invented in early 2005 by a retired technology executive in Southern California named Bill McBride.

Thank God for that, because his blog, Calculated Risk, has been an invaluable and influential read for numerous reasons.

For one thing, it's always been right. In its early days, when we all started reading it, it was way ahead of the curve in terms of warning about the housing bubble, horrible bank lending practices, and generally the economic collapse. From his perch in Newport Beach, CA he could see first hand the people taking out loans worth 10x their income, filling their Inland Empire garages with Harleys and Boats that they obviously couldn't afford.

But unlike many other bloggers who made a name during the crisis, he didn't stick with the doom and gloom message. He started making arguments for a GDP rebound in 2009.

Then in February of this year, he made his most important call: He announced: The Housing Bottom Is Here. McBride had officially come full circle from his days warning of housing collapse. Today, 8 months later, the housing bottom is becoming general consensus.

In addition to being correct on the economy, Calculated Risk has imparted the internet with other good practices, such as dutifully charting out the data, and examining data in an impartial, apolitical, non-hysterical manner.

Dylan Grice leaving SocGen

SORRY to see that Dylan Grice is deserting his strategist post at Societe Generale, where the team never fails to keep readers entertained. He is off to join an investment management firm as did his predecessor, James Montier, who is now at GMO.

His final piece, in typical style, invokes the cockroach, that consummate survivor, which follows the rule that a gust of wind indicates a potential predator and accordingly scurries off in a different direction. The cockroach has survived several mass extinctions, including the one that wiped out the dinosaurs. The calamities that affect investors occur when they herd into an asset class, as they did in equities in the late 1990s and as they are doing in government bonds today.

So Dylan prescribes a native diversification strategy for those who do not know what the future holds (which means all of us). A 50% bonds/50% equities split would have worked well over the last 20 years, but would have been disastrous in the stagflationary 1970s. So he suggests a four way split - 25% equities, 25% government bonds, 25% cash and 25% gold.

Nassim Taleb quote

From The Black Swan:

The scientific association with a big idea, the “brand name,” goes to the one who connects the dots, not the one who makes a casual observation—even Charles Darwin, who uncultured scientists claim “invented” the survival of the fittest, was not the first to mention it. He wrote in the introduction of The Origin of Species that the facts he presented were not necessarily original; it was the consequences that he thought were “interesting” (as he put it with characteristic Victorian modesty). In the end it is those who derive consequences and seize the importance of the ideas, seeing their real value, who win the day. They are the ones who can talk about the subject.

Richard Duncan quote

“In recent decades, the usefulness of the quantity theory of money as a tool for analyzing changes in the economy has broken down because the extraordinary expansion of credit has made money irrelevant in comparison. The money supply is no longer the most important factor affecting economic change. It is the credit supply that matters now. Consequently, the quantity theory of money must be adjusted to reflect that fact.” –Richard Duncan, The New Depression

GMO White Paper: Japan: After the Quake, After the Floods

Link to: Japan: After the Quake, After the Floods

Richard Duncan quote

Kyle Bass made a similar point to the quote below on page 5 of his latest letter. 

“There is a limit to how much debt an economy can bear. That limit is determined by the economy’s ability to generate sufficient income to service the debt. Exhibit 3.18 helps put the relationship between credit and the economy into perspective. It shows the ratio of economic output (i.e., GDP) to total credit market debt in the United States. That ratio represents the return on credit. The sharp decline in the return on credit indicates that in recent decades, the economy has generated steadily less output per dollar borrowed. In other words, there has been a sharp decline in the marginal efficiency of credit. That decline reflects the extraordinary malinvestment that has occurred during the last three decades in particular. It also raises uncomfortable questions about how much more of the financial sector’s capital will be destroyed during the years ahead.”

–Richard Duncan, The New Depression

Kyle Bass interview with Darden professor Ken Eades

Found via Zero Hedge.

Link

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Related previous post: Kyle Bass' latest letter: The Central Bankers' Potemkin Village

James Grant on CNBC

Link

Vikram Mansharamani: Towering Indicators

The video below is a good reminder before reading the article “China Will Build the Tallest Building In the World in Just 90 Days.”

Link

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Related book: Boombustology

Howard Marks Memo: A Fresh Start (Hopefully)

Link to: A Fresh Start (Hopefully) – By Howard Marks

Michael Mauboussin on Bloomberg (video)

Found via The Big Picture.

Nov. 20 (Bloomberg) -- Michael Mauboussin, chief investment strategist at Legg Mason Capital Management Inc., talks about his new book "The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing." Mauboussin talks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance." Richard Falkenrath, a principal at the Chertoff Group and a Bloomberg Television contributing editor, also speaks.

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Related book: The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

Related previous post: Luck and Skill Untangled: The Science of Success

Jim Chanos Saw Autonomy's Problems...

While alleged fraud at Autonomy may have been a surprise to Hewlett-Packard, its auditors, its bankers and its executives, it wasn’t to short-seller Jim Chanos.

Chanos told me this morning that in early 2011, months before the HP-Autonomy deal, Autonomy was his biggest European short. Chanos' firm even wrote a report on it in July of that year.

Too bad HP didn’t read it.

Among the red flags the report pointed out – the following lifted directly from the report:

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Meg Whitman was also on CNBC discussing the HP-Autonomy deal. Video: HP's Whitman on Autonomy Allegations

Chanos was also on CNBC in July discussing how he thought HPQ was a value trap, HERE.

Jeremy Grantham and Ben Inker's Q3 Letter

In GMO's 3Q 2012 Letter, Jeremy Grantham explores the premise that the expectation for the continuation of historical robust U.S. GDP Growth needs to be tempered substantially while Ben Inker looks at current Fed monetary policy.

Steve Keen on Capital Account

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Much ado about liquidity? Lockup expirations and stock prices - By Aswath Damodaran

Last week shaped up as a big one for Facebook. On Wednesday (November 14), the company faced the steepest of its lockup expiration cliffs so far, with 777 million shares released for sale by insiders. Its two earlier lockup expirations, of 271 million shares on August 16 and 234 million shares on October 29, did cause stock price pullbacks of about 5% and 3% respectively. Consequently, there was concern that Facebook’s stock price would take a beating on November 14, but the stock price climbed 12.6% on that day.

There are a host on intriguing questions that derive from lockups, their expiration and the market reaction to them, and I think it is worth taking a look at them.

Jack Schwager on Market Sense and Nonsense

I just got Jack Schwager’s new book, Market Sense and Nonsense: How the Markets Really Work (and How They Don't), in the mail and am looking forward to getting more into it. Unlike most of his previous books, this one isn’t a series of interviews, but rather an overview of the markets and how they work. Joel Greenblatt wrote the foreword.

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Carol Loomis' Derivatives Articles from 1994 & 1995

Thanks to Lincoln for passing these along.

Links to articles:

The risk that won't go away

UNTANGLING THE DERIVATIVES MESS

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Excerpt:

Given the range of complications that derivatives present, outside directors cannot possibly achieve close communion with the contracts their companies hold. Most chief executives won't master the game, either. In the end, the choice of what risks to hedge, what derivatives to employ in doing it, and how to draw the bright line between risk management and speculation will be largely left to financial people down the corridor --some of whom, recent train wrecks notwithstanding, may think of themselves as running a profit center. And on the other end of their phones will be derivatives salespeople trying to sell the latest innovation, which assuredly will not be a plain-vanilla hedge.

It's not a particularly cheerful picture-not for a problem as big as derivatives. So maybe what we need is new thinking, a fresh approach, a suggestion so radical it goes off the page. Here's one: Warren E. Buffett, chairman of Berkshire Hathaway, says he'd deal with derivatives by requiring every CEO to affirm in his annual report that he understands each derivatives contract his company has entered into. Says Buffett: "Put that in, and I suspect you'll fix up just about every problem that exists." In a market that seems to thrive on complexity and obfuscation, such a solution won't happen. It's too simple. But he's right.

What’s on Malcolm Gladwell’s Bookshelf?

Via Farnam Street:

What we’re reading says a lot about who we are – or who we want to be. In a new feature in the Globe and Mail, Jane Mount asks 100 writers, artists, and foodies to describe what the books that inspire them.

I wanted to highlight Malcolm Galdwell’s and Jennifer Egan’s.

First up is Gladwell:

Big Sugar's Sweet Little Lies: How the industry kept scientists from asking: Does sugar kill? – By Gary Taubes and Cristin Kearns Couzens

ON A BRISK SPRING Tuesday in 1976, a pair of executives from the Sugar Association stepped up to the podium of a Chicago ballroom to accept the Oscar of the public relations world, the Silver Anvil award for excellence in "the forging of public opinion." The trade group had recently pulled off one of the greatest turnarounds in PR history. For nearly a decade, the sugar industry had been buffeted by crisis after crisis as the media and the public soured on sugar and scientists began to view it as a likely cause of obesity, diabetes, and heart disease. Industry ads claiming that eating sugar helped you lose weight had been called out by the Federal Trade Commission, and the Food and Drug Administration had launched a review of whether sugar was even safe to eat. Consumption had declined 12 percent in just two years, and producers could see where that trend might lead. As John "JW" Tatem Jr. and Jack O'Connell Jr., the Sugar Association's president and director of public relations, posed that day with their trophies, their smiles only hinted at the coup they'd just pulled off.

Their winning campaign, crafted with the help of the prestigious public relations firm Carl Byoir & Associates, had been prompted by a poll showing that consumers had come to see sugar as fattening, and that most doctors suspected it might exacerbate, if not cause, heart disease and diabetes. With an initial annual budget of nearly $800,000 ($3.4 million today) collected from the makers of Dixie Crystals, Domino, C&H, Great Western, and other sugar brands, the association recruited a stable of medical and nutritional professionals to allay the public's fears, brought snack and beverage companies into the fold, and bankrolled scientific papers that contributed to a "highly supportive" FDA ruling, which, the Silver Anvil application boasted, made it "unlikely that sugar will be subject to legislative restriction in coming years."

The story of sugar, as Tatem told it, was one of a harmless product under attack by "opportunists dedicated to exploiting the consuming public." Over the subsequent decades, it would be transformed from what the New York Times in 1977 had deemed "a villain in disguise" into a nutrient so seemingly innocuous that even the American Heart Association and the American Diabetes Association approved it as part of a healthy diet. Research on the suspected links between sugar and chronic disease largely ground to a halt by the late 1980s, and scientists came to view such pursuits as a career dead end. So effective were the Sugar Association's efforts that, to this day, no consensus exists about sugar's potential dangers. The industry's PR campaign corresponded roughly with a significant rise in Americans' consumption of "caloric sweeteners," including table sugar (sucrose) and high-fructose corn syrup (HFCS). This increase was accompanied, in turn, by a surge in the chronic diseases increasingly linked to sugar. Since 1970, obesity rates in the United States have more than doubled, while the incidence of diabetes has more than tripled.

Precisely how did the sugar industry engineer its turnaround? The answer is found in more than 1,500 pages of internal memos, letters, and company board reports we discovered buried in the archives of now-defunct sugar companies as well as in the recently released papers of deceased researchers and consultants who played key roles in the industry's strategy. They show how Big Sugar used Big Tobacco-style tactics to ensure that government agencies would dismiss troubling health claims against their products. Compared to the tobacco companies, which knew for a fact that their wares were deadly and spent billions of dollars trying to cover up that reality, the sugar industry had a relatively easy task. With the jury still out on sugar's health effects, producers simply needed to make sure that the uncertainty lingered. But the goal was the same: to safeguard sales by creating a body of evidence companies could deploy to counter any unfavorable research.

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Taubes also had a new post on his blog today, HERE. 

Related links: 

Sugar: The Bitter Truth

Related previous posts:

60 Minutes: Is sugar toxic?

Authors@Google: Robert Lustig

Is Sugar Toxic? - By Gary Taubes

Specialty Health Interviews Gary Taubes and Dr. Thomas Dayspring

FiveBooks Interview: Gary Taubes on Dieting

Gary Taubes on EconTalk

Gary Taubes Talk on Why We Get Fat

Gary Taubes Interview with Jimmy Moore

The Scientist and the Stairmaster

Related books:

Why We Get Fat: And What to Do About It

The Primal Blueprint

The New Evolution Diet

How the Chou Income Fund Got Its Mojo

Francis Chou was a 25-year-old telephone repairman in Canada when he pooled 51,000 Canadian dollars from himself and six co-workers to start an investment club.

Thirty-one years later, Mr. Chou manages more than US$650 million for investors at his firm, Chou Associates Management Inc., and runs the best-performing bond fund in North America.

"It wasn't a big sum," Mr. Chou says of his stock-investment club. "But it did quite well."

Indeed. The Bell Canada co-workers—and some of their parents and friends who also invested early on with Mr. Chou—now are each worth more than $2 million.

Mr. Chou's trajectory to the top of the bond-fund world shows how investors are tweaking tried-and-true strategies to boost returns and overcome chronically low interest rates. When he was starting out, Mr. Chou largely stuck to stocks and the classic value-investing methods made famous by Benjamin Graham and Warren Buffett.

"The key idea was to find bargains, and if you could find bargains, you could do quite well," Mr. Chou says in an interview at his unadorned suburban office, far from the bustle of Toronto's Bay Street financial hub.

Richard Duncan quotes

“Credit did more to the U.S. economy than make it grow. It also radically changed its composition.

Credit allowed America to buy all the manufactured goods it desired from abroad and credit financed the procurement of services at home. It could be argued that credit creation became the country’s most important industry and debt its principal export.”

–Richard Duncan, The New Depression

Contrary (or Reverse) Brands

Other “reverse brands” mentioned in Moon’s book besides Google include Ikea, JetBlue, and In-N-Out Burger, among others. As she mentions in the book, reverse brands eliminate and elevate.

Youngme Moon has written a remarkable book called Different: Escaping The Competitive Herd. Moon, a marketing professor at Harvard, deconstructs the business of marketing and exposes something that is not a surprise — marketing has become predictable, interchangeable and un-creative.

Of course, that’s a broad generalization, but one that she aptly demonstrates to be true. At the same time, it provides Moon with a platform to showcase what she calls “reverse brands” or “oxymoron brands,” which are often the most successful in their categories by going out of their way to be different from the herd and single-minded in their approach. As she says, marketing is supposed to be about creating meaningful differences, and yet most brands bludgeon us with a proliferation of sameness.

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How do brands that go in the opposite direction by providing fewer amenities, fewer services, fewer product features become so distinctive and successful? What are their similarities — or are they all so unique their strategy can’t be duplicated?

What is both unique and similar about each of these single-minded “reverse brands?” One of the things that she discovered is that “there is a kind of difference that says nothing, and there is a kind of difference that speaks volumes.” As Moon writes, for difference to work — to resonate — it’s got to deviate and it’s got to be charismatic.

Google is a prototype of a “reverse-positioned brand.” It deliberately reduced the number of features it offered, while its competitors were adding features by the fistful. Google decided that while users thought they wanted more features, what they really wanted (and maybe didn’t realize it) was a simpler, easier home page for searching and browsing. While every other portal was a cacophony of visual stimulation, Google showed up almost naked.

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Related book: Different: Escaping The Competitive Herd

Jeff Bezos on Charlie Rose

Link to: Jeff Bezos on Charlie Rose

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Related article: Amazon's Jeff Bezos: The ultimate disrupter

Learning to Love Volatility – By Nassim Taleb

Several years before the financial crisis descended on us, I put forward the concept of "black swans": large events that are both unexpected and highly consequential. We never see black swans coming, but when they do arrive, they profoundly shape our world: Think of World War I, 9/11, the Internet, the rise of Google.

In economic life and history more generally, just about everything of consequence comes from black swans; ordinary events have paltry effects in the long term. Still, through some mental bias, people think in hindsight that they "sort of" considered the possibility of such events; this gives them confidence in continuing to formulate predictions. But our tools for forecasting and risk measurement cannot begin to capture black swans. Indeed, our faith in these tools make it more likely that we will continue to take dangerous, uninformed risks.

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Related book: Antifragile