Links

Byron Trott: The billionaires' banker [H/T Linc] (LINK)

Mohnish Pabrai speaks with The Economic Times of India (video) [H/T ValueWalk] (LINK)

Jason Zweig: Lessons From a Year of Market Surprises (LINK)

Tim Ferriss interviews Ed Cooke (LINK)

Related book: Moonwalking with Einstein: The Art and Science of Remembering Everything

Related previous post: Memortation, or One Way to Put What You Learn to Practical Use

The Indiana Jones of collapsed cultures: Our Western civilization itself is a bubble [H/T Jon Shayne] (LINK)

Farnam Street: Einstein on the ideas of Truth, Goodness, and Beauty (LINK)

Links

A Dozen Things Learned from Steve Jobs about Business (LINK)

Mervyn King and former chairman of Federal Reserve Ben Bernanke reflect on world financial crisis [H/T ValueWalk] (LINK)

Burger chain Shake Shack files for IPO (LINK) [$1 billion would be quite the valuation for the company, and Danny Meyer, whose book Setting the Table and documentary The Restaurateur are recommended.]

Related previous post: Danny Meyer speaks to GWU students

James Altucher: What I Learned About Life After Interviewing 80 Highly Successful People (LINK)

The Wisdom of Drucker (LINK)

Disney CEO Bob Iger's empire of tech (LINK)

The Price One Pays to Avoid the Risk of Negatively Standing Out

Some great quotes passed along to me by my good friend Lincoln:

Doctors who understand why we get fat and what to do about it are obviously hard to find; otherwise, this book wouldn’t be necessary. The truly unfortunate fact is that even those doctors who do understand the reality of weight regulation often hesitate to prescribe carbohydrate restriction to their patients—even if this is how they maintain their own weight. Physicians who tell their fat patients to eat less and exercise more, and particularly to eat the kind of low-fat, high-carbohydrate diet that the authorities recommend, will not be sued for malpractice should any of those patients have a heart attack two weeks or even two months later. The doctor who goes against established medical convention and prescribes carbohydrate restriction has no such safeguard.

--Gary Taubes, Why We Get Fat

I’m convinced that for many institutional investment organizations the operative rule – intentional or unconscious – is this: “We would never buy so much of something that if it doesn’t work, we’ll look bad.”  For many agents and their organizations, the realities of life mandate such a rule.  But people who follow this rule must understand that by definition it will keep them from buying enough of something that works for it to make much of a difference for the better.

In 1936, the economist John Maynard Keynes wrote in The General Theory of Employment, Interest and Money, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally” [italics added].  For people who measure success in terms of dollars and cents, risk taking can pay off when gains on winners are netted out against losses on losers.  But if reputation or job retention is what counts, losers may be all that matter, since winners may be incapable of outweighing them.  In that case, success may hinge entirely on the avoidance of unconventional behavior that’s unsuccessful.

--Howard Marks, Dare to Be Great II

If the behavior of institutional investors weren't so horrifying, it might actually be humorous. Hundreds of billions of other people's hard-earned dollars are routinely whipped from investment to investment based on little or no in-depth research or analysis. The prevalent mentality is consensus, groupthink. Acting with the crowd ensures an acceptable mediocrity; acting independently runs the risk of unacceptable underperformance. Indeed, the short-term, relative-performance orientation of many money managers has made "institutional investor" a contradiction in terms….

The pressure to retain clients exerts a stifling influence on institutional investors. Since clients frequently replace the worst-performing managers (and since money managers live in fear of this), most managers try to avoid standing apart from the crowd. Those with only average results are considerably less likely to lose accounts than are the worst performers. The result is that most money managers consider mediocre performance acceptable. Although unconventional decisions that prove successful could generate superior investment performance and result in client additions, the risk of mistakes, which would diminish performance and possibly lead to client departures, is usually considered too high.

--Seth Klarman, Margin of Safety

Links

Mohnish Pabrai, Guy Spier, and Michael Shearn on Investment Checklists [H/T ValueWalk... This is the video and transcript from their Value Conferences appearance early in 2014.] (LINK)

Related book: The Investment Checklist

Richard Muller's Physics for Future Presidents lectures (LINK)

Related book: Physics for Future Presidents

The Best (and Worst) Investments They Ever Made: Luminaries in Finance and Other Fields Reveal Their Greatest Hits—and Biggest Misses [H/T ValueWalk]  (LINK)

Guy Spier joins The Investors Podcast to discuss his book, The Education of a Value Investor (LINK)

Porsche: The Hedge Fund that Also Made Cars [H/T Whopper Investments] (LINK)

The Paradox of Choice, 10 Years Later [H/T Abnormal Returns] (LINK) [The audiobook MP3 CD version is currently only $8.06 as well.]

Hussman Weekly Market Comment: The Line Between Rational Speculation and Market Collapse (LINK)

The Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is now 27, versus a long-term historical norm of 15 prior to the late-1990’s bubble. Importantly, the profit margin embedded into the Shiller P/E is currently 6.7% versus a historical norm of just 5.4%. The implied margin is simply the denominator of the Shiller P/E divided by current S&P 500 revenues (the ratio of trailing 12-month earnings to revenues is even higher at 8.9%). As I showed in Margins, Multiples and the Iron Law of Valuation, taking this embedded margin into account significantly improves the usefulness and correlation of the Shiller P/E in explaining actual subsequent market returns. With this adjustment, the margin-adjusted Shiller P/E is now nearly 34, easily more than double its historical norm.  

This fact is important, because the Shiller P/E averaged 40 during the first 9 months of 2000 as the tech bubble was peaking. But that Shiller P/E was associated with an embedded profit margin of only 5.0%. Adjusting for that embedded margin brings the margin-adjusted Shiller P/E at the 2000 peak to 37.

...

On other measures that have an even stronger historical correlation with actual subsequent market returns than either the Shiller P/E or the S&P 500 price/operating earnings ratio, the ratio of stock market capitalization to GDP is now about 1.33, compared to a pre-bubble norm of 0.55. The S&P 500 price/revenue multiple is now about 1.80, versus a historical norm of 0.80. On the measures we find most reliably associated with actual subsequent 10-year market returns (with a correlation of about 90%), the S&P 500 is not just double, but about 120-140% above historical norms. On a broader set of reliable but more varied measures, the elevation averages about 116%.

A couple of book recommendations from Twitter:

Via @Sanjay__Bakshi: Recasting India: How Entrepreneurship is Revolutionizing the World's Largest Democracy

Via @PlanMaestro: City of Fortune: How Venice Won and Lost a Naval Empire

Links

Talks at Google: Tobias Carlisle discusses his book Deep Value (video) [H/T ValueWalk] (LINK)

Atul Gawande: What ails India's public health system (LINK)

Larry Cunningham: Ocwen Would Do Well to Follow the Lessons of Berkshire’s Clayton Homes (LINK)

Related book: Berkshire Beyond Buffett

Michael Pettis on Strains in China's Banking System (LINK)

Related book: Avoiding the Fall: China's Economic Restructuring

Farnam Street: Bruce Lee on Self-Actualization (LINK)

Related books: Bruce Lee: Artist of Life, Striking Thoughts: Bruce Lee's Wisdom for Daily Living

Jared Diamond: The Evolution of Religions

Link to video

....................

To check out Jared Diamond's books, go HERE.

A good conscience is a continual Christmas...

“Let no pleasure tempt thee, no profit allure thee, no ambition corrupt thee, no example sway thee, no persuasion move thee, to do any thing which thou knowest to be evil; so shalt thou always live jollily; for a good conscience is a continual Christmas.” –Ben Franklin

Ralph Waldo Emerson quote

“As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.” -Ralph Waldo Emerson

Ray Dalio at the DealBook Conference

Link to video

Links

Aswath Damodaran: The Oil Price Shock: Primary, Secondary and Collateral Effects (LINK)

In the last few weeks, financial markets have been rocked by the drop in oil prices, and in the process reminded us of three realities. The first is that for all the money that is spent on commodity price forecasting, there is very little that we have to show for it. The second is that all large macroeconomic events create winners and losers and the net effect of this oil price change, whether positive, neutral or negative, may take a while to manifest itself. The third is that investors are generally ill-served by either panicky selling of all things oil-related or the mindless buying of the most beaten-up oil stocks.

Guaranteed Taxes versus Uncertain Returns: An Introduction (LINK)

David Merkel: Learning from the Past, Part 1 (LINK)

Book of the day: The Sense of Style: The Thinking Person’s Guide to Writing in the 21st Century - by Steven Pinker

Links

Li Lu Adds 3 Mil Shares In BYD On The Day Of Stock Plunge (LINK)

On the day that the stock of Chinese electric cars company BYD took a sharp dip, one investor saw an opportunity to buy.

Himalaya Capital Investors, an investment vehicle controlled by Li Lu, added 3.2 million shares in BYD last Thursday, the day when the company’s share price mysteriously plunged nearly 30% on the Hong Kong Stock Exchange, according to the company’s latest filing.

LL Group, the parent company of Himalaya Capital Investors where Li Lu is the controlling shareholder, now holds 57.4 million shares, or about 2.4% of BYD’s total issued share capital.

The once rumored candidate to run a portion of Warren Buffett’s portfolio, Li is an early investor in BYD himself and later through a fund with investment from Charlie Munger, the vice chairman of Berkshire Hathaway.
...
BYD closed at HKD 27.85 on the Hong Kong Stock Exchange today, down 2.6% from opening. Li looks to have already made a paper profit from the additional shares, which were purchased at an average of HKD 23.54 per share.

Five Good Questions for Lawrence Cunningham (LINK)

Related books: Berkshire Beyond Buffett and How to Change the World: Social Entrepreneurs and the Power of New Ideas

Brain Pickings' 14 Best Books of 2014, including The Accidental Universe: The World You Thought You Knew and How We Got to Now: Six Innovations That Made the Modern World (LINK)

Tim Harford on the psychology of giving and receiving gifts [H/T The Browser] (LINK)

Related book: The Undercover Economist Strikes Back

Hussman Weekly Market Comment: Iceberg at the Starboard Bow (LINK)

Notably, the rather breathtaking short-squeeze we observed late last week was not accompanied by a material shift in internals or credit spreads. Understand that such improvement would not reduce the overvaluation of the market, but it would significantly reduce the immediacy of our downside concerns. Meanwhile, however, we interpret last week’s short-squeeze as more likely to be one of those “short-lived announcement effects.” Even here, despite enthusiasm over the word “patient,” the Fed announced no meaningful change of course.

Monetary easing is reliably supportive to risky assets only when safe, low-interest liquidity is viewed as an inferior asset. This can be inferred from the behavior of market internals and credit spreads. At present – again, aside from short-lived announcement effects – we don’t observe the conditions under which monetary easing should be expected to be particularly supportive to risky assets. While the current meme is that monetary easing is equivalent to rising stock prices, recall that the Fed was already aggressively lowering interest rates in the fall of 2007, and eased monetary policy aggressively and persistently through the entire course of the 55% stock market collapse that followed. 

..... 

Coupled with an increasingly synchronized global economic downturn, we’ve seen a particular collapse in oil prices. Some observers view this as if it is “stimulative” to the economy, but that perspective confuses the price decline resulting from an inward shift of the demand curve as if it was caused by an outward shift of supply. Our view is that the concerted decline in commodity prices, foreign currencies, and Treasury yields, coupled with a blowout of credit spreads in junk debt (particularly energy-related debt) is all consistent with weakening global economic prospects. Given the “cleanest dirty shirt” perception of the U.S. dollar, the greenback has certainly benefited from this dynamic. But to expect this benefit to persist assumes that a) the dispersion between U.S. and global prospects will continue to widen, and b) that widening is not already priced into the currency markets.

Links

Merryn Somerset Webb's Christmas reading list (LINK) [The books: Jesse Livermore Boy Plunger: The Man Who Sold America Short in 1929, Saving the City: the Great Financial Crisis of 1914, The Forgotten Depression: 1921: The Crash that Cured itself, Edinburgh: Mapping the City, Bitcoin: the Future of Money, The Second Machine Age, Fast Forward , The English Civil War: A People’s History]

This week, one commentator referred to the general level of upset over the threats to Sony and its movie about Kim Jong Un as “beyond the realms of stupid”. It is an entirely reasonable reaction. The idea that a huge corporation can be forced to change the way its business works by a tiny group of the ideologically insane is clearly silly.

But if you start looking around for things that somehow feel beyond stupid in today’s world of money and business, your list will get very long, very quickly. Still, lest you think that beyond stupid is somehow a modern thing, I am making the first part of this year’s Christmas book list about the many crises of the past.

Paul Graham: How to Be an Expert in a Changing World (LINK)

Philosophical Economics: What Is Intrinsic Value, And Who Decides It? (LINK)

Stable Investor blog interviews Safal Niveshak's Vishal Khandelwal (LINK)

The must watch video of the day: A monkey saves the life of another monkey who fell unconscious after being electrocuted in India's northern city of Kanpur on Saturday (LINK)

Seneca on freedom

From Moral letters to Lucilius/Letter 51 (Kindle):

Fortune is fighting against me, and I shall not carry out her commands. I refuse to submit to the yoke; nay rather, I shake off the yoke that is upon me, – an act which demands even greater courage. The soul is not to be pampered; surrendering to pleasure means also surrendering to pain, surrendering to toil, surrendering to poverty. Both ambition and anger will wish to have the same rights over me as pleasure, and I shall be torn asunder, or rather pulled to pieces, amid all these conflicting passions. I have set freedom before my eyes; and I am striving for that reward. And what is freedom, you ask? It means not being a slave to any circumstance, to any constraint, to any chance; it means compelling Fortune to enter the lists on equal terms. And on the day when I know that I have the upper hand, her power will be naught.

Links

Buffett and Munger on How to be a Hack [H/T The Big Picture] (LINK)

Related book:  The Warren Buffett Portfolio

Benedict Evans on the a16z podcast discussing his article "New questions in mobile" (LINK)

I finally got to the second two segments ("Inside Homs", "Mindfulness")  from the latest 60 Minutes, both of which were interesting (LINK)

The Conventional Wisdom On Oil Is Always Wrong (LINK)

While the title of the above article on oil says "Always", the actual wording in the article is "almost always wrong." This reminded me of an excerpt from George Soros' The Alchemy of Finance: 

In other words, financial markets constantly anticipate events, both on the positive and the negative side, which fail to materialize exactly because they have been anticipated. No wonder that financial markets get so excited in anticipating events that seem quite harmless in retrospect! It is an old joke that the stock market has predicted seven of the last two recessions. We can now understand why that should be so. By the same token, financial crashes tend to occur only when they are unexpected.

This last point should not be overstated. There are many events that actually occur in spite of the fact that they were widely anticipated. The collapse in oil prices is a case in point; the outbreak of the Second World War was another. It has become fashionable to be a contrarian, but to bet against prevailing expectations is far from safe. It will be recalled that, in the boom/bust model, events tend to reinforce prevailing expectations most of the time and contradict them only at the inflection points; and inflection points are notoriously difficult to identify. Now that the contrarian viewpoint has become the prevailing bias, I have become a confirmed anti-contrarian.

Howard Marks Memo: The Lessons of Oil

Link to memo: The Lessons of Oil

I want to provide a memo on this topic before I – and hopefully many of my readers – head out for year-end holidays. I’ll be writing not with regard to the right price for oil – about which I certainly have no unique insight – but rather, as indicated by the title, about what we can learn from recent experience. 

When capital leaves an industry...

From the book Capital Account:

Just as mixing gluttony with capital investment can destroy industry returns, so capital starvation can be a saviour. When stock market values fall below replacement cost, not only is it senseless to invest in new capacity, but the retirement of capital through share buybacks and special dividends becomes attractive. 

Links

How levered was John Maynard Keynes' portfolio? (LINK)

What Happened When Marissa Mayer Tried to Be Steve Jobs (LINK)

Eddie Lampert: Is something a “failure” if other successes come from it? (LINK)

THE EVERYTHING BOOK: READING IN THE AGE OF AMAZON (LINK)

Amazon Not as Unstoppable as It Might Appear (LINK)

Andrew Smithers: Poor productivity in developed economies appears to be structural (LINK)

TED Talk - Carol Dweck: The power of believing that you can improve (LINK)

Related book: Mindset: The New Psychology of Success

Winners Announced in the National Geographic Photo Contest 2014 (LINK)

BYD shares sink by a third in mystery sell-off (LINK)

Shares in BYD, the Chinese electric car company part-owned by Warren Buffett, fell as much as 47 per cent during a bout of panic selling. 

BYD’s Hong Kong-traded shares rebounded partially in late trading to close down 29 per cent, at HK$25.05, on Thursday. Trading volumes were very heavy, at 40 times the previous day’s 15-day moving average, according to Bloomberg data. 

In a statement issued after the market closed, the company’s board said it was not aware of any reason for the sharp sell-off.

...

Having bought into the Shenzhen-based company at about HK$8 a share, Mr Buffett’s Berkshire Hathaway Energy is still sitting on a sizeable paper profit. BYD’s shares peaked at HK$88 in 2009.

Henry Blodget interviews Jeff Bezos

Link to interview: I Asked Jeff Bezos The Tough Questions — No Profits, The Book Controversies, The Phone Flop — And He Showed Why Amazon Is Such A Huge Success

HB: You talked about what a lot of CEOs do in terms of trying to drive that stock price, selling the stock. You told me something when we we’re outside that is extraordinary, which is that you spend six hours a year on investor relations. 

JB: Yes. We do a lot of unusual things there. We don’t meet with our biggest investors. We meet with investors who have low portfolio turnover. Many investment funds have very high portfolio turnover. They’re not really investors — they’re traders. There’s nothing wrong with that: It’s just a different thing. Where you are going to spend your time and your energy is one of the most important decisions you get to make in life. We all have a limited amount of time, and where you spend it and how you spend it is just an incredibly levered way to think about the world. If you’re going to spend time explaining the company, you should do it with people who are long-term investors, rather than traders. That’s our point of view.

....................

Related book: The Everything Store (which was also a good audiobook)


[H/T Market Folly]

Links

Howard Marks on Bloomberg TV (video) (LINK)

Dec. 16 (Bloomberg) -- Howard Marks, co-chairman and co-founder of Oaktree Capital Group LLC, talks about investor concerns about Russia's financial markets, investment strategy and the outlook for oil prices and stocks.

.....

Marks also mentioned "Dornbusch’s Law" in the interview: The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.

Farnam Street: Albert Einstein on Sifting the Essential from the Non-Essential (LINK)

Related previous post: Memortation, or One Way to Put What You Learn to Practical Use 

William Thorndike, Author Of ‘The Outsiders’, Fireside Chat (video) [H/T ValueWalk] (LINK)

Related book: The Outsiders

How Computer Hackers Could Destroy a Hedge Fund [H/T Will] (LINK)

Walter Isaacson on CNBC (video) (LINK)

Related book: The Innovators

Related previous posts:  Walter Isaacson in converstaion with two pioneers of the Internet, Vint Cerf and Bob Kahn, The Innovators: Author Walter Isaacson in Conversation with John Hollar, Walter Isaacson interview with Elon Musk, Walter Isaacson on Charlie Rose

Expeditor's latest 8-K (LINK)

In the name of full disclosure, we've always subscribed to the late and internationally renowned economist, John Kenneth Galbraith's opinion that "The only function of economic forecasting is to make astrology look respectable."

Russia, oil and stocks, from Meb Faber via Twitter:

• 1998 oil was down 40% & Russian stocks down 90% from peak
• 2014 oil was down 40% & Russian stocks down 75% from peak
• What happened in 1999?
• Russian stocks were up over 150%. [LINK to August 2006 paper on investing in the Russian stock market.]

Brain Pickings: Carl Sagan Explains How Stars Are Born, Live, and Die (LINK)

Related previous posts: Carl Sagan - Pale Blue Dot, The Most Astounding Fact About the Universe

After Oil Spill in Bangladesh's Unique Mangrove Forest, Fears About Rare Animals (LINK)

Book of the day: World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability [This book was recommended by Malcolm Gladwell a few years ago. I was reminded of it when I read a Nassim Taleb tweet about his latest article. Specifically, I was reminded of this excerpt from the book that I had saved: “Whenever a market dominant minority [ethnicity, religion, etc.] is present, markets and democracy are not mutually reinforcing but on a collision course."]

The Calm Before the Storm - By Nassim Nicholas Taleb and Gregory F. Treverton

Link to article: The Calm Before the Storm: Why Volatility Signals Stability, and 
Vice Versa

The divergent tales of Syria and Lebanon demonstrate that the best early warning signs of instability are found not in historical data but in underlying structural properties. Past experience can be extremely effective when it comes to detecting risks of cancer, crime, and earthquakes. But it is a bad bellwether of complex political and economic events, particularly so-called tail risks—events, such as coups and financial crises, that are highly unlikely but enormously consequential. For those, the evidence of risk comes too late to do anything about it, and a more sophisticated approach is required.
 

Thus, instead of trying in vain to predict such “Black Swan” events, it’s much more fruitful to focus on how systems can handle disorder—in other words, to study how fragile they are. Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility. 


..................

Related book (which I re-read again this year): Antifragile: Things That Gain from Disorder

Links

Paul Graham: How You Know (LINK)

Eddie Lampert on Sears: Moving Forward (LINK)

Arnold Van Den Berg at Century Management’s 2014 Client Review [H/T GuruFocus] (LINK)

Graham - Newman Letters to Partners 1946 - 1958 (LINK) [I've mentioned these before, but since they are making their rounds again, they are always worthy of mentioning again. As are the papers and lectures of Ben Graham.]

Book of the day (a novel): Waccamaw Gold

Quote of the day: “There never was a sounder logical maxim of scientific procedure than Ockham’s razor: Entia non sunt multiplicanda praeter necessitatem. That is to say; before you try a complicated hypothesis, you should make quite sure that no simplification of it will explain the facts equally well.” -Charles Sanders Peirce

Links

Michael Lewis: Eight Things I Wish for Wall Street (LINK)

Tom Russo, Susan Decker, Lawrence Cunningham, and Brad Kinstler discuss Berkshire Hathaway at Stanford (video) [H/T ValueWalk] (LINK)

Related book: Berkshire Beyond Buffett

Matthew McLennan on WealthTrack (video) [H/T ValueWalk] (LINK)

Inside Mark Zuckerberg's plan to get every human online (LINK)

Talks at Google: John Heins & Whitney Tilson: "The Art of Value Investing" (video) (LINK)

Hussman Weekly Market Comment: A Sensible Proposal and a New Adjective (LINK)

My impression is that the recent weakness in the equity market and the plunge in Treasury yields have not been “caused” by weakness in the energy market, but that all are joint symptoms of a synchronous downturn in global economic growth, most obvious in Japan and Europe, and increasingly developing in England, China, and elsewhere. It's a reasonable concern that this softening may include the U.S. economy. In U.S. data, we don’t observe much evidence of recession risks at present, but that evidence can emerge fairly rapidly. A large-scale credit event would obviously heighten our immediate economic concerns. We’re particularly attentive to clear upward pressure on credit spreads and risk premiums here.

Ebola: An eyewitness account from Sierra Leone [H/T The Browser] (LINK)

Book of the day: Fast Forward: The Technologies and Companies Shaping Our Future

Peter Cundill on selling too early

From There's Always Something to Do:

This is a recurring problem for most value investors – that tendency to buy and to sell too early. The virtues of patience are severely tested and you get to thinking it’s never going to work and then finally your ship comes home and you’re so relieved that you sell before it’s time. What we ought to do is go off to Bali or some such place and sit in the sun to avoid the temptation to sell too early.

Warren Buffett Looks Ahead to Berkshire’s Next 50 Years

Link to article: Warren Buffett Looks Ahead to Berkshire’s Next 50 Years

Warren Buffett says that lately he’s been pondering the future of Berkshire Hathaway Inc. more than usual.

Like in years past, he has been busy composing his annual letter to shareholders reviewing Berkshire’s performance in 2014. However, because 2015 will mark the golden anniversary of Berkshire Hathaway under “current management,” Mr. Buffett has also been laying out, on paper, his vision for Berkshire for the next 50 years.

.....

Berkshire shareholders and those who follow the conglomerate’s activities will get a bonus next year: Mr. Munger is also writing down his vision for Berkshire for the next 50 years. Shareholders love Mr. Munger’s sometimes bruising wit and deadpan delivery, often in response to questions posed at Berkshire’s annual meeting.

[H/T Linc]

Links

Louis Hyman lecture on his book Borrow: The American Way of Debt [H/T Matt] (LINK)

Brain Pickings discusses Atul Gawande's Being Mortal (LINK)

Heather Capital: How a $600 Million Hedge Fund Disappeared (LINK)

On-the-record remarks by Claudio Borio (LINK) [Borio is someone mentioned by Frank Martin as being very worth listening to. There are a couple of links to his papers HERE.]

Eastern Philosophy Explained with Three Animated Videos by Alain de Botton’s School of Life (LINK)

Links

A Conversation With Square’s Jack Dorsey (LINK)

'Building a brand is a painstaking process' [H/T @Sanjay__Bakshi] (LINK)

Matt Ridley: Science is being corrupted by political bias (LINK)

Analyzing and Valuing Growth: Interactive Brokers Group (LINK)

What They Don’t Tell You About the Galápagos (LINK)

Scott Adams: Diet Science in 2014 (LINK) [As he mentions in the post, he discusses his diet and thoughts in more detail in his book How to Fail at Almost Everything and Still Win Big. I've also noticed a lot of truth in his statement: "What I noticed in myself is that until I reached a critical base of knowledge about diet science I couldn't lose weight no matter how much so-called willpower I brought to it." My favorite book on this is still probably The New Evolution Diet. For those who prefer to listen instead of read, I recommend The Primal Blueprint Podcast. Mark Sisson's website, Mark's Daily Apple, is also a great resource.]

Ryan Flynn discusses his favorite reads of 2014, including Seeking Wisdom: From Darwin to Munger, The Daodejing, The Fish That Ate the Whale and The Box, among many others (LINK)

Links

Elizabeth Holmes: One woman’s drive to upend medical testing (LINK)

Related links: Elizabeth Holmes at TEDMED 2014 (video), Elizabeth Holmes interview at TechCrunch Disrupt San Francisco ’14

Atul Gawande's 2014 Reith Lectures series (LINK)

In the 2014 Reith Lectures series, entitled The Future of Medicine, Dr Atul Gawande examines the nature of progress and failure in medicine.  

Related book: Being Mortal: Medicine and What Matters in the End

Berkshire Hathaway Director Susan Decker offers rare peek into Warren Buffett's boardroom [H/T Linc] (LINK) 

Early in her tenure at Berkshire, Decker said she shared with Buffett that based on her experience with board service, directors typically play an increasing role based on the size of a proposed transaction. For instance, she recalled telling Buffett that a small deal might be considered an internal investment, a larger deal might be brought to the attention of the board's audit committee and the largest of deals are brought before the full board.

"Warren leaned back and laughed and said, 'You need to devise that for the next CEO,'" Decker recalled Monday.

Related book: Berkshire Beyond Buffett: The Enduring Value of Values

Sellers Capital still looking for a resolution with its Premier Exhibitions shares after the recent deal falls through [H/T Linc] (LINK)

Mark Spitznagel: The Goat Whisperer [H/T Jim] (LINK)

Related book: The Dao of Capital

Andrew Smithers: The post-recession slowdown is structural (LINK)

Tobias Carlisle's interview about investing and his book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (LINK)

Buffett Disciple Mohnish Pabrai on Bank of America, Citi, Google, and Hyundai

Link to article: Buffett Disciple Mohnish Pabrai on Bank of America, Citi, Google, and Hyundai

“I have heard [Warren Buffett’s business partner] Charlie Munger more than once say that a well-diversified portfolio needs four stocks,” says Pabrai, in a phone interview from his office in Irvine, Calif. 

Pabrai’s portfolios aren’t quite that concentrated. But the value hound is OK with buying a stock that makes up 10% of his fund house’s assets, and even letting it run a bit higher than that. He takes a go-anywhere approach, seeing opportunities ranging from the U.S. to South Korea. 

... 

Barrons.com: Would you say it is easier or harder to find cheaply valued stocks than it was, say, a year ago? 

Pabrai: I would say it’s harder. We haven’t had any meaningful investments in U.S.-listed stocks in probably two years. I’ve found a few things, but they are just really small. The stocks that we have found of any meaning are all out of the U.S. 

Q: Where? 

A: I’ve found stocks in India, China and South Korea. 

... 

Q: In analyzing a business, are you also analyzing the country where the business is based? 

A: Yes. For example, no matter how cheap it gets, we will not invest in Russia. There’s a lack of respect for capital. The same applies to Zimbabwe.

Links

Jeremy Grantham's Favorite Book (LINK)

Related book: The End of Normal: The Great Crisis and the Future of Growth

Deal Tips From Buffett and Berkshire’s Other Managers (LINK)

Related book: Berkshire Beyond Buffett: The Enduring Value of Values

Cognitive Constraints on Valuing Annuities [H/T @jasonzweigwsj] (LINK)

This paper investigates consumers' difficulty in valuing life annuities. Using a survey-based experiment, we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them. This finding is not a simple endowment effect, because it prevails even when the annuity and lump-sum option are both presented as deviations from their own endowments. We also find that buy values are negatively correlated with sell values, as those individuals who express the highest sell values tend to also express the lowest buy values. This sell-buy valuation spread is negatively correlated with cognition; that is, the spread is larger for those with less education, weaker numerical abilities, and lower levels of financial literacy. Our evidence contribute to the emerging literature on heterogeneity in financial decision-making abilities. Importantly, it implies that many people lack the cognitive skills required to manage their retirement asset decumulation decisions optimally.

Paul Graham: The Fatal Pinch (LINK)

Scott Adams: The Human Mind (LINK)

Robert Sapolsky Explains the Biological Basis of Religiosity, and What It Shares in Common with OCD, Schizophrenia & Epilepsy (LINK)

Book of the day: Pay Attention to the Thin Cow

Bill Gates: the best books I read in 2014

Philanthropist Bill Gates recommends five favorite books he read this year. 

Link to: Bill Gates: the best books I read in 2014

..........

The books:

Business Adventures: Twelve Classic Tales from the World of Wall Street

Capital in the Twenty-First Century

How Asia Works

The Rosie Effect

Making the Modern World: Materials and Dematerialization

Links

From March 11, 2008: A Conversation with Charlie Munger at Caltech (video) [H/T ValueWalk] (LINK) [This used to be up on Caltech's website, but it appears it has now been posted to YouTube. I have it saved in iTunes, where you can also download it for free, HERE.]

Howard G. Buffett and Howard W. Buffett on the Bryan Callen podcast (LINK)

Related book: 40 Chances: Finding Hope in a Hungry World

James Grant at the Cato Monetary Conference (starting around the 10-minute mark) [H/T James] (LINK) [Grant also recommended the book When Money Dies in the Q&A.]

Jason Zweig on dividend capture (LINK)

Audio Excerpt: The Education of a Value Investor, by Guy Spier (LINK)

Amit Wadhwaney's Lecture to Sanjay Bakshi's students (LINK)

There are now 20 Lectures available in Sam Altman's class on How to Start a Startup (LINK)

How Hedge Fund Titan Jim Chanos Does Art Basel (video) [H/T ValueWalk] (LINK)

Hussman Weekly Market Comment: Peaking Process (LINK)

In my view, we are likely witnessing the peak of the third equity valuation bubble in the past 14 years, the first two which saw major indices plunge by at least 50%. It’s important to recognize that market peaks are a process, not an event. Internal deterioration has actually been developing since early July, and became measurable in early August (see A Hint of Advance Warning). This process has been quite like what we observed in 2007, when deterioration became measurable in July of that year (see Market Internals Go Negative). Despite an initial selloff, the major indices recovered to a marginal new high in October 2007 before continuing lower.

Vishal Khandelwal: 36 Lessons from 36 Years of My Life (LINK)

Book of the day: If This Is a Man and The Truce - by Primo Levi

Improving returns with industry consolidation...

From the book Capital Account:

One of the primary cures for poor returns is consolidation, which is either driven by mergers and acquisition activity or by firms leaving the industry. By increasing the average size of firms within an industry, consolidation allows them to exploit economies of scale. This may improve the bargaining power of a business with suppliers and customers, while economies of scale in production reduce fixed costs as a percentage of sales. These forces have worked to great effect in the European paper industry over the last decade. The few firms that are left in the industry--with their vast plants and highly automated machinery--now spend a great deal of time in discussions with competition regulators, something which we regard from an investment perspective as a healthy development. 'Pricing discipline', the corporately correct euphemism for oligopolistic practices, is a term that always gives us a warm feeling whenever it crops up in our discussions with company managements. 

..................

The above was written in June 2002, and was in regards to a discussion about the stocks of European technology and telecom companies. Today, a similar case may be made for consolidation among Australian mining and energy services companies. At Boyles, we are finally starting to see this among some of the micro-cap stocks we've been watching, and of which we have now begun to acquire a few shares (still too early for me to reveal names here). Among the bigger firms, Brookfield Asset Management and Bain Capital are among those that have recently begun to enter the space, with Brookfield specifically mentioning a strategic partnership to pursue industry consolidation.

Links

Andrew Smithers: Japan’s chances of achieving inflation (LINK)

Jim Grant on ‘Top Ideas’ For 2015 (video) (LINK)

How Bourbon is Made: The ABC’s in 9 Minutes (video) [H/T Open Culture] (LINK)

TED Talk - Barbara Natterson-Horowitz: What veterinarians know that doctors don't (LINK)

If you haven't read them in a while, or are new to the blog, the end of the year is always a good time to review the interviews with Peter Bevelin, HERE. I also put the books mentioned in those interviews HERE.

Links

James Montier interview (LINK)

One shouldn’t dwell too much on the semantics of a bubble. We at GMO define bubbles as a two standard deviation move away from the long term trend. And we are not quite there yet. We’d need another 10 to 15%. But let’s say it in simple terms: For all purposes, this is a hideously expensive market. I don’t care if it’s a bubble or not. It’s too expensive, and I don’t need to own it. But because this is a central bank sponsored near bubble, it hurts to stay away. 

... 

Be patient. Don’t take it from me, take it from Winnie the Pooh: Never underestimate the value of doing nothing. Never forget: You can’t know the future. Hold a lot of dry powder now. 50% of our portfolio today is in cash or some form of short term bond holdings. If we do get a dislocation in equity markets, we will have the ability and deploy that dry powder. That’s the time to buy.

Jason Zweig: Lessons From Oil's Black Friday (LINK)

The Absolute Return Letter, December 2014: A Brave New World (LINK)

Over the next decade, the investment world is likely to be quite different from anything we have seen over the last 30 years or so. Interest rates will stay low for much longer than nearly anyone is currently predicting, the dividend investor will return to glory, passive equity management will win substantial market share from active managers, fees will fall much further than they already have, and some investment strategies which are only alternative by name, will struggle to survive in their current form.

Farnam Street - Innovation: The Attacker’s Advantage (LINK)

Related book: Innovation: The Attacker's Advantage

Charles Brandes sees the value in sticking to his hunch (and Russia) [H/T ValueWalk] (LINK)

Related book: Brandes on Value: The Independent Investor

Matt Ridley: Ants, altruism and self sacrifice [H/T The Browser] (LINK)

Book of the day (which was recommended by Alan Watts in You're It!: On Hiding, Seeking, and Being Found): Memories, Dreams, Reflections - by C.G. Jung

Links

Daniel Yergen on Charlie Rose (LINK)

Related book: The Quest: Energy, Security, and the Remaking of the Modern World

Fall of the Bond King: How Gross Lost Empire as Pimco Cracked (LINK)

Jeff Bezos Defends the Fire Phone’s Flop and Amazon’s Dismal Earnings (LINK)

Aswath Damodaran: Up, up and away! A crowd-valuation of Uber! (LINK)

J. Carlo Cannell's letter to Jim Cramer [Which starts about halfway down the page.] (LINK)

Why Our Memory Fails Us (LINK)

Seneca quote

Prose doesn't get much better than this. From Moral letters to Lucilius/Letter 49 (Kindle):

Infinitely swift is the flight of time, as those see more clearly who are looking backwards. For when we are intent on the present, we do not notice it, so gentle is the passage of time's headlong flight.

Links

Forbes 400 Philanthropy Summit Q&A with Warren Buffett (video) [H/T ValueWalk] (LINK)

The Spider Of Silicon Valley: Inside 'Zuck & Friends' Secret Billionaire Fund (LINK)

The Power of Habit (LINK)

Related book: The Power of Habit

Base Hit Investing: Some Thoughts on Markel’s Intrinsic Value (LINK)

Book of the day: The Magic of Thinking Big

Peter Cundill quote

From There's Always Something to Do:

Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths.

GMO White Paper

Link to white paper: The World’s Dumbest Idea

In this white paper, James Montier, a member of GMO's Asset Allocation team, presents evidence that bolsters his assertion that Shareholder Value Maximization has been a complete failure and has contributed to some worrisome economic outcomes.

.................

Related video: James Montier: Shareholder Value Maximization: The World's Dumbest Idea? (Montier starts in the video around 5:30)

Links

I had previously missed this, but Richard Koo's latest book came out a few weeks ago: The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy

Fortune: Inside Elon Musk's $1.4 billion score (LINK)

Amazon Reveals the Robots at the Heart of Its Epic Cyber Monday Operation (LINK)

Scott Adams proposes Bill Gates as Temporary Dictator (LINK)

Paul Graham: Mean People Fail (LINK)

Don’t Waste Your Two Most Productive Hours (LINK)

Brain Pickings on Van Gogh's Letters to His Brother (LINK)

Related book: Ever Yours: The Essential Letters

Mutual Fund Observer, December 2014 (LINK)

Hussman Weekly Market Comment: Hard-Won Lessons and the Bird in the Hand (LINK)

The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme. Unless QE will persist forever, even 3-4 more years of zero short-term interest rates don’t “justify” more than a 12-16% elevation above historical norms. That increment can be calculated using any discounted cash flow method. Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely tooutperform stocks over that horizon, with no downside risk. The only thing that keeps this from being obvious is the proclivity of Wall Street analysts to form opinions and quote indicators without actually testing whether their methods have any reliability at all in evidence from market cycles across history. Numerous popular metrics, including the “Fed Model” and price-to-forward-earnings as a measure of value, have a very weak relationship to market returns over the following quarters or years.

As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There's clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There's no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad. 

“But I don’t want to go among mad people,” said Alice. “Oh, you can’t help that,” said the cat. “We’re all mad here.” – Lewis Carroll