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Monthly Archives: April 2013

Created by Goldman, found via Zero Hedge.

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Seems like a very cool service.  I added it to my Chrome browser and I’ve been amazed to see how many sites are tracking me.  The Wall Street Journal appears to be the biggest culprit thus far.  Shame on you Rupert, I pay for access!

Disconnect.me

Probably the best 11 minutes you’ll spend all week….

 

On share price volatility:

  • There have been three times Munger / Buffett have seen their holdings in Berkshire go down 50% (top tick to bottom tick)
  • Volatility is in the nature of long-term shareholding – if you’re not willing to react with equanimity to drastic declines you don’t deserve to do as well as the long-term holders that do
  • It’s a temperament, one needs to be more philosophical about market fluctuations

How political ideology caused the markets to crash:

  • Can never take all the boom and bust out of a capitalist economy but they could be considerably dampened if there were certain wise restraints
  • The folks that made a lot of money due to the lack of wise restraints channeled their resources to lobby for even less restraints – aided by ideological nuttiness that assumes because free markets work so well compared to communism, it follows that no laws at all will work even better – not true, the economy will work worse if you don’t have any wise restraints

The idiot boom and the fringes of the US Democrat and Republican Parties

  • Both parties have wings that are full of idiots – that’s the nature of the game
  • The people in the middle usually can tune out the idiots and do pretty well but every once in a while the idiots get in control
  • Compares the idiot boom (the idiot expansion of consumer credit) to going on Heroine – your life would be pleasant for a few weeks but it will ultimately totally destroy you

On Alan Greenspan

  • To his credit, of all the major figures, he’s the only one that promptly said “I’m a horse’s ass”

The trouble with Wall Street culture

  • Wall Street attracts and rewards a “locker room culture” – people that just have to win.  They’re so competitive that whatever “A” is doing they have to be better than “A”
  • They’re not very squeamish about what they have to do to win and thus are willing to do enormous damage to the rest of us in order to win

Munger and Buffett’s checklist for picking a company to invest in

  • First filter: must deal in things they’re capable of understanding
  • Next, the business must have some intrinsic characteristics that give it a durable competitive advantage
  • Vastly prefer a management in place with a lot of integrity and talent
  • Finally, no matter how wonderful it is, its not worth an infinite price – must have a price that makes sense and provides a margin of safety
  • It’s a very simple set of ideas – they’re too simple – the professional classes can’t justify their existence if that’s all they have to do – it’s so obvious, so simple, what would they have to do with the rest of the semester?

Munger’s way of thinking about buying shares

  • We have the mindset of the person buying the whole business
  • We like buying individual shares at a price that’s lower than what we think a rational person would pay if he could buy the whole business

It’s been a while since I posted about one of my all time favorite people in this world, Jeremy Grantham.  There are two interesting articles from a sit down chat Leo Hickman had with Grantham. The topic was the environment, and Grantham’s efforts to help save it.  The first article is a summary version from The Guardian.  The second article is the full length interview from Business Insider.

As usual you’ll find my favorite excerpts below.  I especially like his balanced view that oil and gas aren’t entirely bad.  It’s a nuanced opinion but he has a point – for now they’re a necessary evil; try taking them away tomorrow and see what happens.

Part I: Jeremy Grantham, environmental philanthropist: ‘We’re trying to buy time for the world to wake up’ (The Guardian)

Part II: GRANTHAM: Capitalism Is Great, But It Assigns No Value To Your Grandchildren (Business Insider)

Excerpts from Part I:

Many deep-greens – who claim the root cause for our environmental woes is the slavish quest for economic growth – will recoil at the thought of a hard-boiled capitalist such as Grantham underpinning so much of the environmental movement. He is unconcerned. “Capitalism does millions of things better than the alternatives. It balances supply and demand in an elegant way that central planning has never come close to. However, it is totally ill-equipped to deal with a small handful of issues. Unfortunately, they are the issues that are absolutely central to our long-term wellbeing and even survival.”

More awkwardly, he insists his substantial investments in oil and gas don’t contradict his green views. “We need oil. If we took oil away tomorrow, civilisation ends. We can burn all the cheap, high-quality oil and gas, but if we mean to burn all the coal and any appreciable percentage of the tar sands, or even third-derivative, energy-intensive oil and gas, with ‘fracking’ for shale gas on the boundary, then we’re cooked, we’re done for.”

***

But “China is my secret weapon,” he says enthusiastically. His eyes widen with excitement, and he talks quicker and quicker. “The Chinese cavalry riding to the rescue. I have very high hopes for China because they have embedded high scientific capabilities in their leadership class. They know this is serious. And they are acting much faster now than we are. They have it within their capabilities to come back in 30 years with the guarantee of complete energy independence – all alternative and sustainable for ever. They have an embarrassment of capital. We have an embarrassment of debt. So they can set a stunning pace, which they are doing. And they could crank it up. To hell with their five-year plans, they should move up to 25-year plans. They would have such low-cost energy at the end of it they’d be the terror of the capitalist system. Low energy and low labour, that’s the ball game.”

But he argues that there is no reason why the west can’t compete. “Anyone who says government can’t do this, or can’t do that, I say a pox on you; have a look at the Manhattan Project. They did remarkable things. They stuck the brightest minds out in the desert. They were herding cats with great egos, but it worked. If we did that on alternative energy, we’d be home free.”

Excerpts from Part II:

[Continuing his point on where capitalism fails us…]

Unfortunately, today, they are the issues that are absolutely central to our long-term wellbeing and even survival. It doesn’t think long-term very well because of high discount rate structure.

If you’re a typical corporation anything lying out 30 years literally doesn’t matter. Or, as I like to say: QED, your grandchildren have no value. And they usually act as if that was true, even though I’m sure they are actually very kind to their grandchildren.

***

It has been remarked before that modern economics is belief in a perpetual motion machine. Capital and labour, but no mention of energy. Without energy the whole thing grinds to a halt and the whole theory is demonstrated to be totally false. I’m late in the game at recognising this.

One of my new heroes is an economist called Kenneth Boulding who, at 22, got a paper into Keynes‘s journal. At the age of about 50 he realised that economics was not taking its job seriously, that it was not interested in utility, in real serious improvement in the world, but that it was increasingly interested in new, elegant mathematical theories designed to get career advancement, over usefulness.

He said the only people who believe you can have compound growth in a finite world are either mad men or economists. He also said: “Mathematics has brought rigor to economics. Unfortunately, it also brought mortis.”

 

Interesting to hear how a legendary investor was humbled by the markets in his early days…

“There’s nothing like going broke to make you focus”.  “It’s very good to lose everything but do it when you’re young, do it when it’s fifty thousand dollars or five thousand dollars, not fifty million dollars”

“Don’t invest unless you know what you’re doing”

If you’ve never paid a visit to Zero Hedge here’s the gist: they have lightning fast reporting of financial news, in depth analysis of global markets, and a wealth of intelligent contributors – however the conclusion is almost always the same: get rid of your fiat money, hoard gold, and brace yourself for the imminent financial armageddon.  With that being said they do often times have some good insights and though provoking commentary.  I’d advise you to set a rule for yourself though: do not do any trading immediately after reading Zero Hedge – give yourself a chance to cool off first, the world is probably not coming to an end quite yet.

The first piece is actually from the WSJ by way of Zero Hedge, featuring PIMCO’s Mohamed El-Erian. Below I’m quoting Zero Hedge quoting El-Erian in the WSJ interview (emphasis added by ZH):

El-Erian’s Summary: “Virtually Every Market Is Trading At Very Artificial Levels”

“In order for central banks to achieve their ultimate economic objective – which is growth and jobs – they have to push investors into taking more risk than is justified,” is the somewhat chilling warning that PIMCO’s Mohamed El-Erian gives in this excellent interview with the WSJ. “Central banks are operating through the wealth effect and animal spirits,” El-Erian says peeling back the truth onion, as they prop up asset prices to “artificial levels, in virtually every market.” Worries over the central bankers of the world withdrawing easy money policies too early are “unwarranted,” he notes, adding that he suspects, “they will most likely stay too long and they will consciously make that mistake.” Critically, though, he sends a message that appears to fit with many of our recent discussions (most recently here) that “if these levels aren’t validated by the fundamentals, then investors will get hurt.”

 

The second piece is an attempt to explain the massive price drop in every Zero Hedge commentator’s investment of choice, gold.  This piece is largely about central / too big to fail banks manipulating the gold market.  The author seems to be your garden variety Zero Hedge contributor, 100% certain there is a huge conspiracy taking place to manipulate the global markets and economy.  He does make some interesting points, however my favorite part of his post is rather benign when compared to the rest of his post – it’s when he lays out the effects of ZIRP.

This Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks

The central plank of Bernanke’s magic recovery plan has been to get everybody back borrowing, spending, and “investing” in stocks, bonds, and other financial assets.  But not equally so, as he has been instrumental in distorting the landscape towards risk assets and away from safe harbors.

That’s why a 2-year loan to the U.S. government will only net you 0.22%, a rate that is far below even the official rate of inflation.  In other words, loan the U.S. government $10,000,000 and you will receive just $22,000 per year for your efforts and lose wealth in the process because inflation reduced the value of your $10,000,000 by $130,000 per year.  After the two years is up, you are up $44,000 but out $260,000, for net loss of $216,000.

That wealth, or purchasing power, did not just vanish:  It was taken by the process of inflation and transferred to someone else.  But to whom did it go?  There’s no easy answer for that, but the basic answer is that it went to those closest to the printing press.  It went to the government itself, which spent your $10,000,000 loan the instant you made it, and it went to the financiers who play the leveraged game of money who happen to be closest to the Fed’s printing press.

This almost completely explains why the gap between the rich and everyone else is widening so rapidly, and why financiers now populate the top of every Forbes 400 list.  There is no mystery, just a process of wealth transfer of magnificent and historic proportions; one that has been repeated dozens of times throughout history