Market Mood Swings: Facebook Euphoria – by Aswath Damodaran

As some of you who have tracked my blog posts over the last couple of years know, I have tried to make sense of Facebook's value and how the market has been pricing it. Given today's news, I thought it would be useful to go back first to these earlier posts and then do a fresh valuation of the company, with updated information.

On the intrinsic value of gold, and how not to be a turkey - by Dylan Grice

Link to:  On the intrinsic value of gold, and how not to be a turkey

Uralkali Opens $20B Freely Traded Potash Market (video)

July 31 (Bloomberg) -- Blomberg's Ryan Chilcote reports that potash supplier Uralkali announced an end to production restrictions, opening up the $20 billion industry in a change that may lower prices as much as 33 percent. He speaks on Bloomberg Television's "On The Move."

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This is the news that caused the potash suppliers (e.g. POT, MOS) to get beaten down yesterday. As such, it may be a good time to read-up on some history and the possible long-term trends driving the industry. Some suggestions:

Book: Enriching the Earth: Fritz Haber, Carl Bosch, and the Transformation of World Food Production – by Vaclav Smil

Passport Capital: From Dirt to Dinner Table: The Case for Agriculture (2009)

Jeremy Grantham’s 2011 letters:

Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever

Resource Limitations 2: Separating the Dangerous from the Merely Serious

U.S. Recession Began in 2012, ECRI's Achuthan Says (video)

Found via Zero Hedge. Still being bold and sticking with his recession call.

July 30 (Bloomberg) -- Lakshman Achuthan, co-founder 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."

The Manual of Ideas: Interview with Hasbro ex-CEO Alan Hassenfeld

Link

Atul Gawande on The Colbert Report

Atul Gawande discusses his New Yorker article, "Slow Ideas: Some ideas spread fast. How do you speed the ones that don't?"

Link

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Related previous post: Atul Gawande: How Do Good Ideas Spread?

Nate Silver on Charlie Rose

Link to: Nate Silver on Charlie Rose

Paul Tough: How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

Paul Tough: How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

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Related book: How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

Harvey Firestone quote

"The test of a business man is not whether he can make money in one or two boom years, or can make money through the luck of getting into the field first, but whether in a highly competitive field, without having any initial advantage over his competitors, he can outdistance them in a perfectly honourable way and keep the respect of himself and of his community." –Harvey Firestone, Men and Rubber: The Story of Business

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Related quotes:

Charlie Munger on competitive destruction

Harvey Firestone on surplus

Harvard Business School Case Study on Coors (1992)

Via csinvesting:

"Rarely in Adolph Coors Company's 113-year history has there been a year with as many success stories as 1985." Coors's annual report for 1985 went on to cite records set by the company's Brewing Division. In a year when domestic beer consumption was flat, Coors's beer volume had jumped by 13% to a new high of 14.7 million barrels. And its revenues from beer had topped $1 billion for the first time in the company's history.

The Brewing Division accounted for 84% of Coors's revenues in 1985, and over 100% of its operating income. Although Coors had diversified into several businesses, including porcelain, food products, biotechnology, oil and gas, and health systems, Chairman Bill Coors acknowledged that for the foreseeable future, the company's fortunes were tied to brewing.

The strategy of the Brewing Division had changed drastically over the 1975-1985 period. The changes continued: in a decision that the company billed as "the most significant event of 1985 and perhaps our history," Coors announced plans to build its second brewery in Virginia's Shenandoah Valley.

The first section of this case describes competition in the U.S. brewing industry and its structural consequences. The next two sections describe Coors's position within the industry, and the plans that it had announced for its second brewery.

Book TV 2013 Book Expo America: Malcolm Gladwell, "David and Goliath"

Link to video: Malcolm Gladwell on his new book "David and Goliath"

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Related book (October release): David and Goliath: Underdogs, Misfits, and the Art of Battling Giants

Evernote Wants to Become the Nike for Your Brain

Evernote is known for its eponymous note-taking app, a seemingly modest piece of software that has brought in a heap of money. Evernote has topped 10 million downloads in the iOS and Android app stores and accumulated more than 65 million users across its mobile, web, and desktop versions.

CEO and serial tech entrepreneur Phil Libin used to bristle when people would refer to Evernote as a digital notebook. He sees the product as an extension of the mind, albeit one that’s only about 5 percent complete. These days, though, he’s learned to embrace the pigeonholing. After all, it was humble note-takers who brought Redwood City, California-based Evernote to profitability in 2011 by upgrading en masse to a premium version that includes optical character recognition (handy for pictures of business cards and receipts) and collaborative note editing (great for workgroups).

This year, Evernote is in the red again as the company scales up to reach Libin’s bigger ambition — becoming something like Microsoft Office for mobile devices. Or, as Libin put it in an hourlong interview with WIRED, “like Nike for your mind.”

Evernote’s staff of 330 is divided into teams of no more than eight members — small enough, as Libin sees it, to sit around a dinner table and have a single conversation. No team project can last more than nine months, and none of the teams share any code, which is something close to sacrilege among the software priests of Silicon Valley. One recent sunny Friday, while programmers behind him raced to rewrite the iPhone and iPad versions of Evernote from scratch, we pelted Libin with questions about the past, present, and future of his company.

Hussman Weekly Market Comment: Baked In The Cake

“I can feel it coming, S.E.C. or not, a whole new round of disastrous speculation… and finally the inevitable crash.  I don’t know when it will come, but I can feel it coming, and, damn it, I don’t know what to do about it.”

- Bernard Lasker, NYSE Chairman, 1972, just before the market fell by half in the 73-74 plunge

“The danger of mispricing risk is that there is no way out without investors taking losses. And the longer the process continues, the bigger those losses could be. That's why the Fed should start tapering this summer before financial market distortions become even more damaging.”

- Martin Feldstein, President emeritus, National Bureau of Economic Research, July 1, 2013

The U.S. equity market is now in the third, mature, late-stage, overvalued, overbought, overbullish, Fed-enabled equity bubble in just over a decade. Like the 2000-2002 plunge of 50%, and the 2007-2009 plunge of 55%, the current episode is likely to end tragically. This expectation is not a statement about whether the market will or will not register a marginal new high over the next few weeks or months. It is not predicated on the question of whether or when the Fed will or will not taper its program of quantitative easing. It is predicated instead on the fact that the deepest market losses in history have always emerged from an identical set of conditions (also evident at the pre-crash peaks of 1929, 1972, and 1987) – namely, an extreme syndrome of overvalued, overbought, overbullish conditions, generally in the context of rising long-term interest rates.

Henry David Thoreau quote

“Public opinion is a weak tyrant compared with our own private opinion. What a man thinks of himself, that it is which determines, or rather indicates, his fate.” –Henry David Thoreau, Walden

Steve Romick's Q2 Commentary

Found via ValueWalk.

Our views on the economy are not terribly original and have not changed significantly in the past six months. It’s a challenge finding new ways to say the same thing. So we won’t. We think our past commentaries effectively communicate our longstanding view that as we exited the 2008-9 financial crisis, the average Joe on the street was left with less in his bank account, a diminished home value, and what stocks he did own weren’t worth as much. When Joe could afford less, the U.S. government stepped in and spent in his place, and hasn’t stopped spending since. What the Joes of the world can’t afford, the U.S. government apparently can – but don’t ask us to explain that “new” math. The recovery has been disappointing and largely ngineered by central bank policy. We worry that low interest rates and novel and theoretical Fed policy could lead to unintended consequences.

The past quarter included a brief hiccup when investors considered their exposure to low interest rates in the event the Fed allows rates to normalize. There was a lot of discussion in the media during the past quarter regarding how and when Ben Bernanke intends to taper the purchase of bonds by the Federal Reserve. Interestingly, we can’t recall having a single conversation internally about the taper, as this simply isn’t how we look at the world. We are worried about how a business and the world might look three to five years from now, not next quarter. In fact, if one thinks back five years, the world has dealt with a great financial crisis, potential currency collapse and fears of sovereign liquidity, just to name some of what we have seen. Through it all, we invested with a long-term strategy dependent on patience, discipline and a focus on long-term value. With an average holding period of roughly five years, we strive to add value over a full business cycle rather than try to guess where central bankers may move interest rates.

The Charitable-Industrial Complex - By Peter Buffett

I HAD spent much of my life writing music for commercials, film and television and knew little about the world of philanthropy as practiced by the very wealthy until what I call the big bang happened in 2006. That year, my father, Warren Buffett, made good on his commitment to give nearly all of his accumulated wealth back to society. In addition to making several large donations, he added generously to the three foundations that my parents had created years earlier, one for each of their children to run.

Early on in our philanthropic journey, my wife and I became aware of something I started to call Philanthropic Colonialism. I noticed that a donor had the urge to “save the day” in some fashion. People (including me) who had very little knowledge of a particular place would think that they could solve a local problem. Whether it involved farming methods, education practices, job training or business development, over and over I would hear people discuss transplanting what worked in one setting directly into another with little regard for culture, geography or societal norms.

Often the results of our decisions had unintended consequences; distributing condoms to stop the spread of AIDS in a brothel area ended up creating a higher price for unprotected sex.

But now I think something even more damaging is going on.

Greenlight Capital Q2 2013 Letter

Via ValueWalk:

Link to: Greenlight Capital Q2 2013 Letter

Marks Takes the Market's Temperature

Stipp: Last question for you, Howard, is more of a personal one. You've been watching the markets for a long time. You've been studying the swings that occur and recur, but at the end of the day we're all human beings and we're subject to emotions. I am just wondering how you as an investor are able to walk away from those emotional urges. It's easy to say, "Buy low and sell high," but when the time comes it can be a tough thing to do.

Marks: I think that you're right. It's very important, and it's very tough. I think it helps to associate with likeminded people, and my partners and I buttress each other. We keep each other calm in heated times when the market booms and we keep each other more collected in tough times. In 2005, '06, '07, precrisis, we spent most of our time going into each other's office and saying, "Hey, look at this deal. This is crazy. How did this deal get done?" When you can see the deals that are unwise and shouldn't be done are getting done, and that's a way to take the temperature of the market, so we cool each other off.

Then when things collapse and there is a tendency to lose heart, we remind each other how good the values are. Now, of course, I've been doing this for 45 years, and my team and I have been through three crises in the debt world in 1990, '02, and '08. When you've been through a few crises, then you start to realize that things don't just collapse and stay there. They tend to come back, which means that the low prices are more of a signal to buy than a fear factor telling you to get out. I think that experience, understanding the issues and the health of, let’s say, a support network.

John Mauldin: A Lost Generation

It is pretty well established that a tax increase, especially an income tax increase, will have an immediate negative effect on the economy, with a multiplier of between 1 and 3 depending upon whose research you accept. As far as I am aware, no peer-reviewed study exists that concludes there will be no negative effects. The US economy is soft; employment growth is weak – and yet we are about to see a significant middle-class tax increase, albeit a stealth one, passed by the current administration. I will acknowledge that dealing a blow to the economy was not the actual plan, but that is what is happening in the real world where you and I live. This week we will briefly look at why weak consumer spending is going to become an even greater problem in the coming years, and we will continue to look at some disturbing trends in employment.

Last week, I noted at the beginning of the letter that an unintended consequence of Obamacare is a rather dramatic rise in the number of temporary versus full-time jobs. This trend results from employers having to pay for the health insurance of employees who work more than 29 hours a week.

I quoted Mort Zuckerman, who wrote in the Wall Street Journal:

The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full-time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 – three million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

As it turns out, the unintended consequences of Obamacare are not the only problem. Charles Gave wrote a withering indictment of quantitative easing this week (which we will look at in a few pages) and included the following chart, which caught my eye. Note that the relative increase in part-time jobs began prior to Obama's even assuming office. The redefinition of part-time as less than 29 hours a week and the new costs associated with full-time employment due to Obamacare simply accelerated a trend already set into motion.

Boyles Asset Management - Q2 2013 Letter Excerpt

Below are a couple of sections (slightly edited for public viewing) from a letter just sent to the investors of the fund I help manage.

Disclosure: I am a portfolio manager at Boyles Asset Management, LLC ("Boyles") and the fund managed by Boyles owns shares of stock in a company or companies mentioned in the excerpt below.  We may in the future buy or sell shares in the fund and are under no obligation to update our activities. This is for information purposes only and is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

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July 25, 2013

When one discovers a bargain asset whose owner might find it unimportant or inconsequential, the potential exists for a highly profitable transaction.

It Matters to Me

Classic economic thinking might suggest otherwise, but there are times when a seller of a financial asset cares little about what price he or she receives.  Perhaps there is a need for immediate liquidity at any price or perhaps the goal of the seller is social rather than economic.  We suspect there are other reasons (which we hope to take advantage of in due course), but we would like to highlight one relevant additional example from our first two months of operation.

In the prior fund we managed, we owned a small UK software company named Electronic Data Processing (LSE: EDP).  The company is small and its stock relatively illiquid.  With our increased capital base at Boyles, we were unsure if we’d be able to meaningfully participate in a company that we believed was materially mispriced in the marketplace.  When we began operations at Boyles, one of your intrepid managing partners began cold-calling some of EDP’s large stockholders, which were primarily listed trusts in the UK that operate like closed-end funds.  One such owner of a large block was an entity with nearly £525 million in equity.  When it was clear that the chief investment officer of that organization knew very little about the current circumstances surrounding its £1.11 million position in EDP—representing a mere 0.21% of the organization’s equity—the conversation shifted to one about Boyles acquiring the firm’s stake.  It was agreed that two days later Boyles would have a bid prepared.

During this period the stock had traded as high as 64p per share and was generally in a range of 60p to 64p.  The potential seller recommended to us that the deal be done at the mid-point of the bid/ask at the time or perhaps even higher than the ask, given the large nature of the block.  After we indicated our bid was 55p we received a verbal accosting about our unreasonableness, our poor conduct, and our general approach to dealmaking.  After we reiterated that it was our best and final offer, the conversation came to an abrupt close.  The story naturally didn’t finish there, as just 24 hours later the firm came back to us “with their tail between their legs” and asked if the offer was still on the table.  We closed the block transaction at 55p later that week.

The moral of the story, of course, is to acquire assets from folks that ultimately care very little if they get “X” or “0.8X” because it won’t ultimately affect their net worth and the position may just be a nuisance for them to own.  Buy small operating units or assets of large organizations; or small holdings of large investment firms.

Shortly after our transaction, the company announced updated results and declared a special 5p dividend.

Discipline and Patience

“If we are to hit the bull’s-eye, we will need markets that allow the purchase of businesses and securities on sensible terms. Right now, markets are difficult, but they can - and will - change in unexpected ways and at unexpected times.  In the meantime, we’ll try to resist the temptation to do something marginal simply because we are long on cash.  There’s no use running if you’re on the wrong road.” -Warren Buffett, 1993 Letter to Shareholders

Do-something syndrome is a disease that infects many investors, both professional and amateur.  Professional investors feel they need to do something to earn their fees; and both professionals and non-professionals alike feel the urge to “get in on the action.”

The human psyche is made to fall for stories and when added to the do-something syndrome the resulting combination can be a potent detriment to one’s investment objective.  The mind likes a good narrative, and it is easy to fall into the trap of mistaking a good narrative for a good investment, perhaps especially when you feel you need to do something.  Whether it’s internet stocks, residential real estate, tulip bulbs, or something less euphoric, a good story can compel people to do something—anything—and break away from their discipline (if they had one to begin with).

If we are to be successful over a long period of time, we must be disciplined in waiting for the combination of the right businesses and right prices before putting capital to work.  At times, this philosophy may dictate more investing and less waiting; and at other times, there may be a lot of waiting with very little investing.

Our goals are capital preservation and long-term (five years or more) outperformance, not just to invest for the sake of investing or to satisfy an urge to do something.  But we remind partners and readers that there is plenty of activity going on behind the scenes: looking for businesses we’d like to own and thinking about the prices at which we’d like to buy shares in those businesses, improving our process, developing specific industry knowledge and growing our network of industry contacts.  Much is happening even if we are doing more waiting.

Just as we need to be disciplined in our waiting, we also need to be ready to act decisively when the opportunity to take the bat off the shoulder and swing at a fat pitch presents itself.  To use another Buffett quote: “In the search, we adopt the same attitude one might find appropriate in looking for a spouse:  It pays to be active, interested and open-minded, but it does not pay to be in a hurry.”

Roumell Q2 2013 Letter: Price Trumps Economic Forecasting

Price Trumps Economic Forecasting

In July 2009, the very popular macroeconomic investment strategist Marc Faber predicted that the United States was about to enter a period of hyperinflation approaching the levels of Zimbabwe. PIMCO’s Bill Gross in May of 2009 expressed his belief in “accelerating inflation” and low market returns because of subdued growth. Inflation has been modest, at best. Nouriel Roubini, the widely regarded NYU economist who correctly predicted the housing collapse, rightly indicated in 2009 that the economic recovery would be anemic; unfortunately for those who may have taken his advice, he recommended investors keep all their assets safely in cash, thereby missing the past few years’ dramatic market rise. Columbia University Professor Edmund Phelps, winner of a Nobel Prize in economics in 2006, predicted in 2009 that it may take as long as 15 years for U.S. households to restore the wealth lost in the financial crisis. It actually took four years, having recently climbed to $70 trillion, above the 2008 peak of $67 trillion.

There’s no shortage of examples of “the dismal science’s” dismal record in predicting the economy’s future. In July 2005, the same month that home-builder stocks peaked, soon-to-be Federal Reserve chairman Ben Bernanke disputed the existence of a housing bubble. Bernanke said, “We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize.… I don’t think it’s going to drive the economy too far from its full employment path, though.” A few months later, his predecessor, Alan Greenspan, said, “We’re not about to go into a situation where prices will go down.… There is no evidence home prices are going to collapse.” Moreover, macroeconomic conditions do not foretell market responses, as Roubini’s correct economic forecast, but dead wrong market prediction, well illustrates. If the best trained, most highly educated economists, possessing the best information, cannot reasonably predict the future or, more importantly, markets’ reactions, why do investors keep trying to use economics as an investment tool?

Readers of our letters know that we have weighed in over the past few years with our own economic observations. Like many investors, we have wrestled with how much time we should allocate to understanding macroeconomic trends. We have noted—as points of concern—economic growth rates that seem to be perennially reset down, in both the United States and Europe, persistently high real unemployment levels, and overleveraged consumers. Particularly in the aftermath of the financial crisis, we focused more time on these issues. However, three factors appear to undermine the utility of economic forecasting as an investment tool: the absence of price in the equation, the scarcity of original thinking, and the difficulty of predicting human behavior.

Nassim Taleb quotes (prediction)

I had this quote saved to post later, but it seemed to go well with the Tetlock article, so here it is now. THIS paper written by Taleb and Tetlock may also be worth reading (or re-reading)

"I insist on the via negativa method of prophecy as being the only valid one: there is no other way to produce a forecast without being a turkey somewhere, particularly in the complex environment in which we live today. Now, I am not saying that new technologies will not emerge—something new will rule its day, for a while. What is currently fragile will be replaced by something else, of course. But this “something else” is unpredictable. In all likelihood, the technologies you have in your mind are not the ones that will make it, no matter your perception of their fitness and applicability—with all due respect to your imagination.

...

An interesting apparent paradox is that, according to these principles, longer-term predictions are more reliable than short-term ones, given that one can be quite certain that what is Black Swan–prone will be eventually swallowed by history since time augments the probability of such an event. On the other hand, typical predictions (not involving the currently fragile) degrade with time; in the presence of nonlinearities, the longer the forecast the worse its accuracy. Your error rate for a ten-year forecast of, say, the sales of a computer plant or the profits of a commodity vendor can be a thousand times that of a one-year projection."

-Nassim Taleb, Antifragile

The Quixotic Quest to Make Pundits Suck Less

Thanks to Sean for passing this along.

“The average expert’s forecasts were revealed to be only slightly more accurate than random guessing—or, to put more harshly, only a bit better than the proverbial dart-throwing chimpanzee. And the average expert performed slightly worse than a still more mindless competition: simple extrapolation algorithms that automatically predicted more of the same.” ~ Dr. Philip Tetlock

During the presidential election, statistician Nate Silver consistently predicted on his FiveThirtyEight blog (hosted by the New York Times) that the odds of Mitt Romney winning the presidency were slim. Leading conservative political experts like Karl Rove and Newt Gingrich called his claims ridiculous. Silver kept the faith in his poll numbers and models; the pundits trusted their “years of experience.”

In the end, Silver (whose background was the moneyball world of applying statistics to baseball) embarrassed the pundits by accurately predicting which states would be won by each candidate. But you wouldn’t know it by looking at the careers of the experts. News channels never stopped welcoming Newt Gingrich and his ilk as experts, while Karl Rove continues to accept healthy paychecks as an expert consultant for political campaigns around the world. The consequences of their nationally televised embarrassment were exactly nil.

It is this lack of accountability when it comes to making predictions that fascinates Philip Tetlock, a professor at the University of Pennsylvania. His interest in expert judgment began after the end of the Cold War. Despite both conservatives and liberals failing to predict how the Soviet Union would end, he saw both sides fit the emerging developments to their original ideas - the same ideas that had just failed.

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Related book: Expert Political Judgment: How Good Is It? How Can We Know?

Related link: HOW TO WIN AT FORECASTING: A Conversation with Philip Tetlock

There's No Formula for Fixing Detroit, and That's a Good Thing – by Justin Fox

The news of Detroit's bankruptcy has brought countless explanations of what went wrong, some of them pretty interesting. But the main point of a bankruptcy — especially this bankruptcy, which has been looming for decades — is to get a fresh start.

So it's been dismaying to see how little attention has been paid in the past week's news coverage to the fact that central Detroit is already in the midst of fresh start, a revitalization that feels far more organic and durable than past top-down efforts like the construction of the Renaissance Center in the late 1970s and the arrival of casinos in the late 1990s (although the casinos do appear to pay the bulk of the city's bills at the moment). Decrepit buildings in downtown and midtown are being renovated and converted into loft apartments, hotels, restaurants, and offices. Compuware and Quicken Loans have moved their headquarters and thousands of employees from the suburbs to the city. There's an incipient venture-capital and startup scene, and lots of small creative businesses. The area's pro sports teams are almost all back downtown. Young, upwardly mobile people are actually moving to Detroit.

At the moment, this renaissance is almost completely disconnected from what's going on in the rest of the city. A small group of affluent, well-educated Creative Classers (and a larger number of occasional suburban visitors) has occupied an island in a sea of economic despair. One telling factoid: Detroit had been without a major chain supermarket since 2007. Now it has one in midtown, and it's a Whole Foods! (For non-U.S. readers, Whole Foods is a high-end natural foods chain long known by the nickname "Whole Paycheck.")

Outside of this rejuvenating core and a few residential neighborhoods that are still holding strong, Detroit is an underpopulated, crumbling mess. In 1950 the city had more than 1.8 million inhabitants; this year the population will probably slip below 700,000. Providing city services like police protection and garbage pickup across 139 ever-emptier square miles keeps getting more expensive and difficult (Detroit now has much lower population density than famously sprawling Los Angeles — although it's still denser than more recent boomtowns such as Houston and Phoenix). Just since 2000, the city has lost 26% of its people, with the white flight that began Detroit's decline in the 1950s long since overtaken by an exodus of middle-class African-Americans.

Detroit aftershocks will be staggering – By Meredith Whitney

She was also on CNBC yesterday discussing this topic HERE.

As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the US municipal market – which is what the bond-peddlers are now telling their clients. The aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.

Municipal bankruptcies have historically been rare for a number of reasons – including the states’ determination to preserve their credit ratings, their access to cheap funding and the stigma of bankruptcy. But, these days, things are very different in the world of municipal finance.

Whitman, Diz on net-nets

From the book Modern Security Analysis: Understanding Wall Street Fundamentals:

Our definition of net nets is taken from Graham and Dodd’s Security Analysis, but with a few twists. Graham and Dodd relied on a GAAP classified balance sheet to definite current assets in order to ascertain if a common stock was a net net. We use our own judgment rather than GAAP classification to definite current assets in order to decide what is a liquid, that is, a current asset. 

While Graham and Dodd seem to have invented the idea of net nets, we use that idea with a number of modifications based on our discussion earlier in this chapter. 

First, we are not interested in net nets unless the company is extremely well financed. A large quantity of current assets, especially if they consist of inventories, costs in excess of billings, or receivables from less than creditworthy customers, probably cannot help the common stock of a company that cannot meet its obligations to its creditors. Second, many current assets classified as current assets under GAAP are really fixed assets of the worst sort. Take department store merchandise inventories. If the department store is to be liquidated, merchandise inventories are indeed a current asset, convertible to cash within 12 months at prices that conceivably could be close to NAV, although much less than NAV may be realized if the merchandise is disposed of in a GOB (going out of business) sale. On the other hand, if the department store is a going concern, merchandise inventories are a fixed asset of the worst sort. The merchandise inventories have to be replaced, are hard to value, and are subject to markdowns, obsolescence, shrinkage, seasonality and misallocation. The Toyota Industries portfolio of marketable securities seems to be much more of a current asset than department store merchandise inventories even though, for GAAP or IFRS purposes, Toyota Industries’ marketable securities are not considered a current asset. Third, the Graham and Dodd formulation does not account for off-balance-sheet liabilities that  may, or may not, be disclosed in footnotes, nor do Graham and Dodd take into account excessive expenses or losses. We capitalize such expenses or losses, and we add them to liabilities. Fourth, Graham and Dodd only seem to recognize partially that certain fixed assets, such as property, plant and equipment, can sometimes create cash. For example, under Section 1231 of the U.S. Internal Revenue Code, the sale at a loss of such assets used in a trade or business, usually gives rise to an ordinary loss for income tax purposes. In that case, a corporation may be able to apply the loss first to reduce current year taxes and any excess loss might be used to get quickie cash refunds from the IRS with regard to taxes paid in the prior two years. 

The identification of net nets does not appear to be difficult. Cheung Kong Holdings, The Wharf Holdings, and Capital Southwest, discussed earlier in this chapter, are clear examples of Graham and Dodd net nets. The toughest problem by far, is to identify managements and control groups of these net nets who are both able and conscious of the interests of outside, passive, minority investors. This problem notwithstanding, the investor using a fundamental finance approach can obtain large margins of safety by restricting his purchases to issues selling at steep discounts from readily ascertainable NAVs from highly creditworthy issuers with good prospects for increasing NAV in the future at rates of 10 percent per annum or larger. 

When all is said and done, however, we owe an enormous debt of gratitude to Graham and Dodd for introducing the concept of net nets.

 

Horizon Kinetics: Q2 2013 Commentary

Link to: Horizon Kinetics: Q2 2013 Commentary

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

Via csinvesting. It looks like an updated version of a paper Mauboussin was also a co-author on that was published several years ago.

Link to: Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

Klarman: Economy ‘House of Cards’, ‘Will Eventually Implode’

Via ValueWalk. The full text of this speech is apparently available somewhere, but I (unfortunately!) have yet to see a copy.

The legendary Seth Klarman spoke at a private meeting with business leaders in June in which he criticized not just the Federal Reserve, but all the ‘silly’ investors and the even sillier rating agencies. Klarman has been an outspoken critic of the Fed’s interventions and the consequent ebullience of the markets.

His latest speech also includes a distinct tone of regret over where the current state of affairs is taking the U.S. He sounds positively saddened by how things are run in his country. In Klarman’s words:

“Like all of you, I am worried about our future, I am concerned about the prospect for upcoming generations to have the same opportunities that ours did, and I’m saddened that our generation was handed something unique, the stewardship of the greatest country in the history of the world– and we are far down the path of making it less great.”

Hoisington Q2 2013 Letter

The secular low in bond yields has yet to be recorded. This assessment for a continuing pattern of lower yields in the quarters ahead is clearly a minority view, as the recent selling of all types of bond products attest. The rise in long term yields over the last several months was accelerated by the recent Federal Reserve announcement that it would be “tapering” its purchases of Treasury and mortgage-backed securities. This has convinced many bond market participants that the low in long rates is in the past. The Treasury bond market’s short term fluctuations are a function of many factors, but its primary and most fundamental determinate is attitudes toward current and future inflation. From that perspective, the outlook for long term Treasury yields to fall is most favorable in light of: a) diminished inflation pressures; b) slowing GDP growth; c) weakening consumer fundamentals; and d) anti-growth monetary and fiscal policies.

The latest from Frank Martin...

Found via Santangel's Review.

Links to:

Cyclical or Secular? That is the Question

The Rational Allocation of Capital in an Irrational World

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Related links:

Martin Capital Management: 2012 Annual Report

Borio and White - Whither Monetary and Financial Stability (2003)

Overt Monetary Financing (OMF) and Crisis Management by William White - Project Syndicate (June 2013)

Raghuram G. Rajan: Has Financial Development Made the World Riskier? (2005)

Andrew G Haldane: The dog and the frisbee (2012)

Ultra Easy Monetary Policy and the Law of Unintended Consequences – By William R. White (2012)

On time, stocks and flows: Understanding the global macroeconomic Challenges – By Claudio Borio (2012)

The financial cycle and macroeconomics: What have we learnt? – By Claudio Borio (2012)

Gold seen in neutron star collision debris

Dead stars make good alchemists.

Images snapped by the Hubble Space Telescope suggest that gold may have been generated by a violent neutron star collision that also yielded lead, platinum, uranium and other heavy elements.

The stellar smashup was detected on June 3, when NASA’s Swift satellite observed a gamma-ray burst 3.9 billion light-years away. Astrophysicists believe that a crash between two neutron stars, the dense, neutron-rich cores left over after massive stars explode, released the 0.2-second flash of energy.

Images snapped by the Hubble Space Telescope nine days later saw evidence for a bounty of heavy elements amounting to about 1 percent of the sun’s mass and including several moon masses of gold, says Edo Berger of the Harvard-Smithsonian Center for Astrophysics in Cambridge, Mass. Given the amount of gold and the fact that these collisions probably happen once every 10,000 or 100,000 years in any given galaxy, such crashes could account for all of the gold in the universe, he says.

Richard Cook and Dowe Bynum at Wide-Moat Investing Summit 2013 (video)

The next Investing Summit, for those interested, is the Equity Income Summit which takes place on August 6-7.

Link: Richard Cook and Dowe Bynum at Wide-Moat Investing Summit 2013

How ESPN and ABC landed Nate Silver

Found via The Big Picture.

If you were away from your screens this weekend, you may have missed Mike Allen's fascinating behind-the-scenes look at how ESPN and ABC News fought to lure data-whiz Nate Silver away from The New York Times. Because this all went down in Playbook, it'll be lost to the archives soon. It shouldn't be: Silver's hire is a huge boon to ESPN/ABC and a major blow to NYT, and Allen's reporting reveals just how hard the two news organizations fought for a prized possession.

Why Buffett Bailed on India

Charlie Munger also briefly mentioned some of the issues with politics in India at the 58:38  mark in THIS video posted yesterday. The Confluence Weekly Geopolitical Report also discussed India this week, HERE.

India has long been viewed as a value investor’s dream: rapid growth, 1.2 billion people pining for a taste of globalization, and underdeveloped industries ripe for turnarounds. So it surprised few when the genre’s guru, Warren Buffett, placed a bet on the world’s ninth-biggest economy.

What did come as a surprise, though, was last week’s decision by the billionaire’s Berkshire Hathaway Inc. to give up on India’s insurance market after just two years. Adding to the drama, the withdrawal came the same week India unveiled plans to open the economy as never before to foreign-direct investment.

Buffett isn’t alone in voting with his feet. Wal-Mart Stores Inc., ArcelorMittal (MT) SA and Posco are pulling back on investments in India that they had announced with great fanfare. What’s scaring foreigners away? A rampant political dysfunction that has stopped India’s progress cold.

Whitman, Diz quote

From the book Modern Security Analysis: Understanding Wall Street Fundamentals:

To repeat, we do not believe in acquiring securities solely on the basis of the earnings record of a company or on the outlook for its reported earnings. Neither do we think that an investment program based on acquiring securities simply because they are available at large discounts from NAV would necessarily be well advised. Availability at a large discount from book does give a first approximation that a security may be a bargain, or even that it may be attractive according to the fundamental finance approach. But this first approximation ought to be tempered by a more thorough analysis. In order for NAV to be a good indicator of the wealth or future earning power of a business, other factors must be considered as well.

James Montier quote

"One of the most useful things I’ve learnt over the years is to remember that if you don’t know what is going to happen, don’t structure your portfolio as though you do!" -James Montier

GMO's 2Q 2013 Letter

In GMO's 2Q 2013 Letter, Ben Inker reviews the shocking fall of markets globally this past spring in ""What the *&%! Just Happened?" and James Montier follows with "The Purgatory of Low Returns," wherein he looks at the current opportunity set for today's investor.

Roundtable: Charles Munger, Jim Sinegal, and Victor Fung: U.S. -- China Bilateral Investment: Managing Challenges, Optimizing Choices

Found via the Corner of Berkshire & Fairfax. It looks like Munger also gave quick (about 1 minute) comment when accepting an award HERE (at the 6:30 mark).


Link

Atul Gawande: How Do Good Ideas Spread?

In our era of electronic communications, we’ve come to expect that important innovations will spread quickly. Plenty do: think of in-vitro fertilization, genomics, and communications technologies themselves. But there’s an equally long list of vital innovations that have failed to catch on. The puzzle is why.

Continuous reorganization, activity...

This excerpt from Peter Bevelin’s book Seeking Wisdom reminded me of the Sears/Eddie Lampert article from last week:

Continuous reorganization may be dangerous. The Roman satirist Petronius Arbiter said in the 1st Century: "We trained hard, but it seemed that every time we were beginning to form into teams we would be reorganized. I was to learn later in life that we tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization." 

Keep in mind 

• The 19th Century American writer Henry David Thoreau said: "It is not enough to be busy; so are the ants. The question is: What are we busy about?" Don't confuse activity with results. There is no reason to do a good job with something you shouldn't do in the first place. 

• Charles Munger says, "We've got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active - discipline in avoiding just doing any damn thing just because you can't stand inactivity." 

• What do you want to accomplish? As Warren Buffett says, "There's no use running if you're on the wrong road."

Hussman Weekly Market Comment: The Road to Easy Street

In nearly every effort worth pursuing, I think the secret to eventual success is the same. Find a set of well-informed daily actions that you’re convinced will produce good results if you follow them consistently. Then follow them consistently. In a world where randomness, frustrations, and events outside of one’s control play an enormous role in day-to-day outcomes, the best measure of day-to-day success is whether or not those daily actions were followed. Over time, the results take care of themselves. But Arnie was right. There’s not a single road to easy street that doesn’t run through the sewer at one point or another.

Official Trailer: COSMOS (with Neil deGrasse Tyson)

Found via RDFRS: The new trailer for the reboot of Carl Sagan's COSMOS was released at Comic Con this weekend. A 13 part series being released in 2014!


Link

Ben Goldacre discusses Bad Pharma (video)

Dr. Ben Goldacre talked about his book, Bad Pharma: How Drug Companies Mislead Doctors and Harm Patients, in which he discusses the influence of the pharmaceutical industry on the global healthcare system and argues that pharmaceutical companies hide negative studies and use questionable testing and intensive lobbying to get what they want, regardless of whether the drugs they produce are good for patients. Mr. Goldacre spoke about his book at Town Hall Seattle.

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Related books:

Bad Pharma

Bad Science

Related previous post: TED Talk - Ben Goldacre: What doctors don't know about the drugs they prescribe

Related videos:

TED Talk - Ben Goldacre: Battling bad science

Ben Goldacre - "Squabbles About Homeopathy"

Silver linings: Banks big and small are embracing cloud computing

“I’VE only got one IT guy,” says Segun Akintemi, the chief executive of Renaissance Credit, a Nigerian moneylender that opened for business in October 2012 and signed up about 3,000 customers in its first six months. “Whenever I walk past his desk he is surfing the web.” That the firm has just one bored computer specialist is not a sign of backwardness. On the contrary, Renaissance Credit is ahead of its time when it comes to technology. Its information processing takes place in the “cloud”, the term for software and services delivered over the internet.

The emergence of cloud-based banking promises to affect banks big and small. Banks are expected to spend almost $180 billion on IT this year, according to Celent, a consultancy. For the moment cloud-based services make up a tiny fraction of this amount, but by some estimates spending by financial-services firms on the cloud will total $26 billion in 2015. This increase should lower barriers to entry for newcomers, which can rent modern IT infrastructure at monthly fees of less than $10,000 rather than having to invest tens of millions of dollars upfront to build their own secure data centres. And it should also enable big banks to become much more cost-efficient.

A Buffett Fortune Fades in Brooklyn

As early investors with Warren Buffett, Donald and Mildred Othmer quietly amassed a fortune that they believed would sustain their favorite charities for generations.

Among those organizations: Long Island College Hospital in Brooklyn, N.Y., for which the Othmers created a $135 million endowment in the 1990s, "to be held in perpetuity," according to their wills.

Less than 20 years later, much of their gift is gone. And the hospital's owners have been cleared by state regulators to close the money-losing nonprofit, which has sparked protests because the 155-year-old facility was one of Brooklyn's largest private employers.

In a series of court-approved transactions, hospital administrators repeatedly tapped the fund to serve as collateral for loans and to cover malpractice and other costs, according to court records. The transfers were permissible to keep the hospital going, the court ruled, saying that is what the Othmers would have wanted.

Doctors, nurses and community activists say the treatment of the Othmer gift illustrates a pattern of financial mismanagement on the hospital's part.

Mr. Buffett has even expressed concern. "This came as a huge surprise to me," said the billionaire investor, who learned of the situation earlier this year in an email from a Brooklyn resident. "I would think if [the Othmers] were alive they would feel betrayed."

John Mauldin: Any Bonds Today?

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless…." – John Maynard Keynes 

One of the more frequent and important questions I get asked when I travel is whether I think we will see inflation or deflation. My usual flippant answer is "Yes," and then I go on to explain that there is no simple answer. Over what time period? In what country? And by what means do you want me to measure inflation or deflation? Today we take a look at part of a white paper I am working on with Jonathan Tepper, the co-author of Endgame, on this topic. I think you will find it interesting reading on a summer's day. And I have to quickly mention the absolute disaster that is happening before our eyes in the labor market. Our kids are getting skewered (the polite word) by unintended consequences of the Affordable Care Act. We need a bipartisan fix quick, before we damage an entire generation. 

Steve Jobs quote (simplicity)

“That’s been one of my mantras—focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” -Steve Jobs, 1998 Business Week interview

Mavericks Lecture 2012: John Malone

This is from last year, but the previous posted reminded me of it, and it doesn't appear I had posted it before.


Link

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Related book: Cable Cowboy: John Malone and the Rise of the Modern Cable Business

John Malone on the Future of Media

Found via ValueWalk.


Link

How the Tesla Model S is Made

Thanks to Andrew for passing this along.


Link

Golf in China Is Younger Than Tiger Woods, but Growing Up Fast

Thanks to Phil for passing this along.

Xie Chengfeng had a fever. Otherwise, the Chinese golfer would have been driving his orange coupe to the practice range on this June morning rather than languishing in bed, cold towel on his forehead, in his four-story mansion. Five years ago, Xie (pronounced “shee-eh”) and his family uprooted themselves and moved to Mission Hills, a sprawling golf resort in the southern Chinese city of Shenzhen for just one purpose: so he could become the next Tiger Woods.

Nearly every day of the year, when he’s not competing in a tournament, Xie works out in the morning, using the punching bag, medicine balls and bull whip (to strengthen his wrists) in the second-floor living room overlooking a quiet lagoon. Then he’s off to the members-only driving range for two hours of training, hitting balls with every club in his bag. After lunch, Xie works on chipping and putting before playing a round on one of Mission Hills’ 22 courses (it bills itself as the world’s largest golf club). Nearly every other activity is designed to benefit Xie’s golf game: piano lessons to strengthen his fingers; math tutorials to help him calculate distances, wind speeds and green breaks; and a daily English class to prepare him for his eventual arrival on the PGA Tour.

Xie is 8 years old.

East Coast Asset Management's Q2 Letter

Via Market Folly. You can also sign up to receive ECAM’s future investor letters via email HERE.

Link to: Second Quarter 2013 Update – Yielding to the Still Point

Bill Gates reviews Jared Diamond's book "The World Until Yesterday"

Diamond starts with the premise that human beings were hunter-gatherers for millions of years, and only settled down when we began farming about 10,000 years ago. So most of our genetic selection has been done in a hunter-gatherer environment. He argues that we can learn a lot by studying hunter-gatherer societies in places like New Guinea, where he has spent much of his career. (He uses the term New Guinea to refer to the island that is divided between Indonesia and Papua New Guinea.)

He describes several areas in particular, like raising children, dealing with the elderly, and eating well. He doesn’t romanticize these societies, as I thought he might, or make some grand pronouncement that they all do these things better than we do. He just wants to find the best practices and share them.

Unfortunately, I didn’t find much deep wisdom in the lessons that Diamond documents. But I found the book fascinating anyway.

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Book: The World Until Yesterday

Related previous posts:

Jared Diamond: Best Practices for Raising Kids? Look to Hunter-Gatherers

"The Worst Mistake In The History Of The Human Race" – 1987 article by Jared Diamond

Broyhill Asset Management's thesis on Cedar Fair

The amusement park industry is a clear-cut and easy to understand business model, an attribute we seek in all of our investments. Cedar Fair owns and operates amusement parks and generates almost all of its revenues from the sale of tickets in addition to food & merchandise. Unlike peers in the leisure industry, FUN’s revenues are incredibly resilient as its regional parks cater to recurring “day-tripping” visitors from the surrounding area rather than long-distance visitors to destination parks. As a result, the business enjoys a natural economic stabilizer during difficult times, as consumers cut back on more expensive vacations in favor of the value offered by amusement parks closer to home. We analyzed attendance records going back to 1990 and found only three instances where the industry’s head count declined, but only a single period in which revenues fell year over year. In each of these instances, the recovery in the following year made up nearly all of the lost ground. This is a very good business.

Is a House Really a Good “Investment”? - by Cullen Roche

The Bottom Line

Don’t worry.  This post isn’t intended to wreck the “american dream”.  None of this analysis means that buying a house is a bad idea.  You have to live somewhere and this analysis does not compare the specifics of renting versus the specifics of buying a house outright, buying a house with a mortgage or using the property as an income source.  The analysis is simply intended to put the total costs and real, real returns in the right perspective for those of us who buy a house with a mortgage and live in that home (as most people do).  In my personal opinion, I view buying a home as a less expensive way to live than the option of renting (but I guess you could make both arguments depending on where you live).  Plus, there are numerous intangibles involved in owning your own home that make it a wise purchase.  But we should stop thinking about housing or talking about it like it’s an amazing “investment”.  Whether you rent or buy you are experiencing an expense.  The real costs of that expense will depend on your specific situation.  But in both real returns and real, real returns (including taxes and fees) the returns are unlikely to be anything to write home about.  And certainly not what I would refer to as a good financial “investment”.

John Paulson's CNBC Interview

Link

John Mauldin's Outside the Box: The Mirror Cracks

This reminds me of something else I was thinking about this morning. I was trying to think about a good analogy to the way the markets currently seem so dependent on Fed action/intervention. The thing that came to mind was Taleb’s turkey problem….for 1,000 days a turkey gets fed by a butcher. Every day that goes by the turkey gets more and more confident that this butcher is nice and is looking out for its well being. Until day 1,001 (a few days before Thanksgiving) when the butcher kills the turkey. The turkey was most confident in the thought that the butcher would always feed it and do good for it at the point just before the butcher delivered the Black Swan to the turkey (Black Swan for the turkey, not a Black Swan for the butcher). The markets seem to be acting similar to the turkey in response to the Fed, its equivalent of the butcher. The lesson: Don’t be a turkey.

Michael Lewitt is one of my favorite credit analysts. If I want to know what is happening in the credit markets, one of my first calls is to Michael. He has been doing deep dives into some rather esoteric markets as well as traditional bonds over the course of his career, and he really understands what is happening under the surface.

In the latest issue of The Credit Strategist, which Michael has given me special permission to pass on to you as today's Outside the Box, he gets our attention right off the bat by comparing the recent big move in the benchmark 10-year Treasury yield to a comparable two-month move in 1994, a year that, as he says, was "generally viewed as Armageddon for bond investors." But in percentage terms, the 1994 move was only 20% over that period while the recent move was 40%.

And what caused that move? Ben Bernanke blinked, that's all. It's high time, says Michael, for investors to prepare their portfolios for the eventual termination of the Fed's monetary fun and games, since:

The comparison between the recent interest rate spike and 1994 underlines just how Fed-dependent markets have become and how incredibly difficult it is going to be for Mr. Bernanke and his colleagues to alter policy without causing serious market dislocations…. 

Mr. Bernanke is creating the conditions for a violent market reversal. As I wrote last month (“Delusions of Stability”), the dependence of markets on the continued beneficence of the Federal Reserve is profoundly unhealthy.

Then Michael takes us straight into the nitty-gritty of how to put in protection. Read and learn – then act while the acting is good.

Jim Chanos on CNBC

Link to videos:

Chanos: China 'great place to be short'

Chanos' Best Idea: Why I'm Short Caterpillar

Jim Chano's best short idea: CAT & HPQ (fuller version of his talk, starting at 9:45)

At Sears, Eddie Lampert's Warring Divisions Model Adds to the Troubles

Every year the presidents of Sears Holdings’ (SHLD) many business units trudge across the company’s sprawling headquarters in Hoffman Estates, Ill., to a conference room in Building B, where they ask Eddie Lampert for money. The leaders have made these solitary treks since 2008, when Lampert, a reclusive hedge fund billionaire, splintered the company into more than 30 units. Each meeting starts quietly: When the executive arrives, Lampert’s top consiglieri are there, waiting around a U-shaped table, according to interviews with a half-dozen former employees who attended these sessions. An assistant walks in, turns on a screen on the opposite wall, and an image of Lampert flickers to life.

The Sears chairman, who lives in a $38 million mansion in South Florida and visits the campus no more than twice a year (he hates flying), is usually staring at his computer when the camera goes live, according to attendees.

The executive in the hot seat will begin clicking through a PowerPoint presentation meant to impress. Often he’ll boast an overly ambitious target—“We can definitely grow 20 percent this year!”—without so much as a glance from Lampert, 50, whose preference is to peck out e-mails or scroll through a spreadsheet during the talks. Not until the executive makes a mistake does the Sears chief look up, unleashing a torrent of questions that can go on for hours.