Monetary Regimes and Inflation - by Peter Bernholz

Kyle Bass has mentioned this book a couple of times. Based on Bill Gross’ recommendation to position your portfolios for eventual inflation, it seemed like a fitting post. A link to the PDF is below, or you can purchase the book HERE.

Link to: Monetary Regimes and Inflation: History, Economic and Political Relationships – By Peter Bernholz

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Related previous post: Warren Buffett’s Comments on Inflation

How Amazon Trained Its Investors to Behave

In March 2000, Barron's reported that 51 Internet companies were burning cash so fast that they'd be broke by the end of the end of the year. The article (it's behind a seemingly unbreachable paywall) has acquired the reputation of having marked the end of the dot-com boom. The Nasdaq composite index peaked on March 10 at 5132, and by the end of the month was in a full-on collapse (as I write this, it's only at 3155, despite years of gains).

The Burn Rate 51 was made up mostly of now-forgotten companies like drkoop.com and CDNow. But it also included a certain Internet bookseller from Seattle. The Barron's article mentioned that a 690 million euro convertible bond sale in February had bought Amazon some more time (the list was based on 1999 year-end data) — but that the company would still run out of cash in 21 months.

In fact, Amazon was only operating at such a high burn rate because it could. Once investors stopped giving it free money, the company quickly cut back on its investments and its losses. By the fourth quarter of 2001 — that is, within about 21 months — it was turning a profit.

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Related link (Bezos quotes Buffett and Ben Graham): Jeff Bezos on Leading for the Long-Term at Amazon

Related articles:

Amazon’s Growth Looks Like Walmart in the 1990s — But Even Better

Amazon’s Future Is Not in Selling Stuff — And That’s a Good Thing

Google’s Plan to Snatch Shopping From Amazon Is Working

Bill Gross – February 2013 Investment Outlook: Credit Supernova!

Economist Hyman Minsky did. With credit now expanding, the sophisticated economic model provided by Minsky was working its way towards what he called Ponzi finance. First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since as shown in Chart 1. (Patterns for other developed economies are similar.) While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion.† Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

Steven Romick’s Q4 Letter

Our success, such as it may be, is dictated primarily by two factors: 1) A rigorous and replicable process by which we analyze businesses and assets that offer what we believe are superior prospective returns as well as the safety cushion of a discounted price; and 2) Patience. Our willingness to wait for opportunity -- and when found, to wait for that investment to succeed -- means that our trading department sometimes gets a tad bored, and some clients get anxious. We are neither. We occupy ourselves by continuing to learn new businesses that may or may not end up in the portfolio. We know there will be more bad news, and with it more volatility and investment opportunity, but we never know when. That means our results will lag at times, as they have in the past and will in the future. But it also means we will lead at other times, and we’ve done that in the past and hope to do so in the future. We are in the arbitrage business, but not in the traditional merger-arbitrage sense of the term. We engage in time arbitrage. We tend to buy early, average down, and then wait until our thesis is proven correct, and then we exit. This can happen quickly, or it may take years. While a quick success is easy for investors to digest, one that takes longer can be tough for clients to stomach.

Chicago Ideas Week: 10,000 Hours (Dan McLaughlin)

At 30-years-old, Dan McLaughlin decided to quit his day job and become a PGA Tour golfer. With no experience in the sport, Dan is setting out to expose the limitlessness of human potential—with the help of 10,000 hours of highly focused practice.

TEDxCopenhagen - Lone Frank - Sharing our beautiful genome

Link

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Related book: My Beautiful Genome: Exposing Our Genetic Future, One Quirk at a Time

Science writing: how do you make complex issues accessible and readable?

As London's Royal Society prepared to award its annual book prize, we asked five top writers – Steven Pinker, James Gleick, Brian Greene, Lone Frank and Joshua Foer – to debate what makes good science writing in a technically minded age

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Related article: Joshua Foer: How I Write

Gates Foundation: 2013 Annual Letter from Bill Gates

Link to: 2013 Annual Letter from Bill Gates

Gran Colombia Gold Corp. (TSX:GCM)

For those that may be interested in a more speculative gold play (traded in Canada and on the Pink Sheets under the symbol TPRFF), below is an excerpt from Chris Mayer’s book, World Right Side Up. The book was published in early 2012, so I’m not sure if all of this is still up-to-date, but the latest company presentation is available HERE. I don’t own any shares and don’t know much about the company, but the story seemed interesting enough to mention, and the stock has come down quite a bit.

El Dorado is one of my favorite historical Colombian stories. But there is a modern gold boom that echoes these past desperate efforts. As the New York Times reported: 

The gold rush here is just a part of a broader mining boom in Colombia, with gold production climbing more than 30 percent last year and attracting an array of fortune seekers, from multinational corporations to farmers who have left their fields and picked up shovels. 

Over 40 international mining companies were poking around Colombia's steamy basins looking for gold in 2011. By the end of 2012, Colombia could be at a run rate of 2 to 3 million ounces of gold annually—more than double what it produced in 2009. Miners are putting billions to work in Colombia to get its gold. 

This is a nod to the world right side up, as Colombia was South America's largest gold producer until 1937. It has a long way to go before it catches Peru, the current leader. But Colombia could become a top-10 global gold producer in the next few years. As it is, Colombia ranks twenty-first in the world in gold production. 

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One of my favorites is the largest Colombian gold miner, Gran Colombia (GCM:TSX). 

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Serafino really stressed to me the importance of political and cultural factors in mine building in Latin America. “The mine is simple,” he said. “The harder part is convincing the politicians and the local people that you aren't here to take away jobs and mess up the environment.” That is why hiring CEO Araújo was so important. As mentioned, she has a star-studded resume. “She is a superstar over here,” Serafino told me. Family members have held the posts of minister, governor, and senator. She is a great asset at this stage in the company's development. In addition to political connections, it is important to have size and clout. 

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As Gran Colombia ramps up production here, it will impossible for the market to ignore it. If Gran Colombia comes anywhere close to its goals over the next year, ramping up from 100,000 ounces in 2011 to 600,000 ounces by 2016, the stock will soar. 

I should mention the free option in silver. Gran Colombia has nearly 60 million ounces of silver at Marmato. “There's a billion dollars' worth of silver here,” Serafino said.

Nassim Taleb on CNBC

Links to videos:

Nassim Taleb on Icahn/Ackman: 'They're Only Human' (and his thoughts on equities…..he doesn’t like them but he owns them because he doesn’t like Treasury Bonds, and the stocks protect him from hyperinflation, which may not come, but he likes to sleep at night.)

Nassim Taleb: We Have to Address the Core of the Problem

Edge and the Art Collector

Thanks to Andrew for passing this along.

In 1999, he bought Munch’s Madonna for $11 million. In 2004, he bought Hirst’s The Physical Impossibility of Death in the Mind of Someone Living for $8 million. In 2006, he bought a Pollock for $52 million. In 2006, he bought de Kooning’s Woman III for $137 million. In 2007, he bought Warhol’s Turquoise Marilyn for $80 million. In 2010, he bought a Johns Flag for $110 million. There have been works by Bacon and Richter and Picasso and Koons. Probably only he knows how much he has spent. Someone on the internet estimates it at $700 million.

It was 1997, or maybe 1998, when I first heard of the Art Collector. I was working as a research analyst at a large New York investment bank. The broker at our firm whose responsibility was serving the Art Collector told a gathering of the bank’s research analysts that the Art Collector’s hedge fund was now one of the top payers of brokerage commissions to the bank. He may have said the top payer. It was an awakening: a hedge fund, five or six years old at the time, could now pay as much—or more—in commissions than the mutual fund giants that had always been our most important clients. The math, however, was straightforward. The mutual funds had a lot more money. The Art Collector traded many more times.

Even if I had heard of the Art Collector’s hedge fund before then, I still would have been surprised by the salesman’s purpose that day. The Art Collector’s firm, we were told, would happily continue to generate huge revenue for the bank. It was asking for only one thing in return. It was not for us to do better research on companies or their stocks, or to do the research more quickly, or in greater quantities. That would be too literal. Or figurative. The Art Collector wanted something more abstract: not better information, just early information. When we interpreted an event in the life of a company, we distributed a note to all of the bank’s clients. We also called the more important ones to provide context difficult to fire as bullet points. We had to call one client first. Why shouldn’t it be the one that paid us the most?

The Power of Habit Investments – By Leo Babauta

I’ve come to believe that two major forces can greatly improve processes for doing all kinds of things: HABITS and CHECKLISTS. The article linked to below discusses a little about the habit side of things, and there are two good books that can give you a more thorough rundown of habits and checklists, if you haven’t yet read them: The Power of Habit and The Checklist Manifesto. I've been tinkering with my learning process over the last few months to develop some sustainable habits, and I think I've finally got something down that I really like. But that is a topic for another post, on another day.

One of the things I’ve learned in my last 7 years of creating new habits is the power of compound habit interest.

It sounds really obvious when you say it, but if you do something small repeatedly, the benefits accrue greatly over time. It’s obvious, but not everyone puts it into practice.

It’s like putting a little extra cash into an index investment fund … let’s say you put in just $5/day (less than you spend at Starbucks perhaps) … at the end of 20 years, you’d have almost $70,000 if you could make just 6 percent interest, and closer to $90,000 if you could make 8 percent. Change that to just $8/day, and you’re now talking about $140,000 or so. It adds up greatly over time.

The same principle applies to habits.

The Biggest Housing Bubble in the World Is in ... Canada?

Found via The Big Picture.

Canada has a new worthwhile initiative. After years of booming prices, that bastion of politeness north of the border is looking to avoid a catastrophic housing bust for something more, well, boring. Initiatives don't get more worthwhile, and perhaps not more difficult considering Canada just might have the biggest housing bubble in the world right now.

SciShow - Chemistry: Gold: The Big Bling

Link

Recent health-related interviews...

Some fairly recent and worthwhile interviews done by Jimmy Moore:

Robert Lustig (Book: Fat Chance)

Paul Jaminet (Book: Perfect Health Diet)

Mark Sisson (Book: The Primal Connection)

A New Housing Boom? Don’t Count on It – By Robert Shiller

WE’RE beginning to hear noises that we’ve reached a major turning point in the housing market — and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target?

It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down.

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The bottom line for potential home buyers or sellers is probably this: Don’t do anything dramatic or difficult. There is too much uncertainty to justify any aggressive speculative moves right now. If you have personal reasons for getting into or out of the housing market, go ahead. Otherwise, don’t stay up worrying about home prices any more than you do about stock prices.

I can’t offer any clearer picture, and I don’t see a solid basis for anyone else to do so, either.

Competitive Advantages and Barriers to Entry...

"Although often treated as separate aspects of strategy, barriers to entry and competitive advantages are essentially alternative ways of describing the same thing. The only necessary qualification to this statement is that barriers to entry are identical to incumbent competitive advantages; whereas entrant competitive advantages—situations in which the latest firm to arrive in the market enjoys an edge (the benefit of the latest generation of technology, the hottest product design, no costs for maintaining legacy products or retired workers)—are of limited and transitory value." -Bruce Greenwald and Judd Kahn, Competition Demystified: A Radically Simplified Approach to Business Strategy

Bill Gates: My Plan to Fix The World's Biggest Problems

We can learn a lot about improving the 21st-century world from an icon of the industrial era: the steam engine.

Harnessing steam power required many innovations, as William Rosen chronicles in the book "The Most Powerful Idea in the World." Among the most important were a new way to measure the energy output of engines and a micrometer dubbed the "Lord Chancellor" that could gauge tiny distances.

Such measuring tools, Mr. Rosen writes, allowed inventors to see if their incremental design changes led to the improvements—such as higher power and less coal consumption—needed to build better engines. There's a larger lesson here: Without feedback from precise measurement, Mr. Rosen writes, invention is "doomed to be rare and erratic." With it, invention becomes "commonplace."

In the past year, I have been struck by how important measurement is to improving the human condition. You can achieve incredible progress if you set a clear goal and find a measure that will drive progress toward that goal—in a feedback loop similar to the one Mr. Rosen describes.

This may seem basic, but it is amazing how often it is not done and how hard it is to get right. Historically, foreign aid has been measured in terms of the total amount of money invested—and during the Cold War, by whether a country stayed on our side—but not by how well it performed in actually helping people. Closer to home, despite innovation in measuring teacher performance world-wide, more than 90% of educators in the U.S. still get zero feedback on how to improve.

Hussman Weekly Market Comment: Capitulation Everywhere

“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”- Benjamin Graham

“Human beings desperately want to belong, but, they also desperately want to understand the environment around them. Often, the desire to belong and the desire to know the truth conflict. The idea of the majority view or the ‘mainstream,’ gives people the sense that they are a part of a group, and at the same time, gives them the illusion of being informed.”- Brandon Smith

The bears are gone, extinct, vanished. Among the ones remaining, many are people whom even I would consider to be either permabears or nut-cases. And yet, the historical evidence for major defensiveness has rarely been stronger.

The newest iteration of the bullish case is the idea of a “great rotation” from bonds and cash to stocks, as if the outstanding quantity of each is not held by someone at every point in time. The head of a “too big to fail” investment firm argued last week that stocks are “underowned” – as if every share of stock presently in existence is not actually owned by someone. To assert that stocks can be “underowned” seems to reflect either a misunderstanding of how markets work, or a desire to distribute overvalued institutional holdings onto the unwashed muppets. Likewise, the idea of a “rotation” out of bonds and into stocks begs the question of who will buy the bonds and sell the stocks, as someone must be on the other side of that trade. Similarly, to “move cash into the market” requires a seller of stock who becomes the new holder of said cash.

Quite simply, the reason that pension funds and other investors hold more bonds relative to stocks than they have historically is that there are more bonds outstanding, relative to stocks, than there have been historically. What is viewed as “underinvestment” in stocks is actually a symptom of a rise in the gross indebtedness of the global economy, enabled and encouraged by quantitative easing of central banks, which have been successful in suppressing all apparent costs of that releveraging.

The "rotation" fallacy has emerged even in the work of analysts that we admire. Ray Dalio of Bridgewater talked on CNBC last week of a move “out of” cash and “into” stocks, seemingly reversing comments he made only weeks ago at the Dealbook conference (h/t PragCap) where he suggested that risk premiums are likely to expand, that the effects of QE are diminishing as we do more rounds, that we’re facing austerity, that growth is flagging, that the economy is facing unprecedented risk, and that we face a slowdown with very little room to maneuver. Meanwhile, Albert Edwards of SocGen suggested that there has been an excessive “move away from equities” in recent years – instead of noting, for example, that the volume of U.S. government debt foisted upon the public (even excluding what has been purchased by the Fed) has doubled since 2007, not to mention other sources of global debt issuance, while the market capitalization of stocks has merely recovered to its previously overvalued highs.

Transcript of Ray Dalio's Comments at Davos

Via Santangel's Review (the video of the panel is also available HERE):

Link to: Transcript of Ray Dalio's Comments at Davos

Michael Shearn quote

"When you do not have investment opportunities that you are ready to act on, you can use your time to prepare for future opportunities. When you identify a unique business or superior management team, add the business to your inventory of ideas or watch list, regardless of its current valuation. This is the secret sauce to investing intelligently, because it allows you to act decisively when a good opportunity is in front of you, and it prevents you from acting imprudently when you first have the idea or insight. In essence, you are letting time work in your favor." -Michael Shearn, The Investment Checklist

No Arms, No Legs, No Worries

Wow.


Link

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Related link: ATTITUDE IS ALTITUDE

Competitive advantages...

"There are only a few types of competitive advantage (demand, supply, and economies of scale) and two straightforward tests (market-share stability and high return on capital) to confirm their existence." -Bruce Greenwald and Judd Kahn, Competition Demystified: A Radically Simplified Approach to Business Strategy 

Baltasar Gracián quote

"One of life’s great lessons lies in knowing how to refuse, and it is even more important to refuse yourself, both to business and to others. There are certain inessential activities—moths of precious time—and it is worse to busy yourself with the trivial than to do nothing. To be prudent, it isn’t enough not to meddle in other people’s business: you must also keep them from meddling in yours. Don’t belong so much to others that you stop belonging to yourself." -Baltasar Gracián, The Art of Worldly Wisdom

John Mauldin: Prisoner of the Bureaucracy

I wrote some time ago that Greece had a choice between Disaster A: staying in the euro; and Disaster B: leaving the euro. I have recently come back from four days in Greece, meeting with lots of people at all levels of society, and will share with you in this letter my analysis of their choices and the results. I’ll also have a few things to say about what the developments in Greece might mean for the rest of Europe and the developed world.

The Ackman, Icahn debate heats up...

Thanks to Andrew for passing this along.

Bill Ackman and Carl Icahn square-off live and insult each other on CNBC's "Fast Money Halftime" over a past deal gone bad and disagreements about current investments in Herbalife. This is the complete, unedited conversation.

Link

Michael Shearn on filtering investment ideas

I think having the right filters is one of the most important things in the investment process, which is also something I tried to express is THIS post as well.

"When filtering through the many investment opportunities the stock market is offering at any given time, it is important for you to establish criteria of the types of businesses and management teams you are searching for. These criteria serve as a filter, so you don’t have to review thousands of investment opportunities and therefore can reject investment ideas quickly....Your criteria can be as simple as looking for a simplified business with a large market opportunity, managed by a great management team, and trading at a low price. You can also set criteria of what you do not want to invest in. For example, you may want to avoid businesses that have a high dependency on commodity resources, such as exploration and production (E&P) businesses, because oil prices are difficult to forecast. By articulating and following strict criteria, you can put the odds of making a successful investment in your favor." -Michael Shearn, The Investment Checklist

George Soros on CNBC

Link

East Coast Asset Management's Q4 Letter

Found via Market Folly.

In our Q4 letter you will find an update on our portfolio and general market observations. Each quarter we highlight one component of our investment process – this quarter in the section titled Seek Knowledge of Causes we highlight our transformation investment category.

James Grant on CNBC

Link

Buffett pulls ahead in wager against hedge funds

Found via the Corner of Berkshire & Fairfax.

It's halfway time in the 10-year stock market wager sometimes called The Million-Dollar Bet—that's Warren Buffett backing the performance of an S&P index fund vs. a New York money manager backing five funds of hedge funds—and there's double-barreled news.

Item One: For the first time since the bet started five years ago, Buffett has moved ahead—by an okay margin to boot. Item Two: For the first time ever as well, both sides have crawled out of the ditch (though the funds of funds barely made it) and are showing positive results.

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At the five-year mark, the Vanguard index fund backed by Buffett is up by 8.69%. The five funds of funds picked by Protégé Partners to carry its flag in the race are up, on the average, only—"gulp," says Protégé partner Ted Seides—0.13%.

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We'll let that suspense hang and report still one more piece of news about this bet. This bulletin concerns the 10-year zero-coupon bond that the two bettors, Buffett and Protégé, bought with the collateral they put up as the bet began. Each contributed about $320,000, so a total of roughly $640,000 went into the bond. Its value was set to rise gradually to $1 million—thus the nickname for the bet—by its conclusion on December 31, 2017.

But as Fortune.com reported last year (Buffett gains ground in hedge fund bet), the zero-coupon bond proceeded to perform so splendidly in the prevailing environment of falling interest rates that by 2012 it was already worth almost $1 million.

That remarkable result suggested to Buffett and Protégé that they could revise the terms of the bet and quite possibly get more than $1 million to the charity ultimately benefitting from the bet. That will be Girls Inc. of Omaha if Buffett wins and Absolute Returns for Kids if the victor is Protégé.

So the zero-coupon bond was sold for nearly $1 million toward the close of 2012, and by agreement between Buffett and Protégé, the proceeds were put into the B stock of Buffett's company, Berkshire Hathaway (BRKA). Berkshire's shares have risen since, and the current value of the investment is well over $1 million.

And couldn't the stock fall? It certainly could, but that won't make a whit of difference to the winning charity—because Buffett has guaranteed that it will get at least $1 million at the end of the bet. On the upside, meanwhile, there's no ceiling on what the charity can walk away with. That depends simply on what happens to Berkshire's stock between now and the bet's conclusion.

2007 and 2009 Interviews with Peter Bevelin

2007 and 2009 interviews with Peter Bevelin

Below are the combined 2007 and 2009 interviews I did with Peter Bevelin, which I thought might be good to combine in one place, and to post in case any new readers have yet to see them. I seem to notice something new every time I read them, just as I do anytime I open Seeking Wisdom or Poor Charlie’s Almanack. I also created a PDF of the interviews HERE.

2007 Interview with Peter Bevelin

Q: In the introduction of your book, you mention that you owe a great debt to Warren Buffett and Charlie Munger and that if you had listened to them earlier in your life, you would have avoided many expensive mistakes. Could you elaborate a bit on how you first came across Warren and Charlie, how your process of learning from them began, and maybe even mention a couple of the mistakes that you may have avoided had you come across them earlier?

I first came across the name of Warren Buffett in 1986, when I was on a plane between New York and Miami and picked up Fortune Magazine in the seat in front of me. Back home in Sweden I immediately ordered Berkshire’s annual reports. But I was a slow learner. I didn’t really pick up his and Charlie Munger’s wisdom until I went to my first Berkshire annual meeting in 1994. What did I learn? – How to think about businesses and investing, how to behave in life, the importance of ethics and honesty, how to approach problems but foremost how to reduce the chance of meeting problems. As Munger says: “All I want to know is where I’m going to die so I’ll never go there.” When I hear them at the annual meeting, I am thinking about Einstein’s reply to a student. The student had challenged Einstein’s statement that the laws of physics should be simple by asking: “What if they aren’t simple?” Einstein replied, “Then I would not be interested in them.” 

They have a unique ability to distinguish masses of trivia from what is really important – to filter out situations, and find what’s at their core. They tell the simple, blunt truth rather than say things that sound good.

In the past, I complicated things too much, I put too much trust in people that really shouldn’t be trusted, I wasn’t skeptical enough , I bought into things merely because they were cheap etc. In short, I wasn’t thinking and I was lacking the Munger ability to un-learn my own best-loved ideas. The stock certificates of some of my earlier investments in private businesses are now used as lining in my old overcoat; at least they had a nice color. And is there really any other way to approach investments than their way? Turn it around and ask what are the effects of investing in things we don’t understand, lack advantages and have a dishonest and incompetent management and that can be bought at a high price.

I found that I could increase my chance of making better judgments if I could learn what works and not, if I adapt what I do to my personal situation, and if I could establish some values and preferences. If I then could set up some avoid-rules and filters/tests to judge what make sense or is important or not, life could be improved (even if I still do some mistakes; but hopefully I am less of a fool now). Also remember that all decisions aren’t important. Some people spend more time making a judgment on what TV to buy or where to go on vacation than a life-changing decision like marriage.

Q: Charlie Munger has mentioned that a great way to learn Adam Smith’s ideas is to first learn about Adam Smith. Do you believe that this idea of learning about the “teacher” before the “lesson” is truer in some disciplines than in others and do you have any examples when this method of learning was especially useful to you?

Experiments have shown that we learn better if information is tied to a vivid story. So, I would say, it depends. In some cases the “Smith-model” is superior and in other cases I may learn better in some other fashion. For example, I learnt a lot from reading The Autobiography of Charles Darwin. But I also learnt a lot of Einstein’s ideas by reading Mr. Tompkins in Paperback by George Gamow. See also what I wrote about Reason-respecting (20 in the book). On the other hand, when reading, we must constantly watch out for the sensemaking trap (19 in my book) since we are so easily influenced when we are told stories or given information in a “story-format.”

Q: As you state in the introduction, “This book is for those who love the constant search for knowledge. I have focused on explaining timeless ideas. The number of pages I have devoted to each idea does not reflect on its importance. My goal is to lay the foundation.” Once readers acquire the foundation they receive by reading Seeking Wisdom, where should they go next? Specifically, what is the first thing that you would recommend they should pick up to start learning more about the big ideas in the discipline of Math? Psychology? Physics? Biology? Chemistry? Economics? Engineering? Philosophy?

Look around you – observe reality. What can explain this? Learn some core concepts that account for reality. Start from the basics for each discipline and emphasize the understanding of general principles and use simple real-life examples to illustrate principles. Read, read and think about what you have read. Look for understanding. What is going on here? What is the core idea? What is the evidence that it is right? Also remember what Richard Feynman once asked someone who remarked that he had read a book. “But, did you learn anything?” Understand an idea’s meaning and applications. Focus on useful and obviously important and correct general ideas, concepts and principles. What does it mean? What happens? What is the effect?

Q: As many value investors have been taught, it is more important to focus on the process of doing something instead of solely focusing on the outcome of that process. Do you have any tips that may help people along the process of “seeking wisdom?” Should someone focus their attention on learning many ideas from one or two disciplines at a time, or by learning many disciplines one or two big ideas at a time?

There are principles, which apply to all different kind of phenomena. For example, JB Williams’s definition of value is applicable for all financial assets. Personally, I started with biology and psychology since knowing some human constraints and “brain traps” I could avoid some things by for example using some “avoid-rules.” Why can’t we all be nice, honest and rational? (And why can’t we all have wings and thus eliminate department store escalators?). I favor ideas that explain a whole range of phenomena. For example, biology (evolution and natural selection) explains why people: fear losses but take big risks when threatened, fear strangers, trust similar people, cooperate, imitate, fear social disapproval, make fast judgments, and overreact to vivid information.

Also, some disciplines are more reliable than others. For example, disciplines describing experimentally tested ideas, concepts and principles.

Some other examples on disciplines and ideas that explain a lot: Mathematics (scaling) explain how living things are shaped and constrained by basic mathematical principles. For example, why: no giants exist, a mouse can survive a big fall but not a human, some animals have short and thick legs, larger plants have leaves, small animals can’t live in cold countries, ants can lift such a big load, and grasshoppers can jump so high relative to their body sizes. Mathematics (combinatorics) and Physics (systems theory) explain why: we can’t predict the economy, it is hard to make money on new ventures, most projects take more time and money than we anticipate, nuclear accidents happen, we will have more electrical black-outs, coincidences occur, and some mutual funds beat the index.

Q: Are there any books in which you believe the models presented within those books are so important that you make it a habit to re-read them every year or every couple of years?

All of Charles Munger’s speeches. Most of them can be found in Peter Kaufman’s Poor Charlie’s Almanack. I also re-read Hardin’s Filters Against Folly.

Q: Charlie Munger once said that he can’t afford ($) to have too many friends like Peter Bevelin because when you recommend a book to him, it is so good that Charlie feels compelled to buy a copy for all of his friends and family. So, have you made any recommendations to Charlie or read any of those “need-to-send-everyone” kinds of books recently?

No comments.

Q: Can you give a Top 10 list of books that really changed the way you view the world?

Some books that I really learnt a lot from (in no order of preference):

Cialdini Robert B., Influence: The Psychology of Persuasion 

Darwin Francis (editor), The Autobiography of Charles Darwin and Selected Letters

Dawes Robyn M., Everyday Irrationality: How Pseudo-Scientists,Lunatics, and the Rest of Us Systematically Fail to Think Rationally (it really introduced me to the value of always asking: Why should I believe this? – Show me the evidence + Compared to what?)

Feynman Richard, The Character of Physical Law and The Meaning of it All: Thoughts of a Citizen Scientist

Hardin Garrett, Filters Against Folly: How to Survive Despite Economists, Ecologists, and the Merely Eloquent

Lowenstein Roger, Buffett: The Making of an American Capitalist

Montaigne Michel de, The Complete Essays

Nassim Nicholas Taleb, The Black Swan 

Q: Can you talk a little about the process of writing your book? I think you did a magnificent job of pulling things together into a logical and understandable order and I imagine it was quite the experience organizing all the models that you have acquired over the years from your mind down on to paper.

Gene Fowler once said: “Writing is easy. All you do is stare at a blank sheet of paper until drops of blood form on your forehead.” Most people can do what I did. I am not especially smart or talented. It just takes curiosity and real interest. After being inspired by Charles Munger’s lectures on worldly wisdom (from Outstanding Investor Digest), and after reading Darwin, I took some time off business and started reading books in biology, neuroscience, psychology, and physics. As Warren Buffett once said: “I think you can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many ideas on your own. You can just apply the best of what you see.” Then I wrote down what I learned – I put together some key thoughts as a crude working model (what I found was that I couldn’t really synthesize things sitting in front of the computer. Like Arthur Schopenhauer said: “Thoughts die the moment they are embodied by words.” I could only see various connections between things and the big picture when I was out walking thinking about something else). Since sorrow feels worse than happiness feels good, I concentrated on learning causes of what I wanted to avoid – things with huge consequences.

I also spent some time visiting the Neurosciences Institute in La Jolla where I got some real understanding of how our anatomy, physiology and biochemistry constraints our behavior. I also interacted with a lot of science people via the Internet. Remember, I did this not to write a book, but to improve my own thinking and as a kind of memorandum to my children. I had no time constraints. And I loved it! Exploring and learning new things give me great satisfaction. When I started to read and write some of my friends said: what’s that good for? Why do you waste time studying that? How can that help you make money? Usually I don’t like to answer these questions, not because I don’t believe that the basic insight into how things work will not pay off at some time, but because I believe that acquiring insight is in itself a worthwhile effort. As Benjamin Franklin said: “ If a man empties his purse into his head, no one can take it away from him. An investment in knowledge always pays the best interest.”

Q: Finally, is there anything people may be surprised to know about you? Any unique interests?

People immediately assume that merely because I have written a book containing a lot of science, I must be a professor or an academic. I am not. Regarding any unique interests – nothing that would interest your readers.

I wish you and your readers a happy day – Everyday!

**********

2009 Interview with Peter Bevelin

If we make the assumption that Warren Buffett is going to be running Berkshire Hathaway for another 20-30 years, what advice would you give a 20-30 year-old today in regards to what he or she needs to learn over those years to be capable of taking over the job for Warren when he retires? And what qualities will be especially useful for seeing those risks that are important, but have never happened before? And why did Munger once say that Warren is a better investor than him?

I always try to remember what Munger once answered to a question: “I don't have any special competence that would enable me to answer that question." And I can’t answer your question on Buffett. Buffett is what Munger calls a Lollapalooza. If you go back and read the notes from the Wesco annual meeting in 2007, you get some clues on what factors contribute to his greatness (also by reading Poor Charlie’s Almanack, created by Peter Kaufman).

I may be wrong, but I don’t think I am totally wrong, but I believe there are some general characteristics that are important to reduce investment sorrow (no order of importance and not considering the eternal virtues of price, management and moat). Some examples:

1. The importance of knowing what you know and don’t know. There is a lot of wisdom in this remark from Eitan Wertheimer: “I had a very big lesson from Warren: the use of the word discipline…We learned very quickly that our most important asset is our limitations…The second thing we understand is that when we respect our limitations we don’t suffer from them anymore.”

2. Not putting all your trust in checklists (causing a false sense of security and control, just like wearing a seat belt makes drivers feel more secure, making them drive faster or more recklessly). Trouble often comes from the direction we least expect. I like this fable by Aesop:

“A Doe who had had the misfortune to lose the sight of one of her eyes, and so could not see anyone approaching on that side, made it her practice to graze on a high cliff near the sea. Thus she kept her good eye toward the land on the lookout for hunters, while her blind side was toward the sea whence she feared no danger. But one day some sailors were rowing past in a boat. Catching sight of the doe as she was grazing peacefully along the edge of the cliff, one of the sailors drew his bow and shot her. With her last gasp the dying doe said: "Alas, ill-fated creature that I am! I was safe on the land side, whence I looked for danger, but my enemy came from the sea, to which I looked for protection.”

Montaigne said: “Death can surprise us in so many ways.” For example, recurring revenue streams may stop or long-term customers may disappear. Remember what has happened to newspapers. As Alice Schroeder wrote on Buffett in The Snowball: “He tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will."

3. Related to the above is the importance of resilience and redundancy. Let me exemplify by some quotes from our heroes:

Munger: “'Of course you prefer a business that will prosper even if it is not managed well. We are not looking for mismanagement; we like the capacity to withstand it if we stumble into it... having a margin of safety running through the whole system.. All our super-cat policies have limits – meaning the maximum we can pay under a single policy. We can add up all those maximum limits. And when we get to a number that would make us squirm in our seats, we stop writing it… We try and operate so that it wouldn’t be too awful for us if something really extreme happened – like interest rates at 1% or interest rates at 20%… We try to arrange [our affairs] so that no matter what happens, we’ll never have to “go back to go.”

Buffett: “We want to always keep a lot of money around. We have so many extra levels of safety we follow at Berkshire…. in financial markets, almost anything that can happen does happen. And it pays to conduct your affairs so that no matter how foolish other people get, you’re still around to play the game next day.”

Try to follow the advice of Confucius: “The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved.”

4. Pascal’s lesson as told by Buffett: “If we can't tolerate a possible consequence, remote though it may be, we steer clear of planting its seeds.”

5. Absence of a need to invest all the time. As Buffett said: “You only have to do a few things right in your life as long as you don’t do too many things wrong.” Also, Seneca said: “The mind must be given relaxation; it will arise better and keener after resting.”

6. Knowing what to avoid. As Buffett recently said on Wells Fargo: “The real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do. And what Wells didn't do is what defines their greatness.” Isn’t that wise? My favorite Munger quote on this is: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

7. Temperament is more important than intelligence. As Buffett said: “Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior are vital to long-term investment success.”

8. Keynes’ advice: “It is better to be roughly right than precisely wrong.”

9. Thinking like a businessman and investor. As Buffett said: "Being a businessman makes me a better investor and being an investor makes me a better businessman."

10. Keeping things simple. I love this Munger quote: “We use a lot of experience and do it [investment returns] in our heads. We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false. We’re so afraid of that process so we don’t do it.”

11. Understanding the fundamental importance of trust to life and business. As Oliver Wendell Holmes said: “Put not your trust in money, but put your money in trust.” And to quote Seneca in the choice of friends: “After friendship is formed you must trust, but before that you must judge.” Think about how much life is improved by being around people you can trust. Or to invert – think about the misery of being around people you can’t trust. And it simplifies life. As Munger said: “When you get a seamless web of deserved trust, you get enormous efficiencies.”

12. An ability to tune out folly and noise. For example, physicists have a wonderful ability to eliminate unimportant details and focus on what matters. Professor Douglas Hofstadter once said that thinking is all about the ability to look at complex situations and strip away things that don’t count – the ability to filter out situations, and [find] what’s at their core. Something Buffett and Munger are extremely good at.

In your opinion, why is there so much difference in opinion when it comes to economics? For example, conservative, liberal, and the Austrian School economists all seem to have dramatically different economic theories on causes and solutions to crises. Is economics a science that hasn’t evolved enough, one that has evolved too quickly, or are their other factors that keep smart people from coming to even a general consensus?

Since economics is not an exact science (if it is a science at all) there exist a lot of opinions, ideas and therefore different “schools” and personal beliefs and ideologies. How could it be otherwise?

Many of the big ideas in economics, like Ricardo’s principle of comparative advantage and Smith’s idea on the gains from specialization and division of labor, are hundreds of years old. Then something happened. As the 18^th century Irish statesman Edmund Burke said: “The age of chivalry has gone: the age of economists, sophists and calculators has arrived.” Not much has happened since then except that now economics focuses on econometrics and statistics. After World War 2, mathematics was turned into an obsession where economists overemphasized techniques over ideas. But reality is a little bit too messy to be put into an equation. There is too much uncertainty. Too many factors and possible outcomes (see more about this in part three of my book). As Keynes said: “Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.”

Their models may be rigorous but the key is whether they are useful. Is it physics envy? I would characterize it more as mathematics envy. Physicists are more empirical. Economists imitate mathematicians in their effort to try to prove theorems. It is more applied mathematics than science. Furthermore, economists often forget side effects, as they call it, meaning effects they didn’t foresee or didn’t want to think about. But as Buffett has said over and over again: “The most important question in economics is, “And then what?”

Let me end with Keynes again:

"I also want to emphasise strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple's motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the center of the earth."

Several books have come out within the past year, such as Outliers, Talent is Overrated, and The Talent Code, which discuss the concept of greatness and the process it takes to achieve it. They basically say that the key to achieving greatness is a very specific kind of really hard work, or deliberate (or deep) practice, assuming one is in a position to perform that kind of deliberate practice (which is often a factor of luck and culture). Can you comment on the kind of deliberate practice activities you think: (1) makes a great investor; (2) it takes to be an overall great thinker? Also, can you give an example of the type of work you put in when trying to master a particular mental model?

Please, tell me the secret formula on how to get rich, be the best thinker, lose weight, have a happy marriage and solve all my problems quickly. There are no secret formulas or shortcuts and beware of the articulate incompetents and false prophets – they sound impressive and clever but lack substance. I can only refer to what Buffett said in the foreword to Poor Charlie’s Almanack: “From 1733 to 1758, Ben Franklin dispensed useful and timeless advice through Poor Richard's Almanack. Among the virtues extolled were thrift, duty, hard work, and simplicity.” Of course, Munger’s views on how to get worldly wisdom help.

Personally, I read a lot. I have to work things out for myself to understand them. I try to use the “see one, do one, teach one” approach used in medical education (but change it to “do many” and in multiple situations and over time). I often go from reality (something I have seen) to find answers among ideas. I don’t try to fit reality to an idea. And then I try to find more examples on an idea from reality. Finally, I try to explain it to someone else. Writing Seeking Wisdom was such an exercise – I forced myself to learn by teaching someone else. And reading Feynman at an early point helped me where I clearly learnt the difference between knowing the name of something and knowing what goes on since knowledge is only valuable if it’s useful and something is only useful if I understand what it means. What I in my book called meaning and asking, “what happens?”

I try to concentrate on learning practical and consequential things that can help me reduce the chance of sorrow.

When you talk about deliberate practice or working on what you’re bad at, just remember this Munger quote: “Each of you will have to figure out where your talents lie. And you’ll have to use your advantages. But if you try to succeed in what you’re worst at, you’re going to have a very lousy career. I can almost guarantee it. To do otherwise, you'd have to buy a winning lottery ticket or get very lucky somewhere else.” Also, as Munger said, what often causes greatness or a Lollapalooza is when many factors work together in the same direction (as in the case of Buffett).

In a recent interview with Bill Gates and his father, the elder Gates mentioned two traits that he thought really described his son’s success: curiosity and hard work. An intense curiosity has also been used to describe so many of the great minds throughout history, such as Ben Franklin, Darwin, Einstein, Feynman, among many others (including Buffett and Munger). Can you describe what you’re currently curious about? And is there anything you became more curious about while curiously writing your book?

I have a peculiar kind of mind that is continuously curious. Especially on things that relate to human nature and the brain in all its colors. For example, one thing that presently fascinates me is the workings of placebo and nocebo. And isn’t this fascinating – after you have read this you will never be the same. Not that my answers will have any dramatic impact but I am talking about the fact that all experiences modify the brain.

When I wrote Seeking Wisdom, I got more curious about DNA-testing and diagnostic screening and the uncertainties involved.

I have been reading a lot about the ancients and their wisdom lately. On and off I write on a memo for my children and myself. I call it “THE WISDOM SEEKER: Uncommon Sense from the Ancients to Munger.” It is about a man who wants to become wiser and visits a place I call “The Library of Wisdom.” In the library he meets and learns from wise people like Cicero, Newton, Einstein, Munger, etc. Reading ancient history has reinforced the notion that people’s behavior stays the same. As the saying goes - "Plus ça change, plus c'est la même chose" or the more things change, the more they stay the same - just different actors.

I believe Charlie Munger has mentioned that if he could live another lifetime, he may spend most of it trying to fix the education system. I know it is a complex and detailed subject, one that Bill Gates said in a recent interview is his hardest one to solve, but could you give a couple of things that you think schools, on any level, should do better?

What do we need to teach? A preparation for real life; that is [composed of] useful knowledge of practical consequence, not recitation of facts. The purpose of education is not to fill the minds of students with facts – it is to teach them to think, and to think for themselves. To quote James Clerk Maxwell: “It is very necessary that those who are trying to learn from books the facts of physical science should be enabled to recognize these facts when they meet them out-of-doors.”

We need to learn some general and time-tested principles. Any theory or model that doesn’t work in practical reality should be banned. Practical applications are key. If what a student learns isn’t tied to reality, he cannot possibly remember what he has learned. And then a student needs to practice what he learnt.

Any educational experience must also tell stories – teach from real life situations from the experiences of others. We don’t pay attention to boring things. To quote Horace Mann: “A teacher who is attempting to teach without inspiring the pupil with a desire to learn is hammering on a cold iron.” We need more drama in class and more stories on failures, before we make them ourselves. Like the air flight simulator but when it is complemented with pilots hearing from other pilots (stories) who failed in real life. The U.S. Army conducts “After Action Reviews” that enable participants to analyze, discuss, and learn from both the successes and failures of a variety of military initiatives. Hospitals use "Morbidity and Mortality" conferences (in which physicians convene to discuss significant mistakes or unexpected deaths) as a forum for identifying, discussing, and learning from failures. And when a plane crashes, investigators retrieve the flight recorder and try to find out what went wrong. Why doesn’t academia learn more from failures?

Instead of teaching formulas to solve problems, wouldn’t it be better to teach the student the art of thinking and where to look for answers to various problems? And wouldn’t it be better to teach students that most of life’s problems have no easy solutions? And to teach them to learn to know when they know something and when they don’t?

Of course, I may be totally wrong. Like Cicero said: “No one can speak well, unless he thoroughly understands his subject.”

Have you come across any big ideas, in any field of study, within the last couple of years that have altered some of your previously held beliefs, or reinforced those that you already had?

One thing that has been reinforced is how hard it is to change people’s opinions or beliefs. On the other hand, this is understandable. As the author Jacob Braude said: “Consider how hard it is to change yourself and you’ll understand what little chance you have of trying to change others.” The lesson? It is better to avoid situations where we need to change people. Also, in the end, each of us has to respect that others may disagree with us.

Also, how quick we are in drawing conclusions. For example, I am often too quick in being judgmental and forget how I myself behaved or would have behaved if put in another person’s shoes.

Another thing that has been reinforced is how much uncertainty and randomness there is in the world. But what also has been reinforced – especially during the financial crisis– is how hard it is to accept this. I am referring to our hate of uncertainty and the unknown or our strong psychological need a) for control of what will happen to us, b) for reasons why something happened and c) to know what will happen in the future.There is a poem by Miroslav Holub that well illustrates our need of a map of hope – a sense of control so uncertainty is reduced:

Albert Szent-Gyorgyi, who knew a lot about maps according to which life is on its way somewhere or other, told us this story from the war due to which history is on its way somewhere or other:

The young lieutenant of a small Hungarian detachment in the Alps sent a reconnaissance unit out into the icy wasteland.

It began to snow immediately, snowed for two days and the unit did not return. The lieutenant suffered: he had dispatched his own people to death.

But the third day the unit came back.

Where had they been? How had they made their way?

Yes, they said, we considered ourselves lost and waited for the end. And then one of us found a map in his pocket. That calmed us down.

We pitched camp, lasted out the snowstorm and then with the map we discovered our bearings.

And here we are.

The lieutenant borrowed this remarkable map and had a good look at it. It was not a map of the Alps but of the Pyrenees.

Personally, I try to improve my understanding of what really can be explained or usefully predicted and what can’t. And sometimes finding an answer doesn’t mean anything or doesn’t lead to a rational course of action.

Can you describe the importance of skepticism in this world? It seems that it is so easy to fall for a good story and fall for the sensemaking trap described in your book. Do you have any red flags or checklists you use in these situations? I think you may have touched on one in our previous interview: Why should I believe this? – Show me the evidence + Compared to what?

First of all, I try to follow Pascal’s philosophy – only be skeptical about matters that really can hurt me if I’m wrong. So by this, I eliminate a lot – I don’t even think about it. Second, I try to learn how to recognize crap, including my own. There are many things I don’t do or think about – elimination is a great conservator of effort.

Generally, keep it simple and use some filters. Some questions I ask myself: Is it important? If yes, is it knowable? If yes, is this within my circle of competence? Which of course assumes that I know what I know and can do, and what I don’t know and can’t do. Otherwise I exclude and throw it in to too hard pile. If within, then, any testable argument should be tested – What is the evidence? Can I disprove it? Compared to what (including negative cases and non-events)? Randomness content? If I believe this, what would follow? What would I have to check out? What ideas can help me? I wrote more about this in part three of my book.

Take medicine and research as an example where my skepticism has increased. For example, there is a great article by John Ioannidis - Why Most Published Research Findings Are False.

(http://www.plosmedicine.org/article/info:doi/10.1371/journal.pmed.0020124)

Montaigne best illustrates another “filter” - assumptions are useful but only to the extent that they are valid: “I realize that if you ask people to account for ‘facts’, they usually spend more time finding reasons for them than finding out whether they are true… They skip over the facts but carefully deduce inferences. They normally begin thus: 'How does this come about?' But does it do so? That is what they ought to be asking.”

Also regarding making comparisons, take Robyn Dawes’ discussion on the crash of Western Airlines Flight 903. He says that to find out the cause of the crash, we have to compare the crash with cases where no accidents happen. For example, just because pilots are often tired before a crash doesn't give us any insights if it is important, unless we know they are often not tired before a safe landing. (There is a good interview with Dawes called, Ethics, science, and the helping professions: a conversation with Robyn Dawes.)

http://findarticles.com/p/articles/mi_hb3060/is_1_39/ai_n29007242/?tag=content;col1

In our previous interview, you gave a great list of books from which you learned a lot. Which books have you read in the last couple of years that you have also learned a lot from and can recommend for our readers?

I read so many books but to mention a few I liked. The Strategist by Robert Dodge - about the Game Theorist Thomas Schelling. The Electric Life of Michael Faradayby Alan Hirshfeld. Niall Ferguson’s The Ascent of Money, The Choice by Eliyahu Goldratt, Brain Rules by John Medina. Joshua Cooper Ramo’s The Age of the Unthinkable, and The Match King by Frank Partnoy. The most recent book I read was The Invisible Hook by Peter Leeson. It’s about pirates. It clearly showed that there was honor among thieves. Rules, incentives and disincentives were needed for proper functioning. As you can see I read all kind of books. It’s fun!

Finally let me end with some wise words from the Greek historian Herodotus: “If a man insisted always on being serious, and never allowed himself a bit of fun and relaxation, he would go mad or become unstable without knowing it.”

Many Thanks and I wish you and your readers a happy, healthy and prosperous life.

May 31, 2009

Peter Bevelin