TED Talk - Malcolm Gladwell: The unheard story of David and Goliath

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Related book: David and Goliath: Underdogs, Misfits, and the Art of Battling Giants

Related article: Malcolm Gladwell: 'If my books appear oversimplified, then you shouldn't read them'

Horizon Kinetics September 2013 Commentary - Liquidations

Liquidations are an extremely interesting type of investment, but they are incredibly rare, and require an extended investment horizon. Therefore, they are of little interest to the majority of investors. The timing of the payout, if any, is unpredictable. However, if and when it comes, it may handsomely reward the investor’s patience. This month’s commentary reviews some of the idiosyncrasies of investments in companies in liquidation, as well as provides an overview of a past liquidation investment made by the Firm.

As Jeff Bezos prepares to take over, a look at forces that shaped The Washington Post sale

Thanks to Lincoln for passing this along. The April 2013 interview with Graham is available HERE.

On April 4, Donald E. Graham sat for a videotaped interview about how the Internet and digital technology had hammered and transformed the news business. Cradling a coffee cup emblazoned with the word “Washington,” Graham sat next to his desk, with three Herblock cartoons on the wall behind him and a photo of a young Warren Buffett on the table next to him.

Graham gave a classic performance, telling stories of bygone times in his disarming aw-shucks manner, dispensing compliments to colleagues and rivals while mixing in his sober, analytical view about the reporting-intensive newspaper business — and his failure to come up with a way to sustain it.

 “One of the questions that faces places like the [New York] Times and The Post is: Is there any kind of a plus to a news organization in having really high-quality reporting and editing?” he said at one point. “I’m pretty sure the answer to that is yes, but we have not figured it out.”

He added, “If somebody said to me there’s a way out for newspapers, but you’re going to have to lose $100 million a year to get there four to five years from now, I would sign up for it in a minute.”

But no one said that to him and unbeknownst to the three veteran journalists interviewing him that day for Riptide, a journalism history project at Harvard University’s Shorenstein center, Graham was trying to figure his own way out — of the daily newspaper business. Quietly, he was shopping around for a buyer, one without a political agenda but also one with a sense of stewardship about the paper — and pockets deep enough to buy the franchise and cover losses if necessary.

Amazon founder and chief executive Jeffrey P. Bezos ultimately agreed to buy the paper himself for $250 million, also acquiring El Tiempo, Express, the local Gazettes, and Robinson Terminal, including Robinson’s 23 acres of undeveloped land in Charles County, Md.

He wasn’t the only billionaire wooed, however, and that hadn’t been the only price discussed. Among others, Graham and the advisory firm of Allen & Co. also approached Robert Allbritton, owner of Politico and whose family once owned the Washington Star; Michael R. Bloomberg, who some people believed would want a daily print outlet in addition to his economic-driven subscriber news and data service; David Rubenstein, co-founder of the Carlyle Group and a major Washington philanthropist; and Eric Schmidt, who was chief executive of Google for 10 years.

The asking price in other negotiations reached $600 million, according to people familiar with the talks; for one prospective buyer, the price was significantly higher, according to a person whose advice was solicited by that person.

A stronger network, with more capacity: How BNSF is leveraging a record $4.3 billion in capital investment

Thanks to Lincoln for passing this along.

There can be a distinct advantage to having only one shareholder. For BNSF Railway chief executive Matt Rose, answering to Warren Buffett—who put his faith in the freight rail industry and BNSF management when he acquired the railroad in 2009 ("It's going to be around for the next 100 or 200 years, and you can't move it to China or India," he said at the time)—the advantage is the ability to invest what is necessary into state-of-good repair and capital expansion programs, without analysts or shareholders with short-term financial interests looking over your shoulder.

Rose and his management team know where the investments need to be made. For sole shareholder Buffett—who firmly believes that railroads are essential to the long-term health of the U.S. economy, and will continue to grow as the need for efficient surface transportation increases—all he's looking for is "a reasonable return" on his investment.

BNSF's 2013 capex program is a whopping $4.3 billion, the industry's biggest, about a 16% increase from 2012's $3.6 billion. This year's program was initially set at $4.1 billion, but was increased by $200 million "due to more expansion-related spending," Rose said in the railroad's Form 10-Q for the period ended June 30, 2013. "We will spend $2.3 billion in capital in 2013 to maintain a strong core network and related assets. In addition, we will continue investing in our locomotive and railcar fleet and in projects that expand and improve the efficiency of our infrastructure, and continue installing Positive Train Control in response to a federal mandate."

The program includes about $200 million for PTC and $800 million for terminal, line, and intermodal expansion and efficiency projects.

About 50% of BNSF's 2013 capex program is for engineering projects designed "to make our rail network stronger, with more capacity, so that more customers will want to use our services," Rose tells Railway Age. "We are very passionate about our network velocity, and our maintainability," both of which "are code words for better service."

Matthew McLennan on WealthTrack (video)

Is the financial crisis really over? Hank Paulson said yes, we are still in danger. Matthew McLennan, is in complete agreement and calls the widely believed “return to normalcy” that we are experiencing a “Keynesian mirage.”

Hussman Weekly Market Comment: Sitting Ducks

The present market context is this: from a valuation standpoint, virtually every reliable measure of market valuation we observe is now within the highest 1% of historical observations prior to the late-1990’s bubble. “Reliable” in this context refers to valuation measures that are well-correlated with actual subsequent market returns. These measures include price/revenue, price/book, various cyclically-adjusted price/earnings multiples, and market capitalization/GDP, among others. We’ll discuss valuations first, with the caveat that in practice, the most reliable effect of valuations is on long-term returns. The effect of valuations on shorter-horizon returns cannot be separated from other important factors; particularly the quality of market internals and the presence (or absence) of an overvalued, overbought, overbullish syndrome of conditions. Those factors can either mute or amplify the effect of valuations on subsequent market returns, but only for a while.

At its recent high of 24.6, the Shiller P/E (the S&P 500 divided by the 10-year average of inflation-adjusted earnings) matched the level that was observed in September 1929, exceeded the peak of 23 reached in March 1937 (the S&P 500 lost half of its value over the following year), matched the extreme of May 1965, which ushered in a 17-year secular bear market, and significantly exceeded the level of 19.8 seen at the August 1987 peak.

What draws complacency, however, is that valuations are significantly lower here than they were at the 2000 market peak. It doesn’t seem to matter that from the 2000 market peak to the present, the S&P 500 has achieved a nominal total return of just 2.7% annually, and even then only by re-establishing the present strenuous valuation extremes. It also doesn’t seem to matter that 2000 ushered in a decade that included two 50% market declines; one in 2000-2002 that wiped out the entire total return of the S&P 500, in excess of Treasury bills, all the way back to May 1996, and one in 2007-2009 that wiped out the entire total return of the S&P 500, in excess of Treasury bills, all the way back to June 1995.

A second feature that draws complacency is that the Shiller P/E broke above 27 at the late-2007 market peak, just before the market lost 55%, making present valuations seem not-so-high by comparison (“a Shiller P/E of just 24.6? We spit at your Shiller P/E of 24.6!”)

A third feature that draws complacency is that profit margins are about 70% above their historical norms, making raw P/E ratios (particularly those based on “forward operating earnings”) seem fairly reasonable. Understand that the use of raw forward operating P/E ratios implicitly assumes that these profit margins will remain at the most extreme levels in history forever. That’s the essential problem with using a single year of earnings as the basis for stock valuations. Stocks are a claim on a very long-term stream of future cash flows that will be distributed to shareholders over time, and P/E ratios are simply a shorthand. P/E ratios are useful only to the extent that the earnings measure being used is reasonably representative and informative about the long-term stream of cash flows – what might be called a “sufficient statistic.” I made the same observation (to no avail) at the 2007 peak (see Long-Term Evidence on the Fed Model and Forward Operating P/E Ratios). Investors who passively accept Wall Street’s never-ending pitch that “stocks are cheap on forward earnings” without attention to embedded profit margins are the sitting ducks of the investment world.

A final feature that draws complacency is that stocks were already overvalued three years ago, when the market was at lower levels, so to see stocks advance in the face of overvaluation (albeit only because of extraordinary monetary policy) seems to negate the entire basis for concern. I doubt that any of these gains will actually be retained by investors over the completion of the present market cycle. It isn’t difficult to see how badly this sort of complacency has injured investors in previous cycles, but there's no denying that stocks were overvalued some time ago, and stocks have advanced to even greater valuation extremes. The market could not have reached the level of valuation it set in 1929 if the same thing did not happen then. But, here we are. It's worth remembering how brutally those prior overvaluations punished speculators who held out for the last sip of punch.

How Many Fools Does It Take to Make a Bubble? – By Jason Zweig

Where do market "bubbles" come from? A team of neuroscientists and economists has produced the first scientific evidence for what prudent investors have long believed: Paying attention to what others are doing is the easiest way for traders to get carried away.

This new research can't prevent the mass contagions that lead to bubbles. But it might help you step back before you get swept up in the next one.

Economists have struggled and failed to explain why markets turn into manias. Some have denied bubbles exist; others have argued bubbles must somehow be "rational." Often, the argument is that bubbles are caused by "uninformed" traders, or "dumb money," while the "smart money" sits on the sidelines.

The latest findings suggest, however, that bubbles might be caused not by traders who lack information but by those who have too much.

Walter Isaacson on Bill Gates at Harvard

Walter Isaacson ’74, a member of the Board of Overseers and biographer of Apple’s Steve Jobs and others, is writing a book about the great inventors of the digital era. He shared this section on the Harvard undergraduate years of Bill Gates ’77, LL.D. ’07, co-founder of Microsoft, who now runs the Bill & Melinda Gates Foundation. 

Richard Dawkins on The Daily Show with Jon Stewart

Links to videos:

Richard Dawkins Extended Interview Pt. 1

Richard Dawkins Extended Interview Pt. 2

Richard Dawkins Extended Interview Pt. 3

Nassim Taleb quote

"If there is something in nature you don’t understand, odds are it makes sense in a deeper way that is beyond your understanding. So there is a logic to natural things that is much superior to our own. Just as there is a dichotomy in law: innocent until proven guilty as opposed to guilty until proven innocent, let me express my rule as follows: what Mother Nature does is rigorous until proven otherwise; what humans and science do is flawed until proven otherwise." -Nassim Taleb, Antifragile 

Jim Grant on The Daily Ticker

As the government prepares for worker furloughs starting Tuesday if Congress doesn’t avert a shutdown and as Washington gets ready for a debt ceiling fight that could follow -- markets are a snooze.

The Dow (^DJI) has gained more than 3% this month, 10-year Treasury yields have fallen since the Fed’s “no taper” news after briefly hitting (gasp) 3% and gold hasn’t been doing much of late.

But Jim Grant, founder and editor of Grant’s Interest Rate Observer, reminds The Daily Ticker that unlike 2010, when the memory of 2008 was fresh in investors’ minds and we had a “bull market in fear,” we are now in a “bear market in fear.”

He says experts can read this in the depths of the options markets, where people are no longer buying derivatives to protect themselves agains 'tail risks, but are "getting in the swim of things going up."

So this moment may be a fairly good one in which to begin fretting (though he advises against being a permanent worry wart), according to Mr. Grant.

In the above video he discusses potential risks for investors to be wary of, from the threat of a Washington debt default to Federal Reserve policy.

“These debt talks have a record of being air balls,” Grant tells The Daily Ticker. “However, Treasuries are the collateral par excellence in the world of finance. What would happen if so-called technical default? I don’t know. There would be some real drama because someone would not get paid.

Invoking recent history, he says that “in 2008, even those who did anticipate widespread credit troubles did not anticipate the speed with which Lehman Brothers metastasized.”

And regarding Fed policy, Jim Grant was on CNBC earlier this month saying there would not be a taper in September. He was dead right, when consensus seemed to be calling for a “tiny taper” of $10 or $15 billion in the central bank's $85 billion bond buying program.

So will the Fed taper this year? Jim Grant says he doesn’t think so.

Charlie Munger Speech at USC - May 2007

Just in case any readers haven’t watched or read this speech in a while. This speech is also in the third edition of Poor Charlie’s Almanack, and I took some notes on it when I first watched it HERE.

Links to videos:

Charlie Munger Speech at USC - May 2007 (part 1 of 5)

Charlie Munger Speech at USC - May 2007 (part 2 of 5)

Charlie Munger Speech at USC - May 2007 (part 3 of 5)

Charlie Munger Speech at USC - May 2007 (part 4 of 5)

Charlie Munger Speech at USC - May 2007 (part 5 of 5)

Q&A with Bill Gates

Thanks to Alex for passing this along.


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Seize the ACA: The Innovator’s Guide to the Affordable Care Act – by Ben Wanamaker and Devin Bean

Throughout history, disruptive innovations have repeatedly, and often predictably, transformed entire industries through the introduction of affordable and accessible products and services. Personal computers, automobiles, mobile phones, airplanes, and email are disruptive innovations that have permanently changed the world around us by making previously expensive and complicated products increasingly available to larger groups of people. Today, with health care costs spiraling ever higher, the U.S. is in a health care crisis—and in dire need of disruptive innovations that could make quality care more affordable and accessible.

In 2010, the passage of the Patient Protection and Affordable Care Act (ACA) dramatically altered the U.S. health care industry. It remains one of the most controversial pieces of legislation passed in decades. In October 2013, significant provisions of the act will be implemented and the health care ecosystem will once again shift to accommodate new regulation and infrastructure.

A complicated policy with over 955 pages and countless congressional revisions, it is naïve to claim that the ACA is a wholly good or bad policy. With such complexity and nuance, sweeping statements of political or economic ideology do little to address the reality at hand. Provisions of the law are now being implemented, and it is essential that policymakers, medical practitioners, and innovators alike consider where opportunities for disruptive innovation reside. It is also essential to consider which provisions of the law might inhibit disruptive innovation and focus reform efforts on those provisions.

Why We Should Choose Science over Beliefs – By Michael Shermer

Found via The Big Picture.

Ever since college I have been a libertarian—socially liberal and fiscally conservative. I believe in individual liberty and personal responsibility. I also believe in science as the greatest instrument ever devised for understanding the world. So what happens when these two principles are in conflict? My libertarian beliefs have not always served me well. Like most people who hold strong ideological convictions, I find that, too often, my beliefs trump the scientific facts. This is called motivated reasoning, in which our brain reasons our way to supporting what we want to be true. Knowing about the existence of motivated reasoning, however, can help us overcome it when it is at odds with evidence.

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The article above reminded me of some quotes:

“Nothing is easier than self-deceit. For what every man wishes, that he also believes to be true.” –Demosthenes

“Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.” –John Kenneth Galbraith

“We work really hard never to get confused with what we know from what we think or hope or wish.” –Seth Klarman

"So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do." –Ben Franklin

Nate Silver on Finding a Mentor, Teaching Yourself Statistics, and Not Settling in Your Career

Found via The Big Picture.

HBR: You’ve had obviously some very public experience with the fact that even when the data is good and the model is good, people can push back a lot for various reasons, legitimate and otherwise. Any advice for once you’re in that position, you have a seat at the table, but the other people around the table are really just not buying what you’re selling?

Silver: If you can’t present your ideas to at least a modestly larger audience, then it’s not going to do you very much good. Einstein supposedly said that I don’t trust any physics theory that can’t be explained to a 10-year-old. A lot of times the intuitions behind things aren’t really all that complicated. In Moneyball that on-base percentage is better than batting average looks like ‘OK, well, the goal is to score runs. The first step in scoring runs is getting on base, so let’s have a statistic that measures getting on base instead of just one type of getting on base.’ Not that hard a battle to fight.

Now, if you feel like you’re expressing yourself and getting the gist of something and you’re still not being listened to, then maybe it’s time to change careers. It is the case [that] people who have analytic talent are very much in demand right now across a lot of fields so people can afford to be picky to an extent.

Don’t take a job where you feel bored. If it’s challenging, you feel like you’re growing, you have good internal debates, that’s fine. Some friction can be healthy. But if you feel like you’re not being listened to, then you’re going just want to slit your wrists after too much longer. It’s time to move on.

Mark Spitznagel articles

Thanks to Jim for passing these along.

Link to: A Hedge Fund Manager Who Doesn’t Mind a Losing Bet

Link to: Waiting for the next stock market crash

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Related book: The Dao of Capital: Austrian Investing in a Distorted World

Related link: Chapter 1 of The Dao of Capital

Notes from the Pabrai Funds Chicago Annual Meeting

Update on the Japanese Net-Net:

The Pabrai funds invested in a basket of Japanese net-nets starting October 2010. Pabrai has exited all the positions with a realized gain of 2.2% including dividends, or 1.4% annualized. To me, this is surprising as the Japanese market has advanced significantly since October 2010. In search of explanation, Mornish referred to a few quotes from Ben Graham from the 1940 edition of "Security Analysis." Here is one:

"It may be pointed out, however, that investment in such bargain issues needs to be carried on with some regard to general market conditions at the time. Strangely enough, this is a type of operation that fares best, relatively speaking, when price levels are neither extremely high nor extremely low."

Pabrai expanded on this by stating that when the market bottoms it's much better to buy quality companies that have fallen precipitously with the market than focus on net-nets. When the market flies, net-nets are also ignored because investors shift their focus to both quality companies and story stocks.

Examples include Hibiya Engineering (TSE:1982) and Ryoyo Electro (TSE:8068). Both were trading below NCAV at the time of his investment, generating profits as well as positive and consistent cash flows. Managements of both companies were also repurchasing shares. Hibiya ended up just a little bit profitable, and Ryoyo turned out be a 15% loss.

Nassim Taleb quote

"Subtractive knowledge is a form of barbell. Critically, it is convex. What is wrong is quite robust, what you don’t know is fragile and speculative, but you do not take it seriously so you make sure it does not harm you in case it turns out to be false." -Nassim Taleb, Antifragile

Chanos, O'Neill on Chinese Economy and Real Estate (video)

Found via ValueWalk.

Sept. 24 (Bloomberg) -- Jim Chanos, founder of Kynikos Associates Ltd., and Jim O'Neill, former chairman of Goldman Sachs Asset Management, talk about China's economy, real estate and financial markets. They speak with Tom Keene at the Bloomberg Markets 50 Summit in New York. 

Michael Pettis: Revisiting my 2011 predictions

It is still too early for all of these predictions either to have materialized or to have failed, but I thought it might be useful to review them to see whether or not they have been reasonably accurate in describing unfolding events and, if not, how my model for thinking about global imbalances should be revised. My reason for doing this is not so much to keep score but rather that these predictions were almost necessary or logical outcomes of the savings imbalance model I implicitly use to understand the world, and so to the extent that my model is valid it should show up in the evolution of these predictions.

Obviously a truly clever economist never makes a verifiable prediction, and if he does he should never refer to that prediction subsequently, so it is with a sense of trepidation that I do so, but here goes:

Billionaires? Try Well-Grounded Heirs

A big thanks to George for passing this along. 

How do those who have achieved great financial success avoid raising spoiled brats? Members of three of America's greatest business families -- the Buffetts, the Pritzkers and the Carlsons -- show the way.

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Moonwalking with Einstein

Chris over at The View from the Blue Ridge posted a great excerpt from the book Moonwalking with Einstein, which is pasted below. That book may have been the most useful one I've read over the past couple of years from an investing standpoint, as I've used what I learned from it to help me improve my filtering process when it comes to looking at investment ideas….a process that continues to evolve and (hopefully) improve.

In our gross misunderstanding of the function of memory, we thought that memory was operated primarily by rote. In other words, you rammed it in until your head was stuffed with facts. What was not realized is that memory is primarily an imaginative process. In fact, learning, memory, creativity are the same fundamental process directed with a different focus. The art and science of memory is about developing the capacity to quickly create images that link disparate ideas. Creativity is the ability to form similar connections between disparate images and to create something new and hurl it into the future. Creativity, is in a sense, future memory. 

If the essence of creativity is linking disparate facts and ideas, then the more facility you have making associations, and the more facts and ideas you have at your disposal, the better you’ll be at coming up with new ideas. 

The notion that memory and creativity are two sides of the same coin sounds counterintuitive.  Remembering and creativity seem like opposite, not complementary, processes. But the idea that they are one and the same is actually quite old, and was once even taken for granted. The Latin root inventio is the basis of two words in our modern English vocabulary: inventory and invention. And to a mind trained in the art of memory, those two ideas were closely linked. Invention was a product of inventorying. In order to invent, one first needed a proper inventory, a bank of existing ideas to draw on. Not just an inventory, but an indexed inventory. 

This is what the art of memory was ultimately most useful for. It was not merely a tool for recording but also a tool of invention and composition. The realization that composing depended on a well-furnished and securely available memory formed the basis of rhetorical education in antiquity. Brains were as organized as modern filing cabinets, with important facts, quotations and ideas stuffed into neat mnemonic cubbyholes, where they would never go missing, and where they could be recombined and strung together on the fly. The goal of training one’s memory was to develop the capacity to leap from topic to topic and make new connections between old ideas.

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Book: Moonwalking with Einstein: The Art and Science of Remembering Everything

Related previous posts:

TED Talk - Joshua Foer: Feats of memory anyone can do

Joshua Foer: Moonwalking with Einstein

The Secret of Memory

David Epstein on EconTalk

David Epstein, writer for ProPublica and author of The Sports Gene, talks with EconTalk host Russ Roberts about the book. Epstein discusses a number of the ideas in the book including what we have learned about the nature vs. nurture debate, the role of practice in achieving mastery, why a small part of Kenya produces so many champion marathoners, why major league all-stars can't hit a fast-pitch softball, the strange nature of body types in the NBA and why Michael Phelps's body gives him an advantage.

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Related books:

The Sports Gene

Outliers: The Story of Success

Related previous posts:

Interview with David Epstein: How Athletes Get Great

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

MAN AND SUPERMAN: In athletic competitions, what qualifies as a sporting chance? – By Malcolm Gladwell

WSJ: Our Chat With Jeremy Grantham

Found via The Big Picture.

He called the Internet bubble, then the housing bubble. What alarm bell is Jeremy Grantham, the chief investment strategist at GMO, ringing about now?

How The Economic Machine Works In 30 Minutes - by Ray Dalio

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Related link: How the Economic Machine Works, Debt Cycles, Productivity (DRAFT) (Via ValueWalk)

Chris Martenson interviews Jim Rickards

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Alpha Hedge West Conference Notes

Via Market Folly:

Link to: Alpha Hedge West Conference Notes

Hussman Weekly Market Comment: Psychological Ether

“It’s quite possible that even a small taper will be too much for investors, but the alternative to tapering is to make an already precarious situation more precarious, while damaging the Fed’s credibility in the process.”

Hussman Weekly Market Comment, Baby Steps, September 16, 2013

Last week, the Federal Open Market Committee (FOMC) decided to go the alternative route. The Fed’s decision does not seem intended to be a “reset” of perpetual quantitative easing. Instead, it appears to reflect the committee’s belief that QE has real economic effects, but that these economic benefits have not gained sufficient momentum. Notably, one member of the FOMC who voted in favor observed on Friday that the decision not to reduce the pace of quantitative easing was a “borderline decision.” Another voiced concerns that the Fed now faces “challenges that come with issues of credibility” and that the inaction “discounts the potential costs of the policy tool with which we have limited experience.”

In my view, the problem with quantitative easing is that its entire effect relies on provoking risk-taking by those who would otherwise choose not to do so; that the FOMC has extended and amplified financial market distortions without regard to the rich valuations and dismal prospective returns that financial assets are most likely priced to achieve; and that this distortion of financial asset prices has precious little to do with the presumptive goal of Fed policy, which is greater job creation and economic activity.

Unfortunately, even though the equity market has been rising on what we view as nothing but noxious psychological ether, the FOMC has – perhaps unintentionally – released another tank of the stuff. Quantitative easing only “works” however, to the extent that investors have no immediate desire to hold short-term, risk-free assets. In any environment where investors become eager to hold currency and other low-risk, default-free assets despite their low yield, I expect that both investors and the Fed will discover that quantitative easing is wholly ineffective in supporting the prices of risky assets. This is an experiment that has not yet run its course, and we have no intention of being the guinea pigs in that study.

Garrett Hardin quote

From Living within Limits: Ecology, Economics, and Population Taboos:

For all but the last few hundred years of human history the dominant worldview was a limited view: resources were limited, human nature was fixed, and spending beyond one’s income was a sin. This essentially conservative perception prevailed until about 1600. Then science and technology shook the foundations. One presumed limit after another was shown to be, in part, false.

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The “Don’t worry” theories of population control amount to a reaffirmation of the religious idea of Providence. Professional publicists know there is always a good living to be made by catering to the public’s craving for optimistic reports. Such behavior finds no justification in the attitude of the Buddha, expressed five centuries before Christ: “I teach only two things: the cause of human sorrow and the way to become free of it.” The present work, though written by a non-Buddhist, proceeds along the Buddhist path—first to reveal the causes of human sorrow in population matters and then to uncover promising ways to free ourselves of the sorrow.

Hearing the Buddha’s statement today many people think, “How depressing! Why accept such a pessimistic outlook on life?” But they are wrong: it is not a pessimistic view if we reword it in terms that are more familiar to our science-based society. Reworded: “Here’s something that isn’t working right. I want to fix it, but before I can do that I have to know exactly why it doesn’t work right.” One who looks for causes before seeking remedies should not be condemned as a pessimist. In general, a great deal of looking for causes must precede the finding of remedies.

The Problems with a Growing Population

Albert Bartlett might have been another obscure physics professor had he not put together a now famous lecture entitled "Arithmetic, Population and Energy" in 1969. The lecture, available broadly on the internet, begins with the line: "The greatest shortcoming of the human race is our inability to understand the exponential function."

The logic is surprisingly simple and irrefutable. Exponential growth, which is simply consistent growth at some percentage rate each year (or other time period), cannot proceed indefinitely within a finite system, for example, planet Earth. The fact that human populations continue to grow or that the extraction of energy and other natural resources continues to climb does not in any way refute this statement. It simply means that the absolute limits have not yet been reached.

Bartlett, who died this month at age 90, gave his lecture all over the world 1,742 times or on average once every 8.5 days for 36 years to audiences ranging from junior high students to seasoned professionals in many fields. His ability to stay on message for so long about something so important should make him the envy of every modern communications professional.

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Related site: albartlett.org

Related previous posts:

Miguel Barbosa’s Interview with Albert Bartlett

Arithmetic, Population, & Energy and The Crash Course 

Video: Arithmetic, Population and Energy - FULL LENGTH 



Video: Al Bartlett Interview

Warren Buffett and Brian Moynihan on CNBC

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Warren Buffett, Brian Moynihan Speak at Georgetown

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Here's to the Curious - Chris Anderson - Zeitgeist Americas 2013

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Jim Chanos on CNBC

Thanks to Matt for passing this along. “While people are admonished never to short on valuation, it’s awfully dangerous to buy a stock forgetting valuation.”


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Imagine a Better World - Malcolm Gladwell - Zeitgeist Americas 2013

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

OpenStax College

This is pretty interesting.

It’s innovation in education. And the time is right. OpenStax College offers students free textbooks that meet scope and sequence requirements for most courses. These are peer-reviewed texts written by professional content developers. Adopt a book today for a turnkey classroom solution or modify it to suit your teaching approach. Free online and low-cost in print, OpenStax College books are built for today’s student budgets.

Stanley Druckenmiller on CNBC

Link

Jim Chanos quote

From his appearance on Bloomberg yesterday:

"My view is, just as an analyst, that any business that is predicated on selling overpriced products to consumers and/or distributors is ultimately a flawed business model."

The comment was in response to a question on Herbalife, but it is applicable across the board. When there is a desire for a certain product or service, the companies that can meet that demand with the right combination(s) of quality and price should win in the end. This is probably as applicable to “nutritional” beverages as it is with higher education, insurance, retail, etc. It can often be hard to tell who the winners will be, as the people running the business can have a huge impact on that outcome; like when you have fanatics like Sam Walton, Les Schwab, Rose Blumkin, or Jeff Bezos, for example, entering difficult, competitive businesses and succeeding. But it is easier to tell who the losers will probably be, which I think gets a bit to Nassim Taleb’s idea that it is easier to detect fragility than to estimate the probability of success. Figuring out the timing of when the fragile break or the flawed business model fails, however, is the tricky part (i.e. Keynes' comment about the market staying irrational longer than you can stay solvent.)

Companies Unplug From the Electric Grid, Delivering a Jolt to Utilities

Thanks to Matt for passing this along.

On a hill overlooking the Susquehanna River, two big wind turbines crank out electricity for Kroger Co.'s Turkey Hill Dairy in rural Lancaster County, Pa., allowing it to save 25% on its power bill for the past two years.

Across the country, at a big food-distribution center Kroger also owns in Compton, Calif., a tank system installed this year uses bacteria to convert 150 tons a day of damaged produce, bread and other organic waste into a biogas that is burned on site to produce 20% of the electricity the facility uses.

These two projects, plus the electric output of solar panels at four Kroger grocery stores, and some energy-conservation efforts are saving the Cincinnati-based grocery chain $160 million a year on electricity, said Denis George, its energy manager. That is a lot of money that isn't going into the pockets of utilities.

From big-box retailers to high-tech manufacturers, more companies across the country are producing their own power. Since 2006, the number of electricity-generation units at commercial and industrial sites has more than quadrupled to roughly 40,000 from about 10,000, according to federal statistics.

Experts say the trend is gaining momentum, spurred by falling prices for solar panels and natural gas, as well as a fear that power outages caused by major storms will become more common.

What’s Happening to Bonds and Why? – By Mohamed A. El-Erian

Found via The View from the Blue Ridge.

To say that bonds are under pressure would be an understatement. Over the last few months, sentiment about fixed income has flipped dramatically: from a favored investment destination that is deemed to benefit from exceptional support from central banks, to an asset class experiencing large outflows, negative returns and reduced standing as an anchor of a well-diversified asset allocation. Understanding well what created this change is critical to how investors may think about the future, including the role of fixed income as part of prudent investment portfolios that help generate returns and mitigate risk.

Value Investing Congress Notes: New York 2013

From Market Folly:

Link to: Value Investing Congress Notes: New York 2013

Be Foxy - by Jana Vembunarayanan

A great post on the fox/hedgehog dynamic.

Link to: Be Foxy

Jim Chanos on Bloomberg (video)

Sept. 17 (Bloomberg) –- Kynikos Associates President and Founder Jim Chanos discusses the continued push for investment spending in China. He speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

Quote about George Soros...

I thought the quote below was a great thought, and really distinguishes the difference between the investing styles of someone like Warren Buffett and someone like George Soros, both of whom were wildly successful doing it their own way. This is from the book More Money Than God: Hedge Funds and the Making of a New Elite:

“Soros saw no point in knowing everything about a few stocks in the hope of anticipating small moves; the game was to know a little about a lot of things, so that you could spot the places where the big wave might be coming.”

Inside Dropbox’s Quest to Bury the Hard Drive

If you haven’t tried Dropbox yet but would like to, my referral link (for free extra storage) is HERE. Thanks.

Drew Houston, the 30-year-old CEO and cofounder of Dropbox, is supposed to be having his Steve Jobs moment. In an auditorium packed with elite coders and Silicon Valley insiders in July, Houston is debuting new features he says will transform Dropbox into the mobile era’s answer to the hard drive. This is DBX, the company’s first developers conference. It’s Houston’s bid to convince the software industry to buy into his grand vision—and the Wi-Fi isn’t working. The demo team is trying to show off a digital drawing app that allows you to sketch on your iPad in, say, San Francisco and have the sketch appear simultaneously on a colleague’s device anywhere in the world. It was meant to be the centerpiece of Houston’s pitch for his ambitious new strategy. Dropbox is known for its supremely useful cloud storage service, which lets you drop files into a folder that can be accessed from any computer. But going forward, the company wants to power a new breed of syncable apps that would let you share any kind of data with anyone across any device. In theory it’s an epic shift that would put Dropbox at the center of everyone’s digital life, turning it into a powerhouse on the level of Facebook, Google, Amazon, and Apple. But it’s hard to see that when the demo doesn’t work. After an awkward moment, Houston returns to center stage. But if the glitch has rattled him, he doesn’t show it. “You’d think that I would be sad about what just happened,” Houston tells the audience. “Actually this is a really good omen.” He explains that the Wi-Fi also failed when he was onstage launching the original Dropbox in September 2008. Back then he was trying to sell the world on just how wonderful and simple his new magic folder was. Instead, nothing happened. But in the five years since, it’s clear: “Things worked out.” Indeed. In little more than half a decade, Dropbox has grown from a few lines of code banged out in a bus station to a go-to service with 200 million users saving more than a billion files every day. So there’s reason to believe it can pull of its plan to become what the company calls the “pervasive data layer.” In this vision, Dropbox acts as a kind of virtual infrastructure that lets you access all your digital stuff whenever, wherever—via tablet or PC, iOS or Android. Leave off playing Angry Birds on your phone and pick up the game at the same spot on your iPad or your television or the touchscreen in your car. Devices become dumb windows for accessing the information—your information—in Dropbox’s cloud. That’s where your stuff lives. And you’ll pay Dropbox for more space because you will want to put more stuff there.

Tad Montross’ Presentation at RVS on Tail Risk

A big thanks to the reader who was kind enough to pass this along. Other presentations from this year are available HERE, and from previous years HERE.

Link to: Tad Montross’ Presentation at RVS

Berkshire Billionaire Found With More Shares Than Gates

Thanks to Matt for passing this along.

Stewart Horejsi’s business was in a funk. It was 1980, and Brown Welding Supply LLC, his family’s third-generation distributor of hydrogen and oxygen tanks, was battling competitors that were intent on expanding into the corner of Kansas he controlled.

“It was a profitable business, but companies took their money and bought more trucks,” Horejsi, 75, said in a telephone interview from his home in Paradise Valley, Arizona. “The competition just grew.”

Frustrated, Horejsi bought 40 shares of Berkshire Hathaway Inc. (BRK/A) for $265 each with the company’s cash after friends told him about Warren Buffett, the company’s then-little known chairman. He bought another 60 shares two weeks later at $295 and 200 more at $330 a month after that.

Today, he’s a billionaire. The 4,300 Class A shares of the Omaha, Nebraska-based conglomerate Horejsi says he holds is bigger than the stake controlled by Bill Gates, 57, the world’s richest person and Buffett’s bridge partner. He has a net worth of at least $1.1 billion, according to the Bloomberg Billionaires Index, and has never appeared on an international wealth ranking.

Horejsi joins a squad of billionaires minted by Berkshire. In addition to Buffett, the world’s fourth-richest person, at least six current or former billionaires derive their fortunes from Berkshire. They include Charles Munger, 89, the company’s vice chairman and David Gottesman, 86, a Berkshire board member and founder of asset management firm First Manhattan Co.

Broyhill Asset Management: Muni Diaries

The long case for treasuries was a difficult sell at 4% three years ago. It is a tougher sell today. There is nothing exciting about a 3% pre-tax return on capital. Thankfully, there are better alternatives today, as panicked liquidations from bond funds have created compelling opportunities for patient investors.

Those investors who stretched for yield earlier in the year and purchased closed-end funds at a premium to net asset value are suffering the consequences today. But those with the discipline and patience to hold zero-yielding cash now have the opportunity to purchase the same funds at 5% - 10% discounts to their underlying assets. Over time, shrewd investors can capitalize on these emotional swings by keeping a clear head and recognizing that the pendulum always swings back in the direction it came from.

Buying closed-end funds at a discount to NAV is equivalent to buying a dollar for less than a dollar. In other words, the discount provides us with a margin of safety. And with tax-exempt yields above taxable equivalents today, we have an additional buffer against rising treasury rates. So, outside of crisis, downside risk is minimal in our view. The upside, however, is quite attractive with multiple value drivers. First, if we assume that the consensus opinion is wrong (we do) and rates retrace much of their recent move over the next twelve months, then municipals should rally 7% or so given the average duration of the sector. Second, if we assume that the consensus will again feel starved for yield over the next twelve months (we do), then current discounts to asset value should also close, representing another 7% of upside, give or take. Last but not least, if we are wrong on both fronts, we are comfortable sitting tight and collecting the 7% average yield on these instruments at current prices. And if a few things move in our direction over the next year, we believe the upside (7% + 7% + 7%) looks much better than expected returns on most risk assets with minimal risk of capital impairment.

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UPDATE: The Turnkey Analyst blog posted a list of closed-end muni funds trading at discounts to NAV, HERE.

Live from the Bakken: A year in America's oil patch

A friend of a friend decided to head to the Bakken and blog about his experiences there. It should be very interesting to follow.

Link to blog: Live from the Bakken

On the Origin of Celebrity – By Robert Sapolsky

A big thanks Kjetil for passing this along.

I had such fun the other evening. LeBron James, Anne Hathaway, J.K. Rowling, and I had gone ice skating in Central Park. My dear friend Koko the sign-language gorilla was there, ice-dancing with Ryan Gosling, who is always good for a laugh. Afterward, we all got hot chocolate and ran into Lady Gaga and Freeman Dyson, who had just flown in from Cabo. Koko and Ryan had a hilarious arm-wrestling contest (we called it a draw). Things got even crazier when we went to get sushi and met up with Hilary Clinton, Justin Bieber, and Lucy the Australophithecus. Eventually, we all wound up at Hil’s apartment, where we played Twister half the night. What fun.

Now who wouldn’t want an evening like that?

We all feel the magnetic pull of celebrities—we track them, know their net worth, their tastes in furniture, the absurd names of their pets and children. We go under the knives of cosmetic surgeons to look like them. We feel personal connections with them, are let down by their moral failings, care about their tragedies. As I write, my family of musical fanatics is mourning the death of Cory Monteith. We not only feel for the pointless loss of a talented young actor, and for his girlfriend, Lea Michelle, but in some confused, inchoate way, also feel heartbroken for Finn and Rachel, the characters they play on Glee.

Why the obsession? Because we’re primates with vested interests in tracking social hierarchies and patterns of social affiliation. And celebrities provide our primate minds with stimulating gyrations of hierarchy and affiliation (who is sleeping with, feuding with, out-earning whom). Celebrities also reflect the peculiar distance we have traveled culturally since our hominid past, and reveal how distorted our minds can become in our virtual world. We obsess over celebrities because, for better or worse, we feel a deep personal sense of connection with people who aren’t real.

Learning from Superinvestors: The Wisdom of Tom Russo

Tom Russo on the First Factor to Look at when Analyzing a Company

Thomas A. Russo (transcript): “Well for me it would be the people.  It would be who owns it and then it would be kind of who runs it, what’s the quality of the management team—it’s very much people driven analysis.  On the ownership side is if there is a strong holder who is likeminded in their long-term outlook I would find that to be a very early positive indicator that justifies setting out to do more work.  If I found on that first test that there was something about the management that left me feeling it was opportunistic or short term driven I probably won’t embark on the analysis that follows.  Threshold screening would be caliber of owners and then the management that follows.”

Hussman Weekly Market Comment: Baby Steps

“The events of the past decade demonstrate the enormous human costs of asset price bubbles and crashes.” – San Francisco Fed President John Williams, September 2013

And yet, here we are again. The Federal Reserve has now enabled the creation of a third equity bubble in hardly more than a decade. It has enabled this, in part, by intentionally targeting equity prices in a vain attempt to create a “wealth effect” that economists have known for decades does not exist – as consumers spend based on their view of lifetime “permanent income” and not based on fluctuations in volatile assets. The Fed has also enabled this, in part, by ignoring the inverse relationship between government/household deficits and corporate profit margins (which make equity valuations seem only modestly elevated on the basis of temporarily bloated earnings, even while stocks remain steeply overvalued on cyclically normalized measures). This week, the Federal Reserve is likely to make a small step toward addressing this mistake.

The breaking news is that Larry Summers has removed himself from the running for Fed Chairman, and while the choice between Summers and Yellen was largely a choice between Scylla and Charybdis, I did prefer Summers, as Yellen is a more conventional Phillips Curve thinker. We now face the prospect of Janet Yellen, who in October 2005, at the height of the housing bubble, delivered a speech effectively proposing that monetary policy could mitigate any negative economic consequences of a housing collapse, and arguing that the Fed had no role in preventing further housing distortions:

“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”

Fortunately, the fact is that quantitative easing is largely Bernanke’s beast, making it at least somewhat less likely that other Fed leaders will pursue this policy with the same zeal once he is gone. Indeed, even those who agree with its premises seem increasingly constrained by its already gargantuan scope. A Yellen Fed will almost surely remain interventionist in hopes of affecting outcomes where the Fed’s impact is weak (employment), while taking a benign view toward financial bubbles, resulting in repeated insults to the economy when those bubbles crash. My own preference would have been Martin Feldstein or Thomas Hoenig, but both seem unlikely choices from the President, leaving – among thoughtful choices for Fed Chairman – Roger Ferguson as the most appropriate and politically acceptable alternative to Yellen.

Why the Dow—Quirks and All—Is Beating the S&P 500 – By Jason Zweig

This coming week, the dowager gets a makeover. The Dow Jones Industrial Average, which turned 117 years old this summer, will get three new members as Nike, Visa and Goldman Sachs Group replace Alcoa, Hewlett-Packard and Bank of America.

Should you care? There will be no immediate impact on the level of the Dow, which finished this week at 15376; the three stocks getting the boot have barely budged in price. But the inner workings of the average, which have changed little since its inception, hold some important lessons for investors—most notably that things on Wall Street are seldom as simple as they seem.

The changes to the Dow “were prompted by the low stock price” of Alcoa, H-P and Bank of America and by the “desire to diversify…the index,” S&P Dow Jones Indices, which oversees the Dow, said in a statement. Dow Jones, publisher of The Wall Street Journal, owns a stake in the index company, which is a unit of McGraw Hill Financial.

Wall Street professionals, who regard the Dow as antiquated and cumbersome, mostly sneered. “High priced stocks totally skew this horribly constructed index,” tweeted Kid Dynamite, a trader who runs a popular blog. The way the Dow is put together, he later told me by email, “makes no sense at all.”

The Dow consists of 30 stocks; the higher its share price, the more a stock influences the level of the index. At its recent price of $192, International Business Machines has the largest weight in the Dow, at 9.6%—while Alcoa, at $8, makes up just 0.4%. A 1% rise in IBM’s share price would add roughly 15 points to the value of the Dow, while a 1% jump in Alcoa’s price would add only 0.6 point.

That method of building an index, called price weighting, differs from “value weighting,” in which stocks with a greater total market value (regardless of their per-share price) loom larger. The market value of IBM’s shares totals $209 billion—but that gives it only the 12th largest position in the value-weighted S&P 500, at 1.32% of the index. Instead, Apple—total market value, $429 billion—has the biggest weight in the S&P 500, at 2.92%.

Ray Dalio Interview with the Academy of Achievement (October 2012)

A big thanks to Remmelt for passing this along. [Update: And another big thanks to Jean-Pierre for passing the iTunes link to this along, HERE.]

Link to: Ray Dalio Interview

……….

Excerpt:

You've spoken about individuals who shape the world we live in and the particular qualities they share. What is the process these people, "the shapers," go through that perhaps the rest of us do not? 

Ray Dalio: I think for everybody, in order to be successful, there are five steps that you go through essentially. But everybody has their goals. What is their goal and passion? So you have goals. And then what happens is you're going after your goals and you encounter your problems. So encountering problems, and then the big difference between people is how they approach those problems. People who get bummed out by the problems don't learn from it. Who learns from them? So those who recognized the problems are excited that they get into those problems or mistakes. Mistakes are learning experiences. The pain that comes for that mistake, every time you have pain it's an indication that something is at odds. So the people who have the pain are the people then who will go into that and realize that if they solve that pain, solve that problem, understand what that is representative of -- not just the one problem -- but that problem is a certain type of problem that will happen over and over and over again in your life, and if you can solve, "How do I deal with that kind of problem?" The third thing that everybody needs to do is, if they have problems on the way to their goals, that they diagnose those problems and they get to the root cause -- the real root cause. The real root is often -- is typically -- what people are like. Can you go to what you're like? Can you go to your mistakes? Can you go to your weaknesses? Right. Can you go to other people's mistakes and weakness? Some people, because of ego barrier, can't do that, so if they don't recognize their own mistakes, their own weaknesses, or other's mistakes and weaknesses -- what the root cause may be and what they're like because of ego barriers -- if they can't go there, they're going to repeat those mistakes. They're going to have them over and over again. So it's the process essentially of saying, at that stage, "What am I like?" Everybody has strengths and everybody has weaknesses. The weaknesses are the other side of the strengths. So let's say if you're a right brain/creative person, you may not be reliable. Because just the way you think necessitates you to think a certain way, that means you can't think in another way. That means you're going to keep bumping into that thing that's standing in your way. But unless you can embrace, "I'm not reliable," right, and deal with it, you won't get around it. It's still going to continue to be a barrier. Right. So the diagnosis to the root cause is important. So then if you diagnose, then you have to design what you are going to do about it that works. So let's say you are very creative but not reliable. Okay, you have to find the means of first of all embracing that, and then saying, "If I'm not reliable, what do I? Do I work with a reliable person? Do I learn reliability? Do I have some compensating mechanism?" Because I can't let that lack of reliability stand in the way of my goal. As long as I keep doing that I'm going to keep running into problems. 

So you have to design what you do about the problems. And then when you're designing what to do about the problems, you have to follow it through. You have to follow through, or do the thing you design. Doing the thing you design requires self-discipline and so on. People have to do those things in order to be successful. Right. They have to know what their goals are. They have to diagnose their problems down to the root cause, the real root cause. They have to design ways to get around them, and then they have to have the self-discipline to follow that. It's a continuous iterative process. So that's what we keep doing. I would say that all of the shapers are doing that. So they don't mind the problems. That's their adventure. A wonderful book is Einstein's Mistakes. You hear his struggles. He wouldn't have been cutting-edge, he wouldn't have been inventive if he didn't go through that. So when you're looking at the personality characteristics, the personality characteristics lend themselves to doing that five-step process well. 

In his book The Outliers, Malcolm Gladwell says it takes something like 10,000 hours of working at something to become remarkable, to become extraordinary. I think you're also describing a person who is very driven, who has great tenacity and doesn't let things get in the way of the goal. 

Ray Dalio: Yes, of course. It's an element, but...It's the mixture of the elements that matter. You could have a tremendous tenacity, but you're studying, you're learning, you're trying to memorize and remember everything that you're being taught and you're really trying hard. You could have great tenacity. You need the making sense of something, you need to embrace reality. You need these other dimensions. Right. So I think the things that we started to talk about just before, the things that these people have a need for is: First, they need to -- most fundamentally - make sense of things, which is a very different kind of learning process. It's a very internalized learning process. It's not a memory-based process. So none of these people -- unlike the population as a whole -- none of these people have a desire to follow instructions.