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I’ve posted this quote before but it bears repeating:

“For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips… The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.”

Source: John Hussman by way of Value Investing World 

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Presenting the family tree of systemically important, Too Big To Fail banks.  Usually family trees grow up and out – not the case with banks.

We’ve come a long way from the early 1990s when risks were relatively compartmentalized and spread across a few dozen institutions.  Sure the risks become more concentrated among fewer institutions but think of all the synergies that will be realized and think of all the shareholder value that will be created!

This reminds me of an old saying about eggs in a basket but I can’t remember how it goes…

Too_big_to_fail

Found via The Big Picture

That number is shocking to me.  I for one think high frequency trading is a perversion of our capital markets.  People will argue that it provides liquidity but at what cost?  Read the full article over at Quartz.

“Although the SEC isn’t saying as much, experts think it’s a sign that high-frequency trading are flooding the market with orders, overwhelming the average retail or institutional investor.”

“High frequency trading firms have been known to flood the market with orders, trying to determine the price institutional or retail investors are offering, then cancel 90% of them a split-second later. This can artificially alter the price of a security, netting high-frequency traders profits at the expense of their counterparties. True, those profits are small—often just pennies. But over time, these firms make millions of dollars.”

I like Charle Schwab’s and Walt Bettinger’s solution:

“A penalty on excessive cancellations, rigorous enforcement of rules regarding information access, and a top-to-bottom study of the NYSE’s 40-year-old Market Data System would be good places to start,”

 

Buffett on Career Risk:

“Wall Street abhors a commercial vacuum.  If the will to believe stirs within the customer, the merchandise will be supplied – without warranty.  When franchise companies are wanted by investors, franchise companies will be found – and recommended by the underwriters.  If there are none to be found, they will be created.  Similarly, if above-average investment performance is sought, it will be promised in abidance – and at least the illusion will be produced.

Initially those who know better will resist promising the impossible.  As the clientele first begins to drain away, advisors will argue the un-soundness of the new trend and the strengths of the old methods.  But when the trickle gives signs of turning into a flood, business Darwinism will prevail and most organizations will adapt.  This is what happened in the money management field.”

 

Buffett on how to manage a portfolio (in this case the Washington Post’s Pension):

“(5) My final option – and the one to which I lean, although not at anything like a 45-degree angle – is mildly unconventional, thereby causing somewhat more legal risk for directors.  It may differ from other common stock programs, more in attitude than in appearance, or even results.  It involves treating portfolio management decisions much like business acquisition decisions by corporate managers.

The directors and officers of the company consider themselves to be quite capable of making business decisions, including decisions regarding the long-term attractiveness of specific business operations purchased at specific prices.  We have made decisions to purchase several television businesses, a newspaper business, etc.  And in other relationships we have made such judgments covering a much wider spectrum of business operations.

Negotiated prices for such purchases of entire businesses often are dramatically higher than stock market valuations attributable to well-managed similar operations.  Longer term, rewards to owners in both cases will flow from such investments proportional to the economic results of the business.  By buying small pieces of businesses through the stock market rather than entire businesses through negotiation, several disadvantages occur: (a) the right to manage, or select mangers, is forfeited; (b) the right to determine dividend policy or direct the areas of internal investment is absent; (c) ability to borrow long-term against the business assets (versus against the stock position) is greatly reduced; and (d) the opportunity to sell the business on a full-value, private-owner basis is forfeited.

These are important negative factors but, if a group of investments are carefully chosen at a bargain price, it can minimize the impact of a single bad experience, in say, the management area, which cannot be corrected.  And occasionally there is an offsetting advantage which can be of very substantial value – but for which nothing should be paid at the time of purchase.  That relates to the periodic tendency of stock markets to experience excesses which cause businesses – when changing hands in small pieces through stock transactions – to sell at prices significantly above privately-determine negotiated values.  At such times, holdings may be liquidated at better prices than if the whole business were owned – and, due to the impersonal nature of securities markets, no moral stigma need be attached to dealing with such unwitting buyers.

Stock market prices may bounce wildly and irrationally but, if decisions regarding internal rates of return of the business are reasonably correct – and a small portion of the business is bought at a fraction of its private-owner value – a good return for the fund should be assured over the time span against which pension fund results should be measured.

It might be asked what the difference is between this approach and simply pick stocks a la Morgan, Scudder, Stevens, etc.  It is, in large part, a matter of attitude, whereby the results of the business become the standard against which measurements are made rather than quarterly stock prices.  It embodies a long time span for judgement confirmation, just as does an investment by a corporation in a major new division, plant or product.  It treats stock ownership as business ownership with the corresponding adjustment in mental set.  And it demands an excess of value over price paid, not merely a favorable short-term earnings or stock market outlook.  General stock market considerations simply don’t enter into the purchase decision.

Finally, it rests on a belief, which both seems logical and which has been borne out historically in securities markets, that intrinsic business value is the eventual prime determinant of stock prices.  In the words of my former boss: ‘in the short run the market is a voting machine, but in the long run it is a weighing machine.'”

A nice analysis of moats by Credit Suisse.  Report embedded below – followed by Buffett’s quotes on moats.  Note the Value Creation Checklist on p. 52 of the analysis.

Warren Buffett on Economic Moats

“What we refer to as a “moat” is what other people might call competitive advantage . . . It’s something
that differentiates the company from its nearest competitors – either in service or low cost or taste or
some other perceived virtue that the product possesses in the mind of the consumer versus the next best  alternative . . . There are various kinds of moats. All economic moats are either widening or narrowing – even though you can’t see it.”

— Outstanding Investor Digest, June 30, 1993

“Look for the durability of the franchise. The most important thing to me is figuring out how big a moat  there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.”

— Linda Grant, “Striking Out at Wall Street,” U.S. News & World Report, June 12, 1994

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the
durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

— Warren Buffett and Carol Loomis, “Mr. Buffett on the Stock Market,” Fortune, November 22, 1999

We think of every business as an economic castle. And castles are subject to marauders. And in
capitalism, with any castle . . . you have to expect . . . that millions of people out there . . . are thinking
about ways to take your castle away.  Then the question is, “What kind of moat do you have around that castle that protects it?”

— Outstanding Investor Digest, December 18, 2000

“When our long-term competitive position improves . . . we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and longterm conflict, widening the moat must take precedence. ”

— Berkshire Hathaway Letter to Shareholders, 2005

“A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns . . . Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all . . . Additionally, this criterion eliminates the business whose success depends on having a great manager.”

— Berkshire Hathaway Letter to Shareholders, 2007

 

Found via Punchcard Investing Blog