Nassim Taleb quotes

From Antifragile:

Remember from the logic of the barbell that it is necessary to first remove fragilities.

I have used all my life a wonderfully simple heuristic: charlatans are recognizable in that they will give you positive advice, and only positive advice, exploiting our gullibility and sucker-proneness for recipes that hit you in a flash as just obvious, then evaporate later as you forget them. Just look at the “how to” books with, in their title, “Ten Steps for—” (fill in: enrichment, weight loss, making friends, innovation, getting elected, building muscles, finding a husband, running an orphanage, etc.). Yet in practice it is the negative that’s used by the pros, those selected by evolution: chess grandmasters usually win by not losing; people become rich by not going bust (particularly when others do); religions are mostly about interdicts; the learning of life is about what to avoid. You reduce most of your personal risks of accident thanks to a small number of measures.

Further, being fooled by randomness is that in most circumstances fraught with a high degree of randomness, one cannot really tell if a successful person has skills, or if a person with skills will succeed—but we can pretty much predict the negative, that a person totally devoid of skills will eventually fail.

Now when it comes to knowledge, the same applies. The greatest—and most robust—contribution to knowledge consists in removing what we think is wrong—subtractive epistemology.

In life, antifragility is reached by not being a sucker.

Summary of Albert Edwards' latest...

Via ValueWalk. And just in case readers haven't read them yet, SocGen put out collections of Albert Edwards' and James Montier's letters from 2008 a few years ago, and then also put out a collection of Dylan Grice's letters from 2009-2012. I think they are some of the best combinations of getting both a top-down and bottom-up picture of the 2007-2012 crisis period as it unfolded, and as it continues to unfold.

The emerging markets ‘story’ has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P 500, sub-1% US 10y yields and gold above $10,000.

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My outlook remains the same. I see the current EM FX turbulence leading to a renewed global recession, with waves of deflation flowing to the west from Asia as China is ultimately forced to devalue in the face of an unrelenting loss of competitiveness, most especially against its EM rivals. The structural US equity valuation bear market will then embrace the third major leg in its long and volatile Ice Age journey. With fiscal firepower essentially spent, QE will be ramped up exponentially as the Fed doves coo in universal reassurance that they can still save the world. In fact, as Marc Faber says, they will destroy it. Ultimately I expect a new phase of aggressive QE will lead to inflation that is unlikely to be containable. Policymakers have no idea how much QE is too much, other than by looking in the rear-view mirror. But, until this unfolds, I remain resigned to being Rabbi Riskin’s proverbial crackpot.

The Brazilian Billionaire Who Controls Your Beer, Your Condiments, and Your Whopper

Found via the Corner of Berkshire & Fairfax.

After they sold H.J. Heinz to Warren Buffett and a bunch of Brazilians in June, the ketchup manufacturer’s outgoing board of directors met for dinner at Pittsburgh’s Duquesne Club to congratulate themselves on a job well done. Twenty-three billion dollars had just changed hands. The takeover price, at $72.50 a share, was almost 20 percent higher than the company’s recent all-time high. “We said we’re all going to miss each other, but we felt we had done right by the shareholders,” says Dean O’Hare, who’d sat on the board since 2000. Heinz is an institution in Pittsburgh—the Steelers play at Heinz Field, locals of means like to get married at Heinz Memorial Chapel—and Buffett’s presence allayed fears that the 144-year-old company would be dismantled. “Seeing the name on the letter was very important to us,” O’Hare says.

The only really un-Buffettlike aspect of the deal, other than the high price, was the Brazilians. Not because of their nationality, but because they were the principals at 3G Capital, an investment firm best known for the leveraged buyout of Burger King in 2010. Had the Oracle of Omaha changed his mind on private equity, which he once compared to a porn shop? At Berkshire Hathaway’s (BRK/A) annual shareholders’ meeting in May, Buffett explained why he seemed to be breaking his own rules: his confidence in 3G’s 74-year-old chief investor and strategist, Jorge Paulo Lemann. He called Lemann “classy.” As a sign of Buffett’s esteem, 3G and Berkshire have equal stakes in Heinz despite Berkshire putting up three times as much cash. Heinz, Buffett said, would be Lemann’s show.

In the U.S., Lemann is virtually unknown, even though he and his two longtime partners, Marcel Herrmann Telles and Carlos Alberto Sicupira, now control three icons of U.S. consumer culture: Heinz ketchup, Burger King, and, after the $52 billion takeover of Anheuser-Busch in 2008, Budweiser beer. The combined market value of the companies they run is $187 billion—larger than that of Citigroup (C).

Daniel Kahneman interview

Found via @RichardBeddard.

The psychologist Daniel Kahneman, who won the 2002 Nobel Prize for Economics, is interviewed by Kirsty Young for Desert Island Discs.

Widely acknowledged as one of the world's most influential living psychologists, his many years of study have centred on how and why we make the decisions we do.

As a child, he lived in Nazi occupied France and he says that, from a young age, he already had a pretty good idea that he wanted to be an academic.

He says "My mother had a big influence ... in fact I credit her with the fact that I became a psychologist ... because she got me interested in people and listening to gossip. I've been fascinated by gossip ever since."

Jared Diamond interview

If the embedded video doesn't play, try clicking on THIS link.


Jared Diamond from Nautilus on Vimeo.

Ruane, Cunniff & Goldfarb Investor Day Transcript (2013)

Found via The Corner of Berkshire & Fairfax.

Link to: Ruane, Cunniff & Goldfarb Investor Day Transcript (2013)

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Related previous posts:

Ruane, Cunniff & Goldfarb Investor Day Transcript (2012)

Ruane, Cunniff & Goldfarb Investor Day Transcript (2011)

Ruane, Cunniff & Goldfarb Investor Day Transcript (2010)

Rob Arnott on CNBC

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Related previous post: Mind the (Expectations) Gap: Demographic Trends and GDP – By Rob Arnott and Denis Chaves

Bill Gates: Innovation & Opportunity—The Contribution of Computing to Improving Our World (video)

Microsoft Chairman Bill Gates shares his thoughts and perspective on computing’s impact on society and fields questions from the audience at the 2013 Microsoft Research Faculty Summit. Rick Rashid, chief research officer of Microsoft, moderates the discussion.

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Related article by Bill Gates: We Need Our Brightest People Working on Our Biggest Problems

Nassim Taleb quote

"Someone with a linear payoff needs to be right more than 50 percent of the time. Someone with a convex payoff, much less. The hidden benefit of antifragility is that you can guess worse than random and still end up outperforming. Here lies the power of optionality—your function of something is very convex, so you can be wrong and still do fine—the more uncertainty, the better. This explains my statement that you can be dumb and antifragile and still do very well."

-Nassim Taleb, Antifragile

Robert Shiller on CNBC: Risk of weakening housing market

Found via ValueWalk.


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Revisiting “Moneyball” with Paul DePodesta

Have you ever been surprised by a player who outperformed his statistical profile?

Oh, yeah. A main part of our reasoning is to put ourselves in a position to get lucky. With the amount of competition there is in the industry, it’s hard to put together 25 players that are just way better than everybody else. We drafted some college players at Oakland who we knew would probably be Major League players, but there was a limit to how much impact they might have. We had made the mistake of taking what they were then, and projecting it indefinitely into the future. But they got better. Guys like Eric Byrnes and Barry Zito. We had expectations for them; don’t get me wrong. They were talented players, but they made themselves even better.

What do you mean by putting yourself in a position to get lucky?

Failure is a huge part of our industry. The best players fail every day. It’s no different than a championship poker player or a card-counter at the blackjack table. They lose all the time, too, but they put themselves in a position to get lucky by using pot odds or having an idea what’s remaining in the shoe. Over time, they win, even though there are a lot of losses along the way. We try to do the same. We know we’re still going to be wrong often, but we’re at least trying to give ourselves positive odds.

Bill Gates on His Foundation's Health and Education Campaigns

What have you learned so far about MOOCs, or massive open online courses? Are they a superior alternative to traditional classrooms, or is this the best available solution for students who can’t attend a traditional university?

If you look at who’s used MOOCs so far, it’s an elite phenomenon. The completion rates are very low, and the effect on employability is very low. Yes, it’s promising and exciting. But this notion that “just don’t go to school, just connect to a MOOC,” that’s like telling somebody to read the textbook. You’d have to couple that with student support, study groups, lab activity, and the credential. And until you complete that equation, MOOCs have not changed higher ed.

Why I spent 10th grade online - By Sophia Pink

The debate about online education is polarized — it’s either a grand solution for schools’ troubles, or it’s a menace. For example, the Economist recently reported that, because of MOOCs, “the ivory towers of academia have been shaken to their foundations.” Thrun predicts that in 50 years, only 10 institutions of higher learning will remain. Two Stanford scholars conclude that online learning represents nothing less than “a historic transformation in how students learn, teachers teach, and schools and school systems are organized.”

At the same time, one prominent English professor at the University of Virginia, where the debate over online education nearly brought down the university president who resisted it, has argued that “Internet learning promises to make intellectual life more sterile and abstract than it already is.” Professors at San Jose State University have protested that offering online classes would “replace professors, dismantle departments, and provide a diminished education for students in public universities.”

Based on my year away from traditional school, I think we’re looking at a new method too narrowly. Classroom education is not a relic. And online learning isn’t a pale imitation of “real” education, a dumbed-down version that endangers quality and excellence. The reality lies where it usually does — somewhere in between.

Classroom education won’t and shouldn’t be fully replaced by Web courses, but it could draw on what works online. For instance, in many high school courses, students could watch short video lectures at home to understand key concepts and then use class time more for discussions and group projects. Huge online courses have many virtues, but they need to do better at fostering the side-by-side collaboration that my generation will need on the job. In the end, each approach could strengthen the other.

That’s been true for me. I learned a lot studying online, but on Monday I’ll return to my school for 11th grade. Yet I’ll be returning as a different kind of student, one who sees the good points of the classroom more clearly but who also knows that virtual classrooms can be just as important as blackboards and desks.

Tim Harford: The man who gives geeks a good name

Tim Harford can't help himself. We are navigating our way to lunch in an unfamiliar city and I am momentarily disorientated by the mass of visual paraphernalia at a busy crossing. My hesitation is his cue for a story about the Dutch traffic engineer who found that getting rid of excess street furniture forced car drivers to take more responsibility, dramatically slashing the number of accidents.

Welcome to the world as seen by Harford, a man who made his name explaining the economic rationale behind everything that we do. His tale about the late Hans Monderman is illustrative. Later, over a tableful of dim sum, he adds: "The world is a constant source of ideas for someone who thinks like an economist."

His bestselling "Undercover Economist" books have made him a founding member of the new tribe popularising the dismal science; not before time given the circumstances, you might add. His latest volume, The Undercover Economist Strikes Back, subtitled How to Run – or Ruin – an Economy, is out this week. It tackles the recent "titanic" mess and is his first foray into macroeconomics, also known as the "bigger picture".

"It's my job to figure out an interesting way to talk about these things, and a different angle that's fun and memorable and tells people something about how the economy works.... I've always been much more of a micro guy – individual behaviour and the psychological elements of game theory were always my thing, so when I started, it felt like a sense of duty. But halfway through, the subject had won me over."

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Related book: The Undercover Economist Strikes Back: How to Run-or Ruin-an Economy

Stocks as overvalued now as at 2007 high - By Mark Hulbert

Here’s yet another reason to be worried about the stock market: A valuation model with an impressive record says that stocks are as overvalued today as they were at the 2007 stock market peak.

The model comes from Dan Seiver, a member of the economics faculty at Cal Poly State University. Seiver also is editor of an investment advisory service named The PAD System Report. Though Seiver created the model nearly 30 years ago, he recently co-authored an academic study of the model’s effectiveness that appears in the current issue of the Journal of Wealth Management.

Seiver’s model is based on a single number that is published each week in the famed Value Line Investment Survey, published by Value Line, Inc. The number represents the median of the projections made by Value Line’s analysts of where the 1,700 widely followed stocks they closely monitor will be trading in three to five years’ time. Followers refer to this number as the VLMAP, which stands for Value Line’s Median Appreciation Potential.

The model Seiver devised using VLMAP considers the risk-reward ratio for stocks to be attractive enough to warrant investing new money in the market only when it rises to at least 100. When it drops to 55, in contrast, it’s time to begin building up cash.

The VLMAP recently dropped to just 35%. The last time it was this low was in July 2007. At the top bull market in October of that year, it stood at 40%.

As Seiver recently pointed out to his clients, the VLMAP’s current level “puts it in the worst 5% of all readings since 1966. In the past, a level as low as this has preceded months or years of poor stock returns. We doubt this time will be different.”

To be sure, Seiver’s model is not a short-term market-timing tool. As he pointed out the last time I wrote a column about it, “the stock market can continue to rise for months, if not years, after a sell reading.” Indeed, as documented in his Journal of Wealth Management study, it’s over a four-year horizon that the model has impressive forecasting powers.

Great Moments in Hot Stock Tips - By Jason Zweig

Exactly 293 years ago today, the great English poet Alexander Pope was beside himself with excitement.

On Aug. 22, 1720, he wrote to his friend, Lady Mary Wortley Montagu:

“I was made acquainted late last night, that I might depend upon it as a certain gain, to Buy the South Sea-Stock at the present price, which will certainly rise in some weeks, or less. I can be as sure of this, as the nature of any such thing will allow, from the first & best hands.”

The original letter is in the collection of the Morgan Library in New York. J.P. Morgan himself purchased it around 1903 – and it’s easy to imagine the burly banker, then the most powerful financier in the world, bursting out in laughter when he first read it.

Pope, author of “An Essay on Man,” translator of Homer and one of the sharpest wits ever to put a pen to paper, had – like thousands of other Englishmen of the time – lost his financial mind in one of the first bubbles to sweep the markets. Pope had good company, including Sir Isaac Newton, the eminent portrait painter Sir Godfrey Kneller, numerous members of Parliament and the Prince of Wales’s valet.

Howard Marks interviewed by Hugo Scott-Gall

Via Zero Hedge:

Hugo Scott-Gall: How can we understand investor psychology and use it to make investment decisions?

Howard Marks: It's the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.

Another mistake that people often make is that they compare themselves with others who are making more money than they are and conclude that they should emulate the others’ actions ... after they’ve worked. This is the source of the herd behaviour that so often gets them into trouble. We're all human and so we’re subject to these influences, but we mustn’t succumb. This is why the best investors are quite cold-blooded in their professional activities.

We can infer psychology from investor behaviour, and that allows us to get an understanding of how risky the market is, even though the direction in which it will head can never be known for certain. By understanding what’s going on, we can infer the “temperature” of the market. In my book, I give a list of characteristics that can give you an idea whether the market is hot or cold, and by using them we can control our buying patterns. They include capital availability, the eagerness of lenders and investors, the ease of entry for new funds, and the width of credit spreads, among others.

We need to remember to buy more when attitudes toward the market are cool and less when they’re heated. For example, the ability to do inherently unsafe deals in quantity suggests a dearth of scepticism on the part of investors. Likewise, when every new fund is oversubscribed, you know there's eagerness. Too little scepticism and too much eagerness in an up-market – just like too much resistance and pessimism in a down-market – can be very bad for investment results.

Warren Buffett once said, "The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs." I agree thoroughly, and in order to understand how much prudence others are applying, we need to observe investor behaviour and the kinds of deals that are getting done. In 2006 and 2007, just before the onset of the financial crisis, many deals got done that left me scratching my head. That indicated low levels of risk aversion and prudence. We can't measure prudence through a quantitative process, and so we have to infer it by observing the behaviour of market participants.

The fundamental building block of investment theory is the assumption that investors are risk averse. But, in reality, they are sometimes very risk averse and miss a lot of buying opportunities, and sometimes very risk tolerant and buy when they shouldn’t. Risk aversion isn’t constant or dependable. That's what Buffett means when he says that when other people apply less, you should apply more.

Hugo Scott-Gall: Why do behaviour patterns and mistakes recur despite the plethora of information available now? Are we doomed to repeat our mistakes?

Howard Marks: Information and knowledge are two different things. We can have a lot of information without much knowledge, and we can have a lot of knowledge without much wisdom. In fact, sometimes too much data keeps us from seeing the big picture; we can “miss the forest for the trees.”

It's extremely important to know history, but the trouble is that the big events in financial history occur only once every few generations. The latest global financial crisis began in 2008 and the one before that in 1929. That’s a gap of 79 years. So, while memory has the potential to restrain action and induce prudence by reminding us of tough periods, over time as memory fades the lessons fade as well.

In the investment environment, memory and the resultant prudence regularly do battle with greed, and greed tends to win out. Prudence is particularly dismissed when risky investments have paid off for a span of years. John Kenneth Galbraith wrote that the outstanding characteristics of financial markets are shortness of memory and ignorance of history. In hot times, the few who do remember the past are dismissed as relics of the old, lacking the ability to imagine the new. But it invariably turns out that there's nothing new in terms of investor behaviour. Mark Twain said that “history does not repeat itself but it does rhyme,” and what rhyme are the important themes.

The bottom line is that even though knowing financial history is important, requiring people to study it won’t make a big difference, because they'll ignore its lessons. There's a very strong tendency for people to believe in things which, if true, would make them rich. Demosthenes said, "For that a man wishes, he generally believes to be true" Just like in the movies, where they show a person in a dilemma to have an angel on one side and a devil on the other, in the case of investing, investors have prudence and memory on one shoulder and greed on the other. Most of the time greed wins. As long as human nature is part of the investment environment, which it always will be, we’ll experience bubbles and crashes.

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Hugo Scott-Gall: What things in your skill set have served you well?

Howard Marks: While knowing financial analysis and accounting is essential, almost any smart person can acquire those skills and get a rough idea of the merits of a company. Superior investors are those who understand both fundamentals and markets and have a better sense for what a given set of merits is worth today and what it will be worth in the future. I don't think I became less able to do financial analysis over time, but I engaged much more in understanding and sensing markets and values: the “big picture”. A lot of my contribution comes from understanding history and investor behaviour, from inferring what's going on around me, and from controlling my emotions.

Hussman Weekly Market Comment: The Outlook Will Shift as Conditions Shift

Our investment outlook will shift as market conditions shift, and we will lean toward a more constructive stance when conditions support it. There are straightforward ways to do that while still remaining careful about larger cyclical risks. Present conditions simply don’t provide historical evidence that investors can expect to be rewarded by accepting market risk here.

Market conditions will change, not least because the belief in some “monetary put option” itself is superstition (see Following the Fed to 50% Flops), and not least because the Fed has announced – in what should be no uncertain terms – that it intends to taper this policy going forward. Moreover, despite the view that economic factors are the Fed's sole consideration and that small disappointments will cause the Fed to “flinch,” the members of the Federal Reserve Open Market Committee have become increasingly aware of the diminishing effectiveness and growing distortions resulting from QE. This is evident in recent speeches even by “dovish” members. The FOMC has also noted that “an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.”

Last week’s Federal Reserve monetary policy symposium at Jackson Hole certainly provided no support for the “flinch” expectation. Rather, the academic presentations emphasized the general futility of quantitative easing, while the presentations by policy-makers such as other central-bank heads focused largely on the mechanics of an exit:

“The United States and most other advanced countries are closing on five years of all-out expansionary monetary policy that has failed in all cases to restore normal conditions of employment and output. These countries have been in liquidity traps where monetary policies that normally expand the economy by enlarging the monetary base are ineffectual. Reserves have become near-perfect substitutes for government debt, so open-market policies of funding purchases of debt with reserves have essentially no effect.”

- Robert Hall, Stanford Economist & Chair of NBER Business Cycle Dating Committee, Federal Reserve Economic Policy Symposium (Jackson Hole)

“The portfolio balance channel of QE works largely through narrow channels that affect the prices of purchased assets, with spillovers depending on particulars of the assets and economic conditions. It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds. The Fed’s purchases of long-term US Treasury bonds significantly raised Treasury bond prices, but has had limited spillover effects for private sector bond yields, and thus limited economic benefits. Moreover, since the safety premium on Treasury bonds stem from the economic benefits they provide to investors, by reducing the supply of Treasury bonds, the economy is deprived of extremely safe and liquid assets and welfare is reduced.”

- Arvind Krishnamurthy & Annette Vissing-Jorgenson, Northwestern University, Federal Reserve Economic Policy Symposium (Jackson Hole)

Note that even the benefit of "significantly raised Treasury bond prices" no longer exists, as 10-year Treasury yields and 30-year fixed mortgage yields are now higher than both their starting and average levels since QE2 was initiated in 2010. The interest cost of buying a home with a 30-year fixed mortgage has increased by 40% since last year. Moreover, while nobody evidently cares that the Fed is almost certainly insolvent on a mark-to-market basis here, to the extent that the Fed experiences net losses on its holdings, the overall impact on public finance is equivalent to the Treasury issuing debt at a higher interest cost than necessary.

John Mauldin: France: On the Edge of the Periphery

Recently there have been a spate of horrific train wrecks in the news. Almost inevitably we find out there was human error involved. Almost four years ago I began writing about the coming train wreck that was Europe and specifically Greece. It was clear from the numbers that Greece would have to default, and I thought at the time that Portugal would not be too far behind. Spain and Italy clearly needed massive restructuring. Part of the problem I highlighted was the significant imbalance between exports and imports in all of the above countries.

In the Eurozone there was no mechanism by which exchange rates could be used to balance the labor-cost differentials between the peripheral countries and those of the northern tier. And then there's France. I've been writing in this space for some time that France has the potential to become the next Greece. I've spent a good deal of time this past month reviewing the European situation, and I'm more convinced than ever that France is on its way to becoming the most significant economic train wreck in Europe within the next few years.

We shifted focus at the beginning of the year to Japan because of the real crisis that is brewing there. Over the next few months I will begin to refocus on Europe as that train threatens to go off the track again. And true to form, this wreck will be entirely due to human error, coupled with a large dollop of hubris. This week we will take a brief look at the problems developing in Europe and then do a series of in-depth dives between now and the beginning of winter. The coming European crisis will not show up next week but will start playing in a movie theater near you sometime next year. Today's letter will close with a little speculation on how the developing conflict between France and Germany and the rest of its euro neighbors will play out.

Tim Harford: A lesson from the other ‘sage’ of investing

In his famous letter to Berkshire Hathaway shareholders in 1988, Warren Buffett declared: “When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.” Compare this statement, apparently from a kindred spirit: “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.”

Earlier, in 1984, Buffett had explained his view on diversification by approvingly quoting the theatre impresario Billy Rose: “If you have a harem of 40 women, you never get to know any of them very well.” Here’s that kindred spirit again:

“It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”

In each case the second statement is from a man who is as quotable as the Sage of Omaha himself: John Maynard Keynes, writing to a colleague in 1934.

Warren Buffett on Financial Audits, Corporate Boards, and U.S. Business Regulation (2007)

Found via the Corner of Berkshire & Fairfax. It looks like there's two different panels and I haven't watched them yet, but along with Buffett, you have Hank Paulson, Jamie Dimon, John Thain, Jeff Immelt, Alan Greenspan, Paul Volcker, and Robert Rubin, among others....i.e. a bunch of people who would figure prominently in the financial crisis the following year.

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Nassim Taleb quotes

From Antifragile:

Squeezes are exacerbated by size. When one is large, one becomes vulnerable to some errors, particularly horrendous squeezes. The squeezes become nonlinearly costlier as size increases. 

In spite of what is studied in business schools concerning “economies of scale,” size hurts you at times of stress; it is not a good idea to be large during difficult times. Some economists have been wondering why mergers of corporations do not appear to play out. The combined unit is now much larger, hence more powerful, and according to the theories of economies of scale, it should be more “efficient.” But the numbers show, at best, no gain from such increase in size—that was already true in 1978, when Richard Roll voiced the “hubris hypothesis,” finding it irrational for companies to engage in mergers given their poor historical record. Recent data, more than three decades later, still confirm both the poor record of mergers and the same hubris as managers seem to ignore the bad economic aspect of the transaction. There appears to be something about size that is harmful to corporations. 

As with the idea of having elephants as pets, squeezes are much, much more expensive (relative to size) for large corporations. The gains from size are visible but the risks are hidden, and some concealed risks seem to bring frailties into the companies. 

Large animals, such as elephants, boa constrictors, mammoths, and other animals of size tend to become rapidly extinct. Aside from the squeeze when resources are tight, there are mechanical considerations. Large animals are more fragile to shocks than small ones—again, stone and pebbles. Jared Diamond, always ahead of others, figured out such vulnerability in a paper called “Why Cats Have Nine Lives.” If you throw a cat or a mouse from an elevation of several times their height, they will typically manage to survive. Elephants, by comparison, break limbs very easily.

Daily Journal Tells SEC Munger Knows Best Buying Stocks

Charles Munger’s Daily Journal Corp. (DJCO) told regulators that selling Treasuries and jumping into stocks was the safe move for the publisher in the financial crisis.

“The board recognized that this decision would be contrary to the conventional (but questionable) notion that the least risky way to preserve corporate capital for the long-term benefit of stockholders is to invest it in government bonds at interest rates approximating zero,” an attorney for Los Angeles-based Daily Journal wrote in a March 18 letter made public today.

The U.S. Securities and Exchange Commission in February questioned why the publisher shouldn’t be considered an investment company given the “high percentage” of total assets that were in marketable securities. Such a designation could subject the publisher of California Lawyer magazine and 10 newspapers to some of the regulations imposed on mutual funds.

Munger, 89, best known as Warren Buffett’s longtime business partner, helped triple Daily Journal’s value since 2008 by reallocating the company’s investments. The publisher initially benefited from the housing slump and deepest U.S. recession since the 1930s because it earned revenue from publishing foreclosure notices, the company said in its letter.

Still, the board recognized that Daily Journal needed a long-term plan to protect the company from deterioration in its newspaper publishing business, provide an asset base for future takeovers and build a net worth that would allow its software unit to bid on government contracts, according to the letter.

The publisher said it shouldn’t qualify as an in investment company, in part because none of its officers spend time overseeing the portfolio.

‘Little Time’

“Two of the company’s directors, Charles Munger and J.P. Guerin, selected the securities which, given their experience and knowledge of investing, required very little time,” Daily Journal said in the letter. “Also, there have been only purchases and no sales, so no time has been spent trading or ‘managing’ these marketable securities.” Guerin is the company’s vice chairman.

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Related article: Munger Triples Publisher’s Value With Panic-Era Stock Bet

Science Reveals Why Calorie Counts Are All Wrong

Almost every packaged food today features calorie counts in its label. Most of these counts are inaccurate because they are based on a system of averages that ignores the complexity of digestion.

Recent research reveals that how many calories we extract from food depends on which species we eat, how we prepare our food, which bacteria are in our gut and how much energy we use to digest different foods.

Current calorie counts do not consider any of these factors. Digestion is so intricate that even if we try to improve calorie counts, we will likely never make them perfectly accurate.

Grant's Interest Rate Observer: SummerBreak Issue

To the readers (and potential readers) of Grant’s:

This anthology of Grant’s pieces, both ancient and modern, is not only for you, but also for your friends—and co-workers, clients, classmates, shipmates, brothers-in-law and maids-of-honor, too. Please pass it along, with our compliments, to any and all prospective members of the greater Grant’s family.

Naked Statistics - Stripping the Dread from the Data

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Related book: Naked Statistics: Stripping the Dread from the Data - By Charles Wheelan

Malcolm Gladwell: COMPLEXITY AND THE TEN-THOUSAND-HOUR RULE

Forty years ago, in a paper in American Scientist, Herbert Simon and William Chase drew one of the most famous conclusions in the study of expertise:

There are no instant experts in chess—certainly no instant masters or grandmasters. There appears not to be on record any case (including Bobby Fischer) where a person reached grandmaster level with less than about a decade's intense preoccupation with the game. We would estimate, very roughly, that a master has spent perhaps 10,000 to 50,000 hours staring at chess positions…

In the years that followed, an entire field within psychology grew up devoted to elaborating on Simon and Chase’s observation—and researchers, time and again, reached the same conclusion: it takes a lot of practice to be good at complex tasks. After Simon and Chase’s paper, for example, the psychologist John Hayes looked at seventy-six famous classical composers and found that, in almost every case, those composers did not create their greatest work until they had been composing for at least ten years. (The sole exceptions: Shostakovich and Paganini, who took nine years, and Erik Satie, who took eight.)

This is the scholarly tradition I was referring to in my book “Outliers,” when I wrote about the “ten-thousand-hour rule.” No one succeeds at a high level without innate talent, I wrote: “achievement is talent plus preparation.” But the ten-thousand-hour research reminds us that "the closer psychologists look at the careers of the gifted, the smaller the role innate talent seems to play and the bigger the role preparation seems to play." In cognitively demanding fields, there are no naturals. Nobody walks into an operating room, straight out of a surgical rotation, and does world-class neurosurgery. And second—and more crucially for the theme of Outliers—the amount of practice necessary for exceptional performance is so extensive that people who end up on top need help. They invariably have access to lucky breaks or privileges or conditions that make all those years of practice possible. As examples, I focussed on the countless hours the Beatles spent playing strip clubs in Hamburg and the privileged, early access Bill Gates and Bill Joy got to computers in the nineteen-seventies. “He has talent by the truckload,” I wrote of Joy. “But that’s not the only consideration. It never is.”

Recently, there has been some confusion about this argument. Some of the critiques are just bewildering. Here, for example, is a passage from an article in Time a few months ago, which makes me think that there is another Malcolm Gladwell out there, with far more eccentric views than mine, who put on a Halloween wig and somehow conned his way into the Time Life Building:

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I think that it is also a mistake to assume that the ten-thousand-hour idea applies to every domain. For instance, Epstein uses as his main counterexample the high jumper Donald Thomas, who reached world-class level after no more than a few months of the most rudimentary practice. He then quotes academic papers making similar observations about other sports—like one that showed that people could make the Australian winter Olympic team in skeleton after no more than a few hundred practice runs. Skeleton, in case you are curious, is a sport in which a person pushes a sled as fast as she can along a track, jumps on, and then steers the sled down a hill. Some of the other domains that Epstein says do not fit the ten-thousand-hour model are darts, wrestling, and sprinting. “We’ve tested over ten thousand boys,” Epstein quotes one South African researcher as saying, “and I’ve never seen a boy who was slow become fast.”

As it happens, I have been a runner and a serious track-and-field fan my entire life, and I have never seen a boy who was slow become fast either. For that matter, I’ve never met someone who thinks a boy who was slow can become fast. Epstein has written a wonderful book. But I wonder if, in his zeal to stake out a provocative claim on this one matter, he has built himself a straw man. The point of Simon and Chase’s paper years ago was that cognitively complex activities take many years to master because they require that a very long list of situations and possibilities and scenarios be experienced and processed. There’s a reason the Beatles didn’t give us “The White Album” when they were teen-agers. And if the surgeon who wants to fuse your spinal cord did some newfangled online accelerated residency, you should probably tell him no. It does not invalidate the ten-thousand-hour principle, however, to point out that in instances where there are not a long list of situations and scenarios and possibilities to master—like jumping really high, running as fast as you can in a straight line, or directing a sharp object at a large, round piece of cork—expertise can be attained a whole lot more quickly. What Simon and Chase wrote forty years ago remains true today. In cognitively demanding fields, there are no naturals.

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Related books:

Outliers: The Story of Success

The Sports Gene

Related previous posts:

What it takes to be great

Malcolm Gladwell at the 92nd Street Y

Whitman, Diz on risk

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

Risk is a word that should not be used without an adjective in front of it. Just because a common stock might have a lot of market risk (i.e., a plunge in OPMI [Outside Passive Minority Investor] market price) and a company might have a lot of investment risk (i.e., the business is unlikely to survive as a going concern) does not mean that adequately secured lenders to the corporation are taking any credit risk at all. Creditors can be confident that the loan will remain a performing loan or that in a reorganization, they will receive a value of principal amount plus interest and interest on interest. General risk really does not exist.

Bill Ackman's Q2 2013 Letter

Found via ValueWalk.

Link to: Bill Ackman's Q2 2013 Letter

The Antifragile Organization: Embracing Failure to Improve Resilience and Maximize Availability

Found via @nntaleb.

Failure is inevitable. Disks fail. Software bugs lie dormant waiting for just the right conditions to bite. People make mistakes. Data centers are built on farms of unreliable commodity hardware. If you’re running in a cloud environment, then many of these factors are outside of your control. To compound the problem, failure is not predictable and doesn’t occur with uniform probability and frequency. The lack of a uniform frequency increases uncertainty and risk in the system. In the face of such inevitable and unpredictable failure, how can you build a reliable service that provides the high level of availability your users can depend on?

Nassim Taleb quotes

From Antifragile:

Those recommending the nutritional policies fail to understand that “steadily” getting your calories and nutrients throughout the day, with “balanced” composition and metronomic regularity, does not necessarily have the same effect as consuming them unevenly or randomly, say by having a lot of proteins one day, fasting completely another, feasting the third, etc. 

This is a denial of hormesis, the slight stressor of episodic deprivation. For a long time, nobody even bothered to try to figure out whether variability in distribution—the second-order effect—mattered as much as long-term composition. Now research is starting to catch up to such a very, very simple point. It turns out that the effect of variability in food sources and the nonlinearity in the physiological response is central to biological systems. Consuming no protein at all on Monday and catching up on Wednesday seemingly causes a different—better—physiological response, possibly because the deprivation, as a stressor, activates some pathways that facilitate the subsequent absorption of the nutrients (or something similar). And, until a few recent (and disconnected) empirical studies, this convexity effect has been totally missed by science—though not by religions, ancestral heuristics, and traditions. And if scientists get some convexity effects (as we said about domain dependence, doctors, just like weight lifters, understand here and there nonlinearities in dose response), the notion of convexity effects itself appears to be completely missing from their language and methods. 

Health benefits are convex to speed (up to a point, of course).

The Canadian Model: Invented in South Dakota?

Found via Abnormal Returns. It looks like the South Dakota Annual Report is also available HERE.

What public pension system in the US of A is the best? Seriously, take a second and jot down the retirement system or investment council you think generates the highest investment returns. Got it?

Anybody pick the South Dakota Retirement System or its Investment Council? I didn't think so. But the SDIC just clocked 19.5 percent for the fiscal year ending June 30, which is truly remarkable.

Here's how the Chairman of the SDIC explained the performance in a recent legislative session: "The staff for the last four years have hit home runs every year. This year, they hit a grand slam walk-off home run."

No kidding. The Chairman went on to say that he expects this performance will place the SDIC as the single best performing pension fund in the nation. And I bet he’s right. You know why? Because the SDIC is almost always among the best funds in the nation.

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So, you may be wondering, how does the SDIC do it? Let’s just say that the “Canadian Model” may have been invented in South Dakota. Indeed, the SDIC manages most of its assets internally:

“The Investment Council manages most assets internally to save money and to try to earn higher returns. Internal management is cheaper than external managers, especially for expensive areas such as global equity, high yield, and arbitrage. Index funds are another low cost alternative, but would preclude any opportunity to add value above index returns. The Council believes the superior performance that has historically come from its internal management relates to a greater focus on long-term value and increased conviction from performing in-house research.”

Gene Breakthroughs Spark a Revolution in Cancer Treatment

Kellie Carey's doctor finally stopped dodging questions about how long she had to live six weeks after he diagnosed her lung cancer.

"Maybe three months," he told her in his office one sunny May morning in 2010, she recalls.

Yet she is still alive, a testament to the most extraordinary decade of progress ever in the long scientific struggle against lung cancer.

Tests found Ms. Carey's lung cancer to be of a rare type that researchers had found just three years earlier by deciphering its genetic code. The 45-year-old businesswoman in 2010 went on a drug Pfizer Inc. was testing for that type. By pinpointing her cancer, the drug probably helped give her years more to live than chemotherapy would have, her doctors say.

That is remarkable because lung cancer for decades defied efforts to find drugs that could extend an average patient's life by even a few weeks.

But an explosion in knowledge about the genetic mutations that cause tumors is just now offering the first real promise of drugs that can control what is the most-common and most-deadly cancer.

Warren Buffett thanks BofA CEO Moynihan for $5.3 billion profit

Link

The Most Successful People Practice Better, Not More

Thanks to Barry for passing this along.

How long does it take to become elite at your craft? And what do the people who master their goals do differently than the rest of us?

That’s what John Hayes, a cognitive psychology professor at Carnegie Mellon University, wanted to know.

For decades, Hayes has been investigating the role of effort, practice, and knowledge in top performers. He has studied the most talented creators in history — people like Mozart and Picasso — to determine how long it took them to become world class at their craft. Furthermore, he has investigated the choices and experiences that have led to their success.

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Related previous post: What it takes to be great

Get 1GB Free Space By Linking Mailbox App With Dropbox

Via ValueWalk. I just did this and it only took a couple of minutes. Well worth the effort for an extra 1GB of free storage.

As we know, Dropbox has acquired Mailbox, an email client for iPhone and iPad that works only with Gmail or Google Apps account. You can add up to five Gmail or Google Apps to get a unified, simple and less cluttered experience. While we’ve previously never seen any evidence of the two companies working together, this time, we’re in for a treat.

Mailbox now supports attachments from Dropbox, and if you link your Dropbox account to Mailbox, then you can get a sweet 1GB of free storage space on the cloud. Wouldn’t it be great to get an extra gig on Dropbox? Yes, it would!

Hussman Weekly Market Comment: A Warning Regarding Broken Speculative Peaks

Frankly, I wonder whether any amount of arm-waving will incline investors to actually examine their risk exposures here, much less consider the prospect of a 40%+ decline in the S&P 500 Index that would be required simply to bring stocks to historically run-of-the-mill valuations. But at a time when our estimates of prospective risk are surging, I would be remiss not to observe that fact.

At present, we have what might best be characterized as a broken speculative peak, in that market internals (particularly interest-sensitive groups), breadth and leadership have broken down uniformly following an extreme overvalued, overbought, overbullish syndrome. If you recall, the market also recovered to new highs in October 2007, weeks after the initial, decisive break in market internals at that time. Presently, we’re looking at the same set of circumstances. On some event related to tapering or the Fed Chair nomination, we may even see another push higher. It isn't simply short-term risk, but deep cyclical risk that is of concern.

My main goal here is to encourage investors to look carefully at their investment positions, before they lose the chance to alter them advantageously. As I noted in the October 15, 2007 market comment Warning – Examine All Risk Exposures:

“Whatever market exposure investors accept today ought to be the same market exposure that investors are committed to maintain for the duration of a bear market, without abandoning their investment plan. Investors with no plan to own stocks through a market decline, holding them only in the hope of selling at market highs, may discover in hindsight that these were them.”

John Mauldin: Signs of the Top

The investment media seems obsessed with the question of whether the Fed will taper. The real question should be not about "tapering" but about credibility. What happens when fundamentals become the narrative as opposed to what the central bank is doing? What happens if the Federal Reserve throws a liquidity party and nobody comes? Today we look at some of the fundamentals. The market is in fact overvalued, but that doesn't mean it can't become more overvalued. Is this August 1987 or August 1999?

Chapter 1 of "The Manual of Ideas" book

I spent a little time this weekend digging into John Mihaljevic’s new book, The Manual of Ideas: The Proven Framework for Finding the Best Value Investments. I think it is a great addition to the value investor’s library. But you can decide for yourself after reading Chapter 1, which is available from Wiley via the link below (the table of contents is also available HERE).

Link to: The Manual of Ideas – Chapter 1

Chris Martenson interviews Michael Pettis

Link

Nassim Taleb quote

From Antifragile:

A Black Swan event and how it affects you—its impact on your finances, emotions, the destruction it will cause—are not the same “ting.” And the problem is deeply ingrained in standard reactions; the predictors’ reply when we point out their failures has typically been “we need better computation” in order to predict the event better and figure out the probabilities, instead of the vastly more effective “modify your exposure” and learn to get out of trouble, something religions and traditional heuristics have been better at enforcing than naive and cosmetic science.

Richard Fisher interview excerpts

Via ValueWalk:

On recent reports from the San Francisco Federal Reserve that suggest bond buying and money printing has a very minimal effect on the GDP: 

“I argued that when I argued against this program so I am happy to see and they have one of the best research departments in the entire Federal Reserve system. The point is we’ve gone through this program, interest rates have been at historic lows, we’ve had a secular trend as well as this final crescendo, which was assisted by the Federal Reserve program. I think it certainly helped corporations clean up their balance sheets. I don’t think there’s any question about that. At the same time, there were some costs. Savers have been hit, small banks and other intermediate bank sizes have been hurt in terms of their interest rate margins. It has exacerbated that decline in interest rate margins that occurred over the last 20 years. So there are costs and benefits. Again, the benefits of QE3 and the efficacy of that program are constantly being analyzed and we’ll just see what the committee as a whole, because it is a committee of 19 people, decides under Chairman Bernanke’s leadership in September and in subsequent meetings.”

Interview with David Epstein: How Athletes Get Great

Just train for 10,000 hours, right? Not quite. In his new book, author David Epstein argues that top-shelf athletic performance may be a more complicated formula than we’ve recently come to believe. 

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Related book: The Sports Gene

There is also a video interview, broken into a few clips, with Epstein on the book HERE.

For Jeff Bezos, a new frontier

Found via Abnormal Returns.

A newspaper represents not just a business but a “public trust,” Washington Post Co. chairman and chief executive Donald E. Graham has said more than once. In other words, the values that matter in owning a newspaper go beyond profit and loss. Bezos’s politics and sense of fairness may come to bear as the newspaper, in a perilous state of flux, takes on a new shape.

In a brief letter to employees, Bezos seemed to agree: The “values of The Post do not need changing. The paper’s duty will remain to its readers and not to the private interests of its owners.”

But exactly why he is acquiring The Post — and what he plans to do with it once he owns it — remains mostly a mystery.

Bezos declined to be interviewed for this article. Amazon declined to offer anyone for interviews.

For now, as a result, the best anyone can do to divine his motives is to look at his past.

What emerges from dozens of interviews with friends and colleagues from every stage of his life, combined with his own previous comments, is a portrait of a curious mind attracted to grand schemes. He is a tenacious businessman, too, tough on employees who don’t measure up, ruthless with competitors and willing to take risks.

Larry Ellison on Charlie Rose

Link

Gundlach dips toe into uber-indexing

DoubleLine Capital LP plans to launch an enhanced index fund based on Yale University economics professor Robert Shiller's cyclically adjusted price-earnings ratio. 

The DoubleLine Shiller Enhanced CAPE Fund will use derivatives — either swaps or futures contracts — to track the Shiller Barclays U.S. Sector Total Return Index, which invests equally in the four most undervalued U.S. stock sectors based on their CAPE ratio and their price momentum over the past 12 months.